Neiman Marcus 2008 Annual Report Download - page 112

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• a first-priority pledge of 100% of NMG's capital stock and certain of the capital stock held by NMG, the Company or
any subsidiary guarantor (which pledge, in the case of any foreign subsidiary is limited to 100% of the non-voting stock
(if any) and 65% of the voting stock of such foreign subsidiary); and
• a first-priority security interest in, and mortgages on, substantially all other tangible and intangible assets of NMG, the
Company and each subsidiary guarantor, including a significant portion of NMG's owned and leased real property
(which currently consists of approximately half of NMG's full-line retail stores) and equipment, but excluding, among
other things, the collateral described in the following bullet point; and
• a second-priority security interest in personal property consisting of inventory and related accounts, cash, deposit
accounts, all payments received by NMG or the subsidiary guarantors from credit card clearinghouses and processors or
otherwise in respect of all credit card charges for sales of inventory by NMG and the subsidiary guarantors, certain
related assets and proceeds of the foregoing.
Capital stock and other securities of a subsidiary of NMG that are owned by NMG or any subsidiary guarantor will not
constitute collateral under NMG's Senior Secured Term Loan Facility to the extent that such securities cannot secure the 2028
Debentures or other secured public debt obligations without requiring the preparation and filing of separate financial statements of
such subsidiary in accordance with applicable SEC rules. As a result, the collateral under NMG's Senior Secured Term Loan Facility
will include shares of capital stock or other securities of subsidiaries of NMG or any subsidiary guarantor only to the extent that the
applicable value of such securities (on a subsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amount of the 2028
Debentures or other secured public debt obligations of NMG.
The credit agreement governing the Senior Secured Term Loan Facility contains a number of negative covenants that are
substantially similar to those governing the Senior Notes and additional covenants related to the security arrangements for the Senior
Secured Term Loan Facility. The credit agreement also contains customary affirmative covenants and events of default, including a
cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50 million.
2028 Debentures. In May 1998, NMG issued $125.0 million aggregate principal amount of its 7.125% 2028 Debentures.
NMG equally and ratably secures its 2028 Debentures by a first lien security interest on certain collateral subject to liens granted
under NMG's Senior Secured Credit Facilities constituting (a) (i) 100% of the capital stock of certain of NMG's existing and future
domestic subsidiaries, and (ii) 100% of the non-voting stock and 65% of the voting stock of certain of NMG's existing and future
foreign subsidiaries and (b) certain of NMG's principal properties that include approximately half of NMG's full-line stores, in each
case, to the extent required by the terms of the indenture governing the 2028 Debentures. The 2028 Debentures contain covenants that
restrict NMG's ability to create liens and enter into sale and lease back transactions. The collateral securing the 2028 Debentures will
be released upon the release of liens on such collateral under NMG's Senior Secured Credit Facilities and any other debt (other than
the 2028 Debentures) secured by such collateral. Capital stock and other securities of a subsidiary of NMG that are owned by NMG or
any subsidiary will not constitute collateral under the 2028 Debentures to the extent such property does not constitute collateral under
NMG's Senior Secured Credit Facilities as described above. The 2028 Debentures are guaranteed on an unsecured, senior basis by the
Company. NMG's 2028 Debentures mature on June 1, 2028.
The fair value of 2028 Debentures at August 1, 2009 was approximately $95.6 million.
Senior Notes. In October 2005, Newton Acquisition Merger Sub, Inc. issued $700.0 million aggregate original principal
amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture) with Wells Fargo Bank, National Association, as
trustee. At the closing of the Acquisition, as the surviving corporation in the Acquisition, NMG assumed all the obligations of Newton
Acquisition Merger Sub, Inc. under the Senior Indenture. At August 1, 2009, NMG has $734.5 million aggregate principal amount of
9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture). NMG's Senior Notes mature on October 15, 2015.
Interest on the Senior Notes is payable quarterly in arrears on each January 15, April 15, July 15 and October 15. For any
interest payment period through October 15, 2010, NMG may, at its option, elect to pay interest on the Senior Notes entirely in cash
(Cash Interest) or entirely by increasing the principal amount of the outstanding Senior Notes by issuing additional Senior Notes (PIK
Interest). Cash Interest on the Senior Notes accrues at the rate of 9% per annum. PIK Interest on the Senior Notes accrues at the rate of
9.75% per annum. We negotiated for the right to include the PIK feature in our Senior Notes because of our belief that this feature
could be a useful tool to enhance liquidity under appropriate circumstances. In the second quarter of fiscal year 2009, given the
dislocation in the financial markets and the uncertainty as to when reasonable conditions will return, we believed that it was
appropriate to utilize this feature, even though we had available borrowing
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