Neiman Marcus 2009 Annual Report Download - page 14

Table of Contents
million and the outstanding letters of credit were $31.1 million. As of July 31, 2010, NMG had no borrowings outstanding under this
facility. NMG's substantial indebtedness, combined with its lease and other financial obligations and contractual commitments, could
have other important consequences. For example, it could:
• make it more difficult for NMG to satisfy its obligations with respect to its indebtedness and any failure to comply with
the obligations of any of its debt instruments, including restrictive covenants and borrowing conditions, could result in an
event of default under the agreements governing NMG's indebtedness;
• make NMG more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse
changes in government regulation;
• require NMG to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, thereby
reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions and other general
corporate purposes;
• limit NMG's flexibility in planning for, or reacting to, changes in NMG's business and the industry in which it operates;
• place NMG at a competitive disadvantage compared to its competitors that are less highly leveraged;
• limit NMG's ability to obtain credit from our vendors and/or the vendors' factors and other financing sources; and
• limit NMG's ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service
requirements, execution of its business strategy or other purposes.
Any of the above listed factors could materially and adversely affect NMG's business, financial condition and results of
operations.
In addition, NMG's interest expense could increase if interest rates increase because the entire amount of the indebtedness
under the senior secured credit facilities bears interest at floating rates. As of July 31, 2010, NMG had approximately
$1,513.4 million principal amount of floating rate debt, consisting of outstanding borrowings under the Senior Secured Term Loan
Facility (including $7.6 million of borrowings classified as current liabilities).
Effective December 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount
of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. The interest
rate swap agreements expire in December 2010.
Effective January 2010, NMG entered into interest rate cap agreements for an aggregate notional amount of $500.0 million in
order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness once the interest rate swap
agreements expire in December 2010. The interest rate cap agreements commence in December 2010 and expire in December 2012.
Pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through December 2012 with respect to the $500.0
million notional amount of such agreements. In the event LIBOR is less than 2.50%, NMG will pay interest at the lower LIBOR rate.
In the event LIBOR is higher than 2.50%, NMG will pay interest at the capped rate of 2.50%.
To service NMG's indebtedness, it will require a significant amount of cash. NMG's ability to generate cash depends on many
factors beyond its control, and any failure to meet its debt service obligations could harm its business, financial condition and
results of operations.
NMG's ability to pay interest on and principal of the debt obligations will primarily depend upon NMG's future operating
performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our
control, will affect its ability to make these payments.
If NMG does not generate sufficient cash flow from operations to satisfy the debt service obligations, NMG may have to
undertake alternative financing plans, such as refinancing or restructuring its indebtedness, selling assets, reducing or delaying capital
investments or seeking to raise additional capital. Our ability to restructure or refinance NMG's debt will depend on the condition of
the capital markets and our financial condition at such time. Any refinancing of NMG's debt could be at higher interest rates and may
require it to comply with more onerous covenants, which could further restrict its business operations.
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