Neiman Marcus 2008 Annual Report Download - page 116

Table of Contents
significant assumptions are observable in the market or can be corroborated by observable market data for substantially the
full term of the assets or liabilities.
• Level 3 — valuation inputs are unobservable and typically reflect management's estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models and similar techniques.
In the third quarter of fiscal year 2009, we adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" (SFAS 161). SFAS 161 enhances current
disclosures related to derivative instruments and hedging activities to provide adequate information about how derivative and hedging
activities affect an entity's financial position, financial performance and cash flows.
In connection with the Acquisition, we obtained $2,575.0 million of floating rate debt agreements, of which $2,125.0 million
was outstanding at the Acquisition date and $1,625.0 million is outstanding at August 1, 2009 (including $26.6 million of borrowings
classified as current liabilities). Effective December 6, 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. These swap agreements hedge a portion of our contractual floating rate interest commitments through the expiration of
the agreements in December 2010. As a result of the swap agreements, NMG's effective fixed interest rates as to the $1,000.0 million
in floating rate indebtedness will currently range from 6.831% to 6.983% per quarter through 2010 and result in an average fixed rate
of 6.900%.
As of the effective date, NMG designated the interest rate swaps as cash flow hedges. As cash flow hedges, unrealized gains
on our outstanding interest rate swaps are recognized as assets while unrealized losses are recognized as liabilities. Our interest rate
swap agreements are highly, but not perfectly, correlated to the changes in interest rates to which we are exposed. As a result,
unrealized gains and losses on our interest rate swap agreements are designated as effective or ineffective. The effective portion of
such gains or losses is recorded as a component of accumulated other comprehensive loss while the ineffective portion of such gains
or losses is recorded as a component of interest expense.
In addition, we realize a gain or loss on our interest rate swap agreements in connection with each required interest payment
on our floating rate indebtedness. These realized gains or losses are reclassified from accumulated other comprehensive loss to
interest expense. The realized gains and losses effectively adjust the contractual interest requirements pursuant to the terms of our
floating rate indebtedness to the interest requirements at the fixed rates established in the interest rate swaps agreements. The cash
flows from our interest rate swaps are recorded in operating activities in the condensed consolidated statements of cash flows.
The fair values of the interest rate swaps are estimated using industry standard valuation models using market-based
observable inputs including interest rate curves (Level 2). A summary of the recorded balances with respect to our interest rate swaps
included in our consolidated balance sheets is as follows:
(in thousands)
August 1,
2009
August 2,
2008
Unrecognized losses — included in other long-term liabilities $ 57,750 $ 34,386
Accumulated other comprehensive loss, net of taxes $ 35,508 $ 21,755
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