Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**Form 10-K**

 

**(Mark One)**

| **x**                                                                                                                                                                                                                                                         | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                    | ** **                                                                                              |
| **For the fiscal year ended August 1, 2009**                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                    |
| **OR**                                                                                                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                                                    | ** **                                                                                              |
| **o**                                                                                                                                                                                                                                                         | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                    | ** **                                                                                              |
| **For the transition period  from                  to                  ** |

 

**Commissionfile no. 333-133184-12**

 

**Neiman Marcus, Inc.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**

(State  or other jurisdiction of

incorporation  or organization)    | ** ** | **20-3509435**

(I.R.S.  Employer

Identification  No.) |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|
| ** **                                                                         | ** ** | ** **                                              |
| **1618 Main Street**

**Dallas, Texas**

(Address  of principal executive offices) | ** ** | **75201**

(Zip  code)                                  |

 

Registrant’stelephone number, including area code: **(214) 743-7600**

 

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Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:  **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o  No x

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act. Yes o  No x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data file required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes  ̈  No  ̈

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.

 

| Large  accelerated filer o |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer x   |   | Smaller  reporting company o |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No x

 

The aggregate market value ofthe registrant’s voting and non-voting common equity held by non-affiliates ofthe registrant is zero.  The registrantis a privately held corporation.

 

Asof October 1, 2009, the registrant had outstanding 1,013,082 shares of itscommon stock, par value $0.01 per share.

 

 

 

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**NEIMAN MARCUS, INC.**

**ANNUAL REPORT ON FORM 10-K**

**FOR THE FISCAL YEAR ENDED AUGUST 1, 2009**

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                      | **Page No.** |
|-------------------|-------------------------------------------------------------------------------------------------|-------------------|
| **PART I**   |                                                                                            |              |
| Item 1.           | Business                                                                                        | 2                 |
| Item 1A.          | Risk Factors                                                                                    | 10                |
| Item 2.           | Properties                                                                                      | 19                |
| Item 3.           | Legal Proceedings                                                                               | 20                |
| Item 4.           | Submission of  Matters to a Vote of Security Holders                                            | 20                |
| **PART II**  |                                                                                            |              |
| Item 6.           | Selected Financial  Data                                                                        | 21                |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations     | 23                |
| Item 7A.          | Quantitative  and Qualitative Disclosures about Market Risk                                     | 48                |
| Item 8.           | Financial  Statements and Supplementary Data                                                    | 49                |
| Item 9.           | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure           | 49                |
| Item 9A.          | Controls and  Procedures                                                                        | 49                |
| Item 9B.          | Other information                                                                               | 50                |
| **PART III** |                                                                                            |              |
| Item 10.          | Directors and  Executive Officers of the Registrant                                             | 50                |
| Item 11.          | Executive  Compensation                                                                         | 53                |
| Item 12.          | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters | 72                |
| Item 13.          | Certain Relationships and Related  Transactions, and Director Independence                      | 75                |
| Item 14.          | Principal Accounting Fees and Services                                                          | 77                |
| **PART IV**  |                                                                                            |              |
| Item 15.          | Exhibits and  Financial Statement Schedules                                                     | 78                |
| Signatures        | Signatures                                                                                      | 84                |

 

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**PART I**

 

**ITEM 1.BUSINESS**

 

**Business Overview**

 

We are one of the nation’sleading luxury retailers, offering distinctive merchandise and excellentcustomer service that cater to the needs of the affluent consumer. Since ourfounding in the early 1900s, we have established ourselves as a leading fashionauthority among luxury consumers and have become a premier U.S. retail channelfor many of the world’s most exclusive designers. Currently, we operate 41Neiman Marcus full-line stores at prime retail locations in major U.S. marketsand two Bergdorf Goodman stores on Fifth Avenue in New York City. We alsooperate catalogs and e-commerce websites under the brands Neiman Marcus®,Bergdorf Goodman® and Horchow®. During fiscal years 2009, 2008 and 2007, wegenerated revenues of $3,643.3 million, $4,600.5 million and $4,390.1million, respectively, and operating (loss) earnings of $(652.9) million,$466.4 million and $476.8 million, respectively.

 

We operate an integrated,multi-channel retailing model as described below:

 

***Specialty Retail.***  Our specialty retail store operations(Specialty Retail) consist primarily of our 41 Neiman Marcus stores and twoBergdorf Goodman stores. Specialty Retail accounted for 82.1% of our totalrevenues in fiscal year 2009, 83.8% in fiscal year 2008 and 83.7% in fiscalyear 2007.

 

·                  Neiman MarcusStores.  Neiman Marcus stores offerdistinctive luxury merchandise, including women’s couture and designer apparel,contemporary sportswear, handbags, fashion accessories, shoes, cosmetics, men’sclothing and furnishings, precious and designer jewelry, decorative homeaccessories, fine china, crystal and silver, children’s apparel and gift items.We locate our Neiman Marcus stores at carefully selected venues in majormetropolitan markets across the United States and design our stores to providea feeling of residential luxury by blending art and architectural details fromthe communities in which they are located. We also operate 28 clearance centersoffering end-of-season clearance goods from our Neiman Marcus stores, BergdorfGoodman stores and direct-to-consumer operations as well as clearance goodspurchased directly for resale by our clearance centers.  Our full-line Neiman Marcus stores andclearance centers accounted for 69.7% of our total revenues in fiscal year2009, 71.2% in fiscal year 2008 and 71.6% in fiscal year 2007 and 84.9% ofSpecialty Retail revenues in fiscal year 2009, 85.0% in fiscal year 2008 and85.6% in fiscal year 2007.

 

·                  Bergdorf Goodman Stores. Bergdorf Goodman is apremier luxury retailer in New York City well known for its couturemerchandise, opulent shopping environment and landmark Fifth Avenue locations.Bergdorf Goodman features high-end apparel, fashion accessories, shoes,decorative home accessories, precious and designer jewelry, cosmetics and giftitems. Our Bergdorf Goodman stores accounted for 12.4% of our total revenues infiscal year 2009, 12.6% in fiscal year 2008 and 12.1% in fiscal year 2007 and15.1% of Specialty Retail revenues in fiscal year 2009, 15.0% in fiscal year2008 and 14.4% in fiscal year 2007.

 

We currentlyoperate 6 stores under the CUSP name. CUSP is a smaller store format (6,000 to11,000 square feet) that targets a younger, fashion savvy customer with acontemporary point of view. To date, the operations of the CUSP stores areinsignificant to the revenues and operating earnings of our Specialty Retailstores.

 

***Direct Marketing.***  Our upscale direct-to-consumer operation(Direct Marketing) conducts online and catalog sales of fashion apparel,accessories and home furnishings through the Neiman Marcus brand, online andcatalog sales of home furnishings and accessories through the Horchow brand,and online sales of fashion apparel and accessories through the BergdorfGoodman brand.  In addition, DirectMarketing currently operates 9 designer websites.  In connection with the designer websites,Direct Marketing creates and/or maintains separate e-commerce sites bearing thedesigners’ brand names.  Direct Marketingprocures inventory from each designer to be showcased on that designer’swebsite and bears all the responsibilities related to the fulfillment of goodspurchased on the designer website.

 

Direct Marketing generated17.9% of our total revenues in fiscal year 2009, 16.2% in fiscal year 2008 and16.3% in fiscal year 2007.  Over onemillion customers made a purchase through one of our websites or catalogs infiscal year 2009. In recent years, internet revenues have increased as apercentage of Direct Marketing revenues. As a percentage of total revenues of Direct Marketing, internet revenueswere 79.5% in fiscal year 2009, 75.5% in fiscal year 2008 and 69.7% in fiscalyear 2007. Our catalog business circulated approximately 68 million catalogsin fiscal year 2009, a decrease of approximately 25% from the prior year.  With the growth of internet revenues, we havereduced catalog circulation in recent years and would expect flat to

 

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declining catalog circulation in theforeseeable future. We regularly send e-mails to approximately 3.7 millione-mail addresses, alerting our customers to our newest merchandise and thelatest fashion trends.

 

Formore information about our reportable segments, see Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andNote 17 of the Notes to Consolidated Financial Statements in Item 15.

 

Ourfiscal year ends on the Saturday closest to July 31. Like many other retailers, we follow a4-5-4 reporting calendar which resulted in an extra week in fiscal year 2008(the 53rd week). All references to fiscal year2009 relate to the fifty two weeks ended August 1, 2009; all references tofiscal year 2008 relate to the fifty three weeks ended August 2, 2008 andall references to fiscal year 2007 relate to the fifty two weeks ended July 28,2007.  References to fiscal years 2010and years thereafter relate to our fiscal years for such periods.

 

Wemake our annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K, and related amendments, available free ofcharge through our website at www.neimanmarcusgroup.com as soon as reasonablypracticable after we electronically file such material with (or furnish suchmaterial to) the Securities and Exchange Commission. The information containedon our website is not incorporated by reference into this Annual Report on Form 10-Kand should not be considered to be part of this Annual Report on Form 10-K.

 

**The Acquisition**

 

On April 22, 2005,Neiman Marcus, Inc. (the Company), formerly Newton Acquisition, Inc.,and its wholly-owned subsidiary, Newton Acquisition Merger Sub, Inc.(Merger Sub), were formed and incorporated in the state of Delaware. On April 29,2005, the Company received subscriptions for 900 shares of its commonstock from Newton Holding, LLC (Holding) in exchange for a capital contributionof $900 and Merger Sub issued 900 shares of its common stock to the Company inexchange for a capital contribution of $900. Holding, the Company and MergerSub were formed by investment funds affiliated with TPG Capital (formerly TexasPacific Group) and Warburg Pincus LLC (collectively, the Sponsors) for thepurpose of acquiring The Neiman Marcus Group, Inc. (NMG).

 

In connection with theacquisition of NMG, Holding made an aggregate cash equity contribution of$1,420.0 million and a noncash equity contribution of $25.0 millionto the Company in exchange for the Company issuing 999,100 shares of its commonstock to Holding. In addition, certain members of executive management of theCompany made cash equity contributions aggregating $7.7 million andnoncash equity contributions, consisting of shares of common stock and commonstock options in NMG, aggregating $17.9 million in exchange for 12,264shares of common stock in the Company.

 

The acquisition of NMG wascompleted on October 6, 2005 through the merger of Merger Sub with andinto NMG, with NMG being the surviving entity (the Acquisition). Subsequent tothe Acquisition, NMG is a subsidiary of the Company, which is controlled byHolding. In connection with the Acquisition, NMG incurred significantindebtedness and became highly leveraged. See Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Liquidity and Capital Resources.”  All references to “we” and “our” relate tothe Company for periods subsequent to the Acquisition and to NMG for periodsprior to the Acquisition.

 

Prior to the Acquisition,the Company had no independent assets or operations. After the Acquisition, theCompany represents the successor to NMG since the Company’s sole asset is itsinvestment in NMG and its operations consist solely of the operating activitiesof NMG as well as costs incurred by the Company related to its investment inNMG.  For periods prior to theAcquisition, NMG is deemed to be the predecessor to the Company.  As a result, for periods prior to theAcquisition, the financial statements of the Company consist of the financialstatements of NMG for such periods.

 

**Discontinued Operation**

 

InFebruary 1999, NMG acquired a 56% controlling interest in Kate Spade LLC,a designer and marketer of high-end accessories.  In April 2005, the minority investor inKate Spade LLC exercised the put option with respect to the sale of the fullamount of its 44% stake in such company to NMG. In October 2006, weentered into an agreement to settle the put option whereby we purchased theinterest held by the minority investor for approximately $59.4 million.

 

In November 2006, weentered into a definitive agreement to sell 100% of the ownership interests inKate Spade LLC to Liz Claiborne, Inc. (consisting of both our original 56%interest and the 44% minority interest subsequently purchased by NMG) forpretax net cash proceeds of approximately $121.5 million. Both the purchase ofthe minority interest 

 

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in Kate Spade LLC and the sale of Kate SpadeLLC to Liz Claiborne, Inc. were consummated in December 2006.

 

Ourconsolidated financial statements, accompanying notes and other informationprovided in this Annual Report on Form 10-K reflect Kate Spade LLC as adiscontinued operation for all periods presented.

 

**Recent Developments**

 

On September 3, 2009,we announced preliminary total revenues and comparable revenues ofapproximately $241.0 million and $237.0 million, respectively, forthe four-week period ended August 29, 2009. In the four-week August periodof fiscal year 2010, total revenues decreased 15.3% and comparable revenuesdecreased 16.6% compared to the four-week August period of fiscal year2009. Comparable revenues decreased 19.6% in our Specialty Retail stores andincreased 0.1% in our Direct Marketing operation for the four-week August periodof fiscal year 2010.

 

On October 8, 2009, weannounced preliminary total revenues and comparable revenues of approximately$353.5 million and $344.2 million, respectively, for the five-weekperiod ended October 3, 2009 and $594.5 million and$581.2 million, respectively, for the nine-week period ended October 3,2009. In the five-week September period of fiscal year 2010, totalrevenues decreased 14.8% and comparable revenues decreased 16.9% compared tothe five-week September period of fiscal year 2009. Comparable revenuesdecreased 17.6% in our Specialty Retail stores and 13.6% in our DirectMarketing operation for the five-week September period of fiscal year2010.  In the nine-week September periodof fiscal year 2010, total revenues decreased 15.0% and comparable revenuesdecreased 16.8% compared to the nine-week September period of fiscal year2009. Comparable revenues decreased 18.4% in our Specialty Retail stores and8.3% in our Direct Marketing operation for the nine-week September periodof fiscal year 2010.

 

All the financial data setforth above for the five and nine-week periods ending October 3, 2009 arepreliminary and unaudited and subject to revision based upon our review and areview by our independent registered public accounting firm of our financialcondition and results of operations for the quarter ending October 31,2009. Once we and our independent registered public accounting firm havecompleted our respective reviews of our financial information for the quarterending October 31, 2009, we may report financial results that aredifferent from those set forth above.

 

**Industry Overview**

 

We operate in the luxuryapparel and accessories segment of the U.S. retail industry and market and sellmerchandise from luxury-branded fashion vendors, including, but not limited to,Chanel, Prada, Giorgio Armani, David Yurman, St. John, Gucci, ErmenegildoZegna, Manolo Blahnik and Brioni. Luxury-branded fashion vendors typicallymanage the distribution and marketing of their merchandise to maximize theperception of brand exclusivity and to facilitate the sale of their goods atpremium prices, including limitations on the number of retail locations throughwhich they distribute their merchandise. These retail locations typicallyconsist of a limited number of specialty stores, high-end department storesand, in some instances, vendor-owned proprietary boutiques. Retailers thatcompete with us for the distribution of luxury fashion brands include SaksFifth Avenue, Nordstrom, Barney’s New York and other national, regional andlocal retailers.

 

**Customer Service and Marketing**

 

We are committed toproviding our customers with a premier shopping experience through ourrelationship-based customer service model, with superior merchandise selectionand elegant store settings of our stores. Critical elements to our customerservice approach are:

 

·                  knowledgeable, professional and well-trained salesassociates;

 

·                  marketing programs designed to promote customerawareness of our offerings of the latest fashion trends;

 

·                  loyalty programs designed to cultivate long-termrelationships with our customers; and

 

·                  facilitating the extension of credit to ourcustomers through a proprietary credit card program.

 

We believe we offer ourcustomers fair and liberal return policies consistent with the practices ofother luxury and specialty retailers.  Webelieve these policies help to cultivate long-term relationships with ourcustomers.

 

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***Sales Associates.***  We seek to maintain a sales force ofknowledgeable, professional and well-trained sales associates to deliverpersonal attention and service to our customers through our relationship-basedcustomer service model. We compensate our sales associates primarily on a commissionbasis and provide them with training in the areas of customer service, sellingskills and product knowledge. Our sales associates participate in activeclienteling programs designed to maintain contact with our customers betweenstore visits and to ensure that our customers are aware of the latestmerchandise offerings and fashion trends that we present in our stores. Weempower our sales associates to act as personal shoppers and in many cases, asthe personal style advisor to our customers.

 

***Marketing Programs.***  We conduct a wide variety of marketingprograms to support our sales associates in the communication of fashion trendsto our customers in order to create fashion excitement and enhance our customerrelationships. The programs include both in-store events and targeted,brand-consistent print media communications.

 

We maintain an activecalendar of in-store events to promote our sales efforts. The activitiesinclude in-store visits and trunk shows by leading designers featuring thenewest fashions from the designer, in-store promotions of the merchandise ofselected designers or merchandise categories, often through events conducted inconnection with our loyalty programs, and participation in charitable functionsin each of our markets. Past trunk shows and in-store promotions at our NeimanMarcus and Bergdorf Goodman stores have featured vendors such as Chanel,Giorgio Armani, Oscar de la Renta and Manolo Blahnik.

 

Through our print mediaprograms, we mail various publications to our customers communicating upcomingin-store events, new merchandise offerings and fashion trends. In connectionwith these programs, Neiman Marcus produces The Book® approximately eight tonine times each year. The Book is a high-quality publication featuring the latestfashion trends that is mailed on a targeted basis to our customers and has ayearly printing in excess of 3.7 million. Our other print publicationsinclude The Book for Men, the Bergdorf Goodman Magazine and specific designermailers.

 

We also believe that theonline and print catalog operations of Direct Marketing promote brandawareness, which benefits the operations of our retail stores.

 

***Loyalty Programs.***  We maintain a loyalty program under theInCircle® brand name designed to cultivate long-term relationships with ourcustomers. Our loyalty program focuses on our most active customers. Thisprogram includes marketing features, including private in-store events, specialmagazine issues, as well as the ability to accumulate points for qualifying purchases.Increased points are periodically offered in connection with in-storepromotional and other events. Upon attaining specified point levels, customersmay redeem their points for a wide variety of gifts ranging from gift cards todesigner merchandise and trips to exotic locations. Beginning in calendar 2006,we transitioned customers in our previous Bergdorf Goodman loyalty program toour InCircle loyalty program. Approximately 40% of our total revenues duringeach of the last two calendar years was generated by our InCircle loyaltyprogram members.

 

***Proprietary Credit Card Program.***  In June 2005, we entered into a marketing andservicing alliance with HSBC Bank Nevada, N.A. and HSBC Private LabelCorporation (formerly known as Household Corporation) (collectively referred toas HSBC).  Pursuant to the agreement with HSBC (ProgramAgreement), HSBC offers proprietary credit card accounts to our customers underboth the “Neiman Marcus” and “Bergdorf Goodman” brand names.

 

Under the terms of thisalliance, HSBC offers credit cards and non-card payment plans and bearssubstantially all credit risk with respect to sales transacted on the cardsbearing our brands. We receive ongoing payments from HSBC related to creditcard sales and compensation for marketing and servicing activities (HSBCProgram Income). During fiscal year 2006, we outsourced various administrativeelements of the proprietary credit card program, including the processing ofdata with respect to our proprietary credit card program, to HSBC as providedfor in the Program Agreement.  Wecontinue to handle key customer service functions, primarily customer inquiriesand collections.

 

In connection with ourProgram Agreement, we have changed and may continue to change, the terms ofcredit offered to our customers.  Inaddition, HSBC has discretion over certain policies and arrangements withcredit card customers and may change these policies and arrangements in waysthat affect our relationship with these customers. Any such changes in ourcredit card arrangements may adversely affect our credit card program andultimately, our business.

 

On April 21, 2008, weentered into an amendment to the Program Agreement, dated as of June 8,2005, with HSBC. The Program Agreement, as amended, provides for 1) theallocation between HSBC and NMG of additional income, if any, to be generatedfrom the credit card program as a result of certain changes made to the termsof credit extended to our customers since the inception of the ProgramAgreement and 2) the allocation of certain credit card losses between HSBC andNMG. We may enter into additional amendments to the Program Agreement prior toits maturity to alter the allocation of 

 

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both credit card losses and income, as agreedto by the parties in response to current economic conditions and otherfactors.  We do not expect that any suchamendments, if executed, will have a material impact on our future operatingresults.

 

Historically, our customersholding a proprietary credit card have tended to shop more frequently and havea higher level of spending than customers paying with cash or third-partycredit cards. In fiscal years 2009 and 2008, approximately 50% of our revenueswere transacted through our proprietary credit cards.

 

We utilize data capturedthrough our proprietary credit card program in connection with promotionalevents and customer relationship programs targeting specific customers basedupon their past spending patterns for certain brands, merchandise categoriesand store locations.

 

***Integrated Multi-Channel Model.***  We offer products through our complementaryDirect Marketing and Specialty Retail businesses, which enables us to maximizeour brand recognition and strengthen our customer relationships across allchannels. Our well-established online and catalog operation expands our reachbeyond the trading area of our retail stores, as over 40% of our Direct Marketingcustomers in fiscal years 2009 and 2008 were located outside of the trade areasof our existing retail locations. We also use our e-commerce websites andcatalogs as selling and marketing tools to increase the visibility and exposureof our brand and generate customer traffic within our retail stores. We believethe combination of our retail stores and direct selling efforts is the mainreason that our multi-channel customers spend more on average than oursingle-channel customers (over 3 times more in each of fiscal years 2009 and2008).

 

**Merchandise**

 

We carry luxurymerchandise from well-recognized designers as well as emerging designers.  We believe our merchandising experience andin-depth knowledge of our customers and the markets within which we operate,allow us to select an appropriate merchandise assortment for each of our storesthat is tailored to our customers’ tastes and lifestyles.

 

Ourpercentages of revenues by major merchandise category are as follows:

 
| ** **                                   | ** ** | **Years Ended**          | ** ** |
|----------------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| Women’s Apparel                         |       | 36                       | %          | 36 | % | 37 | % |
| Women’s Shoes, Handbags and Accessories |       | 21                       | %          | 20 | % | 20 | % |
| Cosmetics and Fragrances                     |       | 11                       | %          | 11 | % | 11 | % |
| Men’s Apparel and Shoes                 |       | 12                       | %          | 12 | % | 12 | % |
| Designer and Precious Jewelry                |       | 11                       | %          | 12 | % | 11 | % |
| Home Furnishings and Décor              |       | 7                        | %          | 8 | % | 9 | % |
| Other                                        |       | 2                        | %          | 1 | % | 0 | % |
|                                         |       | 100                      | %          | 100 | % | 100 | % |

 

Substantially all of ourmerchandise is delivered to us by our vendors as finished goods and ismanufactured in numerous locations, including Europe and the United States and,to a lesser extent, China, Mexico and South America.

 

Our major merchandisecategories are as follows:

 

*Women’s Apparel:* Women’s apparel consists of dresses,eveningwear, suits, coats, and sportswear separates—skirts, pants, blouses,jackets, and sweaters. Women’s apparel occupies the largest amount of squarefootage within our stores. We work with women’s apparel vendors to present themerchandise and highlight the best of the vendor’s product. Our primary women’sapparel vendors include Chanel, Prada, Gucci, Giorgio Armani, St. John, Akrisand Escada.

 

*Women’s Shoes, Handbagsand Accessories:*  Women’saccessories include belts, gloves, scarves, hats and sunglasses and complementour shoes and handbags assortments. Our primary vendors in this category includeManolo Blahnik, Prada, Christian Louboutin, Gucci, Chanel and Tory Burch inladies shoes, and handbags from Chanel, Prada, Gucci, Nancy Gonzalez andBalenciaga.

 

*Cosmetics and Fragrances:*  Cosmetics and fragrances include facial andskin cosmetics, skin therapy and lotions, soaps, fragrances, candles and beautyaccessories. Our primary vendors of cosmetics and beauty products include LaMer, Chanel, Sisley, Bobbi Brown, La Prairie, Estee Lauder and Laura Mercier.

 

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*Men’s Apparel and Shoes:*  Men’s apparel and shoes include suits, dressshirts and ties, sport coats, jackets, trousers, casual wear and eveningwear aswell as business and casual footwear. Bergdorf Goodman has a fully dedicated men’s store in New York. Ourprimary vendors in this category include Ermenegildo Zegna, Brioni, GiorgioArmani, Prada and Loro Piana in men’s clothing and sportswear and ErmenegildoZegna, Brioni, Prada, Ferragamo, Gucci and Stefano Ricci in men’s furnishingsand shoes.

 

*Designer and PreciousJewelry:*  Our designerand precious jewelry offering includes women’s necklaces, bracelets, rings,earrings and watches that are selected to complement our apparel merchandiseoffering. Our primary vendors in this category include David Yurman, JohnHardy, Ippolita and Konstantino in designer jewelry and Cartier and RobertoCoin in precious jewelry. We often sell precious jewelry which has beenconsigned to us from the vendor.

 

*Home Furnishings andDécor:*  Home furnishings and décorinclude linens, tabletop, kitchen accessories, furniture, rugs, decorativeitems (frames, candlesticks, vases and sculptures) as well as collectables.Merchandise for the home complements our apparel offering in terms of qualityand design. Our primary vendors in this category include Jay Strongwater, Daum,Steuben, Baccarat, MacKenzie-Childs and Lalique.

 

**Vendor Relationships**

 

Our merchandise assortmentconsists of a wide selection of luxury goods purchased from both well-knownluxury-branded fashion vendors as well as new and emerging designers. Wecommunicate with our vendors frequently, providing feedback on current demandfor their products, suggesting, at times, changes to specific productcategories or items and gaining insight into their future fashion direction.Certain designers sell their merchandise, or certain of their designcollections, exclusively to us and other designers sell to us pursuant to theirlimited distribution policies. We compete for quality merchandise andassortment principally based on relationships and purchasing power withdesigner resources. Our women’s and men’s apparel and fashion accessoriesbusinesses are especially dependent upon our relationships with these designerresources. We monitor and evaluate the sales and profitability performance ofeach vendor and adjust our future purchasing decisions from time to time basedupon the results of this analysis. We have no guaranteed supply arrangementswith our principal merchandising sources and, accordingly, there can be noassurance that such sources will continue to meet our needs for quality, styleand volume. In addition, our vendor base is diverse, with only one vendorrepresenting slightly more than 5% of the cost of our total purchases in fiscalyear 2009. The breadth of our sourcing helps mitigate risks associated with asingle brand or designer.

 

As a result of currenteconomic conditions, some of our vendors have experienced serious cash flowissues, reductions in available credit from banks, factors or other financialinstitutions, or increases in the cost of capital.  To counteract their cash flow problems, ourvendors may attempt to increase their prices, pass through increased costs,alter historical credit and payment terms available to us or seek otherrelief.  Any of these actions could havean adverse impact on our relationship with the vendor or constrain the amountsor timing of our purchases from the vendor and, ultimately, have an adverseimpact on our revenues, profitability and liquidity.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. We receive certain allowances toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. Other allowances wereceive represent reductions to the amounts we pay to acquire the merchandise.We also receive advertising allowances from certain of our merchandise vendors,substantially all of which represent reimbursements of direct, specified andincremental costs we incur to promote the vendors’ merchandise. Theseallowances are recorded as a reduction of our advertising costs when incurred.In addition, we receive allowances from certain merchandise vendors inconjunction with compensation allowances for employees who sell the vendors’merchandise, which allowances are netted against the related compensation expensesthat we incur.  For more informationrelated to allowances received from vendors, see Note 1 to our auditedconsolidated financial statements included herein.

 

In order to expand ourproduct assortment, we offer certain merchandise, primarily precious jewelry,which has been consigned to us from the vendor. As of August 1, 2009 and August 2,2008, we held consigned inventories with a cost basis of approximately $283.0million and $388.8 million, respectively (consigned inventories are notreflected in our consolidated balance sheet as we do not take title toconsigned merchandise).  From time totime, we make advances to certain of our vendors. These advances are typicallydeducted from amounts paid to vendors at the time we receive the merchandiseor, in the case of advances made for consigned goods, at the time we sell thegoods. We had net outstanding advances to vendors of approximately$11.6 million at August 1, 2009 and $22.7 million at August 2,2008.

 

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**InventoryManagement**

 

Our merchandising functionis decentralized with separate merchandising functions for Neiman Marcusstores, Bergdorf Goodman and Direct Marketing. Each merchandising function isresponsible for the determination of the merchandise assortment and quantitiesto be purchased and, in the case of Neiman Marcus stores, for the allocation ofmerchandise to each store. We currently have approximately 400 merchandisebuyers and merchandise planners.

 

The majority of themerchandise we purchase is initially received at one of our centralizeddistribution facilities. To support our Specialty Retail stores, we utilize aprimary distribution facility in Longview, Texas, a regional distributionfacility in Dayton, New Jersey and four regional service centers. We alsooperate two distribution facilities in the Dallas-Fort Worth area to supportour Direct Marketing operation.

 

Our distribution facilitiesare linked electronically to our various merchandising staffs to facilitate thedistribution of goods to our stores. We utilize electronic data interchange(EDI) technology with certain of our vendors, which is designed to movemerchandise onto the selling floor quickly and cost-effectively by allowingvendors to deliver floor-ready merchandise to the distribution facilities. Inaddition, we utilize high-speed automated conveyor systems capable of scanningthe bar coded labels on incoming cartons of merchandise and directing thecartons to the proper processing areas. Many types of merchandise are processedin the receiving area and immediately “cross docked” to the shipping dock fordelivery to the stores. Certain processing areas are staffed with personnelequipped with hand-held radio frequency terminals that can scan a vendor’s barcode and transmit the necessary information to a computer to record merchandiseon hand. We utilize third-party carriers to distribute our merchandise toindividual stores.

 

With respect to theSpecialty Retail stores, the majority of the merchandise is held in our retailstores.  We primarily operate on apre-distribution model through which we allocate merchandise on our initialpurchase orders to each store. This merchandise is shipped from our vendors toour distribution facilities for delivery to designated stores. We closelymonitor the inventory levels and assortments in our retail stores to facilitatereorder and replenishment decisions, satisfy customer demand and maximize sales.Transfers of goods between stores are made primarily at the direction ofmerchandising personnel and, to a lesser extent, by store management primarilyto fulfill customer requests.

 

We also maintain certaininventories at the Longview distribution facility. The goods held at theLongview distribution facility consist primarily of goods held in limitedassortment or quantity by our stores and replenishment goods available tostores achieving high initial sales levels. With our “locker stock” inventory management program, we maintain aportion of our most in-demand and high fashion merchandise at our distributionfacilities.  For products stored inlocker stock, we can ship replenishment merchandise to the stores thatdemonstrate the highest customer demand. In addition, our sales associates can use the program to ship itemsdirectly to our customers, thereby improving customer service and increasingproductivity.  This program also helps usto restock inventory at individual stores more efficiently, to maximize theopportunity for full-price selling and to minimize the potential risks relatedto excess inventories.

 

**CapitalInvestments**

 

We make capital investmentsannually to support our long-term business goals and objectives. We investcapital in new and existing stores, distribution and support facilities as wellas information technology. We have gradually increased the number of our storesover the past ten years, growing our full-line Neiman Marcus and BergdorfGoodman store base from 28 stores at the beginning of fiscal year 1999 to ourcurrent 43 stores.

 

We invest capital in thedevelopment and construction of new stores in both existing and new markets. Weconduct extensive demographic, marketing and lifestyle research to identifyattractive retail markets with a high concentration of our target customersprior to our decision to construct a new store. We compete with other retailersfor real estate opportunities principally on the basis of our ability toattract customers. In addition to the construction of new stores, we alsoinvest in the on-going maintenance of our stores to ensure an elegant shoppingexperience for our customers. Capital expenditures for existing stores rangefrom minor renovations of certain areas within the store to major remodels andrenovations and store expansions. We are focused on operating only inattractive markets that can profitably support our stores as well asmaintaining the quality of our stores and, consequently, our brand. Withrespect to our major remodels, we only expand after extensive analysis of ourprojected returns on capital. We generally experience an increase in both totalsales and sales per square foot at stores that undergo a remodel or expansion.

 

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We also believe capitalinvestments for information technology in our stores, distribution facilitiesand support functions are necessary to support our business strategies. As aresult, we are continually upgrading our information systems to improveefficiency and productivity.

 

In the past three fiscalyears, we have made capital expenditures aggregating $433 million relatedprimarily to:

 

·                  the construction of new stores in Austin, Natick(suburban Boston), Topanga (greater Los Angeles area) and Bellevue (suburbanSeattle);

 

·                  the renovation and expansion of our main BergdorfGoodman store in New York City and Neiman Marcus stores in Atlanta andWestchester; and

 

·                  enhancements to merchandising and store systems.

 

In fiscal year 2010, weanticipate capital expenditures for planned new stores in Walnut Creek,California and San Jose, California.

 

We receive allowances fromdevelopers related to the construction of our stores thereby reducing our cashinvestment in these stores. We record these allowances as deferred real estatecredits which are recognized as a reduction of rent expense on a straight-linebasis over the lease term. We received construction allowances aggregating$10.0 million in fiscal year 2009 and $36.8 million in fiscal year2008.

 

**Competition**

 

The specialty retailindustry is highly competitive and fragmented. We compete for customers withspecialty retailers, traditional and high-end department stores, nationalapparel chains, vendor-owned proprietary boutiques, individual specialtyapparel stores and direct marketing firms. We compete for customers principallyon the basis of quality and fashion, customer service, value, assortment andpresentation of merchandise, marketing and customer loyalty programs and, inthe case of Neiman Marcus and Bergdorf Goodman, store ambiance. Retailers thatcompete with us for distribution of luxury fashion brands include Saks FifthAvenue, Nordstrom, Barney’s New York and other national, regional and localretailers. Many of these competitors have greater financial resources than wedo. In addition, following consummation of the Acquisition many of thosecompetitors are significantly less leveraged than we are, and therefore mayhave greater flexibility to respond to changes in our industry.

 

We believe we aredifferentiated from other national retailers by our distinctive merchandiseassortment, which we believe is more upscale than other high-end departmentstores, excellent customer service, prime real estate locations and elegantshopping environment. We believe we differentiate ourselves from regional andlocal high-end luxury retailers through our diverse product selection, strongnational brand, loyalty programs, customer service, prime shopping locationsand strong vendor relationships that allow us to offer the top merchandise fromeach vendor. Vendor-owned proprietary boutiques and specialty stores carry amuch smaller selection of brands and merchandise, lack the overall shoppingexperience we provide and have a limited number of retail locations.

 

**Employees**

 

As of October 1, 2009,we had approximately 14,700 employees. Neiman Marcus stores had approximately11,900 employees, Bergdorf Goodman stores had approximately 1,000 employees,Direct Marketing had approximately 1,500 employees and Neiman Marcus Group hadapproximately 300 employees. Our staffing requirements fluctuate during theyear as a result of the seasonality of the retail industry. We hire additionaltemporary associates and increase the hours of part-time employees duringseasonal peak selling periods.  Exceptfor approximately 13% of the Bergdorf Goodman employees, none of our employeesis subject to a collective bargaining agreement. We believe that our relationswith our employees are good.

 

**Seasonality**

 

Our business, like that ofmost retailers, is affected by seasonal fluctuations in customer demand,product offerings and working capital expenditures. For additional informationon seasonality, see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Executive Overview—Seasonality.”

 

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**Regulation**

 

The credit card operationsthat are conducted under our arrangements with HSBC are subject to numerousfederal and state laws that impose disclosure and other requirements upon theorigination, servicing and enforcement of credit accounts and limitations onthe maximum amount of finance charges that may be charged by a credit provider.In addition to our proprietary credit cards, credit to our customers is alsoprovided primarily through third parties. Any regulation or change in theregulation of credit arrangements that would materially limit the availabilityof credit to our customer base could adversely affect our results of operationsor financial condition.

 

Our practices, as well asour competitors, are subject to review in the ordinary course of business bythe Federal Trade Commission and are subject to numerous federal and statelaws. Additionally, we are subject to certain customs, truth-in-advertising andother laws, including consumer protection regulations that regulate retailersgenerally and/or govern the importation, promotion and sale of merchandise. Weundertake to monitor changes in these laws and believe that we are in materialcompliance with all applicable state and federal regulations with respect tosuch practices.

 

**ITEM1A. RISK FACTORS**

 

**RisksRelated to Current Economic Conditions**

 

**Currenteconomic conditions have adversely affected, and may continue to adverselyaffect, our business and results of operations.**

 

The recent deterioration ineconomic conditions, both in the domestic and global economies, has had asignificant adverse impact on our business. Instability in the financial markets, tightening of consumer credit andother economic conditions and uncertainties have caused a reduction in consumerspending.  These conditions have had asignificant negative impact on our revenues.

 

The merchandise we sellconsists in large part of luxury retail goods. The purchase of these goods bycustomers is discretionary, and therefore highly dependent upon the level ofconsumer spending, particularly among affluent customers. Accordingly, sales ofthese products may continue to be adversely affected by a continuation orworsening of current economic conditions, increases in consumer debt levels,uncertainties regarding future economic prospects or a decline in consumerconfidence. During an actual or perceived economic downturn (as a result ofincreases in consumer debt levels, increases in interest rates, a tightening ofconsumer credit, uncertainties regarding future economic performance and taxrates and policies, or a decline in consumer confidence, among other factors),fewer customers may shop our stores and websites and those who do shop maylimit the amounts of their purchases.  Asa result, we could be required to take significant additional markdowns and/orincrease our marketing and promotional expenses in response to the lower thananticipated levels of demand for luxury goods. In addition, promotional and/or prolonged periods of deep discount pricingby our competitors could have a material adverse effect on our business.

 

We continue to experience achallenging economic and retail environment and expect these conditions willcontinue for an extended period of time. Consistent with the significant declines in overall macroeconomicfactors, capital markets and consumer confidence that have existed duringfiscal year 2009, customer demand has been well below our initial expectationsand the prior year.  The current softnessin customer demand exists across all geographic areas, all distributionchannels and all merchandise categories, particularly the apparel and homedécor categories.  We expect retaildemand and revenues will remain weak for an extended period of time.  We will continue to align our inventorylevels and purchases with anticipated lower customer demand.  The prolonged continuation of current marketconditions could have a material adverse effect on our business.

 

**Current economic conditions mayconstrain our ability to obtain credit.**

 

Current economic conditionsmay constrain our ability to obtain credit. Domestic and global credit and equity markets have recently undergonesignificant disruption, making it difficult for many businesses to obtainfinancing on acceptable terms or at all. As a result of this disruption, wehave experienced an increase in the cost of borrowings necessary to operate ourbusiness.  If these conditions continueor become worse, our cost of borrowing could continue to increase.  It may also become more difficult to obtainfinancing for our operations or to refinance long-term obligations as theybecome payable.  In addition, ourborrowing costs can be affected by independent rating agencies’ short andlong-term debt ratings which are based largely on our performance as measuredby credit metrics including interest coverage and leverage ratios.  A decrease in these ratings would likely alsoincrease our cost of borrowing and make it more difficult for us to obtain 

 

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financing. Based on current economic conditions and our recent operatingperformance, our long-term debt ratings were downgraded in fiscal year 2009 byall three independent rating agencies.  Asignificant increase in the costs we incur in order to finance our operationsmay have a material adverse impact on our business results and financialcondition.

 

**RisksRelated to Our Structure and NMG’s Indebtedness**

 

**Because ourownership of NMG accounts for substantially all of our assets and operations,we are subject to all risks applicable to NMG.**

 

Weare a holding company.  NMG and itssubsidiaries conduct substantially all of our consolidated operations and own substantiallyall of our consolidated assets.  As aresult, we are subject to all risks applicable to NMG.  In addition, NMG’s Asset-Based RevolvingCredit Facility, NMG’s Senior Secured Term Loan Facility and the indenturesgoverning NMG’s senior notes and senior subordinated notes contain provisionslimiting NMG’s ability to distribute earnings to us, in the form of dividendsor otherwise.

 

**NMG has asubstantial amount of indebtedness, which may adversely affect NMG’s cash flowand its ability to operate the business, to comply with debt covenants and makepayments on its indebtedness.**

 

We are highlyleveraged.  As of August 1, 2009,the principal amount of NMG’s total indebtedness was approximately $2,984.9million, the unused borrowing availability under the $600.0 million Asset-BasedRevolving Credit Facility was $468.5 million and the outstanding letters ofcredit were $32.8 million.  NMG’ssubstantial indebtedness, combined with its lease and other financialobligations and contractual commitments, could have other importantconsequences. For example, it could:

 

·                  make it more difficult forNMG to satisfy its obligations with respect to its indebtedness and any failureto comply with the obligations of any of its debt instruments, includingrestrictive covenants and borrowing conditions, could result in an event ofdefault under the agreements governing NMG’s indebtedness;

 

·                  make NMG more vulnerableto adverse changes in general economic, industry and competitive conditions andadverse changes in government regulation;

 

·                  require NMG to dedicate asubstantial portion of its cash flow from operations to payments on itsindebtedness, thereby reducing the availability of cash flows to fund workingcapital, capital expenditures, acquisitions and other general corporatepurposes;

 

·                  limit NMG’s flexibility inplanning for, or reacting to, changes in NMG’s business and the industry inwhich it operates;

 

·                  place NMG at a competitivedisadvantage compared to its competitors that are less highly leveraged;

 

·                  limit NMG’s ability toobtain credit from our vendors and/or the vendors’ factors; and

 

·                  limit NMG’s ability toborrow additional amounts for working capital, capital expenditures,acquisitions, debt service requirements, execution of its business strategy orother purposes.

 

Any of the above listedfactors could materially adversely affect NMG’s business, financial conditionand results of operations.

 

In addition, NMG’s interestexpense could increase if interest rates increase because the entire amount of theindebtedness under the senior secured credit facilities bears interest atfloating rates.  As of August 1,2009, NMG had approximately $1,625.0 million principal amount of floatingrate debt, consisting of outstanding borrowings under the Senior Secured TermLoan Facility (including $26.6 million of borrowings classified as currentliabilities).  In addition, NMG has anAsset-Based Revolving Credit Facility that provides committed financing of upto $600.0 million, subject to a borrowing base. As of August 1, 2009, NMG had no borrowings outstanding under thisfacility, $32.8 million of outstanding letters of credit and $468.5 million ofunused borrowing availability.  EffectiveDecember 6, 2005, NMG entered into floating to fixed interest rate swapagreements for an aggregate notional amount of $1,000.0 million to limit ourexposure to interest rate increases related to a portion of our floating rateindebtedness.

 

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**To serviceNMG’s indebtedness, it will require a significant amount of cash. NMG’s abilityto generate cash depends on many factors beyond its control, and any failure tomeet its debt service obligations could harm its business, financial conditionand results of operations.**

 

NMG’s ability to payinterest on and principal of the debt obligations will primarily depend uponNMG’s future operating performance. As a result, prevailing economic conditionsand financial, business and other factors, many of which are beyond ourcontrol, will affect its ability to make these payments.

 

If NMG does not generatesufficient cash flow from operations to satisfy the debt service obligations,NMG may have to undertake alternative financing plans, such as refinancing orrestructuring its indebtedness, selling assets, reducing or delaying capitalinvestments or seeking to raise additional capital.  Our ability to restructure or refinance NMG’sdebt will depend on the condition of the capital markets and our financialcondition at such time.  Any refinancingof NMG’s debt could be at higher interest rates and may require it to complywith more onerous covenants, which could further restrict its businessoperations.  The terms of existing orfuture debt instruments may restrict NMG from adopting some of thesealternatives.  In addition, our borrowingcosts and ability to refinance may be affected by short-term and long-term debtratings assigned by independent rating agencies, which are based, insignificant part, on NMG’s performance as measured by indicators such asinterest coverage and leverage ratios. Furthermore, any failure to make payments of interest and principal onNMG’s outstanding indebtedness on a timely basis would likely result in areduction of NMG’s credit rating, which could harm its ability to incuradditional indebtedness on acceptable terms.

 

Contractual limitations onNMG’s ability to execute any necessary alternative financing plans couldexacerbate the effects of any failure to generate sufficient cash flow tosatisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits NMG to borrow up to$600.0 million; however, NMG’s ability to borrow and obtain letters ofcredit (including amendments, renewals and extensions of letters of credit)thereunder is limited by a borrowing base, which at any time will equal the sumof (a) the lesser of (i) 80% of eligible inventory (valued at thelower of cost or market value) and (ii) 85% of the net orderly liquidationvalue of eligible inventory, and (b) 85% of the amounts owed by creditcard processors to the borrowers under the Asset-Based Revolving CreditFacility in respect of eligible credit card accounts constituting proceedsarising from the sale or disposition of inventory, less certain reserves.  In addition, if at any time the aggregateamount of outstanding revolving loans and incremental term loans, unreimbursedletter of credit drawings and undrawn letters of credit under the Asset-BasedRevolving Credit Facility exceeds the reported value of inventory as calculatedunder that facility, NMG will be required to eliminate such excess. Further, if (a) the amount available under the Asset-Based RevolvingCredit Facility is less than the greater of (i) 20% of the lesser of (A) theaggregate revolving commitments and (B) the borrowing base and (ii) $75million or (b) an event of default has occurred, NMG will be required torepay outstanding loans and cash collateralize letters of credit.  In addition, under the terms of theAsset-Based Revolving Credit Facility, through April 30, 2011 NMG isrequired to maintain excess availability of at least the greater of (a) 10%of the lesser of (i) the aggregate revolving commitments and (ii) theborrowing base and (b) $50 million.  After April 30, 2011, if atany time, excess availability is less than the greater of (a) 15% of thelesser of (i) the aggregate revolving commitments and (ii) theborrowing base and (b) $60 million, NMG will be required to maintain a proforma ratio of consolidated EBITDA to consolidated Fixed Charges (as such termsare defined in the credit agreement) of at least 1.1 to 1.0.  Our ability to meet the conditions describedin this paragraph may be affected by events beyond our control.

 

NMG’s inability to generatesufficient cash flow to satisfy its debt service obligations, or to refinanceits obligations at all or on commercially reasonable terms, would have anadverse effect, which could be material, on NMG’s business, financial conditionand results of operations.

 

**The termsof NMG’s****Asset-Based Revolving Credit Facility and Senior Secured Term LoanFacility****and the indentures governing theSenior Notes, the Senior Subordinated Notes and the 2028 Debentures mayrestrict NMG’s current and future operations, particularly its ability torespond to changes in its business or to take certain actions.**

 

The credit agreementsgoverning NMG’s Asset-Based Revolving Credit Facility and Senior Secured TermLoan Facility and the indentures governing the Senior Notes, the SeniorSubordinated Notes and the 2028 Debentures contain, and any future indebtednessof NMG would likely contain, a number of restrictive covenants that imposesignificant operating and financial restrictions, including restrictions on NMG’sability to engage in acts that may be in its best long-term interests. Theindentures governing the Senior Notes, the Senior Subordinated Notes and the2028 Debentures and the credit agreements governing the senior secured creditfacilities include covenants that, among other things, restrict NMG’s abilityto:

 

·                  incur additionalindebtedness;

 

·                  pay dividends on NMG’scapital stock or redeem, repurchase or retire its capital stock orindebtedness;

 

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·                  make investments;

 

·                  create restrictions on thepayment of dividends or other amounts to NMG from NMG’s restrictedsubsidiaries;

 

·                  engage in transactionswith its affiliates;

 

·                  sell assets, includingcapital stock of NMG’s subsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and leaseback transactions.

 

In addition, NMG’s abilityto borrow under the Asset-Based Revolving Credit Facility is limited by theconditions described above.

 

Moreover, NMG’s Asset-BasedRevolving Credit Facility provides discretion to the agent bank acting onbehalf of the lenders to impose additional availability restrictions and otherreserves, which could materially impair the amount of borrowings that wouldotherwise be available to us. There can be no assurance that the agent bankwill not impose such reserves or, were it to do so, that the resulting impactof this action would not materially and adversely impair NMG’s liquidity.

 

A breach of any of therestrictive covenants would result in a default under the Asset-Based RevolvingCredit Facility and Senior Secured Term Loan Facility.  If any such default occurs, the lenders underthe Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facilitymay elect to declare all outstanding borrowings under such facilities, togetherwith accrued interest and other fees, to be immediately due and payable, orenforce their security interest, any of which would result in an event ofdefault under NMG’s Senior Notes and Senior Subordinated Notes and 2028Debentures. The lenders would also have the right in these circumstances toterminate any commitments they have to provide further borrowings.

 

The operating and financialrestrictions and covenants in these debt agreements and any future financingagreements may adversely affect NMG’s ability to finance future operations orcapital needs or to engage in other business activities.

 

**RisksRelated to Our Business and Industry**

 

**Thespecialty retail industry is highly competitive.**

 

The specialty retailindustry is highly competitive and fragmented. Competition is strong both toattract and sell to customers and to establish relationships with, and obtainmerchandise from, key vendors.

 

A number of differentcompetitive factors could have a material adverse effect on our business,results of operations and financial condition, including:

 

·                  increasedoperational efficiencies of competitors;

 

·                  competitivepricing strategies, including deep discount pricing by a broad range ofretailers during periods of poor consumer confidence or economic instability;

 

·                  expansion ofproduct offerings by existing competitors;

 

·                  entry by newcompetitors into markets in which we currently operate; and

 

·                  adoption byexisting competitors of innovative retail sales methods.

 

We compete for customerswith specialty retailers, traditional and high-end department stores, nationalapparel chains, vendor-owned proprietary boutiques, individual specialtyapparel stores and direct marketing firms. We compete for customers principallyon the basis of quality and fashion, customer service, value, assortment andpresentation of merchandise, marketing and customer loyalty programs and, inthe case of Neiman Marcus and Bergdorf Goodman, store ambiance. In ourSpecialty Retail business, merchandise assortment is a critical competitivefactor, and retail stores compete for exclusive, preferred and limiteddistribution arrangements with key designers. Many of our competitors arelarger than we are and have greater financial resources than we do. Inaddition, certain designers from whom we source merchandise have established competingfree-standing retail stores in the same vicinity as our stores. If we fail tosuccessfully compete for customers or merchandise, our

 

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business will suffer.

 

**We aredependent on our relationships with certain designers, vendors and othersources of merchandise.**

 

Our relationships withestablished and emerging designers are a key factor in our position as a retailerof high-fashion merchandise, and a substantial portion of our revenues isattributable to our sales of designer merchandise. Many of our key vendorslimit the number of retail channels they use to sell their merchandise andcompetition among luxury retailers to obtain and sell these goods is intense.Our relationships with our designers have been a significant contributor to ourpast success. We have no guaranteed supply arrangements with our principalmerchandising sources. Accordingly, there can be no assurance that such sourceswill continue to meet our quality, style and volume requirements.

 

As a result of currenteconomic conditions, some of our vendors have experienced serious cash flowissues, reductions in available credit from banks, factors or other financialinstitutions, or increases in the cost of capital.  To counteract their cash flow problems, ourvendors may attempt to increase their prices, pass through increased costs,alter historical credit and payment terms available to us or seek otherrelief.  Any of these actions could havean adverse impact on our relationship with the vendor or constrain the amountsor timing of our purchases from the vendor and, ultimately, have an adverseimpact on our revenues, profitability and liquidity.

 

Moreover, nearly all of thebrands of our top designers are sold by competing retailers, and many of ourtop designers also have their own dedicated retail stores. If one or more ofour top designers were to cease providing us with adequate supplies of merchandiseor, conversely, were to increase sales of merchandise through their own storesor to the stores of our competitors, our business could be adversely affected.In addition, any decline in the popularity or quality of any of our designerbrands could adversely affect our business.

 

**If wesignificantly overestimate our future sales, our profitability may be adverselyaffected.**

 

We make decisions regardingthe purchase of our merchandise well in advance of the season in which it willbe sold. For example, women’s apparel, men’s apparel and shoes are typicallyordered six to nine months in advance of the products being offered for salewhile handbags, jewelry and other categories are typically ordered three to sixmonths in advance.  If our sales duringany season, particularly a peak season, are significantly lower than we expectfor any reason, we may not be able to adjust our expenditures for inventory andother expenses in a timely fashion and may be left with a substantial amount ofunsold inventory. If that occurs, we may be forced to rely on markdowns orpromotional sales to dispose of excess inventory. This could have an adverseeffect on our margins and operating income. At the same time, if we fail topurchase a sufficient quantity of merchandise, we may not have an adequatesupply of products to meet consumer demand. This may cause us to lose sales orharm our customer relationships.

 

**Our failureto identify changes in consumer preferences or fashion trends may adverselyaffect our performance.**

 

Our success depends in largepart on our ability to identify fashion trends as well as to anticipate, gaugeand react to changing consumer demands in a timely manner. If we fail toadequately match our product mix to prevailing customer tastes, we may be requiredto sell our merchandise at higher average markdown levels and lower averagemargins. Furthermore, the products we sell often require long lead times toorder and must appeal to consumers whose preferences cannot be predicted withcertainty and often change rapidly. Consequently, we must stay abreast ofemerging lifestyle and consumer trends and anticipate trends and fashions thatwill appeal to our consumer base. Any failure on our part to anticipate,identify and respond effectively to changing consumer demands and fashiontrends could adversely affect our business.

 

**A breach in information privacycould negatively impact our operations.**

 

The protection of ourcustomer, employee and company data is critically important to us.  We utilize customer data captured throughboth our proprietary credit card programs and our direct marketing activities.Our customers have a high expectation that we will adequately safeguard andprotect their personal information.  Theregulatory environment surrounding information security and privacy is evolvingand increasingly demanding, with the frequent imposition of new and constantlychanging requirements across all our business units.  A significant breach of customer, employee orcompany data could damage our reputation and relationships with our customersand result in lost sales, fines and lawsuits.

 

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**Ourbusiness and performance may be affected by our ability to implement our storeexpansion and remodeling strategies.**

 

Based upon our expansionstrategy, we expect that planned new stores will add over 185,000 square feetof new store space over approximately the next four fiscal years, representingan increase of approximately 3% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores.  New store openings involve certain risks,including constructing, furnishing and supplying a store in a timely and costeffective manner, accurately assessing the demographic or retail environment ata given location, hiring and training quality staff, obtaining necessarypermits and zoning approvals, obtaining commitments from a core group of vendorsto supply the new store, integrating the new store into our distributionnetwork and building customer awareness and loyalty. In undertaking storeremodels, we must complete the remodel in a timely, cost effective manner,minimize disruptions to our existing operations, and succeed in creating animproved shopping environment. If we fail to execute on these or other aspectsof our store expansion and remodeling strategy, we could suffer harm to oursales, an increase in costs and expenses and an adverse effect on our business.

 

**Weoutsource certain business processes to third-party vendors that subject us torisks, including disruptions in business and increased costs.**

 

Somebusiness processes that are dependent on technology are outsourced to thirdparties.  Such processes include creditcard authorization and processing, insurance claims processing, payrollprocessing, record keeping for retirement and other benefit plans and other accountingprocesses.  In addition, we reviewoutsourcing alternatives on a routine basis and may decide to outsourceadditional business processes in the future. We make a diligent effort to ensure that all providers of outsourcedservices are observing proper internal control practices, such as redundantprocessing facilities; however, there are no guarantees that failures will notoccur.  Failure of third parties toprovide adequate services could have an adverse effect on our results ofoperations, financial condition or ability to accomplish our financial andmanagement reporting.

 

**Acts ofterrorism could adversely affect our business.**

 

The economic downturn thatfollowed the terrorist attacks of September 11, 2001 had a materialadverse effect on our business. Any further acts of terrorism or other futureconflicts may disrupt commerce and undermine consumer confidence, cause adownturn in the economy generally, cause consumer spending or shopping centertraffic to decline or reduce the desire of our customers to make discretionarypurchases. Any of the foregoing factors could negatively impact our salesrevenue, particularly in the case of any terrorist attack targeting retailspace, such as a shopping center. Furthermore, an act of terrorism or war, or thethreat thereof, could negatively impact our business by interfering with ourability to obtain merchandise from foreign manufacturers. Any future inabilityto obtain merchandise from our foreign manufacturers or to substitute othermanufacturers, at similar costs and in a timely manner, could adversely affectour business.

 

**The loss ofany of our senior management team or attrition among our buyers or key salesassociates could adversely affect our business.**

 

Our success in the specialtyretail industry will continue to depend to a significant extent on our seniormanagement team, buyers and key sales associates. We rely on the experience ofour senior management, who have specific knowledge relating to us and ourindustry that would be difficult to replace. If we were to lose a portion ofour buyers or key sales associates, our ability to benefit from long-standingrelationships with key vendors or to provide relationship-based customerservice may suffer. We may not be able to retain our current senior managementteam, buyers or key sales associates and the loss of any of these individualscould adversely affect our business.

 

**Inflationmay adversely affect our business operations in the future.**

 

In recent years, we haveexperienced certain inflationary conditions in our cost base due primarily to (1) changesin foreign currency exchange rates that have reduced the purchasing power ofthe U.S. dollar, (2) increases in selling, general and administrativeexpenses, particularly with regard to employee benefits and (3) increasesin fuel prices and costs impacted by increases in fuel prices, such as freightand transportation costs. Inflation can harm our margins and profitability ifwe are unable to increase prices or cut costs enough to offset the effects of inflationin our cost base. If inflation in these or other costs worsens, we may not beable to offset the effects of inflation and cost increases through control ofexpenses, passing cost increases on to customers or any other method.  Any future inflation could adversely affectour profitability and our business.

 

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**Failure tomaintain competitive terms under our loyalty programs could adversely affectour business.**

 

Wemaintain loyalty programs that are designed to cultivate long-termrelationships with our customers and enhance the quality of service we provideto our customers. We must constantly monitor and update the terms of ourloyalty programs so that they continue to meet the demands and needs of ourcustomers and remain competitive with loyalty programs offered by otherhigh-end specialty retailers. Given that approximately 40% of our totalrevenues during each of the last two calendar years was generated by ourInCircle loyalty program members, our failure to continue to provide qualityservice and competitive rewards to our customers through the InCircle loyaltyprogram could adversely affect our business.

 

**Changes inour credit card arrangements, applicable regulations and consumer creditpatterns could adversely impact our ability to facilitate the provision ofconsumer credit to our customers and adversely affect our business.**

 

Wemaintain a proprietary credit card program through which credit is extended tocustomers under the “Neiman Marcus” and “Bergdorf Goodman” names. Because amajority of our revenues are transacted through our proprietary credit cards,changes in our proprietary credit card arrangement that adversely impact ourability to facilitate the provision of consumer credit may adversely affect ourperformance.

 

Weentered into a five-year program agreement with HSBC in June 2005 whichprovides for a long-term marketing and servicing alliance under which HSBCoffers proprietary credit card accounts to our customers under both the “NeimanMarcus” and “Bergdorf Goodman” brand names. Under the terms of this alliance, HSBC offers credit cards and non-cardpayment plans and bears substantially all credit risk with respect to salestransacted on the cards bearing our brands. HSBC has discretion over certain policiesand arrangements with our credit card customers and may change these policiesand arrangements in ways that affect our relationship with these customers.

 

Wereceive ongoing payments from HSBC related to credit card sales andcompensation for marketing and servicing activities. During fiscal year 2006,we outsourced various administrative elements of the proprietary credit cardprogram to HSBC, including the processing of data, although we continue tohandle key customer service functions, including customer inquiries andcollections.

 

Wehave entered into various amendments to the Program Agreement with HSBC sinceits inception. These amendments, among other things, provide for 1) theallocation between HSBC and NMG of additional income, if any, to be generatedfrom the credit card program as a result of certain changes made to the termsof credit extended to our customers and 2) the allocation of certain creditcard losses between HSBC and NMG.  We mayenter into additional amendments to the Program Agreement prior to its maturityto alter the allocation of both credit card losses and income, as agreed to bythe parties in response to current economic conditions and other factors.

 

Creditcard operations are subject to numerous federal and state laws that imposedisclosure and other requirements upon the origination, servicing andenforcement of credit accounts and limitations on the maximum amount of financecharges that may be charged by a credit provider. Any regulation or change inthe regulation of credit arrangements that would materially limit theavailability of credit to our customer base could adversely affect ourbusiness.  Changes in credit card use,payment patterns, and default rates may result from a variety of economic,legal, social, and other factors that we cannot control or predict withcertainty.  In addition, there can be noassurance that, upon expiration of our current alliance with HSBC, that we willbe able to enter into a replacement arrangement on terms comparable to the currentarrangement. Any changes in our credit card arrangements may adversely affectour credit card program and ultimately, our business.

 

**Ourbusiness can be affected by extreme or unseasonable weather conditions.**

 

Extremeweather conditions in the areas in which our stores are located could adverselyaffect our business. For example, heavy snowfall, rainfall or other extremeweather conditions over a prolonged period might make it difficult for ourcustomers to travel to our stores and thereby reduce our sales andprofitability. Our business is also susceptible to unseasonable weatherconditions. For example, extended periods of unseasonably warm temperaturesduring the winter season or cool weather during the summer season could rendera portion of our inventory incompatible with those unseasonable conditions.Reduced sales from extreme or prolonged unseasonable weather conditions wouldadversely affect our business.

 

**We aresubject to numerous regulations that could affect our operations.**

 

Weare subject to customs, truth-in-advertising and other laws, including consumerprotection regulations and zoning and occupancy ordinances that regulateretailers generally and/or govern the importation, promotion and sale ofmerchandise and the operation of retail stores and warehouse facilities.Although we undertake to monitor changes in these laws, if these laws

 

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change without our knowledge, or are violatedby importers, designers, manufacturers or distributors, we could experiencedelays in shipments and receipt of goods or be subject to fines or otherpenalties under the controlling regulations, any of which could adverselyaffect our business.

 

**Ourrevenues and cash requirements are affected by the seasonal nature of ourbusiness.**

 

Thespecialty retail industry is seasonal in nature, with a higher level of salestypically generated in the fall and holiday selling seasons. We have in thepast experienced significant fluctuation in our revenues from quarter toquarter with a disproportionate amount of our revenues falling in our secondfiscal quarter, which coincides with the holiday season. In addition, we havesignificant additional cash requirements in the period leading up to the monthsof November and December in anticipation of higher sales volume inthose periods, including payments relating to additional inventory, advertisingand employees.

 

**Ourbusiness is affected by foreign currency fluctuations.**

 

Wepurchase a substantial portion of our inventory from foreign suppliers whosecost to us is affected by the fluctuation of their local currency against thedollar or who price their merchandise in currencies other than the dollar.Fluctuations in the Euro-U.S. dollar exchange rate affect us mostsignificantly; however, we source goods from numerous countries and thus areaffected by changes in numerous currencies and, generally, by fluctuations inthe U.S. dollar relative to such currencies. Accordingly, changes in the value of the dollar relative to foreigncurrencies may increase our cost of goods sold and if we are unable to passsuch cost increases on to our customers, our gross margins, and ultimately ourearnings, will decrease. Foreign currency fluctuations could have a materialadverse effect on our business, financial condition and results of operationsin the future.

 

**Conditionsin, and the United States’ relationship with, the countries where we source ourmerchandise could affect our sales.**

 

Asubstantial majority of our merchandise is manufactured overseas, mostly inEurope. As a result, political instability or other events resulting in thedisruption of trade from other countries or the imposition of additionalregulations relating to or duties upon imports could cause significant delaysor interruptions in the supply of our merchandise or increase our costs, eitherof which could have a material adverse effect on our business. If we are forcedto source merchandise from other countries, those goods may be more expensiveor of a different or inferior quality from the ones we now sell. The importanceto us of our existing designer relationships could present additionaldifficulties, as it may not be possible to source merchandise from a givendesigner from alternative jurisdictions. If we were unable to adequatelyreplace the merchandise we currently source with merchandise producedelsewhere, our business could be adversely affected.

 

**Significantincreases in costs associated with the production of catalogs and otherpromotional materials may adversely affect our operating income.**

 

Weadvertise and promote in-store events, new merchandise and fashion trendsthrough print catalogs and other promotional materials mailed on a targetedbasis to our customers. Significant increases in paper, printing and postagecosts could affect the cost of producing these materials and as a result, mayadversely affect our operating income.

 

**Weare indirectly owned and controlled by the Sponsors, and their interests asequity holders may conflict with those of our creditors.**

** **

Weare indirectly owned and controlled by the Sponsors and certain other equityinvestors, and the Sponsors have the ability to control our policies and operations.The interests of the Sponsors may not in all cases be aligned with those of ourcreditors. For example, if we encounter financial difficulties or are unable topay our debts as they mature, the interests of our equity holders mightconflict with our creditors’ interests. In addition, our equity holders mayhave an interest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investments,even though such transactions might involve risks to holders of ourindebtedness. Furthermore, the Sponsors may in the future own businesses thatdirectly or indirectly compete with us. One or more of the Sponsors also maypursue acquisition opportunities that may be complementary to our business, andas a result, those acquisition opportunities may not be available to us.

 

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**If we areunable to enforce our intellectual property rights, or if we are accused ofinfringing on a third party’s intellectual property rights, our net income maydecline.**

 

Weand our subsidiaries currently own our tradenames and service marks, includingthe “Neiman Marcus” and “Bergdorf Goodman” marks. Our tradenames and servicemarks are registered in the United States and in various foreign countries,primarily in Europe. The laws of some foreign countries do not protectproprietary rights to the same extent as do the laws of the United States.Moreover, we are unable to predict the effect that any future foreign ordomestic intellectual property legislation or regulation may have on ourexisting or future business. The loss or reduction of any of our significantproprietary rights could have an adverse effect on our business.

 

Additionally,third parties may assert claims against us alleging infringement,misappropriation or other violations of their tradename or other proprietaryrights, whether or not the claims have merit. Claims like these may be timeconsuming and expensive to defend and could result in our being required tocease using the tradename or other rights and selling the allegedly infringingproducts. This might have an adverse affect on our sales and cause us to incursignificant litigation costs and expenses.

 

**Failure tosuccessfully maintain and update information technology systems and enhanceexisting systems may adversely affect our business.**

 

Tokeep pace with changing technology, we must continuously provide for the designand implementation of new information technology systems as well asenhancements of our existing systems. Any failure to adequately maintain andupdate the information technology systems supporting our online operations,sales operations or inventory control could prevent our customers frompurchasing merchandise on our websites or prevent us from processing anddelivering merchandise, which could adversely affect our business.

 

**Delays inreceipt of merchandise in connection with either the manufacturing or shipmentof such merchandise can affect our performance.**

 

Substantiallyall of our merchandise is delivered to us by our vendors as finished goods andis manufactured in numerous locations, including Europe and the United Statesand, to a lesser extent, China, Mexico and South America. Our vendors rely onthird party carriers to deliver merchandise to our distribution facilities. Inaddition, our success depends on our ability to source and distributemerchandise efficiently to our Specialty Retail stores and Direct Marketingcustomers. Events such as U.S. or foreign labor strikes, natural disasters,work stoppages or boycotts affecting the manufacturing or transportationsectors could increase the cost or reduce the supply of merchandise availableto us and could adversely affect our results of operations.

 

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**ITEM 2.PROPERTIES**

 

Ourcorporate headquarters are located at the Downtown Neiman Marcus store locationin Dallas, Texas. The operating headquarters for Neiman Marcus, BergdorfGoodman and Direct Marketing are located in Dallas, Texas; New York, New York;and Irving, Texas, respectively.

 

Propertiesthat we use in our operations include Neiman Marcus stores, Bergdorf Goodmanstores, clearance centers and distribution, support and office facilities. Asof October 1, 2009, the approximate aggregate square footage of theproperties used in our operations was as follows:

 
| ** **                                  | ** ** | **Owned** | ** ** | **Owned  Subject********to Ground********Lease** | ** ** | **Leased** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------|------------|--------------------------------------------------|------------|------------|------------|-----------|------------|
| Neiman Marcus Stores                        |       | 752,000   |       | 2,513,000                                        |       | 2,302,000  |       | 5,567,000 |       |
| Bergdorf Goodman Stores                     |       | —    |       | —                                           |       | 316,000    |       | 316,000   |       |
| Clearance Centers and Other                 |       | —    |       | —                                           |       | 857,000    |       | 857,000   |       |
| Distribution, Support and Office Facilities |       | 1,317,000 |       | 150,000                                          |       | 1,008,000  |       | 2,475,000 |       |

 

***Neiman Marcus Stores. ***As of October 1, 2009, we operated 41 NeimanMarcus stores, with an aggregate total property size of approximately 5,567,000square feet. The following table sets forth certain details regarding eachNeiman Marcus store:

 

**Neiman Marcus Stores**

 
| **Locations**                        | ** ** | **Fiscal Year********Operations********Began** | ** ** | **Gross********Store********Sq. Feet** | ** ** |
|--------------------------------------|------------|------------------------------------------------|------------|----------------------------------------|------------|
| Dallas, Texas (Downtown)(1)          |       | 1908                                           |       | 129,000                                |       |
| Dallas, Texas (NorthPark)(2)*        |       | 1965                                           |       | 218,000                                |       |
| Houston, Texas (Galleria)(3)*        |       | 1969                                           |       | 224,000                                |       |
| Bal Harbour, Florida(2)              |       | 1971                                           |       | 97,000                                 |       |
| Atlanta, Georgia(2)*                 |       | 1973                                           |       | 206,000                                |       |
| St. Louis, Missouri(2)               |       | 1975                                           |       | 145,000                                |       |
| Northbrook, Illinois(3)              |       | 1976                                           |       | 144,000                                |       |
| Fort Worth, Texas(2)                 |       | 1977                                           |       | 119,000                                |       |
| Washington, D.C.(2)*                 |       | 1978                                           |       | 130,000                                |       |
| Newport Beach, California(3)*        |       | 1978                                           |       | 154,000                                |       |
| Beverly Hills, California(1)*        |       | 1979                                           |       | 185,000                                |       |
| Westchester, New York(2)*            |       | 1981                                           |       | 138,000                                |       |
| Las Vegas, Nevada(2)                 |       | 1981                                           |       | 174,000                                |       |
| Oak Brook, Illinois(2)               |       | 1982                                           |       | 119,000                                |       |
| San Diego, California(2)             |       | 1982                                           |       | 106,000                                |       |
| Fort Lauderdale, Florida(3)*         |       | 1983                                           |       | 94,000                                 |       |
| San Francisco, California(4)*        |       | 1983                                           |       | 251,000                                |       |
| Chicago, Illinois (Michigan Ave.)(2) |       | 1984                                           |       | 188,000                                |       |
| Boston, Massachusetts(2)             |       | 1984                                           |       | 111,000                                |       |
| Palo Alto, California(3)*            |       | 1986                                           |       | 120,000                                |       |
| McLean, Virginia(4)*                 |       | 1990                                           |       | 130,000                                |       |
| Denver, Colorado(3)*                 |       | 1991                                           |       | 90,000                                 |       |
| Minneapolis, Minnesota(2)            |       | 1992                                           |       | 119,000                                |       |
| Scottsdale, Arizona(2)*              |       | 1992                                           |       | 118,000                                |       |
| Troy, Michigan(3)*                   |       | 1993                                           |       | 157,000                                |       |
| Short Hills, New  Jersey(3)*         |       | 1996                                           |       | 138,000                                |       |
| King of Prussia, Pennsylvania(3)*    |       | 1996                                           |       | 142,000                                |       |
| Paramus, New Jersey(3)*              |       | 1997                                           |       | 141,000                                |       |
| Honolulu, Hawaii(3)                  |       | 1999                                           |       | 181,000                                |       |
| Palm Beach, Florida(2)               |       | 2001                                           |       | 53,000                                 |       |
| Plano, Texas (Willow  Bend)(4)*      |       | 2002                                           |       | 156,000                                |       |
| Tampa, Florida(3)*                   |       | 2002                                           |       | 96,000                                 |       |
| Coral Gables, Florida(2)*            |       | 2003                                           |       | 136,000                                |       |
| Orlando, Florida(4)*                 |       | 2003                                           |       | 95,000                                 |       |
| San Antonio, Texas(4)*               |       | 2006                                           |       | 120,000                                |       |
| Boca Raton, Florida(3)               |       | 2006                                           |       | 136,000                                |       |
| Charlotte, North  Carolina(3)        |       | 2007                                           |       | 80,000                                 |       |
| Austin, Texas(3)                     |       | 2007                                           |       | 80,000                                 |       |
| Natick, Massachusetts(1)             |       | 2008                                           |       | 102,000                                |       |
| Topanga, California(3)               |       | 2009                                           |       | 120,000                                |       |
| Bellevue, Washington(2)              |       | 2010                                           |       | 125,000                                |       |

 

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(1)           Ownedsubject to partial ground lease.

(2)           Leased.

(3)           Ownedsubject to ground lease.

(4)           Owned.

*              Mortgagedto secure our senior secured credit facilities and the 2028 Debentures.

 

Werecently opened new stores in Charlotte (80,000 square feet) in September 2006,Austin (80,000 square feet) in March 2007, Natick (102,000 square feet) inSeptember 2007, Topanga (120,000 square feet) in September 2008 andBellevue, Washington (125,000 square feet) in September 2009 and currentlyplan to open new stores in Walnut Creek, California in 2012 (85,000 square feetplanned) and San Jose, California in 2013 (100,000 square feet planned).

 

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***Bergdorf Goodman Stores. ***We operate two Bergdorf Goodman stores, both ofwhich are located in Manhattan at 58th Street andFifth Avenue. The following table sets forth certain details regarding thesestores:

 

**Bergdorf Goodman Stores**

 
| **Locations**                  | ** ** | **Fiscal Year********Operations********Began** | ** ** | **Gross Store********Sq. Feet** | ** ** |
|--------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|
| New York City (Main)(1)        |       | 1901                                           |       | 250,000                         |       |
| New York City (Men’s)(1)* |       | 1991                                           |       | 66,000                          |       |

 

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(1)           Leased.

 

*              Mortgagedto secure our senior secured credit facilities and the 2028 Debentures.

 

***Clearance Centers. ***As of October 1,2009, we operated 28 clearance centers that average approximately 28,900 squarefeet each in size.

 

***Distribution, support and office facilities. ***We own approximately 41acres of land in Longview, Texas, where our primary distribution facility islocated. The Longview facility is the principal merchandise processing anddistribution facility for Neiman Marcus stores. We currently utilize a regionaldistribution facility in Dayton, New Jersey and four regional service centersin New York, Florida, Texas and California. We also own approximately 50 acresof land in Irving, Texas, where our Direct Marketing operating headquarters anddistribution facility is located.   Inaddition, we currently utilize another regional distribution facility inDallas, Texas to support our Direct Marketing operation.

 

***Lease Terms.***  The terms of the leases for substantially allof our stores, assuming all outstanding renewal options are exercised, rangefrom 1 to 101 years. The lease on the Bergdorf Goodman Main Store expiresin 2050, with no renewal options, and the lease on the Bergdorf Goodman Men’sStore expires in 2020, with a 10-year renewal option. Most leases provide for monthlyfixed rentals or contingent rentals based upon sales in excess of statedamounts and normally require us to pay real estate taxes, insurance, commonarea maintenance costs and other occupancy costs.

 

Forfurther information on our properties and lease obligations, see Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andNote 15 of the Notes to Consolidated Financial Statements in Item 15.

 

**ITEM 3.LEGAL PROCEEDINGS**

 

Weare currently involved in various legal actions and proceedings that arose inthe ordinary course of our business. We believe that any liability arising as aresult of these actions and proceedings will not have a material adverse effecton our financial position, results of operations or cash flows.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Nomatters were submitted to a vote of our security holders during the quarterended August 1, 2009.

 

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**PART II**

 

**ITEM 6.SELECTED FINANCIAL DATA**

 

Thefollowing selected financial data is qualified in entirety by our consolidatedfinancial statements (and the related Notes thereto) contained in Item 15and should be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in Item 7.

 
| ** **                                                                        | ** ** | **(Successor)**                                           | ** ** | ** **                                                      | **(Predecessor)** | ** **                                                     |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------------|-------------------|----------------------------------------------------------------|
| **(in millions)**                                                                 | ** ** | **Fiscal********year  ended********August 1,  2009** | ** ** | **Fiscal********year********ended********August 2,  2008** | ** **        | **Fiscal********year********ended********July 28,  2007** | ** ** | **Forty-three  weeks********ended********July 29,********2006** | ** ** | ** ** | **Nine********weeks  ended  October 1,********2005** | ** ** | **Fiscal********year********ended********July 30,********2005** | ** ** |
| **OPERATING RESULTS**                                                             |       |                                                      |       |                                                            |              |                                                           |   |   |   |   |   |   |   |   |
| Revenues                                                                          |       | $                                                         | 3,643.3    |                                                            | $                 | 4,600.5                                                        |   | $ | 4,390.1 |   | $ | 3,397.7 |   |   | $ | 632.4 |   | $ | 3,695.1 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | 2,536.8                                                   |       | 2,935.0                                                         |              | 2,753.8                                                        |   | 2,219.4 |   |   | 371.5 |   | 2,349.2 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | 882.7                                                     |       | 1,045.4                                                         |              | 1,015.1                                                        |   | 802.4 |   |   | 155.6 |   | 907.3 |   |
| Income from credit card program, net                                              |       | (50.0                                                     | )          | (65.7                                                           | )                 | (65.7                                                          | ) | (49.4 | ) |   | (7.8 | ) | (71.6 | ) |
| Depreciation and amortization                                                     |       | 223.5                                                     |       | 220.6                                                           |              | 208.7                                                          |   | 166.6 |   |   | 19.2 |   | 103.6 |   |
| Impairment charges                                                                |       | 703.2                                                     | (2)        | 31.3                                                            | (3)               | 11.5                                                           | (4) | — |   |   | — |   | — |   |
| Operating (loss) earnings                                                         |       | (652.9                                                    | )(2)       | 466.4                                                           | (3)               | 476.8                                                          | (4) | 258.7 |   |   | 70.3 | (5) | 397.4 | (6) |
| (Loss) earnings from continuing operations before income taxes                    |       | (888.5                                                    | )          | 226.6                                                           |              | 217.0                                                          |   | 41.0 |   |   | 71.2 |   | 385.2 |   |
| (Loss) earnings from discontinued operations, net of tax (7)                      |       | —                                                    |       | —                                                          |              | (22.8                                                          | ) | (14.0 | ) |   | (0.8 | ) | 5.0 |   |
| Net (loss) earnings                                                               |       | $                                                         | (668.0     | )                                                               | $                 | 142.8                                                          |   | $ | 111.9 |   | $ | 12.5 |   |   | $ | 44.2 |   | $ | 248.8 |   |
| ** **                                                                        | ** ** | ** **                                                | ** ** | ** **                                                      | ** **        | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| ** **                                                                        | ** ** | **(Successor)**                                           | ** ** | ** **                                                      | **(Predecessor)** | ** **                                                     |
| **(in  millions)**                                                                | ** ** | **August 1,  2009**                                  | ** ** | **August 2,  2008**                                        | ** **        | **July 28,  2007**                                        | ** ** | **July 29,  2006** | ** ** | ** ** | ** ** | ** ** | **July 30,********2005(1)** | ** ** |
| ** **                                                                        | ** ** | ** **                                                | ** ** | ** **                                                      | ** **        | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
| **FINANCIAL POSITION**                                                            |       |                                                      |       |                                                            |              |                                                           |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                         |       | $                                                         | 323.4      |                                                            | $                 | 239.2                                                          |   | $ | 141.2 |   | $ | 223.7 |   |   |   |   | $ | 852.6 |   |
| Merchandise inventories                                                           |       | 755.0                                                     |       | 978.0                                                           |              | 918.3                                                          |   | 793.6 |   |   |   |   | 729.3 |   |
| Total current assets                                                              |       | 1,221.5                                                   |       | 1,363.7                                                         |              | 1,215.0                                                        |   | 1,135.9 |   |   |   |   | 1,708.5 |   |
| Property and equipment, net                                                       |       | 992.7                                                     |       | 1,075.3                                                         |              | 1,043.7                                                        |   | 1,030.3 |   |   |   |   | 836.7 |   |
| Total assets                                                                      |       | 5,581.0                                                   |       | 6,556.8                                                         |              | 6,501.0                                                        |   | 6,608.0 |   |   |   |   | 2,660.7 |   |
| Current liabilities                                                               |       | 563.5                                                     |       | 706.7                                                           |              | 767.9                                                          |   | 699.1 |   |   |   |   | 617.3 |   |
| Long-term liabilities                                                             |       | $                                                         | 4,098.7    |                                                            | $                 | 4,173.6                                                        |   | $ | 4,175.1 |   | $ | 4,474.9 |   |   |   |   | $ | 457.3 |   |

 

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| ** **                                        | ** ** | **(Successor)**                                           | ** ** | ** **                                                | **(Predecessor)** | ** **                                                     |
|---------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|-------------------|----------------------------------------------------------------|
| **(in  millions, except sales  per square foot)** | ** ** | **Fiscal********year********ended  August 1,  2009** | ** ** | **Fiscal********year********ended  August 2,  2008** | ** **        | **Fiscal********year********ended********July 28,  2007** | ** ** | **Forty-three weeks********ended********July 29,********2006** | ** ** | ** ** | **Nine********weeks  ended  October 1,********2005** | ** ** | **Fiscal********year********ended********July 30,********2005** | ** ** |
| **OTHER OPERATING DATA**                          |       |                                                      |       |                                                      |              |                                                           |   |   |   |   |   |   |   |   |
| Capital expenditures                              |       | $                                                         | 101.5      |                                                      | $                 | 183.5                                                          |   | $ | 147.9 |   | $ | 138.2 |   |   | $ | 25.6 |   | $ | 190.3 |   |
| Depreciation expense                              |       | $                                                         | 150.8      |                                                      | $                 | 148.4                                                          |   | $ | 136.5 |   | $ | 107.0 |   |   | $ | 19.2 |   | $ | 103.6 |   |
| Rent expense and related occupancy costs          |       | $                                                         | 85.4       |                                                      | $                 | 92.6                                                           |   | $ | 87.5 |   | $ | 69.3 |   |   | $ | 12.5 |   | $ | 72.3 |   |
| Change in comparable revenues (8)                 |       | (21.4                                                     | )%         | 1.7                                                       | %                 | 6.7                                                            | % | 6.8 | % |   | 9.8 | % | 9.8 | % |
| Number of stores open at period end               |       | 42                                                        |       | 41                                                        |              | 40                                                             |   | 38 |   |   | 37 |   | 36 |   |
| Sales per square foot                             |       | $                                                         | 475        |                                                      | $                 | 634                                                            | (9) | $ | 638 |   | $ | 508 |   |   | $ | 103 |   | $ | 577 |   |
|                                              |       |                                                      |       |                                                      |              |                                                           |   |   |   |   |   |   |   |   |
| **NON-GAAP FINANCIAL MEASURE**                    |       |                                                      |       |                                                      |              |                                                           |   |   |   |   |   |   |   |   |
| EBITDA (10)                                       |       | $                                                         | (429.4     | )(2)                                                      | $                 | 687.0                                                          | (3) | $ | 685.6 | (4) | $ | 425.3 |   |   | $ | 89.5 | (5) | $ | 501.1 | (6) |
| Adjusted EBITDA (10)                              |       | $                                                         | 273.8      |                                                      | $                 | 685.8                                                          |   | $ | 686.9 |   | $ | 425.3 |   |   | $ | 113.0 |   | $ | 510.2 |   |

 

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(1)                                  The selectedfinancial data as of July 30, 2005 reflect adjustments to the Predecessor’saudited consolidated financial statements to reclassify the operations ofGurwitch Products, L.L.C. and Kate Spade LLC as discontinued operations.

 

(2)                                  For fiscal year2009, operating earnings and EBITDA include pretax impairment charges relatedto 1) $329.7 million for the writedown to fair value of goodwill, 2) $343.2million for the writedown to fair value of the net carrying value of tradenamesand 3) $30.3 million for the writedown to fair value of the net carrying valueof certain long-lived assets.

 

(3)                                  For fiscal year2008, operating earnings and EBITDA include 1) $32.5 million of other incomerelated to a pension curtailment gain as a result of our decision to freezecertain Pension and SERP benefits as of December 31, 2007, offset by 2)$31.3 million pretax impairment charge related to the writedown to fair valueof the Horchow tradename.

 

(4)                                  For fiscal year2007, operating earnings and EBITDA include 1) $11.5 million pretax impairmentcharge related to the writedown to fair value of the Horchow tradename, offsetby 2) $4.2 million of other income we received in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot and 3)$6.0M of other income related to aged, non-escheatable gift cards.

 

(5)                                  For the nineweeks ended October 1, 2005, operating earnings and EBITDA include$23.5 million of transaction and other costs incurred in connection withthe Acquisition. These costs consist primarily of $4.5 million ofaccounting, investment banking, legal and other costs associated with theAcquisition and a $19.0 million non-cash charge for stock compensationresulting from the accelerated vesting of Predecessor stock options andrestricted stock in connection with the Acquisition.

 

(6)                                  For fiscal year2005, operating earnings and EBITDA include a $15.3 million pretax lossrelated to the disposition of Chef’s Catalog in November 2004 and a$6.2 million pretax gain related to the sale of our credit card portfolio.

 

(7)                                  (Loss) earnings from discontinuedoperations, reflects the operations of Kate Spade LLC (prior to itssale in December 2006) and Gurwitch Products, L.L.C. (prior to its sale inJuly 2006).

 

(8)                                  Comparablerevenues include 1) revenues derived from our retail stores open for morethan fifty two weeks, including stores that have been relocated or expandedand 2) revenues from our Direct Marketing operation. Comparable revenuesexclude 1) revenues of closed stores, 2) revenues from our discontinuedoperations (Gurwitch Products, L.L.C. and Kate Spade LLC) and 3) revenues ofour previous Chef’s Catalog operations (sold in November 2004).  The calculation of the change in comparablerevenues for fiscal year 2008 is based on revenues for the fifty two weeksended July 26, 2008 compared to revenues for the fifty two weeksended July 28, 2007.

 

(9)                                  Sales persquare foot for fiscal year 2008 is based on revenues for the fiftytwo weeks ended July 26, 2008.

 

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(10)                            For anexplanation of EBITDA and Adjusted EBITDA, see Item 7, “Management’s Discussionand Analysis of Financial Condition and Results of Operations — Non-GAAPFinancial Measure-EBITDA and Adjusted EBITDA.”

 

**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

 

**EXECUTIVE OVERVIEW**

 

Thefollowing discussion and analysis of our financial condition and results ofoperations should be read together with our audited consolidated financialstatements and related notes. Unless otherwise specified, the meanings of alldefined terms in Management’s Discussion and Analysis of Financial Conditionand Results of Operations (MD&A) are consistent with the meanings of suchterms as defined in the Notes to Consolidated Financial Statements. Thisdiscussion contains forward-looking statements. Please see “Forward-LookingStatements” for a discussion of the risks, uncertainties and assumptionsrelating to these statements.

 

**Overview**

 

NeimanMarcus, Inc. (the Company), together with our operating segments andsubsidiaries, is a high-end specialty retailer. Our operations include theSpecialty Retail stores segment and the Direct Marketing segment. The SpecialtyRetail stores segment consists primarily of Neiman Marcus and Bergdorf Goodmanstores. The Direct Marketing segment conducts both online and print catalogoperations under the brand names of Neiman Marcus, Bergdorf Goodman andHorchow.

 

TheCompany acquired The Neiman Marcus Group, Inc. (NMG) on October 6,2005 through a merger transaction with Newton Acquisition Merger Sub, Inc.,a wholly-owned subsidiary of Neiman Marcus, Inc.  The acquisition was accomplished through themerger of the Newton Acquisition Merger Sub, Inc. with and into NMG, withNMG being the surviving entity (the Acquisition).  Subsequent to the Acquisition, NMG is asubsidiary of the Company, which is controlled by Newton Holding, LLC(Holding). Both the Company and Holding were formed by investment fundsaffiliated with TPG Capital (formerly Texas Pacific Group) and Warburg PincusLLC (collectively, the Sponsors).  Inconnection with the Acquisition, NMG incurred significant indebtedness andbecame highly leveraged.

 

Ourfiscal year ends on the Saturday closest to July 31. Like many other retailers, we follow a4-5-4 reporting calendar which resulted in an extra week in fiscal year 2008(the 53rd week). All references to fiscal year 2009 relate to the fifty two weeks ended August 1,2009; all references to fiscal year 2008 relate to the fifty three weeks endedAugust 2, 2008 and all references to fiscal year 2007 relate to the fiftytwo weeks ended July 28, 2007.

 

**Discontinued Operation**

 

InFebruary 1999, NMG acquired a 56% controlling interest in Kate Spade LLC,a designer and marketer of high-end accessories.  In April 2005, the minority investor inKate Spade LLC exercised the put option with respect to the sale of the fullamount of its 44% stake in such company to NMG. In October 2006, weentered into an agreement to settle the put option whereby we purchased the interestheld by the minority investor for approximately $59.4 million.

 

InNovember 2006, we entered into a definitive agreement to sell 100% of theownership interests in Kate Spade LLC to Liz Claiborne, Inc. (consistingof both our original 56% interest and the 44% minority interest subsequentlypurchased by NMG) for pretax net cash proceeds of approximately $121.5 million.Both the purchase of the minority interest in Kate Spade LLC and the sale ofKate Spade LLC to Liz Claiborne, Inc. were consummated in December 2006.

 

TheCompany’s consolidated financial statements, accompanying notes and otherinformation provided in this Annual Report on Form 10-K reflect Kate SpadeLLC as a discontinued operation for all periods presented.

 

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**RecentDevelopments**

 

OnSeptember 3, 2009, we announced preliminary total revenues and comparablerevenues of approximately $241.0 million and $237.0 million,respectively, for the four-week period ended August 29, 2009. In thefour-week August period of fiscal year 2010, total revenues decreased15.3% and comparable revenues decreased 16.6% compared to the four-week August periodof fiscal year 2009. Comparable revenues decreased 19.6% in our SpecialtyRetail stores and increased 0.1% in our Direct Marketing operation for thefour-week August period of fiscal year 2010.

 

OnOctober 8, 2009, we announced preliminary total revenues and comparablerevenues of approximately $353.5 million and $344.2 million,respectively, for the five-week period ended October 3, 2009 and$594.5 million and $581.2 million, respectively, for the nine-weekperiod ended October 3, 2009. In the five-week September period offiscal year 2010, total revenues decreased 14.8% and comparable revenuesdecreased 16.9% compared to the five-week September period of fiscal year2009. Comparable revenues decreased 17.6% in our Specialty Retail stores and13.6% in our Direct Marketing operation for the five-week September periodof fiscal year 2010.  In the nine-week September periodof fiscal year 2010, total revenues decreased 15.0% and comparable revenuesdecreased 16.8% compared to the nine-week September period of fiscal year2009. Comparable revenues decreased 18.4% in our Specialty Retail stores and8.3% in our Direct Marketing operation for the nine-week September periodof fiscal year 2010.

 

Allthe financial data set forth above for the five and nine-week periods ending October 3,2009 are preliminary and unaudited and subject to revision based upon ourreview and a review by our independent registered public accounting firm of ourfinancial condition and results of operations for the quarter ending October 31,2009. Once we and our independent registered public accounting firm havecompleted our respective reviews of our financial information for the quarterending October 31, 2009, we may report financial results that aredifferent from those set forth above.

 

**Factors AffectingOur Results**

 

***Revenues.***  Wegenerate our revenues from the sale of high-end merchandise through ourSpecialty Retail stores and Direct Marketing operation. Components of ourrevenues include:

 

·                  Sales ofmerchandise—Revenues from our Specialty Retail stores are recognized at thelater of the point of sale or the delivery of goods to the customer. Revenuesfrom our Direct Marketing operation are recognized when the merchandise isdelivered to the customer. We maintain reserves for anticipated sales returnsprimarily based on our historical trends related to returns by both our retailand direct marketing customers. Revenues exclude sales taxes collected from ourcustomers.

 

·                  Delivery and processing—Wegenerate revenues from delivery and processing charges related to merchandisedelivered to our customers from both our retail and direct marketing operation.

 

Ourrevenues can be affected by the following factors:

 

·                  general economicconditions, including the recent deterioration of domestic and internationalcapital markets and general economic conditions and the prospects for ameaningful recovery in the near-term;

 

·                  changes in the level ofconsumer spending generally and, specifically, on luxury goods;

 

·                  changes in the level offull-price sales;

 

·                  changes in the level ofpromotional events conducted by our Specialty Retail stores and DirectMarketing operation;

 

·                  our ability tosuccessfully implement our store expansion and remodeling strategies; and

 

·                  the rate of growth ininternet revenues by our Direct Marketing operation.

 

Inaddition, our revenues are seasonal. For a description of the seasonality ofour business, see “Seasonality.”

 

***Cost of goods sold including buying and occupancy costs (excludingdepreciation) (COGS).***  COGSconsists of the following components:

 

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·                  Inventory costs—We utilize the retail method ofaccounting. Under the retail inventory method, the valuation of inventories atcost and the resulting gross margins are determined by applying a calculatedcost-to-retail ratio, for various groupings of similar items, to the retailvalue of our inventories. The cost of the inventory reflected on theconsolidated balance sheet is decreased by charges to cost of goods sold at thetime the retail value of the inventory is lowered through the use of markdowns.Hence, earnings are negatively impacted when merchandise is marked down. Withthe introduction of new fashions in the first and third fiscal quarters and ouremphasis on full-price selling in these quarters, a lower level of markdownsand higher margins are characteristic of these quarters.

 

·                  Buying costs—Buying costs consist primarily ofsalaries and expenses incurred by our merchandising and buying operations.

 

·                  Occupancy costs—Occupancy costs consist primarily ofrent, property taxes and operating costs of our retail, distribution and supportfacilities. A significant portion of our buying and occupancy costs are fixedin nature and are not dependent on the revenues we generate.

 

·                  Delivery and processing costs—Delivery andprocessing costs consist primarily of delivery charges we pay to third-partycarriers and other costs related to the fulfillment of customer orders notdelivered at the point-of-sale.

 

Consistentwith industry business practice, we receive allowances from certain of ourvendors in support of the merchandise we purchase for resale. Certainallowances are received to reimburse us for markdowns taken or to support thegross margins that we earn in connection with the sales of the vendor’smerchandise. These allowances result in an increase to gross margin when weearn the allowances and they are approved by the vendor. Other allowances wereceive represent reductions to the amounts we pay to acquire the merchandise.These allowances reduce the cost of the acquired merchandise and are recognizedat the time the goods are sold. We received vendor allowances of$107.7 million, or 3.0% of revenues, in fiscal year 2009,$109.6 million, or 2.4% of revenues, in fiscal year 2008 and $96.1million, or 2.2% of revenues, in fiscal year 2007. The amounts of vendorallowances we received did not have a significant impact on the year-over-yearchange in gross margin during fiscal years 2009, 2008 or 2007.

 

Changesin our COGS as a percentage of revenues can be affected by the followingfactors:

 

·                  our ability to order an appropriate amount ofmerchandise to match customer demand and the related impact on the level of netmarkdowns incurred;

 

·                  customer acceptance of and demand for themerchandise we offer in a given season and the related impact of such factorson the level of full-price sales;

 

·                  factors affecting revenues generally, includingpricing strategies, product offerings and other actions taken by competitors;

 

·                  changes in occupancy costs primarily associated withthe opening of new stores or distribution facilities; and

 

·                  the amount of vendor reimbursements we receiveduring the fiscal year.

 

***Selling, general and administrative expenses (excluding depreciation)(SG&A).***  SG&Aprincipally consists of costs related to employee compensation and benefits inthe selling and administrative support areas, advertising and catalog costs andinsurance and long-term benefits expenses. A significant portion of ourselling, general and administrative expenses are variable in nature and aredependent on the revenues we generate.

 

Advertisingcosts incurred by our Specialty Retail segment consist primarily of print mediacosts related to promotional materials mailed to our customers, whileadvertising costs incurred by our Direct Marketing operation relate to theproduction, printing and distribution of our print catalogs and the productionof the photographic content on our websites, as well as online marketing costs.We receive advertising allowances from certain of our merchandise vendors.Substantially all the advertising allowances we receive representreimbursements of direct, specific and incremental costs that we incur topromote the vendor’s merchandise in connection with our various advertisingprograms, primarily catalogs and other print media.  As a result, advertising allowances are recordedas a reduction of our advertising costs when earned. Advertising allowancesaggregated approximately $65.7 million, or 1.8% of revenues, in fiscal year2009, $75.7 million, or 1.6% of revenues, in fiscal year 2008 and $63.4million, or 1.4% of revenues, in fiscal year 2007.

 

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We also receive allowances from certainmerchandise vendors in conjunction with compensation programs for employees whosell the vendor’s merchandise. These allowances are netted against the relatedcompensation expense that we incur. Amounts received from vendors related tocompensation programs were $65.8 million, or 1.8% of revenues, in fiscal year2009, $71.6 million, or 1.6% of revenues, in fiscal year 2008 and $65.4 million,or 1.5% of revenues, in fiscal year 2007.

 

Changes in our selling, general andadministrative expenses are affected primarily by the following factors:

 

·      changes in the number of sales associates primarily due to new storeopenings and expansion of existing stores, including increased health care andrelated benefits expenses;

 

·      changes in expenses incurred in connection with our advertising andmarketing programs; and

 

·      changes in expenses related to insurance and long-term benefits due togeneral economic conditions such as rising health care costs.

 

***Income from credit card program,net***.  Pursuant to a long-termmarketing and servicing alliance with HSBC, HSBC offers credit card andnon-card payment plans bearing our brands and we receive 1) ongoing paymentsfrom HSBC based on net credit card sales, 2) compensation for marketing andservicing activities, 3) our allocable share of certain income generated fromthe credit card program and 4) our allocable share of certain credit card lossesgenerated from the credit card portfolio (HSBC Program Income). We recognizeHSBC Program Income when earned.  In thefuture, the HSBC Program Income may be:

 

·      increased or decreasedbased upon the level of utilization of our proprietary credit cards by ourcustomers;

 

·      increased or decreasedbased upon future changes to our historical credit card program related to,among other things, the interest rates applied to unpaid balances, theassessment of late fees and the level of usage of promotional no-interestcredit programs;

 

·      decreased based upon thelevel of future services we provide to HSBC;

 

·      increased for our allocable share of certain income,if any, generated from the credit card program as provided pursuant to ourcontractual agreement with HSBC, or any subsequent amendment thereto; and

 

·      decreased for our allocable share of certain creditcard losses generated from the credit card portfolio as provided pursuant toour contractual agreement with HSBC, or any subsequent amendment thereto.

 

**Seasonality**

 

We conduct our selling activities in twoprimary selling seasons—Fall and Spring. The Fall season is comprised of ourfirst and second fiscal quarters and the Spring season is comprised of ourthird and fourth fiscal quarters.

 

Our first fiscal quarter is generallycharacterized by a higher level of full-price sales with a focus on the initialintroduction of Fall season fashions. Aggressive in-store marketing activitiesdesigned to stimulate customer buying, a lower level of markdowns and higher marginsare characteristic of this quarter. The second fiscal quarter is more focusedon promotional activities related to the December holiday season, the earlyintroduction of resort season collections from certain designers and the saleof Fall season goods on a marked down basis. As a result, margins are typicallylower in the second fiscal quarter. However, due to the seasonal increase inrevenues that occurs during the holiday season, the second fiscal quarter istypically the quarter in which our revenues are the highest and in whichexpenses as a percentage of revenues are the lowest. Our working capitalrequirements are also the greatest in the first and second fiscal quarters as aresult of higher seasonal requirements.

 

Similarly, the third fiscal quarter isgenerally characterized by a higher level of full-price sales with a focus onthe initial introduction of Spring season fashions. Aggressive in-storemarketing activities designed to stimulate customer buying, a lower level ofmarkdowns and higher margins are again characteristic of this quarter. Revenuesare generally the lowest in the fourth fiscal quarter with a focus onpromotional activities offering Spring season goods to the customer on a markeddown basis, resulting in lower margins during the quarter. Our working capitalrequirements are typically lower in the third and fourth fiscal quarters thanin the other quarters.

 

A large percentage of our merchandiseassortment, particularly in the apparel, fashion accessories and shoecategories, is ordered months in advance of the introduction of such goods. Forexample, women’s apparel, men’s apparel, shoes and handbags are typicallyordered six to nine months in advance of the products being offered for salewhile jewelry and other

 

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categories are typically ordered three to six months in advance. As aresult, inherent in the successful execution of our business plans is ourability both to predict the fashion trends that will be of interest to ourcustomers and to anticipate future spending patterns of our customer base.

 

We monitorthe sales performance of our inventories throughout each season. We seek toorder additional goods to supplement our original purchasing decisions when thelevel of customer demand is higher than originally anticipated. However, incertain merchandise categories, particularly fashion apparel, our ability topurchase additional goods can be limited. This can result in lost sales in theevent of higher than anticipated demand of the fashion goods we offer or ahigher than anticipated level of consumer spending. Conversely, in the event webuy fashion goods that are not accepted by the customer or the level ofconsumer spending is less than we anticipated, we typically incur a higher thananticipated level of markdowns, net of vendor allowances, resulting in loweroperating profits. We believe that the experience of our merchandising andselling organizations helps to minimize the inherent risk in predicting fashiontrends.

 

**Fiscal Year 2009 Summary**

 

We continue to experience achallenging economic and retail environment and expect these conditions willcontinue for an extended period of time. Consistent with the significant declines in overall macroeconomicfactors, capital markets and consumer confidence that have existed duringfiscal year 2009, customer demand has been well below our initial expectationsand the prior year.  The current softnessin customer demand exists across all geographic areas, all distributionchannels and all merchandise categories, particularly the apparel and homedécor categories.  We believe affluentcustomers are continuing to react to the economic conditions mentionedabove.  However, based on our experiencein previous business cycles, we believe our customers’ buying levels willincrease once the economic environment improves.

 

In response to thesechallenging business conditions, we continue to take the following actions:

 

·      stimulate sales throughadditional promotional and other events;

 

·      reduce inventory levels andpurchases;

 

·      implement expense controlinitiatives; and

 

·      review future capitalexpenditures and eliminate or postpone certain projects.

 

A summary of our operatingresults is as follows:

 

·      **Revenues**— Ourrevenues in fiscal year 2009 were significantly impacted by a lower level ofcustomer demand.  As a result, ourrevenues for fiscal year 2009 were $3,643.3 million, a decrease of 20.8% ascompared to fiscal year 2008 reflecting a decline in comparable revenues of 21.4%.  Comparablerevenues decreased in fiscal year 2009 for both our Specialty Retail stores andDirect Marketing operation.

 

Comparable revenues byquarter for fiscal year 2009 are as follows:

 
| First fiscal quarter  |   | (14.5 | )% |
|-----------------------|--------|-------|----|
| Second fiscal quarter |   | (22.8 | )% |
| Third fiscal quarter  |   | (25.1 | )% |
| Fourth fiscal quarter |   | (23.4 | )% |

 

Revenues in the 53rd week of fiscal year 2008 are not included inour calculations of changes in comparable revenues.

 

For Specialty Retail stores,our sales per square foot decreased to $475 for the fifty two weeks ended August1, 2009 from $634 for the fifty two weeks ended July 26, 2008.

 

·      **Cost of goods sold includingbuying and occupancy costs (excluding depreciation)**—COGS represented 69.6% of revenues infiscal year 2009 and 63.8% of revenues in fiscal year 2008.  This increase in COGS was primarily due to 1) lower levelsof full-price sales and higher levels of net markdowns and promotional activitiesrequired to liquidate on-hand inventories held in excess of sales trends forboth our Specialty Retail 

 

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stores and Direct Marketingoperation and 2) the deleveraging of our fixed buying and occupancy costs onlower revenues.

 

·      **Inventories**—As a result of thesignificant decrease in customer demand we experienced during fiscal year 2009,our inventory purchases and on-hand inventories were significantly in excess ofactual demand.  As a result, we generateda lower level of full-price sales in both the Fall and Spring seasons andincurred significantly higher net markdowns and sales promotions costs to liquidateinventories held in excess of customer demand. In response to the lower levels of customer demand, we reduced ourreceipts in the Spring season of fiscal year 2009 by approximately 30% comparedto the prior year.

 

At August 1, 2009, on-handinventories totaled $755.0 million, a 22.8% decrease from the prior fiscalyear.  Inventories decreased by 25.1% ona comparable basis.

 

·      **Selling,general and administrative expenses (excluding depreciation)**—Compared to fiscal year2008, we reduced SG&A by $162.7 million in fiscal year 2009.  The lower levels of SG&A expensesprimarily reflect 1) savings in variable costs, primarily commissions, on lowerrevenues and 2) savings realized as a result of our on-going initiatives tocontrol our expenses.

 

Despite the lower levels of SG&A incurred,SG&A deleveraged in fiscal year 2009. SG&A represented 24.2% of revenues in fiscal year 2009 and 22.7% ofrevenues in fiscal year 2008.  Theincreases in SG&A as percentages of revenues are primarily due to thedeleveraging of payroll and certain benefits costs on the significant decreasesin revenues.

 

·      **Expense control initiatives**— In additionto savings in variable costs, primarily commissions, on lower revenues, we haveimplemented both short-term expense control initiatives and longer-termadjustments to our cost structure, which initiatives include headcount andsalary reductions and the centralization of various store and corporate jobfunctions.  We believe we realizedsavings in our non-variable buying and occupancy costs and SG&A expensesaggregating approximately $100 million in fiscal year 2009.  We continue to review and evaluate additionalinitiatives to reduce our cost structure.

 

·      **Impairment of long-lived assets**— We tested ourlong-lived assets for recoverability and determined certain of our property andequipment, tradenames and goodwill to be impaired and recorded non-cashimpairment charges aggregating $703.2 million in fiscal year 2009, as morefully described in Note 7 to the consolidated financial statements.

 

·      **Operating (loss) earnings—**Total operating losses infiscal year 2009 were $652.9 million, or 17.9% of revenues, which included impairments of our long-lived assetsof $703.2 million, or 19.3% of revenues.  Excludingthese impairment charges, operating earnings were $50.3 million, or 1.4% ofrevenues, in fiscal year 2009.  Totaloperating earnings in fiscal year 2008 were $466.4 million, or 10.1% ofrevenues.  Excluding the impairmentcharges in fiscal year 2009, operating earnings margin decreased as apercentage of revenues, by 8.7% primarily due to:

 

·      an increase in COGS by5.8% of revenues as a result of 1) lower levels of full-price sales, primarilydue to weak customer demand, 2) higher net markdowns and higher promotionalcosts incurred to liquidate on-hand inventories held in excess of sales trendsand 3) the deleveraging of our buying and occupancy expenses on lower revenues;and

 

·      increases in both SG&Aexpenses by 1.5% of revenues and depreciation and amortization expense by 1.3%of revenues, primarily due to the deleveraging of these expenses on lowerrevenues.

 

·      **Liquidity—**Cash provided byour operating activities was $210.8 million in fiscal year 2009, a decrease of$74.5 million from the prior fiscal year as a result of lower revenues andearnings.  Despite the decrease in cashprovided by operating activities, we held cash balances of $323.4 million at August1, 2009 compared to $239.2 million at August 2, 2008.  At August 1, 2009, we had no borrowingsoutstanding under our Asset-Based Revolving Credit Facility, $32.8 million ofoutstanding letters of credit and $468.5 million of unused borrowingavailability.  At October 3, 2009, we had$507.2 million of unused borrowing availability.

 

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Given the dislocation in the financial markets andthe uncertainty as to when reasonable conditions will return, we have electedto pay PIK Interest for the three quarterly interest periods ending October 14,2009 and to make such interest payments with the issuance of additional SeniorNotes at the PIK Interest rate of 9.75% instead of paying interest incash.  As a result, the originalprincipal amount of Senior Notes of $700.0 million increased by $17.1 millionon April 14, 2009 and $17.4 million on July 14, 2009 and will increase by $18.1million on October 14, 2009.

 

Prior to the beginning of eacheligible interest period in the future, we will evaluate whether to continueutilizing this PIK feature, taking into account market conditions and otherrelevant factors at that time. After October 15, 2010, we are required to makeall interest payments on the Senior Notes entirely in cash.

 

·      **Outlook—**We expect retaildemand and revenues will remain weak for an extended period of time.  We will continue to align our inventorylevels and purchases with anticipated lower customer demand. Despite theanticipated continuation of current economic conditions, we believe the cashgenerated from our operations along with our available sources of financingwill enable us to meet our cash obligations for fiscal year 2010.

 

**OPERATING RESULTS**

 

**Performance Summary**

 

The following table sets forth certain itemsexpressed as percentages of net revenues for the periods indicated.

 
| ** **                                                                        | ** ** | **Fiscal year  ended**    | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                        | ** ** | **August 1,********2009** | ** ** | **August 2,********2008** | ** ** | **July 28,********2007** | ** ** |
| ** **                                                                        | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                     | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 69.6                      |       | 63.8 |   | 62.7 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 24.2                      |       | 22.7 |   | 23.1 |   |
| Income from credit card  program, net                                             |       | (1.4                      | )          | (1.4 | ) | (1.5 | ) |
| Depreciation expense                                                              |       | 4.1                       |       | 3.2 |   | 3.1 |   |
| Amortization of intangible  assets                                                |       | 1.5                       |       | 1.2 |   | 1.2 |   |
| Amortization of favorable  lease commitments                                      |       | 0.5                       |       | 0.4 |   | 0.4 |   |
| Impairment charges                                                                |       | 19.3                      |       | 0.7 |   | 0.3 |   |
| Other income                                                                      |       | —                    |       | (0.7 | ) | (0.2 | ) |
| Operating (loss) earnings                                                         |       | (17.9                     | )          | 10.1 |   | 10.9 |   |
| Interest expense, net                                                             |       | 6.5                       |       | 5.2 |   | 5.9 |   |
| (Loss) earnings from continuing  operations before income taxes                   |       | (24.4                     | )          | 4.9 |   | 4.9 |   |
| Income tax (benefit)  expense                                                     |       | (6.1                      | )          | 1.8 |   | 1.9 |   |
| (Loss) earnings from  continuing operations                                       |       | (18.3                     | )          | 3.1 |   | 3.1 |   |
| Loss from discontinued  operation, net of taxes                                   |       | —                    |       | — |   | (0.5 | ) |
| Net (loss) earnings                                                               |       | (18.3                     | )%         | 3.1 | % | 2.5 | % |

 

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Set forth in the following table is certainsummary information with respect to our operations for the periods indicated.

 
| ** **                                                         | ** ** | **Fiscal year  ended**    | ** ** |
|--------------------------------------------------------------------|------------|---------------------------|------------|
| **(in  millions, except sales per square foot)**                   | ** ** | **August 1,********2009** | ** ** | **August 2,********2008** | ** ** | **July 28,********2007** | ** ** |
| ** **                                                         | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                           |       |                      |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                         | 2,991.3    |   | $ | 3,853.0 |   | $ | 3,674.6 |   |
| Direct Marketing                                                   |       | 652.0                     |       | 747.5 |   | 715.5 |   |
| Total                                                              |       | $                         | 3,643.3    |   | $ | 4,600.5 |   | $ | 4,390.1 |   |
|                                                               |       |                      |       |   |   |   |   |
| OPERATING (LOSS) EARNINGS                                          |       |                      |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                         | 112.4      |   | $ | 476.7 |   | $ | 490.6 |   |
| Direct Marketing                                                   |       | 70.6                      |       | 117.7 |   | 116.0 |   |
| Corporate expenses                                                 |       | (60.0                     | )          | (57.0 | ) | (56.2 | ) |
| Amortization of intangible  assets and favorable lease commitments |       | (72.7                     | )          | (72.2 | ) | (72.3 | ) |
| Impairment charges (1)                                             |       | (703.2                    | )          | (31.3 | ) | (11.5 | ) |
| Other income (2)                                                   |       | —                    |       | 32.5 |   | 10.2 |   |
| Total                                                              |       | $                         | (652.9     | ) | $ | 466.4 |   | $ | 476.8 |   |
|                                                               |       |                      |       |   |   |   |   |
| OPERATING PROFIT (LOSS)  MARGIN                                    |       |                      |       |   |   |   |   |
| Specialty Retail stores                                            |       | 3.8                       | %          | 12.4 | % | 13.4 | % |
| Direct Marketing                                                   |       | 10.8                      | %          | 15.7 | % | 16.2 | % |
| Total                                                              |       | (17.9                     | )%         | 10.1 | % | 10.9 | % |
|                                                               |       |                      |       |   |   |   |   |
| CHANGE IN COMPARABLE  REVENUES (3)                                 |       |                      |       |   |   |   |   |
| Specialty Retail stores                                            |       | (23.2                     | )%         | 1.3 | % | 6.2 | % |
| Direct Marketing                                                   |       | (12.2                     | )%         | 3.8 | % | 9.2 | % |
| Total                                                              |       | (21.4                     | )%         | 1.7 | % | 6.7 | % |
|                                                               |       |                      |       |   |   |   |   |
| SALES PER SQUARE FOOT                                              |       |                      |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                         | 475        |   | $ | 634 | (4) | $ | 638 |   |
|                                                               |       |                      |       |   |   |   |   |
| STORE COUNT                                                        |       |                      |       |   |   |   |   |
| Neiman Marcus and Bergdorf  Goodman stores:                        |       |                      |       |   |   |   |   |
| Open at beginning of  period                                       |       | 41                        |       | 40 |   | 38 |   |
| Opened during the period                                           |       | 1                         |       | 1 |   | 2 |   |
| Open at end of period                                              |       | 42                        |       | 41 |   | 40 |   |
| Clearance centers:                                                 |       |                      |       |   |   |   |   |
| Open at beginning of  period                                       |       | 24                        |       | 20 |   | 18 |   |
| Opened during the period                                           |       | 4                         |       | 4 |   | 2 |   |
| Closed during the period                                           |       | (1                        | )          | — |   | — |   |
| Open at end of period                                              |       | 27                        |       | 24 |   | 20 |   |
|                                                               |       |                      |       |   |   |   |   |
| NON-GAAP FINANCIAL DATA                                            |       |                      |       |   |   |   |   |
| EBITDA (5)                                                         |       | $                         | (429.4     | ) | $ | 687.0 |   | $ | 685.6 |   |
| Adjusted EBITDA (5)                                                |       | $                         | 273.8      |   | $ | 685.8 |   | $ | 686.9 |   |

 

----

(1)           For fiscal year2009, impairment charges consist of pretax charges of 1) $329.7 million for thewritedown to fair value of goodwill, 2) $343.2 million for the writedown tofair value of the net carrying value of tradenames and 3) $30.3 million for thewritedown to fair value of the net carrying value of certain long-lived assets.

 

For fiscal years 2008 and 2007, impairmentcharges consist of a$31.3 million and $11.5 million pretax impairment chargerelated to the writedown to fair value of the Horchow tradename.

 

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(2)           For fiscal year 2008, other income includesa pension curtailment gain of $32.5 million as a result of our decision tofreeze certain Pension and SERP benefits as of December 31, 2007.

 

For fiscal year 2007, other income includes 1) $4.2 million ofother income we received in connection with the merger of Wedding Channel.com,in which we held a minority interest, and The Knot and 2) $6.0M of other incomerelated to aged, non-escheatable gift cards.

 

(3)           Comparablerevenues include 1) revenues derived from our retail stores open for more thanfifty two weeks, including stores that have been relocated or expanded and 2) revenuesfrom our Direct Marketing operation. Comparable revenues exclude 1) revenues ofclosed stores and 2) revenues from our discontinued operation (Kate Spade LLCsold in December 2006). The calculation of the change in comparable revenuesfor fiscal year 2008 is based on revenues for the fifty two weeks ended July 26,2008 compared to revenues for the fifty two weeks ended July 28, 2007.

 

(4)           Sales persquare foot for fiscal year 2008 is based on revenues for the fifty two weeksended July 26, 2008.

 

(5)           For an explanation of EBITDAand Adjusted EBITDA as measures of our operating performance, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Non-GAAP Financial Measure-EBITDA and Adjusted EBITDA.”

 

**Fiscal Year Ended August 1, 2009 Compared to FiscalYear Ended August 2, 2008**

 

***Revenues.**** *Our revenues for fiscal year 2009 of $3,643.3 million decreased $957.2million, or 20.8%, from $4,600.5 million in fiscal year 2008.  The decrease in revenues was due to decreasesin comparable revenues for both our Specialty Retail stores and DirectMarketing operation as a result of the current challenging economic environmentand lower customer demand.  Customerdemand, especially during the holiday selling season, was well below ourinitial expectations and the prior year and the lower level of customer demandcontinued throughout the Spring season of fiscal year 2009.

 

Comparable revenues for the fifty two weeks ended August 1, 2009 were$3,575.4 million compared to $4,548.5 million in fiscal year 2008, representinga decrease of 21.4%.  Comparable revenuesdecreased in fiscal year 2009 by 23.2% for Specialty Retail stores and 12.2%for Direct Marketing.  New storesgenerated revenues of $67.9 million in fiscal year 2009.

 

Comparable revenues by quarter for fiscal years 2009 and 2008 are asfollows:

 
| ** **              | ** ** | **Fiscal year  2009**     | ** ** | **Fiscal year  2008**    | ** ** |
|-------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **Fourth********Quarter** | ** ** | **Third********Quarter** | ** ** | **Second********Quarter** | ** ** | **First********Quarter** | ** ** | **Fourth********Quarter** | ** ** | **Third********Quarter** | ** ** | **Second********Quarter** | ** ** | **First********Quarter** | ** ** |
| Specialty Retail stores |       | (25.0                     | )%         | (27.1                    | )%         | (25.0 | )% | (15.8 | )% | (1.8 | )% | (3.4 | )% | 3.4 | % | 6.4 | % |
| Direct Marketing        |       | (15.7                     | )%         | (14.3                    | )%         | (12.1 | )% | (7.0 | )% | 0.7 | % | 2.0 | % | 5.2 | % | 7.1 | % |
| Total                   |       | (23.4                     | )%         | (25.1                    | )%         | (22.8 | )% | (14.5 | )% | (1.4 | )% | (2.5 | )% | 3.7 | % | 6.5 | % |

 

Internet revenues generated by Direct Marketing were $518.5 million forfiscal year 2009, a decrease of 8.2% compared to the prior fiscal year. Inaddition, catalog revenues decreased 27.0% compared to the prior fiscal year.

 

***Cost of goods sold including buying and occupancycosts (excluding depreciation).***  COGS for fiscal year 2009 were 69.6% ofrevenues compared to 63.8% of revenues for fiscal year 2008.

 

The increase in COGS as a percentage of revenues in fiscal year 2009was primarily due to decreased product margins generated by both our SpecialtyRetail stores and Direct Marketing operation of approximately 4.6% ofrevenues.  We experienced a lower thananticipated level of customer demand in fiscal year 2009.  As a result, we generated a lower level offull-price sales and incurred significantly higher net markdowns and salespromotions costs to liquidate inventories held in excess of customer demand,resulting in lower product margins. Additionally, buying and occupancy costs increased by 1.2% of revenuesprimarily due to the deleveraging of payroll and rent expenses on the lowerlevel of revenues generated, net of savings realized as a result of ourinitiatives to control our expenses (approximately $10 million).

 

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***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses decreased by $162.7 millionin fiscal year 2009 compared to the prior fiscal year.  The decrease in SG&A expenses reflects 1)savings in variable costs, primarily commissions, on lower revenues and 2)savings realized as a result of our initiatives to control our expenses(approximately $90 million).

 

Despite a decrease in SG&A expenses, SG&A expenses as apercentage of revenues increased to 24.2% of revenues in fiscal year 2009compared to 22.7% of revenues in the prior fiscal year.  The net increase in SG&A expenses as apercentage of revenues in fiscal year 2009 of approximately 1.5% of revenueswas primarily due to:

 

·      thedeleveraging of a significant portion of our SG&A expenses, primarilypayroll and related benefits net of lower incentive compensation requirements,by approximately 1.1% of revenues; and

 

·      expenses,primarily consulting fees and severance, aggregating $21.3 million, or 0.6% ofrevenues, incurred in connection with our initiatives to control expenses andto reduce our cost structure, which initiatives included headcount and salaryreductions and the centralization and redesign of various store and corporatejob functions; offset by

 

·      a lower levelof advertising and promotions costs incurred in fiscal year 2009 ofapproximately 0.1% of revenues, primarily due to a lower level of spending byour Specialty Retail stores.  During thefirst quarter of fiscal year 2008, we incurred incremental advertising andpromotions costs in connection with the celebration of the 100th anniversary of Neiman Marcus in October 2007.

 

***Income from credit card program, net. ***We earned HSBC ProgramIncome of $50.0 million, or 1.4% of revenues, in fiscal year 2009 compared to$65.7 million, or 1.4% of revenues, in fiscal year 2008.

 

***Depreciation expense. ***Depreciation expense was$150.8 million, or 4.1% of revenues, in fiscal year 2009 compared to $148.4million, or 3.2% of revenues, in fiscal year 2008.  The increase in depreciation expense as apercentage of revenues results primarily from the deleveraging of these costson lower revenues.

 

***Amortization expense. ***Amortization of intangibleassets (primarily customer lists and favorable lease commitments) aggregated$72.7 million, or 2.0% of revenues, in fiscal year 2009 compared to $72.2million, or 1.6% of revenues, in fiscal year 2008.  The increase in amortization expense as apercentage of revenues results primarily from the deleveraging of these costson lower revenues.

 

***Impairment charges.***** **In fiscal year 2009, werecorded impairment charges, related primarily to our tradenames and goodwill,aggregating $703.2 million in connection with the review of our long-livedassets for recoverability, as more fully explained in Note 7 in our notes toconsolidated financial statements.

 

In the fourth quarter of fiscal year 2008, we recorded a $31.3 million,or 0.7% of revenues, pretax impairment charge related to the writedown to fairvalue of the Horchow tradename.

 

***Other income. ***In the first quarter of fiscal year 2008, werecorded a pension curtailment gain of $32.5 million, or 0.7% of revenues, as aresult of our decision to freeze certain Pension and SERP benefits as of December31, 2007, as more fully explained in Note 14 in our notes to consolidatedfinancial statements.

 

***Segment operating earnings.***  Segment operating earnings for our SpecialtyRetail stores and Direct Marketing segments do not reflect either the impact ofadjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date or impairment charges related to declines in fair valuesubsequent to the Acquisition date.  Thereconciliation of segment operating earnings to total operating loss is asfollows:

 
| Specialty Retail stores                                            |   | $      | 112.4  |   |
|--------------------------------------------------------------------|--------|--------|--------|--------|
| Direct Marketing                                                   |   | 70.6   |   |
| Amortization of intangible  assets and favorable lease commitments |   | (72.7  | )      |
| Corporate expenses                                                 |   | (60.0  | )      |
| Impairment charges                                                 |   | (703.2 | )      |
| Total operating loss                                               |   | $      | (652.9 | )      |

 

Operating earnings for our Specialty Retail stores segment were $112.4million, or 3.8% of Specialty Retail stores revenues, for fiscal year 2009compared to $476.7 million, or 12.4% of Specialty Retail stores revenues, forthe prior fiscal

 

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year.  The decrease in operatingmargin as a percentage of revenues was primarily due to:

 

·      lower level offull-price sales as a result of weak customer demand and higher net markdownsand promotional costs incurred to liquidate on-hand inventories held in excessof sales trends; and

 

·      thedeleveraging of a significant portion of our expenses on the lower level ofrevenues; partially offset by

 

·      a lower levelof spending for advertising and promotion costs.

 

Operating earnings for Direct Marketing were $70.6 million, or 10.8% ofDirect Marketing revenues, in fiscal year 2009 compared to $117.7 million, or15.7% of Direct Marketing revenues, for the prior fiscal year.  The decrease in operating margin as apercentage of revenues for Direct Marketing was primarily the result of:

 

·      a decrease inmargins primarily due to higher net markdowns in response to weak customerdemand; and

 

·      thedeleveraging of a significant portion of our expenses.

 

***Interest expense, net*****.**  Net interest expense was $235.6 million, or6.5% of revenues, in fiscal year 2009 and $239.8 million, or 5.2% of revenues,for the prior fiscal year.  The netdecrease in interest expense is primarily due to 1) the decrease in interestrates on our variable-rate indebtedness, partially offset by 2) incremental PIKinterest on the Senior Notes, 3) lower interest income and 4) lower capitalizedinterest as a result of lower capital expenditures.  The significant components of interestexpense are as follows:

 
| ** **                         | ** ** | **Fiscal  year ended**    | ** ** |
|------------------------------------|------------|---------------------------|------------|
| **(in  thousands)**                | ** ** | **August 1,********2009** | ** ** | **August 2,********2008** | ** ** |
|                               |       |                      |       |   |   |
| Senior Secured Term Loan  Facility |       | $                         | 90,952     |   | $ | 106,504 |   |
| 2028 Debentures                    |       | 8,906                     |       | 8,903 |   |
| Senior Notes                       |       | 66,356                    |       | 63,000 |   |
| Senior Subordinated Notes          |       | 52,028                    |       | 51,875 |   |
| Amortization of debt issue  costs  |       | 17,185                    |       | 14,217 |   |
| Other                              |       | 3,709                     |       | 3,275 |   |
| Total interest expense             |       | 239,136                   |       | 247,774 |   |
| Less:                              |       |                      |       |   |   |
| Interest income                    |       | 2,569                     |       | 4,933 |   |
| Capitalized interest               |       | 993                       |       | 3,036 |   |
| Interest expense, net              |       | $                         | 235,574    |   | $ | 239,805 |   |

 

***Income tax (benefit) expense.***  Our effective income tax rate for fiscal year2009 was 24.8% compared to 37.0% for fiscal year 2008.  No income tax benefit exists related to the$329.7 million of goodwill impairment charges recorded in fiscal year2009.  Excluding the impact of thegoodwill impairment charges, our effective income tax rate was 39.5% for fiscalyear 2009.

 

We file income tax returns in the U.S.federal jurisdiction and various state and local jurisdictions.  During the third quarter of fiscal year 2009,we closed the IRS examination of fiscal years 2005 and 2006 and received netrefunds of approximately $2.8 million. In addition, as a result of the completion of the audit and IRSdetermination regarding certain deductions taken in connection with theAcquisition, we recorded a decrease in the gross amount of unrecognized taxbenefits of $13.7 million and a decrease in accrued interest and penalties of$2.2 million. This $15.9 million reduction in our liability for unrecognizedtax benefits resulted in a decrease to goodwill of $17.3 million and a taxbenefit of $1.3 million, offset by a decrease to deferred tax liabilities of$2.7 million during fiscal year 2009. Finally, in the fourth quarter of fiscal year 2009, we recorded adecrease to our recorded liability for unrecognized tax benefits and acorresponding reduction to goodwill of $0.7 million as a result of the expirationof statutes of limitation in various taxing jurisdictions.

 

During the fourth quarter of fiscal year2008, we entered into a negotiated settlement with a state tax authorityregarding a state non-filing position which resulted in a decrease in ouraccruals for uncertain tax positions and a reduction to our gross unrecognizedtax benefits of $7.2 million and a corresponding decrease to goodwill of $3.0million related to the resolution of uncertainties that existed at the time ofthe Acquisition.

 

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The IRS is now examining our federal taxreturns for fiscal year 2007.  We believeour recorded tax liabilities as of August 1, 2009 are sufficient to cover any potentialassessments to be made by the IRS upon the completion of their examinations. Wewill continue to monitor the progress of the IRS examinations and review ourrecorded tax liabilities for potential audit assessments.  With respect to state and localjurisdictions, with limited exceptions, the Company and its subsidiaries are nolonger subject to income tax audits for fiscal years before 2005.  We believe it is reasonably possible thatadditional adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 12 months as a result of settlements with tax authoritiesor expiration of statutes of limitation. At this time, we do not believe such adjustments will have a materialimpact on our consolidated financial statements.

 

**Fiscal Year Ended August 2, 2008 Compared to FiscalYear Ended July 28, 2007**

 

***Revenues.**** *Our revenues for fiscal year 2008 of $4,600.5 million increased $210.4million, or 4.8%, from $4,390.1 million in fiscal year 2007.  The increase in revenues was due to increasesin comparable revenues, revenues from new stores, higher internet revenues andrevenues generated in the 53rd week of fiscal year 2008.  Revenues increased in fiscal year 2008compared to the prior fiscal year at all our operating companies.

 

Comparable revenues for the fifty two weeks ended July 26, 2008 were$4,464.4 million compared to $4,390.1 million in fiscal year 2007, representingan increase of 1.7%.  Comparable revenuesincreased in fiscal year 2008 by 1.3% for Specialty Retail stores and 3.8% forDirect Marketing compared to fiscal year 2007. New stores generated sales of$86.4 million for the fifty two weeks ended July 26, 2008 while revenues forthe 53rd week were $49.8 million.

 

Our comparable revenues trends were stronger in the first part offiscal year 2008.  We began to experiencea lower level of customer spending in the second quarter of fiscal year 2008which continued into the third and fourth quarters of fiscal year 2008.

 

Changes in comparable revenues by fiscal quarter are as follows:

 
| ** **              | ** ** | **Fiscal Year 2008**      | ** ** | **Fiscal Year 2007**     | ** ** |
|-------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **Fourth********Quarter** | ** ** | **Third********Quarter** | ** ** | **Second********Quarter** | ** ** | **First********Quarter** | ** ** | **Fourth********Quarter** | ** ** | **Third********Quarter** | ** ** | **Second********Quarter** | ** ** | **First********Quarter** | ** ** |
| Specialty Retail stores |       | (1.8                      | )%         | (3.4                     | )%         | 3.4 | % | 6.4 | % | 6.6 | % | 5.6 | % | 7.0 | % | 5.4 | % |
| Direct Marketing        |       | 0.7                       | %          | 2.0                      | %          | 5.2 | % | 7.1 | % | 9.0 | % | 8.7 | % | 6.1 | % | 14.7 | % |
| Total                   |       | (1.4                      | )%         | (2.5                     | )%         | 3.7 | % | 6.5 | % | 7.0 | % | 6.1 | % | 6.8 | % | 6.8 | % |

 

The increase in comparable revenues for Direct Marketing was due tohigher internet revenues.  Internetrevenues were $564.5 million for fiscal year 2008, an increase of 13.1%compared to the prior fiscal year. The increase in internet revenues waspartially offset by decreases in catalog revenues as well as a decrease inrevenues from the home décor category, primarily offered by our Horchow brand.

 

***Cost of goods sold including buying and occupancycosts (excluding depreciation).***  COGS for fiscal year 2008 was 63.8% ofrevenues compared to 62.7% of revenues for fiscal year 2007.

 

The net increase in COGS as a percentage of revenues in fiscal year2008 was primarily due to decreased margins generated by both our SpecialtyRetail stores and Direct Marketing operation of approximately 1.1% ofrevenues.  The increase in COGS as apercentage of revenues reflects the lower level of customer demand weexperienced in fiscal year 2008.  As aresult, we generated a lower level of full-price sales in fiscal year 2008 andincurred higher markdowns and sales promotions costs to liquidate on-handinventories held in excess of sales trends. In addition, our Direct Marketing operation realized lower margins ondelivery and processing revenues as a result of discounted and free shippingpromotions.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses were 22.7% of revenues infiscal year 2008 compared to 23.1% of revenues in the prior fiscal year.

 

The net decrease in SG&A expenses as a percentage of revenues infiscal year 2008 of approximately 0.4% of revenues was primarily due to:

 

·      Lower payrollcosts, including estimated annual incentive compensation, of approximately 0.4%of revenues; and

 

·      a decrease inmarketing and advertising costs of approximately 0.2% of revenues incurred byDirect Marketing primarily due to higher internet revenues, which have a lowerexpense to revenue ratio than catalog revenues.

 

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These decreases in SG&A expenses, as a percentage of revenues, werepartially offset by:

 

·      higher benefitsexpenses of approximately 0.2% of revenues reflecting increases in long-termbenefits; and

 

·      a higher levelof advertising and promotions costs of approximately 0.1% of revenues incurredby our Specialty Retail stores during fiscal year 2008 in connection with 1)the celebration of the 100th anniversary of Neiman Marcus in October2007 and 2) promotional events and activities conducted to facilitate thesell-through of on-hand inventories held in excess of sales trends.

 

***Income from credit card program. ***We earned HSBC ProgramIncome of $65.7 million, or 1.4% of revenues, in fiscal year 2008 compared to$65.7 million, or 1.5% of revenues, in fiscal year 2007.

 

***Depreciation expense. ***Depreciation expense was$148.4 million, or 3.2% of revenues, in fiscal year 2008 compared to $136.5million, or 3.1% of revenues, in fiscal year 2007.

 

***Amortization expense. ***Amortization of intangibleassets (customer lists and favorable lease commitments) aggregated $72.2million, or 1.6% of revenues, in fiscal year 2008 compared to $72.3 million, or1.6% of revenues, in fiscal year 2007.

 

***Impairment charges. ***In the fourth quarter of fiscal year 2008, werecorded a $31.3 million, or 0.7% of revenues, pretax impairment charge relatedto the writedown to fair value of the Horchow tradename based upon lowerrevenues and royalty rate expectations with respect to the Horchow brand inlight of current operating performance and future operating expectations.

 

In the fourth quarter of fiscal year 2007, we recorded a $11.5 million,or 0.3% of revenues, pretax impairment charge related to the writedown to fairvalue of the Horchow tradename.

 

***Other income.***** **In the first quarter offiscal year 2008, we recorded a pension curtailment gain of $32.5 million, or0.7% of revenues, as a result of our decision to freeze certain Pension andSERP benefits as of December 31, 2007.

 

In fiscal year 2007, other income of $10.2 million was comprised ofincome related to proceeds received from an investment and gift cardbreakage.  In the first quarter of fiscalyear 2007, we received consideration aggregating $4.2 million, or 0.1% ofrevenues, in connection with the merger of Wedding Channel.com, in which weheld a minority interest, and The Knot. We accounted for our investment in WeddingChannel.com under the cost method. In prior years, we had previously reducedour carrying value of this investment to zero.

 

In the fourth quarter of fiscal year 2007, we recorded $6.0 million, or0.1% of revenues, of other income for the breakage on gift cards we previouslysold and issued.  The income wasrecognized based upon our analysis of the aging of these gift cards, ourdetermination that the likelihood of future redemption was remote and ourdetermination that such balances were not subject to escheatment lawsapplicable to our operations.  Prior tothe fourth quarter of fiscal year 2007, we had not recognized breakage on giftcards pending, among other things, our final determination of the applicableescheatment laws applicable to our operations. Gift cardbreakage during fiscal year 2008 was not significant.

 

***Segment operating earnings.***  Segment operating earnings for our SpecialtyRetail stores and Direct Marketing segments do not reflect the impact ofadjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date.  The reconciliationof segment operating earnings to total operating earnings is as follows:

 
| Specialty Retail stores                                            |   | $     | 476.7  |   |
|--------------------------------------------------------------------|--------|-------|--------|--------|
| Direct Marketing                                                   |   | 117.7 |   |
| Amortization of intangible  assets and favorable lease commitments |   | (72.2 | )      |
| Corporate expenses and  other                                      |   | (55.8 | )      |
| Total operating earnings                                           |   | $     | 466.4  |   |

 

Operating earnings for our Specialty Retail stores segment were $476.7million, or 12.4% of Specialty Retail stores revenues, for fiscal year ended August2, 2008 compared to $490.6 million, or 13.4% of Specialty Retail storesrevenues, for the prior fiscal year.  Thedecrease in operating margin as a percentage of revenues was primarily due to:

 

·      lower thananticipated demand resulting in a lower level of full-price sales and highermarkdowns; and

 

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·      net increasesin advertising and promotion costs; partially offset by

 

·      lower estimatedannual incentive compensation costs.

 

Operating earnings for Direct Marketing were $117.7 million, or 15.7%of Direct Marketing revenues, in fiscal year 2008 compared to $116.0 million,or 16.2% of Direct Marketing revenues, for the prior fiscal year.  The decrease in operating margin as apercentage of revenues for Direct Marketing was primarily the result of 1) adecrease in margins realized on delivery and processing revenues, partiallyoffset by 2) a decrease in advertising and marketing costs, as a percentage ofrevenues, due to the continued growth in internet revenues.

 

Total operating earnings in fiscal year 2008 were $466.4 million, or10.1% of revenues.  Total operatingearnings in fiscal year 2007 were $476.8 million, or 10.9% of revenues.  Operating earnings margin decreased in fiscalyear 2008 by 0.8% of revenues as a result of 1) an increase in COGS by 1.1% ofrevenues due primarily to lower margins at both Specialty Retail stores andDirect Marketing, partially offset by 2) a decrease in SG&A expenses by0.4% of revenues (primarily lower incentive compensation).

 

***Interest expense, net*****.**  Net interest expense was $239.8 million, or5.2% of revenues, in fiscal year 2008 and $259.8 million, or 5.9% of revenues,for the prior fiscal year.  The decreasein interest expense is primarily due to the decrease in term loan interestrates as well as the paydown of $250 million of debt during fiscal year 2007.  The significant components of interestexpense are as follows:

 
| **(in  thousands)**                | ** ** | **Fiscal  year********ended********August 2,********2008** | ** ** | **Fiscal  year********ended********July 28,********2007** | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                               |       |                                                       |       |                                                      |       |
| Senior Secured Term Loan  Facility |       | $                                                          | 106,504    |                                                      | $          | 128,380 |   |
| 2028 Debentures                    |       | 8,903                                                      |       | 8,915                                                     |       |
| Senior Notes                       |       | 63,000                                                     |       | 63,000                                                    |       |
| Senior Subordinated Notes          |       | 51,875                                                     |       | 51,875                                                    |       |
| Amortization of debt issue  costs  |       | 14,217                                                     |       | 14,141                                                    |       |
| Other                              |       | 3,275                                                      |       | 3,689                                                     |       |
| Total interest expense             |       | 247,774                                                    |       | 270,000                                                   |       |
| Less:                              |       |                                                       |       |                                                      |       |
| Interest income                    |       | 4,933                                                      |       | 7,370                                                     |       |
| Capitalized interest               |       | 3,036                                                      |       | 2,825                                                     |       |
| Interest expense, net              |       | $                                                          | 239,805    |                                                      | $          | 259,805 |   |

 

***Income taxes.***  Our effective income tax rate for fiscal yearended August 2, 2008 was 37.0% compared to 37.9% for fiscal year ended July 28,2007.  Our effective tax rate for fiscalyear 2008 was favorably impacted by a decrease in tax liabilities resultingfrom settlements with taxing authorities.

 

We adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year2008.  The cumulative effect of adoptingFIN 48 resulted in a net increase to our accruals for uncertain tax positionsof $9.1 million for the derecognition of certain tax benefits. This increase toour accruals was offset by a corresponding increase to goodwill as theseuncertainties existed at the time of the Acquisition.

 

During the fourth quarter of fiscal year2008, we entered into a negotiated settlement with a state tax authorityregarding a state non-filing position which resulted in a reduction to ourgross unrecognized tax benefits of $7.2 million and a corresponding decrease togoodwill of $3.0 million related to the resolution of uncertainties thatexisted at the time of the Acquisition.

 

**Non-GAAPFinancial Measure — EBITDA and Adjusted EBITDA**

 

Wepresent the non-GAAP financial performance measures of EBITDA and Adjusted EBITDAbecause we use these measures to monitor and evaluate the performance of ourbusiness and believe the presentation of these measures will enhance investors’ability to analyze trends in our business, evaluate our performance relative toother companies in our industry and 

 

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evaluateour ability to service our debt.  Inaddition, we use performance targets based on Adjusted EBITDA as a component ofthe measurement of incentive compensation as described under “ExecutiveCompensation — Compensation Discussion and Analysis — 2009 Executive OfficerCompensation.”

 

EBITDA and Adjusted EBITDAare not presentations made in accordance with GAAP and our computation ofEBITDA and Adjusted EBITDA may vary from others in our industry.  In addition, EBITDA and Adjusted EBITDAcontain some, but not all, adjustments that are taken into account in thecalculation of the components of various covenants in the indentures governingNMG’s senior secured Asset-Based Revolving Credit Facility, Senior Secured TermLoan Facility, Senior Notes and Senior Subordinated Notes.  EBITDA and Adjusted EBITDA should not beconsidered as alternatives to operating earnings or net earnings as measures ofoperating performance.  In addition,EBITDA and Adjusted EBITDA are not presented as and should not be considered asalternatives to cash flows as measures of liquidity.  EBITDA and Adjusted EBITDA have importantlimitations as analytical tools and should not be considered in isolation, oras a substitute for analysis of our results as reported under GAAP.  For example, EBITDA and Adjusted EBITDA:

 

·      do not reflect our cashexpenditures, or future requirements, for capital expenditures or contractualcommitments;

 

·      do not reflect changes in,or cash requirements for, our working capital needs;

 

·      do not reflect ourconsiderable interest expense, or the cash requirements necessary to serviceinterest or principal payments, on our debt;

 

·      exclude tax payments thatrepresent a reduction in available cash; and

 

·      do not reflect any cashrequirements for assets being depreciated and amortized that may have to bereplaced in the future.

 

The following tablereconciles (loss) earnings from continuing operations as reflected in ourconsolidated statements of operations prepared in accordance with GAAP toEBITDA and Adjusted EBITDA:

 
| ** **                                                         | ** ** | **Fiscal  year ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|
| **(dollars  in millions)**                                         | ** ** | **August 1,  2009**    | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                                                               |       |                   |       |   |   |   |   |
| (Loss) earnings from  continuing operations                        |       | $                      | (668.0     | )(1) | $ | 142.8 | (2) | $ | 134.7 | (3) |
| Income tax (benefit)  expense                                      |       | (220.5                 | )          | 83.8 |   | 82.3 |   |
| Interest expense, net                                              |       | 235.6                  |       | 239.8 |   | 259.8 |   |
| Depreciation expense                                               |       | 150.8                  |       | 148.4 |   | 136.5 |   |
| Amortization of intangible  assets and favorable lease commitments |       | 72.7                   |       | 72.2 |   | 72.3 |   |
| EBITDA                                                             |       | (429.4                 | )(1)       | 687.0 | (2) | 685.6 | (3) |
| EBITDA rate                                                        |       | (11.8                  | )%         | 14.9 | % | 15.6 | % |
| Non-cash impairment of  long-lived assets                          |       | 703.2                  |       | 31.3 |   | 11.5 |   |
| Other income                                                       |       | —                 |       | (32.5 | ) | (10.2 | ) |
| Adjusted EBITDA                                                    |       | $                      | 273.8      |   | $ | 685.8 |   | $ | 686.9 |   |
| Adjusted EBITDA rate                                               |       | 7.5                    | %          | 14.9 | % | 15.6 | % |

 

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(1)   For fiscal year 2009,operating loss and EBITDA include pretax impairment charges related to 1)$329.7 million for the writedown to fair value of goodwill, 2) $343.2 millionfor the writedown to fair value of the net carrying value of tradenames and 3)$30.3 million for the writedown to fair value of the net carrying value ofcertain long-lived assets.

 

(2)   For fiscal year 2008,operating earnings and EBITDA include 1) $32.5 million of other income relatedto a pension curtailment gain as a result of our decision to freeze certainPension and SERP benefits as of December 31, 2007, offset by 2) $31.3 millionpretax impairment charge related to the writedown to fair value of the Horchowtradename.

 

(3)   For fiscal year 2007,operating earnings and EBITDA include 1) $11.5 million pretax impairment chargerelated to the writedown to fair value of the Horchow tradename, offset by 2)$4.2 million of other income we received in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot and 3)$6.0M of other income related to aged, non-escheatable gift cards.

 

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**Inflation and Deflation**

 

We believe changes in revenues and netearnings that have resulted from inflation or deflation have not been materialduring the periods presented. In recent years, we have experienced certaininflationary conditions related to 1) increases in product costs primarily dueto changes in foreign currency exchange rates that have reduced the purchasingpower of the U.S. dollar and 2) increases in SG&A. We purchase asubstantial portion of our inventory from foreign suppliers whose costs areaffected by the fluctuation of their local currency against the dollar or whoprice their merchandise in currencies other than the dollar. Fluctuations inthe Euro-U.S. dollar exchange rate affect us most significantly; however, wesource goods from numerous countries and thus are affected by changes innumerous currencies and, generally, by fluctuations in the U.S. dollar relativeto such currencies. Accordingly, changes in the value of the dollar relative toforeign currencies may increase our cost of goods sold and if we are unable topass such cost increases to our customers, our gross margins, and ultimatelyour earnings, would decrease. Foreign currency fluctuations could have amaterial adverse effect on our business, financial condition and results ofoperations in the future. We attempt to offset the effects of inflation throughprice increases and control of expenses, although our ability to increaseprices may be limited by competitive factors. We attempt to offset the effectsof merchandise deflation, which has occurred on a limited basis in recentyears, through control of expenses. There is no assurance, however, thatinflation or deflation will not materially affect our operations in the future.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our cash requirements consist principally of:

 

·      the funding of ourmerchandise purchases;

 

·      capital expenditures fornew store construction, store renovations and upgrades of our managementinformation systems;

 

·      debt service requirements;

 

·      income tax payments; and

 

·      obligations related to ourPension Plan.

 

Our primary sources of short-term liquidityare comprised of cash on hand, availability under our Asset-Based RevolvingCredit Facility and vendor financing. The amounts of cash on hand andborrowings under the Asset-Based Revolving Credit Facility are influenced by anumber of factors, including revenues, working capital levels, vendor terms,the level of capital expenditures, cash requirements related to financinginstruments and debt service obligations, Pension Plan funding obligations and taxpayment obligations, among others.  As tovendor financing, some of our vendors have experienced serious cash flowissues, reductions in available credit from banks, factors or other financialinstitutions, or increases in the cost of capital as a result of currenteconomic conditions.  To counteract theircash flow problems, our vendors may attempt to increase their prices, passthrough increased costs, alter historical credit and payment terms available tous or seek other relief.  Any of theseactions could have an adverse impact on our relationship with the vendor orconstrain the amounts or timing of our purchases from the vendor and,ultimately, have an adverse impact on our revenues, profitability andliquidity.

 

Our working capital requirements fluctuateduring the fiscal year, increasing substantially during the first and secondquarters of each fiscal year as a result of higher seasonal levels ofinventories.  We have typically financedthe increases in working capital needs during the first and second fiscalquarters with available cash balances, cash flows from operations and, ifnecessary, with cash provided from borrowings under our credit facilities.  We have made no borrowings under ourAsset-Based Revolving Credit Facility during fiscal years 2009 or 2008.

 

We believe that operating cash flows,available vendor financing and amounts available pursuant to our senior securedAsset-Based Revolving Credit Facility as well as our option to elect PIKInterest under the Senior Notes through October 15, 2010, will be sufficient tofund our operations, anticipated capital expenditure requirements, debt serviceobligations, contractual obligations and commitments and Pension Plan fundingrequirements through the end of fiscal year 2010.

 

At August 1, 2009, cash and cash equivalentswere $323.4 million compared to $239.2 million at August 2, 2008. Net cashprovided by operating activities was $210.8 million for fiscal year 2009compared to $285.3 million in fiscal year 2008. Cash flows provided by operatingactivities were $74.5 million lower in fiscal year 2009 than in the priorfiscal year primarily due to the lower levels of revenues and earningsgenerated in the current year.

 

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Net cash used for investing activities,representing capital expenditures, was $101.5 million in fiscal year 2009 and$183.5 million in fiscal year 2008.  Weincurred significant capital expenditures in fiscal year 2009 related to theconstruction of new stores in Topanga (the greater Los Angeles area) andBellevue (suburban Seattle). We incurred capital expenditures in fiscal year2008 related to the construction of new stores in Natick and Topanga and theremodel of our Atlanta and Westchester stores. We opened our Natick store in September2007, our Topanga store in September 2008 and our Bellevue store in September 2009.In light of current economic conditions and delays in certain real estateprojects, we have reduced our current and near-term construction commitmentsand currently project gross capital expenditures for fiscal year 2010 to beapproximately $70 to $80 million.  Net ofdeveloper contributions, capital expenditures for fiscal year 2010 areprojected to be approximately $55 to $65 million.

 

Net cash used for financing activities was$25.0 million in fiscal year 2009 as compared to $3.9 million in fiscal year2008.  In fiscal year 2009, we incurred$23.4 million of debt issuance costs as a result of amending and restating theterms of our asset-based revolving credit facility.

 

In response to currenteconomic conditions, we have taken and will continue to take actions tomaintain appropriate liquidity by:

 

·      stimulating sales throughadditional promotional and other events;

 

·      reducing inventory levelsand purchases;

 

·      implementing expense controlinitiatives; and

 

·      reviewing future capitalexpenditures and eliminating or postponing certain projects.

 

**Financing Structure at August 1,2009**

 

Our major sources of funds are comprised ofvendor financing, a $600.0 million Asset-Based Revolving Credit Facility,$1,625.0 million Senior Secured Term Loan Facility (including $26.6 million ofborrowings classified as current liabilities), $734.5 million Senior Notes,$500.0 million Senior Subordinated Notes, $125.0 million 2028 Debentures andoperating leases.

 

***Senior Secured Asset-Based Revolving CreditFacility.***  On July 15,2009, NMG amended and restated the terms of its existing asset-based revolvingcredit facility (which had been scheduled to mature on October 6, 2010).  The terms of the amended and restatedAsset-Based Revolving Credit Facility include a scheduled maturity date of January15, 2013 and a maximum committed borrowing capacity of $600.0 million (the sameamount as in the prior facility).  Thenew facility also provides an uncommitted accordion feature that allows NMG torequest the lenders to provide additional capacity in either the form ofincreased revolving commitments or incremental term loans, subject to apotential total maximum facility of $800 million.

 

TheAsset-Based Revolving Credit Facility provides committed financing of up to$600.0 million, subject to a borrowing base. The Asset-Based Revolving Credit Facility includes borrowing capacityavailable for letters of credit and for borrowings on same-day notice.  The borrowing base for the Asset-BasedRevolving Credit Facility is equal to at any time the sum of (a) the lesser of (i)80% of eligible inventory (valued at the lower of cost or market value) and (ii)85% of the net orderly liquidation value of eligible inventory, and (b) 85% ofthe amounts owed by credit card processors in respect of eligible credit cardaccounts constituting proceeds arising from the sale or disposition ofinventory, less certain reserves.   Through April 30, 2011 NMG is required tomaintain excess availability of at least the greater of (a) 10% of the lesserof (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $50million under the terms of the Asset-Based Revolving Credit Facility.  After April 30, 2011, if at any time, excessavailability is less than the greater of (a) 15% of the lesser of (i) theaggregate revolving commitments and (ii) the borrowing base and (b) $60million, NMG will be required to maintain a pro forma ratio of consolidatedEBITDA to consolidated Fixed Charges (as such terms are defined in the creditagreement) of at least 1.1 to 1.0.  On August1, 2009, NMG had no borrowings outstanding under this facility, $32.8 millionof outstanding letters of credit and $468.5 million of unused borrowingavailability.

 

See Note 9 of our Notes to ConsolidatedFinancial Statements in Item 15 for a further description of the terms of theAsset-Based Revolving Credit Facility.

 

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***Senior Secured Term LoanFacility.***  In October 2005,NMG entered into a credit agreement and related security and other agreementsfor a $1,975.0 million Senior Secured Term Loan Facility.  NMG voluntarily repaid $100.0 millionprincipal amount of its loans under the Senior Secured Term Loan Facility infiscal year 2006 and $250 million in fiscal year 2007.  At August 1, 2009, the outstanding balanceunder the Senior Secured Term Loan Facility was $1,625.0 million (including$26.6 million of borrowings classified as current liabilities).  The principal amount of the loans outstandingis due and payable in full on April 6, 2013.

 

At August 1, 2009, borrowings under the Senior SecuredTerm Loan Facility bore interest at a rate per annum equal to, at NMG’s option,either (a) a base rate determined by reference to the higher of (1) the prime rateof Credit Suisse and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject to certainadjustments, in each case plus an applicable margin. The interest rate on theoutstanding borrowings pursuant to the Senior Secured Term Loan Facility was2.50% at August 1, 2009.  The applicablemargin is subject to adjustment based on contractually defined debt coverageratios.  At August 1, 2009, theapplicable margin with respect to base rate borrowings was 1.00% and theapplicable margin with respect to LIBOR borrowings was 2.00%.

 

See Note 9 of our Notes to ConsolidatedFinancial Statements in Item 15 for a further description of the terms of theSenior Secured Term Loan Facility.

 

***2028 Debentures.***  In May 1998, NMG issued $125.0 millionaggregate principal amount of its 7.125% 2028 Debentures.  NMG’s 2028 Debentures mature on June 1, 2028.

 

See Note 9 of our Notes to ConsolidatedFinancial Statements in Item 15 for a further description of the terms of the2028 Debentures.

 

***Senior Notes.**** *NMG has $734.5 millionaggregate principal amount of 9.0% / 9.75% Senior Notes under a seniorindenture (Senior Indenture).  NMG’sSenior Notes mature on October 15, 2015. We negotiated for the right to include the PIK feature in our SeniorNotes because of our belief that this feature could be a useful tool to enhanceliquidity under appropriate circumstances. In the second quarter of fiscal year2009, given the dislocation in the financial markets and the uncertainty as towhen reasonable conditions will return, we believed that it was appropriate toutilize this feature, even though we had unused borrowing capacity under our$600.0 million revolving credit facility. Accordingly, we elected to pay PIKInterest for the three quarterly interest periods ending on October 14, 2009and to make such interest payments with the issuance of additional Senior Notesat the PIK Interest rate of 9.75% instead of paying interest in cash.  As a result, the original principal amount ofSenior Notes of $700.0 million increased by $17.1 million on April 14, 2009 andby $17.4 million on July 14, 2009.

 

Prior to the beginning of each eligibleinterest period in the future, we will evaluate whether to continue utilizingthis PIK feature, taking into account market conditions and other relevantfactors at that time. After October 15, 2010, we are required to make allinterest payments on the Senior Notes entirely in cash.

 

See Note 9 of our Notes to ConsolidatedFinancial Statements in Item 15 for a further description of the terms of theSenior Notes.

 

***Senior Subordinated Notes.**** *NMG has $500.0 millionaggregate principal amount of 10.375% Senior Subordinated Notes under a seniorsubordinated indenture (Senior Subordinated Indenture).  NMG’s Senior Subordinated Notes mature on October15, 2015.

 

See Note 9 of our Notes to ConsolidatedFinancial Statements in Item 15 for a further description of the terms of theSenior Subordinated Notes.

 

***Interest Rate Swaps.***  In connection with the Acquisition, weobtained $2,575.0 million of floating rate debt agreements, of which $2,125.0million was outstanding at the Acquisition date and $1,625.0 million isoutstanding at August 1, 2009 (including $26.6 million of borrowings classifiedas current liabilities).  Effective December6, 2005, NMG entered into floating to fixed interest rate swap agreements foran aggregate notional amount of $1,000.0 million to limit our exposure tointerest rate increases related to a portion of our floating rateindebtedness.  These swap agreementshedge a portion of our contractual floating rate interest commitments throughthe expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.831% to 6.983% per quarter through2010 and result in an average fixed rate of 6.900%.

 

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**Contractual Obligations andCommitments**

 

The following table summarizes our estimatedsignificant contractual cash obligations at August 1, 2009:

 
| ** **                                      | ** ** | **Payments  Due By Period** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                             | ** ** | **Total**                   | ** ** | **Fiscal Year********2010** | ** ** | **Fiscal  Years********2011-2012** | ** ** | **Fiscal  Years********2013-2014** | ** ** | **Fiscal Year********2015 and********Beyond** | ** ** |
| Contractual obligations:                        |       |                        |       |   |   |   |   |   |   |   |   |
| Senior Secured Term Loan  Facility (1)          |       | $                           | 1,625,000  |   | $ | 26,617 |   | $ | — |   | $ | 1,598,383 |   | $ | — |   |
| Senior Notes                                    |       | 734,500                     |       | — |   | — |   | — |   | 734,500 |   |
| Senior Subordinated Notes                       |       | 500,000                     |       | — |   | — |   | — |   | 500,000 |   |
| 2028 Debentures                                 |       | 125,000                     |       | — |   | — |   | — |   | 125,000 |   |
| Interest requirements (2)                       |       | 1,117,300                   |       | 213,500 |   | 352,300 |   | 283,800 |   | 267,700 |   |
| Lease obligations                               |       | 900,900                     |       | 55,600 |   | 103,100 |   | 91,500 |   | 650,700 |   |
| Minimum pension funding  obligation (3)         |       | 161,000                     |       | — |   | 60,500 |   | 57,200 |   | 43,300 |   |
| Other long-term  liabilities (4)                |       | 69,100                      |       | 5,000 |   | 11,400 |   | 13,200 |   | 39,500 |   |
| Construction and purchase  commitments (5) |       | 887,900                     |       | 799,500 |   | 40,600 |   | 47,800 |   | — |   |
|                                            |       | $                           | 6,120,700  |   | $ | 1,100,217 |   | $ | 567,900 |   | $ | 2,091,883 |   | $ | 2,360,700 |   |

 

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(1)           Pursuant to theterms of our Senior Secured Term Loan Facility, we will be required to prepay$26.6 million of outstanding borrowings under that facility in the firstquarter of fiscal year 2010 from excess cash flow, as defined in the creditagreement governing that facility, that we generated in fiscal year 2009.  The above table does not reflect futureexcess cash flow prepayments, if any, that may be required under the term loanfacility.

 

(2)           The cash obligations forinterest requirements reflect 1) interest requirements on our fixed-rate debtobligations at their contractual rates, 2) interest requirements on floatingrate debt obligations not subject to interest rate swaps at rates in effect at August1, 2009 and 3) interest requirements on floating rate debt obligations subjectto interest rate swaps at the fixed rates provided through the swapagreements.  A 1% increase in thefloating rates related to floating rate debt outstanding at August 1, 2009 notsubject to interest rate swaps would increase annual interest rate requirementsby approximately $6.3 million.

 

(3)           At July 31,2009 (the most recent measurement date), our actuarially calculated projectedbenefit obligation for our Pension Plan was $428.0 million and the fair valueof the assets was $272.0 million. Our policy is to fund the Pension Plan at orabove the minimum amount required by law. We made a $15.0 million voluntary contribution to the Pension Plan inboth fiscal years 2009 and 2008.  Basedupon currently available information, we will not be required to makecontributions in fiscal year 2010 to the Pension Plan.

 

(4)           Included inother long-term liabilities at August 1, 2009 are our liabilities for ourPension, SERP and Postretirement Plans aggregating $261.0 million.  Our scheduled obligations with respect to ourSERP and Postretirement Plan liabilities consist of expected benefit paymentsthrough 2019, as currently estimated using information provided by ouractuaries.  Also included in otherlong-term liabilities at August 1, 2009 are our liabilities related to 1) theunrealized loss on financial instruments of $57.8 million, 2) uncertain taxpositions (including related accruals for interest and penalties) of $12.4million and 3) other obligations aggregating $19.0 million, primarily foremployee benefits.  Future cashobligations related to these liabilities are not currently estimable.

 

(5)           Constructioncommitments relate primarily to obligations pursuant to contracts for theconstruction of new stores and the renovation of existing stores expected as ofAugust 1, 2009.  These amounts representthe gross construction costs and exclude developer contributions ofapproximately $54 million which we expect to receive pursuant to the terms ofthe construction contracts.

 

In the normal course of our business, we issuepurchase orders to vendors/suppliers for merchandise. Our purchase orders arenot unconditional commitments but, rather represent executory contractsrequiring performance by the vendors/suppliers, including the delivery of themerchandise prior to a specified cancellation date and the compliance withproduct specifications, quality standards and other requirements. In the eventof the vendor’s failure to meet the agreed upon terms and conditions, we maycancel the order.

 

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The following table summarizes the expirationof our significant commercial commitments outstanding at August 1, 2009:

 
| ** **                                                | ** ** | **Amount of  Commitment by Expiration Period** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------|------------|
| **(in  thousands)**                                       | ** ** | **Total**                                      | ** ** | **Fiscal Year********2010** | ** ** | **Fiscal  Years********2011-2012** | ** ** | **Fiscal  Years********2013-2014** | ** ** | **Fiscal Year********2015 and********Beyond** | ** ** |
| Other commercial  commitments:                            |       |                                           |       |   |   |   |   |   |   |   |   |
| Senior secured asset-based  revolving credit facility (1) |       | $                                              | 600,000    |   | $ | — |   | $ | — |   | $ | 600,000 |   | $ | — |   |
| Surety bonds                                              |       | 3,100                                          |       | 3,100 |   | — |   | — |   | — |   |
|                                                      |       | $                                              | 603,100    |   | $ | 3,100 |   | $ | — |   | $ | 600,000 |   | $ | — |   |

 

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(1)           As of August 1,2009, we had no borrowings outstanding under our Senior Secured Asset-BasedRevolving Credit Facility, $32.8 million of outstanding letters of credit and$468.5 million of unused borrowing availability. Our working capitalrequirements are greatest in the first and second fiscal quarters as a resultof higher seasonal requirements. See “Description of Other Indebtedness—Senior SecuredAsset-Based Revolving Credit Facility” and “Management’s Discussion andAnalysis of Financial Conditions and Results of Operations—Seasonality.”

 

In addition to the items presented above, ourother principal commercial commitments are comprised of common area maintenancecosts, tax and insurance obligations and contingent rent payments.

 

**OTHERMATTERS**

 

**Factors That May AffectFuture Results**

 

Matters discussed inMD&A include forward-looking statements. Forward-looking statementsgenerally can be identified by the use of forward-looking terminology such as “may,”“plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,” “should,” “anticipate,”“believe,” “project” or “continue.” We make these forward-looking statementsbased on our expectations and beliefs concerning future events, as well ascurrently available data.  While webelieve there is a reasonable basis for our forward-looking statements, theyinvolve a number of risks and uncertainties. Therefore, these statements arenot guarantees of future performance and you should not place undue reliance onthem. A variety of factors could cause our actual results to differ materiallyfrom the anticipated or expected results expressed in our forward-lookingstatements. Factors that could affect future performance include, but are notlimited, to:

 

*Political and GeneralEconomic Conditions*

 

·      prolonged weakness indomestic and global capital markets and other economic conditions and theimpact of such conditions on our ability to obtain credit;

 

·      current political andgeneral economic conditions or changes in such conditions including relationshipsbetween the United States and the countries from which we source ourmerchandise;

 

·      terrorist activities inthe United States and elsewhere;

 

·      political, social,economic, or other events resulting in the short- or long-term disruption inbusiness at our stores, distribution centers or offices;

 

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*Customer Considerations*

 

·      changes in consumerconfidence resulting in a reduction of discretionary spending on goods;

 

·      changes in the demographicor retail environment;

 

·      changes in consumerpreferences or fashion trends;

 

·      changes in ourrelationships with customers due to, among other things, 1) our failure toprovide quality service and competitive loyalty programs, 2) our inability toprovide credit pursuant to our proprietary credit card arrangement or 3) ourfailure to protect customer data or comply with regulations surroundinginformation security and privacy;

 

*Merchandise Procurement andSupply Chain Considerations*

 

·      changes in ourrelationships with designers, vendors and other sources of merchandise,including adverse changes in their financial viability, cash flows or availablesources of funds;

 

·      delays in receipt ofmerchandise ordered due to work stoppages or other causes of delay inconnection with either the manufacture or shipment of such merchandise;

 

·      changes in foreigncurrency exchange or inflation rates;

 

·      significant increases inpaper, printing and postage costs;

 

*Industry and CompetitiveFactors*

 

·      competitive responses toour loyalty programs, marketing, merchandising and promotional efforts orinventory liquidations by vendors or other retailers;

 

·      adverse changes in thefinancial viability of our competitors;

 

·      seasonality of the retailbusiness;

 

·      adverse weather conditionsor natural disasters, particularly during peak selling seasons;

 

·      delays in anticipatedstore openings and renovations;

 

·      our success in enforcingour intellectual property rights;

 

*Employee Considerations*

 

·      changes in key managementpersonnel and our ability to retain key management personnel;

 

·      changes in ourrelationships with certain of our key sales associates and our ability toretain our key sales associates;

 

*Legal and Regulatory Issues*

 

·      changes in government orregulatory requirements increasing our costs of operations;

 

·      litigation that may havean adverse effect on our financial results or reputation;

 

*Leverage Considerations*

 

·      the effects of incurring asubstantial amount of indebtedness under our senior secured credit facilitiesand our senior notes and senior subordinated notes;

 

·      the ability and theeffects of refinancing our indebtedness under our senior secured creditfacilities;

 

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·      the effects upon us ofcomplying with the covenants contained in our senior secured credit facilitiesand the indentures governing our senior notes and senior subordinated notes;

 

·      restrictions the terms andconditions of the indebtedness under our senior secured credit facilities mayplace on our ability to respond to changes in our business or to take certainactions;

 

*Other Factors*

 

·      impact of fundingrequirements related to our noncontributory defined benefit pension plan;

 

·      the design andimplementation of new information systems as well as enhancements of existingsystems; and

 

·      other risks, uncertaintiesand factors set forth in this Annual Report on Form 10-K, including those setforth in Item 1A, “Risk Factors.”

 

The foregoing factors arenot exhaustive, and new factors may emerge or changes to the foregoing factorsmay occur that could impact our business. Except to the extent required by law,we undertake no obligation to update or revise (publicly or otherwise) anyforward-looking statements to reflect subsequent events, new information orfuture circumstances.

 

**Critical Accounting Policies**

 

Our accounting policies are more fullydescribed in Note 1 of the notes to our audited consolidated financialstatements appearing elsewhere in this Annual Report. As disclosed in Note 1 ofthe notes to our audited consolidated financial statements, the preparation offinancial statements in conformity with generally accepted accountingprinciples requires us to make estimates and assumptions about future events.These estimates and assumptions affect the amounts of assets, liabilities,revenues and expenses and the disclosure of gain and loss contingencies at thedate of our audited consolidated financial statements appearing elsewhere inthis Annual Report on Form 10-K.

 

While we believe that our past estimates andassumptions have been materially accurate, the amounts currently estimated aresubject to change if different assumptions as to the outcome of future eventswere made. We evaluate our estimates and judgments on an ongoing basis andpredicate those estimates and judgments on historical experience and on variousother factors that we believe to be reasonable under the circumstances. We makeadjustments to our assumptions and judgments when facts and circumstancesdictate. Since future events and their effects cannot be determined withabsolute certainty, actual results may differ from the estimates used inpreparing the accompanying audited consolidated financial statements.

 

We believe the following critical accountingpolicies encompass the more significant judgments and estimates used in thepreparation of our audited consolidated financial statements.

 

***Revenues.*** Revenues include sales of merchandise and services and delivery andprocessing revenues related to merchandise sold. Revenues from our SpecialtyRetail stores are recognized at the later of the point of sale or the deliveryof goods to the customer. Revenues from our Direct Marketing operation arerecognized when the merchandise is delivered to the customer. Revenues associated with gift cards arerecognized at the time of redemption by the customer. Revenuesexclude sales taxes collected from our customers.

 

We maintain reserves for anticipated salesreturns primarily based on our historical trends related to returns by ourretail and direct marketing customers. Our reserves for anticipated salesreturns aggregated $29.7 million at August 1, 2009 and $45.0 million at August 2,2008. As the vastmajority of merchandise returns are made in less than 30 days after the salestransaction, we believe the risk that differences between our estimated andactual returns will have a material impact on our consolidated financialstatements is minimal.

 

***Merchandise Inventories and Cost of Goods Sold.***  We utilize the retail method of accounting. Under theretail inventory method, the valuation of inventories at cost and the resultinggross margins are determined by applying a calculated cost-to-retail ratio, forvarious groupings of similar items, to the retail value of inventories.The cost of the inventoryreflected on the consolidated balance sheets is decreased by charges to cost ofgoods sold at the time the retail value of the inventory is lowered through theuse of markdowns. Earnings are negatively impacted when merchandise is marked down.As we adjust theretail value of our inventories through the use of markdowns to reflect marketconditions, our merchandise inventories are stated at the lower of cost ormarket.

 

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The areas requiring significant managementjudgment related to the valuation of our inventories include 1) setting theoriginal retail value for the merchandise held for sale, 2) recognizingmerchandise for which the customer’s perception of value has declined andappropriately marking the retail value of the merchandise down to the perceivedvalue and 3) estimating the shrinkage that has occurred between physicalinventory counts. These judgments and estimates, coupled with the averagingprocesses within the retail method can, under certain circumstances, producevarying financial results. Factors that can lead to different financial resultsinclude 1) determination of original retail values for merchandise held forsale, 2) identification of declines in perceived value of inventories andprocessing the appropriate retail value markdowns and 3) overly optimistic orconservative estimation of shrinkage. In prior years, we have made no materialchanges to our estimates of shrinkage or markdown requirements on inventoriesheld as of the end of our fiscal years. We do not believe that the assumptions used in these estimates at August1, 2009 will change significantly based upon our prior experience or thatchanges in these estimates, if any, will have a material effect on our futureoperating performance.

 

Consistent with industry business practice,we receive allowances from certain of our vendors in support of the merchandisewe purchase for resale. Certain allowances are received to reimburse us formarkdowns taken or to support the gross margins that we earn in connection withthe sales of the vendor’s merchandise. These allowances result in an increaseto gross margin when we earn the allowances and they are approved by thevendor. Other allowances we receive represent reductions to the amounts we payto acquire the merchandise. These allowances reduce the cost of the acquiredmerchandise and are recognized at the time the goods are sold. The amounts ofvendor allowances we received did not have a significant impact on theyear-over-year change in gross margin during fiscal years 2009, 2008 or 2007.We received vendor allowances of $107.7 million, or 3.0% of revenues, in fiscalyear 2009, $109.6 million, or 2.4% of revenues, in fiscal year 2008 and $96.1million, or 2.2% of revenues, in fiscal year 2007.

 

***Long-lived Assets.***  Property and equipment are stated at costless accumulated depreciation. For financial reporting purposes, we computedepreciation principally using the straight-line method over the estimateduseful lives of the assets. Buildings and improvements are depreciated overfive to 30 years while fixtures and equipment are depreciated over three to 15 years.Leasehold improvements are amortized over the shorter of the asset life or thelease term (which mayinclude renewal periods when exercise of the renewal option is at ourdiscretion and considered reasonably assured at the inception of the lease). Costs incurredfor the development of internal computer software are capitalized and amortizedusing the straight-line method over three to ten years.

 

To the extent we remodel or otherwise replaceor dispose of property and equipment prior to the end of the assigneddepreciable lives, we could realize a loss or gain on the disposition. To theextent assets continue to be used beyond their assigned depreciable lives, nodepreciation expense is incurred. We reassess the depreciable lives of ourlong-lived assets in an effort to reduce the risk of significant losses orgains at disposition and the utilization of assets with no depreciationcharges. The reassessment of depreciable lives involves utilizing historicalremodel and disposition activity and forward-looking capital expenditure plans.

 

We assess the recoverability of the carryingvalues of our store assets, consisting of property and equipment, customerlists and favorable lease commitments, annually and upon the occurrence ofcertain events (e.g., opening a new store near an existing store or announcingplans for a store closing). The recoverability assessment requires judgment andestimates of future store generated cash flows. The underlying estimates ofcash flows include estimates for future revenues, gross margin rates and storeexpenses. We base these estimates upon the stores’ past and expected futureperformance. New stores may require two to five years to develop a customerbase necessary to generate the cash flows of our more mature stores. To theextent our estimates for revenue growth and gross margin improvement are notrealized, future annual assessments could result in impairment charges.

 

***Indefinite-Lived IntangibleAssets and Goodwill.*** Indefinite-lived intangible assets, such as tradenames, and goodwill,are not subject to amortization. Rather, we assess the recoverability ofindefinite-lived intangible assets and goodwill in the fourth quarter of eachfiscal year and upon the occurrence of certain events.

 

Therecoverability assessment with respect to each of the tradenames used in ouroperations requires us to estimate the fair value of the tradename as of theassessment date.  Such determination ismade using discounted cash flow techniques. Inputs to the valuation model include:

 

·      future revenue andprofitability projections associated with the tradename;

 

·      estimated market royaltyrates that could be derived from the licensing of our tradenames to thirdparties in order to establish the cash flows accruing to the benefit of theCompany as a result of our ownership of our tradenames; and

 

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·      rate used to discount theestimated royalty cash flow projections to their present value (or estimatedfair value).

 

If the recorded carrying value of the tradenameexceeds its estimated fair value, an impairment charge is recorded to write thetradename down to its estimated fair value. The tradename impairment testing process is subject to inherentuncertainties and subjectivity.  The useof different assumptions, estimates or judgments could materially increase ordecrease any related impairment charge. We believe our estimates are appropriate based upon current marketconditions and the best information available at the assessment date.  However, future impairment charges could berequired if we do not achieve our current revenue and profitabilityprojections, market royalty rates decrease or the weighted average cost ofcapital increases.  We currently estimatethat the fair value of our tradenames decreases by approximately $225 millionfor each 0.5% decrease in market royalty rates and by approximately $90 millionfor each 0.5% increase in the weighted average cost of capital.

 

The assessment of the recoverability of thegoodwill associated with our Neiman Marcus stores, Bergdorf Goodman stores andDirect Marketing reporting units involves a two-step process.  The first step requires the comparison of theestimated enterprise fair value of each of our reporting units to its recordedcarrying value.  We estimate theenterprise fair value based on discounted cash flow techniques.  Inputs to the valuation model include:

 

·      estimated future cash flows;

 

·      growth assumptions forfuture revenues as well as future gross margin rates, expense rates and otherestimates; and

 

·      rate used to discount ourestimated future cash flow projections to their present value (or estimated fairvalue).

 

The projected sales, gross margin andSG&A expense rate assumptions and capital expenditures are based on ourannual business plan or other forecasted results.  Discount rates reflect market-based estimates(based on the weighted average cost of capital) of the risks associated withthe projected cash flows directly resulting from the use of those assets inoperations.  The estimates of theenterprise fair values of our reporting units are based on the best informationavailable as of the date of the assessment.

 

If the recorded carrying value of a reportingunit exceeds its estimated enterprise fair value in the first step, a secondstep is performed in which we allocate the enterprise fair value to the fairvalue of the reporting unit’s net assets. The second step of the impairment testing process requires, among otherthings, the estimation of the fair values of substantially all of our tangibleand intangible assets.  Any enterprisefair value in excess of amounts allocated to such net assets represents theimplied fair value of goodwill for that reporting unit.  If the recorded goodwill balance for areporting unit exceeds the implied fair value of goodwill, an impairment chargeis recorded to write goodwill down to its fair value.

 

The goodwill impairment testing process issubject to inherent uncertainties and subjectivity.  The use of different assumptions, estimatesor judgments in either step of the process, including with estimation of theprojected future cash flows of our reporting units, the discount rate used toreduce such projected future cash flows to their net present value, and theestimation of the fair value of the reporting units’ tangible and intangibleassets and liabilities, could materially increase or decrease the fair value ofthe reporting unit’s net assets and, accordingly, could materially increase ordecrease any related impairment charge. We believe our estimates are appropriate based upon current marketconditions and the best information available at the assessment date.  However, future impairment charges could berequired if we do not achieve our current revenue and profitability projectionsor the weighted average cost of capital increases.  We currently estimate that a 5% decrease inthe estimated fair value of the net assets of each of our reporting units ascompared to the values used in the preparation of these financial statementswould increase the impairment charge related to goodwill by approximately $200million.  In addition, we currentlyestimate that the fair value of our goodwill decreases by approximately $300million for each 0.5% increase in the discount rate used to estimate fairvalue.

 

***Advertising and Catalog Costs.***  We incur costs to advertise and promote themerchandise assortment offered by both Specialty Retail stores and DirectMarketing. Advertising costs incurred by our Specialty Retail stores consistprimarily of print media costs related to promotional materials mailed to ourcustomers. These costs are expensed at the time of mailing to the customer.Advertising costs incurred by Direct Marketing relate to the production,printing and distribution of our print catalogs and the production of thephotographic content on our websites. We amortize the costs of print catalogsduring the periods we expect to generate revenues from such catalogs, generallythree to six months. We expense the costs incurred to produce the photographiccontent on our websites at the time the images are first loaded onto thewebsite. We expense website design and web advertising costs as incurred.

 

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***Loyalty Programs.***  We maintain customer loyalty programs inwhich customers accumulate points for qualifying purchases. Upon reachingcertain levels, customers may redeem their points for gifts. Generally, pointsearned in a given year must be redeemed no later than 90 days subsequent to theend of the annual program period.

 

The estimates of the costs associated withthe loyalty programs require us to make assumptions related to customerpurchasing levels, redemption rates and costs of awards to be chosen by ourcustomers. Our customers redeem a substantial portion of the points earned inconnection with our loyalty programs for gift cards. At the time the qualifyingsales giving rise to the loyalty program points are made, we defer the portionof the revenues on the qualifying sales transactions equal to the estimate ofthe retail value of the gift cards to be issued upon conversion of the pointsto gift cards. We record the deferral of revenues related to gift card awardsunder our loyalty programs as a reduction of revenues. In addition, we chargethe cost of all other awards under our loyalty programs to cost of goods sold.

 

***Benefit Plans.***  We sponsor a noncontributory defined benefitpension plan (Pension Plan), an unfunded supplemental executive retirement plan(SERP Plan) which provides certain employees additional pension benefits and apostretirement plan providing eligible employees limited postretirement healthcare benefits (Postretirement Plan). In calculating our obligations and relatedexpense, we make various assumptions and estimates, after consulting with outsideactuaries and advisors. The annual determination of expense involvescalculating the estimated total benefits ultimately payable to planparticipants and allocating this cost to the periods in which services areexpected to be rendered. We use the projected unit credit method in recognizingpension liabilities. The Pension and SERP Plans are valued annually as of thebeginning of each fiscal year.

 

Significant assumptions related to thecalculation of our obligations include the discount rate used to calculate thepresent value of benefit obligations to be paid in the future, the expectedlong-term rate of return on assets held by the Pension Plan, the average rateof compensation increase by Pension Plan and SERP Plan participants and thehealth care cost trend rate for the Postretirement Plan. We review theseassumptions annually based upon currently available information, includinginformation provided by our actuaries.

 

Significant assumptions utilized in thecalculation of our projected benefit obligations as of August 1, 2009 andfuture expense requirements for our Pension Plan, SERP Plan and PostretirementPlan, and sensitivity analysis related to changes in these assumptions, are asfollows:

 
| ** **                                        | ** ** | ** **             | ** ** | ** **                                 | ** ** | **Using  Sensitivity Rate**                           | ** ** |
|---------------------------------------------------|------------|------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                        | ** ** | **Actual********Rate** | ** ** | **Sensitivity  Rate  Increase/(Decrease)** | ** ** | **Increase in********Liability********(in millions)** | ** ** | **Increase in********Expense********(in millions)** | ** ** |
| Pension Plan:                                     |       |                   |       |                                       |       |                                                  |       |   |   |
| Discount rate                                     |       | 5.90                   | %          | (0.25                                      | )%         | $                                                     | 16.1       |   | $ | 1.7 |   |
| Expected long-term rate of  return on plan assets |       | 8.00                   | %          | (1.00                                      | )%         | n/a                                                   |       | $ | 3.2 |   |
| Rate of future  compensation increase             |       | 4.50                   | %          | 0.25                                       | %          | $                                                     | 0.5        |   | $ | 0.1 |   |
| SERP Plan:                                        |       |                   |       |                                       |       |                                                  |       |   |   |
| Discount rate                                     |       | 5.90                   | %          | (0.25                                      | )%         | $                                                     | 2.7        |   | Insignificant |   |
| Rate of future  compensation increase             |       | 4.50                   | %          | 0.25                                       | %          | $                                                     | 0.5        |   | Insignificant |   |
| Postretirement Plan:                              |       |                   |       |                                       |       |                                                  |       |   |   |
| Discount rate                                     |       | 5.80                   | %          | (0.25                                      | )%         | $                                                     | 0.5        |   | Insignificant |   |
| Ultimate health care cost  trend rate             |       | 8.00                   | %          | 1.00                                       | %          | $                                                     | 2.2        |   | $ | 0.2 |   |

 

***Self-insurance and Other Employee Benefit Reserves.***  We use estimates in the determination of therequired accruals for general liability, workers’ compensation and healthinsurance. We base these estimates upon an examination of historical trends,industry claims experience and independent actuarial estimates. Although we do not expect that we willultimately pay claims significantly different from our estimates,self-insurance reserves could be affected if future claims experience differsignificantly from our historical trends and assumptions. Self-insurancereserves including general liability, workers’ compensation and healthinsurance aggregated $35.5 million at August 1, 2009 and$44.1 million at August 2, 2008.

 

***Income Taxes.***  Weuse the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets andliabilities are determined based on differences between financial reporting andtax basis of assets and liabilities and are measured using the enacted taxrates and laws that will be in effect when the differences are expected toreverse.  We are routinely under audit byfederal, state or local authorities in the area of income taxes. We regularlyevaluate the likelihood of realization of tax benefits derived from positionswe have taken in various federal and state filings after consideration of allrelevant facts, circumstances and available information. For those tax benefitswe believe more likely than not will be sustained, we recognize the benefit webelieve is cumulatively greater than 50% likely to be realized. To the extentwe were to prevail in

 

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matters for which accruals have been established or be required to payamounts in excess of recorded reserves, our effective tax rate in a givenfinancial statement period could be materially impacted.

 

**RecentAccounting Pronouncements**

 

In December 2007, the FASB issuedStatement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (SFAS 141(R)), which addresses the recognition and accounting foridentifiable assets acquired, liabilities assumed and non-controlling interestsin business combinations.  In addition,SFAS 141(R) changes the accounting treatment for certainacquisition-related items, including requirements to expenseacquisition-related costs as incurred, expense restructuring costs associatedwith an acquired business and recognize post-acquisition changes in taxuncertainties associated with a business combination as a component of taxexpense.  SFAS 141(R) is to beapplied prospectively to business combinations for which the acquisition dateis on or after December 15, 2008, or our fiscal year ending July 31,2010.  Generally, the effect of SFAS 141(R) willdepend on future acquisitions.  However,the accounting for the resolution of any tax uncertainties remaining as of August 1,2009 related to the Acquisition will be subject to the provisions of SFAS141(R).

 

InFebruary 2008, the FASB issued FASB Staff Position 157-2,*“*EffectiveDate of FASB Statement No. 157” (FSP 157-2), which delays the effectivedate of fair value disclosures required by SFAS 157 for all nonfinancialassets, such as intangible assets and goodwill, and nonfinancial liabilitiesthat are recognized or disclosed at fair value in the financial statements on anonrecurring basis.  FSP 157-2 iseffective for fiscal years beginning after November 15, 2008, or ourfiscal year ending July 31, 2010. We have not yet evaluated the impact of adopting FSP 157-2 on ourconsolidated financial statements.

 

InDecember 2008, the FASB issued FASB Staff Position 132(R)-1,*“*Employers’Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1),which provides guidance on an employer’s disclosures about plan assets of adefined benefit pension or other postretirement plan.  FSP 132(R)-1 is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have not yet evaluated theimpact of adopting the disclosure requirements of FSP 132(R)-1.

 

InMay 2009, the FASB issued Statement of Financial Accounting Standards No. 165,“Subsequent Events” (SFAS 165), which establishes general standards ofaccounting and disclosure for events that occur after the balance sheet datebut before financial statements are issued, including the required disclosureof the date through which subsequent events have been evaluated and the basisfor that date.  SFAS 165 is effective forinterim or annual periods ending after June 15, 2009.  We adopted SFAS 165 during the fourth quarterof fiscal year 2009, as more fully described in Note 1 “Basis of Presentation.”

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in the Company’sfinancial instruments represents the potential loss arising from adversechanges in interest rates. The Company does not enter into derivative financialinstruments for trading purposes. The Company seeks to manage exposure toadverse interest rate changes through its normal operating and financingactivities. The Company is exposed to interest rate risk through its borrowingactivities, which are described in Note 9 to our consolidated financialstatements.

 

In connection with the Acquisition, NMGobtained $2,575.0 million of floating rate debt agreements, of which $2,125.0million was outstanding at the Acquisition date and $1,625.0 million isoutstanding under its Senior Secured Term Loan Facility at August 1, 2009(including $26.6 million of borrowings classified as current liabilities).  In addition, as of August 1, 2009, NMGhad no borrowings outstanding under its Asset-Based Revolving CreditFacility.  Future borrowings under NMG’sAsset-Based Revolving Facility, to the extent of outstanding borrowings, wouldbe affected by interest rate changes.

 

Effective December 6, 2005, NMG enteredinto floating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness.  These swap agreements hedge a portion of ourcontractual floating rate interest commitments through the expiration of theagreements in December 2010.  As aresult of the swap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.831% to 6.983% per quarter through 2010 and 

 

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result in an average fixed rate of 6.900%.  A 1% increase in the rates relating to theportion of our floating rate date that is not hedged would increase annualinterest expense by approximately $6.3 million.

 

The effects of changes inthe U.S. equity and bond markets serve to increase or decrease the value ofpension plan assets, resulting in increased or decreased cash funding by theCompany. The Company seeks to manage exposure to adverse equity and bondreturns by maintaining diversified investment portfolios and utilizingprofessional investment managers.

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

The following consolidatedfinancial statements of the Company and supplementary data are included as pages F-1through F-46 at the end of this Annual Report on Form 10-K:

 
| **Index**                                                              | ** ** | **Page  Number** |
|------------------------------------------------------------------------|------------|------------------|
| Management’s  Report on Internal Control over Financial Reporting |       | F-2              |
| Report  of Independent Registered Public Accounting Firm               |       | F-3              |
| Consolidated  Balance Sheets                                           |       | F-5              |
| Consolidated  Statements of Operations                                 |       | F-6              |
| Consolidated  Statements of Cash Flows                                 |       | F-7              |
| Consolidated  Statements of Shareholders’ Equity                  |       | F-8              |
| Notes  to Consolidated Financial Statements                            |       | F-9              |

 

**ITEM 9.********CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

**a.****            ****DisclosureControls and Procedures**

 

In accordance with ExchangeAct Rules 13a-15 and 15d-15, we carried out an evaluation as of August 1,2009, under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, as well as other key members of ourmanagement, of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and Rule 15d-15(e) under theExchange Act). Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,accumulated, processed, summarized, reported and communicated on a timely basiswithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**b.****            ****InternalControl over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Exchange Act Rule 13a-15(f). Ourmanagement conducted an evaluation of the effectiveness of our internal controlover financial reporting based on the framework and criteria established in *Internal Control—Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on this evaluation, our management concluded that our internal controlover financial reporting was effective as of August 1, 2009. During itsassessment, management did not identify any material weaknesses in our internalcontrol over financial reporting. Our independent registered public accountingfirm, Ernst & Young LLP, has audited our consolidated financialstatements and has issued an attestation report on the effectiveness of ourinternal controls over financial reporting as of August 1, 2009.

 

**c.****            ****Changes inInternal Control over Financial Reporting**

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter

 

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ended August 1, 2009 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10.****      ****DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT**

 

The following table setsforth the name, age, and position of individuals who currently serve as ourdirectors and executive officers.

 
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                                                 |
|--------------------|------------|---------|------------|----------------------------------------------------------------------------------------------|
| David A. Barr      |       | 46      |       | Director since 2005                                                                          |
| Jonathan Coslet    |       | 44      |       | Director since 2005                                                                          |
| James Coulter      |       | 49      |       | Director since 2005                                                                          |
| John G. Danhakl    |       | 53      |       | Director since 2005                                                                          |
| Sidney Lapidus     |       | 71      |       | Director since 2005                                                                          |
| Kewsong Lee        |       | 44      |       | Director since 2005                                                                          |
| Carrie Wheeler     |       | 37      |       | Director since 2005                                                                          |
| Burton M. Tansky   |       | 71      |       | Director since 2005,  President and Chief Executive Officer                                  |
| Karen W. Katz      |       | 52      |       | Executive  Vice President and President and Chief Executive Officer of Neiman Marcus  Stores |
| James E. Skinner   |       | 56      |       | Executive Vice  President and Chief Financial Officer                                        |
| James J. Gold      |       | 45      |       | President and Chief  Executive Officer of Bergdorf Goodman                                   |
| Gerald A. Barnes   |       | 56      |       | President and Chief  Executive Officer of Neiman Marcus Direct                               |
| Nelson A. Bangs    |       | 56      |       | Senior Vice President  and General Counsel                                                   |
| Marita O’Dea  |       | 60      |       | Senior Vice President  and Chief Human Resource Officer                                      |
| Phillip L. Maxwell |       | 61      |       | Senior Vice President  and Chief Information Officer                                         |
| Wayne A. Hussey    |       | 59      |       | Senior Vice President,  Properties and Store Development                                     |

 

The following biographiesdescribe the business experience of our directors and executive officers.

 

**David A.Barr**has been amember and managing director of Warburg Pincus LLC and a general partner ofWarburg Pincus & Co. since January 2001.  Prior to joining Warburg Pincus in 2000, Mr. Barrserved as a managing director at Butler Capital where he focused on consumerand industrial leveraged buyout transactions for more than ten years.  Mr. Barr also serves on the board ofdirectors of Builders First Source, Inc., Polypore Inc., and TransDigmGroup Inc.

 

**JonathanCoslet** has been apartner of TPG Capital, L.P. since 1993 and is currently a senior partner andmember of the firm’s Executive, Management and Investment Committees.  Prior to joining TPG Capital, L.P., Mr. Cosletworked at Donaldson, Lufkin & Jenrette, specializing in leveragedacquisitions and high yield finance from 1991 to 1993.  Mr. Coslet also serves on the board ofdirectors of Harrah’s Entertainment, Inc., Quintiles Transnational Corp.,IASIS Healthcare Corp., Petco Animal Supplies, Inc., and Biomet, Inc.

 

**JamesCoulter** co-foundedTPG Capital, L.P. in 1992.  From 1986 to1992, Mr. Coulter was a Vice President of Keystone, Inc.  From 1986 to 1988, Mr. Coulter was alsoassociated with SPO Partners, an investment firm that focuses on public marketand private minority investments.  Mr. Coulteralso serves on the board of directors of Lenovo Group Limited and J. Crew Group, Inc.

 

**John G.Danhakl** is aManaging Partner of Leonard Green & Partners, L.P. with whom he hasbeen a partner since 1995.  Prior tojoining Leonard Green & Partners, L.P., he served as a ManagingDirector in the Los Angeles office of Donaldson, Lufkin & Jenrette,which he joined in 1990.  From 1985 to1990, Mr. Danhakl was a Vice President in corporate finance at DrexelBurnham Lambert.  He also serves on theboard of directors of Arden Group, Inc., Horseshows In the Sun, Inc.,Leslie’s Poolmart, Inc., Petco Animal Supplies, Inc., The Tire Rack, Inc.,and Sagittarius Brands, Inc.

 

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**SidneyLapidus** retiredin December 2007 as Managing Director and Senior Advisor of Warburg PincusLLC.  He had been employed at WarburgPincus since 1967.  He presently servesas a director of Lennar Corporation and Knoll, Inc.  He serves on the boards of a number ofnon-profit organizations including New York University Langone Medical Center,the American Antiquarian Society, and the New York Historical Society, and ischairman of the American Jewish Historical Society.

 

**KewsongLee** has been amember and managing director of Warburg Pincus LLC and a general partner ofWarburg Pincus & Co. since January 1997 and is currently a memberof Warburg Pincus LLC’s Executive Management Group.  He has been employed at Warburg Pincus since1992.  Prior to joining Warburg Pincus, Mr. Leeserved as a consultant at McKinsey & Company, Inc. from 1990 to1992.  Mr. Lee also serves on theboard of directors of Arch Capital Group, Ltd., MBIA Inc., and several privatelyheld companies.

 

**CarrieWheeler** is apartner of TPG Capital, L.P.  Prior tojoining TPG Capital, L.P. in 1996, she was with Goldman, Sachs & Co.from 1993 to 1996.  Ms. Wheeler alsoserves on the board of directors of Metro-Goldwyn-Mayer Inc. and Petco AnimalSupplies, Inc.

 

**Burton M.Tansky** has servedas a director and as President and Chief Executive Officer since October 6,2005.  He also has served as a directorand President and Chief Executive Officer of The Neiman Marcus Group, Inc.since May 2001 and as President and Chief Operating Officer from December 1998until May 2001.  He served asExecutive Vice President of The Neiman Marcus Group, Inc. from February 1998until December 1998 and as Chairman and Chief Executive Officer of NeimanMarcus Stores from May 1994 until February 1998.  He served as Chairman and Chief ExecutiveOfficer of Bergdorf Goodman from 1990 until 1994.  Mr. Tansky also serves on the board ofdirectors of International Flavors and Fragrances Inc.

 

**Karen W.Katz**was electedExecutive Vice President in October 2007 and appointed a member of theOffice of the Chairman.  Since December 2002,she has also served as President and Chief Executive Officer of Neiman MarcusStores.  Ms. Katz served asPresident and Chief Executive Officer of Neiman Marcus Direct from May 2000to December 2002 and as Executive Vice President of Neiman Marcus Storesfrom February 1998 until May 2000. Ms. Katz serves on the board of directors of Pier 1 Imports, Inc.

 

**James E. Skinner** was elected Executive Vice President and ChiefFinancial Officer and appointed a member of the Office of the Chairman in October 2007.  From October 2005 to October 2007,he served as Senior Vice President and Chief Financial Officer.  From October 2001 to October 2005,he served as Senior Vice President and Chief Financial Officer of The NeimanMarcus Group, Inc.  From August 2000through December 2000, Mr. Skinner served as Senior Vice Presidentand Chief Financial Officer of Caprock Communications Corp. and from 1994 until2000, he served as Executive Vice President, Chief Financial Officer andTreasurer for CompUSA Inc.  Mr. Skinnerserves on the board of directors of Fossil, Inc.

 

**James J.Gold** has beenPresident and Chief Executive Officer of Bergdorf Goodman since May 2004.  Mr. Gold served as Senior VicePresident, General Merchandise Manager of Neiman Marcus Stores from December 2002to May 2004, as Division Merchandise Manager from June 2000 to December 2002,and as Vice President of the Neiman Marcus Last Call Clearance Division from March 1997to June 2000.

 

**Gerald A.Barnes** has been President and Chief Executive Officerof Neiman Marcus Direct since April 2009. He served as Executive Vice President, Merchandising, Neiman MarcusDirect from April 2008 to April 2009 and as Senior Vice President,General Merchandise Manager, Fashion, Neiman Marcus Direct from 2001 until2007.

 

**Nelson A.Bangs** has beenSenior Vice President and General Counsel since October 6, 2005 and hasserved in that capacity for The Neiman Marcus Group, Inc. since April 2001.  From January 1999 to April 2001, Mr. Bangsengaged in a private consulting and law practice; and from April 1998until January 1999, he served as Senior Vice President and General Counselof Pillowtex Corporation.  Prior to April 1998,Mr. Bangs served as Senior Vice President, General Counsel and Secretaryof Dr Pepper/Seven Up, Inc. and its predecessors.

 

**Marita O’Dea** has been Senior Vice President and ChiefHuman Resource Officer since October 6, 2005 and has also served in thatcapacity for The Neiman Marcus Group, Inc. since September 2002.  She served as Vice President - HumanResources of The Neiman Marcus Group, Inc. from June 2001 until September 2002.  Also, Ms. O’Dea has served as SeniorVice President of Human Resources of Neiman Marcus Stores since 1995.

 

**PhillipL. Maxwell** hasbeen Senior Vice President and Chief Information Officer since October 6,2005 and has also served in that capacity for The Neiman Marcus Group, Inc.since May 2000.  From 1993 untiljoining us in 2000, Mr.

 

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Maxwell advanced fromChief Information Officer, Director of Management Information Systems for NissanMotor Acceptance Corporation to Vice President, Chief Information Officer,Information Systems and eBusiness Strategy for Nissan North America.

 

**Wayne A.Hussey**has beenSenior Vice President, Properties and Store Development since October 22,2007.  From May 1999 to October 2007he served as Senior Vice President, Properties and Store Development of NeimanMarcus Stores.

 

**Code of Ethics**

 

The Board has adopted TheNeiman Marcus Group, Inc. Code of Ethics and Conduct which is applicableto all our directors, officers and employees, as well as a separate Code ofEthics for Financial Professionals that applies to all financial employeesincluding the Chief Executive Officer, the Chief Financial Officer and thePrincipal Accounting Officer.  Both theCode of Ethics and Conduct and the Code of Ethics for Financial Professionalsmay be accessed through our website at www.neimanmarcusgroup.com under the “InvestorInformation —Governance Documents” section. Requests for printed copies may be made in writing to The Neiman MarcusGroup, Inc., Attn. Investor Relations, One Marcus Square, 1618 MainStreet, Dallas, Texas 75201.

 

We have established ameans for employees, customers, suppliers, or other interested parties tosubmit confidential and anonymous reports of suspected or actual violations ofthe Company’s Code of Conduct relating, among other things, to:

 

·       accountingpractices, internal accounting controls, or auditing matters and procedures;

·       theftor fraud of any amount;

·       performanceand execution of contracts;

·       conflictsof interest;

·       violationsof securities and antitrust laws; and

·       violationsof the Foreign Corrupt Practices Act.

 

Any employee or otherinterested party can call the following toll-free number to submit areport.  This number is operational 24hours a day, seven days a week:  **1-866-384-4277**

 

**Board Committees**

 

Our Board of Directorshas established an audit committee, a compensation committee, and an executivecommittee.  The members of our auditcommittee for fiscal year 2009 were David A. Barr, Carrie Wheeler, and SidneyLapidus.  The audit committee recommendsthe annual appointment of auditors with whom the audit committee reviews thescope of audit and non-audit assignments and related fees, accountingprinciples we use in financial reporting, internal auditing procedures and theadequacy of our internal control procedures. The members of our executive committee are Jonathan Coslet, Kewsong Lee,and Burton M. Tansky.  The executivecommittee manages the affairs of the Company as necessary between meetings ofour Board of Directors and acts on matters that must be dealt with prior to thenext scheduled Board meeting.  Themembers of our compensation committee are Jonathan Coslet, Kewsong Lee, andJohn Danhakl.  The compensation committeereviews and approves the compensation and benefits of our employees, directorsand consultants, administers our employee benefit plans, authorizes andratifies stock option and/or restricted stock grants and other incentivearrangements, and authorizes employment and related agreements.

 

Each of the Sponsors hasthe right to have at least one of its directors sit on each committee of theBoard of Directors, to the extent permitted by applicable laws and regulations.

 

**Audit Committee Financial Expert**

 

The Board of Directors has determined that David A. Barr, Chairman ofthe Audit Committee, meets the criteria set forth in the rules andregulations of the SEC for an “audit committee financial expert.”  Mr. Barr is an employee of one of ourSponsors so therefore would not be considered independent under theindependence standards of the New York Stock Exchange.

 

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**ITEM 11.****      ****EXECUTIVE COMPENSATION**

 

**Compensation Discussion and Analysis**

 

This CompensationDiscussion and Analysis is designed to provide an understanding of ourcompensation philosophy, core principles and arrangements that are applicableto the executive officers identified in the Summary Compensation Table on page 60(referred to as the named executive officers).

 

*CompensationPhilosophy and Objectives. *We are a premier luxury retailer that hasbeen in business for over a century.  Ourcontinued success depends on the skills of talented leaders who are dedicatedto achieving solid financial performance, providing outstanding service tocustomers, and managing the Company’s assets wisely.  Our compensation program is designed to meetthe following objectives:

 

—      Recruit and retain executives who possess theexceptional ability, experience, and vision to sustain and promote ourpreeminence in the marketplace.

 

—      Encourage and reward the achievement of our short- andlong-term goals and operating plans.

 

—      Increase customer satisfaction, improve customerservice, provide our customers with the high-end luxury merchandise they havecome to expect, and increase the amount of business our customers do with us.

 

—      Align the interests of our executives with the financialand strategic objectives of our equity investors.

 

—      Provide total compensation opportunities that meet theexpectations of a highly skilled executive team, are aligned and consistentwith our fundamental performance and are competitive with the compensationpractices and levels offered by companies with whom we compete for talent.

 

**Individual CompensationComponents**

 

*BaseSalary.*  Base salary is intended to provide a baselevel of compensation commensurate with an executive’s job title, role, tenure,and experience.  We utilize base salaryas a building block of our compensation program, establishing a salary rangefor particular positions based on survey data and job responsibilities.  Being competitive in base salary is a minimumrequirement to recruit and retain skilled executives.  Specifically, base salary levels of the namedexecutive officers are determined based on a combination of factors, includingour compensation philosophy, market compensation data, competition for keyexecutive talent, the named executive officer’s experience, leadership,achievement of specified business objectives, individual performance, ouroverall budget for merit increases, and attainment of our financial goals.  Salaries are reviewed before the end of eachfiscal year as part of our performance and compensation review process as wellas at other times to recognize a promotion or change in jobresponsibilities.  Merit increases areusually awarded to the named executive officers in the same percentage range asall employees and are based on overall performance and competitive market dataexcept in those situations where individual performance and other factorsjustify awarding increases above or below this range.  Merit increases typically range between twoand eight percent.  As a result ofoverall company performance in fiscal year 2009, the Company implemented abroad salary decrease program that also applied to the named executiveofficers.  See discussion on “*Base Salary”*****on page 55of this section.

 

In addition, Mr. Tanskyand Ms. Katz have employment agreements, described in more detail below,that set a minimum salary upon execution of the agreement.

 

*AnnualBonus. *Annual bonus incentives keyed to short-term objectivesform the second building block of our compensation program and are designed toprovide incentives to achieve certain financial goals of the Company andpersonal objectives.  These financialgoals, which are used to determine annual bonus incentives for all employees,emphasize profitability and asset management. The Compensation Committee believes that a significant portion of annualcash compensation for the named executive officers should be at risk and tiedto our operational and financial results. “Pay for performance” for the named executive officers has beensignificantly enhanced in recent years by putting a larger percentage of theirpotential compensation at risk in the annual bonus incentive program.

 

All named executiveofficers are eligible to be considered for annual bonus incentives.  Threshold, target, and maximum annualperformance incentives, stated as a percentage of base salary, are establishedfor each of the named executive officers at the beginning of each fiscalyear.  The objectives set for Mr. Tanskyand other senior officers with broad corporate responsibilities are based onfinancial results of the overall company as well as individual performanceobjectives.  

 

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When an employee hasresponsibility for a particular business unit or division, the performancegoals are heavily weighted toward the operational performance of thatunit.  Actual awards earned by the namedexecutive officers are determined based on an assessment of our overallperformance, a review of each named executive officer’s contribution to ouroverall achievement, and an assessment of each named executive officer’sperformance.

 

The employment agreementsof Mr. Tansky and Ms. Katz contain provisions regarding target levelsand the payment of annual incentives and are described in more detail below.

 

*Long-TermIncentive.*  Long-term incentives in the form of stockoptions are intended to promote sustained high performance and to align ourexecutives’ interests with those of our equity investors.  The stock options, which vest over five years(other than in the case of Mr. Tansky whose options vest over four years),will only create value for the executives if the value of the Companyincreases.  This creates a directcorrelation to the interests of our equity investors.

 

An initial stock optiongrant was made in fiscal year 2006 under the Neiman Marcus, Inc.Management Equity Incentive Plan (referred to as the Management Incentive Plan)to each of the named executive officers. The initial grant was made following the consummation of the Acquisitionin order to retain the senior management team and enable them to share in thegrowth of the Company along with our equity investors.  All grants of stock options under theManagement Incentive Plan have an exercise price at least equal to the fairmarket value of our common stock on the date of grant.  No grants of stock options have been made tothe named executive officers since the initial grant in fiscal year 2006.

 

In addition, followingthe consummation of the Acquisition, the Neiman Marcus, Inc. CashIncentive Plan (referred to as the Cash Incentive Plan) was adopted in fiscalyear 2006 to aid in the retention of certain key executives, including ournamed executive officers.  Under the CashIncentive Plan, a $14 million cash bonus pool was created to be shared by itsparticipants.  In the event of a changein control or an initial public offering in which the internal rate of returnto our investors is positive, each participant in the Cash Incentive Plan,subject generally to continued employment, will be entitled to a cash bonusbased upon the number of options that were granted to the participant under theManagement Incentive Plan relative to the other participants in the CashIncentive Plan.  Mr. Tansky will beentitled to receive (subject, with certain exceptions, to continued employment)a cash bonus under the Cash Incentive Plan in the amount of $3,080,911 pursuantto the terms of his employment agreement. If the internal rate of return to the Sponsors is not positive followinga change in control or an initial public offering, no amounts will be paid tothose participating in the Cash Incentive Plan. No amounts have been paid to date under the Cash Incentive Plan and noneare anticipated until a change of control or initial public offering occurs.

 

**Executive Officer Compensation**

 

***Processfor Evaluating Executive Officer Performance***

 

*Role ofthe Compensation Committee.  *The Compensation Committee is responsiblefor determining the compensation of our named executive officers and forestablishing, implementing and monitoring adherence to our executivecompensation philosophy.  The CompensationCommittee charter authorizes the committee to retain and terminate compensationconsultants to provide advice and evaluation relative to the named executiveofficers.  The Compensation Committee isfurther authorized to approve the fees and retention terms of any consultant itretains.

 

The CompensationCommittee considers input from our CEO, our Senior Vice President and ChiefHuman Resource Officer, and the compensation consultants in makingdeterminations regarding our executive compensation program and the individualcontribution of each of our named executive officers.  The CEO does not play a role in his owncompensation determinations other than discussing individual performanceobjectives.  The CEO’s performanceassessment and compensation are reviewed and determined solely by theCompensation Committee.

 

In developing andreviewing the executive incentive programs, the Compensation Committeeconsiders the business risks inherent in program designs to ensure they do notinduce executives to take unacceptable levels of business risk for the purposeof increasing their incentive plan awards. The Committee ensures that the plan designs are conservative in thisrespect and that together the compensation components work as a check andbalance to ensure executive incentives are fully consistent with the interestsof our equity investors.  TheCompensation Committee believes that the mix of compensation components used inthe determination of our named executive officers’ compensation does notencourage our named executive officers to take unreasonable risks relating tothe business.

 

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* *

*Role ofManagement.*  As part of our annual planning process, theCEO and the Senior Vice President and Chief Human Resource Officer, with thehelp of our consultants, develop and recommend a compensation program for allexecutive officers.  Based on performanceassessments, the CEO and the Senior Vice President and Chief Human ResourceOfficer attend a meeting of the Compensation Committee held for the purpose ofconsidering the executives’ annual compensation and recommend the base salaryand any incentive bonus awards or long-term incentive awards, if applicable, foreach of the other executive officers, including the named executiveofficers.  Neither the CEO nor the SeniorVice President and Chief Human Resource Officer participate in the portion ofthe Compensation Committee meeting during which their own compensation isdiscussed.

 

*Role ofthe Compensation Consultants.*  In fiscal year2009, W. T. Haigh & Company, Inc. continued to provide theCompensation Committee and the Company comparative market data regardingexecutive compensation to assist in establishing reference points for theprincipal components of compensation. They also provide information regarding compensation trends in thegeneral marketplace, compensation practices of other retail companies, andregulatory and compliance developments.

 

*CompetitiveMarket Assessment.*  The Compensation Committee requestsinformation from the compensation consultants to determine if any element ofcompensation needs adjustment in order to comply with our strategy of targetingexecutive compensation that is between the 50th and 75th percentile levels of the compensation packagesreceived by executives at a group of industry related companies.

 

In fiscal year 2009, theCompensation Committee, on the recommendation of the consultants, referredprimarily to the 16 companies identified below for purposes of benchmarking thecompensation of our named executive officers. These companies are intended to represent our competitors for businessand talent.  Their executive compensationprograms are compared to ours, as well as the compensation of individualexecutives if the jobs are sufficiently similar to make the comparisonmeaningful.  The compensation assessmentincludes an evaluation of base salary, target annual incentive opportunities,long-term incentive grant values and benefits for each of the named executiveofficers relative to similar positions in the market.  The comparison data is used to ensure thatthe compensation for our named executive officers, both individually and as awhole, is appropriately competitive relative to our performance.

 

—      Abercrombie & Fitch

—      Ann Taylor

—      Coach

—      Macy’s

—      The Gap

—      Jones Apparel

—      Kohl’s

—      Limited Brands

—      Liz Claiborne

—      Nordstrom

—      Polo Ralph Lauren

—      Saks

—      Talbots

—      Tiffany & Co.

—      Tommy Hilfiger

—      Williams-Sonoma

 

In addition to the selectcompanies above, we also review various third party compensation surveyreports.

 

*Assessmentof Fiscal Year 2009 Performance*.  In fiscalyear 2009, we faced a challenging retail environment.  Deteriorating global economic conditions influencedcustomer spending behavior amidst concerns over declining asset values, theavailability and cost of credit, rising unemployment, and the stability andsolvency of financial institutions, financial markets, and businesses.  These concerns have slowed global economicgrowth.  As a result, we focused on areasof our operations that would provide profitable growth opportunities as well ascost savings.  The compensation actionstaken for the named executive officers were based on these objectives but alsotook into consideration the outside influences on company performance mentionedabove.

 

**2009 Executive OfficerCompensation**

 

We target our directcompensation to be positioned between the 50th and 75th percentile levels of the compensation packagesreceived by executives in our peer group of industry related companies.  Ultimately, our named executive officers’total compensation is based on the level of achievement versus Company,business unit, and individual target performance levels.  The Compensation Committee uses itsdiscretion in making decisions on the overall compensation packages of ourexecutive officers based on current market conditions, business trends, andoverall Company performance.

 

*BaseSalary.*Due tothe economic downtown and uncertainty of market conditions, a Company-widesalary reduction plan was implemented, effective March 8, 2009, for allsalaried employees including the named executive officers.

 

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The base salaries of all salaried employees,including the named executive officers, earning $200,000 and above were reducedby four percent.  The following tablereflects the original base salary increases approved by the CompensationCommittee for the named executive officers on September 16, 2008, thepercentage increase over the prior year, and the adjusted salaries followingimplementation of the Company-wide salary reduction plan.

 
| **Name**             | ** ** | **FY 2008  Base Salary  ($)** | ** ** | **Percentage  Increase  (%)** | ** ** | **FY 2009  Base Salary  ($)** | ** ** | **Adjusted FY 2009  Base Salary  ($)** | ** ** |
|----------------------|------------|-----------------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------|------------|
|                 |       |                                    |       |                          |       |                                    |       |                                                  |       |
| Burton M. Tansky     |       | 1,500,000                               |       | 4.0                           |       | 1,560,000                               |       | 1,497,600                                             |       |
| Karen W. Katz        |       | 875,000                                 |       | 6.8                           |       | 935,000                                 |       | 897,600                                               |       |
| James E. Skinner     |       | 625,000                                 |       | 4.8                           |       | 655,000                                 |       | 628,800                                               |       |
| James J. Gold        |       | 490,000                                 |       | 6.1                           |       | 520,000                                 |       | 499,200                                               |       |
| Gerald A. Barnes (1) |       | 360,500                                 |       | 3.0                           |       | 371,500                                 |       | 356,600                                               |       |

 

----

Footnotes:

(1)      In April 2009, Gerald Barnes was promoted to his current position andhis annual base salary increased to $425,000.

 

For all named executiveofficers, the original base salary increases reflect merit increases andadjustments relative to competitive market benchmarks as discussed above.  Information on amounts actually earned by thenamed executive officers in fiscal years 2007, 2008, and 2009 can be found inthe Summary Compensation Table on page 60 of this section.

 

*Annual Incentive Bonus.*  Indetermining annual incentive bonus amounts for the named executive officers,the Compensation Committee considers the performance relative to thepre-established goals that are set at the beginning of the year.  For fiscal year 2009, our annual financialgoals were based on Adjusted EBITDA, return on invested capital (ROIC), orinventory turnover performance as described more fully on page 57.  The attainment of certain predeterminedindividual performance goals for each of the named executive officers is also akey component in the amount of incentive bonus each will receive.  The individual performance objectives areproject oriented and change from year to year. The Committee sets the threshold, target, and maximum performancetargets at levels they believe are challenging based on historical companyperformance and industry and market conditions. Goals are established at the division and business unit levels whereappropriate for each of the named executive officers.  As it relates to our annual incentivecompensation program in particular, this performance assessment is a keydeterminant in total compensation paid to our named executive officers.  Fiscal year 2009 target annual incentives andrelative performance weightings for the named executive officers were asfollows:

 
| ** **           | ** ** | **Target Bonus**  | ** ** | ** **                         | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------|------------|-------------------|------------|------------------------------------|------------|--------------|------------|----------------|------------|
| ** **           | ** ** | **As Percent of** | ** ** | **Relative Performance Weighting** | ** ** |
| **Name**             | ** ** | **Salary**        | ** ** | **Company**                        | ** ** | **Division** | ** ** | **Individual** | ** ** |
| Burton M. Tansky     |       | 100               | %          | 75                                 | %          | —       |       | 25             | %          |
| Karen W. Katz        |       | 75                | %          | 30                                 | %          | 50           | %          | 20             | %          |
| James E. Skinner     |       | 65                | %          | 75                                 | %          | —       |       | 25             | %          |
| James J. Gold        |       | 60                | %          | 30                                 | %          | 50           | %          | 20             | %          |
| Gerald A. Barnes (1) |       | 60                | %          | 30                                 | %          | 50           | %          | 20             | %          |

 

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Footnotes:

(1)      The threshold, target, and maximum award levels were based on Mr.Barnes’ salary level subsequent to his promotion.

 

Mr. Tansky, the individualwith the greatest overall responsibility for company performance, was granted alarger incentive opportunity in comparison to his base salary in order toweight his annual cash compensation mix more heavily towards performance-basedcompensation.  For each of the namedexecutive officers, the Compensation Committee deemed their potential impact oncompany results as equally significant.

 

*Corporate PerformanceTargets. *At the end of the fiscal year, theCompensation Committee evaluates Company performance against specific financialand strategic performance targets set at the beginning of the fiscal year.  For fiscal year 2009, the bonus metrics andweightings for Messrs. Tansky and Skinner were based on overall Adjusted EBITDAand ROIC; for Ms. Katz , overall Adjusted EBITDA and ROIC and Adjusted EBITDAand Inventory Turnover at Neiman Marcus Stores; for Mr. Gold, Adjusted EBITDAand Inventory Turnover at Bergdorf Goodman, and for Mr. Barnes, Adjusted EBITDAand Inventory Turnover at Neiman Marcus Direct. The bonus metrics were based on the following financial goals:

 

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| ** **                    | ** ** | **Threshold** | ** ** | **Target** | ** ** | **Maximum** | ** ** |
|-------------------------------|------------|---------------|------------|------------|------------|-------------|------------|
| **Neiman Marcus Group**       |       |          |       |       |       |        |       |
| Adjusted EBITDA (in millions) |       | $             | 685.9      |       | $          | 702.2       |       | $ | 746.9 |   |
| ROIC                          |       | 33.280        | %          | 34.780     | %          | 37.740      | %          |
|                          |       |          |       |       |       |        |       |
| **Neiman Marcus Stores**      |       |          |       |       |       |        |       |
| Adjusted EBITDA (in millions) |       | $             | 507.8      |       | $          | 521.4       |       | $ | 551.4 |   |
| Inventory Turnover            |       | 2.352         | x          | 2.368      | x          | 2.389       | x          |
|                          |       |          |       |       |       |        |       |
| **Neiman Marcus Direct**      |       |          |       |       |       |        |       |
| Adjusted EBITDA (in millions) |       | $             | 134.0      |       | $          | 137.2       |       | $ | 146.1 |   |
| Inventory Turnover            |       | 3.813         | x          | 3.830      | x          | 3.876       | x          |
|                          |       |          |       |       |       |        |       |
| **Bergdorf Goodman**          |       |          |       |       |       |        |       |
| Adjusted EBITDA (in millions) |       | $             | 108.9      |       | $          | 111.2       |       | $ | 120.7 |   |
| Inventory Turnover            |       | 3.606         | x          | 3.630      | x          | 3.677       | x          |

 

For fiscal year 2009, theCompensation Committee determined that, due to the overall market conditions asdiscussed above, performance levels were below minimum and no annual incentivebonuses were paid to any of the named executive officers.

 

In calculatingAdjusted EBITDA for purposes of evaluating performance and annual incentivecompensation, the Compensation Committee adjusts EBITDA upwards or downwards,as applicable, for events and circumstances that 1) were not anticipated at thetime performance targets were set and 2) were not impacted by or under thecontrol of the named executives.  This adjustmentis performed by the Compensation Committee at the end of each fiscal year,based upon any such events and circumstances during such year.  The adjustments that were made to EBITDA inorder to calculate Adjusted EBITDA for fiscal year 2009 are described underItem 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Non-GAAP Financial Measure-EBITDA and AdjustedEBITDA.”  In applying Adjusted EBITDA forfiscal year 2009 to performance targets, the Compensation Committee added $21million to the Adjusted EBITDA to reflect the costs related to the Company’srestructuring and expense reduction initiatives in fiscal year 2009.  These initiatives were not anticipated at thetime the performance targets were set.

 

For purposesof evaluating performance and annual incentive compensation, the ROIC metric iscalculated by dividing earnings before interest and taxes by average investedcapital excluding cash, accrued interest, deferred taxes and amounts related tofinancial derivatives and is used to assess our efficiency at turning capitalinto profitable investments.  Theinventory turnover metric is calculated by dividing sales by average inventoryand is used to assess our efficiency in managing inventories.

 

**Other Compensation Components**

** **

*Health and WelfareBenefits. *Executive officers are eligible to participateunder the same plans as all other eligible employees for medical, dental,vision, disability, and life insurance. These benefits are intended to be competitive with benefits offered inthe retail industry.

 

*Retirement Plan.*  Priorto 2008, most non-union employees over age 21 who had completed one year ofservice with 1,000 or more hours participated in The Neiman Marcus Group, Inc.Retirement Plan (referred to as the Retirement Plan), which paid benefits uponretirement or termination of employment. Effective as of December 31, 2007, eligibility and benefit accrualsunder the Retirement Plan were frozen for all participants except for those“Rule of 65” employees who elected to continue participation in the RetirementPlan.  “Rule of 65” employees includedonly those active employees who had completed at least 10 years of service andwhose combined years of service and age equaled at least 65 as of December 31,2007.  The Retirement Plan is a“career-accumulation” plan, under which a participant earns each year aretirement annuity equal to one percent of his or her compensation for the yearup to the Social Security wage base and 1.5 percent of his or her compensationfor the year in excess of such wage base. A participant becomes fully vested after five years of service withus.  Mr. Tansky, Ms. Katz, and Mr. Barneswere “Rule of 65” employees as of December 31, 2007, and elected to continueparticipation in the Retirement Plan. For Messrs. Skinner and Gold, benefits and accruals under the RetirementPlan were frozen effective as of December 31, 2007.

 

*Savings Plan (401(k)Plan).  *Effective January 1, 2008, a new enhanced401(k) plan, The Neiman Marcus Group, 

 

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Inc. Retirement Savings Plan (referred to asthe RSP), was offered to all employees, including the named executive officers,as the primary retirement plan.  Benefitsand accruals under The Neiman Marcus Group, Inc. Employee Savings Plan(referred to as the ESP) were frozen as well as benefits and accruals under theRetirement Plan and all future and current employees who were not alreadyenrolled in the ESP and the Retirement Plan were automatically enrolled in theRSP.  “Rule of 65” employees, asdescribed above, were given a choice to either continue participation in theRetirement Plan and the ESP or freeze what was earned under those plans throughDecember 31, 2007 and participate in the RSP. Mr. Tansky, Ms. Katz, and Mr. Barnes were “Rule of 65” employees as ofDecember 31, 2007, and elected to remain in the Retirement Plan and theESP.  Messrs. Skinner and Gold were noteligible to continue participating in the ESP and amounts in their RetirementPlan were frozen and the balances in their ESP were transferred to theRSP.  The RSP is a tax-qualified definedcontribution 401(k) plan that allows participants to contribute up to the limitprescribed by the Internal Revenue Service on a pre-tax basis.  The Company will match 100% of the first 3%and 50% of the next 3% of pay that is contributed to the RSP after the first yearof employment.  All employee contributionsto the RSP are fully vested upon contribution. Company matching contributions vest after two years of service.

 

For those who remaineligible, the ESP is a retirement savings plan that allows participants tocontribute up to the limit prescribed by the Internal Revenue Service on apre-tax basis (provided, however, that highly compensated employees are limitedto 6% of eligible compensation).  TheCompany will match 100% of the first 2% and 25% of the next 4% of pay that iscontributed to the ESP after the first year of employment.  All employee contributions to the ESP arefully vested upon contribution.  Companymatching contributions vest after three years of service.

 

*Supplemental RetirementPlan and Key Employee Deferred Compensation Plan.*  U.S.tax laws limit the amount of benefits that we can provide under ourtax-qualified plans.  We maintain TheNeiman Marcus Group, Inc. Supplemental Executive Retirement Plan (referred toas the SERP) and the Neiman Marcus Group, Inc. Key Employee Deferred CompensationPlan (referred to as the KEDC Plan), which are unfunded, nonqualifiedarrangements intended to provide named executive officers and certain other keyemployees with additional benefits, including the benefits that they would havereceived under the Retirement Plan, 401(k) plan, the ESP and the RSP if the taxlaw limitations did not apply and if certain other items of compensation couldbe included in calculation of benefits under our tax-qualified plans.  Prior to 2008, executive, administrative andprofessional employees (other than those employed as salespersons) with anannual base salary at least equal to a minimum established by the Company wereeligible to participate in the SERP. Similar to the Retirement Plan, effective December 31, 2007, eligibilityand benefit accruals under the SERP were frozen for all participants except forthose “Rule of 65” employees who elected to continue participating in theRetirement Plan.  Each SERP participantaccrues a benefit for amounts in excess of those provided under the RetirementPlan.  SERP related benefits are morefully described under “Pension Benefits” on page 63.

 

Participation in the KEDCPlan is limited to employees whose base salary is in excess of $300,000 andmeet other stated criteria.  Amounts inexcess of those benefits provided under the 401(K) plans are credited to theaccount balances of each KEDC Plan participant. KEDC Plan benefits are more fully described under “Nonqualified DeferredCompensation” on page 64.

 

*Matching Gift Program. *All employees, including the named executive officers, may participatein our matching gift program.  Under theprogram, we will match charitable contributions by employees up to a maximum of$2,000 per qualifying organization on a two-for-one basis in each calendaryear.  For any contribution made to aqualifying organization in which the employee has an active involvement (asevidenced by service on the organization’s governing body or in one of itsworking committees), the basis of our matching contribution may, uponapplication by the employee, be increased to a level greater than two-for-one.

 

*Perquisites.  *We provide perquisites and other personal benefits that we believe arereasonable and consistent with the nature of individual responsibilities inorder to provide a competitive level of total compensation to ourexecutives.  We believe the level ofperquisites is within an acceptable range of what is offered by a group ofindustry related companies.  TheCompensation Committee believes that these benefits are aligned with theCompany’s desire to attract and retain superior management talent for thebenefit of all stockholders.  The valueof these benefits to the named executive officers is set forth in the SummaryCompensation Table under the column “*All Other Compensation*”and detail about each benefit is set forth in a table following the SummaryCompensation Table.

 

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**Compensation Following EmploymentTermination or Change in Control**

 

·  *Employment Agreements*

*** ***

Except for Mr. Tansky andMs. Katz, none of our executives has an employment agreement.  The Company and the Compensation Committeebelieve that the employment agreements with Mr. Tansky and Ms. Katz are animportant component in retaining these key executives.  The employment agreements were entered intoin conjunction with the consummation of the Acquisition and amended effectiveJanuary 1, 2009 to comply with Section 409A of the Internal Revenue Code.  The Compensation Committee considered theimportance of the continuity of senior leadership following the consummation ofthe Acquisition to be a compelling reason to enter into the employment agreements.  The employment agreements provide, amongother things, for payments to the executive following a termination ofemployment by the executive for “good reason” or a termination of theexecutive’s employment by the Company without “cause.”  The triggering events constituting “goodreason” and “cause” were negotiated to provide protection to the Company and tothe executive for unwarranted terminations of employment that could cause harmto the Company.  The employmentagreements also provide for certain payments to the executives upon death ordisability.  For a detailed descriptionof the terms of these employment agreements, see “*Employmentand Other Compensation Agreements”* on page 65 of this section.

 

·  *Confidentiality, Non-Competition and Termination Benefits Agreements*

* *

Each of the named executiveofficers (and certain other officers except for Mr. Tansky) is a party to aconfidentiality, non-competition and termination benefits agreement with theCompany.  The confidentiality, non-competitionand termination benefits agreements provide for severance benefits if theemployment of the affected individual is terminated other than for death,disability, or for cause.  Theseagreements provide for a severance payment equal to one and one-half annualbase salary of the named executive officer, payable over an eighteen monthperiod, and reimbursement for COBRA premiums for the same period.

 

·  *Other*

* *

The Company has change incontrol provisions in its Management Incentive Plan and its retirement plansthat may provide for accelerated vesting and/or distributions in certaincircumstances and these provisions apply equally to all participants in theplans, including the named executive officers, except to the extent anexecutive is party to an individual agreement that provides otherwise.

 

**Consideration of Tax andAccounting Treatment of Compensation**

** **

·  *Internal Revenue Code §409A*

 

The American Jobs CreationAct of 2004 added a new Section 409A to the Internal Revenue Code which appliesto compensation deferred under a nonqualified deferred compensation plan afterDecember 31, 2004.  Compliance with thenew Section 409A became fully effective on January 1, 2009.  Section 409A imposes restrictions on funding,distributions, and election to participate in the affected plans.  We believe our executive compensation plansand arrangements comply with Section 409A.

 

·  *Accounting for Stock-Based Compensation*

 

We began accounting forstock-based payments in accordance with the requirements of FASB Statement123(R) on July 31, 2005.  When settingequity compensation, the Compensation Committee considers the estimated costfor financial reporting purposes of any equity compensation it isconsidering.  However, the accountingimpact does not have a material impact on the design of our equity compensationplan.

 

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**CompensationCommittee Report**

** **

The Compensation Committeehas reviewed and discussed the Compensation Discussion and Analysis required byItem 402(b) of Regulation S-K with management and, based on such review anddiscussions, the Compensation Committee recommended to the Board that theCompensation Discussion and Analysis be included in this Annual Report on Form10-K.

 
| ** ** | **THE COMPENSATION COMMITTEE** | ** ** |
|------------|--------------------------------|------------|
|       |                           |       |
|       | Jonathan J. Coslet, Chairman   |       |
|       | Kewsong Lee                    |       |
|       | John G. Danhakl                |       |

 

**Compensation Committee Interlocksand Insider Participation**

 

In fiscal year 2009,Jonathan Coslet, Kewsong Lee, and John Danhakl served as members of ourCompensation Committee.  No officer oremployee served on the compensation committee (or equivalent), or the board ofdirectors, of another entity whose executive officer(s) served on ourCompensation Committee or Board.

 

**SummaryCompensation Table**

** **

The following table setsforth the annual compensation for the Principal Executive Officer, thePrincipal Financial Officer, and the three other most highly compensatedexecutive officers (referred to as the named executive officers) serving at theend of fiscal year 2009.

 
| **Name and Principal  Position**                                               | ** ** | **Fiscal  Year** | ** ** | **Salary  ($)**                 | ** ** | **Bonus  ($)(1)**       | ** ** | **Option  Awards  ($)(2)**      | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)(3)** | ** ** | **Change in  Pension  Value and  Non-  qualified  Deferred  Compensation  Earnings  ($)(4)** | ** ** | **All Other  Compensation  ($)(5)** | ** ** | **Total  ($)**                  | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------------------|------------|-------------------------|------------|---------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                               |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| **Burton  M. Tansky**                                                                    |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| President and Chief  Executive Officer                                                   |       | 2009  2008  2007 |       | 1,497,600  1,500,000  1,420,000 |       | —  —  108,027 |       | 1,458,134  1,458,134  1,458,134 |       | —  —  2,160,530                             |       | 786,000  205,000  754,000                                                                              |       | 108,287  145,992  138,657                |       | 3,850,021  3,309,126  6,039,348 |       |
| ** **                                                                               |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| **Karen W.  Katz**                                                                       |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| Executive Vice President  and President and Chief Executive Officer Neiman Marcus Stores |       | 2009  2008  2007 |       | 897,600  875,000  800,000       |       | —  —  45,448  |       | 791,488  791,488  791,488       |       | —  —  908,960                               |       | 721,000  145,369  284,145                                                                              |       | 45,394  113,324  93,187                  |       | 2,455,482  1,925,181  2,923,228 |       |
| ** **                                                                               |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| **James E.  Skinner**                                                                    |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| Executive Vice President  and Chief Financial Officer                               |       | 2009

2008  2007 |       | 628,800

625,000  575,000       |       | —

—  25,228  |       | 395,744

395,744  395,744       |       | —

—  504,563                               |       | 102,000

54,653  100,983                                                                               |       | 35,980

52,381  36,038                   |       | 1,162,524

1,127,778  1,637,556 |       |
| ** **                                                                               |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| **James J.  Gold**                                                                       |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| President and Chief  Executive Officer Bergdorf Goodman                             |       | 2009

2008  2007 |       | 499,200

490,000  460,000       |       | —

—  21,793  |       | 395,744

395,744  395,744       |       | —

253,546  435,850                              |       | 116,000

—  158,000                                                                               |       | 202,189

196,001  476,144                |       | 1,213,133

1,335,291  1,947,531 |       |
| ** **                                                                               |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| **Gerald  A. Barnes**                                                                    |       |             |       |                            |       |                    |       |                            |       |                                                  |       |                                                                                                   |       |                                     |       |                            |       |
| President and Chief  Executive Officer Neiman Marcus Direct                         |       | 2009

2008  2007 |       | 425,000

371,500  360,500       |       | —

—  —  |       | 79,151

79,151  79,151          |       | —

19,937  96,064                                |       | 282,000

350,000  248,000                                                                              |       | 25,041

30,345  21,524                   |       | 811,192

850,933  805,239       |       |

 

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Footnotes:

(1)      For fiscal year 2007, the amount shownrepresents discretionary bonuses awarded by the Compensation Committee. Forfiscal years 2008 and 2009, no such discretionary bonuses were made.

 

(2)      Shown is the expense recognized in ourfinancial statements for fiscal year 2009 under SFAS 123(R) for all outstandingoption awards held by each of the named executive officers. This amount is comprisedof the portions of the fair values of options awarded in fiscal year 2005,which were allocated to services provided by the named executive officers infiscal year 2009. The assumptions we used in calculating these amounts areincorporated herein by reference to Note 12 to Consolidated FinancialStatements appearing elsewhere in this Annual Report on Form 10-K.

 

(3)      The amounts reported in the Non-EquityIncentive Plan Compensation column reflect the actual amounts earned under thebonus plan described in the “*Compensation Discussionand Analysis”* section beginning on page 53.

 

(4)      The amounts in this column represent the change in the actuarial valueof the named executive officers’ benefits under our retirement and supplementalexecutive retirement plans from August 2, 2008 to August 1, 2009. This “changein the actuarial value” is the difference between the fiscal year 2008 andfiscal year 2009 present value of the pension benefits accumulated as ofyear-end by the named executive officers, assuming that benefit is not paiduntil age 65. These amounts were computed using the same assumptions used forfinancial statement reporting purposes under FAS 87, Employers’ Accounting forPensions as described in Note 14 to the audited consolidated financial statementson page F-31 of this Annual Report on Form 10-K.

 

Forfiscal year 2009, no earnings of each of the named executive officers in theKEDC plan exceeded 120 percent of the applicable federal long-term rate.

 

(5)      Includes all items listed in the followingtable entitled *“All Other Compensation.”* In theinterest of transparency, the value of perquisites and other personal benefitsis provided in this column and in the footnotes below even if the amount isless than the reporting threshold established by the SEC.

 

The tablebelow sets forth all other compensation for each of the named executiveofficers.

 
| **All Other Compensation**  | ** ** | **Burton M.  Tansky  ($)** | ** ** | **Karen W.  Katz  ($)** | ** ** | **James E.  Skinner  ($)** | ** ** | **James J.  Gold  ($)** | ** ** | **Gerald A.  Barnes  ($)** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| 401(k) plans contributions paid by us |       | $                               | 7,350      |                         | $          | 7,350                           |       | $                            | 11,025     |                            | $          | 11,025 |   | $ | 7,890 |   |
| Deferred compensation plan match      |       | —                          |       | 17,982                       |       | 11,358                          |       | —                       |       | 3,214                           |       |
| Group term life insurance             |       | 17,758                          |       | 2,572                        |       | 3,333                           |       | 1,308                        |       | 3,719                           |       |
| Financial counseling/tax preparation  |       | 27,090                          |       | 1,800                        |       | 3,154                           |       | —                       |       | —                          |       |
| Long-term disability                  |       | 3,180                           |       | 3,180                        |       | 2,935                           |       | 2,935                        |       | 3,138                           |       |
| Car allowance                         |       | 12,000                          |       | —                       |       | —                          |       | —                       |       | —                          |       |
| Cost of living adjustment(1)          |       | —                          |       | —                       |       | —                          |       | 186,921                      |       | —                          |       |
| Gross ups:                            |       | —                          |       | —                       |       | —                          |       | —                       |       | —                          |       |
| New York non-resident taxes (2)       |       | 40,909                          |       | 12,510                       |       | 4,175                           |       | —                       |       | 7,080                           |       |
| **TOTALS**                            |       | $                               | 108,287    |                         | $          | 45,394                          |       | $                            | 35,980     |                            | $          | 202,189 |   | $ | 25,041 |   |

 

----

Footnotes:

(1)      The amount listed for Mr. Gold represents anannualized cost of living adjustment following his relocation from Texas to NewYork.

 

(2)      The amounts shown represent gross up paymentsmade in connection with New York non-resident taxes.

 

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**FISCALYEAR 2009 GRANTS OF PLAN BASED AWARDS**

 

The following table providesinformation regarding the grant of planned-based awards to the named executiveofficers during the year ended August 1, 2009.

 
| ** **            | ** ** | ** **     | ** ** | **Estimated Possible Future Payouts Under** | ** ** |
|-----------------------|------------|----------------|------------|-----------------------------------------------------------------|------------|
| ** **            | ** ** | ** **     | ** ** | **Non-Equity Incentive Plan Awards(1)**          | ** ** |
| ** **            | ** ** | ** **     | ** ** | **Threshold**                                                   | ** ** | **Target** | ** ** | **Maximum** | ** ** |
| **Name**              | ** ** | **Grant Date** | ** ** | **($)**                                                         | ** ** | **($)** | ** ** | **($)** | ** ** |
|                  |       |           |       |                                                            |       |   |   |   |   |
| Tansky, Burton M.     |       | 9-16-2008      |       | 780,000                                                         |       | 1,560,000 |   | 3,120,000 |   |
|                  |       |           |       |                                                            |       |   |   |   |   |
| Katz, Karen W.        |       | 9-16-2008      |       | 175,313                                                         |       | 701,250 |   | 1,402,500 |   |
|                  |       |           |       |                                                            |       |   |   |   |   |
| Skinner, James E.     |       | 9-16-2008      |       | 106,438                                                         |       | 425,750 |   | 851,500 |   |
|                  |       |           |       |                                                            |       |   |   |   |   |
| Gold, James J.        |       | 9-16-2008      |       | 78,000                                                          |       | 312,000 |   | 624,000 |   |
|                  |       |           |       |                                                            |       |   |   |   |   |
| Barnes, Gerald A. (2) |       | 9-16-2008      |       | 27,863                                                          |       | 111,450 |   | 222,900 |   |

 

----

Footnotes:

(1)      Non-equity incentive awards granted each ofthe named executive officers at the beginning of fiscal year 2009. The grant ofthese plan-based awards was based on the salaries of each of the namedexecutive officers before the Company-wide salary reduction plan. For adetailed discussion of the annual incentive awards for fiscal year 2009, see “*Compensation Discussion and Analysis”* beginning on page 53.

 

(2)      The threshold, target, and maximum awardlevels were based on Mr. Barnes’ salary level before his promotion.

 

The following table setsforth certain information regarding the total number and aggregate value of stockoptions held by each of our named executive officers at August 1, 2009.

 

**OUTSTANDINGEQUITY AWARDS AT FISCAL YEAR END**

 
| ** **       | ** ** | **Option  Awards**                                                                                               | ** ** | ** **                                                                                                         | ** ** | **Stock  Awards**                                  | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| **Name**         | ** ** | **Number of********Securities********Underlying********Unexercised********Options********(#)  Exercisable** | ** ** | **Number of********Securities********Underlying********Unexercised********Options********(#)  Unexercisable** | ** ** | **Option********Exercise********Price********($)** | ** ** | **Option********Expiration********Date** | ** ** | **Number of  Shares or  Units of  Stock that  have not  Vested********(#)** | ** ** | **Market  Value of  Shares or  Units of  Stock that  have not  Vested********($)** | ** ** | **Equity  Incentive********Plan Awards:********Number of  Unearned********Shares, Units  or Other  Rights that  have not  Vested********(#)** | ** ** | **Equity Incentive  Plan Awards:  Market or Payout  Value Of  Unearned Shares,  Units or Other  Rights that have  not Vested********($)** | ** ** |
| Burton M. Tansky |       | 3,742                                                                                                            |       | —                                                                                                             |       | 361.25                                             |       | 9-23-2010 |   | — |   | — |   | — |   | — |   |
|             |       | 1,465                                                                                                            |       | —                                                                                                             |       | 361.25                                             |       | 5-15-2011 |   | — |   | — |   | — |   | — |   |
|             |       | 2,076                                                                                                            |       | —                                                                                                             |       | 354.03                                             |       | 9-22-2011 |   | — |   | — |   | — |   | — |   |
|             |       | 4,999                                                                                                            |       | 2,270                                                                                                              | (1)        | 1,445.00                                           |       | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|             |       | 6,232                                                                                                            |       | 2,270                                                                                                              | (2)        | 1,923.30                                           | (2)        | 10-06-2015 |   | — |   | — |   | — |   | — |   |
| Karen W. Katz    |       | 4,005                                                                                                            |       | 1,335                                                                                                              | (3)        | 1,445.00                                           |       | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|             |       | 4,005                                                                                                            |       | 1,335                                                                                                              | (4)        | 1,923.30                                           | (4)        | 10-06-2015 |   | — |   | — |   | — |   | — |   |
| James E. Skinner |       | 2,002                                                                                                            |       | 667                                                                                                                | (3)        | 1,445.00                                           |       | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|             |       | 2,002                                                                                                            |       | 667                                                                                                                | (4)        | 1,923.30                                           | (4)        | 10-06-2015 |   | — |   | — |   | — |   | — |   |
| James J. Gold    |       | 2,002                                                                                                            |       | 667                                                                                                                | (3)        | 1,445.00                                           |       | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|             |       | 2,002                                                                                                            |       | 667                                                                                                                | (4)        | 1,923.30                                           | (4)        | 10-06-2015 |   | — |   | — |   | — |   | — |   |
| Gerald A. Barnes |       | 400                                                                                                              |       | 133                                                                                                                | (3)        | 1,445.00                                           |       | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|             |       | 400                                                                                                              |       | 133                                                                                                                | (4)        | 1,923.30                                           | (4)        | 10-06-2015 |   | — |   | — |   | — |   | — |   |

 

----

Footnotes:

(1)      Nonqualified stock options granted November29, 2005 vested with respect to 460 shares on the first anniversary date ofOctober 6, 2005 and thereafter on the subsequent three anniversary dates ofOctober 6, 2005 with respect to 2,270 shares. As of August 1, 2009, the exercise price was above the fair marketvalue.

 

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(2)      Nonqualified stock options granted onNovember 29, 2005 vest in four equal annual installments on October 6, 2006,October 6, 2007, October 6, 2008, and October 6, 2009, subject to earliervesting. The options were granted at the initial exercise price of $1,445.00per share which will increase at a 10.00% compound rate on each anniversary ofOctober 6, 2005 until the earlier to occur of (i) the exercise of the option,(ii) October 6, 2010, or (iii) the occurrence of a change of control.  On October 6, 2009, the option price willincrease to $2,115.62 per share.  As ofAugust 1, 2009, the exercise price was above the fair market value.

 

(3)      Nonqualified stock options granted onNovember 29, 2005 at the exercise price of $1,445.00 per share which vests 20%on the first anniversary of October 6, 2005 and thereafter in forty-eight equalmonthly installments over the forty-eight months following the firstanniversary of October 6, 2005, beginning on the one-month anniversary of suchfirst anniversary and becoming fully vested on October 6, 2010, subject toearlier vesting in certain circumstances following a change in control.  As of August 1, 2009, the exercise price wasabove the fair market value.

 

(4)      Nonqualified stock options granted onNovember 29, 2005 which vests 20% on the first anniversary of October 6, 2005and thereafter in forty-eight equal monthly installments over the forty-eightmonths following the first anniversary of October 6, 2005, beginning on theone-month anniversary of such first anniversary and becoming fully vested onOctober 6, 2010.  The options were grantedat the initial exercise price of $1,445.00 per share which will increase at a10.00% compound rate on each anniversary of October 6, 2005 until the earlierto occur of (i) the exercise of the option, (ii) October 6, 2010, or (iii) theoccurrence of a change of control, or in the event the equity investors sell aportion of their investment, with respect to a portion of the options bearingthe same ratio as the portion of the equity investor’s equity sold.  On October 6, 2009, the option price will increaseto $2,115.62 per share. As of August 1, 2009, the exercise price was above thefair market value.

 

**PENSIONBENEFITS**

** **

The following table setsforth certain information with respect to retirement payments and benefitsunder the Retirement Plan and the SERP for each of our named executive officers.

 
| **Name**         | ** ** | **Plan Name** | ** ** | **Number of Years  Credited Service  (#)(1)** | ** ** | **Present Value  of Accumulated  Benefit  ($)(2)** | ** ** | **Payments During  Last  Fiscal Year  ($)** | ** ** |
|------------------|------------|--------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Burton M. Tansky |       | Retirement Plan    |       | 19                                                      |       | 428,000                                                      |       | —                                           |       |
|             |       | SERP               |       | 31                                                      | (3)        | 7,898,000                                                    |       | —                                           |       |
| Karen W. Katz    |       | Retirement Plan    |       | 24                                                      |       | 258,000                                                      |       | —                                           |       |
|             |       | SERP               |       | 24                                                      | (4)        | 1,962,000                                                    |       | —                                           |       |
| James E. Skinner |       | Retirement Plan    |       | 7                                                       | (5)        | 111,000                                                      |       | —                                           |       |
|             |       | SERP               |       | 7                                                       | (5)        | 351,000                                                      |       | —                                           |       |
| James J. Gold    |       | Retirement Plan    |       | 17                                                      | (5)        | 105,000                                                      |       | —                                           |       |
|             |       | SERP               |       | 17                                                      | (5)        | 288,000                                                      |       | —                                           |       |
| Gerald A. Barnes |       | Retirement Plan    |       | 26                                                      |       | 323,000                                                      |       | —                                           |       |
|             |       | SERP               |       | 25                                                      |       | 696,000                                                      |       | —                                           |       |

 

----

Footnotes:

(1)      Computed as of August 1, 2009, which is thesame pension measurement date used for financial statement reporting purposeswith respect to our audited consolidated financial statements and notesthereto.

 

(2)      For purposes of calculating the amounts inthis column, retirement age was assumed to be the normal retirement age of  the later of age 65 or the fifth anniversaryof the individual’s date of hire, as defined in the Retirement Plan.  A description of the valuation method and allmaterial assumptions applied in quantifying the present value of accumulatedbenefit is set forth in Note 14 to the audited consolidated financialstatements on page F-31 of this Annual Report on Form 10-K.

 

(3)      The difference in years of service is aresult of the provision in Mr. Tansky’s employment agreement relating to thecalculation of his years of service under the SERP.  Following his termination of employment withus, his years of service for purposes of calculating his benefit under the SERPwill be determined by multiplying his actual service for purposes of the SERPby 2, subject to the 25-year maximum set forth in the SERP, and by thenproviding him with an additional credit for each year of service to the Companyfollowing his attainment of age sixty-five (65) (disregarding the 25-yearmaximum set forth in the SERP).  Thevalue of Mr. Tansky’s actual years of service under the SERP is $4,493,000, sothe value of the additional years of service in excess of his actual service is$3,405,000.  See the discussion of hisemployment agreement under “*Employment and OtherCompensation Agreements”* on page 65 of this section.

 

(4)      Pursuant to the terms of Karen Katz’semployment agreement, after she has reached the 25-year maximum set forth inthe SERP, she will be entitled to an additional one year of credit for eachfull year of service thereafter.  Inaddition, if her 

 

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employmentis terminated by us for any reason other than death, disability, cause, or fornon-renewal of her employment term, or if she terminates her employment with usfor good reason, and she has not yet reached 65, her SERP benefit will not bereduced solely by reason of her failure to reach 65 as of the termination date.

 

(5)      Effective December 31, 2007, benefit accrualsfor Messrs. Skinner and Gold under the Retirement Plan and the SERP werefrozen, as further described below.

 

The Retirement Plan is a funded, tax-qualifiedpension plan.  Prior to 2008, mostnon-union employees over age 21 who had completed one year of service with1,000 or more hours were eligible to participate in the Retirement Plan, which paidbenefits upon retirement or termination of employment.  Effective as of December 31, 2007,eligibility and benefit accruals under the Retirement Plan were frozen for allparticipants except for those “Rule of 65” employees who elected to continueparticipating in the Retirement Plan. “Rule of 65” employees included only those active employees who hadcompleted at least 10 years of service and whose combined years of service andage equaled at least 65 as of December 2007. The Retirement Plan is a “career-accumulation” plan, under which aparticipant earns each year a retirement annuity equal to one percent of his orher compensation for the year up to the Social Security wage base and 1.5percent of his or her compensation for the year in excess of such wagebase.  “Compensation” for this purposegenerally includes salary, bonuses, commissions and overtime but not in excessof the limits imposed upon annual compensation under Internal Revenue CodeSection 401(a)(17).  Such limit for 2008was $230,000 and for 2009 is $245,000, and is adjusted annually forcost-of-living increases.  Benefits underthe Retirement Plan become fully vested after five years of service with us.

 

The SERP is an unfunded, nonqualified planunder which benefits are paid from our general assets to supplement RetirementPlan benefits and Social Security.  Priorto 2008, executive, administrative and professional employees (other than thoseemployed as salespersons) with an annual base salary at least equal to aminimum established by the Company were eligible to participate.  Similar to the Retirement Plan, effectiveDecember 31, 2007, eligibility and benefit accruals under the SERP were frozenfor all participants except for those “Rule of 65” employees who elected tocontinue participating in the Retirement Plan. At normal retirement age (the later of age 65 and the fifth anniversaryof the participant’s date of hire), an eligible participant with 25 or moreyears of service is entitled to full benefits in the form of monthly paymentsunder the SERP computed as a straight life annuity, equal to 50 percent of theparticipant’s average monthly compensation for the highest consecutive 60months preceding retirement less 60 percent of his or her estimated annualprimary Social Security benefit, offset by the benefit accrued by theparticipant under the Retirement Plan. The amount is then adjusted actuarially to determine the actual monthlypayments based on the time and form of payment. For this purpose, “compensation” includes salary but does not includebonuses.  If the participant has fewerthan 25 years of service, the combined benefit is proportionately reduced.  Benefits under the SERP become fully vestedafter five years of service with us.  TheSERP is designed to comply with the requirements of Section 409A of theInternal Revenue Code.

 

**NONQUALIFIED DEFERRED COMPENSATION**

 
| **Name**          | ** ** | **Executive  Contributions  in Last Fiscal Year  ($)(1)** | ** ** | **Registrant  Contributions in  Last Fiscal Year  ($)** | ** ** | **Aggregate Earnings  in Last Fiscal Year  ($)** | ** ** | **Aggregate  Withdrawals /  Distributions  ($)** | ** ** | **Aggregate Balance  at Last Fiscal Year-  End  ($)(2)** | ** ** |
|-------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
|              |       |                                                                     |       |                                                                   |       |                                                                 |       |                                                  |       | *** ***                                                                 |       |
| Burton  M. Tansky |       | —                                                                   |       | —                                                                 |       | —                                                               |       | —                                                |       | —                                                                       |       |
|              |       |                                                                     |       |                                                                   |       |                                                                 |       |                                                  |       |                                                                         |       |
| Karen W. Katz     |       | 126,660                                                                  |       | 17,982                                                                 |       | 32,367                                                               |       | —                                                |       | 912,585                                                                      |       |
|              |       |                                                                     |       |                                                                   |       |                                                                 |       |                                                  |       |                                                                         |       |
| James E. Skinner  |       | 38,668                                                                   |       | 67,281                                                                 |       | 11,714                                                               |       | —                                                |       | 357,529                                                                      |       |
|              |       |                                                                     |       |                                                                   |       |                                                                 |       |                                                  |       |                                                                         |       |
| James J. Gold     |       | —                                                                   |       | 101,512                                                                |       | 3,451                                                                |       | —                                                |       | 131,826                                                                      |       |
|              |       |                                                                     |       |                                                                   |       |                                                                 |       |                                                  |       |                                                                         |       |
| Gerald  A. Barnes |       | 4,285                                                                    |       | 3,214                                                                  |       | 1,320                                                                |       | —                                                |       | 35,942                                                                       |       |

 

----

Footnotes:

(1)      The amounts reported as ExecutiveContributions in Last Fiscal Year are also included as Salary in the SummaryCompensation Table on page 60 of this Section.

 

(2)      Amounts included in this column for Ms. Katzand Messrs. Tansky, Skinner, and Gold were included as salary in the SummaryCompensation Table for previous years.

 

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Theamounts reported in the Nonqualified Deferred Compensation Table representdeferrals and Company matching contributions credited pursuant to the KEDC Planand Company contributions credited pursuant to The Neiman Marcus Group, Inc.Defined Contribution Supplemental Executive Retirement Plan (referred to hereinas the DC SERP).

 

The KEDC Plan allows eligible employees to elect to defer up to 15% ofbase pay and up to 15% of annual performance bonus each year.  Eligible employees generally are thoseemployees who have completed one year of service with the Company, have annualbase pay of at least $300,000 and are otherwise designated as eligible by theCompany’s employee benefits committee; provided, however, that effective January 1,2008, only those persons who were eligible for the KEDC as of January 1,2007 are permitted to continue participating in the KEDC.  No new participants will be added.  The Company also credits a matchingcontribution each pay period equal to (A) the sum of (i) 100% of thesum of the employee’s KEDC Plan deferrals and the maximum ESP or RSP, asapplicable, deferral that the employee could have made under such plan for suchpay period, to the extent that such sum does not exceed 2% of the employee’scompensation for such pay period, and (ii) 25% of the sum of the employee’sKEDC Plan deferrals and the maximum ESP or RSP, as applicable, deferral thatthe employee could have made under such plan for such pay period, to the extentthat such sum does not exceed the next 4% of the employee’s compensation forsuch pay period, minus (B) the maximum possible match the employee couldhave received under the ESP or RSP, as applicable, for such pay period.  Such amounts are credited to a bookkeepingaccount for the employee and are fully vested with respect to matchingcontributions made for calendar years prior to 2008.  Amounts attributable to matchingcontributions, plus interest thereon, for calendar years on and after 2008 aresubject to forfeiture in the event the employee is terminated for cause.  Accounts are credited monthly with interestat an annual rate equal to the prime interest rate published in The Wall StreetJournal on the last business day of the preceding calendar quarter.  Amounts credited to an employee’s accountbecome payable to the employee upon separation from service, death,unforeseeable emergency, or change of control of the Company.  In the event of separation of service, paymentis made in a lump sum in the calendar quarter following the calendar quarter inwhich the separation occurs although if the employee is eligible for retirementupon such separation, payment may be deferred until the following year or thenine subsequent years, and may be made in a lump sum or in installments over aperiod of up to ten years, depending upon the distribution form elected by theemployee.  There is no separate fundingfor the amounts payable under the KEDC Plan, rather the Company makes paymentfrom its general assets.  The KEDC Planis designed to comply with the requirements of Section 409A of theInternal Revenue Code.

 

The DC SERP is an unfunded, nonqualified deferred compensation planunder which benefits are paid from our general assets to provide eligibleemployees with the opportunity to receive employer contributions on the portionof their eligible compensation that exceeds the compensation limit imposed byInternal Revenue Code Section 401(a)(17) (the “IRS Limit”).  The IRS Limit for 2008 was $230,000 and for2009 is $245,000.  Eligible employeesgenerally are those employees who have completed one year of service with theCompany, who have annual base pay of at least 80% of the IRS Limit (or wereeligible to participate in the SERP as of December 31, 2007 and ceased tobe eligible to participate in the SERP as of January 1, 2008), and who areotherwise designated as eligible by the Company’s employee benefitscommittee.  The Company will maketransitional and non-transitional credits to the accounts of eligibleparticipants each pay period. Transitional credits apply only to participants who were eligible toparticipate in the SERP as of December 31, 2007 but ceased participatingin the SERP as of that date and became a participant in the DC SERP on January 1,2008.  The amount of a transitionalcredit is the product of a participant’s eligible compensation in excess of theIRS Limit and an applicable percentage ranging from 0% to 6% depending upon theage of the participant.  Non-transitionalcredits apply to all eligible participants. The amount of a non-transitional credit is the product of a participant’seligible compensation in excess of the IRS Limit and 10.5%.  All transitional and non-transitional creditsare credited to a bookkeeping account and vest upon the earlier of (i) aneligible employee’s attainment of five years of service, (ii) an eligibleemployee’s attainment of age 65, (iii) an eligible employee’s death, (iv) aneligible employee’s disability, or (v) a change of control (as defined inthe DC SERP) while in the employ of the Company.  Notwithstanding the preceding, amountscredited to an account are subject to forfeiture in the event the employee isterminated for cause.  Accounts arecredited monthly with interest at an annual rate equal to the prime interestrate published in The Wall Street Journal on the last business day of thepreceding calendar quarter. Vested amounts credited to an employee’s accountbecome payable in the form of five annual installments beginning upon the laterof the employee’s separation from service and age 55, or such later age as theemployee may elect. Upon the employee’s death or disability or upon a change ofcontrol of the Company, vested amounts credited to an employee’s account willbe paid in a single lump sum.  The DCSERP is designed to comply with the requirements of Section 409A of theInternal Revenue Code.

 

**Employmentand Other Compensation Agreements**

 

As discussed in “*Compensation Discussion & Analysis,*” The Neiman MarcusGroup, Inc. has entered into employment agreements with Burton M. Tanskyand Karen W. Katz.  In addition, each ofthe named executive officers, except for Mr. Tansky, is a party to aconfidentiality, non-competition and termination benefits agreement, discussedbelow.

 

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* *

*EmploymentAgreement with Mr. Tansky*

 

The employment agreementwith Mr. Tansky, as amended, has an employment term of five years until October 2010,subject to automatic one-year renewals of the term if neither party submits anotice of termination at least six months prior to the end of the then-currentterm, and provides for a base salary of not less than $1,300,000 per year.  Mr. Tansky’s agreement also providesthat he will participate in the Company’s annual bonus plan.  Mr. Tansky’s agreement provides that ifbonus levels for a fiscal year are met, the minimum bonus amount he will receivewill be at least 50% of his base salary, if the target bonus goal for thefiscal year is met, he will receive at least 85% of his base salary, and if themaximum target goal is met, he will receive at least 170% of his base salary.  The actual amounts will be determinedaccording to the terms of the annual bonus program and will be payable at thediscretion of the Compensation Committee.

 

In addition to theforegoing, the agreement provides that upon the occurrence of the earlier of achange of control or an initial public offering, Mr. Tansky will beentitled to a cash bonus equal to $3,080,911, which represents his portion ofthe cash incentive pool pursuant to the Cash Incentive Plan (more fullydescribed on page 68 of this section). The agreement also provides that at the time of Mr. Tansky’stermination of employment with the Company, his years of service for purposesof calculating his benefit under the SERP shall be determined by multiplyinghis actual service for purposes of the SERP by 2, subject to the 25-yearmaximum set forth in the SERP, and by then providing him with additional creditfor each year of service by him to the Company following his attainment of agesixty-five (65) (disregarding the 25-year maximum set forth in the SERP).

 

If (1) we terminate Mr. Tansky’semployment without cause or if he resigns for good reason, or (2) Mr. Tanskyresigns without good reason during the 30 day period following the six monthanniversary of a future change of control (referred to herein as a change ofcontrol resignation), he will receive, subject to his execution of a mutualrelease and waiver of claims, a lump sum equal to (A) 85% of base salarymultiplied by a fraction, the numerator of which is the number of days duringthe fiscal year up to the termination date and the denominator of which is 365,plus (B) 36 times the monthly COBRA premium applicable to Mr. Tanskyplus (C) if such termination is not a change of control resignation, anamount equal to three times the sum of (i) base salary and (ii) 85%of base salary in effect on the termination date, or if such termination is achange of control resignation, an amount equal to two times the sum of (i) basesalary and (ii) 85% of base salary in effect on the termination date;provided, however, that Mr. Tansky shall be required to repay this paymentif he violates certain of the restrictive covenants or if he is found to haveengaged in certain acts of wrongdoing, all as further described in theagreement.  In certain circumstances, Mr. Tanskywill also be entitled to some or all of the benefits under the Cash IncentivePlan.

 

If Mr. Tansky’semployment terminates before the end of the term due to death or inability toperform (as defined in the employment agreement), we will pay him or hisestate, as applicable, 85% of base salary multiplied by a fraction, thenumerator of which is the number of days during the fiscal year up to thetermination date and the denominator of which is 365.

 

Pursuantto the agreement and depending on the circumstances of the termination of Mr. Tansky’semployment, he may also be entitled to receive an amount equal to the monthlyCOBRA premium applicable at his termination date based upon the coverage ineffect under the group medical plan immediately prior to his termination datemultiplied by thirty-six (36).

 

Alsopursuant to the agreement, depending on the circumstances of the termination ofMr. Tansky’s employment, he may be entitled to up to three years ofcontinuing coverage under our life insurance plan at the same benefit level asprovided to him immediately prior to his termination date and at the same costas is generally provided to similarly situated active employees of the Company.

 

Mr. Tansky’s agreement provides that he is entitled to participatein any extraordinary dividend on certain of his options, if then outstanding,that were granted prior to the acquisition and assumed by Parent.

 

Mr. Tansky’s agreement also contains a tax gross-up provisionwhereby if, in the event of a change in control following the existence of apublic market for the Company’s stock, he incurs any excise tax by reason ofhis receipt of any payment that constitutes an excess parachute payment asdefined in Section 280G of the Internal Revenue Code of 1986, as amended(the “Code”), he will receive a gross-up payment in an amount that would placehim in the same after-tax position that he would have been in if no excise taxhad applied.  However, under certainconditions, rather than receive a gross-up payment, the payments payable to himwill be reduced so that no excise tax is imposed.

 

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Pursuant to the agreement, Mr. Tansky received a grant of optionsto purchase 16,349.1797 shares of the Company’s common stock, which vest inaccordance with the terms of the agreement over the first four anniversaries ofthe date of grant.  The agreementprovides for the accelerated vesting of these options upon (i) a change ofcontrol or (ii) the termination of Mr. Tansky’s employment before theend of the term due to death or inability to perform.  In addition, in the event that we terminate Mr. Tansky’semployment without cause or if he resigns for good reason, the agreementprovides that the options will vest as to (i) the number of shares thatwould have become vested on the next anniversary of the grant date, plus (ii) ifthe termination date occurs prior to the third anniversary of the grant date,the number of shares that would have vested on the next anniversary of thegrant date, multiplied by a fraction, the numerator of which is the number ofdays from the preceding anniversary of the grant date and the denominator ofwhich is 365.

 

Mr. Tansky’s agreementalso contains obligations on his part regarding non-competition andnon-solicitation of employees during employment following the termination ofhis employment for any reason, confidential information and non-disparagementof the Company and its business.  Thenon-competition agreement generally prohibits Mr. Tansky during hisemployment and for a period of three years from termination from becoming adirector, officer, employee or consultant for any competing business that ownsor operates a luxury specialty retail store located in the geographic areas ofthe Company’s operations.  The agreementalso requires that he disclose and assign to the Company any trademarks orinventions developed by him which relate to his employment by the Company or tothe Company’s business.

 

*EmploymentAgreement with Ms. Katz*

 

The employment agreementwith Ms. Katz provides that she will act as Chief Executive Officer andPresident of Neiman Marcus Stores, a division of The Neiman Marcus Group, Inc.,until October 2010, subject to automatic one-year renewals of the term ifneither party submits a notice of termination at least three months prior tothe end of the then-current term. Pursuant to the agreement, her base salary shall not be less than$760,000.  Ms. Katz’s agreement alsoprovides that she will participate in the Company’s annual bonus plan.  The actual amounts will be determinedaccording to the terms of the annual bonus program and will be payable at thediscretion of the Compensation Committee. However, Ms. Katz’s agreement provides that her target bonus maynot be reduced below 65% of her base salary. In addition, the agreement provides that during the term, Ms. Katzshall continue to accrue benefits under the SERP, provided that (i) theSERP shall not be amended or terminated in any way that adversely affects her,and (ii) after she has reached the 25-year maximum set forth in the SERP,she shall be entitled to an additional one year of credit for each full year ofservice thereafter.  In addition, if (i) duringthe term, her employment is terminated by the Company for any reason other thandeath, disability, or cause (as defined in the employment agreement), (ii) duringthe term, she terminates her employment for good reason (as defined in theemployment agreement), or (iii) her employment terminates upon expirationof the term following the provision by the Company of a notice of non-renewal,and, in any such case, on the date of such termination she has not yet reachedage 65, her SERP benefit shall not be reduced according to the terms of theSERP solely by reason of her failure to reach age 65 as of the terminationdate.

 

This agreement may beterminated by either party on three months’ notice, subject to severanceobligations in the event of termination under certain circumstances (asdescribed below).

 

If we terminate Ms. Katz’semployment without cause or if she resigns for good reason or following herreceipt of a notice of non-renewal from the Company relating to the employmentterm, she will receive (i) an amount of annual incentive pay equal to aprorated portion of her target bonus amount for the year in which theemployment termination date occurs, and (ii) a lump sum equal to (A) 6times the monthly COBRA premium applicable to Ms. Katz plus (B) two times thesum of her base salary and target bonus, at the level in effect as of theemployment termination date; provided, however, that Ms. Katz shall be required to repay thispayment if she violates certain restrictive covenants in her agreement or if sheis found to have engaged in certain acts of wrongdoing, all as furtherdescribed in the agreement.  Ms. Katzis also entitled to continuation of certain benefits for a two-year periodfollowing a termination of her employment for any reason as set forth morefully in her employment agreement.

 

If Ms. Katz’semployment terminates before the end of the term due to her death ordisability, we will pay her or her estate, as applicable, (i) any unpaidsalary through the date of termination and any bonus payable for the precedingfiscal year that has otherwise not already been paid, (ii) any accrued butunused vacation days, (iii) any reimbursement for business travel andother expenses to which she is entitled, and (iv) an amount of annualincentive pay equal to a prorated portion of her target bonus amount for theyear in which the employment termination date occurs.

 

Ms. Katz’s agreementalso contains a tax gross-up provision whereby if, in the event of a change incontrol following the existence of a public market for the Company’s stock, sheincurs any excise tax by reason of her receipt of any payment that constitutesan excess parachute payment as defined in Section 280G of the Code, shewill receive a gross-up 

 

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payment in an amount thatwould place her in the same after-tax position that she would have been in ifno excise tax had applied.  However,under certain conditions, rather than receive a gross-up payment, the paymentspayable to her will be reduced so that no excise tax is imposed.

 

Ms. Katz’s agreement also contains obligations on her partregarding non-competition and non-solicitation of employees following thetermination of her employment for any reason, confidential information andnon-disparagement of the Company and its business.  The non-competition agreement generallyprohibits Ms. Katz during employment and for a period of one year fromtermination from becoming a director, officer, employee or consultant for anycompeting business that owns or operates a luxury specialty retail storelocated in the geographic areas of the Company’s operations.  The agreement also requires that she discloseand assign to the Company any trademarks or inventions developed by her whichrelate to her employment by the Company or to the Company’s business.

 

*Confidentiality,Non-Competition and Termination Benefits Agreements*

 

Each of the named executive officers and certain other officers, exceptfor Mr. Tansky, are party to a confidentiality, non-competition andtermination benefits agreement that will provide for severance benefits if theemployment of the affected individual is terminated by the Company other thanin the event of death, disability or termination for cause.  These agreements provide for a severancepayment equal to one and one-half annual base salary payable over an eighteenmonth period, and reimbursement for COBRA premiums for the same period.  Eachconfidentiality, non-competition and termination benefits agreement containsrestrictive covenants as a condition to receipt of any payments payablethereunder.

 

**Cash Incentive Plan**

 

Following the consummation of the Acquisition, the Neiman Marcus, Inc.Cash Incentive Plan (referred to as the Cash Incentive Plan) was adopted to aidin the retention of certain key executives, including the named executiveofficers.  The Cash Incentive Planprovides for the creation of a $14 million cash bonus pool to be shared by theparticipants based on the number of stock options that were granted to eachsuch participant pursuant to the Management Incentive Plan.  Each participant in the Cash Incentive Planwill be entitled to a cash bonus upon the earlier to occur of a change ofcontrol or an initial public offering, provided that the internal rate ofreturn to certain of our investors ispositive.  If the internal rate of returnto certain of our investors is not positive, no amounts will be paid under theCash Incentive pool.  The CashIncentive Plan was adopted in connection with the acquisition of NMG by theSponsors, and was intended to align the interests of certain key executiveswith those of the Sponsors.  Furthermore,it has been our experience that it often takes a long period of time toconsummate a change in control transaction with a large retail company.  As a result, it was our view and the view ofthe Sponsors that a “single trigger” payment upon an initial public offering orchange in control of the Company correctly aligns the interests of management,on the one hand, and the Company and its shareholders, on the other hand, andalso provides the Company with an effective and durable retention mechanismthat incentivizes each named executive officer to remain with us prior to theconsummation of such an event.

 

Based on the foregoing,each of the named executive officers would be entitled to receive the followingpercentages of the remaining cash bonus pool on August 1, 2009, assumingthere was a change in control or an initial public offering on that date, andthe rate of return to the Sponsors was positive:

 
| **Name**          | ** ** | **Percentage** | ** ** |
|-------------------|------------|----------------|------------|
| Burton  M. Tansky |       | 22.00          | %          |
| Karen  W. Katz    |       | 15.65          | %          |
| James  E. Skinner |       | 7.83           | %          |
| James  J. Gold    |       | 7.83           | %          |
| Gerald  A. Barnes |       | 1.57           | %          |

 

All required federal,state, or local government tax will be withheld from all payments made toparticipants under the Cash Incentive Plan. No payments have been made or are currently anticipated under the CashIncentive Plan.

 

**Potential Payments Upon Terminationor Change-in-Control**

 

The tables below showcertain potential payments that would have been made to a named executiveofficer if the named executive officer’s employment had terminated on August 1,2009 under various scenarios, including a change in control.  Because the payments to be made to a namedexecutive officer depend on several factors, the actual amounts to be

 

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paid out upon a namedexecutive officer’s termination of employment can only be determined at thetime of an executive’s separation from the Company.

 

**Burton M. Tansky**

 
| **Executive  Benefits  and Payments UponSeparation** | ** ** | **Retirement  ($)(1)(7)** | ** ** | **Termination  due to  death  ($)(2)(7)** | ** ** | **Termination  due to  disability  ($)(3)(7)** | ** ** | **Termination  without  cause  or   for good  reason  ($)(4)(7)** | ** ** | **Change  in  Control  ($)(5)(7)** | ** ** | **Termination  without good reason 6  months  following a  change in  control  ($)(6)(7)** | ** ** |
|------------------------------------------------------|------------|---------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                           |       |                      |       |                                      |       |                                           |       |                                                              |       |                               |       |                                                                                       |       |
| **Compensation:**                                    |       |                      |       |                                      |       |                                           |       |                                                              |       |                               |       |                                                                                       |       |
| Severance                                            |       | $                         | —     |                                      | $          | —                                         |       | $                                                                 | —     |                               | $          | 5,765,760                                                                                  |       | $ | — |   | $ | 4,268,160 |   |
| Bonus                                                |       | —                    |       | 1,272,960                                 |       | 1,272,960                                      |       | 3,818,880                                                         |       | —                             |       | 2,545,920                                                                                  |       |
| Stock Options                                        |       | —                    |       | —                                    |       | —                                         |       | —                                                            |       | —                             |       | —                                                                                     |       |
|                                                 |       |                      |       |                                      |       |                                           |       |                                                              |       |                               |       |                                                                                       |       |
| **Benefits &  Perquisites:**                |       |                      |       |                                      |       |                                           |       |                                                              |       |                               |       |                                                                                       |       |
| Retirement Plans                                     |       | 3,405,000                 |       | —                                    |       | —                                         |       | —                                                            |       | —                             |       | —                                                                                     |       |
| Cash Incentive Plan Payment                          |       | —                    |       | —                                    |       | —                                         |       | —                                                            |       | 3,080,911                          |       | —                                                                                     |       |
| Long-Term Disability                                 |       | —                    |       | —                                    |       | 240,000                                        |       | —                                                            |       | —                             |       | —                                                                                     |       |
| Health and Welfare Benefits                          |       | —                    |       | —                                    |       | —                                         |       | 55,384                                                            |       | 55,384                             |       | 55,384                                                                                     |       |
| Life Insurance Benefits                              |       | —                    |       | 1,000,000                                 |       | —                                         |       | 60,123                                                            |       | 60,123                             |       | 60,123                                                                                     |       |
| **Total**                                            |       | $                         | 3,405,000  |                                      | $          | 2,272,960                                      |       | $                                                                 | 1,512,960  |                               | $          | 9,700,147                                                                                  |       | $ | 3,196,418 |   | $ | 6,929,587 |   |

 

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Footnotes:
| (1)    |   | Represents  the SERP enhancement provided in Mr. Tansky’s employment agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    |   | Represents  the estimated present value of amounts payable to Mr. Tansky’s  beneficiaries upon his death: A lump sum payment of 85% of Mr. Tansky’s  base salary provided pursuant to his employment contract (see “*Employment and Other Compensation Agreements”* on  page 65 of this section); a lump sum basic life insurance benefits  payment of $1,000,000 payable by the Company’s life insurance provider, and a  lump sum amount payable under the Cash Incentive Plan, more fully described  on page 68 of this Section.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    |   | Represents  a lump sum payment of 85% of Mr. Tansky’s base salary provided pursuant  to his employment contract (see “*Employment and Other  Compensation Agreements”* on page 65 of this section) and  $20,000 per month payable for 12 months pursuant to the terms and conditions  of the Company’s long-term disability plan provider.                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    |   | Represents  a lump sum payment of three times base salary in effect at the time of  termination, 85% percent of base salary in effect at the time of termination,  and three times 85% of base salary provided pursuant to his employment  contract (see “*Employment and Other Compensation  Agreements”* on page 65 of this section). The amount included  for health and welfare benefits represents a continuation of COBRA benefits  for a period of three years. Calculations were based on COBRA rates currently  in effect. The amount included for life insurance represents coverage for a  period of three years at the same benefit level in effect at the time of  termination. See “*Employment and Other  Compensation Agreements”* on page 65 of this section. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)    |   | Represents  a lump sum amount payable under the Cash Incentive Plan, more fully described  on page 68 of this section and life insurance coverage for a period of  three years at the same benefit level in effect at the time of termination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)    |   | Represents  a lump sum payment of 85% of base salary in effect at the time of  termination, two times base salary, and two times 85% of base salary provided  pursuant to his employment contract (see “*Employment and Other  Compensation Agreements”* on page 65 of this section). The  amount included for life insurance represents coverage for a period of three  years at the same benefit level in effect at the time of termination. The  amount included for health and welfare benefits represents a continuation of  COBRA benefits for a period of three years. Calculations were based on COBRA  rates currently in effect.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (7)    |   | In  addition, Mr. Tansky may become entitled to receive a portion (ranging  from, as of August 1, 2009, 75% to 100%, depending on the reason for the  separation from service) of the Cash Incentive Plan Payment indicated under  the column entitled “Change in Control” if his employment is terminated for  any reason other than Cause, and, subsequent to such termination, a change in  control or an initial public offering meeting certain conditions occurs.                                                                                                                                                                                                                                                                                                                  |

 

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Mr. Tansky would beentitled to the intrinsic value of all unvested equity incentive awards, whichwould become vested upon his death, disability, or change in control.  The value of the common stock at the end ofthe fiscal year 2009 is lower than the exercise price of his unvested awards.

 

**Karen W. Katz**

 
| **Executive  Benefits  and Payments Upon Separation** | ** ** | **Termination  due to  death  ($)(1)** | ** ** | **Termination  due to  disability  ($)(2)** | ** ** | **Termination  without cause  or   for good  reason  ($)(3)** | ** ** | **Change  in  Control  ($)(4)** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            |       |                                   |       |                                        |       |                                                          |       |                            |       |
| **Compensation:**                                     |       |                                   |       |                                        |       |                                                          |       |                            |       |
| Severance                                             |       | $                                      | —     |                                        | $          | —                                                        |       | $                               | 2,468,400  |   | $ | — |   |
| Bonus                                                 |       | 673,200                                |       | 673,200                                     |       | 1,346,400                                                     |       | —                          |       |
| Stock Options                                         |       | —                                 |       | —                                      |       | —                                                        |       | —                          |       |
|                                                  |       |                                   |       |                                        |       |                                                          |       |                            |       |
| **Benefits &  Perquisites:**                 |       |                                   |       |                                        |       |                                                          |       |                            |       |
| Retirement Plans                                      |       | —                                 |       | —                                      |       | —                                                        |       | —                          |       |
| Deferred Compensation Plan                            |       | 912,585                                |       | 912,585                                     |       | 912,585                                                       |       | 912,585                         |       |
| Cash Incentive Plan Payment                           |       | —                                 |       | —                                      |       | —                                                        |       | 2,191,263                       |       |
| Long-Term Disability                                  |       | —                                 |       | 240,000                                     |       | —                                                        |       | —                          |       |
| Health and Welfare Benefits                           |       | —                                 |       | —                                      |       | 34,568                                                        |       | 34,568                          |       |
| Life Insurance Benefits                               |       | 1,000,000                              |       | —                                      |       | 5,659                                                         |       | 5,659                           |       |
| **Total**                                             |       | $                                      | 2,585,785  |                                        | $          | 1,825,785                                                     |       | $                               | 4,767,612  |   | $ | 3,144,075 |   |

 

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Footnotes:
| (1)    |   | Represents  Ms. Katz’ target bonus, a lump sum payout under the deferred  compensation plan, and a lump sum basic life insurance benefit payment of  $1,000,000 payable by the Company’s life insurance provider to Ms. Katz’  beneficiaries upon her death.                                                                                                                                                                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Represents  Ms. Katz’ target bonus, lump sum payout under the deferred compensation  plan, and long-term disability payments of $20,000 per month for twelve  months payable from the Company’s long-term disability insurance provider.                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    |   | Represents  a lump sum payment of the target bonus and two times base salary, two times  target bonus and a lump sum payout under the deferred compensation plan. The  amount included for health and welfare benefits represents a continuation of  COBRA benefits for a period of two years. Calculations were based on COBRA  rates currently in effect. The amount included for life insurance represents  coverage for a period of two years at the same benefit level in effect at the  time of termination. See “*Employment and Other  Compensation Agreements”* on page 65 of this section. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (4)    |   | Represents  a lump sum payout under the deferred compensation plan and a lump sum amount  payable under the Cash Incentive Plan, more fully described on page 68  of this section. The amount included for life insurance represents coverage for  a period of two years at the same benefit level in effect at the time of  termination.                                                                                                                                                                                                                                                                      |

 

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| **Executive  Benefits and  Payments Upon Separation** | ** ** | **Termination  due to  death  ($)(1)(5)** | ** ** | **Termination  due to  disability  ($)(1)(2)** | ** ** | **Termination  without cause  or for  good reason  ($)(3)** | ** ** | **Change  in  Control  ($)(1)(4)** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------|------------|
| **JAMES E.  SKINNER**                                 |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **Compensation:**                                     |       |                                      |       |                                           |       |                                                        |       |                               |       |
| Severance                                             |       | $                                         | —     |                                           | $          | —                                                      |       | $                                  | 943,200    |   | $ | — |   |
|                                                  |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **Benefits &  Perquisites:**                 |       |                                      |       |                                           |       |                                                        |       |                               |       |
| Retirement Plans                                      |       | 78,354                                    |       | 78,354                                         |       | 78,354                                                      |       | 78,354                             |       |
| Deferred Compensation Plan                            |       | 279,175                                   |       | 279,175                                        |       | 279,175                                                     |       | 279,175                            |       |
| Cash Incentive Plan Payment                           |       | —                                    |       | —                                         |       | —                                                      |       | 1,095,631                          |       |
| Long-Term Disability                                  |       | —                                    |       | 240,000                                        |       | —                                                      |       | —                             |       |
| Health and Welfare Benefits                           |       | —                                    |       | —                                         |       | 26,394                                                      |       | —                             |       |
| Life Insurance Benefits                               |       | —                                    |       | —                                         |       | —                                                      |       | —                             |       |
| **Total James E. Skinner**                            |       | $                                         | 357,529    |                                           | $          | 597,529                                                     |       | $                                  | 1,327,123  |   | $ | 1,453,160 |   |
| ** **                                            |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **JAMES J. GOLD**                                     |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **Compensation:**                                     |       |                                      |       |                                           |       |                                                        |       |                               |       |
| Severance                                             |       | $                                         | —     |                                           | $          | —                                                      |       | $                                  | 748,800    |   | $ | — |   |
| ** **                                            |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **Benefits &  Perquisites:**                 |       |                                      |       |                                           |       |                                                        |       |                               |       |
| Retirement Plans                                      |       | 131,826                                   |       | 131,826                                        |       | 131,826                                                     |       | 131,826                            |       |
| Cash Incentive Plan Payment                           |       | —                                    |       | —                                         |       | —                                                      |       | 1,095,631                          |       |
| Long-Term Disability                                  |       | —                                    |       | 240,000                                        |       | —                                                      |       | —                             |       |
| Health and Welfare Benefits                           |       | —                                    |       | —                                         |       | 34,422                                                      |       | —                             |       |
| Life Insurance Benefits                               |       | —                                    |       | —                                         |       | —                                                      |       | —                             |       |
| **Total James J. Gold**                               |       | $                                         | 131,826    |                                           | $          | 371,826                                                     |       | $                                  | 915,048    |   | $ | 1,227,457 |   |
| ** **                                            |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **GERALD A. BARNES**                                  |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **Compensation:**                                     |       |                                      |       |                                           |       |                                                        |       |                               |       |
| Severance                                             |       | $                                         | —     |                                           | $          | —                                                      |       | $                                  | 637,500    |   | $ | — |   |
| ** **                                            |       |                                      |       |                                           |       |                                                        |       |                               |       |
| **Benefits &  Perquisites:**                 |       |                                      |       |                                           |       |                                                        |       |                               |       |
| Retirement Plans                                      |       | —                                    |       | —                                         |       | —                                                      |       | —                             |       |
| Deferred Compensation Plan                            |       | 35,942                                    |       | 35,942                                         |       | 35,942                                                      |       | 35,942                             |       |
| Cash Incentive Plan Payment                           |       | —                                    |       | —                                         |       | —                                                      |       | 219,133                            |       |
| Long-Term Disability                                  |       | —                                    |       | 240,000                                        |       | —                                                      |       | —                             |       |
| Health and Welfare Benefits                           |       | —                                    |       | —                                         |       | 34,422                                                      |       | —                             |       |
| Life Insurance Benefits                               |       | —                                    |       | —                                         |       | —                                                      |       | —                             |       |
| **Total Gerald A. Barnes**                            |       | $                                         | 35,942     |                                           | $          | 275,942                                                     |       | $                                  | 707,864    |   | $ | 255,075 |   |

 

----

Footnotes:
| (1)    |   | Represents  a lump sum payout under the deferred compensation plans. See *“Nonqualified Deferred Compensation”* on page 64 of  this section.                                                                                                                                                                                                                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (2)    |   | Represents  long-term disability payments of $20,000 per month for twelve months payable  from the Company’s long-term disability insurance provider.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (3)    |   | Represents  a lump sum payment of one and one-half times base salary for each of  Messrs. Skinner, Gold, and Barnes. The amount included for health and  welfare benefits represents a continuation of COBRA benefits for a period of  eighteen months. Calculations were based on COBRA rates currently in effect.  See “*Employment and Other Compensation Agreements”*on  page 65 of this section. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (4)    |   | Represents  a lump sum payments payable under the Cash Incentive Plan more fully  described on page 68 of this section.                                                                                                                                                                                                                                                                                              |

 

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**DIRECTORCOMPENSATION**

 

None of our directorsreceive compensation for their service as a member of our board.  They are reimbursed for any expenses incurredas a result of their service.  As anemployee director, Mr. Tansky receives no compensation for his service asa board member.  We offer to each of ourdirectors a discount at our stores at the same rate that is available to ouremployees.

 

In connection with theAcquisition, affiliates of the Sponsors receive an annual management fee equalto the lesser of (i) 0.25% of consolidated annual revenue, and (ii) $10million for consulting and management advisory services they provide tous.  See discussion on “*Management Services Agreement”*on page 76 of thissection.

 
| **ITEM  12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|---------------|------------|-----------------------------------------------------------------------------------------------------|

 

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

 

The following table setsforth information regarding equity compensation plans approved by shareholdersand equity compensation plans not approved by shareholders as of August 1,2009.

 
| **Plan Category**                                           | ** ** | **Number of  securities to be  issued upon exercise  of outstanding options,  warrants and  rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants,  and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                              | ** ** | **(b)**                                                                              | ** ** | **(c)**                                                                                                                                               | ** ** |
| Equity compensation plans approved by security  holders     |       | 79,399                                                                                               | (1)        | $                                                                                    | 1,585      |                                                                                                                                                  | 7,160      |   |
|                                                        |       |                                                                                                 |       |                                                                                 |       |                                                                                                                                                  |       |
| Equity compensation plans not approved by security  holders |       | —                                                                                               |       | —                                                                               |       | —                                                                                                                                                |       |
|                                                        |       |                                                                                                 |       |                                                                                 |       |                                                                                                                                                  |       |
| Total                                                       |       | 79,399                                                                                               |       | $                                                                                    | 1,585      |                                                                                                                                                  | 7,160      |   |

 

----

| (1) |   | This  number represents options issuable under the Management Incentive Plan that  was approved by a majority of the shares of common stock of Neiman  Marcus, Inc. on November 29, 2005. The Plan became effective on  November 29, 2005 and will expire on November 29, 2015. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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** **

**SecurityOwnership of Certain Beneficial Owners and Management**

 

The following table setsforth, as of October 1, 2009, the beneficial ownership of each personknown to us to own more than 5% of our common stock, each of our directors,each named executive officer listed in the Summary Compensation Table, and allour directors and executive officers as a group.

 
| **Name of Beneficial Owner**            | ** ** | **Amount and  Nature of  Beneficial  Ownership  (Common Stock)** | ** ** | **Options Currently  Exercisable  or Exercisable  within 60 days** | ** ** | **Total  Stock and  Stock Based  Holdings** | ** ** | **Percent  of Class  (1)** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------|------------|
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **Newton Holding, LLC**                 |       | 1,000,000                                                        |       | —                                                             |       | 1,000,000                                   |       | 98.71                      | %          |
| 301 Commerce Street                     |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| Suite 3300                         |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| Fort Worth, Texas76102                  |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **Affiliates of TPG Capital,  L.P.(2)** |       | 1,000,000                                                        |       | —                                                             |       | 1,000,000                                   |       | 98.71                      | %          |
| 301 Commerce Street                     |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| Suite 3300                         |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| Fort Worth, Texas76102                  |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **Affiliates of Warburg Pincus,**       |       | 1,000,000                                                        |       | —                                                             |       | 1,000,000                                   |       | 98.71                      | %          |
| **LLC(3)**                              |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| 466 Lexington Avenue                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| New York, NY10017                       |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **David A. Barr(4)**                    |       | 1,000,000                                                        |       | —                                                             |       | 1,000,000                                   |       | 98.71                      | %          |
| 466 Lexington Avenue                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| New York, NY10017                       |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **James Coulter(2)**                    |       | 1,000,000                                                        |       | —                                                             |       | 1,000,000                                   |       | 98.71                      | %          |
| 345 California Street, Suite 3300  |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| San Francisco, CA94104                  |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **Sidney Lapidus(4)**                   |       | 1,000,000                                                        |       | —                                                             |       | 1,000,000                                   |       | 98.71                      | %          |
| 466 Lexington Avenue                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| New York, NY10017                       |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **Kewsong Lee(4)**                      |       | 1,000,000                                                        |       | —                                                             |       | 1,000,000                                   |       | 98.71                      | %          |
| 466 Lexington Avenue                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| New York, NY10017                       |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **Burton M. Tansky (5)**                |       | 1,506                                                            |       | 23,054                                                             |       | 24,560                                      |       | 2.37                       | %          |
| 1618 Main Street                        |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| Dallas, TX75201                         |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **Karen W. Katz (6)**                   |       | 4,027                                                            |       | 8,724                                                              |       | 12,751                                      |       | 1.25                       | %          |
| 1618 Main Street                        |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| Dallas, TX75201                         |       |                                                             |       |                                                               |       |                                        |       |                       |       |
|                                    |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| **James E. Skinner**                    |       | 2,107                                                            |       | 4,362                                                              |       | 6,469                                       |       | *                          |       |
| 1618 Main Street                        |       |                                                             |       |                                                               |       |                                        |       |                       |       |
| Dallas, TX75201                         |       |                                                             |       |                                                               |       |                                        |       |                       |       |

 

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| **Name of Beneficial Owner**            | ** ** | **Amount  and  Nature of  Beneficial  Ownership  (Common Stock)** | ** ** | **Options  Currently  Exercisable  or Exercisable  within 60 days** | ** ** | **Total  Stock and  Stock Based  Holdings** | ** ** | **Percent  of Class  (1)** |   |
|-----------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------|--------|
|                                    |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| **Gerald A. Barnes**                    |       | 50                                                                |       | 872                                                                 |       | 922                                         |       | *                          |   |
| 1618 Main Street                        |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| Dallas, TX75201                         |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| ** **                              |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| **James J. Gold**                       |       | 902                                                               |       | 4,362                                                               |       | 5,264                                       |       | *                          |   |
| 754 Fifth Avenue                        |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| New York, NY10019                       |       |                                                              |       |                                                                |       |                                        |       |                       |   |
|                                    |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| **Jonathan Coslet(2)**                  |       | —                                                            |       | —                                                              |       | —                                      |       | *                          |   |
| 345 California Street                   |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| Suite 3300                         |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| San Francisco, CA94104                  |       |                                                              |       |                                                                |       |                                        |       |                       |   |
|                                    |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| **John G. Danhakl**                     |       | —                                                            |       | —                                                              |       | —                                      |       | *                          |   |
| 11111 Santa Monica Boulevard            |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| Suite 2000                         |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| Los Angeles, CA90025                    |       |                                                              |       |                                                                |       |                                        |       |                       |   |
|                                    |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| **Carrie Wheeler(2)**                   |       | —                                                            |       | —                                                              |       | —                                      |       | *                          |   |
| 345 California Street                   |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| Suite 3300                         |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| San Francisco, CA94104                  |       |                                                              |       |                                                                |       |                                        |       |                       |   |
|                                    |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| **All current executive officers  and** |       | 1,009,038                                                         |       | 47,437                                                              |       | 1,056,475                                   |       | 99.60                      | %      |
| **directors as a group**                |       |                                                              |       |                                                                |       |                                        |       |                       |   |
| **(16 persons)**                        |       |                                                              |       |                                                                |       |                                        |       |                       |   |

 

----

*  Representsless than 1% of the class.

 

Footnotes:
| (1)    |   | Percentage  of class beneficially owned is based on 1,013,082 common shares outstanding  as of September 18, 2009, together with the applicable options to  purchase common shares for each shareholder exercisable on September 18,  2009 or within 60 days thereafter. Shares issuable upon the exercise of  options currently exercisable or exercisable 60 days after September 18,  2009 are deemed outstanding for computing the percentage ownership of the  person holding the options, but are not deemed outstanding for computing the  percentage of any other person. The amounts and percentages of common stock  beneficially owned are reported on the basis of regulations of the SEC  governing the determination of beneficial ownership of securities. Under the  rules of the SEC, a person is deemed to be a “beneficial owner” of a  security if that person has or shares “voting power,” which includes the  power to vote or to direct the voting of such security, or “investment  power,” which includes the power to dispose of or to direct the disposition  of such security. A person is also deemed to be a beneficial owner of any  securities of which that person has a right to acquire beneficial ownership  within 60 days. Under these rules, more than one person may be deemed to be a  beneficial owner of such securities as to which such person has voting or  investment power. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (2)    |   | Includes  the 1,000,000 shares owned by Newton Holding, LLC over which TPG Partners IV,  L.P., TPG Newton III, LLC and TPG Newton Co-Invest I, LLC (the “TPG  Entities”) may be deemed, as a result of their ownership of 41.52% of Newton  Holding, LLC’s total outstanding shares and certain provisions under the  Newton Holding, LLC operating agreement, to have shared voting or dispositive  power. David Bonderman and James G. Coulter are directors, officers and sole  shareholders of each of i) TPG Advisors III, Inc., which is the general  partner of TPG GenPar III, L.P., which is general partner of TPG Partners III,  L.P. which in turn is the managing member of TPG Newton III, LLC; and ii) TPG  Advisors IV, Inc., which is the general partner of TPG GenPar IV, L.P.,  which in turn is a) the general partner of TPG Partners IV, L.P. and b) the  managing member of TPG Newton Co-Invest I, LLC. By virtue of their position  in relation to the TPG Entities, Mr. Bonderman and Mr. Coulter may  be deemed to have investment powers and beneficial ownership with respect to  the securities described herein. Neither Mr. Coslet nor Ms. Wheeler  has voting or dispositive power over any of the shares of common stock that  may be deemed to be beneficially owned by TPG Capital, L.P.                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)    |   | Includes  the 1,000,000 shares owned by Newton Holding, LLC over which Warburg Pincus  Private Equity VIII, L.P., Warburg Pincus Netherlands Private Equity VIII,  C.V. I, Warburg Pincus Germany Private Equity VIII K. G.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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|   |   | (collectively,  “WP VIII”) and Warburg Pincus Private Equity IX, L.P. (“WP IX”) may be  deemed, as a result of their ownership of 43.25% of Newton Holding, LLC’s  total outstanding shares and certain provisions under the Newton Holding, LLC  operating agreement, to have shared voting or dispositive power. Warburg  Pincus Partners, LLC, a direct subsidiary of Warburg Pincus & Co.  (“WP”), is the general partner of WP VIII. Warburg Pincus IX, LLC, an  indirect subsidiary of WP, is the general partner of WP IX. Warburg Pincus  LLC (“WP LLC”) is the manager of each of WP VIII and WP IX. WP and WP LLC may  be deemed to beneficially own all of the shares of common stock owned by WP  VIII and WP IX. Messrs. Barr, Lapidus, and Lee disclaim beneficial  ownership of all of the shares of common stock owned by the Warburg Pincus  entities. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (4)    |   | Messrs. Barr and Lee, as partners of WP and managing directors  and members of WP LLC, may be deemed to beneficially own all of the shares of  common stock beneficially owned by the Warburg Pincus entities.  Messrs. Barr and Lee disclaim any beneficial ownership of these shares  of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (5)    |   | Includes  1,506 shares held for the benefit of a family trust of which Mr. Tansky  disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (6)    |   | Includes  944 shares held for the benefit of a family trust of which Ms. Katz  disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

 
| **ITEM  13.** | ** ** | **CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE** |
|---------------|------------|--------------------------------------------------------------------------------|

 

Our board of directors has adopted a writtenrelated-person transactions policy that sets forth our policies and proceduresregarding the identification, review, consideration and approval orratification of “related-person transactions.” For purposes of our policy only, a “related-person transaction “ is anytransaction, including any financial transaction, arrangement or relationship(or any series of similar transactions, arrangements or relationships), inwhich we and any “related person” are, were or will be participants involvingan amount that exceeds $120,000.  Certaintransactions, including transactions involving compensation for servicesprovided to us as an employee, director or consultant by a related person andtransactions in which rates or charges are determined by competitive bid, arenot covered by this policy.  A relatedperson is any executive officer, director or nominee for director, or more than5% stockholder of our company, including any of their immediate family members,and any entity owned or controlled by such persons.

 

The Board has determined that the Company’s Audit Committee is bestsuited to review and approve any related-person transaction and any materialamendments thereto, although the Board may instead determine that a particular transaction (or amendment thereto) should bereviewed and approved by a majority of directors disinterested from thetransaction. In the event a member of the Audit Committee has an interest inthe proposed transaction, the relevant member must recuse himself or herselffrom the deliberations and approval.  Thepolicy requires that, in determining whether to approve, ratify or reject arelated-person transaction, the Audit Committee satisfy itself that it has beenfully informed as to the related person’s relationship and interest in thetransaction (or amendment thereto) and the material facts thereof, and mustdetermine must look at, in light of known circumstances, whether thetransaction is, or is not, consistent with the best interests of our companyand our Sponsors, as the Audit Committee determines in the good faith exerciseof its discretion.

 

Typically, in considering related-person transactions, the AuditCommittee takes into account the relevant available facts and circumstancesincluding, but not limited to (a) the risks, costs and benefits to us, (b) theterms of the transaction, (c) the availability of other sources forcomparable services or products and (d) the terms available to or from, asthe case may be, unrelated third parties or to or from employees generally.

 

***RelatedPerson Transactions***

 

**Newton Holding, LLC LimitedLiability Company Operating Agreement**

 

The investment funds associated with or designated by a Sponsor(Sponsor Funds) and certain investors who agreed to co-invest with the SponsorFunds or through a vehicle jointly controlled by the Sponsors to provide equityfinancing for the Acquisition (Co-Investors), entered into a limited liabilitycompany operating agreement in respect of our parent company, Newton Holding,LLC (the “LLC Agreement”).  The LLCAgreement contains agreements among the parties with respect to the election ofour directors and the directors of our parent companies, restrictions on theissuance or transfer of interests in us, including tag-along rights anddrag-along rights, and other corporate governance provisions (including theright to approve various corporate actions).

 

Pursuant to the LLC Agreement, each of TPG Capital, L.P. and WarburgPincus has the right, which is freely assignable to other members or indirectmembers, to nominate four directors, and TPG Capital, L.P. and Warburg Pincusare

 

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entitled tojointly nominate additional directors. The rights of TPG Capital, L.P. and Warburg Pincus to nominate directorsare subject to their ownership percentages in Newton Holding, LLC remainingabove a specified percentage of their initial ownership percentage.  Each of the Sponsors has the right to have atleast one of its directors sit on each committee of the Board of Directors, tothe extent permitted by applicable laws and regulations.

 

The Sponsors haveassigned the right to appoint one of our directors to investment funds that areaffiliates of Credit Suisse Securities (USA) LLC and the right to appoint oneof our directors to investment funds associated with Leonard Green Partners.

 

For purposes of any boardaction, each director nominated by TPG Capital, L.P. or Warburg Pincus hasthree votes and each of the other directors (including any jointly nominateddirectors and the directors nominated by investment funds that are affiliatesof Credit Suisse Securities (USA) LLC and Leonard Green Partners) has onevote.  Certain major decisions of theboard of directors of Newton Holding, LLC require the approval of each of TPGCapital, L.P. and Warburg Pincus and certain other decisions of the board ofdirectors of Newton Holding, LLC require the approval of a specified number ofdirectors designated by each of TPG Capital, L.P. and Warburg Pincus, in eachcase subject to the requirement that their respective ownership percentage inNewton Holding, LLC remains above a specified percentage of their initialownership percentage.

 

**Registration Rights Agreement**

 

The Sponsor Funds and theCo-Investors entered into a registration rights agreement with us uponcompletion of the Acquisition.  Pursuantto this agreement, the Sponsor Funds can cause us to register their interestsin NMG under the Securities Act and to maintain a shelf registration statementeffective with respect to such interests. The Sponsor Funds and the Co-Investors are also entitled to participateon a pro rata basis in any registration of our equity interests under theSecurities Act that we may undertake.

 

**Management Services Agreement**

 

In connection with theAcquisition, we entered into a management services agreement with affiliates ofthe Sponsors pursuant to which affiliates of one of the Sponsors received onthe closing date of the Acquisition a transaction fee of $25 million in cash inconnection with the Acquisition. Affiliates of the other Sponsor waived any cash transaction fee inconnection with the Acquisition.  Inaddition, pursuant to such agreement, and in exchange for consulting andmanagement advisory services that will be provided to us by the Sponsors andtheir affiliates, affiliates of the Sponsors will receive an aggregate annualmanagement fee equal to the lesser of (i) 0.25% of consolidated annualrevenue and (ii) $10 million.  Also,affiliates of the Sponsors are entitled to receive reimbursement forout-of-pocket expenses incurred by them or their affiliates in connection withthe provision of services pursuant to the agreement.  The management services agreement alsoprovides that affiliates of the Sponsors may receive fees in connection withcertain subsequent financing and acquisition or disposition transactions.  The management services agreement includescustomary exculpation and indemnification provisions in favor of the Sponsorsand their affiliates.

 

**CertainCharter and Bylaws Provisions**

 

Our amended and restated certificate of incorporation and our amendedand restated bylaws contain provisions limiting directors’ obligations inrespect of corporate opportunities.  Inaddition, our amended and restated certificate of incorporation provides that Section 203of the Delaware General Corporation Law will not apply to the Company.  Section 203 restricts “businesscombinations” between a corporation and “interested stockholders,” generallydefined as stockholders owning 15% or more of the voting stock of acorporation.

 

**ManagementStockholders’ Agreement**

 

Subjectto the Management Stockholders’ Agreement, certain members of management,including Burton M. Tansky, Karen W. Katz, James E. Skinner, James J. Gold, andGerald A. Barnes along with 22 other members of management, elected to investin the Company by contributing cash or equity interests in NMG, or acombination of both, to the Company prior to the merger and receiving equityinterests in the Company in exchange therefor immediately after completion ofthe merger pursuant to rollover agreements with NMG and the Company enteredinto prior to the effectiveness of the merger. The aggregate amount of this investment was approximately $25.6 million.  The Management Stockholders’ Agreementcreates certain rights and restrictions on these equity interests, includingtransfer restrictions and tag-along, drag-along, put, call, and registrationrights in certain circumstances.

 

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**DirectorIndependence**

 

Becauseall of our directors, except Mr. Tansky, who is an employee of theCompany, are employees of our Sponsors, none of our directors can be consideredindependent under the independence standards of the New York Stock Exchange.

 
| **ITEM  14.** | ** ** | **PRINCIPAL ACCOUNTING FEES AND  SERVICES** |
|---------------|------------|---------------------------------------------|

 

The Audit Committee hasadopted policies and procedures for pre-approving all audit and permissiblenon-audit services performed by our independent registered public accountingfirm. Under these policies, the Audit Committee pre-approves the use of auditand audit-related services following approval of the independent registeredpublic accounting firm’s audit plan. All services detailed in the audit planare considered pre-approved. If, during the course of the audit, theindependent registered public accounting firm expects fees to exceed theapproved fee estimate between 10 percent and 15 percent, those feesmust be pre-approved in advance by the Audit Committee Chairman. If fees areexpected to exceed the approved estimate by more than 15 percent, thosefees must be approved in advance by the Audit Committee.

 

Other non-audit services ofless than $50,000 that are not restricted services may be pre-approved by boththe chief financial officer and the controller, provided those services willnot impair the independence of the independent auditor. These services will beconsidered approved by the Audit Committee, provided those projects arediscussed with the Audit Committee at its next scheduled meeting. Servicesbetween $50,000 and $100,000 in estimated fees must be pre-approved by theChairman of the Audit Committee, acting on behalf of the entire AuditCommittee. Services of greater than $100,000 in estimated fees must bepre-approved by the Audit Committee. All fee overruns will be discussed withthe Audit Committee at the next scheduled meeting.

 

**Principal Accounting Feesand Services**

 

***Audit Fees.***  Theaggregate fees billed for the audits of the Company’s annual financialstatements for the fiscal years ended August 1, 2009 and August 2,2008 and for the reviews of the financial statements included in our QuarterlyReports on Form 10-Q were $1,766,000 and $1,446,000, respectively.

 

***Audit-Related Fees.***  The aggregate fees billed for audit-relatedservices for the fiscal years ended August 1, 2009 and August 2, 2008were $100,000 and $171,000, respectively. These fees related to accounting researchand consultation and attestation services for certain subsidiary companies forthe fiscal years ended August 1, 2009 and August 2, 2008.

 

***Tax Fees.***  Theaggregate fees billed for tax services for the fiscal years ended August 1,2009 and August 2, 2008 were $84,000 and $192,000, respectively. Thesefees are related to tax compliance and planning.

 

The Audit Committee hasconsidered and concluded that the provision of permissible non-audit servicesis compatible with maintaining our independent registered public accountingfirm’s independence.

 

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**PART IV**

 

**ITEM 15. EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES**

 

The following documents arefiled as part of this report.

 

**1.****                                     ****Financial Statements**

 

The list of financialstatements required by this item is set forth in Item 8.

 

**2.****                                     ****Index to Financial Statement Schedules**

 
| ** **                                                            | ** ** | **Page  Number** | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|
| Report of  Independent Registered Public Accounting Firm              |       | F-3              |       |
| Schedule II—Valuation  and Qualifying Accounts and Reserves |       | 85               |       |

 

All other financialstatement schedules for which provision is made in the applicable accountingregulations of the Securities and Exchange Commission are not required underthe related instructions or are not applicable.

 

**3.****                                     ****Exhibits**

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1                  |       | Agreement  and Plan of Merger, dated May 1, 2005, among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and Newton Merger  Sub, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2                  |       | Purchase,  Sale and Servicing Transfer Agreement dated as of June 8, 2005, among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A. and HSBC Finance Corporation, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1                  |       | Amended  and Restated Certificate of Incorporation of Neiman Marcus, Inc.,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Registration Statement on Form S-1 (Registration No. 333-133184)  dated April 10, 2006.                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2                  |       | Amended  and Restated Bylaws of Neiman Marcus, Inc., incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Registration Statement on  Form S-1 (Registration No. 333-133184) dated April 10, 2006.                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1                  |       | Indenture,  dated as of May 27, 1998, between The Neiman Marcus Group, Inc. and  The Bank of New York, as trustee. (1)                                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2                  |       | Form of  7.125% Senior Notes Due 2028, dated May 27, 1998. (1)                                                                                                                                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3                  |       | Senior  Indenture dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4                  |       | Senior  Subordinated Indenture dated as of October 6, 2005, among Newton Acquisition, Inc.,  Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and  Wells Fargo Bank, National Association, trustee, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.5                  |       | Form of  9%/9 3/4% Senior Notes due 2015, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                    |

 

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| 4.6    |   | Form of  10 3/8% Senior Subordinated Notes due 2015, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7    |   | Registration  Rights Agreement dated October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial  Purchasers, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8    |   | First  Supplemental Indenture, dated as of July 11, 2006, to the Indenture,  dated as of May 27, 1998, among The Neiman Marcus Group, Inc.,  Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as  successor trustee, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated July 11, 2006.                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.9    |   | Second  Supplemental Indenture, dated as of August 14, 2006, to the Indenture,  dated as of May 27, 1998, among The Neiman Marcus Group, Inc.,  Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as  successor trustee, incorporated herein by reference to the Company’s Current  Report on Form 8-K dated August 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1*  |   | Employment  Agreement dated as of October 6, 2005 by and among The Neiman Marcus  Group, Inc., Newton Acquisition Merger Sub, Inc., Newton  Acquisition, Inc., and Burton M. Tansky. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2*  |   | First  Amendment to Employment Agreement by and between The Neiman Marcus  Group, Inc., a Delaware corporation, Neiman Marcus, Inc., a  Delaware corporation, and Burton M. Tansky effective December 21, 2007  incorporated herein by reference to the Neiman Marcus, Inc.’s Current  Report on Form 8-K dated December 21, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3*  |   | Second  Amendment to Employment Agreement by and between The Neiman Marcus  Group, Inc., a Delaware corporation, Neiman Marcus, Inc., a  Delaware corporation, and Burton M. Tansky effective January 1, 2009  incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4*  |   | Rollover  Agreement dated as of October 4, 2005 by and among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and Burton M. Tansky. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5*  |   | Amendment  to Letter Agreement effective as of January 1, 2009 by and between  Neiman Marcus, Inc., a Delaware corporation, and Burton M. Tansky  incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6*  |   | Form of  Rollover Agreement by and among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., and certain members of management. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7   |   | Amended  and Restated Credit Agreement dated as of July 15, 2009, among The  Neiman Marcus Group, Inc., the Company, the other borrowers and  guarantors named therein, Bank of America, N.A., as administrative agent and  co-collateral agent, Wells Fargo Retail Finance, LLC as co-collateral agent,  Banc of America Securities LLC, Wells Fargo Retail Finance, LLC, J.P. Morgan  Securities Inc. and Regions Business Capital Corporation as joint lead  arrangers and joint bookrunners, Wells Fargo Retail Finance, LLC as  syndication agent, JPMorgan Chase Bank, N.A. and Regions Bank as  co-documentation agents and the lenders thereunder, incorporated herein by  reference to Neiman Marcus, Inc.’s Current Report on Form 8-K dated  July 16, 2009. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8   |   | Credit  Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Credit Suisse, as  administrative agent and collateral agent, Credit Suisse and Deutsche Bank  Securities Inc. as joint lead arrangers, Banc of America Securities LLC and  Goldman Sachs Credit Partners L.P. as co-arrangers, Credit Suisse, Deutsche  Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as joint bookrunners, Deutsche Bank Securities Inc., Banc of  America Securities LLC and Goldman Sachs Credit Partners L.P. as  co-syndication agents and the lenders thereunder. (1) (2)                                                  |

 

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| 10.9   |   | Amended  and Restated Pledge and Security Agreement dated as of July 15, 2009 by  and among The Neiman Marcus Group, Inc., the Company, subsidiaries named  therein and Bank of America, N.A., as administrative agent and co-collateral  agent, incorporated herein by reference to Neiman Marcus, Inc.’s Current  Report on Form 8-K dated July 16, 2009.                                                                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10  |   | Substitution  of Agent and Joinder Agreement, dated as of July 15, 2009, among  Deutsche Bank Trust Company Americas, Credit Suisse and Bank of America,  N.A., incorporated herein by reference to Neiman Marcus, Inc.’s Current  Report on Form 8-K dated July 16, 2009.                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | Pledge  and Security and Intercreditor Agreement dated as of October 6, 2005,  among Newton Acquisition Merger Sub, Inc., The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., the Subsidiary Guarantors  and Credit Suisse, as administrative agent and collateral agent. (1)                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12  |   | Lien  Subordination and Intercreditor Agreement dated as of October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc.,  the Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as revolving  facility agent, and Credit Suisse, as term loan agent, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13  |   | Form of  First Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from The Neiman Marcus Group, Inc. to Credit  Suisse, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14  |   | Form of  First Priority Leasehold Mortgage, Assignment of Leases and Rents, Security  Agreement and Financing Statement from The Neiman Marcus Group, Inc. to  Credit Suisse, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15  |   | Form of  Second Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from The Neiman Marcus Group, Inc. to Deutsche  Bank Trust Company Americas, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16  |   | Form of  Second Priority Leasehold Mortgage, Assignment of Lease and Rents, Security  Agreement and Financing Statement from The Neiman Marcus Group, Inc. to  Deutsche Bank Trust Company Americas, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17  |   | Amendment  No. 1 dated as of October 6, 2005 to the Credit Agreement dated as  of October 6, 2005 among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc.  from time to time party thereto, the Lenders thereunder, and Credit Suisse,  as administrative agent and as collateral agent for the Lenders, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.18* |   | Newton  Acquisition, Inc. Management Equity Incentive Plan, incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.19* |   | Amendment  to the Newton Acquisition, Inc. Management Equity Incentive Plan  effective as of January 1, 2009 incorporated herein by reference to  Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter  ended January 31, 2009.                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.20* |   | Stock  Option Grant Agreement made as of November 29, 2005 between Newton  Acquisition, Inc. and Burton M. Tansky, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  December 5, 2005.                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.21* |   | Amendment  to the Stock Option Grant Agreement effective as of January 1, 2009 by  and between Neiman Marcus, Inc., a Delaware corporation, and Burton M.  Tansky incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.22* |   | Form of  Stock Option Grant Agreement made as of November 29, 2005 between Newton  Acquisition, Inc. and certain eligible key employees, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s                                                                                                                                                                                                                                                                                                       |

 

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|   |   | Current  Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.23* |   | Amendment  to the Form of Stock Option Grant Agreement effective as of  January 1, 2009 by and between Neiman Marcus, Inc., a Delaware  corporation, and certain eligible key employees incorporated herein by  reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.24  |   | Amendment  No. 2 dated as of January 26, 2006 to the Credit Agreement dated as  of October 6, 2005, as amended, among The Neiman Marcus Group, Inc.,  Newton Acquisition, Inc., each subsidiary of The Neiman Marcus  Group, Inc. from time to time party thereto, the Lenders thereunder and  Credit Suisse, as administrative agent and collateral agent for the Lenders,  incorporated by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated January 30, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.25* |   | Employment  Agreement between The Neiman Marcus Group, Inc. and Karen Katz, dated  February 1, 2006, effective as of October 6, 2005, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated February 1, 2006.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.26* |   | Amendment  to Employment Agreement effective as of January 1, 2009 by and between  The Neiman Marcus Group, Inc., a Delaware corporation, and Karen Katz  incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.27  |   | Management  Services Agreement, dated as of October 6, 2005 among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P.,  TPG GenPar III, L.P. and Warburg Pincus LLC incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 28, 2006.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.28  |   | Registration  Rights Agreement, dated as of October 6, 2005, among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and  the “Holders” identified therein as parties thereto incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Quarterly Report on  Form 10-Q for the quarter ended January 28, 2006.                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.29  |   | Amendment  No. 1, dated as of March 28, 2006, to the Pledge and Security  Intercreditor Agreement dated as of October 6, 2005, among Neiman  Marcus, Inc., The Neiman Marcus Group, Inc., the Subsidiaries party  thereto and Credit Suisse, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated March 29, 2006.                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.30  |   | Credit  Card Program Agreement, dated as of June 8, 2005, by and among The  Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A. and Household Corporation. (1) (2)                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31  |   | Servicing  Agreement by and between The Neiman Marcus Group, Inc. and HSBC Bank  Nevada, N.A. (1) (2)                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.32* |   | Confidentiality,  Non-Competition and Termination Benefits Agreement by and between Bergdorf  Goodman, Inc., a New York corporation and a wholly owned subsidiary of  The Neiman Marcus Group, Inc., and James J. Gold dated May 3, 2004,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.33* |   | Amendment  to the Confidentiality, Non-Competition and Termination Benefits Agreement  effective as of January 1, 2009 by and between Bergdorf  Goodman, Inc., a New York corporation and wholly owned subsidiary of The  Neiman Marcus Group, Inc. and James J. Gold incorporated herein by  reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.34* |   | Form of  Amendment to the Confidentiality, Non-Competition and Termination Benefits  Agreement effective as of January 1, 2009 by and between The Neiman  Marcus Group, Inc., a Delaware corporation, and certain eligible key  employees incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.35  |   | Stockholder  Agreement, dated as of May 1, 2005, among Newton Acquisition, Inc.,  Newton Acquisition Merger Sub, Inc. and the other parties signatory  thereto, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                                                                                                                                                                           |

 

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| 10.36* |   | Neiman  Marcus, Inc. Cash Incentive Plan amended as of January 21, 2008,  incorporated herein by reference to the Neiman Marcus, Inc. Quarterly  Report on Form 10-Q for the quarter ended April 26, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.37  |   | Management  Stockholders’ Agreement dated as of October 6, 2005 between Newton  Acquisition, Inc., Newton Holding, LLC, TPG Newton III, LLC, TPG  Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg Pincus Private Equity  VIII, L.P., Warburg Pincus Netherlands Private Equity VIII C.V. I, Warburg  Pincus Germany Private Equity VIII K.G , Warburg Pincus Private Equity IX,  L.P., and the other parties signatory thereto, incorporated herein by  reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for  the fiscal year ended July 29, 2006.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.38  |   | Amendment  to the Management Stockholders’ Agreement effective as of January 1,  2009 by and between Neiman Marcus, Inc., a Delaware corporation, Newton  Holding, LLC, TPG Newton III, LLC, TPG Partners IV, L.P., TPG Newton  Co-Invest I, LLC, Warburg Pincus Private Equity VIII, L.P., Warburg Pincus  Netherlands Private Equity VIII C.V. I, Warburg Pincus Germany Private Equity  VIII K.G., Warburg Pincus Private Equity IX, L.P., and the other parties  signatory thereto incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.39* |   | The  Neiman Marcus Group, Inc. Key Employee Deferred Compensation Plan  amended and restated effective January 1, 2008, incorporated herein by  reference to the Neiman Marcus, Inc. Quarterly Report on Form 10-Q  for the quarter ended April 26, 2008.                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.40* |   | Amendment  No. 1 effective as of January 1, 2009 to The Neiman Marcus  Group, Inc. Key Employee Deferred Compensation Plan incorporated herein  by reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.41  |   | Amendment  No. 3 dated as of October 12, 2006 to the Credit Agreement dated as  of October 6, 2005 among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from  time to time party thereto, the Lenders thereunder and Credit Suisse, as  administrative agent and collateral agent for the Lenders, incorporated by  reference to Neiman Marcus, Inc.’s Current Report on Form 8-K dated  October 17, 2006.                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.42  |   | Amendment  No. 4 dated as of February 8, 2007 to the Credit Agreement dated as  of October 6, 2005, among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from  time to time party thereto, the lenders thereunder, and Credit Suisse, as  administrative agent and collateral agent for the lenders incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated February 14, 2007.                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.43  |   | The  Neiman Marcus Group, Inc. Supplemental Executive Retirement Plan as  amended and restated effective January 1, 2009 incorporated herein by  reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.44  |   | The  Neiman Marcus Group, Inc. Defined Contribution Supplemental Executive  Retirement Plan, as amended and restated effective as of January 1,  2008, incorporated herein by reference to the Neiman Marcus, Inc. Annual  Report on Form 10-K for the fiscal year ended August 2, 2008.                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.45  |   | Amendment  No. 1 effective January 1, 2009 to the Amended and Restated Neiman  Marcus Group, Inc. Defined Contribution Supplemental Executive  Retirement Plan incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.46  |   | First  Amendment to Credit Card Program Agreement dated as of April 30, 2006 by  and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A., and Household Corporation. (1) (2)                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.47  |   | Second  Amendment to Credit Card Program Agreement dated as of June 28, 2006 by  and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A. and Household Corporation. (1) (2)                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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| 10.48  |   | Third  Amendment to Credit Card Program Agreement dated as of August 1, 2006 by  and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A., and Household Corporation. (1) (2)             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                     |
| 10.49  |   | Fourth  Amendment to Credit Card Program Agreement dated as of April 3, 2007 by  and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A., and HSBC Private Label Corporation. (1) (2)    |
|   |   |                                                                                                                                                                                                                                     |
| 10.50  |   | Fifth  Amendment to Credit Card Program Agreement dated as of March 13, 2007 by  and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A., and HSBC Private Label Corporation. (1)        |
|   |   |                                                                                                                                                                                                                                     |
| 10.51  |   | Sixth  Amendment to Credit Card Program Agreement dated as of July 17, 2007 by  and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A., and HSBC Private Label Corporation. (1) (2)     |
|   |   |                                                                                                                                                                                                                                     |
| 10.52  |   | Seventh  Amendment to Credit Card Program Agreement dated April 21, 2008 by and  among The Neiman Marcus Group, Inc., Bergdorf Goodman, HSBC Private  Label Corporation, and HSBC Bank Nevada, N.A. (1) (2)                    |
|   |   |                                                                                                                                                                                                                                     |
| 10.53  |   | Eighth  Amendment to Credit Card Program Agreement dated as of October 17, 2008  by and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A., and HSBC Private Label Corporation. (1) (2) |
|   |   |                                                                                                                                                                                                                                     |
| 10.54  |   | Ninth  Amendment to Credit Card Program Agreement dated as of December 3, 2008  by and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A., and HSBC Private Label Corporation. (1) (2)  |
|   |   |                                                                                                                                                                                                                                     |
| 10.55  |   | Form of  First Amendment to Second Priority Mortgage, Assignment of Leases and Rents,  Security Agreement and Financing Statement from The Neiman Marcus  Group, Inc. to Bank of America, N.A. (1)                             |
|   |   |                                                                                                                                                                                                                                     |
| 12.1   |   | Computation  of Ratio of Earnings to Fixed Charges. (1)                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                     |
| 14.1   |   | The  Neiman Marcus Group, Inc. Code of Ethics and Conduct. (1)                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                     |
| 14.2   |   | The  Neiman Marcus Group, Inc. Code of Ethics for Financial Professionals.  (1)                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                     |
| 21.1   |   | Subsidiaries  of the Company. (1)                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                     |
| 23.1   |   | Consent  of Ernst & Young LLP. (1)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                     |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (1)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                     |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (1)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                     |
| 32     |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. (1)                                                                                              |

 

----

| (1)    |   | Filed  herewith.                                                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------|
|   |   |                                                                                             |
| (2)    |   | Portions  of these exhibits have been omitted pursuant to a request for confidential  treatment. |
|   |   |                                                                                             |
| *      |   | Current  management contract or compensatory plan or arrangement.                                |

 

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** **

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                             | **Page** |
|------------------------------------------------------------------------|----------|
| Management’s Report on  Internal Control over Financial Reporting | F-2      |
| Report of Independent  Registered Public Accounting Firm               | F-3      |
| Consolidated  Balance Sheets                                           | F-5      |
| Consolidated Statements of  Operations                                 | F-6      |
| Consolidated  Statements of Cash Flows                                 | F-7      |
| Consolidated  Statements of Shareholders’ Equity                  | F-8      |
| Notes  to Consolidated Financial Statements                            | F-9      |

 

F-1

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Tableof Contents

** **

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

We areresponsible for the integrity and objectivity of the financial and operatinginformation contained in this Annual Report, including the consolidatedfinancial statements covered by the Report of Independent Registered PublicAccounting Firm. These statements were prepared in conformity with generallyaccepted accounting principles and include amounts that are based on our bestestimates and judgment.

 

Wemaintain a system of internal controls which provides management withreasonable assurance that transactions are recorded and executed in accordancewith its authorizations, assets are properly safeguarded and accounted for, andrecords are maintained so as to permit preparation of financial statements inaccordance with generally accepted accounting principles. This system includeswritten policies and procedures, an organizational structure that segregatesduties, financial reviews and a comprehensive program of periodic audits by theinternal auditors. We have also instituted policies and guidelines whichrequire employees to maintain a high level of ethical standards.

 

Inaddition, the Audit Committee of the Board of Directors meets periodically withmanagement, the internal auditors and the independent registered publicaccounting firm to review internal accounting controls, audit results andaccounting principles and practices and annually recommends to the Board ofDirectors the selection of the independent registered public accounting firm.

 

We areresponsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Rule 13a-15(f) under the SecuritiesExchange Act of 1934. Under our supervision and with the participation of otherkey members of our management, we conducted an evaluation of the effectivenessof our internal control over financial reporting based on the framework andcriteria established in *InternalControl—Integrated Framework*, issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, managementconcluded that our internal control over financial reporting was effective asof August 1, 2009. During its assessment, management did not identify anymaterial weaknesses in our internal control over financial reporting.

 

Ernst& Young LLP, the independent registered public accounting firm that auditedour consolidated financial statements included in this Annual Report onForm 10-K, has issued an unqualified attestation report on theeffectiveness of our internal controls over financial reporting as of August 1,2009.

 

 

BURTON M. TANSKY

President and ChiefExecutive Officer

 

JAMES E. SKINNER

Executive Vice Presidentand Chief Financial Officer

 

T. DALE STAPLETON

Vice President andController

 

F-2

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Tableof Contents

** **

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

** **

To the Board ofDirectors and Shareholders of Neiman Marcus, Inc.

 

We haveaudited the accompanying consolidated balance sheets of Neiman Marcus, Inc. andsubsidiaries as of August 1, 2009 and August 2, 2008, and the relatedconsolidated statements of operations, cash flows, and shareholders' equity foreach of the three years in the period ended August 1, 2009.  Our auditsalso included the financial statement schedule listed in the Index atItem 15.  These financial statementsand schedule are the responsibility of the Company's management.  Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Neiman Marcus, Inc.and subsidiaries at August 1, 2009 and August 2, 2008, and the consolidatedresults of its operations and its cash flows for each of the three years in theperiod ended August 1, 2009, in conformity with U.S. generally acceptedaccounting principles.  Also, in our opinion,the related financial statement schedule, when considered in relation to thebasic financial statements taken as a whole, presents fairly in all materialrespects the information set forth therein.

 

Asdiscussed in Note 13 to the consolidated financial statements, in fiscal year2008 the Company changed its method of accounting for income taxes.

 

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Neiman Marcus, Inc.'s internal control overfinancial reporting as of August 1, 2009, based on criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated October 20, 2009expressed an unqualified opinion thereon.

 

/S/ ERNST & YOUNG LLP

 

Dallas, Texas

October 20, 2009

 

F-3

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Tableof Contents

** **

**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

** **

To the Board ofDirectors and Shareholders of Neiman Marcus, Inc.

 

Wehave audited Neiman Marcus, Inc.’s internal control over financial reporting asof August 1, 2009, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria).Neiman Marcus, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the company’s internal controlover financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, NeimanMarcus, Inc. maintained, in all material respects, effective internal controlover financial reporting as of August 1, 2009, based on****theCOSO criteria**.**

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Neiman Marcus, Inc.and subsidiaries as of August 1, 2009 and August 2, 2008, and the relatedconsolidated statements of operations, cash flows, and shareholders' equity foreach of the three years in the period ended August 1, 2009 of Neiman Marcus,Inc. and our report datedOctober 20, 2009 expressed anunqualified opinion thereon.

** **

/S/ ERNST & YOUNG LLP

 

Dallas, Texas

October 20, 2009

 

F-4

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** **

**NEIMANMARCUS, INC.**

**CONSOLIDATED BALANCE SHEETS**

 
| **(in thousands, except shares)**                                                                                                                                                                    | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                                           | ** ** | ** **          | ** ** | ** **          | ** ** |
| ASSETS                                                                                                                                                                                               |       |                |       |                |       |
| Current  assets:                                                                                                                                                                                     |       |                |       |                |       |
| Cash  and cash equivalents                                                                                                                                                                           |       | $                   | 323,425    |                | $          | 239,180 |   |
| Merchandise  inventories                                                                                                                                                                             |       | 755,034             |       | 978,044             |       |
| Deferred  income taxes                                                                                                                                                                               |       | 19,136              |       | 32,659              |       |
| Other  current assets                                                                                                                                                                                |       | 123,932             |       | 113,776             |       |
| Total  current assets                                                                                                                                                                                |       | 1,221,527           |       | 1,363,659           |       |
| Property and equipment, net                                                                                                                                                                          |       | 992,715             |       | 1,075,294           |       |
| Customer  lists, net                                                                                                                                                                                 |       | 368,660             |       | 422,931             |       |
| Favorable  lease commitments, net                                                                                                                                                                    |       | 411,564             |       | 429,441             |       |
| Tradenames                                                                                                                                                                                           |       | 1,235,290           |       | 1,579,054           |       |
| Goodwill                                                                                                                                                                                             |       | 1,263,433           |       | 1,611,191           |       |
| Other  assets                                                                                                                                                                                        |       | 87,837              |       | 75,249              |       |
| Total  assets                                                                                                                                                                                        |       | $                   | 5,581,026  |                | $          | 6,556,819 |   |
| LIABILITIES  AND SHAREHOLDERS' EQUITY                                                                                                                                                                |       |                |       |                |       |
| Current  liabilities:                                                                                                                                                                                |       |                |       |                |       |
| Accounts  payable                                                                                                                                                                                    |       | $                   | 233,990    |                | $          | 345,640 |   |
| Accrued  liabilities                                                                                                                                                                                 |       | 302,886             |       | 361,094             |       |
| Current  maturities of long-term liabilities                                                                                                                                                         |       | 26,617              |       | —              |       |
| Total  current liabilities                                                                                                                                                                           |       | 563,493             |       | 706,734             |       |
| Long-term  liabilities:                                                                                                                                                                              |       |                |       |                |       |
| Long-term  debt                                                                                                                                                                                      |       | 2,954,221           |       | 2,946,102           |       |
| Deferred  real estate credits                                                                                                                                                                        |       | 96,420              |       | 84,019              |       |
| Deferred  income taxes                                                                                                                                                                               |       | 697,810             |       | 929,970             |       |
| Other  long-term liabilities                                                                                                                                                                         |       | 350,247             |       | 213,475             |       |
| Total  long-term liabilities                                                                                                                                                                         |       | 4,098,698           |       | 4,173,566           |       |
|                                                                                                                                                                                                 |       |                |       |                |       |
| Common  stock (par value $0.01 per share, 5,000,000 shares authorized and 1,013,082  shares issued and outstanding at August 1, 2009 and 1,012,919 shares issued  and outstanding at August 2, 2008) |       | 10                  |       | 10                  |       |
| Additional  paid-in capital                                                                                                                                                                          |       | 1,424,258           |       | 1,418,473           |       |
| Accumulated  other comprehensive loss                                                                                                                                                                |       | (104,587            | )          | (9,164              | )          |
| Retained (deficit) earnings                                                                                                                                                                          |       | (400,846            | )          | 267,200             |       |
| Total  shareholders' equity                                                                                                                                                                          |       | 918,835             |       | 1,676,519           |       |
| Total  liabilities and shareholders' equity                                                                                                                                                          |       | $                   | 5,581,026  |                | $          | 6,556,819 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

F-5

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Tableof Contents

** **

**NEIMAN MARCUS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

* *
| ** **                                                                        | ** ** | **Fiscal year ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                                                                | ** ** | **August 1,  2009**   | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                                                                              |       |                  |       |   |   |   |   |
| Revenues                                                                          |       | $                     | 3,643,346  |   | $ | 4,600,536 |   | $ | 4,390,076 |   |
| Cost  of goods sold including buying and occupancy costs (excluding depreciation) |       | 2,536,764             |       | 2,934,968 |   | 2,753,814 |   |
| Selling,  general and administrative expenses (excluding depreciation)            |       | 882,737               |       | 1,045,447 |   | 1,015,140 |   |
| Income  from credit card program, net                                             |       | (49,966               | )          | (65,727 | ) | (65,723 | ) |
| Depreciation  expense                                                             |       | 150,759               |       | 148,411 |   | 136,468 |   |
| Amortization  of intangible assets                                                |       | 54,826                |       | 54,314 |   | 54,387 |   |
| Amortization  of favorable lease commitments                                      |       | 17,877                |       | 17,878 |   | 17,878 |   |
| Impairment  charges                                                               |       | 703,266               |       | 31,261 |   | 11,473 |   |
| Other  income                                                                     |       | —                |       | (32,450 | ) | (10,164 | ) |
| Operating  (loss) earnings                                                        |       | (652,917              | )          | 466,434 |   | 476,803 |   |
| Interest  expense, net                                                            |       | 235,574               |       | 239,805 |   | 259,805 |   |
| (Loss)  earnings from continuing operations before income taxes                   |       | (888,491              | )          | 226,629 |   | 216,998 |   |
| Income  tax (benefit) expense                                                     |       | (220,445              | )          | 83,816 |   | 82,295 |   |
| (Loss)  earnings from continuing operations                                       |       | (668,046              | )          | 142,813 |   | 134,703 |   |
| Loss  from discontinued operation, net of taxes                                   |       | —                |       | — |   | (22,771 | ) |
| Net  (loss) earnings                                                              |       | $                     | (668,046   | ) | $ | 142,813 |   | $ | 111,932 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

F-6

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**NEIMANMARCUS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                                       | ** ** | **Fiscal year  ended**   | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                                                                              | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| ** **                                                                                       | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **CASH FLOWS—OPERATING  ACTIVITIES**                                                        |       |                     |       |   |   |   |   |
| Net (loss) earnings                                                                              |       | $                        | (668,046   | ) | $ | 142,813 |   | $ | 111,932 |   |
| Loss from discontinued  operation                                                                |       | —                   |       | — |   | 22,771 |   |
| Adjustments to reconcile  net (loss) earnings to net cash provided by operating activities:      |       |                     |       |   |   |   |   |
| Depreciation and amortization  expense                                                           |       | 240,645                  |       | 234,820 |   | 222,874 |   |
| Impairment charges                                                                               |       | 703,266                  |       | 31,261 |   | 11,473 |   |
| Paid-in-kind interest                                                                            |       | 38,082                   |       | — |   | — |   |
| Deferred income taxes                                                                            |       | (153,888                 | )          | (44,627 | ) | (60,522 | ) |
| Gain on curtailment of defined benefit retirement  obligations                                   |       | —                   |       | (32,450 | ) | — |   |
| Other—primarily costs  related to defined benefit pension and other long-term benefit plans |       | 10,185                   |       | 21,997 |   | 20,531 |   |
|                                                                                             |       | 170,244                  |       | 353,814 |   | 329,059 |   |
| Changes in operating assets  and liabilities:                                                    |       |                     |       |   |   |   |   |
| Merchandise inventories                                                                          |       | 223,010                  |       | (59,775 | ) | (124,648 | ) |
| Other current assets                                                                             |       | (10,156                  | )          | (20,239 | ) | (12,597 | ) |
| Other assets                                                                                     |       | (7,684                   | )          | 3,118 |   | (3,333 | ) |
| Accounts payable and  accrued liabilities                                                        |       | (167,269                 | )          | (10,287 | ) | 53,461 |   |
| Deferred real estate  credits                                                                    |       | 17,668                   |       | 33,694 |   | 27,885 |   |
| Funding of defined benefit  pension plan                                                         |       | (15,000                  | )          | (15,000 | ) | — |   |
| Net cash provided by  operating activities — continuing operations                          |       | 210,813                  |       | 285,325 |   | 269,827 |   |
| Net cash used for operating  activities — discontinued operation                            |       | —                   |       | — |   | (10,918 | ) |
| **Net cash  provided by operating activities**                                                   |       | 210,813                  |       | 285,325 |   | 258,909 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                        |       |                     |       |   |   |   |   |
| Capital expenditures                                                                             |       | (101,525                 | )          | (183,452 | ) | (147,877 | ) |
| Purchases of short-term  investments                                                             |       | —                   |       | (10,000 | ) | — |   |
| Sales of short-term  investments                                                                 |       | —                   |       | 10,000 |   | — |   |
| Payment to minority interest  holder in Kate Spade LLC                                           |       | —                   |       | — |   | (59,400 | ) |
| Net proceeds from sale of  Kate Spade LLC                                                        |       | —                   |       | — |   | 121,469 |   |
| Net cash used for investing  activities — continuing operations                             |       | (101,525                 | )          | (183,452 | ) | (85,808 | ) |
| Net cash used for investing  activities — discontinued operation                            |       | —                   |       | — |   | (128 | ) |
| **Net cash  used for investing activities**                                                      |       | (101,525                 | )          | (183,452 | ) | (85,936 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                        |       |                     |       |   |   |   |   |
| Repayment of borrowings                                                                          |       | (1,611                   | )          | (3,900 | ) | (4,918 | ) |
| Debt issuance costs paid                                                                         |       | (23,432                  | )          | — |   | (1,449 | ) |
| Repayment of borrowings  under senior term loan facility                                         |       | —                   |       | — |   | (250,000 | ) |
| Proceeds from purchase of  common stock, exercises of stock options and restricted stock grants  |       | —                   |       | — |   | 1,148 |   |
| Net cash used for financing  activities — continuing operations                             |       | (25,043                  | )          | (3,900 | ) | (255,219 | ) |
| Net cash used for financing  activities — discontinued operation                            |       | —                   |       | — |   | (1,675 | ) |
| **Net cash  used for financing activities**                                                      |       | (25,043                  | )          | (3,900 | ) | (256,894 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                                   |       |                     |       |   |   |   |   |
| Increase (decrease) during  the year                                                             |       | 84,245                   |       | 97,973 |   | (83,921 | ) |
| Beginning balance                                                                                |       | 239,180                  |       | 141,207 |   | 225,128 |   |
| **Ending  balance**                                                                              |       | $                        | 323,425    |   | $ | 239,180 |   | $ | 141,207 |   |
| ** **                                                                                       |       |                     |       |   |   |   |   |
| **Supplemental  Schedule of Cash Flow Information:**                                             |       |                     |       |   |   |   |   |
| Cash paid (received) during  the year for:                                                       |       |                     |       |   |   |   |   |
| Interest                                                                                         |       | $                        | 188,587    |   | $ | 233,055 |   | $ | 259,709 |   |
| Income taxes                                                                                     |       | $                        | (29,639    | ) | $ | 145,811 |   | $ | 155,568 |   |
| Noncash activities:                                                                              |       |                     |       |   |   |   |   |
| Additions to property and equipment                                                              |       | $                        | —     |   | $ | — |   | $ | 1,733 |   |
| Adjustments to goodwill related to pre-acquisition  tax contingencies                            |       | $                        | (18,049    | ) | $ | 6,051 |   | $ | — |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

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**NEIMANMARCUS, INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

 
| ** **                                                                                                                             | ** ** | ** **         | ** ** | **Additional**       | ** ** | **Accumulated  other**           | ** ** | ** **             | ** ** | **Total**                      | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|----------------------------------|------------|------------------------|------------|--------------------------------|------------|
| **(in thousands)**                                                                                                                     | ** ** | **Common   stock** | ** ** | **paid-in  capital** | ** ** | **comprehensive  income (loss)** | ** ** | **Retained  earnings** | ** ** | **shareholders’  equity** | ** ** |
| BALANCE AT JULY 29, 2006                                                                                                               |       | $                  | 10         |                 | $          | 1,405,373                        |       | $                      | 9,829      |                           | $          | 12,455 |   | $ | 1,427,667 |   |
| Stock based compensation expense                                                                                                       |       | —             |       | 5,859                |       | —                           |       | —                 |       | 5,859                          |       |
| Other equity transactions                                                                                                              |       | —             |       | 1,154                |       | —                           |       | —                 |       | 1,154                          |       |
| Adjustment for unfunded  benefit obligations (upon initial adoption of new accounting principle), net  of income tax effect of $11,289 |       | —             |       | —               |       | 17,365                           |       | —                 |       | 17,365                         |       |
| Comprehensive income:                                                                                                                  |       |               |       |                 |       |                             |       |                   |       |                           |       |
| Net earnings                                                                                                                           |       | —             |       | —               |       | —                           |       | 111,932                |       | 111,932                        |       |
| Adjustments for  fluctuations in fair market value of financial instruments, net of tax of  ($1,758)                                   |       | —             |       | —               |       | (2,678                           | )          | —                 |       | (2,678                         | )          |
| Reclassification to  earnings, net of tax of ($2,327)                                                                                  |       | —             |       | —               |       | (3,579                           | )          | —                 |       | (3,579                         | )          |
| Other                                                                                                                                  |       | —             |       | —               |       | 292                              |       | —                 |       | 292                            |       |
| Total comprehensive income                                                                                                             |       |               |       |                 |       |                             |       |                   |       | 105,967                        |       |
| BALANCE AT JULY 28, 2007                                                                                                               |       | 10                 |       | 1,412,386            |       | 21,229                           |       | 124,387                |       | 1,558,012                      |       |
| Stock based compensation expense                                                                                                       |       | —             |       | 6,087                |       | —                           |       | —                 |       | 6,087                          |       |
| Comprehensive income:                                                                                                                  |       |               |       |                 |       |                             |       |                   |       |                           |       |
| Net earnings                                                                                                                           |       | —             |       | —               |       | —                           |       | 142,813                |       | 142,813                        |       |
| Adjustments for  fluctuations in fair market value of financial instruments, net of tax of  ($16,355)                                  |       | —             |       | —               |       | (25,159                          | )          | —                 |       | (25,159                        | )          |
| Reclassification to  earnings, net of tax of ($214)                                                                                    |       | —             |       | —               |       | (329                             | )          | —                 |       | (329                           | )          |
| Change in unfunded benefit obligations, net of tax  of ($3,239)                                                                        |       | —             |       | —               |       | (5,063                           | )          | —                 |       | (5,063                         | )          |
| Other                                                                                                                                  |       | —             |       | —               |       | 158                              |       | —                 |       | 158                            |       |
| Total comprehensive income                                                                                                             |       |               |       |                 |       |                             |       |                   |       | 112,420                        |       |
| BALANCE AT AUGUST 2, 2008                                                                                                              |       | 10                 |       | 1,418,473            |       | (9,164                           | )          | 267,200                |       | 1,676,519                      |       |
| Stock based compensation expense                                                                                                       |       | —             |       | 5,785                |       | —                           |       | —                 |       | 5,785                          |       |
| Comprehensive loss:                                                                                                                    |       |               |       |                 |       |                             |       |                   |       |                           |       |
| Net loss                                                                                                                               |       | —             |       | —               |       | —                           |       | (668,046               | )          | (668,046                       | )          |
| Adjustments for  fluctuations in fair market value of financial instruments, net of tax of  ($19,229)                                  |       | —             |       | —               |       | (29,575                          | )          | —                 |       | (29,575                        | )          |
| Reclassification to earnings,  net of tax of $10,287                                                                                   |       | —             |       | —               |       | 15,822                           |       | —                 |       | 15,822                         |       |
| Change in unfunded benefit obligations, net of tax  of ($52,865)                                                                       |       | —             |       | —               |       | (81,313                          | )          | —                 |       | (81,313                        | )          |
| Other                                                                                                                                  |       | —             |       | —               |       | (357                             | )          | —                 |       | (357                           | )          |
| Total comprehensive loss                                                                                                               |       |               |       |                 |       |                             |       |                   |       | (763,469                       | )          |
| BALANCE AT AUGUST 1, 2009                                                                                                              |       | $                  | 10         |                 | $          | 1,424,258                        |       | $                      | (104,587   | )                              | $          | (400,846 | ) | $ | 918,835 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

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**NEIMANMARCUS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**BASIS OF PRESENTATION**

 

On April 22, 2005, Neiman Marcus, Inc.(the Company), formerly Newton Acquisition, Inc., and its wholly-ownedsubsidiary, Newton Acquisition Merger Sub, Inc. (Merger Sub), were formedand incorporated in the state of Delaware. The Company is a subsidiary ofNewton Holding, LLC (Holding).  Holding,the Company and Merger Sub were formed by investment funds affiliated with TPGCapital (formerly Texas Pacific Group) and Warburg Pincus LLC (collectively,the Sponsors) for the purpose of acquiring The Neiman Marcus Group, Inc.(NMG).

 

The acquisition of NMG was completed on October 6,2005 through the merger of Merger Sub with and into NMG, with NMG being thesurviving entity (the Acquisition). Subsequent to the Acquisition, NMG is asubsidiary of the Company, which is controlled by Holding.

 

Our fiscal year ends on the Saturday closestto July 31.  Like many other retailers, we follow a4-5-4 reporting calendar which resulted in an extra week in fiscal year 2008(the 53rd week). All references to fiscal year2009 relate to the fifty two weeks ended August 1, 2009; all references tofiscal year 2008 relate to the fifty three weeks ended August 2, 2008 andall references to fiscal year 2007 relate to the fifty two weeks ended July 28,2007.

 

We adopted Statement of Financial AccountingStandards No. 165, “Subsequent Events” (SFAS 165) during the fourthquarter of fiscal year 2009, and have evaluated all material events occurringsubsequent to the date of the financial statements up to the date and time thisAnnual Report on Form 10-K was filed.

 

The accompanying consolidated financialstatements include the amounts of the Company and its subsidiaries.  All significant intercompany accounts andtransactions have been eliminated.

 

Certain prior period balances have beenreclassified to conform to the current period presentation.

 

**ESTIMATES AND CRITICAL ACCOUNTING POLICIES**

 

We make estimates andassumptions about future events in preparing our financial statements inconformity with generally accepted accounting principles. These estimates andassumptions affect the amounts of assets, liabilities, revenues and expensesand the disclosure of gain and loss contingencies at the date of theconsolidated financial statements.

 

While we believe that ourpast estimates and assumptions have been materially accurate, the amountscurrently estimated are subject to change if we make different assumptions asto the outcome of future events. We evaluate our estimates and judgments on anongoing basis and predicate those estimates and judgments on historicalexperience and on various other factors that we believe to be reasonable underthe circumstances. We make adjustments to our assumptions and judgments whenfacts and circumstances dictate. Since future events and their effects cannotbe determined with absolute certainty, actual results may differ from theestimates used in preparing the accompanying consolidated financial statements.

 

***Cash and Cash Equivalents.***  Cash and cash equivalents primarily consistof cash on hand in our stores, deposits with banks and overnight investmentswith banks and financial institutions. Cash equivalents are stated at cost,which approximates fair value. Our cash management system provides for thereimbursement of all major bank disbursement accounts on a daily basis.Accounts payable includes $30.0 million of outstanding checks not yetpresented for payment at August 1, 2009 and $55.3 million at August 2,2008.

 

***Merchandise Inventories and CostOf Goods Sold.***  We utilize the retail method ofaccounting. Under the retail inventory method, the valuation ofinventories at cost and the resulting gross margins are determined by applyinga calculated cost-to-retail ratio, for various groupings of similar items, tothe retail value of inventories.The cost of the inventory reflected on theconsolidated balance sheets is decreased by charges to cost of goods sold atthe time the retail value of the inventory is lowered through the use ofmarkdowns. Earnings are negatively impacted when merchandise ismarked down. Aswe adjust the retail value of our inventories through the use of markdowns toreflect market conditions, our merchandise inventories are stated at the lowerof cost or market.

 

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Consistent with industry business practice,we receive allowances from certain of our vendors in support of the merchandisewe purchase for resale. Certain allowances are received to reimburse us formarkdowns taken or to support the gross margins that we earn in connection withthe sales of the vendor’s merchandise. These allowances result in an increaseto gross margin when we earn the allowances and they are approved by thevendor. Other allowances we receive represent reductions to the amounts we payto acquire the merchandise. These allowances reduce the cost of the acquiredmerchandise and are recognized at the time the goods are sold. The amounts ofvendor allowances we received did not have a significant impact on theyear-over-year change in gross margin during fiscal years 2009, 2008 or 2007.We received vendor allowances of $107.7 million, or 3.0% of revenues, infiscal year 2009, $109.6 million, or 2.4% of revenues, in fiscal year 2008and $96.1 million, or 2.2% of revenues, in fiscal year 2007.

 

We obtain certain merchandise, primarilyprecious jewelry, on a consignment basis in order to expand our productassortment. Consignment merchandise held by us with a cost basis of $283.0million at August 1, 2009 and $388.8 million at August 2, 2008 is notreflected in our consolidated balance sheets.

 

***Long-lived Assets.***  Property and equipment are stated at costless accumulated depreciation. For financial reporting purposes, we computedepreciation principally using the straight-line method over the estimateduseful lives of the assets. Buildings and improvements are depreciated overfive to 30 years while fixtures and equipment are depreciated over threeto 15 years. Leasehold improvements are amortized over the shorter of theasset life or the lease term (which may include renewal periods when exercise of the renewal optionis at our discretion and considered reasonably assured at the inception of thelease). Costs incurred for the development of internal computer software arecapitalized and amortized using the straight-line method over three to ten years.

 

To the extent we remodel or otherwise replaceor dispose of property and equipment prior to the end of the assigneddepreciable lives, we could realize a loss or gain on the disposition. To theextent assets continue to be used beyond their assigned depreciable lives, nodepreciation expense is incurred. We reassess the depreciable lives of ourlong-lived assets in an effort to reduce the risk of significant losses orgains at disposition and utilization of assets with no depreciation charges.The reassessment of depreciable lives involves utilizing historical remodel anddisposition activity and forward-looking capital expenditure plans.

 

We assess the recoverability of the carryingvalues of our store assets, consisting of property and equipment, customerlists and favorable lease commitments, annually and upon the occurrence ofcertain events (e.g., opening a new store near an existing store or announcingplans for a store closing). The recoverability assessment requires judgment andestimates of future store generated cash flows. The underlying estimates ofcash flows include estimates for future revenues, gross margin rates and storeexpenses. We base these estimates upon the stores’ past and expected futureperformance. New stores may require two to five years to develop a customerbase necessary to generate the cash flows of our more mature stores. To theextent our estimates for revenue growth and gross margin improvement are notrealized, future annual assessments could result in additional impairmentcharges.

 

***Intangible Assets Subject toAmortization.***  Customerlists and amortizable tradenames are amortized using the straight-line methodover their estimated useful lives, ranging from 5 to 24 years (weighted averagelife of 13 years).  Favorable leasecommitments are amortized straight-line over the remaining lives of the leases,ranging from 6 to 49 years (weighted average life of 33 years).  Total estimated amortization of allacquisition-related intangible assets for the next five fiscal years iscurrently estimated as follows (in thousands):

 
| 2010 |   | $      | 73,259 |   |
|------|--------|--------|--------|--------|
| 2011 |   | 62,548 |   |
| 2012 |   | 50,123 |   |
| 2013 |   | 47,436 |   |
| 2014 |   | 46,881 |   |

 

***Indefinite-Lived IntangibleAssets and Goodwill.*** Indefinite-lived intangible assets, such as tradenames, and goodwill,and are not subject to amortization. Rather, we assess the recoverability ofindefinite-lived intangible assets and goodwill in the fourth quarter of eachfiscal year and upon the occurrence of certain events.

 

Therecoverability assessment with respect to each of the tradenames used in ouroperations requires us to estimate the fair value of the tradename as of theassessment date.  Such determination ismade using discounted cash flow techniques. Inputs to the valuation model include:

 

·                  future revenueand profitability projections associated with the tradename;

 

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·                  estimatedmarket royalty rates that could be derived from the licensing of our tradenamesto third parties in order to establish the cash flows accruing to the benefitof the Company as a result of our ownership of our tradenames; and

 

·                  rate used todiscount the estimated royalty cash flow projections to their present value (orestimated fair value).

 

If the recorded carrying value of thetradename exceeds its estimated fair value, an impairment charge is recorded towrite the tradename down to its estimated fair value.  The tradename impairment testing process issubject to inherent uncertainties and subjectivity.  The use of different assumptions, estimatesor judgments could materially increase or decrease any related impairmentcharge.  We believe our estimates areappropriate based upon current market conditions and the best informationavailable at the assessment date. However, future impairment charges could be required if we do notachieve our current revenue and profitability projections, market royalty ratesdecrease or the weighted average cost of capital increases.  We currently estimate that the fair value ofour tradenames decreases by approximately $225 million for each 0.5% decreasein market royalty rates and by approximately $90 million for each 0.5% increasein the weighted average cost of capital.

 

The assessment of the recoverability of thegoodwill associated with our Neiman Marcus stores, Bergdorf Goodman stores andDirect Marketing reporting units involves a two-step process.  The first step requires the comparison of theestimated enterprise fair value of each of our reporting units to its recordedcarrying value.  We estimate theenterprise fair value based on discounted cash flow techniques.  Inputs to the valuation model include:

 

·                  estimated future cash flows;

 

·                  growth assumptions forfuture revenues as well as future gross margin rates, expense rates and otherestimates; and

 

·                  rate used to discount ourestimated future cash flow projections to their present value (or estimated fairvalue).

 

The projected sales, gross margin andSG&A expense rate assumptions and capital expenditures are based on ourannual business plan or other forecasted results.  Discount rates reflect market-based estimates(based on the weighted average cost of capital) of the risks associated withthe projected cash flows directly resulting from the use of those assets inoperations.  The estimates of theenterprise fair values of our reporting units are based on the best informationavailable as of the date of the assessment.

 

If the recorded carrying value of a reportingunit exceeds its estimated enterprise fair value in the first step, a secondstep is performed in which we allocate the enterprise fair value to the fairvalue of the reporting unit’s net assets. The second step of the impairment testing process requires, among otherthings, the estimation of the fair values of substantially all of our tangibleand intangible assets.  Any enterprisefair value in excess of amounts allocated to such net assets represents theimplied fair value of goodwill for that reporting unit.  If the recorded goodwill balance for areporting unit exceeds the implied fair value of goodwill, an impairment chargeis recorded to write goodwill down to its fair value.

 

The goodwill impairment testing process issubject to inherent uncertainties and subjectivity.  The use of different assumptions, estimatesor judgments in either step of the process, including with estimation of theprojected future cash flows of our reporting units, the discount rate used toreduce such projected future cash flows to their net present value, and theestimation of the fair value of the reporting units’ tangible and intangibleassets and liabilities, could materially increase or decrease the fair value ofthe reporting unit’s net assets and, accordingly, could materially increase ordecrease any related impairment charge. We believe our estimates are appropriate based upon current marketconditions and the best information available at the assessment date.  However, future impairment charges could berequired if we do not achieve our current revenue and profitability projectionsor the weighted average cost of capital increases.  We currently estimate that a 5% decrease inthe estimated fair value of the net assets of each of our reporting units ascompared to the values used in the preparation of these financial statementswould increase the impairment charge related to goodwill by approximately $200million.  In addition, we currentlyestimate that the fair value of our goodwill decreases by approximately $300million for each 0.5% increase in the discount rate used to estimate fairvalue.

 

Asmore fully described in Note 7, we recorded significant impairment charges infiscal year 2009 to writedown our tradenames and goodwill to estimated fairvalue.

 

***Leases.***  We lease certain retail stores and officefacilities. Stores we own are often subject to ground leases. The terms of ourreal estate leases, including renewal options, range from 1 to 101 years.Most leases provide for monthly fixed minimum rentals or contingent rentalsbased upon sales in excess of stated amounts and normally require us to payreal estate taxes,

 

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insurance, common area maintenance costs and other occupancy costs. Forleases that contain predetermined, fixed calculations of minimum rentals, werecognize rent expense on a straight-line basis over the lease term. We recognize contingent rent expenseswhen it is probable that the sales thresholds will be reached during the year.

 

We receive allowances from developers relatedto the construction of our stores. We record these allowances as deferred realestate credits which we recognize as a reduction of rent expense on astraight-line basis over the lease term beginning with the date the Company takes possession ofthe leased asset. We received construction allowances aggregating$10.0 million in fiscal year 2009, $36.8 million in fiscal year 2008 and $24.6million in fiscal year 2007.

 

***Financial Instruments.***  In connection with the Acquisition, weobtained $2,575.0 million of floating rate debt agreements, of which $2,125.0million was outstanding at the Acquisition date and $1,625.0 million isoutstanding at August 1, 2009 (including $26.6 million of borrowingsclassified as current liabilities). Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rateinterest commitments through the expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.831% to 6.983% per quarter through2010 and result in an average fixed rate of 6.900%.

 

***Benefit Plans.***  We sponsor a noncontributory defined benefitpension plan (Pension Plan), an unfunded supplemental executive retirement plan(SERP Plan) which provides certain employees additional pension benefits and apost retirement plan providing eligible employees limited postretirement healthcare benefits (Postretirement Plan). In calculating our obligations and relatedexpense, we make various assumptions and estimates, after consulting withoutside actuaries and advisors. The annual determination of expense involvescalculating the estimated total benefits ultimately payable to planparticipants and allocating this cost to the periods in which services areexpected to be rendered. We use the projected unit credit method in recognizingpension liabilities. The Pension and SERP Plans are valued annually as of theend of each fiscal year.

 

Significant assumptions related to thecalculation of our obligations include the discount rate used to calculate thepresent value of benefit obligations to be paid in the future, the expectedlong-term rate of return on assets held by the Pension Plan, the average rateof compensation increase by Pension Plan and SERP Plan participants and thehealth care cost trend rate for the Postretirement Plan. We review theseassumptions annually based upon currently available information, includinginformation provided by our actuaries.

 

***Self-insurance and Other EmployeeBenefit Reserves.***  Weuse estimates in the determination of the required accruals for generalliability, workers’ compensation and health insurance. We base these estimatesupon an examination of historical trends, industry claims experience andindependent actuarial estimates. Although we do not expect that we will ultimately payclaims significantly different from our estimates, self-insurance reservescould be affected if future claims experience differ significantly from ourhistorical trends and assumptions.

 

***Other Long-term Liabilities.***  Other long-term liabilities consist primarilyof certain employee benefit obligations, postretirement health care benefitobligations and the liability for scheduled rent increases.

 

***Revenues.***  Revenues include sales of merchandise andservices and delivery and processing revenues related to merchandise sold.Revenues from our Specialty Retail stores are recognized at the later of thepoint of sale or the delivery of goods to the customer. Revenues from ourDirect Marketing operation are recognized when the merchandise is delivered tothe customer. Revenuesassociated with gift cards are recognized at the time of redemption by thecustomer. Revenues exclude sales taxes collected from our customers.

 

We maintain reserves for anticipated salesreturns primarily based on our historical trends related to returns by ourretail and direct marketing customers. Our reserves for anticipated salesreturns aggregated $29.7 million at August 1, 2009 and$45.0 million at August 2, 2008. As the vast majority of merchandise returns are madein less than 30 days after the sales transaction, we believe the risk thatdifferences between our estimated and actual returns will have a materialimpact on our consolidated financial statements is minimal.

 

***Buying and Occupancy Costs.***  Our buying costs consist primarily ofsalaries and expenses incurred by our merchandising and buying operations.Occupancy costs primarily include rent, property taxes and operating costs ofour retail, distribution and support facilities and exclude depreciationexpense.

 

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***Selling, General andAdministrative Expenses (excluding depreciation).***  Selling, general and administrative expensesare comprised principally of the costs related to employee compensation andbenefits in the selling and administrative support areas, preopening expenses,advertising and catalog costs and insurance expense.

 

We receive allowances from certain merchandisevendors in conjunction with compensation programs for employees who sell thevendors’ merchandise. These allowances are netted against the relatedcompensation expense that we incur. Amounts received from vendors related tocompensation programs were $65.8 million in fiscal year 2009, $71.6 million infiscal year 2008 and $65.4 million in fiscal year 2007.

 

We incur costs to advertise and promote themerchandise assortment offered by both Specialty Retail stores and DirectMarketing. Advertising costs incurred by our Specialty Retail stores consistprimarily of print media costs related to promotional materials mailed to ourcustomers. These costs are expensed at the time of mailing to the customer.Advertising costs incurred by Direct Marketing relate to the production,printing and distribution of our print catalogs and the production of thephotographic content on our websites. We amortize the costs of print catalogsduring the periods we expect to generate revenues from such catalogs, generallythree to six months. We expense the costs incurred to produce the photographiccontent on our websites at the time the images are first loaded onto thewebsite. We expense website design and web marketing costs as incurred.

 

Deferred catalog costs included in othercurrent assets in the consolidated balance sheets were $4.0 million as of August 1,2009 and $7.5 million as of August 2, 2008.  Net advertising expenses were $81.1 millionin fiscal year 2009, $102.8 million in fiscal year 2008 and $100.2 million infiscal year 2007.

 

Consistent with industry practice, we receiveadvertising allowances from certain of our merchandise vendors. Substantiallyall the advertising allowances we receive represent reimbursements of direct,specific and incremental costs that we incur to promote the vendor’smerchandise in connection with our various advertising programs, primarilycatalogs and other print media. As a result, advertising allowances arerecorded as a reduction of our advertising costs when earned. Advertising allowancesaggregated approximately $65.7 million in fiscal year 2009, $75.7 million infiscal year 2008 and $63.4 million in fiscal year 2007.

 

Preopening expenses primarily consist ofpayroll and related media costs incurred in connection with store openings andmajor renovations and are expensed when incurred.  We incurred preopening expenses of $5.1million in fiscal year 2009, $7.7 million in fiscal year 2008 and $8.8 millionin fiscal year 2007.

 

***Income from credit card program,net***.  Pursuant to a long-termmarketing and servicing alliance with HSBC Bank Nevada, N.A. and HSBC PrivateLabel Corporation (formerly known as Household Corporation) (collectivelyreferred to as HSBC), HSBC offers credit card and non-card payment plansbearing our brands and we receive 1) ongoing payments from HSBC based on netcredit card sales, 2) compensation for marketing and servicing activities, 3)our allocable share of certain income generated from the credit card programand 4) our allocable share of certain credit card losses generated from thecredit card portfolio (HSBC Program Income). We recognize HSBC Program Incomewhen earned.  In the future, the HSBCProgram Income may be:

 

·                  increased or decreasedbased upon the level of utilization of our proprietary credit cards by ourcustomers;

 

·                  increased or decreasedbased upon future changes to our historical credit card program related to,among other things, the interest rates applied to unpaid balances, theassessment of late fees and the level of usage of promotional no-interestcredit programs;

 

·                  decreased based upon thelevel of future services we provide to HSBC;

 

·                  increased for our allocable share of certain income,if any, generated from the credit card program as provided pursuant to ourcontractual agreement with HSBC, or any subsequent amendment thereto; and

 

·                  decreased for our allocable share of certain creditcard losses generated from the credit card portfolio as provided pursuant toour contractual agreement with HSBC, or any subsequent amendment thereto.

 

***Gift Cards.***  We sell gift cards at our Specialty Retailstores and through our Direct Marketing operation. Unredeemed gift cardsaggregated $30.4 million at August 1, 2009 and $34.1 million at August 2,2008. The gift cards sold to our customers have no stated expiration dates andare subject to actual and/or potential escheatment rights in various of thejurisdictions in which we operate.

 

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In the fourth quarter of fiscal year 2007, werecorded $6.0 million of other income for the breakage on gift cards wepreviously sold and issued.  The incomewas recognized based upon our analysis of the aging of these gift cards, ourdetermination that the likelihood of future redemption is remote and ourdetermination that such balances are not subject to escheatment laws applicableto our operations.  Prior to the fourthquarter of fiscal year 2007, we had not recognized breakage on gift cardspending, among other things, our final determination of the applicableescheatment laws applicable to our operations.

 

Gift card breakage recognized during fiscal years 2009 and 2008 was notsignificant. We do not believe gift card breakage will have amaterial impact on our future operations.

 

***Loyalty Programs.***  We maintain customer loyalty programs inwhich customers accumulate points for qualifying purchases. Upon reachingcertain levels, customers may redeem their points for gifts. Generally, pointsearned in a given year must be redeemed no later than 90 days subsequentto the end of the annual program period.

 

The estimates of the costs associated withthe loyalty programs require us to make assumptions related to customerpurchasing levels, redemption rates and costs of awards to be chosen by ourcustomers. Our customers redeem a substantial portion of the points earned inconnection with our loyalty programs for gift cards. At the time the qualifyingsales giving rise to the loyalty program points are made, we defer the portionof the revenues on the qualifying sales transactions equal to the estimatedretail value of the gift cards to be issued upon conversion of the points togift cards. We record the deferral of revenues related to gift card awardsunder our loyalty programs as a reduction of revenues. In addition, we chargethe cost of all other awards under our loyalty programs to cost of goods sold.

 

***Income Taxes.***  We use the asset and liability method ofaccounting for income taxes.  Under thismethod, deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax basis of assets and liabilities and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse.  Weare routinely under audit by federal, state or local authorities in the area ofincome taxes. We regularly evaluate the likelihood of realization of taxbenefits derived from positions we have taken in various federal and statefilings after consideration of all relevant facts, circumstances and availableinformation. For those tax benefits we believe more likely than not will besustained, we recognize the benefit we believe is cumulatively greater than 50%likely to be realized. To the extent we were to prevail in matters for whichaccruals have been established or be required to pay amounts in excess ofrecorded reserves, our effective tax rate in a given financial statement periodcould be materially impacted.

 

***Recent AccountingPronouncements. ***In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (SFAS 141(R)), which addresses the recognition and accounting foridentifiable assets acquired, liabilities assumed and non-controlling interestsin business combinations.  In addition,SFAS 141(R) changes the accounting treatment for certainacquisition-related items, including requirements to expenseacquisition-related costs as incurred, expense restructuring costs associatedwith an acquired business and recognize post-acquisition changes in taxuncertainties associated with a business combination as a component of taxexpense.  SFAS 141(R) is to beapplied prospectively to business combinations for which the acquisition dateis on or after December 15, 2008, or our fiscal year ending July 31,2010.  Generally, the effect of SFAS 141(R) willdepend on future acquisitions.  However,the accounting for the resolution of any tax uncertainties remaining as of August 1,2009 related to the Acquisition will be subject to the provisions of SFAS141(R).

 

InFebruary 2008, the FASB issued FASB Staff Position 157-2,*“*EffectiveDate of FASB Statement No. 157” (FSP 157-2), which delays theeffective date of fair value disclosures required by SFAS 157 for allnonfinancial assets, such as intangible assets and goodwill, and nonfinancialliabilities that are recognized or disclosed at fair value in the financialstatements on a nonrecurring basis.  FSP157-2 is effective for fiscal years beginning after November 15, 2008, orour fiscal year ending July 31, 2010. We have not yet evaluated the impact of adopting FSP 157-2 on ourconsolidated financial statements.

 

InDecember 2008, the FASB issued FASB Staff Position 132(R)-1,*“*Employers’Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1),which provides guidance on an employer’s disclosures about plan assets of adefined benefit pension or other postretirement plan.  FSP 132(R)-1 is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have not yet evaluated theimpact of adopting the disclosure requirements of FSP 132(R)-1.

 

In May 2009, the FASB issued Statementof Financial Accounting Standards No. 165, “Subsequent Events” (SFAS 165),which establishes general standards of accounting and disclosure for eventsthat occur after the balance sheet date but 

 

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before financial statements are issued, including the requireddisclosure of the date through which subsequent events have been evaluated andthe basis for that date.  SFAS 165 iseffective for interim or annual periods ending after June 15, 2009.  We adopted SFAS 165 during the fourth quarterof fiscal year 2009, as more fully described in Note 1 “Basis of Presentation.”

 

**NOTE 2.  DISCONTINUED OPERATION**

 

InFebruary 1999, NMG acquired a 56% controlling interest in Kate Spade LLC,a designer and marketer of high-end accessories.  In April 2005, the minority investor inKate Spade LLC exercised the put option with respect to the sale of the fullamount of its 44% stake in such company to NMG. In October 2006, weentered into an agreement to settle the put option whereby we purchased theinterest held by the minority investor for approximately $59.4 million.

 

InNovember 2006, we entered into a definitive agreement to sell 100% of theownership interests in Kate Spade LLC to Liz Claiborne, Inc. (consistingof both our original 56% interest and the 44% minority interest subsequentlypurchased by NMG) for pretax net cash proceeds of approximately $121.5 million.Both the purchase of the minority interest in Kate Spade LLC and the sale ofKate Spade LLC to Liz Claiborne, Inc. were consummated in December 2006.

 

Ourconsolidated financial statements, accompanying notes and other informationprovided in this Annual Report on Form 10-K reflect Kate Spade LLC as adiscontinued operation for all periods presented.

 

Summarizedfinancial information with respect to the results of operations of Kate SpadeLLC is as follows:

 
| **(in thousands)**                                        | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------|------------|
|                                                      |       |                                        |       |
| Revenues                                                  |       | $                                           | 29,612     |   |
|                                                      |       |                                        |       |
| Earnings from discontinued operation before income  taxes |       | $                                           | 3,494      |   |
| Income taxes                                              |       | 1,967                                       |       |
| Net earnings from discontinued operation                  |       | 1,527                                       |       |
|                                                      |       |                                        |       |
| Loss on disposition before income taxes                   |       | (13,398                                     | )          |
| Income taxes                                              |       | (10,900                                     | )          |
| Net loss on disposition                                   |       | (24,298                                     | )          |
|                                                      |       |                                        |       |
| Loss from discontinued operation, net of taxes            |       | $                                           | (22,771    | ) |

 

In the first quarter of fiscal year 2007, weimpaired the intangible assets of Kate Spade LLC by $12.5 million in order tostate the net assets of Kate Spade LLC at their estimated net realizable valueto NMG.

 

**NOTE 3.  TRANSACTIONSWITH SPONSORS**

 

Pursuant to a management services agreementwith affiliates of the Sponsors, and in exchange for on-going consulting andmanagement advisory services that are provided to us by the Sponsors and theiraffiliates, affiliates of the Sponsors receive an aggregate annual managementfee equal to the lesser of (i) 0.25% of our consolidated annual revenuesor (ii) $10 million. Affiliates of the Sponsors also receivereimbursement for out-of-pocket expenses incurred by them or their affiliatesin connection with services provided pursuant to the agreement. Thesemanagement fees are payable quarterly in arrears.  We recorded management fees of $9.1 millionduring fiscal year 2009 and $10.0 million during fiscal years 2008 and 2007,which are included in selling, general and administrative expenses in theconsolidated statements of operations.

 

The management services agreement alsoprovides that affiliates of the Sponsors may receive future fees in connectionwith certain future financing and acquisition or disposition transactions. Themanagement services agreement includes customary exculpation andindemnification provisions in favor of the Sponsors and their affiliates.

 

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**NOTE 4.  INCOME FROM CREDIT CARD PROGRAM, NET**

 

In June 2005, we entered into amarketing and servicing alliance with HSBC. Pursuant to the agreement with HSBC (Program Agreement), HSBC offerscredit cards and non-card payment plans and bears substantially all credit riskwith respect to sales transacted on the cards bearing our brands. We receiveongoing payments from HSBC related to credit card sales and compensation formarketing and servicing activities (HSBC Program Income).  The Program Agreement expires in June 2010.  We recognize HSBC Program Income when earned.

 

TheProgram Agreement, as amended, provides for 1) the allocation between HSBC andNMG of additional income, if any, to be generated from the credit card programas a result of certain changes made to the terms of credit extended to ourcustomers since the inception of the Program Agreement and 2) the allocation ofcertain credit card losses between HSBC and NMG.  In light of current economic conditions thathave led to higher delinquencies and losses on consumer indebtednesses, netlosses are currently allocable to NMG. As of August 1, 2009, our reserve for credit card net lossesaggregated $3.5 million, which is included in accrued liabilities in theconsolidated balance sheets.

 

**NOTE 5.  PROPERTY AND EQUIPMENT, NET**

 

The significant components of our propertyand equipment, net are as follows:

 
| **(in thousands)**                             | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Land, buildings and improvements               |       | $                        | 868,026    |                     | $          | 829,647 |   |
| Fixtures and equipment                         |       | 617,303                  |       | 560,537                  |       |
| Construction in progress                       |       | 48,632                   |       | 77,320                   |       |
|                                           |       | 1,533,961                |       | 1,467,504                |       |
| Less accumulated depreciation and amortization |       | 541,246                  |       | 392,210                  |       |
| Property  and equipment, net                   |       | $                        | 992,715    |                     | $          | 1,075,294 |   |

 

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**NOTE 6. GOODWILL AND INTANGIBLE ASSETS, NET**

 

The significant components of our intangibleassets and goodwill, by our reportable operating segments, are as follows:

 
| **(in thousands)**                                    | ** ** | **Customer  lists** | ** ** | **Favorable  lease  commitments** | ** ** | **Tradenames** | ** ** | **Goodwill** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------------------|------------|----------------|------------|--------------|------------|
| ** **                                                 | ** ** | ** **          | ** ** | ** **                        | ** ** | ** **     | ** ** | ** **   | ** ** |
| **Specialty Retail**                                       |       |                |       |                              |       |           |       |         |       |
| Balance at July 28,  2007                             |       | $                   | 418,058    |                              | $          | 447,319        |       | $            | 1,406,030  |   | $ | 1,300,253 |   |
| Amortization                                               |       | (39,542             | )          | (17,878                           | )          |           |       |         |       |
| Adjustments related to  pre-acquisition tax contingencies  |       | —              |       | —                            |       | —         |       | 4,805        |       |
| Balance at August 2,  2008                            |       | $                   | 378,516    |                              | $          | 429,441        |       | $            | 1,406,030  |   | $ | 1,305,058 |   |
| Amortization                                               |       | (39,499             | )          | (17,877                           | )          |           |       |         |       |
| Adjustments related to  pre-acquisition tax contingencies  |       |                |       |                              |       |           |       | (15,687      | )          |
| Writedown of tradenames                                    |       |                |       |                              |       | (311,835       | )          |         |       |
| Writedown of goodwill                                      |       |                |       |                              |       |           |       | (329,709     | )          |
| Balance at August 1,  2009                            |       | $                   | 339,017    |                              | $          | 411,564        |       | $            | 1,094,195  |   | $ | 959,662 |   |
|                                                       |       |                |       |                              |       |           |       |         |       |
| **Direct Marketing**                                       |       |                |       |                              |       |           |       |         |       |
| Balance at July 28,  2007                             |       | $                   | 59,187     |                              | $          | —         |       | $            | 204,285    |   | $ | 304,887 |   |
| Amortization                                               |       | (14,772             | )          | —                            |       |           |       |         |       |
| Adjustments related to  pre-acquisition tax contingencies  |       |                |       |                              |       |           |       | 1,246        |       |
| Writedown of Horchow  tradename                            |       |                |       |                              |       | (31,261        | )          | —       |       |
| Balance at August 2,  2008                            |       | $                   | 44,415     |                              | $          | —         |       | $            | 173,024    |   | $ | 306,133 |   |
| Amortization                                               |       | (14,772             | )          | —                            |       | (555           | )          |         |       |
| Adjustments related to  pre-acquisition tax contingencies  |       |                |       |                              |       |           |       | (2,362       | )          |
| Writedown of tradenames                                    |       |                |       |                              |       | (31,374        | )          |         |       |
| Balance at August 1,  2009                            |       | $                   | 29,643     |                              | $          | —         |       | $            | 141,095    |   | $ | 303,771 |   |
|                                                       |       |                |       |                              |       |           |       |         |       |
| **Total at August 1,  2009**                          |       | $                   | 368,660    |                              | $          | 411,564        |       | $            | 1,235,290  |   | $ | 1,263,433 |   |
|                                                       |       |                |       |                              |       |           |       |         |       |
| **Total accumulated amortization  at August 1, 2009** |       | $                   | 207,830    |                              | $          | 68,416         |       | $            | 555        |   |   |   |

 

During the third quarter of fiscal year 2009,we closed the Internal Revenue Service (IRS) examination of fiscal years 2005and 2006 and received net refunds of approximately $2.8 million.  In addition, as a result of the completion ofthe audit and IRS determination regarding certain deductions taken inconnection with the Acquisition, we recorded a decrease in the gross amount ofunrecognized tax benefits of $13.7 million and a decrease in accrued interestand penalties of $2.2 million.  This$15.9 million reduction in our liability for unrecognized tax benefits resultedin a decrease to goodwill of $17.3 million and a tax benefit of $1.3 million,offset by a decrease to deferred tax liabilities of $2.7 million during fiscalyear 2009.  Finally, in the fourthquarter of fiscal year 2009, we recorded a decrease to our recorded liabilityfor unrecognized tax benefits and a corresponding reduction to goodwill of $0.7million as a result of the expiration of statutes of limitation in varioustaxing jurisdictions.

 

In the first quarter of fiscal year 2008, thecumulative effect of adopting FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48) resulted in a net increase to ouraccruals for uncertain tax positions of $9.1 million for the derecognition ofcertain tax benefits.  This increase toour accruals was offset by a corresponding increase to goodwill as theseuncertainties existed at the time of the Acquisition.  During the fourth quarter of fiscal year2008, we entered into a negotiated settlement with a state tax authorityregarding a state non-filing position which resulted in a decrease in ouraccruals for uncertain tax positions and a reduction to goodwill of $3.0million related to the resolution of tax uncertainties that existed at the timeof the Acquisition.

 

In the fourth quarters of fiscal years 2008and 2007, we recorded $31.3 million and $11.5 million pretax impairment chargesrelated to the writedown to fair value of the Horchow tradename based uponlower revenues and royalty rate 

 

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expectations with respect to the Horchow brand in light of currentoperating performance and future operating expectations.  Additionally, in the second quarter of fiscalyear 2009, we recorded a $12.1 million pretax impairment charge related to thewritedown to fair value of the Horchow tradename.  At August 1, 2009, the recorded amountof the Horchow tradename was $3.9 million.

 

As more fully described in Note 7, werecorded significant impairment charges in the fiscal year 2009 to writedownour tradenames and goodwill to estimated fair value.

 

**NOTE 7.  IMPAIRMENT OF LONG-LIVED ASSETS**

 

We assess the recoverability ofindefinite-lived assets and goodwill in the fourth quarter of each year andupon the occurrence of certain events. In connection with the preparation of our consolidated financialstatements for the second quarter of fiscal year 2009, we concluded that it wasappropriate to test our long-lived assets for recoverability in light of 1) thesignificant declines in the domestic and global financial markets during thefirst and second quarters of fiscal year 2009 and 2) the determination thatthese macroeconomic conditions are significantly impacting our businessoperations.

 

Based upon our assessment of economicconditions as of the end of our second quarter, our expectations of futurebusiness conditions and trends, and our projected revenues, earnings and cashflows, we determined certain of our property and equipment, tradenames andgoodwill to be impaired and recorded impairment charges in the second quarterof fiscal year 2009 aggregating $560.1 million.

 

In the fourth quarter of fiscal year 2009, weupdated our short-term and long-term operating forecasts in connection with ourannual planning process in light of current business conditions and our updatedexpectations of future business conditions and trends.  Utilizing these updated operating forecaststo estimate the fair values of our reporting units, we determined furtherimpairment with respect to certain of our property and equipment, tradenamesand goodwill and recorded additional impairment charges in the fourth quarterof fiscal year 2009 aggregating $143.1 million.

 

Total impairment charges recorded in fiscalyear 2009 are as follows:

 
| **(in thousands)**     | ** ** | **Specialty********Retail stores** | ** ** | **Direct********Marketing** | ** ** | **Total** | ** ** |
|------------------------|------------|------------------------------------|------------|-----------------------------|------------|-----------|------------|
|                   |       |                               |       |                        |       |      |       |
| Property and equipment |       | $                                  | 30,348     |                        | $          | —    |       | $ | 30,348 |   |
| Tradenames             |       | 311,835                            |       | 31,374                      |       | 343,209   |       |
| Goodwill               |       | 329,709                            |       | —                      |       | 329,709   |       |
|                   |       | $                                  | 671,892    |                        | $          | 31,374    |       | $ | 703,266 |   |

 

***Long-lived assets.***  The recoverability assessment with respect toour long-lived assets (consisting of property and equipment, customer lists andfavorable lease commitments) is performed at the store level.  This assessment is based upon the comparisonof the undiscounted cash flows anticipated to be generated from the store tothe net carrying value of the store assets. To the extent the undiscounted store-level cash flows are not sufficientto recover the net carrying value of the store assets, the assets are impairedand written down to their estimated fair value based upon discounted futurecash flows.  Based upon the review of ourstore-level assets conducted in fiscal year 2009, we identified certainproperty and equipment to be impaired by $30.3 million.

 

Therecoverability assessment related to store-level assets requires judgments andestimates of future revenues, gross margin rates and store expenses.  We base these estimates upon our past andexpected future performance.  We believeour estimates are appropriate in light of current market conditions and the bestinformation available at the assessment date. However, future impairment charges could be required if we do notachieve our current revenue or cash flow projections.

 

***Tradenames.***  The recoverability assessment with respect toeach of the tradenames used in our operations requires us to estimate the fairvalue of the tradename as of the assessment date.  Such determination is made using discountedcash flow techniques.  Inputs to thevaluation model include:

 

·                  future revenue andprofitability projections associated with the tradename;

 

·                  estimated market royaltyrates that could be derived from the licensing of our tradenames to thirdparties in order to establish the cash flows accruing to the benefit of theCompany as a result of our ownership of our tradenames; and

 

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·                  rate used to discount theestimated royalty cash flow projections to their present value (or estimatedfair value).

 

Basedupon the review of our tradenames in fiscal year 2009, we determined certain ofthese tradenames were impaired and recorded impairment charges aggregating$343.2 million.  These impairment chargesreflect 1) lower revenues and profitability projections associated with ourtradenames in the near term, 2) lower estimated market royalty rateexpectations in light of current general economic conditions as well as ourlower near-term profitability projections and 3) a higher rate (based upon theweighted average cost of capital) required to discount our cash flowprojections in light of current economic conditions and financial marketconsiderations.  We believe our estimatesare appropriate based upon current market conditions and the best informationavailable at the assessment date. However, future impairment charges could be required if we do notachieve our current revenue and profitability projections, market royalty ratesdecrease or the weighted average cost of capital increases.

 

***Goodwill.***  We assess the recoverability of the goodwillassociated with our Neiman Marcus stores, Bergdorf Goodman stores and DirectMarketing reporting units. Such determination is made using discounted cashflow techniques.  Inputs to the valuationmodel include:

 

·                  estimated future cash flows;

 

·                  growth assumptions forfuture revenues as well as future gross margin rates, expense rates and otherestimates; and

 

·                  rate used to discount ourestimated future cash flow projections to their present value (or estimated fairvalue).

 

Based upon the review of our recordedgoodwill balances in fiscal year 2009, we determined the goodwill balancesassociated with our Specialty Retail stores were impaired and recordedimpairment charges aggregating $329.7 million. These impairment charges reflect 1) lower cash flow, revenue andprofitability projections associated with these operations and 2) a higher rate(based upon the weighted average cost of capital) required to discount our cashflow projections in light of current economic conditions and financial marketconsiderations.  We believe our estimatesare appropriate based upon current market conditions and the best informationavailable at the assessment date. However, future impairment charges could berequired if we do not achieve our current cash flow, revenue and profitabilityprojections or the weighted average cost of capital increases.

 

**NOTE 8.  ACCRUEDLIABILITIES**

 

The significant componentsof accrued liabilities are as follows:

 
| **(in  thousands)**                       | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                      |       |                     |       |                     |       |
| Accrued salaries and  related liabilities |       | $                        | 42,213     |                     | $          | 51,857 |   |
| Amounts due customers                     |       | 62,254                   |       | 60,602                   |       |
| Self-insurance reserves                   |       | 35,510                   |       | 44,132                   |       |
| Sales returns reserves                    |       | 29,749                   |       | 45,042                   |       |
| Interest payable                          |       | 28,933                   |       | 34,756                   |       |
| Sales taxes                               |       | 18,323                   |       | 24,047                   |       |
| Loyalty program liability                 |       | 16,927                   |       | 22,974                   |       |
| Other                                     |       | 68,977                   |       | 77,684                   |       |
| Total                                     |       | $                        | 302,886    |                     | $          | 361,094 |   |

 

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**NOTE 9.  LONG-TERM DEBT**

 

The significant componentsof our long-term debt are as follows:

 
| **(in  thousands)**                                         | ** ** | **Interest  Rate** | ** ** | **August 1,********2009** | ** ** | **August 2,********2008** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|--------------------------------|------------|--------------------------------|------------|
|                                                        |       |               |       |                           |       |                           |       |
| Senior Secured Term Loan  Facility                          |       | variable           |       | $                              | 1,625,000  |                           | $          | 1,625,000 |   |
| 2028 Debentures                                             |       | 7.125%             |       | 121,297                        |       | 121,102                        |       |
| Senior Notes                                                |       | 9.0%/9.75%         |       | 734,541                        |       | 700,000                        |       |
| Senior Subordinated Notes                                   |       | 10.375%            |       | 500,000                        |       | 500,000                        |       |
| Total debt                                                  |       |               |       | 2,980,838                      |       | 2,946,102                      |       |
| Less: current portion of  Senior Secured Term Loan Facility |       |               |       | (26,617                        | )          | —                         |       |
| Long-term debt                                              |       |               |       | $                              | 2,954,221  |                           | $          | 2,946,102 |   |

 

***Senior Secured Asset-Based Revolving CreditFacility.***  On July 15,2009, NMG amended and restated the terms of its prior asset-based revolvingcredit facility (which had been scheduled to mature on October 6,2010).  The terms of the amended and restated Asset-Based Revolving CreditFacility include a scheduled maturity date of January 15, 2013 and amaximum committed borrowing capacity of $600.0 million (the same amount as theprior facility).  The new facility also provides an uncommitted accordionfeature that allows NMG to request the lenders to provide additional capacityin either the form of increased revolving commitments or incremental termloans, subject to a potential total maximum facility of $800 million.

 

TheAsset-Based Revolving Credit Facility provides committed financing of up to$600.0 million, subject to a borrowing base. The Asset-Based Revolving Credit Facility includes borrowing capacityavailable for letters of credit and for borrowings on same-day notice.  The borrowing base for the Asset-BasedRevolving Credit Facility is equal to at any time the sum of (a) thelesser of (i) 80% of eligible inventory (valued at the lower of cost ormarket value) and (ii) 85% of the net orderly liquidation value of eligibleinventory, and (b) 85% of the amounts owed by credit card processors inrespect of eligible credit card accounts constituting proceeds arising from thesale or disposition of inventory, less certain reserves.  Through April 30, 2011, NMG is requiredto maintain excess availability of at least the greater of (a) 10% of thelesser of (i) the aggregate revolving commitments and (ii) theborrowing base and (b) $50 million under the terms of the Asset-BasedRevolving Credit Facility.  After April 30, 2011, if at any time,excess availability is less than the greater of (a) 15% of the lesser of (i) theaggregate revolving commitments and (ii) the borrowing base and (b) $60million, NMG will be required to maintain a pro forma ratio of consolidatedEBITDA to consolidated Fixed Charges (as such terms are defined in the creditagreement) of at least 1.1 to 1.0.  On August 1, 2009, NMG had noborrowings outstanding under this facility, $32.8 million of outstandingletters of credit and $468.5 million of unused borrowing availability.

 

TheAsset-Based Revolving Credit Facility provides that NMG has the right at anytime to request up to $300 million of additional revolving facility commitmentsand/or incremental term loans; provided that the aggregate amount of loan commitmentsunder the Asset-Based Revolving Credit Facility may not exceed $800 million.However, the lenders are under no obligation to provide any such additionalcommitments or loans, and any increase in commitments or incremental term loanswill be subject to customary conditions precedent.  If NMG were to requestany such additional commitments and the existing lenders or new lenders were toagree to provide such commitments, the Asset-Based Revolving Credit Facilitysize could be increased to up to $800 million, but NMG’s ability to borrowwould still be limited by the amount of the borrowing base. Incremental termloans may be exchanged by NMG for any of NMG’s existing senior notes and seniorsubordinated notes, or the cash proceeds of any incremental term loans may beused to repurchase any of such notes, but neither the incremental term loansnor the proceeds thereof may be used for any other purpose.

 

Borrowingsunder the Asset-Based Revolving Credit Facility bear interest at a rate perannum equal to, at NMG’s option, either (a) a base rate determined byreference to the highest of (i) a defined prime rate, (ii) thefederal funds effective rate plus 1/2 of 1% or (iii) a one-month LIBORrate plus 1% or (b) a LIBOR rate, subject to certain adjustments, in eachcase plus an applicable margin.  The applicable margin is up to 3.50% withrespect to base rate borrowings and up to 4.50% with respect to LIBORborrowings, provided that until October 1, 2010, the applicable marginwill be 3.25% with respect to base rate borrowings and 4.25% with respect toLIBOR borrowings. The applicable margin is subject to adjustment based on thehistorical availability under the Asset-Based Revolving Credit Facility. Inaddition, NMG is required to pay a commitment fee in respect of unusedcommitments of (a) 0.750% per annum during any applicable period in whichthe average revolving loan utilization is 50% or more or (b) 1% per annumduring any applicable period in which the average revolving loan utilization isless than 50%.  NMG must also pay customary letter of credit fees andagency fees.

 

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Ifat any time the aggregate amount of outstanding revolving loans, unreimbursedletter of credit drawings and undrawn letters of credit under the Asset-BasedRevolving Credit Facility exceeds the lesser of (a) the commitment amountand (b) the borrowing base (including as a result of reductions to theborrowing base that would result from certain non-ordinary course sales ofinventory with a value in excess of $25 million, if applicable), NMG will berequired to repay outstanding loans or cash collateralize letters of credit inan aggregate amount equal to such excess, with no reduction of the commitmentamount.  In addition, if at any time the aggregate amount of outstandingrevolving loans and incremental term loans, unreimbursed letter of creditdrawings and undrawn letters of credit under the Asset-Based Revolving CreditFacility exceeds the reported value of inventory owned by the borrowers andguarantors, NMG will be required to eliminate such excess within the earlier of30 days from such occurrence or 5 business days from the first date on or aftersuch occurrence at which excess availability is less than $75 million.  If(a) the amount available under the Asset-Based Revolving Credit Facilityis less than the greater of (i) 20% of the lesser of (A) theaggregate revolving commitments and (B) the borrowing base and (ii) $75million or (b) an event of default has occurred, NMG will be required torepay outstanding loans and cash collateralize letters of credit with the cashNMG would then be required to deposit daily in a collection account maintainedwith the agent under the Asset-Based Revolving Credit Facility.

 

NMGmay voluntarily reduce the unutilized portion of the commitment amount andrepay outstanding loans at any time without premium or penalty other thancustomary “breakage” costs with respect to LIBOR loans.  There is noscheduled amortization under the Asset-Based Revolving Credit Facility; theprincipal amount of the revolving loans outstanding thereunder will be due andpayable in full on January 15, 2013.

 

Allobligations under the Asset-Based Revolving Credit Facility are guaranteed bythe Company and certain of NMG’s existing and future domesticsubsidiaries.  As of August 1, 2009, the assets of NMG’snon-guarantor subsidiaries aggregated approximately $0.3 million.  Allobligations under NMG’s Asset-Based Revolving Credit Facility, and theguarantees of those obligations, are secured, subject to certain significantexceptions, by substantially all of the assets of the Company, NMG and thesubsidiaries that have guaranteed the Asset-Based Revolving Credit Facility(subsidiary guarantors), including:

 

·                  afirst-priority security interest in personal property consisting of inventoryand related accounts, cash, deposit accounts, all payments received by NMG orthe subsidiary guarantors from credit card clearinghouses and processors orotherwise in respect of all credit card charges for sales of inventory by NMGand the subsidiary guarantors, certain related assets and proceeds of theforegoing;

 

·                  asecond-priority pledge of 100% of NMG’s capital stock and certain of thecapital stock held by NMG, the Company or any subsidiary guarantor (whichpledge, in the case of any foreign subsidiary is limited to 100% of thenon-voting stock (if any) and 65% of the voting stock of such foreignsubsidiary); and

 

·                  asecond-priority security interest in, and mortgages on, substantially all othertangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s owned and leased realproperty (which currently consists of approximately half of NMG’s full-lineretail stores) and equipment.

 

Capitalstock and other securities of a subsidiary of NMG that are owned by NMG or anysubsidiary guarantor will not constitute collateral under NMG’s Asset-BasedRevolving Credit Facility to the extent that such securities cannot secure NMG’s2028 Debentures or other secured public debt obligations without requiring thepreparation and filing of separate financial statements of such subsidiary inaccordance with applicable Securities and Exchange Commission’s rules.  Asa result, the collateral under NMG’s Asset-Based Revolving Credit Facility willinclude shares of capital stock or other securities of subsidiaries of NMG orany subsidiary guarantor only to the extent that the applicable value of suchsecurities (on a subsidiary-by-subsidiary basis) is less than 20% of theaggregate principal amount of the 2028 Debentures or other secured public debtobligations of NMG. The Asset-Based Revolving Credit Facility contains a numberof covenants that, among other things and subject to certain significantexceptions, restrict its ability and the ability of its subsidiaries to:

 

·                  incuradditional indebtedness;

 

·                  pay dividendson NMG’s capital stock or redeem, repurchase or retire NMG’s capital stock orindebtedness;

 

·                  makeinvestments, loans, advances and acquisitions;

 

·                  createrestrictions on the payment of dividends or other amounts to NMG from itssubsidiaries that are not guarantors;

 

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·                  engage intransactions with NMG’s affiliates;

 

·                  sell assets,including capital stock of NMG’s subsidiaries;

 

·                  consolidate ormerge;

 

·                  create liens;and

 

·                  enter into saleand lease back transactions.

 

Thecovenants limiting dividends and other restricted payments; investments, loans,advances and acquisitions; and prepayments or redemptions of otherindebtedness, each permit the restricted actions in an unlimited amount,subject to the satisfaction of certain payment conditions, principally that NMGmust have pro forma excess availability under the Asset-Based Revolving CreditFacility equal to at least 25% of the lesser of (a) the revolvingcommitments under the facility and (b) the borrowing base, NMG deliveringprojections demonstrating that projected excess availability for the nexttwelve months will be equal to such thresholds and that NMG have a pro formaratio of consolidated EBITDA to consolidated Fixed Charges (as such terms aredefined in the credit agreement) of at least 1.2 to 1.0 (or 1.1 to 1.0 forprepayments or redemptions of other indebtedness).  The Asset-Based Revolving Credit Facilityalso contains customary affirmative covenants and events of default, includinga cross-default provision in respect of any other indebtedness that has an aggregateprincipal amount exceeding $50 million.

 

***Senior Secured Term LoanFacility.***  In October 2005,NMG entered into a credit agreement and related security and other agreementsfor a $1,975.0 million Senior Secured Term Loan Facility.  NMG voluntarily repaid $100.0 millionprincipal amount of the loans under its Senior Secured Term Loan Facility infiscal year 2006 and $250 million in fiscal year 2007.  At August 1, 2009, the outstandingbalance under the Senior Secured Term Loan Facility was $1,625.0 million(including $26.6 million of borrowings classified as current liabilities).  The principal amount of the loans outstandingis due and payable in full on April 6, 2013.

 

At August 1, 2009, borrowings under the SeniorSecured Term Loan Facility bore interest at a rate per annum equal to, at NMG’soption, either (a) a base rate determined by reference to the higher of (1) theprime rate of Credit Suisse and (2) the federal funds effective rate plus 1⁄2of 1% or (b) a LIBOR rate, subject to certain adjustments, in each caseplus an applicable margin. The interest rate on the outstanding borrowingspursuant to the Senior Secured Term Loan Facility was 2.50% at August 1,2009.  The applicable margin is subjectto adjustment based on contractually defined debt coverage ratios.  At August 1, 2009, the applicable marginwith respect to base rate borrowings was 1.00% and the applicable margin withrespect to LIBOR borrowings was 2.00%.

 

The credit agreement governing the SeniorSecured Term Loan Facility requires NMG to prepay outstanding term loans with50% (which percentage will be reduced to 25% if NMG’s total leverage ratio isless than a specified ratio and will be reduced to 0% if NMG’s total leverageratio is less than a specified ratio) of its annual excess cash flow (asdefined in the credit agreement). For fiscal year 2009, NMG will be required toprepay $26.6 million of outstanding term loans in the first quarter of fiscalyear 2010 pursuant to the annual excess cash flow requirements.  For fiscal years 2008 and 2007, NMG was notrequired to prepay any outstanding term loans pursuant to the annual excesscash flow requirements.  If a change ofcontrol (as defined in the credit agreement) occurs, NMG will be required tooffer to prepay all outstanding term loans, at a prepayment price equal to 101%of the principal amount to be prepaid, plus accrued and unpaid interest to thedate of prepayment. NMG also must offer to prepay outstanding term loans at100% of the principal amount to be prepaid, plus accrued and unpaid interest,with the proceeds of certain asset sales under certain circumstances.

 

NMG may voluntarily prepay outstanding loansunder the Senior Secured Term Loan Facility at any time without premium orpenalty other than customary “breakage” costs with respect to LIBOR loans.There is no scheduled amortization under the Senior Secured Term Loan Facility.

 

All obligations under the Senior Secured TermLoan Facility are unconditionally guaranteed by the Company and each direct andindirect domestic subsidiary of NMG that guarantees the obligations of NMGunder its Asset-Based Revolving Credit Facility. All obligations under theSenior Secured Term Loan Facility, and the guarantees of those obligations, aresecured, subject to certain significant exceptions, by substantially all of theassets of the Company, NMG and the subsidiary guarantors, including:

 

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·                  a first-priority pledge of100% of NMG’s capital stock and certain of the capital stock held by NMG, theCompany or any subsidiary guarantor (which pledge, in the case of any foreignsubsidiary is limited to 100% of the non-voting stock (if any) and 65% of thevoting stock of such foreign subsidiary); and

 

·                  a first-priority securityinterest in, and mortgages on, substantially all other tangible and intangibleassets of NMG, the Company and each subsidiary guarantor, including asignificant portion of NMG’s owned and leased real property (which currentlyconsists of approximately half of NMG’s full-line retail stores) and equipment,but excluding, among other things, the collateral described in the followingbullet point; and

 

·                  a second-priority securityinterest in personal property consisting of inventory and related accounts,cash, deposit accounts, all payments received by NMG or the subsidiaryguarantors from credit card clearinghouses and processors or otherwise inrespect of all credit card charges for sales of inventory by NMG and thesubsidiary guarantors, certain related assets and proceeds of the foregoing.

 

Capital stock and other securities of asubsidiary of NMG that are owned by NMG or any subsidiary guarantor will notconstitute collateral under NMG’s Senior Secured Term Loan Facility to theextent that such securities cannot secure the 2028 Debentures or other securedpublic debt obligations without requiring the preparation and filing ofseparate financial statements of such subsidiary in accordance with applicableSEC rules. As a result, the collateral under NMG’s Senior Secured Term LoanFacility will include shares of capital stock or other securities ofsubsidiaries of NMG or any subsidiary guarantor only to the extent that theapplicable value of such securities (on a subsidiary-by-subsidiary basis) isless than 20% of the aggregate principal amount of the 2028 Debentures or othersecured public debt obligations of NMG.

 

The credit agreement governing the SeniorSecured Term Loan Facility contains a number of negative covenants that aresubstantially similar to those governing the Senior Notes and additionalcovenants related to the security arrangements for the Senior Secured Term LoanFacility. The credit agreement also contains customary affirmative covenantsand events of default, including a cross-default provision in respect of anyother indebtedness that has an aggregate principal amount exceeding $50million.

 

***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 securityinterest on certain collateral subject to liens granted under NMG’s SeniorSecured Credit Facilities constituting (a) (i) 100% of the capitalstock 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’sexisting and future foreign subsidiaries and (b) certain of NMG’sprincipal properties that include approximately half of NMG’s full-line stores,in each case, to the extent required by the terms of the indenture governingthe 2028 Debentures. The 2028 Debentures contain covenants that restrict NMG’sability to create liens and enter into sale and lease back transactions. Thecollateral securing the 2028 Debentures will be released upon the release ofliens on such collateral under NMG’s Senior Secured Credit Facilities and anyother debt (other than the 2028 Debentures) secured by such collateral. Capitalstock and other securities of a subsidiary of NMG that are owned by NMG or anysubsidiary will not constitute collateral under the 2028 Debentures to theextent such property does not constitute collateral under NMG’s Senior SecuredCredit Facilities as described above. The 2028 Debentures are guaranteed on anunsecured, 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, NewtonAcquisition Merger Sub, Inc. issued $700.0 million aggregate originalprincipal amount of 9.0% / 9.75% Senior Notes under a senior indenture (SeniorIndenture) with Wells Fargo Bank, National Association, as trustee. At theclosing 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 millionaggregate principal amount of 9.0% / 9.75% Senior Notes under a seniorindenture (Senior Indenture).  NMG’sSenior Notes mature on October 15, 2015.

 

Interest on the Senior Notes is payablequarterly 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 Notesentirely in cash (Cash Interest) or entirely by increasing the principal amountof the outstanding Senior Notes by issuing additional Senior Notes (PIKInterest). Cash Interest on the Senior Notes accrues at the rate of 9% perannum. 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 Notesbecause of our belief that this feature could be a useful tool to enhanceliquidity under appropriate circumstances. In the second quarter of fiscal year2009, given the dislocation in the financial markets and the uncertainty as towhen reasonable conditions will return, we believed that it was appropriate toutilize this feature, even though we had available borrowing

 

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capacity under our $600.0 million revolving credit facility.Accordingly, we have elected to pay PIK Interest for the three quarterlyinterest periods ending October 14, 2009 and to make such interestpayments with the issuance of additional Senior Notes at the PIK Interest rateof 9.75% instead of paying interest in cash. As a result, the original principal amount of Senior Notes of $700.0million increased by $17.1 million on April 14, 2009 and $17.4 million on July 14,2009.

 

Prior to the beginning of each eligibleinterest period in the future, we will evaluate whether to continue utilizingthis PIK feature, taking into account market conditions and other relevantfactors at that time. After October 15, 2010, we are required to make allinterest payments on the Senior Notes entirely in cash.

 

The Senior Notes are fully andunconditionally guaranteed, on a joint and several unsecured, senior basis, byeach of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’s obligationsunder its Senior Secured Credit Facilities and by the Company. The Senior Notesand the guarantees thereof are NMG’s and the guarantors’ unsecured, seniorobligations and rank (i) equal in the right of payment with all of NMG’sand the guarantors’ existing and future senior indebtedness, including anyborrowings under NMG’s Senior Secured Credit Facilities and the guaranteesthereof and NMG’s 2028 Debentures; and (ii) senior to all of NMG’s and itsguarantors’ existing and future subordinated indebtedness, including the SeniorSubordinated Notes due 2015 and the guarantees thereof. The Senior Notes alsoare effectively junior in priority to NMG’s and its guarantors’ obligationsunder all secured indebtedness, including NMG’s Senior Secured Credit Facilities,the 2028 Debentures, and any other secured obligations of NMG, in each case, tothe extent of the value of the assets securing such obligations. In addition,the Senior Notes are structurally subordinated to all existing and futureliabilities, including trade payables, of NMG’s subsidiaries that are notproviding guarantees.

 

NMG is not required to make any mandatoryredemption or sinking fund payments with respect to the Senior Notes, but undercertain circumstances, NMG may be required to offer to purchase Senior Notes asdescribed below. NMG may from time to time acquire Senior Notes by means otherthan a redemption, whether by tender offer, in open market purchases, throughnegotiated transactions or otherwise, in accordance with applicable securitieslaws.

 

Except as described below, the Senior Notesare not redeemable at NMG’s option prior to October 15, 2010. From andafter October 15, 2010, NMG may redeem the Senior Notes, in whole or inpart, at a redemption price equal to 104.5% of principal amount, decliningannually to 100% of the principal amount on October 15, 2013, plus accruedand unpaid interest, and Additional Interest (as defined in the SeniorIndenture), if any, thereon to the applicable redemption date.

 

At any time prior to October 15, 2010,NMG may redeem all or a part of the Senior Notes at a redemption price equal to100% of the principal amount of Senior Notes redeemed plus an applicablepremium, as provided in the Senior Indenture, and accrued and unpaid interestand Additional Interest, if any, to the redemption date.

 

Upon the occurrence of a change of control(as defined in the Senior Indenture), each holder of the Senior Notes has theright to require NMG to repurchase some or all of such holder’s Senior Notes ata price in cash equal to 101% of the aggregate principal amount thereof plusaccrued and unpaid interest, and Additional Interest, if any, to the date ofpurchase.

 

The indenture governing the Senior Notescontains covenants that limit NMG’s ability and certain of its subsidiaries’ability to:

 

·                  incur additionalindebtedness;

 

·                  pay dividends on NMG’scapital stock or redeem, repurchase or retire NMG’s capital stock orsubordinated indebtedness;

 

·                  make investments;

 

·                  create restrictions on thepayment of dividends or other amounts to NMG from its restricted subsidiariesthat are not guarantors of the notes;

 

·                  engage in transactionswith NMG’s affiliates;

 

·                  sell assets, includingcapital stock of NMG’s subsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

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·                  enter into sale and leaseback transactions.

 

The Senior Indenture also provides for eventsof default, including a cross-default provision in respect of any otherindebtedness that has an aggregate principal amount exceeding $50 million,which, if any of them occurs, would permit or require the principal, premium,if any, interest and any other monetary obligations on all outstanding SeniorNotes to be due and payable immediately.

 

Thefair value of NMG’s Senior Notes at August 1, 2009 was approximately$539.9 million.

 

***Senior Subordinated Notes.**** *In October 2005, NewtonAcquisition Merger Sub, Inc. issued $500.0 million aggregateprincipal amount of 10.375% Senior Subordinated Notes under a seniorsubordinated indenture (Senior Subordinated Indenture) with Wells Fargo Bank,National Association, as trustee. At the closing of the Acquisition, as thesurviving corporation in the Acquisition, NMG assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior SubordinatedIndenture. The Senior Subordinated Notes mature on October 15, 2015.Interest on the Senior Subordinated Notes is payable in cash semi-annually inarrears on each April 15 and October 15, commencing April 15,2006.

 

The Senior Subordinated Notes are fully andunconditionally guaranteed, on a joint and several unsecured, seniorsubordinated basis, by each of NMG’s wholly-owned domestic subsidiaries thatguarantee NMG’s obligations under its Senior Secured Credit Facilities and bythe Company. The Senior Subordinated Notes and the guarantees thereof are NMG’sand the guarantors’ unsecured, senior subordinated obligations and rank (i) juniorto all of NMG’s and the guarantors’ existing and future senior indebtedness,including the Senior Notes and any borrowings under NMG’s Senior Secured CreditFacilities, and the guarantees thereof and NMG’s 2028 Debentures; (ii) equallywith any of NMG’s and the guarantors’ future senior subordinated indebtedness;and (iii) senior to any of NMG’s and the guarantors’ future subordinatedindebtedness. In addition, the Senior Subordinated Notes are structurallysubordinated to all existing and future liabilities, including trade payables,of NMG’s subsidiaries that are not providing guarantees.

 

NMG is not required to make any mandatoryredemption or sinking fund payments with respect to the Senior SubordinatedNotes, but, under certain circumstances, NMG may be required to offer topurchase Senior Subordinated Notes as described below. The Company may fromtime to time acquire Senior Subordinated Notes by means other than aredemption, whether by tender offer, in open market purchases, throughnegotiated transactions or otherwise, in accordance with applicable securitieslaws.

 

Except as described below, the SeniorSubordinated Notes are not redeemable at NMG’s option prior to October 15,2010. From and after October 15, 2010, NMG may redeem the SeniorSubordinated Notes, in whole or in part, at a redemption price equal to105.188% of principal amount, declining annually to 100% of principal amount onOctober 15, 2013, plus accrued and unpaid interest, and AdditionalInterest (as defined in the Senior Subordinated Indenture), if any, thereon tothe applicable redemption date.

 

At any time prior to October 15, 2010,NMG also may redeem all or a part of the Senior Subordinated Notes at aredemption price equal to 100% of the principal amount of Senior SubordinatedNotes redeemed plus an applicable premium, as provided in the SeniorSubordinated Indenture, and accrued and unpaid interest and AdditionalInterest, if any, to the redemption date.

 

Upon the occurrence of a change of control(as defined in the Senior Subordinated Indenture), NMG will make an offer topurchase all of the Senior Subordinated Notes at a price in cash equal to 101%of the aggregate principal amount thereof plus accrued and unpaid interest, andAdditional Interest, if any, to the date of purchase.

 

The indenture governing the Senior SubordinatedNotes contains covenants substantially similar to those applicable to NMG’sSenior Notes described above. The Senior Subordinated Indenture also providesfor events of default, including a cross-default provision in respect of anyother indebtedness that has an aggregate principal amount exceeding $50million, which, if any of them occurs, would permit or require the principal,premium, if any, interest and any other monetary obligations on all outstandingSenior Subordinated Notes to be due and payable immediately, subject to certainexceptions.

 

Thefair value of NMG’s Senior Subordinated Notes at August 1, 2009 wasapproximately $355.0 million.

 

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***Maturities of Long-Term Debt.***  At August 1, 2009, annual maturities oflong-term debt during the next five fiscal years and thereafter are as follows(in millions):

 
| 2010       |   | $       | 26.6   |   |
|------------|--------|---------|--------|--------|
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| 2013       |   | 1,598.4 |   |
| 2014       |   | —  |   |
| Thereafter |   | 1,355.8 |   |

 

The above table does not reflect eitherfuture excess cash flow prepayments, if any, that may be required under theSenior Secured Term Loan Facility or additional principal amounts under theSenior Notes that will be outstanding as a result of our current PIK Interestelection for the quarterly interest period ending October 14, 2009, or anyfuture PIK Interest election that we may make through October 15, 2010.

 

***Interest expense.***  The significant components of interestexpense are as follows:

 
| ** **                         | ** ** | **Fiscal  year ended**         | ** **    |
|------------------------------------|------------|--------------------------------|---------------|
| **(in  thousands)**                | ** ** | **August 1,********2009** | ** **    | **August 2,********2008** | ** ** | **July 28,********2007** | ** ** |
|                               |       |                           |          |   |   |   |   |
| Senior Secured Term Loan  Facility |       | $                              |  90,952  |   | $ |  106,504 |   | $ |  128,380 |   |
| 2028 Debentures                    |       | 8,906                          |          | 8,903 |   | 8,915 |   |
| Senior Notes                       |       | 66,356                         |          | 63,000 |   | 63,000 |   |
| Senior Subordinated Notes          |       | 52,028                         |          | 51,875 |   | 51,875 |   |
| Amortization of debt issue  costs  |       | 17,185                         |          | 14,217 |   | 14,141 |   |
| Other                              |       | 3,709                          |          | 3,275 |   | 3,689 |   |
| Total interest expense             |       | 239,136                        |          | 247,774 |   | 270,000 |   |
| Less:                              |       |                           |          |   |   |   |   |
| Interest income                    |       | 2,569                          |          | 4,933 |   | 7,370 |   |
| Capitalized interest               |       | 993                            |          | 3,036 |   | 2,825 |   |
| Interest expense, net              |       | $                              |  235,574 |   | $ |  239,805 |   | $ |  259,805 |   |

 

**NOTE 10.  FAIR VALUE MEASUREMENTS**

 

In the first quarter of fiscal year 2009, weadopted Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS 157), which provides guidance for using fair value tomeasure certain assets and liabilities. SFAS 157 applies whenever another standard requires or permits assets orliabilities to be measured at fair value. The standard does not expand the use of fair value to any newcircumstances.

 

SFAS157 defines fair value as the price that would be received upon sale of anasset or paid upon transfer of a liability in an orderly transaction betweenmarket participants at the measurement date and in the principal or mostadvantageous market for that asset or liability. The fair value is calculatedbased on assumptions that market participants would use in pricing the asset orliability, not on assumptions specific to the entity. In addition, the fairvalue of liabilities includes consideration of non-performance risk, includingour own credit risk.

 

Inaddition to defining fair value, SFAS 157 expands the disclosure requirementsaround fair value and establishes a fair value hierarchy for valuation inputs.The hierarchy prioritizes the inputs into three levels based on the extent towhich inputs used in measuring fair value are observable in themarket. Each fair value measurement is reported in one of the followingthree levels:

 

·                  Level 1 — valuationinputs are based upon unadjusted quoted prices for identical instruments tradedin active markets.

 

·                  Level 2 — valuationinputs are based upon quoted prices for similar instruments in active markets,quoted prices for identical or similar instruments in markets that are notactive, and model-based valuation techniques for which all 

 

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significant assumptions are observable in the market or can becorroborated by observable market data for substantially the full term of theassets or liabilities.

 

·                  Level 3 — valuationinputs are unobservable and typically reflect management’s estimates ofassumptions that market participants would use in pricing the asset orliability. The fair values are therefore determined using model-basedtechniques that include option pricing models, discounted cash flow models andsimilar techniques.

 

Inthe third quarter of fiscal year 2009, we adopted the disclosure requirementsof Statement of Financial Accounting Standards No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities” (SFAS 161).  SFAS 161 enhances current disclosures relatedto derivative instruments and hedging activities to provide adequateinformation about how derivative and hedging activities affect an entity’sfinancial position, financial performance and cash flows.

 

Inconnection with the Acquisition, we obtained $2,575.0 million of floating ratedebt agreements, of which $2,125.0 million was outstanding at the Acquisitiondate 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 enteredinto floating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit our exposure to interest rate increasesrelated to a portion of our floating rate indebtedness.  These swap agreements hedge a portion of ourcontractual floating rate interest commitments through the expiration of theagreements in December 2010.  As aresult of the swap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.831% to 6.983% per quarter through 2010 and result in an average fixed rateof 6.900%.

 

Asof the effective date, NMG designated the interest rate swaps as cash flowhedges. As cash flow hedges, unrealized gains on our outstanding interest rateswaps are recognized as assets while unrealized losses are recognized asliabilities.  Our interest rate swapagreements are highly, but not perfectly, correlated to the changes in interestrates to which we are exposed.  As aresult, unrealized gains and losses on our interest rate swap agreements aredesignated as effective or ineffective. The effective portion of such gains or losses is recorded as a componentof accumulated other comprehensive loss while the ineffective portion of suchgains or losses is recorded as a component of interest expense.

 

Inaddition, we realize a gain or loss on our interest rate swap agreements inconnection with each required interest payment on our floating rateindebtedness.  These realized gains orlosses are reclassified from accumulated other comprehensive loss to interestexpense.  The realized gains and losseseffectively adjust the contractual interest requirements pursuant to the termsof our floating rate indebtedness to the interest requirements at the fixedrates established in the interest rate swaps agreements.  The cash flows from our interest rate swapsare recorded in operating activities in the condensed consolidated statementsof cash flows.

 

Thefair values of the interest rate swaps are estimated using industry standardvaluation models using market-based observable inputs including interest ratecurves (Level 2).  A summary of therecorded balances with respect to our interest rate swaps included in ourconsolidated 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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Asummary of the recorded amounts related to our interest rate swaps reflected inour consolidated statements of operations are as follows:

 
| ** **                                                                | ** ** | **Fiscal year ended**    | ** **   |
|---------------------------------------------------------------------------|------------|--------------------------|--------------|
| **(in thousands)**                                                        | ** ** | **August 1,  2009** | ** **   | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                                                                      |       |                     |         |   |   |   |   |
| Realized hedging losses (gains) — included in interest  expense, net |       | $                        |  29,212 |   | $ |  3,841 |   | $ |  (6,040 | ) |
|                                                                      |       |                     |         |   |   |   |   |
| Ineffective hedging losses — included in interest  expense, net      |       | $                        |  669    |   | $ |  479 |   | $ |  696 |   |

 

Theamount of losses recorded in other comprehensive loss at August 1, 2009that is expected to be reclassified into interest expense in the next twelvemonths, if interest rates remain unchanged, is approximately $41.4 million.

 

**NOTE 11.  OTHER INCOME**

 

In the first quarter of fiscal year 2008, we recorded a pensioncurtailment gain of $32.5 million, or 0.7% of revenues, as a result of ourdecision to freeze certain Pension and SERP benefits as of December 31,2007.

 

In the first quarter of fiscal year 2007, we received considerationaggregating $4.2 million, or 0.1% of revenues, in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot. Weaccounted for our investment in Wedding Channel.com under the cost method. Inprior years, we had previously reduced our carrying value of this investment tozero.

 

In the fourth quarter of fiscal year 2007, we recorded $6.0 million ofother income for the breakage on gift cards we previously sold and issued.  The income was recognized based upon ouranalysis of the aging of these gift cards, our determination that thelikelihood of future redemption was remote and our determination that suchbalances were not subject to escheatment laws applicable to ouroperations.  Prior to the fourth quarterof fiscal year 2007, we had not recognized breakage on gift cards pending,among other things, our final determination of the applicable escheatment lawsapplicable to our operations.

 

**NOTE 12.  STOCK-BASED COMPENSATION**

 

The Company has approved equity-basedmanagement arrangements which authorize equity awards to be granted to certainmanagement employees for up to 87,992.0 shares of the common stock of theCompany.  Options generally vest overfour to five years and expire 10 years from the date of grant.

 

A summary of the status of our stock optionplan is as follows:

 
| ** **                                | ** ** | **Fiscal year ended** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **August 1, 2009**    | ** ** | **August 2, 2008** | ** ** | **July 28, 2007** | ** ** |
| ** **                                | ** ** | **Shares**            | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning  of fiscal year  |       | 83,146.6              |       | $ |  1,507 |   | 83,634.3 |   | $ |  1,430 |   | 81,716.3 |   | $ |  1,416 |   |
| Granted                                   |       | —                |       | — |   | 260.0 |   | 2,684 |   | 2,496.0 |   | 1,942 |   |
| Exercised                                 |       | (854.5                | )          | 1,684 |   | — |   | — |   | (578.0 | ) | 1,590 |   |
| Forfeited                                 |       | (2,893.1              | )          | 1,617 |   | (747.7 | ) | 1,597 |   | — |   | — |   |
| Outstanding at end of fiscal year         |       | 79,399.0              |       | $ |  1,585 |   | 83,146.6 |   | $ |  1,507 |   | 83,634.3 |   | $ |  1,430 |   |
| Options exercisable at end of fiscal year |       | 60,856.7              |       | $ |  1,542 |   | 46,684.4 |   | $ |  1,415 |   | 29,764.1 |   | $ |  1,233 |   |

 

The exercise price of approximately 50% ofour options escalate at a 10% compound rate per year until the earlier to occurof (i) exercise, (ii) the fifth anniversary of the date of grant or (iii) theoccurrence of a change in control. However, in the 

 

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event the Sponsors cause the sale of shares of the Company to anunaffiliated entity, the exercise price will cease to accrete at the time ofthe sale with respect to a pro rata portion of the accreting options.

 

All grants of stock options have an exercise price equal to the fairmarket value of our common stock on the date of grant.  Because we are privately held and there is nopublic market for our common stock, the fair market value of our common stockis determined by our Compensation Committee at the time option grants areawarded.  In determining the fair valueof our common stock, the Compensation Committee considers such factors as theCompany’s actual and projected financial results, the principal amount of theCompany’s indebtedness, valuations of the Company performed by third partiesand other factors it believes are material to the valuation process.

 

We use the Black-Scholes option-pricing modelto determine the fair value of our options as of the date of grant inaccordance with the provisions of SFAS 123(R). A summary of fiscal years 2008 and 2007 grants and fair valueassumptions is as follows:

 
| ** **                             | ** ** | **Fiscal Year  2008  Grants** | ** ** | **Fiscal Year  2007  Grants**           | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **Fair Value  Options**       | ** ** | **Accreting  Exercise  Price  Options** | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise  Price  Options** | ** ** |
| Options Granted                        |       | 130.0                         |       | 130.0                                   |       | 1,248.0 |   | 1,248.0 |   |
| Exercise Price at  August 1, 2009 |       | $                             | 2,684      |                                    | $          | 2,952 |   | $ | 1,942 |   | $ | 2,350 |   |
| Term                                   |       | 5                             |       | 5                                       |       | 5 |   | 5 |   |
| Volatility                             |       | 30.0                          | %          | 30.0                                    | %          | 30.0 | % | 30.0 | % |
| Risk-Free Rate                         |       | 3.5                           | %          | 3.5                                     | %          | 4.5 | % | 4.5 | % |
| Dividend Yield                         |       | —                        |       | —                                  |       | — |   | — |   |
| Fair Value                             |       | $                             |  882  |                                    | $          |  433 |   | $ |  676 |   | $ |  341 |   |

 

Expected volatility is based on a combinationof NMG’s historical volatility adjusted for our leverage and estimates ofimplied volatility of our peer group.

 

We recognize compensation expense for stockoptions straight-line over the vesting period. We recognized non-cash stock compensation expense of $5.8 millionin fiscal year 2009, $6.1 million in fiscal year 2008 and $5.9 million infiscal year 2007, which is included in selling, general and administrativeexpenses. At August 1, 2009, unearned non-cash stock-based compensationthat we expect to recognize as expense through fiscal year 2014 aggregatesapproximately $6.1 million.

 

**NOTE 13.  INCOME TAXES**

 

The significant componentsof income tax (benefit) expense are as follows:

 
| ** **                    | ** ** | **Fiscal year  ended**         | ** **    |
|-------------------------------|------------|--------------------------------|---------------|
| **(in  thousands)**           | ** ** | **August 1,********2009** | ** **    | **August 2,********2008** | ** ** | **July 28,********2007** | ** ** |
|                          |       |                           |          |   |   |   |   |
| Current:                      |       |                           |          |   |   |   |   |
| Federal                       |       | $                              |  (66,168 | ) | $ |  108,467 |   | $ |  127,754 |   |
| State                         |       | (389                           | )             | 19,976 |   | 15,063 |   |
|                          |       | (66,557                        | )             | 128,443 |   | 142,817 |   |
| Deferred:                     |       |                           |          |   |   |   |   |
| Federal                       |       | (132,442                       | )             | (37,693 | ) | (53,763 | ) |
| State                         |       | (21,446                        | )             | (6,934 | ) | (6,759 | ) |
|                          |       | (153,888                       | )             | (44,627 | ) | (60,522 | ) |
| Income tax (benefit)  expense |       | $                              | (220,445      | ) | $ |  83,816 |   | $ |  82,295 |   |

 

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A reconciliation of incometax (benefit) expense to the amount calculated based on the federal and statestatutory rates is as follows:

 
| ** **                                                                             | ** ** | **Fiscal year  ended**         | ** **     |
|----------------------------------------------------------------------------------------|------------|--------------------------------|----------------|
| **(in  thousands)**                                                                    | ** ** | **August 1,********2009** | ** **     | **August 2,********2008** | ** ** | **July 28,********2007** | ** ** |
|                                                                                   |       |                           |           |   |   |   |   |
| Income tax (benefit)  expense at statutory rate                                        |       | $                              |  (310,972 | ) | $ |  79,319 |   | $ |  75,954 |   |
| State income taxes, net of  federal income tax benefit                                 |       | (23,311                        | )              | 5,821 |   | 6,989 |   |
| Impairment of  nondeductible goodwill                                                  |       | 115,398                        |           | — |   | — |   |
| Tax (benefit) expense  related to tax settlements and other changes in tax liabilities |       | (378                           | )              | 159 |   | 1,925 |   |
| Impact of non-taxable  income                                                          |       | (897                           | )              | (1,709 | ) | (2,422 | ) |
| Impact of non-deductible  expenses                                                     |       | 82                             |           | 226 |   | 326 |   |
| Other                                                                                  |       | (367                           | )              | — |   | (477 | ) |
| Total                                                                                  |       | $                              |  (220,445 | ) | $ |  83,816 |   | $ |  82,295 |   |
| Effective tax rate                                                                     |       | 24.8                           | %              | 37.0 | % | 37.9 | % |

 

Oureffective income tax rate for fiscal year 2009 was 24.8% compared to 37.0% forfiscal year 2008 and 37.9% for fiscal year 2007.  No income tax benefit exists related to the$329.7 million of goodwill impairment charges recorded in fiscal year2009.  Excluding the impact of thegoodwill impairment charges, our effective income tax rate was 39.5% for fiscalyear 2009.  Our effective tax rate forfiscal year 2007 was favorably impacted by non-taxable income, partially offsetby increases in tax liabilities for settlements with taxing authorities.

 

Significant components of our net deferredincome tax asset (liability) are as follows:

 
| **(in  thousands)**                         | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                        |       |                     |       |                     |       |
| Deferred income tax  assets:                |       |                     |       |                     |       |
| Accruals and reserves                       |       | $                        | 39,997     |                     | $          | 28,445 |   |
| Employee benefits                           |       | 124,987                  |       | 89,113                   |       |
| Other                                       |       | 43,348                   |       | 28,021                   |       |
| Total deferred tax assets                   |       | $                        | 208,332    |                     | $          | 145,579 |   |
|                                        |       |                     |       |                     |       |
| Deferred income tax  liabilities:           |       |                     |       |                     |       |
| Inventory                                   |       | $                        | (12,208    | )                        | $          | (4,685 | ) |
| Depreciation and  amortization              |       | (76,818                  | )          | (71,890                  | )          |
| Intangible assets                           |       | (787,987                 | )          | (950,141                 | )          |
| Other                                       |       | (9,993                   | )          | (16,174                  | )          |
| Total deferred tax  liabilities             |       | (887,006                 | )          | (1,042,890               | )          |
| Net deferred income tax  asset (liability)  |       | $                        | (678,674   | )                        | $          | (897,311 | ) |
|                                        |       |                     |       |                     |       |
| Net deferred income tax  asset (liability): |       |                     |       |                     |       |
| Current                                     |       | $                        | 19,136     |                     | $          | 32,659 |   |
| Non-current                                 |       | (697,810                 | )          | (929,970                 | )          |
| Total                                       |       | $                        | (678,674   | )                        | $          | (897,311 | ) |

 

The net deferred taxliability of $678.7 million at August 1, 2009 decreased from a $897.3million net deferred liability at August 2, 2008.  This decrease was comprised primarily of 1) a$133.5 million decrease in deferred tax liabilities related to the impairmentof certain intangible assets, 2) a $28.7 million decrease in deferred taxliabilities related to amortization of certain intangible assets, and 3) a$49.6 million increase in deferred tax assets related to an increase in minimumpension liability. We believe it is more likely than not that we will realizethe benefits of our recorded deferred tax assets.

 

Weadopted the provisions of FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year2008.  FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  The cumulative effect ofadopting FIN 48 resulted in a net increase to our accruals for uncertain taxpositions of $9.1 million for the derecognition of certain tax benefitspreviously recorded. This increase to our accruals was offset by acorresponding increase to goodwill as these uncertainties existed at the timeof the Acquisition.  At August 1,2009, the gross amount of unrecognized tax 

 

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benefitswas $6.6 million, all of which would impact our effective tax rate, if recognized.  We classify interest and penalties as acomponent of income tax (benefit) expense and our liability for accruedinterest and penalties was $5.8 million as of August 1, 2009.  A reconciliation of the beginning and endingamounts of unrecognized tax benefits is as follows (in millions):

 
| **(in  thousands)**                                                 | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Balance at beginning of  fiscal year                                |       | $                        | 21,244     |                     | $          | 26,624 |   |
| Gross amount of increases  for current year tax positions           |       | 591                      |       | 1,779                    |       |
| Gross amount of decreases  for settlements with tax authorities     |       | (14,263                  | )          | (7,159                   | )          |
| Gross amount of decreases  for expiration of statutes of limitation |       | (967                     | )          | —                   |       |
| Balance at ending of  fiscal year                                   |       | $                        | 6,605      |                     | $          | 21,244 |   |

 

We file income tax returns in the U.S.federal jurisdiction and various state and local jurisdictions.  During the third quarter of fiscal year 2009,we closed the IRS examination of fiscal years 2005 and 2006 and received netrefunds of approximately $2.8 million. In addition, as a result of the completion of the audit and IRS determinationregarding certain deductions taken in connection with the Acquisition, werecorded a decrease in the gross amount of unrecognized tax benefits of $13.7million and a decrease in accrued interest and penalties of $2.2 million. This$15.9 million reduction in our liability for unrecognized tax benefits resultedin a decrease to goodwill of $17.3 million and a tax benefit of $1.3 million,offset by a decrease to deferred tax liabilities of $2.7 million during fiscalyear 2009.  Finally, in the fourthquarter of fiscal year 2009, we recorded a decrease to our recorded liabilityfor unrecognized tax benefits and a corresponding reduction to goodwill of $0.7million as a result of the expiration of statutes of limitation in varioustaxing jurisdictions.

 

During the fourth quarter of fiscal year2008, we entered into a negotiated settlement with a state tax authorityregarding a state non-filing position which resulted in a decrease in ouraccruals for uncertain tax positions and a reduction to our gross unrecognizedtax benefits of $7.2 million and a corresponding decrease to goodwill of $3.0million related to the resolution of uncertainties that existed at the time ofthe Acquisition.

 

The IRS is now examining our federal taxreturns for fiscal year 2007.  We believeour recorded tax liabilities as of August 1, 2009 are sufficient to coverany potential assessments to be made by the IRS upon the completion of theirexaminations. We will continue to monitor the progress of the IRS examinationsand review our recorded tax liabilities for potential audit assessments.  With respect to state and localjurisdictions, with limited exceptions, the Company and its subsidiaries are nolonger subject to income tax audits for fiscal years before 2005.  We believe it is reasonably possible thatadditional adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 12 months as a result of settlements with tax authoritiesor expiration of statutes of limitation. At this time, we do not believe such adjustments will have a materialimpact on our consolidated financial statements.

 

**NOTE 14.  EMPLOYEE BENEFIT PLANS**

 

***Description of Benefit Plans.***  We sponsor a defined benefit pension plan(Pension Plan) and an unfunded supplemental executive retirement plan (SERPPlan) which provides certain employees additional pension benefits. Benefitsunder both plans are based on the employees’ years of service and compensationover defined periods of employment. As more fully described below, we frozebenefits offered under our Pension and SERP Plans effective December 31,2007.  Retirees and active employeeshired prior to March 1, 1989 are eligible for certain limitedpostretirement health care benefits (Postretirement Plan) if they meet certainservice and minimum age requirements.

 

We also maintain definedcontribution plans consisting of a 401(k) Plan and, in connection with theredesign of our long-term benefits effective January 1, 2008 as more fullydescribed below, a retirement savings plan (RSP) and defined contributionsupplemental executive retirement plan (Defined Contribution SERP Plan).  Employees make contributions to the 401(k) Planand RSP and we match an employee’s contribution up to a maximum of 6% of theemployee’s compensation subject to statutory limitations for a potentialmaximum match of 50% of employee contributions to the 401(k) Plan and 75%of employee contributions to the RSP. We also sponsor an unfunded key employeedeferred compensation plan, which provides certain employees with additionalbenefits.  Our aggregate expense relatedto these plans was approximately $20.0 million in fiscal year 2009, $19.2million in fiscal year 2008 and $11.0 million in fiscal year 2007.

 

***Plan Redesign.*** On September 7,2007, our Board of Directors approved certain changes to our long-term benefitsprogram.  Effective January 1, 2008,we offered a new, enhanced retirement savings plan subject to participants’elections to participate (as more fully described below).  For associates participating in the RSP:

 

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·                  Participants’balances in our 401(k) Plan were automatically transferred to the RSP.

 

·                  Our matchingcontributions to the RSP increased to a potential maximum 75% of the employeecontributions (up to a 6% deferral) from the potential maximum 50% to the 401(k) Plan(subject to IRS limit of $16,500 in 2009 for employee contributions).

 

·                  Our matchingcontributions vest to employees in two years as compared to the three yearvesting under the 401(k) Plan.

 

·                  All currentemployees, who did not participate in the former 401(k) Plan, and futureemployees are automatically enrolled in the RSP at a salary deferral rate of 3%once eligibility requirements have been met.

 

Concurrentwith the implementation of the RSP and the Defined Contribution SERP Plan, wefroze benefits offered under our Pension and SERP Plans for mostemployees.  Employees with a minimum often years of service and whose age plus years of service equaled at least 65 (Rule of65) as of December 31, 2007 were allowed either 1) to continue participationin our 401(k) Plan and Pension Plan (and SERP Plan, if eligible) or 2) tofreeze the benefits earned under the Pension Plan (and SERP Plan, if eligible)and participate in the RSP. No employee who met vesting requirements forfeitedbenefits earned prior to December 31, 2007.

 

***Costs of Benefits.***  The components of the expenses we incurredunder our Pension Plan, SERP Plan and Postretirement Plan are as follows:

 
| ** **                          | ** ** | **Fiscal year  ended**   | ** ** |
|-------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                 | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pension Plan:                       |       |                     |       |   |   |   |   |
| Service cost                        |       | $                        | 6,057      |   | $ | 10,815 |   | $ | 14,886 |   |
| Interest cost                       |       | 24,361                   |       | 22,866 |   | 22,214 |   |
| Expected return on plan  assets     |       | (26,048                  | )          | (24,626 | ) | (23,458 | ) |
| Pension Plan expense                |       | $                        | 4,370      |   | $ | 9,055 |   | $ | 13,642 |   |
| Curtailment gain                    |       | $                        | —     |   | $ | 26,113 |   | $ | — |   |
|                                |       |                     |       |   |   |   |   |
| SERP Plan:                          |       |                     |       |   |   |   |   |
| Service cost                        |       | $                        | 689        |   | $ | 1,254 |   | $ | 1,719 |   |
| Interest cost                       |       | 5,312                    |       | 4,960 |   | 4,928 |   |
| SERP Plan expense                   |       | $                        | 6,001      |   | $ | 6,214 |   | $ | 6,647 |   |
| Curtailment gain                    |       | $                        | —     |   | $ | 6,337 |   | $ | — |   |
|                                |       |                     |       |   |   |   |   |
| Postretirement Plan:                |       |                     |       |   |   |   |   |
| Service cost                        |       | $                        | 92         |   | $ | 124 |   | $ | 57 |   |
| Interest cost                       |       | 1,343                    |       | 1,356 |   | 786 |   |
| Net amortization of losses  (gains) |       | 282                      |       | 547 |   | (64 | ) |
| Postretirement Plan  expense        |       | $                        | 1,717      |   | $ | 2,027 |   | $ | 779 |   |

 

For purposes of determiningpension expense, the expected return on plan assets is calculated using themarket related value of plan assets.  At August 1,2009, the market related value of plan assets exceeded fair value by $57.8million.

 

***Benefit Obligations.***  Our obligations for the Pension Plan, SERPPlan and Postretirement Plan are valued annually as of the beginning of eachfiscal year. With respect to the Pension Plan and the SERP Plan, ourobligations consist of both a projected benefit obligation (PBO) and anaccumulated benefit obligation (ABO). The PBO represents the present value ofbenefits ultimately payable to plan participants for both past and futureservices expected to be provided by the plan participants. The ABO representsthe present value of benefits payable to plan participants for only servicesrendered at the valuation date.

 

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Our obligations pursuant toour Pension Plan, SERP Plan and Postretirement Plan are as follows:

 
| ** **                        | ** ** | **Pension  Plan** | ** ** | **SERP Plan**     | ** ** | **Postretirement  Plan** | ** ** |
|-----------------------------------|------------|-------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                        | ** ** | **Fiscal  years** | ** ** | **Fiscal  years** | ** ** | **Fiscal  years**        | ** ** |
| **(in  thousands)**               | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Projected benefit  obligations:   |       |              |       |              |       |                     |       |   |   |   |   |   |   |
| Beginning of year                 |       | $                 | 354,229    |              | $          | 380,235                  |       | $ | 77,566 |   | $ | 86,146 |   | $ | 20,336 |   | $ | 22,091 |   |
| Service cost                      |       | 6,057             |       | 10,815            |       | 689                      |       | 1,254 |   | 92 |   | 124 |   |
| Interest cost                     |       | 24,361            |       | 22,866            |       | 5,312                    |       | 4,960 |   | 1,343 |   | 1,356 |   |
| Actuarial (gain) loss             |       | 55,554            |       | (22,825           | )          | 11,001                   |       | (5,409 | ) | 665 |   | (2,167 | ) |
| Curtailment                       |       | —            |       | (26,113           | )          | —                   |       | (7,091 | ) | — |   | — |   |
| Benefits paid, net                |       | (12,206           | )          | (10,749           | )          | (2,416                   | )          | (2,294 | ) | (1,525 | ) | (1,068 | ) |
| Plan amendments                   |       | —            |       | —            |       | —                   |       | — |   | (2,991 | ) | — |   |
| End of year                       |       | $                 | 427,995    |              | $          | 354,229                  |       | $ | 92,152 |   | $ | 77,566 |   | $ | 17,920 |   | $ | 20,336 |   |
|                              |       |              |       |              |       |                     |       |   |   |   |   |   |   |
| Accumulated benefit  obligations: |       |              |       |              |       |                     |       |   |   |   |   |   |   |
| Beginning of year                 |       | $                 | 336,016    |              | $          | 337,047                  |       | $ | 68,253 |   | $ | 68,105 |   |   |   |   |   |
| End of year                       |       | $                 | 407,297    |              | $          | 336,016                  |       | $ | 84,254 |   | $ | 68,253 |   |   |   |   |   |

 

A summary of expected benefit paymentsrelated to our Pension Plan, SERP Plan and Postretirement Plan is as follows:

 
| **(in  thousands)**    | ** ** | **Pension  Plan** | ** ** | **SERP  Plan** | ** ** | **Postretirement  Plan** | ** ** |
|------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|
| ** **             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** |
| Fiscal year 2010       |       | $                 | 13,421     |           | $          | 4,142                    |       | $ | 927 |   |
| Fiscal year 2011       |       | 14,903            |       | 4,482          |       | 1,015                    |       |
| Fiscal year 2012       |       | 16,634            |       | 4,799          |       | 1,072                    |       |
| Fiscal year 2013       |       | 18,523            |       | 5,210          |       | 1,124                    |       |
| Fiscal year 2014       |       | 20,413            |       | 5,690          |       | 1,141                    |       |
| Fiscal years 2015-2019 |       | $                 | 130,562    |           | $          | 33,310                   |       | $ | 6,159 |   |

 

***Funding Policy and Plan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law. We were not required to make contributionsto the Pension Plan during fiscal years 2009 and 2008; however, we made avoluntary $15.0 million contribution to our Pension Plan in both fiscal years2009 and 2008.  In fiscal year 2007, wemade no contributions to our Pension Plan. Based upon currently available information, we will not be required tomake contributions to the Pension Plan during fiscal year 2010.  However, we will continue to evaluatevoluntary contributions to our Pension Plan based upon the unfunded position ofthe Pension Plan, our available liquidity and other factors.

 

Assets held by the Pension Plan are invested in accordance with theprovisions of our approved investment policy. The Pension Plan’s strategicasset allocation was structured to reduce volatility through diversificationand enhance return to approximate the amounts and timing of the expectedbenefit payments.  The asset allocationfor our Pension Plan at the end of fiscal years 2009 and 2008 and the targetallocation for fiscal year 2010, by asset category, are as follows:

 
| ** **              | ** ** | **Pension  Plan**                       | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **Allocation  at  July 31,  2009** | ** ** | **Allocation  at  July 31,  2008** | ** ** | **2010  Target  Allocation** | ** ** |
| Equity securities       |       | 68                                      | %          | 76 | % | 75 | % |
| Fixed income securities |       | 32                                      | %          | 24 | % | 25 | % |
| Total                   |       | 100                                     | %          | 100 | % | 100 | % |

 

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Changesin the assets held by the Pension Plan in fiscal years 2009 and 2008 are asfollows:

 
| ** **                                 | ** ** | **Fiscal  years** | ** ** |
|--------------------------------------------|------------|-------------------|------------|
| **(in  thousands)**                        | ** ** | **2009**          | ** ** | **2008** | ** ** |
| Fair value of assets at  beginning of year |       | $                 | 313,427    |   | $ | 324,632 |   |
| Actual return on assets                    |       | (44,227           | )          | (15,456 | ) |
| Contribution                               |       | 15,000            |       | 15,000 |   |
| Benefits paid                              |       | (12,206           | )          | (10,749 | ) |
| Fair value of assets at  end of year       |       | $                 | 271,994    |   | $ | 313,427 |   |

 

***Funded Status.***  The funded status of our Pension Plan, SERPPlan and Postretirement Plan is as follows:

 
| ** **                    | ** ** | **Pension  Plan** | ** ** | **SERP Plan**     | ** ** | **Postretirement  Plan** | ** ** |
|-------------------------------|------------|-------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **Fiscal  years** | ** ** | **Fiscal  years** | ** ** | **Fiscal  years**        | ** ** |
| **(in  thousands)**           | ** ** | **2009**          | ** ** | **2008**          | ** ** | **2009**                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Projected benefit  obligation |       | $                 | 427,995    |              | $          | 354,229                  |       | $ | 92,152 |   | $ | 77,566 |   | $ | 17,920 |   | $ | 20,336 |   |
| Fair value of plan assets     |       | 271,994           |       | 313,427           |       | —                   |       | — |   | — |   | — |   |
| Accrued obligation            |       | $                 | (156,001   | )                 | $          | (40,802                  | )          | $ | (92,152 | ) | $ | (77,566 | ) | $ | (17,920 | ) | $ | (20,336 | ) |

 

Obligations for our employeebenefit plans, included in other long-term liabilities, are as follows:

 
| **(in thousands)**                       | ** ** | **August 1,********2009** | ** ** | **August 2,********2008** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | ** **                     | ** ** | ** **                     | ** ** |
| Pension Plan                             |       | $                              | 156,001    |                           | $          | 40,802 |   |
| SERP Plan                                |       | 92,152                         |       | 77,566                         |       |
| Postretirement Plan                      |       | 17,920                         |       | 20,336                         |       |
|                                     |       | 266,073                        |       | 138,704                        |       |
| Less: current portion                    |       | (5,069                         | )          | (4,165                         | )          |
| Long-term portion of benefit obligations |       | $                              | 261,004    |                           | $          | 134,539 |   |

 

The $127.4 million increase in our employee benefit obligations wasprimarily driven by 1) a decrease in the actual return of our pension planassets of approximately $70.3 million and 2) a decrease in our discount ratefrom 6.75% at August 2, 2008 to 5.90% for the Pension and SERP Plans at August 1,2009 and 5.8% for the Postretirement Plan at August 1, 2009, whichresulted in increases in the obligations related to our employee benefit plansaggregating approximately $57.9 million. As of August 1, 2009, we have $69.0 million (net of taxes of $44.8million) of adjustments to such obligations recorded as increases toaccumulated other comprehensive loss.

 

In the first quarter offiscal year 2008, we reduced our recorded liability for projected benefitobligations payable by the Pension Plan by $26.1 million and by the SERP Planby $6.3 million to reflect the impact of freezing benefits provided under theseplans as of December 31, 2007, as more fully described below.  The total pension curtailment gain of $32.5million was recorded as other income in our consolidated statements ofoperations.

 

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***Assumptions.*** Significant assumptions related to the calculation of our obligationspursuant to our employee benefit plans include the discount rate used tocalculate the present value of benefit obligations to be paid in the future,the expected long-term rate of return on assets held by the Pension Plan, theaverage rate of compensation increase by Pension Plan and SERP Planparticipants and the health care cost trend rate for the Postretirement Plan.We review these assumptions annually based upon currently availableinformation. The assumptions we utilized in calculating the projected benefitobligations and periodic expense of our Pension Plan, SERP Plan andPostretirement Plan are as follows:

 
| ** **                                        | ** ** | **July 31,********2009** | ** ** | **July 31,********2008** | ** ** | **July 31,********2007** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| Pension Plan:                                     |       |                          |       |                          |       |                          |       |
| Discount rate                                     |       | 5.90                          | %          | 6.75                          | %          | 6.25                          | %          |
| Expected long-term rate of  return on plan assets |       | 8.00                          | %          | 8.00                          | %          | 8.00                          | %          |
| Rate of future  compensation increase             |       | 4.50                          | %          | 4.50                          | %          | 4.50                          | %          |
| SERP Plan:                                        |       |                          |       |                          |       |                          |       |
| Discount rate                                     |       | 5.90                          | %          | 6.75                          | %          | 6.25                          | %          |
| Rate of future  compensation increase             |       | 4.50                          | %          | 4.50                          | %          | 4.50                          | %          |
| Postretirement Plan:                              |       |                          |       |                          |       |                          |       |
| Discount rate                                     |       | 5.80                          | %          | 6.75                          | %          | 6.25                          | %          |
| Initial health care cost  trend rate              |       | 8.00                          | %          | 8.00                          | %          | 8.00                          | %          |
| Ultimate health care cost  trend rate             |       | 8.00                          | %          | 8.00                          | %          | 8.00                          | %          |

 

*Discount rate.*  The assumed discount rate utilized is based ona broad sample of Moody’s high quality corporate bond yields as of themeasurement date. The projected benefit payments are matched with the yields onthese bonds to determine an appropriate discount rate for the plan. Thediscount rate is utilized principally in calculating the present values of ourbenefit obligations and related expenses.

 

*Expectedlong-term rate of return on plan assets.*  The assumed expected long-term rate of returnon assets is the weighted average rate of earnings expected on the fundsinvested or to be invested by the Pension Plan to provide for the plan’sobligations. During fiscal year 2009, we utilized 8.0% as the expectedlong-term rate of return on plan assets. We periodically evaluate theallocation between investment categories of the assets held by the PensionPlan. We estimate the expected average long-term rate of return on assets basedon our future asset performance expectations using currently available marketand other data and the counsel of our outside actuaries and advisors. This rateis utilized primarily in calculating the expected return on plan assetscomponent of the annual pension expense. To the extent the actual rate ofreturn on assets realized over the course of a year is greater than the assumedrate, that year’s annual pension expense is not affected. Rather this gainreduces future pension expense over a period of approximately 10 to16 years. To the extent the actual rate of return on assets is less thanthe assumed rate, that year’s annual pension expense is likewise not affected.Rather this loss increases pension expense over approximately 10 to16 years.

 

*Rate offuture compensation increase.*  The assumed average rate of compensationincrease is the average annual compensation increase expected over theremaining employment periods for the participating employees. We utilized arate of 4.5% for fiscal year 2009. This rate is utilized principally incalculating the obligation and annual expense for the Pension and SERP Plans.

 

*Healthcare cost trend rate.*  Theassumed health care cost trend rate represents our estimate of the annual ratesof change in the costs of the health care benefits currently provided by thePostretirement Plan. The health care cost trend rate implicitly considersestimates of health care inflation, changes in health care utilization anddelivery patterns, technological advances and changes in the health status ofthe plan participants.

 

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Significant assumptions utilized in thecalculation of our projected benefit obligations as of August 1, 2009 andfuture expense requirements for our Pension Plan, SERP Plan and PostretirementPlan, and sensitivity analysis related to changes in these assumptions, are asfollows:

 
| ** **                                        | ** ** | ** **             | ** ** | ** **                                 | ** ** | **Using  Sensitivity Rate**                           | ** ** |
|---------------------------------------------------|------------|------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                        | ** ** | **Actual********Rate** | ** ** | **Sensitivity  Rate  Increase/(Decrease)** | ** ** | **Increase in********Liability********(in millions)** | ** ** | **Increase in********Expense********(in millions)** | ** ** |
| Pension Plan:                                     |       |                   |       |                                       |       |                                                  |       |   |   |
| Discount rate                                     |       | 5.90                   | %          | (0.25                                      | )%         | $                                                     | 16.1       |   | $ | 1.7 |   |
| Expected long-term rate of  return on plan assets |       | 8.00                   | %          | (1.00                                      | )%         | n/a                                                   |       | $ | 3.2 |   |
| Rate of future  compensation increase             |       | 4.50                   | %          | 0.25                                       | %          | $                                                     | 0.5        |   | $ | 0.1 |   |
| SERP Plan:                                        |       |                   |       |                                       |       |                                                  |       |   |   |
| Discount rate                                     |       | 5.90                   | %          | (0.25                                      | )%         | $                                                     | 2.7        |   | Insignificant |   |
| Rate of future  compensation increase             |       | 4.50                   | %          | 0.25                                       | %          | $                                                     | 0.5        |   | Insignificant |   |
| Postretirement Plan:                              |       |                   |       |                                       |       |                                                  |       |   |   |
| Discount rate                                     |       | 5.80                   | %          | (0.25                                      | )%         | $                                                     | 0.5        |   | Insignificant |   |
| Ultimate health care cost  trend rate             |       | 8.00                   | %          | 1.00                                       | %          | $                                                     | 2.2        |   | $ | 0.2 |   |

 

**NOTE 15.  COMMITMENTS AND CONTINGENCIES**

 

***Leases.***  We leasecertain property and equipment under various operating leases. The leasesprovide for monthly fixed rentals and/or contingent rentals based upon sales inexcess of stated amounts and normally require us to pay real estate taxes,insurance, common area maintenance costs and other occupancy costs. Generally,the leases have primary terms ranging from one to 99 years and includerenewal options ranging from two to 80 years.

 

Rent expense and relatedoccupancy costs under operating leases is as follows:

 
| ** **                                    | ** ** | **Fiscal year  ended**   | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                           | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                                          |       |                     |       |   |   |   |   |
| Minimum rent                                  |       | $                        | 55,400     |   | $ | 53,000 |   | $ | 46,900 |   |
| Contingent rent                               |       | 19,600                   |       | 29,700 |   | 28,600 |   |
| Other occupancy costs                         |       | 15,700                   |       | 13,600 |   | 13,700 |   |
| Amortization of deferred  real estate credits |       | (5,300                   | )          | (3,700 | ) | (1,700 | ) |
| Total rent expense                            |       | $                        | 85,400     |   | $ | 92,600 |   | $ | 87,500 |   |

 

Future minimum rentalcommitments, excluding renewal options, under non-cancelable leases are asfollows: fiscal year 2010—$55.6 million; fiscal year2011—$53.2 million; fiscal year 2012—$49.9 million; fiscal year2013—$48.1 million; fiscal year 2014—$43.4 million; all fiscal yearsthereafter—$650.7 million.

 

***Long-term Incentive Plan.***  The Company has a long-term incentive plan(Long-term Incentive Plan) that provides for a cash incentive payable tocertain employees upon a change of control, as defined, subject to theattainment of certain performance objectives. Performance objectives and targets are based on cumulative EBITDApercentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performanceperiod will be credited to a book account and will earn interest at acontractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% ofour total outstanding common stock.  Asof August 1, 2009, the vested participant balance in the Long-TermIncentive Plan aggregated $5.1 million.

 

***Cash Incentive Plan. ***The Company also has a cashincentive plan (Cash Incentive Plan) to aid in the retention of certain keyexecutives.  The Cash Incentive Planprovides for the creation of a $14 million cash bonus pool. Each participant inthe Cash Incentive Plan will be entitled to a cash bonus upon the earlier tooccur of a change of control or an initial public offering, as defined in theCash Incentive Plan, provided that the internal rate of return to the Sponsors is positive.

 

***Litigation.***  Weare currently involved in various legal actions and proceedings that arose inthe ordinary course of business. We believe that any liability arising as aresult of these actions and proceedings will not have a material adverse effecton our financial position, results of operations or cash flows.

 

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***Other.***  We hadapproximately $32.8 million of outstanding irrevocable letters of creditrelating to purchase commitments and insurance and other liabilities at August 1,2009. We had approximately $3.1 million in surety bonds at August 1,2009 relating primarily to merchandise imports and state sales tax and utilityrequirements.

 

**NOTE 16.  ACCUMULATED OTHER COMPREHENSIVE LOSS**

 

The following table showsthe components of accumulated other comprehensive loss (amounts are recordednet of related income taxes):

 
| **(in thousands)**                         | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                       |       |                     |       |                     |       |
| Unrealized loss on financial instruments   |       | $                        | (35,508    | )                        | $          | (21,755 | ) |
| Change in unfunded benefit obligations     |       | (69,011                  | )          | 12,302                   |       |
| Other                                      |       | (68                      | )          | 289                      |       |
| Total accumulated other comprehensive loss |       | $                        | (104,587   | )                        | $          | (9,164 | ) |

 

**NOTE 17.  SEGMENT REPORTING**

 

Wehave identified two reportable segments: Specialty Retail stores and DirectMarketing. The Specialty Retail stores segment aggregates the activities of ourNeiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcusclearance stores. The Direct Marketing segment conducts both online and printcatalog operations under the Neiman Marcus, Bergdorf Goodman and Horchow brandnames.  Both the Specialty Retail storesand Direct Marketing segments derive their revenues from the sales of high-endfashion apparel, accessories, cosmetics and fragrances from leading designers,precious and fashion jewelry and decorative home accessories.

 

Operatingearnings for the segments include 1) revenues, 2) cost of sales, 3) directselling, general, and administrative expenses, 4) other direct operatingexpenses, 5) income from credit card program and 6) depreciation expense forthe respective segment.  Items notallocated to our operating segments include those items not considered by managementin measuring the assets and profitability of our segments. These amountsinclude 1) corporate expenses including, but not limited to, treasury, investorrelations, legal and finance support services, and general corporatemanagement, 2) charges related to the application of purchase accountingadjustments made in connection with the Acquisition including amortization ofintangible assets and favorable lease commitments and other non-cash items and3) interest expense.  These items, whileoften times related to the operations of a segment, are not considered bysegment operating management, corporate operating management and the chiefoperating decision maker in assessing segment operating performance.  The accounting policies of the operatingsegments are the same as those described in the summary of significantaccounting policies (except with respect to purchase accounting adjustments notallocated to the operating segments).

 

Thefollowing table presents our revenues by merchandise category as a percentageof net sales:

 
| ** **                                    | ** ** | **Years Ended**          | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| Women’s Apparel                          |       | 36                       | %          | 36 | % | 37 | % |
| Women’s Shoes, Handbags  and Accessories |       | 21                       | %          | 20 | % | 20 | % |
| Cosmetics and Fragrances                      |       | 11                       | %          | 11 | % | 11 | % |
| Men’s Apparel and Shoes                  |       | 12                       | %          | 12 | % | 12 | % |
| Designer and Precious  Jewelry                |       | 11                       | %          | 12 | % | 11 | % |
| Home Furnishings and Décor               |       | 7                        | %          | 8 | % | 9 | % |
| Other                                         |       | 2                        | %          | 1 | % | 0 | % |
|                                          |       | 100                      | %          | 100 | % | 100 | % |

 

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The following tables setforth the information for our reportable segments:

 
| ** **                                                         | ** ** | **Fiscal year  ended**     | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|
| **(in  thousands)**                                                | ** ** | **August 1,  2009**   | ** ** | **August 2,  2008** | ** ** | **July 28,********2007** | ** ** |
|                                                               | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                           |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 2,991,318  |   | $ | 3,853,074 |   | $ | 3,674,600 |   |
| Direct Marketing                                                   |       | 652,028                    |       | 747,462 |   | 715,476 |   |
| Total                                                              |       | $                          | 3,643,346  |   | $ | 4,600,536 |   | $ | 4,390,076 |   |
|                                                               |       |                       |       |   |   |   |   |
| OPERATING (LOSS) EARNINGS                                          |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 112,350    |   | $ | 476,724 |   | $ | 490,564 |   |
| Direct Marketing                                                   |       | 70,652                     |       | 117,657 |   | 116,042 |   |
| Corporate expenses                                                 |       | (59,950                    | )          | (56,944 | ) | (56,229 | ) |
| Amortization of intangible  assets and favorable lease commitments |       | (72,703                    | )          | (72,192 | ) | (72,265 | ) |
| Impairment charges (1)                                             |       | (703,266                   | )          | (31,261 | ) | (11,473 | ) |
| Other income (2)                                                   |       | —                     |       | 32,450 |   | 10,164 |   |
| Total                                                              |       | $                          | (652,917   | ) | $ | 466,434 |   | $ | 476,803 |   |
|                                                               |       |                       |       |   |   |   |   |
| CAPITAL EXPENDITURES                                               |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 91,128     |   | $ | 164,640 |   | $ | 124,402 |   |
| Direct Marketing                                                   |       | 10,397                     |       | 18,812 |   | 23,475 |   |
| Total                                                              |       | $                          | 101,525    |   | $ | 183,452 |   | $ | 147,877 |   |
|                                                               |       |                       |       |   |   |   |   |
| DEPRECIATION EXPENSE                                               |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 128,018    |   | $ | 127,186 |   | $ | 118,126 |   |
| Direct Marketing                                                   |       | 16,727                     |       | 16,801 |   | 13,671 |   |
| Other                                                              |       | 6,014                      |       | 4,424 |   | 4,671 |   |
| Total                                                              |       | $                          | 150,759    |   | $ | 148,411 |   | $ | 136,468 |   |
|                                                               |       |                       |       |   |   |   |   |
|                                                               | ** ** | **August 1,****2009** | ** ** | **August 2,****2008** |   |   |   |
| ASSETS                                                             |       |                       |       |   |   |   |   |
| Tangible assets of Specialty Retail stores                         |       | $                          | 1,703,435  |   | $ | 1,994,456 |   |   |   |
| Tangible assets of Direct Marketing                                |       | 142,123                    |       | 173,265 |   |   |   |
| Corporate assets:                                                  |       |                       |       |   |   |   |   |
| Intangible assets related to Specialty Retail  stores              |       | 2,804,438                  |       | 3,519,045 |   |   |   |
| Intangible assets related to Direct Marketing                      |       | 474,509                    |       | 523,572 |   |   |   |
| Other                                                              |       | 456,521                    |       | 346,481 |   |   |   |
| Total                                                              |       | $                          | 5,581,026  |   | $ | 6,556,819 |   |   |   |

 

----

(1)     Impairment chargesrecorded in fiscal year 2009 consist of pretax charges of 1) $329.7 million forthe writedown to fair value of goodwill, 2) $343.2 million for the writedown tofair value of the net carrying value of tradenames and 3) $30.3 million for thewritedown to fair value of the net carrying value of certain long-lived assets.

 

Forfiscal years 2008 and 2007, we recorded $31.3 million and $11.5 million pretaximpairment charges related to the writedown to fair value of the Horchowtradename.

 

(2)     For fiscal year 2008,other income represents a pension curtailment gain of $32.5 million as a resultof our decision to freeze certain Pension and SERP benefits as of December 31,2007.

 

For fiscal year 2007,other income includes 1) $4.2 million of other income we receivedin connection with the merger of Wedding Channel.com, in which we held aminority interest, and The Knot and 2) $6.0M of other income related to aged,non-escheatable gift cards.

 

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**NOTE 18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION**

 

***2028 Debentures.***  All of NMG’s obligations under the 2028Debentures are guaranteed by the Company. The guarantee by the Company is fulland unconditional and joint and several. Currently, the Company’s non-guarantorsubsidiaries consist principally of Bergdorf Goodman, Inc. through whichNMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trustwhich holds legal title to certain real property and intangible assets used byNMG in conducting its operations. Previously, our non-guarantor subsidiariesalso included Kate Spade LLC (prior to its sale in December 2006), whichis reflected in the tables below as a discontinued operation, and an operatingsubsidiary domiciled in Canada providing support services to our DirectMarketing operation through January 2009.

 

The following condensed consolidatingfinancial information represents the financial information of Neiman Marcus, Inc.and its non-guarantor subsidiaries, prepared on the equity basis of accounting.The information is presented in accordance with the requirements of Rule 3-10under the Securities and Exchange Commission’s Regulation S-X. Thefinancial information may not necessarily be indicative of results ofoperations, cash flows or financial position had the non-guarantor subsidiariesoperated as independent entities.

 
| ** **                                      | ** ** | **August 1,  2009** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|
| **(in  thousands)**                             | ** ** | **Company**              | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                     |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                     |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                        | —     |   | $ | 322,766 |   | $ | 659 |   | $ | — |   | $ | 323,425 |   |
| Merchandise inventories                         |       | —                   |       | 676,973 |   | 78,061 |   | — |   | 755,034 |   |
| Other current assets                            |       | —                   |       | 133,438 |   | 9,630 |   | — |   | 143,068 |   |
| Total current assets                            |       | —                   |       | 1,133,177 |   | 88,350 |   | — |   | 1,221,527 |   |
| Property and equipment, net                     |       | —                   |       | 870,300 |   | 122,415 |   | — |   | 992,715 |   |
| Goodwill and intangible assets, net             |       | —                   |       | 1,535,834 |   | 1,743,113 |   | — |   | 3,278,947 |   |
| Other assets                                    |       | —                   |       | 85,983 |   | 1,854 |   | — |   | 87,837 |   |
| Investments in subsidiaries                     |       | 918,835                  |       | 1,868,405 |   | — |   | (2,787,240 | ) | — |   |
| Total assets                                    |       | $                        | 918,835    |   | $ | 5,493,699 |   | $ | 1,955,732 |   | $ | (2,787,240 | ) | $ | 5,581,026 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |       |                     |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                     |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                        | —     |   | $ | 210,219 |   | $ | 23,771 |   | $ | — |   | $ | 233,990 |   |
| Accrued liabilities                             |       | —                   |       | 240,750 |   | 62,136 |   | — |   | 302,886 |   |
| Current maturities of long-term liabilities     |       | —                   |       | 26,617 |   | — |   | — |   | 26,617 |   |
| Total current liabilities                       |       | —                   |       | 477,586 |   | 85,907 |   | — |   | 563,493 |   |
| Long-term liabilities:                          |       |                     |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                   |       | 2,954,221 |   | — |   | — |   | 2,954,221 |   |
| Deferred income taxes                           |       | —                   |       | 697,810 |   | — |   | — |   | 697,810 |   |
| Other long-term liabilities                     |       | —                   |       | 445,247 |   | 1,420 |   | — |   | 446,667 |   |
| Total long-term liabilities                     |       | —                   |       | 4,097,278 |   | 1,420 |   | — |   | 4,098,698 |   |
| Total shareholders’ equity                 |       | 918,835                  |       | 918,835 |   | 1,868,405 |   | (2,787,240 | ) | 918,835 |   |
| Total liabilities and shareholders’ equity |       | $                        | 918,835    |   | $ | 5,493,699 |   | $ | 1,955,732 |   | $ | (2,787,240 | ) | $ | 5,581,026 |   |

 

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| ** **                                      | ** ** | **August 2, 2008** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| **(in  thousands)**                             | ** ** | **Company**             | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                       | —     |   | $ | 238,204 |   | $ | 976 |   | $ | — |   | $ | 239,180 |   |
| Merchandise inventories                         |       | —                  |       | 884,808 |   | 93,236 |   | — |   | 978,044 |   |
| Other current assets                            |       | —                  |       | 137,738 |   | 8,697 |   | — |   | 146,435 |   |
| Total current assets                            |       | —                  |       | 1,260,750 |   | 102,909 |   | — |   | 1,363,659 |   |
| Property and equipment, net                     |       | —                  |       | 939,522 |   | 135,772 |   | — |   | 1,075,294 |   |
| Goodwill and intangible assets, net             |       | —                  |       | 1,889,445 |   | 2,153,172 |   | — |   | 4,042,617 |   |
| Other assets                                    |       | —                  |       | 75,249 |   | — |   | — |   | 75,249 |   |
| Investments in subsidiaries                     |       | 1,676,519               |       | 2,288,802 |   | — |   | (3,965,321 | ) | — |   |
| Total assets                                    |       | $                       | 1,676,519  |   | $ | 6,453,768 |   | $ | 2,391,853 |   | $ | (3,965,321 | ) | $ | 6,556,819 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |       |                    |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                    |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                       | —     |   | $ | 311,994 |   | $ | 33,646 |   | $ | — |   | $ | 345,640 |   |
| Accrued liabilities                             |       | —                  |       | 291,047 |   | 70,047 |   | — |   | 361,094 |   |
| Total current liabilities                       |       | —                  |       | 603,041 |   | 103,693 |   | — |   | 706,734 |   |
| Long-term liabilities:                          |       |                    |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                  |       | 2,946,102 |   | — |   | — |   | 2,946,102 |   |
| Deferred income taxes                           |       | —                  |       | 929,970 |   | — |   | — |   | 929,970 |   |
| Other long-term liabilities                     |       | —                  |       | 298,136 |   | (642 | ) | — |   | 297,494 |   |
| Total long-term liabilities                     |       | —                  |       | 4,174,208 |   | (642 | ) | — |   | 4,173,566 |   |
| Total shareholders’ equity                 |       | 1,676,519               |       | 1,676,519 |   | 2,288,802 |   | (3,965,321 | ) | 1,676,519 |   |
| Total liabilities and shareholders’ equity |       | $                       | 1,676,519  |   | $ | 6,453,768 |   | $ | 2,391,853 |   | $ | (3,965,321 | ) | $ | 6,556,819 |   |

 

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| ** **                                                                        | ** ** | **Fiscal year ended August 1, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in  thousands)**                                                               | ** ** | **Company**                               | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                         | —     |   | $ | 3,067,882 |   | $ | 575,464 |   | $ | — |   | $ | 3,643,346 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                    |       | 2,132,190 |   | 404,574 |   | — |   | 2,536,764 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                    |       | 772,882 |   | 109,855 |   | — |   | 882,737 |   |
| Income from credit card program, net                                              |       | —                                    |       | (45,272 | ) | (4,694 | ) | — |   | (49,966 | ) |
| Depreciation expense                                                              |       | —                                    |       | 133,604 |   | 17,155 |   | — |   | 150,759 |   |
| Amortization of intangible assets and favorable  lease commitments                |       | —                                    |       | 60,359 |   | 12,344 |   | — |   | 72,703 |   |
| Impairment charges                                                                |       | —                                    |       | 307,989 |   | 395,277 |   | — |   | 703,266 |   |
| Operating loss                                                                    |       | —                                    |       | (293,870 | ) | (359,047 | ) | — |   | (652,917 | ) |
| Interest expense, net                                                             |       | —                                    |       | 235,567 |   | 7 |   | — |   | 235,574 |   |
| Intercompany royalty charges (income)                                             |       | —                                    |       | 195,079 |   | (195,079 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 668,046                                   |       | 163,975 |   | — |   | (832,021 | ) | — |   |
| (Loss) earnings before income taxes                                               |       | (668,046                                  | )          | (888,491 | ) | (163,975 | ) | 832,021 |   | (888,491 | ) |
| Income tax benefit                                                                |       | —                                    |       | (220,445 | ) | — |   | — |   | (220,445 | ) |
| Net (loss) earnings                                                               |       | $                                         | (668,046   | ) | $ | (668,046 | ) | $ | (163,975 | ) | $ | 832,021 |   | $ | (668,046 | ) |

 
| ** **                                                                        | ** ** | **Fiscal year ended August 2, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in  thousands)**                                                               | ** ** | **Company**                               | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                         | —     |   | $ | 3,854,429 |   | $ | 746,107 |   | $ | — |   | $ | 4,600,536 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                    |       | 2,460,441 |   | 474,527 |   | — |   | 2,934,968 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                    |       | 906,014 |   | 139,433 |   | — |   | 1,045,447 |   |
| Income from credit card program, net                                              |       | —                                    |       | (59,131 | ) | (6,596 | ) | — |   | (65,727 | ) |
| Depreciation expense                                                              |       | —                                    |       | 129,812 |   | 18,599 |   | — |   | 148,411 |   |
| Amortization of intangible assets and favorable  lease commitments                |       | —                                    |       | 60,360 |   | 11,832 |   | — |   | 72,192 |   |
| Impairment charges                                                                |       | —                                    |       | — |   | 31,261 |   | — |   | 31,261 |   |
| Other income                                                                      |       | —                                    |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Operating earnings                                                                |       | —                                    |       | 389,383 |   | 77,051 |   | — |   | 466,434 |   |
| Interest expense, net                                                             |       | —                                    |       | 239,795 |   | 10 |   | — |   | 239,805 |   |
| Intercompany royalty charges (income)                                             |       | —                                    |       | 273,584 |   | (273,584 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (142,813                                  | )          | (350,625 | ) | — |   | 493,438 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 142,813                                   |       | 226,629 |   | 350,625 |   | (493,438 | ) | 226,629 |   |
| Income tax expense                                                                |       | —                                    |       | 83,816 |   | — |   | — |   | 83,816 |   |
| Net earnings (loss)                                                               |       | $                                         | 142,813    |   | $ | 142,813 |   | $ | 350,625 |   | $ | (493,438 | ) | $ | 142,813 |   |

 

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| ** **                                                                        | ** ** | **Fiscal year ended July 28, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in  thousands)**                                                               | ** ** | **Company**                              | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                        | —     |   | $ | 3,700,513 |   | $ | 689,563 |   | $ | — |   | $ | 4,390,076 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                   |       | 2,316,301 |   | 437,513 |   | — |   | 2,753,814 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                   |       | 880,136 |   | 135,004 |   | — |   | 1,015,140 |   |
| Income from credit card program, net                                              |       | —                                   |       | (59,090 | ) | (6,633 | ) | — |   | (65,723 | ) |
| Depreciation expense                                                              |       | —                                   |       | 116,984 |   | 19,484 |   | — |   | 136,468 |   |
| Amortization of intangible assets and favorable  lease commitments                |       | —                                   |       | 60,500 |   | 11,765 |   | — |   | 72,265 |   |
| Impairment charges                                                                |       | —                                   |       | — |   | 11,473 |   | — |   | 11,473 |   |
| Other income                                                                      |       | —                                   |       | (9,816 | ) | (348 | ) | — |   | (10,164 | ) |
| Operating earnings                                                                |       | —                                   |       | 395,498 |   | 81,305 |   | — |   | 476,803 |   |
| Interest expense, net                                                             |       | —                                   |       | 259,801 |   | 4 |   | — |   | 259,805 |   |
| Intercompany royalty charges (income)                                             |       | —                                   |       | 276,095 |   | (276,095 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (111,932                                 | )          | (334,625 | ) | — |   | 446,557 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 111,932                                  |       | 194,227 |   | 357,396 |   | (446,557 | ) | 216,998 |   |
| Income tax expense                                                                |       | —                                   |       | 82,295 |   | — |   | — |   | 82,295 |   |
| Earnings (loss) from continuing operations                                        |       | 111,932                                  |       | 111,932 |   | 357,396 |   | (446,557 | ) | 134,703 |   |
| Loss from discontinued operation, net of taxes                                    |       | —                                   |       | — |   | (21,282 | ) | (1,489 | ) | (22,771 | ) |
| Net earnings (loss)                                                               |       | $                                        | 111,932    |   | $ | 111,932 |   | $ | 336,114 |   | $ | (448,046 | ) | $ | 111,932 |   |

 

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| ** **                                                                                   | ** ** | **Fiscal year ended August 1, 2009** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in  thousands)**                                                                          | ** ** | **Company**                               | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING  ACTIVITIES**                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) earnings                                                                          |       | $                                         | (668,046   | ) | $ | (668,046 | ) | $ | (163,975 | ) | $ | 832,021 |   | $ | (668,046 | ) |
| Adjustments to reconcile net (loss) earnings to net  cash provided by operating activities:  |       |                                      |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                    |       | 211,146 |   | 29,499 |   | — |   | 240,645 |   |
| Deferred income taxes                                                                        |       | —                                    |       | (153,888 | ) | — |   | — |   | (153,888 | ) |
| Impairment charges                                                                           |       | —                                    |       | 307,989 |   | 395,277 |   | — |   | 703,266 |   |
| Paid-in-kind interest                                                                        |       | —                                    |       | 38,082 |   | — |   | — |   | 38,082 |   |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | —                                    |       | 10,208 |   | (23 | ) | — |   | 10,185 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                    |       | 195,079 |   | (195,079 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                                    |       | 668,046                                   |       | 163,975 |   | — |   | (832,021 | ) | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                    |       | 102,055 |   | (61,486 | ) | — |   | 40,569 |   |
| Net cash provided by operating activities                                                    |       | —                                    |       | 206,600 |   | 4,213 |   | — |   | 210,813 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                    |       | (96,995 | ) | (4,530 | ) | — |   | (101,525 | ) |
| Net cash used for investing activities                                                       |       | —                                    |       | (96,995 | ) | (4,530 | ) | — |   | (101,525 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                    |       | (1,611 | ) | — |   | — |   | (1,611 | ) |
| Debt issuance costs paid                                                                     |       | —                                    |       | (23,432 | ) | — |   | — |   | (23,432 | ) |
| Net cash used for financing activities                                                       |       | —                                    |       | (25,043 | ) | — |   | — |   | (25,043 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| (Decrease) increase during the period                                                        |       | —                                    |       | 84,562 |   | (317 | ) | — |   | 84,245 |   |
| Beginning balance                                                                            |       | —                                    |       | 238,204 |   | 976 |   | — |   | 239,180 |   |
| Ending balance                                                                               |       | $                                         | —     |   | $ | 322,766 |   | $ | 659 |   | $ | — |   | $ | 323,425 |   |

 
| ** **                                                                                   | ** ** | **Fiscal year ended August 2, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in  thousands)**                                                                          | ** ** | **Company**                               | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING  ACTIVITIES**                                                    |       |                                      |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                         | 142,813    |   | $ | 142,813 |   | $ | 350,625 |   | $ | (493,438 | ) | $ | 142,813 |   |
| Adjustments to reconcile net earnings (loss) to net  cash provided by operating activities:  |       |                                      |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                    |       | 204,389 |   | 30,431 |   | — |   | 234,820 |   |
| Deferred income taxes                                                                        |       | —                                    |       | (44,627 | ) | — |   | — |   | (44,627 | ) |
| Impairment of Horchow tradename                                                              |       | —                                    |       | — |   | 31,261 |   | — |   | 31,261 |   |
| Gain on curtailment of defined benefit retirement  obligations                               |       | —                                    |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | —                                    |       | 21,677 |   | 320 |   | — |   | 21,997 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                    |       | 273,584 |   | (273,584 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                                    |       | (142,813                                  | )          | (350,625 | ) | — |   | 493,438 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                    |       | 60,247 |   | (128,736 | ) | — |   | (68,489 | ) |
| Net cash provided by operating activities                                                    |       | —                                    |       | 275,008 |   | 10,317 |   | — |   | 285,325 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                    |       | (172,237 | ) | (11,215 | ) | — |   | (183,452 | ) |
| Purchases of short-term investments                                                          |       | —                                    |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                    |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used for investing activities                                                       |       | —                                    |       | (172,237 | ) | (11,215 | ) | — |   | (183,452 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                      |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                    |       | (3,900 | ) | — |   | — |   | (3,900 | ) |
| Net cash used for financing activities                                                       |       | —                                    |       | (3,900 | ) | — |   | — |   | (3,900 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                      |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                    |       | 98,871 |   | (898 | ) | — |   | 97,973 |   |
| Beginning balance                                                                            |       | —                                    |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                         | —     |   | $ | 238,204 |   | $ | 976 |   | $ | — |   | $ | 239,180 |   |

 

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| ** **                                                                                   | ** ** | **Fiscal year ended July 28, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in  thousands)**                                                                          | ** ** | **Company**                              | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING  ACTIVITIES**                                                    |       |                                     |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                        | 111,932    |   | $ | 111,932 |   | $ | 336,114 |   | $ | (448,046 | ) | $ | 111,932 |   |
| Loss from discontinued operation                                                             |       | —                                   |       | — |   | 21,282 |   | 1,489 |   | 22,771 |   |
| Adjustments to reconcile net earnings (loss) to net  cash provided by operating activities:  |       |                                     |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                   |       | 191,625 |   | 31,249 |   | — |   | 222,874 |   |
| Deferred income taxes                                                                        |       | —                                   |       | (60,522 | ) | — |   | — |   | (60,522 | ) |
| Impairment of Horchow tradename                                                              |       | —                                   |       | — |   | 11,473 |   | — |   | 11,473 |   |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | —                                   |       | 27,701 |   | (7,170 | ) | — |   | 20,531 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                   |       | 276,095 |   | (276,095 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                                    |       | (111,932                                 | )          | (334,625 | ) | — |   | 446,557 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                   |       | 37,744 |   | (96,976 | ) | — |   | (59,232 | ) |
| Net cash provided by continuing operating  activities                                        |       | —                                   |       | 249,950 |   | 19,877 |   | — |   | 269,827 |   |
| Net cash used for discontinued operation                                                     |       | —                                   |       | — |   | (10,918 | ) | — |   | (10,918 | ) |
| Net cash provided by operating activities                                                    |       | —                                   |       | 249,950 |   | 8,959 |   | — |   | 258,909 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                   |       | (139,775 | ) | (8,102 | ) | — |   | (147,877 | ) |
| Payment to minority interest holder in Kate Spade                                            |       | —                                   |       | (59,400 | ) | — |   | — |   | (59,400 | ) |
| Net proceeds from sale of Kate Spade                                                         |       | —                                   |       | 121,469 |   | — |   | — |   | 121,469 |   |
| Net cash used for continuing investing activities                                            |       | —                                   |       | (77,706 | ) | (8,102 | ) | — |   | (85,808 | ) |
| Net cash used for discontinued operation                                                     |       | —                                   |       | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for investing activities                                                       |       | —                                   |       | (77,706 | ) | (8,230 | ) | — |   | (85,936 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                     |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                   |       | (254,918 | ) | — |   | — |   | (254,918 | ) |
| Debt issuance costs paid                                                                     |       | —                                   |       | (1,449 | ) | — |   | — |   | (1,449 | ) |
| Proceeds from purchase of common stock                                                       |       | —                                   |       | 1,148 |   | — |   | — |   | 1,148 |   |
| Net cash used for continuing financing activities                                            |       | —                                   |       | (255,219 | ) | — |   | — |   | (255,219 | ) |
| Net cash used for discontinued operation                                                     |       | —                                   |       | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for financing activities                                                       |       | —                                   |       | (255,219 | ) | (1,675 | ) | — |   | (256,894 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                     |       |   |   |   |   |   |   |   |   |
| Decrease during the period                                                                   |       | —                                   |       | (82,975 | ) | (946 | ) | — |   | (83,921 | ) |
| Beginning balance                                                                            |       | —                                   |       | 222,308 |   | 2,820 |   | — |   | 225,128 |   |
| Ending balance                                                                               |       | $                                        | —     |   | $ | 139,333 |   | $ | 1,874 |   | $ | — |   | $ | 141,207 |   |

 

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***Senior Notes and SeniorSubordinated Notes.***  Allof NMG’s obligations under the Senior Notes and the Senior Subordinated Notes,as well as its obligations under the Asset-Based Revolving Credit Facility andthe Senior Secured Term Loan Facility, are guaranteed by the Company andcertain of NMG’s existing and future domestic subsidiaries (principally,Bergdorf Goodman, Inc. through which NMG conducts the operations of itsBergdorf Goodman stores and NM Nevada Trust which holds legal title to certainreal property and intangible assets used by the Company in conducting itsoperations). The guarantees by the Company and each subsidiary guarantor arefull and unconditional and joint and several. Currently, NMG conducts no operations through subsidiaries that do notguarantee the Senior Notes or the Senior Subordinated Notes. Previously, thenon-guarantor subsidiaries of NMG included Kate Spade LLC (prior to its sale inDecember 2006), and an operating subsidiary domiciled in Canada providingsupport services to our Direct Marketing operation through January 2009.

 

Information with respect to non-guarantorsubsidiaries with respect to the Senior Notes and Senior Subordinated Notes isas follows:

 
| **(in thousands)** | ** ** | **August 1,  2009** | ** ** | **August 2,  2008** |   |   |   |
|--------------------|------------|--------------------------|------------|--------------------------|--------|--------|--------|
| Total assets       |       | $                        | 332        |                     | $      | 1,207  |   |   |   |
| Net assets         |       | $                        | 332        |                     | $      | 1,037  |   |   |   |

 
| ** **                                            | ** ** | **Fiscal year ended**          | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| **(in  thousands)**                                   | ** ** | **August 1,********2009** | ** ** | **August 2,********2008** | ** ** | **July 28,********2007** | ** ** |
| Revenues                                              |       | $                              | —     |   | $ | — |   | $ | — |   |
| Net earnings (loss)                                   |       | 282                            |       | (1,066 | ) | 987 |   |
| Net cash (used for)  provided by operating activities |       | (341                           | )          | (875 | ) | 462 |   |
|                                                       |            |                                |            |  |  |  |  |  |  |  |

 

The net earnings of non-guarantorsubsidiaries for fiscal year ended 2007 excludes a $24.3 million loss relatedto discontinued operations.

 

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**NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**

 
| ** **              | ** ** | **Fiscal year  2009** | ** ** |
|-------------------------|------------|-----------------------|------------|
| **(in  millions)**      | ** ** | **First  Quarter**    | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total** | ** ** |
| Revenues                |       | $                     | 985.8      |   | $ | 1,079.4 |   | $ | 810.1 |   | $ | 768.0 |   | $ | 3,643.3 |   |
| Gross profit (1)        |       | $                     | 368.0      |   | $ | 258.0 |   | $ | 295.3 |   | $ | 185.3 |   | $ | 1,106.6 |   |
| Net earnings (loss) (2) |       | $                     | 12.9       |   | $ | (509.2 | ) | $ | (3.1 | ) | $ | (168.6 | ) | $ | (668.0 | ) |
|                    |       |                  |       |   |   |   |   |   |   |   |   |
| ** **              | ** ** | **Fiscal year 2008**  | ** ** |
| Revenues                |       | $                     | 1,132.2    |   | $ | 1,373.8 |   | $ | 1,062.2 |   | $ | 1,032.3 |   | $ | 4,600.5 |   |
| Gross profit (1)        |       | $                     | 465.1      |   | $ | 460.6 |   | $ | 425.2 |   | $ | 314.7 |   | $ | 1,665.6 |   |
| Net earnings (loss) (3) |       | $                     | 78.8       |   | $ | 44.3 |   | $ | 55.4 |   | $ | (35.7 | ) | $ | 142.8 |   |

 

----

(1)         Gross profit includesrevenues less cost of goods sold including buying and occupancy costs(excluding depreciation).

 

(2)         For fiscal year2009, net earnings (loss) include pretax impairment charges related to 1)$291.1 million for the writedown to fair value of goodwill, 2) $242.2 millionfor the writedown to fair value of the net carrying value of tradenames and 3)$26.8 million for the writedown to fair value of the net carrying value ofcertain long-lived assets recorded in the second quarter.  In addition, pretax impairment charges of 1)$38.6 million for the writedown to fair value of goodwill, 2) $101.0 millionfor the writedown to fair value of the net carrying value of tradenames and 3)$3.5 million for the writedown to fair value of the net carrying value of certainlong-lived assets were recorded in the fourth quarter.

 

(3)         For fiscal year 2008, netearnings (loss) include 1) $32.5 million of other income related to a pensioncurtailment gain in the first quarter as a result of our decision to freezecertain Pension and SERP benefits as of December 31, 2007, offset by 2)$31.3 million pretax impairment charge related to the writedown to fair valueof the Horchow tradename in the fourth quarter.

 

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   | NEIMAN MARCUS, INC. |
|--------|---------------------|
|   |                |   |
|   |                |   |
|   | By:                 | /S/ NELSON A. BANGS |
|   |                | Nelson A. Bangs  Senior Vice President and General Counsel |

 

Dated: October 20, 2009

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the followingcapacities and on the dates indicated.

 
| **Signature**         | ** ** | **Title**                                              | ** ** | **Date**              |
|-----------------------|------------|--------------------------------------------------------|------------|-----------------------|
| ** **            | ** ** | ** **                                             | ** ** | ** **            |
| /s/ BURTON M. TANSKY  |       | President and Chief  Executive                         |       | October 20, 2009 |
| Burton M. Tansky      |       | Officer, Director                                      |       |                  |
|                  |       |                                                   |       |                  |
| /s/ JAMES E. SKINNER  |       | Executive Vice President  and Chief  Financial Officer |       | October 20, 2009 |
| James E. Skinner      |       | (principal financial  officer)                         |       |                  |
|                  |       |                                                   |       |                  |
| /s/ T. DALE STAPLETON |       | Vice President and  Controller                         |       | October 20, 2009 |
| T. Dale Stapleton     |       | (principal accounting  officer)                        |       |                  |
|                  |       |                                                   |       |                  |
| /s/ DAVID A. BARR     |       | Director                                               |       | October 20, 2009 |
| David A. Barr         |       |                                                   |       |                  |
|                  |       |                                                   |       |                  |
| /s/ JONATHAN COSLET   |       | Director                                               |       | October 20, 2009 |
| Jonathan Coslet       |       |                                                   |       |                  |
|                  |       |                                                   |       |                  |
| /s/ JAMES G. COULTER  |       | Director                                               |       | October 20, 2009 |
| James G. Coulter      |       |                                                   |       |                  |
|                  |       |                                                   |       |                  |
| /s/ JOHN G. DANHAKL   |       | Director                                               |       | October 20, 2009 |
| John G. Danhakl       |       |                                                   |       |                  |
|                  |       |                                                   |       |                  |
| /s/ SIDNEY LAPIDUS    |       | Director                                               |       | October 20, 2009 |
| Sidney Lapidus        |       |                                                   |       |                  |
|                  |       |                                                   |       |                  |
| /s/ KEWSONG LEE       |       | Director                                               |       | October 20, 2009 |
| Kewsong Lee           |       |                                                   |       |                  |
|                  |       |                                                   |       |                  |
| /s/ CARRIE WHEELER    |       | Director                                               |       | October 20, 2009 |
| Carrie Wheeler        |       |                                                   |       |                  |

 

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**SCHEDULE II**

 

**Neiman Marcus, Inc.**

**Valuation and Qualifying Accountsand Reserves**

**(in thousands)**

 

**Three years ended August 1,2009**

 
| **Column A**                         | ** ** | **Column B**                         | ** ** | **Column C**                        | ** ** | **Column D**                    | ** ** | **Column E**   | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | **Additions**                       | ** ** | ** **                      | ** ** | ** **     | ** ** |
| **Description**                      | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
| Reserve for estimated sales returns  |       |                                 |       |                                |       |                            |       |           |       |   |   |
| *Year  ended August 1, 2009*    |       | $                                    | 45,042     |                                | $          | 471,615                         |       | $              | —     |   | $ | (486,908 | )(A) | $ | 29,749 |   |
|                                 |       |                                 |       |                                |       |                            |       |           |       |   |   |
| *Year  ended August 2, 2008*    |       | $                                    | 48,819     |                                | $          | 645,095                         |       | $              | —     |   | $ | (648,872 | )(A) | $ | 45,042 |   |
|                                 |       |                                 |       |                                |       |                            |       |           |       |   |   |
| *Year  ended July 28, 2007 (B)* |       | $                                    | 43,742     |                                | $          | 606,263                         |       | $              | —     |   | $ | (601,186 | )(A) | $ | 48,819 |   |
|                                 |       |                                 |       |                                |       |                            |       |           |       |   |   |
| Reserves for  self-insurance         |       |                                 |       |                                |       |                            |       |           |       |   |   |
| *Year  ended August 1, 2009*    |       | $                                    | 44,132     |                                | $          | 61,597                          |       | $              | —     |   | $ | (70,219 | )(C) | $ | 35,510 |   |
| * *                             |       |                                 |       |                                |       |                            |       |           |       |   |   |
| *Year  ended August 2, 2008*    |       | $                                    | 44,544     |                                | $          | 57,655                          |       | $              | —     |   | $ | (58,067 | )(C) | $ | 44,132 |   |
| * *                             |       |                                 |       |                                |       |                            |       |           |       |   |   |
| *Year  ended July 28, 2007 (B)* |       | $                                    | 45,505     |                                | $          | 54,155                          |       | $              | —     |   | $ | (55,116 | )(C) | $ | 44,544 |   |

 

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(A)                              Gross margin onactual sales returns, net of commissions.

 

(B)                                Fiscal year2007 has been adjusted to exclude the operations of Kate Spade LLC.

 

(C)                                Claims andexpenses paid net of employee contributions.

 

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