Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

#  

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

### **For the Quarterly PeriodEnded January 30, 2010**

 

**OR**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

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

##  

**Neiman Marcus, Inc.**

(Exact name 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’s telephone number, including area code: **(214) 743-7600**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data file required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o No x

 

Therewere 1,013,082 shares of the registrant’s common stock, par value $.01 pershare, outstanding at January 30, 2010.

 

 

 

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**NEIMAN MARCUS, INC.**

 

#### **INDEX**

####  

| ** **    | ** **                                                                                                                         | **Page**   |
|---------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** **                                                                                                                         | **Number** |
| Part I.  | Financial  Information                                                                                                             |       |
|          |                                                                                                                               |       |
| Item 1.       | Condensed  Consolidated Balance Sheets as of January 30, 2010, August 1, 2009  and January 31, 2009                 | 1          |
|          |                                                                                                                               |       |
|          | Condensed Consolidated Statements of Operations for  the Thirteen Weeks Ended January 30, 2010 and January 31, 2009 | 2          |
|          |                                                                                                                               |       |
|          | Condensed Consolidated Statements of Operations for  the Twenty-Six Weeks Ended January 30, 2010 and January 31, 2009    | 3          |
|          |                                                                                                                               |       |
|          | Condensed Consolidated Statements of Cash Flows for  the Twenty-Six Weeks Ended January 30, 2010 and January 31, 2009    | 4          |
|          |                                                                                                                               |       |
|          | Notes to Condensed Consolidated Financial Statements                                                                               | 5          |
|          |                                                                                                                               |       |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                        | 26         |
|          |                                                                                                                               |       |
| Item 3.       | Quantitative  and Qualitative Disclosures about Market Risk                                                                        | 45         |
|          |                                                                                                                               |       |
| Item 4.       | Controls and  Procedures                                                                                                           | 46         |
|          |                                                                                                                               |       |
| Part II. | Other Information                                                                                                                  |       |
|          |                                                                                                                               |       |
| Item 1.       | Legal Proceedings                                                                                                                  | 46         |
|          |                                                                                                                               |       |
| Item  1A.     | Risk Factors                                                                                                                       | 46         |
|          |                                                                                                                               |       |
| Item 2.       | Unregistered Sales of Equity Securities  and Use of Proceeds                                                                       | 55         |
|          |                                                                                                                               |       |
| Item 4.       | Submission of Matters to a Vote of  Security Holders                                                                               | 55         |
|          |                                                                                                                               |       |
| Item 6.       | Exhibits                                                                                                                           | 55         |
|          |                                                                                                                               |       |
| Signatures    | 62                                                                                                                                 |

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

** **
| **(in  thousands, except shares)**                                                                                                                                                          | ** ** | **January 30,********2010** | ** ** | **August 1,********2009** | ** ** | **January 31,********2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                       | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                             |       |                           |       |                             |       |
| Current assets:                                                                                                                                                                             |       |                             |       |                           |       |                             |       |
| Cash and cash equivalents                                                                                                                                                                   |       | $                                | 500,661    |                           | $          | 323,425                          |       | $ | 223,184 |   |
| Merchandise inventories                                                                                                                                                                     |       | 732,289                          |       | 755,034                        |       | 840,331                          |       |
| Deferred income taxes                                                                                                                                                                       |       | 19,136                           |       | 19,136                         |       | 32,659                           |       |
| Other current assets                                                                                                                                                                        |       | 77,614                           |       | 123,932                        |       | 137,324                          |       |
| Total current assets                                                                                                                                                                        |       | 1,329,700                        |       | 1,221,527                      |       | 1,233,498                        |       |
|                                                                                                                                                                                        |       |                             |       |                           |       |                             |       |
| Property and equipment, net                                                                                                                                                                 |       | 947,371                          |       | 992,715                        |       | 1,031,285                        |       |
| Goodwill and intangible assets, net                                                                                                                                                         |       | 3,242,317                        |       | 3,278,947                      |       | 3,473,205                        |       |
| Other assets                                                                                                                                                                                |       | 80,463                           |       | 87,837                         |       | 71,062                           |       |
| Total assets                                                                                                                                                                                |       | $                                | 5,599,851  |                           | $          | 5,581,026                        |       | $ | 5,809,050 |   |
|                                                                                                                                                                                        |       |                             |       |                           |       |                             |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                              |       |                             |       |                           |       |                             |       |
| Current liabilities:                                                                                                                                                                        |       |                             |       |                           |       |                             |       |
| Accounts payable                                                                                                                                                                            |       | $                                | 190,049    |                           | $          | 233,990                          |       | $ | 195,629 |   |
| Accrued liabilities                                                                                                                                                                         |       | 370,275                          |       | 302,886                        |       | 365,409                          |       |
| Other current liabilities                                                                                                                                                                   |       | 45,479                           |       | 26,617                         |       | —                           |       |
| Total current liabilities                                                                                                                                                                   |       | 605,803                          |       | 563,493                        |       | 561,038                          |       |
|                                                                                                                                                                                        |       |                             |       |                           |       |                             |       |
| Long-term liabilities:                                                                                                                                                                      |       |                             |       |                           |       |                             |       |
| Long-term debt                                                                                                                                                                              |       | 2,972,222                        |       | 2,954,221                      |       | 2,946,199                        |       |
| Deferred income taxes                                                                                                                                                                       |       | 684,185                          |       | 697,810                        |       | 750,027                          |       |
| Deferred real estate credits                                                                                                                                                                |       | 98,493                           |       | 96,420                         |       | 90,188                           |       |
| Other long-term liabilities                                                                                                                                                                 |       | 296,287                          |       | 350,247                        |       | 368,019                          |       |
| Total long-term liabilities                                                                                                                                                                 |       | 4,051,187                        |       | 4,098,698                      |       | 4,154,433                        |       |
|                                                                                                                                                                                        |       |                             |       |                           |       |                             |       |
| Common stock (par value $0.01 per share, 5,000,000  shares authorized and 1,013,082 shares issued and outstanding at  January 30, 2010, August 1, 2009 and January 31, 2009) |       | 10                               |       | 10                             |       | 10                               |       |
| Additional paid-in capital                                                                                                                                                                  |       | 1,428,513                        |       | 1,424,258                      |       | 1,421,253                        |       |
| Accumulated other comprehensive loss                                                                                                                                                        |       | (97,301                          | )          | (104,587                       | )          | (98,506                          | )          |
| Retained deficit                                                                                                                                                                            |       | (388,361                         | )          | (400,846                       | )          | (229,178                         | )          |
| Total shareholders’ equity                                                                                                                                                             |       | 942,861                          |       | 918,835                        |       | 1,093,579                        |       |
| Total liabilities and shareholders’ equity                                                                                                                                             |       | $                                | 5,599,851  |                           | $          | 5,581,026                        |       | $ | 5,809,050 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

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**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirteen weeks ended**   | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|
| **(in  thousands)**                                                               | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
| ** **                                                                        | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                          | 1,102,361  |   | $ | 1,079,379 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 761,485                    |       | 821,403 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 237,581                    |       | 243,580 |   |
| Income from credit card program, net                                              |       | (16,572                    | )          | (10,187 | ) |
| Depreciation expense                                                              |       | 34,422                     |       | 39,112 |   |
| Amortization of intangible assets                                                 |       | 13,845                     |       | 13,568 |   |
| Amortization of favorable lease commitments                                       |       | 4,469                      |       | 4,469 |   |
| Impairment charges                                                                |       | —                     |       | 560,159 |   |
|                                                                              |       |                       |       |   |   |
| Operating earnings (loss)                                                         |       | 67,131                     |       | (592,725 | ) |
|                                                                              |       |                       |       |   |   |
| Interest expense, net                                                             |       | 59,004                     |       | 58,581 |   |
|                                                                              |       |                       |       |   |   |
| Earnings (loss) before income taxes                                               |       | 8,127                      |       | (651,306 | ) |
|                                                                              |       |                       |       |   |   |
| Income tax expense (benefit)                                                      |       | 4,163                      |       | (142,050 | ) |
|                                                                              |       |                       |       |   |   |
| Net earnings (loss)                                                               |       | $                          | 3,964      |   | $ | (509,256 | ) |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

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**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|
| **(in  thousands)**                                                               | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
| ** **                                                                        | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                          | 1,971,261  |   | $ | 2,065,166 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 1,295,709                  |       | 1,439,146 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 456,397                    |       | 486,408 |   |
| Income from credit card program, net                                              |       | (29,659                    | )          | (23,187 | ) |
| Depreciation expense                                                              |       | 70,205                     |       | 77,711 |   |
| Amortization of intangible assets                                                 |       | 27,691                     |       | 27,135 |   |
| Amortization of favorable lease commitments                                       |       | 8,939                      |       | 8,939 |   |
| Impairment charges                                                                |       | —                     |       | 560,159 |   |
|                                                                              |       |                       |       |   |   |
| Operating earnings (loss)                                                         |       | 141,979                    |       | (511,145 | ) |
|                                                                              |       |                       |       |   |   |
| Interest expense, net                                                             |       | 118,369                    |       | 116,426 |   |
|                                                                              |       |                       |       |   |   |
| Earnings (loss) before income taxes                                               |       | 23,610                     |       | (627,571 | ) |
|                                                                              |       |                       |       |   |   |
| Income tax expense (benefit)                                                      |       | 11,125                     |       | (131,193 | ) |
|                                                                              |       |                       |       |   |   |
| Net earnings (loss)                                                               |       | $                          | 12,485     |   | $ | (496,378 | ) |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

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**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                   | ** ** | **Twenty-Six weeks ended**       | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in  thousands)**                                                                          | ** ** | **January 30,********2010** | ** ** | **January 31,******** 2009** | ** ** |
| ** **                                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **CASH FLOWS - OPERATING  ACTIVITIES**                                                       |       |                             |       |   |   |
| Net earnings (loss)                                                                          |       | $                                | 12,485     |   | $ | (496,378 | ) |
| Adjustments to reconcile net earnings (loss) to net  cash provided by operating activities:  |       |                             |       |   |   |
| Depreciation and amortization expense                                                        |       | 115,922                          |       | 120,894 |   |
| Paid-in-kind interest                                                                        |       | 14,362                           |       | — |   |
| Impairment charges                                                                           |       | —                           |       | 560,159 |   |
| Deferred income taxes                                                                        |       | (18,318                          | )          | (122,158 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | 2,568                            |       | 8,457 |   |
|                                                                                         |       | 127,019                          |       | 70,974 |   |
| Changes in operating assets and liabilities:                                                 |       |                             |       |   |   |
| Merchandise inventories                                                                      |       | 22,745                           |       | 137,713 |   |
| Other current assets                                                                         |       | 46,318                           |       | (64 | ) |
| Other assets                                                                                 |       | 3,330                            |       | (3,415 | ) |
| Accounts payable and accrued liabilities                                                     |       | 27,785                           |       | (164,007 | ) |
| Deferred real estate credits                                                                 |       | 5,184                            |       | 8,580 |   |
| **Net cash provided by operating  activities**                                               |       | 232,381                          |       | 49,781 |   |
| **CASH FLOWS — INVESTING  ACTIVITIES**                                                  |       |                             |       |   |   |
| Capital expenditures                                                                         |       | (28,382                          | )          | (64,544 | ) |
| **Net cash used for investing  activities**                                                  |       | (28,382                          | )          | (64,544 | ) |
| **CASH FLOWS — FINANCING  ACTIVITIES**                                                  |       |                             |       |   |   |
| Repayment of borrowings under senior term loan  facility                                     |       | (26,617                          | )          | — |   |
| Repayment of borrowings                                                                      |       | (146                             | )          | (1,233 | ) |
| **Net cash used for financing  activities**                                                  |       | (26,763                          | )          | (1,233 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                             |       |   |   |
| Increase (decrease) during the period                                                        |       | 177,236                          |       | (15,996 | ) |
| Beginning balance                                                                            |       | 323,425                          |       | 239,180 |   |
| Ending balance                                                                               |       | $                                | 500,661    |   | $ | 223,184 |   |
|                                                                                         |       |                             |       |   |   |
| **Supplemental Schedule of Cash  Flow Information**                                          |       |                             |       |   |   |
|                                                                                         |       |                             |       |   |   |
| Cash paid (received) during the period for:                                                  |       |                             |       |   |   |
| Interest                                                                                     |       | $                                | 90,634     |   | $ | 111,129 |   |
| Income taxes                                                                                 |       | $                                | (13,355    | ) | $ | 3,206 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.**              Basis of Presentation

** **

Wehave prepared the accompanying unaudited condensed consolidated financialstatements in accordance with generally accepted accounting principles forinterim financial information and the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, thesefinancial statements do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. Therefore, these financial statements should be read in conjunctionwith our Annual Report on Form 10-K for the fiscal year ended August 1,2009.

 

Inour opinion, the accompanying unaudited condensed consolidated financialstatements contain all adjustments, consisting of normal recurring adjustments,necessary to present fairly our financial position, results of operations andcash flows for the applicable interim periods.

 

Thespecialty retail industry is seasonal in nature, with a higher level of salestypically generated in the fall and holiday selling seasons.  Due to seasonal and other factors, theresults of operations for the second quarter of fiscal year 2010 are notnecessarily comparable to, or indicative of, results of any other interimperiod or for the fiscal year as a whole.

 

NeimanMarcus, Inc. (the Company) is a wholly-owned subsidiary of and iscontrolled by Newton Holding, LLC (Holding). Holding is controlled by investment funds affiliated with TPG Capitaland Warburg Pincus (collectively, the Sponsors).  The Company was formed by Holding for thepurpose of acquiring The Neiman Marcus Group, Inc. (NMG), whichacquisition was completed on October 6, 2005 (the Acquisition).  The accompanying unaudited condensedconsolidated financial statements include the amounts of the Company and itssubsidiaries.  All significant intercompanyaccounts and transactions have been eliminated.

 

Ourfiscal year ends on the Saturday closest to July 31.  All references to the second quarter offiscal year 2010 relate to the thirteen weeks ended January 30, 2010.  All references to the second quarter offiscal year 2009 relate to the thirteen weeks ended January 31, 2009.  All references to year-to-date fiscal 2010relate to the twenty-six weeks ended January 30, 2010.  All references to year-to-date fiscal 2009relate to the twenty-six weeks ended January 31, 2009.

 

Adetailed description of our critical accounting policies is included in ourAnnual Report on Form 10-K for the fiscal year ended August 1, 2009.

 

***Use of Estimates.* **We arerequired to make estimates and assumptions about future events in preparingfinancial statements in conformity with generally accepted accountingprinciples.  These estimates andassumptions affect the amounts of assets, liabilities, revenues and expensesand the disclosure of gain and loss contingencies at the date of the unauditedcondensed consolidated financial statements. While we believe that our past estimates and assumptions have beenmaterially accurate, our current estimates are subject to change if differentassumptions as to the outcome of future events were made. We evaluate ourestimates and judgments on an ongoing basis and predicate those estimates andjudgments on historical experience and on various other factors that we believeto be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts andcircumstances dictate.  Since futureevents and their effects cannot be determined with absolute certainty, actualresults may differ from the estimates used in preparing the accompanyingunaudited condensed consolidated financial statements.

** **

Webelieve the following critical accounting policies, among others, encompass themore significant judgments and estimates used in the preparation of ourfinancial statements:

 

·                  Recognition ofrevenues;

·                  Valuation ofmerchandise inventories, including determination of original retail values,recognition of markdowns and vendor allowances, estimation of inventoryshrinkage, and determination of cost of goods sold;

·                  Determination of impairment of long-livedassets;

·                  Recognitionof advertising and catalog costs;

·                  Measurementof liabilities related to our loyalty programs;

·                  Recognitionof income taxes; and

 

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·                  Measurement ofaccruals for general liability, workers’ compensation and health insuranceclaims and pension and postretirement health care benefits.

 

***Fair Value Measurements.***  Under generally accepted accountingprinciples, we are required 1) to measure certain assets and liabilities atfair value or 2) to disclose the fair value of certain assets and liabilitiesrecorded at cost.  Pursuant to these fairvalue measurement and disclosure requirements, fair value is defined as theprice that would be received upon sale of an asset or paid upon transfer of aliability in an orderly transaction between market participants at themeasurement date and in the principal or most advantageous market for thatasset or liability. The fair value is calculated based on assumptions thatmarket participants would use in pricing the asset or liability, not onassumptions specific to the entity. In addition, the fair value of liabilitiesincludes consideration of non-performance risk, including our own creditrisk.  Each fair value measurement isreported in one of the following three 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 significantassumptions are observable in the market or can be corroborated by observablemarket data for substantially the full term of the assets 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.

 

AtJanuary 30, 2010, August 1, 2009 and January 31, 2009, the fairvalues of cash and cash equivalents, receivables and accounts payableapproximated their carrying values due to the short-term nature of theseinstruments.  See Notes 3 and 4 to thecondensed consolidated financial statements for the estimated fair values ofour debt instruments, interest rate swap and interest rate cap financialinstruments subject to fair value disclosures.

 

***Recent Accounting Pronouncements. ***In December 2007, the FASB issued guidance thataddresses the recognition and accounting for identifiable assets acquired,liabilities assumed and non-controlling interests in businesscombinations.  In addition, this guidancechanges the accounting treatment for certain acquisition-related items,including requirements to expense acquisition-related costs as incurred,expense restructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a businesscombination as a component of tax expense. These rules are to be applied prospectively to businesscombinations for which the acquisition date is on or after December 15,2008.  Generally, the effect of thisguidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertaintiesremaining as of January 30, 2010 related to the Acquisition will besubject to the provisions of this guidance. As to the future resolution of these tax uncertainties, we do notbelieve these requirements will have a material impact on our future financialstatements.

 

InFebruary 2008, the FASB issued guidance that delays the effective date offair value disclosures required for all nonfinancial assets, such as intangibleassets and goodwill, and nonfinancial liabilities that are recognized ordisclosed at fair value in the financial statements on a nonrecurringbasis.  We implemented this guidance inthe preparation of our condensed consolidated financial statements for thefirst quarter of fiscal year 2010, however, no additional disclosures wererequired.

 

InDecember 2008, the FASB issued guidance related to an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan.  This guidance iseffective for fiscal years ending after December 15, 2009, or our fiscalyear ending July 31, 2010.  We havenot yet evaluated the impact of adopting the disclosure requirements on ourconsolidated financial statements for our fiscal year ending July 31,2010.

 

InApril 2009, the FASB issued guidance requiring additional disclosures ininterim financial statements regarding determining and reporting fair valuesfor certain assets and liabilities.  Weadopted this guidance in the first quarter of fiscal year 2010 related to thefair value of our debt instruments.

 

InJune 2009, the FASB issued guidance that establishes the AccountingStandards Codification (ASC) as the source of authoritative accounting principlesrecognized by the FASB to be applied by nongovernmental entities in thepreparation of financial statements in conformity with generally acceptedaccounting principles.  This guidance iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009, or our first quarter of fiscal year 2010

 

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endingOctober 31, 2009.  The adoption ofthis guidance did not have an impact on our consolidated financial statements.

 

**2.**              Goodwill andIntangible Assets, Net

 
| **(in thousands)**                   | ** ** | **January 30,********2010** | ** ** | **August 1,********2009** | ** ** | **January 31,********2009** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
|                                 |       |                             |       |                           |       |                             |       |
| Goodwill                             |       | $                                | 1,263,433  |                           | $          | 1,263,433                        |       | $ | 1,320,099 |   |
| Tradenames                           |       | 1,234,735                        |       | 1,235,290                      |       | 1,336,808                        |       |
| Customer lists, net                  |       | 341,524                          |       | 368,660                        |       | 395,796                          |       |
| Favorable lease  commitments, net    |       | 402,625                          |       | 411,564                        |       | 420,502                          |       |
| Goodwill and intangible  assets, net |       | $                                | 3,242,317  |                           | $          | 3,278,947                        |       | $ | 3,473,205 |   |

 

***Indefinite-Lived Intangible Assets and Goodwill.***  Indefinite-lived intangible assets, such astradenames and goodwill, are not subject to amortization. Rather, we assess therecoverability of indefinite-lived intangible assets and goodwill in the fourthquarter of each fiscal year and upon the occurrence of certain events.

 

***Intangible Assets Subject to Amortization.***  Customer lists and amortizable tradenames areamortized using the straight-line method over their estimated useful lives,ranging from 5 to 24 years (weighted average life of 13 years).  Favorable lease commitments are amortizedstraight-line over the remaining lives of the leases, ranging from 6 to 49years (weighted average life of 33 years). Total estimated amortization of all acquisition-related intangibleassets for the next five fiscal years is currently estimated as follows (inthousands):

 
| 2011 |   | $      | 62,548 |   |
|------|--------|--------|--------|--------|
| 2012 |   | 50,123 |   |
| 2013 |   | 47,436 |   |
| 2014 |   | 46,881 |   |
| 2015 |   | 46,881 |   |

 

***Impairment of Long-Lived Assets.**** *We assess the recoverabilityof indefinite-lived assets and goodwill in the fourth quarter of each year andupon the occurrence of certain events. In connection with the preparation of our condensed consolidatedfinancial statements for the second quarter of fiscal year 2009, we concludedthat it was appropriate to test our long-lived assets for recoverability inlight of the significant declines in the domestic and global financial marketsduring the first and second quarters of fiscal year 2009. Utilizing ourthen-current operating forecasts to estimate the fair values of our NeimanMarcus stores, Bergdorf Goodman stores and Direct Marketing operation, wedetermined certain of our property and equipment, tradenames and goodwill to beimpaired and recorded impairment charges in the second quarter of fiscal year2009 aggregating $560.1 million.

 

Inthe fourth quarter of fiscal year 2009, we updated our short-term and long-termoperating forecasts in connection with our annual planning process in light ofour updated expectations of future business conditions and trends.  Utilizing these updated operating forecaststo estimate the fair values of our reporting units, we determined further impairmentwith respect to certain of our property and equipment, tradenames and goodwilland recorded additional impairment charges in the fourth quarter of fiscal year2009 aggregating $143.1 million.

 

Total impairment charges recorded in fiscal year2009 were 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 |   |

 

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**3.**              Long-term Debt

 

The significant components of our long-term debt areas follows:

 
| **(in thousands)**                                          | ** ** | **Interest********Rate** | ** ** | **January 30,********2010** | ** ** | **August 1,********2009** | ** ** | **January 31,********2009** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
|                                                        |       |                     |       |                             |       |                           |       |                             |       |
| Senior Secured Term Loan  Facility                          |       | variable                 |       | $                                | 1,598,383  |                           | $          | 1,625,000                        |       | $ | 1,625,000 |   |
| 2028 Debentures                                             |       | 7.125%                   |       | 121,394                          |       | 121,297                        |       | 121,199                          |       |
| Senior Notes                                                |       | 9.0%/9.75%               |       | 752,445                          |       | 734,541                        |       | 700,000                          |       |
| Senior Subordinated Notes                                   |       | 10.375%                  |       | 500,000                          |       | 500,000                        |       | 500,000                          |       |
| Total debt                                                  |       |                     |       | 2,972,222                        |       | 2,980,838                      |       | 2,946,199                        |       |
| Less: current portion of  Senior Secured Term Loan Facility |       |                     |       | —                           |       | (26,617                        | )          | —                           |       |
| Long-term debt                                              |       |                     |       | $                                | 2,972,222  |                           | $          | 2,954,221                        |       | $ | 2,946,199 |   |

 

***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 ofeligible inventory, and (b) 85% of the amounts owed by credit cardprocessors in respect of eligible credit card accounts constituting proceedsarising from the sale or disposition of inventory, less certain reserves.  Through April 30, 2011, NMG is requiredto maintain excess availability under the terms of the Asset-Based RevolvingCredit Facility of at least the greater of (a) 10% of the lesser of (i) theaggregate revolving commitments and (ii) the borrowing base and (b) $50million.  After April 30, 2011, if at any time, excess availabilityis 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 January 30, 2010, NMG had noborrowings outstanding under this facility, $31.1 million of outstandingletters of credit and $430.1 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 loancommitments under the Asset-Based Revolving Credit Facility may not exceed $800million. However, the lenders are under no obligation to provide any suchadditional commitments or loans, and any increase in commitments or incrementalterm loans will be subject to customary conditions precedent.  If NMG wereto request any such additional commitments and the existing lenders or newlenders were to agree to provide such commitments, the Asset-Based RevolvingCredit Facility size could be increased to up to $800 million, but NMG’sability to borrow would still be limited by the amount of the borrowing base.Incremental term loans may be exchanged by NMG for any of NMG’s existing seniornotes and senior subordinated notes, or the cash proceeds of any incrementalterm loans may be used to repurchase any of such notes, but neither theincremental term loans nor the proceeds thereof may be used for any otherpurpose.

 

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

 

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utilizationis 50% or more or (b) 1% per annum during any applicable period in whichthe average revolving loan utilization is less than 50%.  NMG must alsopay customary letter of credit fees and agency fees.

 

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.  All obligations under NMG’s Asset-Based RevolvingCredit Facility, and the guarantees of those obligations, are secured, subjectto certain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiaries that have guaranteed the Asset-BasedRevolving Credit Facility (subsidiary guarantors). As of January 30, 2010,there were no assets or liabilities held by non-guarantor subsidiaries.

 

TheAsset-Based Revolving Credit Facility contains covenants (which are describedin our Annual Report on Form 10-K for the fiscal year ended August 1,2009), including covenants limiting dividends and other restricted payments;investments, loans, advances and acquisitions; and prepayments or redemptionsof other indebtedness. These covenants permit the restricted actions in anunlimited amount, subject to the satisfaction of certain payment conditions,principally that NMG must have pro forma excess availability under theAsset-Based Revolving Credit Facility equal to at least 25% of the lesser of (a) therevolving commitments under the facility and (b) the borrowing base, NMGdelivering projections demonstrating that projected excess availability for thenext twelve months will be equal to such thresholds and that NMG have a proforma ratio of consolidated EBITDA to consolidated Fixed Charges (as such termsare defined 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 anaggregate principal amount exceeding $50 million.

 

Fora more detailed description of NMG’s Asset-Based Revolving Credit Facility,refer to our Annual Report on Form 10-K for the fiscal year ended August 1,2009.

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG entered into acredit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility.  At January 30, 2010, the outstandingbalance under the Senior Secured Term Loan Facility was $1,598.4 million.  The principal amount of the loans outstandingis due and payable in full on April 6, 2013.

 

At January 30, 2010, 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 1/2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. The interest rateon the outstanding borrowings pursuant to the Senior Secured Term Loan Facilitywas 2.26% at January 30, 2010.  Theapplicable margin is subject to adjustment based on contractually defined debtcoverage ratios.  At January 30,2010, the applicable margin with respect to base rate borrowings was 1.00% andthe applicable margin with respect to LIBOR borrowings was 2.00%.

 

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Thecredit agreement governing the Senior Secured Term Loan Facility requires NMGto prepay outstanding term loans with 50% (which percentage will be reduced to25% if NMG’s total leverage ratio is less than a specified ratio and will bereduced to 0% if NMG’s total leverage ratio is less than a specified ratio) ofits annual excess cash flow (as defined in the credit agreement). For fiscalyear 2009, NMG was required to prepay $26.6 million of outstanding term loansin the first quarter of fiscal year 2010 pursuant to the annual excess cashflow 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.

 

NMGmay voluntarily prepay outstanding loans under the Senior Secured Term LoanFacility at any time without premium or penalty other than customary “breakage”costs with respect to LIBOR loans. There is no scheduled amortization under theSenior Secured Term Loan Facility.

 

Allobligations under the Senior Secured Term Loan Facility are unconditionallyguaranteed by the Company and each direct and indirect domestic subsidiary ofNMG that guarantees the obligations of NMG under its Asset-Based Revolving CreditFacility. All obligations under the Senior Secured Term Loan Facility, and theguarantees of those obligations, are secured, subject to certain significantexceptions, by substantially all of the assets of the Company, NMG and thesubsidiary guarantors.

 

Thecredit agreement governing the Senior Secured Term Loan Facility contains anumber of negative covenants that are substantially similar to those governingthe Senior Notes and additional covenants related to the security arrangementsfor the Senior Secured Term Loan Facility. The credit agreement also containscustomary affirmative covenants and events of default, including across-default provision in respect of any other indebtedness that has anaggregate principal amount exceeding $50 million.

 

Fora more detailed description of the Senior Secured Term Loan Facility, refer toour Annual Report on Form 10-K for the fiscal year ended August 1,2009.

 

Thefair value of the Senior Secured Term Loan Facility was approximately $1,454.5million at January 30, 2010, $1,332.5 million at August 1, 2009 and$1,113.1 million at January 31, 2009 based on prevailing market rates atthis time.

 

***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. The 2028 Debentures are guaranteed on an unsecured,senior basis by the Company.  The 2028Debentures are not guaranteed by certain subsidiaries of NMG.  The 2028 Debentures include across-acceleration provision in respect of any other indebtedness that has anaggregate principal amount exceeding $15 million.  NMG’s 2028 Debentures mature on June 1,2028.

 

Fora more detailed description of the 2028 Debentures, refer to our Annual Reporton Form 10-K for the fiscal year ended August 1, 2009.

 

Thefair value of the 2028 Debentures was approximately $109.4 million at January 30,2010, $95.6 million at August 1, 2009 and $62.5 million at January 31,2009 based on quoted market prices.

 

***Senior Notes.**** *NMG has $752.4 millionaggregate principal amount of 9.0% / 9.75% Senior Notes under a seniorindenture (Senior Indenture).  NMG’sSenior Notes mature on October 15, 2015.

 

Intereston the Senior Notes is payable quarterly in arrears on each January 15, April 15,July 15 and October 15.  Forany interest payment period through October 15, 2010, NMG may, at itsoption, elect to pay interest on the Senior Notes entirely in cash (CashInterest) or entirely by increasing the principal amount of the outstandingSenior Notes by issuing additional Senior Notes (PIK Interest). Cash Intereston the Senior Notes accrues at the rate of 9% per annum. PIK Interest on theSenior Notes accrues at the rate of 9.75% per annum. We negotiated for theright to include the PIK feature in our Senior Notes because of our belief thatthis feature could be a useful tool to enhance liquidity under appropriatecircumstances. In the second quarter of fiscal year 2009, given the dislocationin the financial markets and the uncertainty as to when reasonable conditionswould return, we believed that it was appropriate to utilize this feature, eventhough we had available borrowing capacity under our $600.0 million revolvingcredit facility. Accordingly, we elected to pay PIK Interest for the threequarterly interest periods ending October 14, 2009 and to make suchinterest payments with the issuance of additional Senior Notes at the PIKInterest rate of

 

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9.75%instead of paying interest in cash.  As aresult, the original principal amount of Senior Notes of $700.0 millionincreased by $17.1 million on April 14, 2009, $17.4 million on July 14,2009 and $17.9 million on October 14, 2009.

 

Forthe quarterly interest periods ending on January 15, 2010 and April 15,2010, we elected to pay cash interest. Prior to the beginning of each eligible interest period in the future,we will evaluate whether to continue utilizing this PIK feature, taking intoaccount market conditions and other relevant factors at that time. After October 15,2010, we are required to make all interest payments on the Senior Notesentirely in cash.

 

TheSenior Notes are fully and unconditionally guaranteed, on a joint and severalunsecured, senior basis, by each of NMG’s wholly-owned domestic subsidiariesthat guarantee NMG’s obligations under its Senior Secured Credit Facilities andby the Company. The Senior Notes and the guarantees thereof are NMG’s and theguarantors’ unsecured, senior obligations and rank (i) equal in the rightof payment with all of NMG’s and the guarantors’ existing and future seniorindebtedness, including any borrowings under NMG’s Senior Secured CreditFacilities and the guarantees thereof and NMG’s 2028 Debentures; and (ii) seniorto all of NMG’s and its guarantors’ existing and future subordinatedindebtedness, including the Senior Subordinated Notes due 2015 and theguarantees thereof. The Senior Notes also are effectively junior in priority toNMG’s and its guarantors’ obligations under all secured indebtedness, includingNMG’s Senior Secured Credit Facilities, the 2028 Debentures, and any othersecured obligations of NMG, in each case, to the extent of the value of theassets securing such obligations. In addition, the Senior Notes arestructurally subordinated to all existing and future liabilities, includingtrade payables, of NMG’s subsidiaries that are not providing guarantees.

 

NMGis not required to make any mandatory redemption or sinking fund payments withrespect to the Senior Notes.  Theindenture governing the Senior Notes contains a number of customary negativecovenants and events of default, including a cross-default provision in respectof any other 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 Notes to be due and payable immediately.

 

Fora more detailed description of NMG’s Senior Notes, refer to our Annual Reporton Form 10-K for the fiscal year ended August 1, 2009.

 

Thefair value of NMG’s Senior Notes was approximately $731.8 million at January 30,2010, $539.9 million at August 1, 2009 and $308.0 million at January 31,2009 based on quoted market prices.

 

***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 SeniorSubordinated Notes mature on October 15, 2015.

 

TheSenior Subordinated Notes are fully and unconditionally guaranteed, on a jointand several unsecured, senior subordinated basis, by each of NMG’s wholly-owneddomestic subsidiaries that guarantee NMG’s obligations under its Senior SecuredCredit Facilities and by the Company. The Senior Subordinated Notes and theguarantees thereof are NMG’s and the guarantors’ unsecured, senior subordinatedobligations and rank (i) junior to all of NMG’s and the guarantors’existing and future senior indebtedness, including the Senior Notes and anyborrowings under NMG’s Senior Secured Credit Facilities, and the guaranteesthereof and NMG’s 2028 Debentures; (ii) equally with any of NMG’s and theguarantors’ future senior subordinated indebtedness; and (iii) senior toany of NMG’s and the guarantors’ future subordinated indebtedness. In addition,the Senior Subordinated Notes are structurally subordinated to all existing andfuture liabilities, including trade payables, of NMG’s subsidiaries that arenot providing guarantees.

 

NMGis not required to make any mandatory redemption or sinking fund payments withrespect to the Senior Subordinated Notes. The indenture governing the SeniorSubordinated Notes contains a number of customary negative covenants and eventsof defaults, 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 SeniorSubordinated Notes to be due and payable immediately, subject to certainexceptions.

 

Fora more detailed description of NMG’s Senior Subordinated Notes, refer to ourAnnual Report on Form 10-K for the fiscal year ended August 1, 2009.

 

Thefair value of NMG’s Senior Subordinated Notes was approximately $491.3 millionat January 30, 2010, $355.0 million at August 1, 2009 and $230.0million at January 31, 2009 based on quoted market prices.

 

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***Maturities of Long-Term Debt.***  At January 30, 2010, annual maturitiesof long-term debt during the next five fiscal years and thereafter are asfollows (in millions):

 
| 2011       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2012       |   | —  |   |
| 2013       |   | 1,598.4 |   |
| 2014       |   | —  |   |
| 2015       |   | —  |   |
| Thereafter |   | 1,373.8 |   |

 

Theabove table does not reflect either future excess cash flow prepayments, ifany, that may be required under the Senior Secured Term Loan Facility or anyfuture PIK Interest election that we may make through October 15, 2010.

 

***Interest expense.***  The significant components of interestexpense are as follows:

 
| ** **                         | ** ** | **Thirteen  weeks ended**        | ** ** | **Twenty-Six  weeks ended**      | ** ** |
|------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                 | ** ** | **January 30,********2010** | ** ** | **January 31,********2009** | ** ** | **January 30,********2010** | ** ** | **January 31,********2009** | ** ** |
|                               |       |                             |       |                             |       |   |   |   |   |
| Senior Secured Term Loan  Facility |       | $                                | 20,787     |                             | $          | 23,941 |   | $ | 41,573 |   | $ | 47,871 |   |
| 2028 Debentures                    |       | 2,207                            |       | 2,227                            |       | 4,433 |   | 4,453 |   |
| Senior Notes                       |       | 16,744                           |       | 15,711                           |       | 34,269 |   | 31,461 |   |
| Senior Subordinated Notes          |       | 12,969                           |       | 13,122                           |       | 25,795 |   | 26,091 |   |
| Amortization of debt issue  costs  |       | 4,679                            |       | 3,554                            |       | 9,340 |   | 7,109 |   |
| Other                              |       | 1,770                            |       | 865                              |       | 3,480 |   | 1,691 |   |
| Total interest expense             |       | 59,156                           |       | 59,420                           |       | 118,890 |   | 118,676 |   |
| Less:                              |       |                             |       |                             |       |   |   |   |   |
| Interest income                    |       | 152                              |       | 666                              |       | 328 |   | 1,771 |   |
| Capitalized interest               |       | —                           |       | 173                              |       | 193 |   | 479 |   |
| Interest expense, net              |       | $                                | 59,004     |                             | $          | 58,581 |   | $ | 118,369 |   | $ | 116,426 |   |

 

**4.**              DerivativeFinancial Instruments

 

***Interest Rate Swaps. ***In connection with theAcquisition, we obtained $2,575.0 million of floating rate debt agreements, ofwhich $2,125.0 million was outstanding at the Acquisition date and $1,598.4million is outstanding at January 30, 2010.  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 from6.882% to 6.983% per quarter through 2010 and result in an average fixed rateof 6.930%.

 

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.

 

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***Interest Rate Caps.***  In addition to interest rate swap agreements,we also use interest rate cap agreements to manage our floating rate debt.  Effective January 19, 2010, NMG enteredinto interest rate cap agreements for an aggregate notional amount of $500.0million in order to hedge the variability of our cash flows related to aportion of our floating rate indebtedness once the interest rate swap expireson December 6, 2010.  The interestrate cap agreements commence on December 6, 2010 and expire on December 6,2012.  Pursuant to the interest rate capagreements, NMG has capped LIBOR at 2.50% through December 6, 2012 withrespect to the $500.0 million notional amount of such agreements.  In the event LIBOR is less than 2.5%, NMGwill pay interest at the lower LIBOR rate. In the event LIBOR is higher than 2.5%, NMG will pay interest at thecapped rate of 2.5%.

 

Ateach balance sheet date, the interest rate caps are recorded at estimated fairvalue.  Changes in the fair value of thecap are expected to be highly effective in offsetting the unpredictability inexpected future cash flows on floating rate indebtedness attributable tofluctuations in LIBOR interest rates above 2.50%.  Unrealized gains and losses on theoutstanding balances of the interest rate caps are recorded as a component ofaccumulated other comprehensive loss. Gains and losses realized at the time of our quarterly interest paymentsdue to the expiration of applicable portions of the interest rate caps arereclassified to interest expense.

 

***Fair Value.***  The fair values of the interest rate swapsand interest rate caps are estimated using industry standard valuation modelsusing market-based observable inputs including interest rate curves (Level2).  A summary of the recorded assets(liabilities) with respect to our derivative financial instruments included inour condensed consolidated balance sheets is as follows:

 
| **(in thousands)**                                             | ** ** | **January 30,  2010** | ** ** | **August 1,  2009** | ** ** | **January 31,  2009** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                                                           |       |                       |       |                     |       |                       |       |
| Interest rate caps  (included in other long-term assets)       |       | $                          | 6,114      |                     | $          | —                     |       | $ | — |   |
|                                                           |       |                       |       |                     |       |                       |       |
| Interest rate swaps (included  in other current liabilities)   |       | $                          | (45,479    | )                        | $          | —                     |       | $ | — |   |
|                                                           |       |                       |       |                     |       |                       |       |
| Interest rate swaps  (included in other long-term liabilities) |       | $                          | —     |                     | $          | (57,750                    | )          | $ | (61,670 | ) |
|                                                           |       |                       |       |                     |       |                       |       |
| Accumulated other  comprehensive loss, net of taxes            |       | $                          | 28,290     |                     | $          | 35,508                     |       | $ | 38,114 |   |

 

Asummary of the recorded amounts related to our interest rate swaps reflected inour condensed consolidated statements of operations are as follows:

 
| ** **                                                           | ** ** | **Thirteen weeks ended**   | ** ** | **Twenty-Six weeks ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(in thousands)**                                              | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
|                                                                 |       |                       |       |                       |       |   |   |   |   |
| Realized hedging losses —  included in interest expense, net    |       | $                          | 11,422     |                       | $          | 5,967 |   | $ | 22,520 |   | $ | 11,078 |   |
|                                                                 |       |                       |       |                       |       |   |   |   |   |
| Ineffective hedging losses  — included in interest expense, net |       | $                          | 213        |                       | $          | 154 |   | $ | 429 |   | $ | 291 |   |

 

Theamount of losses recorded in other comprehensive loss at January 30, 2010that is expected to be reclassified into interest expense in the next twelvemonths, if interest rates remain unchanged, is approximately $45.5 million.

 

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**5.**              Employee BenefitPlans

 

***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.  Wefroze benefits offered under our Pension Plan and SERP Plan 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.

 

Wealso maintain defined contribution plans consisting of a 401(k) Plan, aretirement savings plan (RSP) and defined contribution supplemental executiveretirement 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.

 

***Benefit Obligations.***  Obligations for our employee benefit plans,included in other long-term liabilities, are as follows:

 
| **(in thousands)**                        | ** ** | **January 30,********2010** | ** ** | **August 1,********2009** | ** ** | **January 31,********2009** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                       | ** ** |
| Pension Plan                              |       | $                                | 159,156    |                           | $          | 156,001                          |       | $ | 153,968 |   |
| SERP Plan                                 |       | 94,040                           |       | 92,152                         |       | 87,863                           |       |
| Postretirement Plan                       |       | 17,855                           |       | 17,920                         |       | 20,150                           |       |
|                                      |       | 271,051                          |       | 266,073                        |       | 261,981                          |       |
| Less: current portion                     |       | (5,069                           | )          | (5,069                         | )          | (4,165                           | )          |
| Long-term portion of  benefit obligations |       | $                                | 265,982    |                           | $          | 261,004                          |       | $ | 257,816 |   |

 

As of January 30, 2010, we have $69.0 million(net of taxes of $44.8 million) of adjustments to our benefit obligationsrecorded as increases to accumulated other comprehensive loss.

 

***Costs of Benefits. ***The components of theexpenses we incurred under our Pension Plan, SERP Plan and Postretirement Planare as follows:

 
| ** **                              | ** ** | **Thirteen weeks ended**         | ** ** | **Twenty-Six weeks ended**       | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                      | ** ** | **January 30,********2010** | ** ** | **January 31,********2009** | ** ** | **January 30,********2010** | ** ** | **January 31,********2009** | ** ** |
| Pension Plan:                           |       |                             |       |                             |       |   |   |   |   |
| Service cost                            |       | $                                | 1,429      |                             | $          | 1,444 |   | $ | 2,857 |   | $ | 2,875 |   |
| Interest cost                           |       | 6,329                            |       | 5,932                            |       | 12,659 |   | 11,970 |   |
| Expected return on plan  assets         |       | (6,463                           | )          | (6,373                           | )          | (12,925 | ) | (12,880 | ) |
| Net amortization of losses              |       | 282                              |       | —                           |       | 564 |   | — |   |
| Pension Plan expense                    |       | $                                | 1,577      |                             | $          | 1,003 |   | $ | 3,155 |   | $ | 1,965 |   |
|                                    |       |                             |       |                             |       |   |   |   |   |
| SERP Plan:                              |       |                             |       |                             |       |   |   |   |   |
| Service cost                            |       | $                                | 171        |                             | $          | 164 |   | $ | 342 |   | $ | 326 |   |
| Interest cost                           |       | 1,377                            |       | 1,302                            |       | 2,755 |   | 2,638 |   |
| SERP Plan expense                       |       | $                                | 1,548      |                             | $          | 1,466 |   | $ | 3,097 |   | $ | 2,964 |   |
|                                    |       |                             |       |                             |       |   |   |   |   |
| Postretirement Plan:                    |       |                             |       |                             |       |   |   |   |   |
| Service cost                            |       | $                                | 18         |                             | $          | 23 |   | $ | 36 |   | $ | 46 |   |
| Interest cost                           |       | 254                              |       | 336                              |       | 508 |   | 672 |   |
| Net amortization of prior  service cost |       | (172                             | )          | —                           |       | (343 | ) | — |   |
| Net amortization of losses              |       | 90                               |       | 70                               |       | 179 |   | 141 |   |
| Postretirement Plan  expense            |       | $                                | 190        |                             | $          | 429 |   | $ | 380 |   | $ | 859 |   |

 

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***Funding Policyand Plan Assets.***  Our policyis to fund the Pension Plan at or above the minimum required by law. In fiscalyear 2009, we were not required to make contributions to the Pension Plan;however, we made a voluntary $15.0 million contribution to our Pension Plan inthe fourth quarter of fiscal year 2009. In March 2010, we made an additional voluntary $15.0 millioncontribution to our Pension Plan.  Basedupon currently available information, we will not be required to makecontributions 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.

 

**6.**              Income Taxes

 

Oureffective income tax rate for the second quarter of fiscal year 2010 was 51.2%compared to 21.8% for the second quarter of fiscal year 2009.  Our effective income tax rate foryear-to-date fiscal 2010 was 47.1% compared to 20.9% for year-to-date fiscal2009.  No income tax benefit existsrelated to the $291.1 million of goodwill impairment charges recorded in thesecond quarter of fiscal year 2009. Excluding the impact of the goodwill impairment charges, our effectiveincome tax rate was 39.4% for the second quarter of fiscal year 2009 and 39.0%for year-to-date fiscal 2009.  Increasesin our effective tax rates for the second quarter and year-to-date fiscal 2010periods compared to the corresponding periods in fiscal year 2009 are primarilyattributable to the relative significance of non-taxable income andnon-deductible expenses to our estimated taxable loss in the current year.

 

AtJanuary 30, 2010, the gross amount of unrecognized tax benefits was $6.9million, all of which would impact our effective tax rate, if recognized.  We classify interest and penalties as a componentof income tax expense (benefit) and our liability for accrued interest andpenalties was $6.2 million as of January 30, 2010.

 

Wefile income tax returns in the U.S. federal jurisdiction and various state andlocal jurisdictions.  During the third quarterof fiscal year 2009, we closed the IRS examination of fiscal years 2005 and2006 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 liabilityfor unrecognized tax benefits resulted in a decrease to goodwill of $17.3million and a tax benefit of $1.3 million, offset by a decrease to deferred taxliabilities of $2.7 million.

 

TheIRS is examining our federal tax return for fiscal year 2007.  We believe our recorded tax liabilities as ofJanuary 30, 2010 are sufficient to cover any potential assessments to bemade by the IRS upon the completion of their examination. We will continue tomonitor the progress of the IRS examination and review our recorded taxliabilities for potential audit assessments. With respect to state and local jurisdictions, with limited exceptions,the Company and its subsidiaries are no longer subject to income tax audits forfiscal years before 2005.  We believe itis reasonably possible that additional adjustments in the amounts of ourunrecognized tax benefits could occur within the next twelve months as a resultof settlements with tax authorities or expiration of statutes oflimitation.  At this time, we do notbelieve such adjustments will have a material impact on our consolidatedfinancial statements.

 

**7.**              Stock-BasedCompensation

 

TheCompany has approved equity-based management arrangements which authorizeequity awards to be granted to certain management employees for up to 87,992shares of the common stock of the Company. Options generally vest over four to five years and expire eight to tenyears from the date of grant.

 

Theexercise prices of approximately 50% of our options escalate at a 10% compoundrate per year (Accreting Options) until the earlier to occur of (i) exercise,(ii) a defined anniversary of the date of grant (four to five years) or (iii) theoccurrence of a change in control. However, in the event the Sponsors cause thesale of shares of the Company to an unaffiliated entity, the exercise pricewill cease to accrete at the time of the sale with respect to a pro rataportion of the accreting options.  Theexercise price with respect to all other options (Fixed Price Options) is fixedat the grant date.

 

***Stock Option Modification.***  In the second quarter of fiscal year 2010,the Compensation Committee approved 1) a tender offer for outstanding AccretingOptions to purchase 26,614 shares (Eligible Options), 2) the extension of theoption term with respect to Fixed Price Options for 25,236 shares to October 6,2017 and 3) the modification of additional Fixed Price Options to purchase1,378 shares (collectively, the Modification Transactions).  The Modification Transactions were taken inresponse to

 

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declinesin capital markets and general economic conditions that have resulted in theexercise prices for these options to be in excess of the estimated fair valueof our common stock.

 

Inconnection with the tender offer to purchase certain Accreting Options, optionholders were allowed to tender their Eligible Options for new options at anexchange rate of 1.5 Eligible Options to 1.0 new option.  The new options issued 1) have an initialexercise price of $1,000 per share which exercise price will escalate at a 10%compound rate per year through the fourth anniversary of the grant date, 2)vest over four years and 3) expire eight years after the grant date.  The tender offer was completed in December 2009with the tender of all Eligible Options and the issuance of 17,743 new options.

 

Inconnection with the Modification Transactions, we incurred additionalcompensation charges aggregating $1.8 million to recognize the excess of thepost-modification fair value of vested options over the pre-modification fairvalue of such options.

 

TheCompensation Committee is still considering modifications with respect toAccreting Options and Fixed Price Options for an additional 23,054 shares,which were not part of the programs described above.

 

***Outstanding Stock Options.***  A summary of the status of our stock optionplan is as follows:

 
| ** **                            | ** ** | **January 30,  2010** | ** ** | **August 1,  2009**               | ** ** | **January 31,  2009** | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **Shares**                 | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares**                 | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning  of period   |       | 79,399                     |       | $                                      | 1,585      |                       | 83,147     |   | $ | 1,507 |   | 83,147 |   | $ | 1,507 |   |
| Granted                               |       | 25,911                     |       | 1,024                                  |       | —                     |       | — |   | — |   | — |   |
| Exercised                             |       | —                     |       | —                                 |       | (855                       | )          | 1,684 |   | (855 | ) | 1,684 |   |
| Cancelled                             |       | (27,992                    | )          | 2,137                                  |       | —                     |       | — |   | (2,481 | ) | 1,606 |   |
| Forfeited                             |       | (3,116                     | )          | 1,684                                  |       | (2,893                     | )          | 1,617 |   | — |   | — |   |
| Outstanding at end of  period         |       | 74,202                     |       | $                                      | 1,268      |                       | 79,399     |   | $ | 1,585 |   | 79,811 |   | $ | 1,585 |   |
| Options exercisable at end  of period |       | 44,051                     |       | $                                      | 1,395      |                       | 60,857     |   | $ | 1,542 |   | 55,946 |   | $ | 1,527 |   |

 

AtJanuary 30, 2010, Accreting Options were outstanding for 29,640 shares andFixed Price Options were outstanding for 44,562 shares.

 

***Grant Date Fair Value of Stock Options.***  All grants of stock options have an exercise priceequaling or exceeding the fair market value of our common stock on the date ofgrant.  Because we are privately held andthere is no public market for our common stock, the fair market value of ourcommon stock is determined by our Compensation Committee at the time optiongrants are awarded (Level 3 determination of fair value).  In determining the fair value of our commonstock, the Compensation Committee considers such factors as the Company’sactual and projected financial results, the principal amount of the Company’sindebtedness, valuations of the Company performed by third parties and otherfactors it believes are material to the valuation process.

 

Weuse the Black-Scholes option-pricing model to determine the fair value of ouroptions as of the date of grant.  Asummary of our fiscal year 2010 grants and fair value assumptions is asfollows:

 
| ** **                               | ** ** | **Options  Issued in  Connection with  Modification Transactions** | ** ** | **Other  Grants**      | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------|------------|
| ** **                               | ** ** | **Fixed  Price  Options**                                          | ** ** | **Accreting  Options** | ** ** | **Fixed  Price  Options** | ** ** | **Accreting  Options** | ** ** |
| Options Granted                          |       | 1,378                                                              |       | 17,743                 |       | 3,395 |   | 3,395 |   |
| Exercise Price at  January 30, 2010 |       | $                                                                  | 1,445      |                   | $          | 1,000 |   | $ | 1,000 |   | $ | 1,000 |   |
| Term                                     |       | 8                                                                  |       | 8                      |       | 8 |   | 8 |   |
| Volatility                               |       | 53.4                                                               | %          | 53.4                   | %          | 53.4 | % | 53.4 | % |
| Risk-Free Rate                           |       | 3.3                                                                | %          | 3.3                    | %          | 3.3 | % | 3.3 | % |
| Dividend Yield                           |       | —                                                             |       | —                 |       | — |   | — |   |
| Fair Value                               |       | $                                                                  | 465        |                   | $          | 462 |   | $ | 541 |   | $ | 462 |   |

 

Expectedvolatility is based on a combination of NMG’s historical volatility adjustedfor our leverage and estimates of implied volatility of our peer group.

 

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Werecognize compensation expense for stock options on a straight-line basis overthe vesting period.  We recognizednon-cash stock compensation expense of $2.4 million in year-to-date fiscal2010 and $3.0 million in year-to-date fiscal 2009, which is included inselling, general and administrative expenses. At January 30, 2010, unearned non-cash stock-based compensationthat we expect to recognize as expense through fiscal year 2015 aggregatesapproximately $7.7 million.

 

**8.**              Transactions withSponsors

 

Pursuantto a management services agreement with affiliates of the Sponsors, and inexchange for on-going consulting and management advisory services that areprovided to us by the Sponsors and their affiliates, affiliates of the Sponsorsreceive an aggregate annual management fee equal to the lesser of (i) 0.25%of our consolidated annual revenues or (ii) $10 million. Affiliatesof the Sponsors also receive reimbursement for out-of-pocket expenses incurredby them or their affiliates in connection with services provided pursuant tothe agreement. These management fees are payable quarterly in arrears.  We recorded management fees of $4.9 millionduring year-to-date fiscal 2010 and $5.2 million during year-to-date fiscal2009, which are included in selling, general and administrative expenses in thecondensed consolidated statements of operations.

 

Themanagement services agreement also provides that affiliates of the Sponsors mayreceive future fees in connection with certain future financing and acquisitionor disposition transactions. The management services agreement includescustomary exculpation and indemnification provisions in favor of the Sponsorsand their affiliates.

 

**9.**              Income fromCredit Card Program, Net

 

InJune 2005, we entered into a marketing and servicing alliance withHSBC.  Pursuant to the agreement withHSBC (Program Agreement), HSBC offers credit cards and non-card payment plansand bears substantially all credit risk with respect to sales transacted on thecards bearing our brands. We receive ongoing payments from HSBC related tocredit card sales and compensation for marketing and servicing activities (HSBCProgram Income).  We recognize HSBC ProgramIncome 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.  Our reserve for credit card net lossesaggregated $1.5 million as of January 30, 2010, $3.5 million as of August 1,2009 and $6.0 million as of January 31, 2009, which is included in accruedliabilities in the condensed consolidated balance sheets.

 

TheProgram Agreement expires in July 2010. We are currently in negotiations with HSBC and other providers withrespect to a replacement to the Program Agreement.  Based upon current market conditions, webelieve the future income to the Company pursuant to any replacementarrangement will be lower than the current HSBC Program Income earned pursuantto the Program Agreement.

 

**10.**       Commitments andContingencies

 

***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 the attainmentof 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 January 30, 2010, the vested participant balance in the Long-TermIncentive Plan aggregated $5.2 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.

 

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***Litigation.***  We are currently involved in various legalactions and proceedings that arose in the ordinary course of business. Webelieve that any liability arising as a result of these actions and proceedingswill not have a material adverse effect on our financial position, results ofoperations or cash flows.

 

**11.**       Accumulated OtherComprehensive Loss

 

The following table shows the components ofaccumulated other comprehensive loss (amounts are recorded net of relatedincome taxes):

 
| **(in thousands)**                                                        | ** ** | **January 30,  2010** | ** ** | **August 1,********2009** | ** ** | **January 31,  2009** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|----------------------------|------------|
|                                                                      |       |                       |       |                           |       |                       |       |
| Unrealized loss on  financial instruments                                 |       | $                          | (28,290    | )                              | $          | (35,508                    | )          | $ | (38,114 | ) |
| Change in unfunded benefit  obligations                                   |       | (69,011                    | )          | (69,011                        | )          | (60,221                    | )          |
| Other                                                                     |       | —                     |       | (68                            | )          | (171                       | )          |
| Total accumulated other  comprehensive loss                               |       | $                          | (97,301    | )                              | $          | (104,587                   | )          | $ | (98,506 | ) |
|                                                                      |       |                       |       |                           |       |                       |       |
| ** **                                                                | ** ** | **Twenty-Six weeks ended** | ** ** | ** **                     |       |                       |
| **(in thousands)**                                                        | ** ** | **January 30,  2010** | ** ** | **January 31,  2009**     | ** ** | ** **                 |       |   |
| Net earnings (loss) from  condensed consolidated statements of operations |       | $                          | 12,485     |                           | $          | (496,378                   | )          |   |   |   |
| Change in unrealized loss  on financial instruments                       |       | 7,218                      |       | (16,359                        | )          |                       |       |   |
| Change in unfunded benefit  obligations                                   |       | —                     |       | (72,523                        | )          |                       |       |   |
| Other                                                                     |       | 68                         |       | (460                           | )          |                       |       |   |
| Total comprehensive income  (loss) for the period                         |       | $                          | 19,771     |                           | $          | (585,720                   | )          |   |   |   |

 

**12.**       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 (loss) for the segments include 1) revenues, 2) cost of sales, 3)direct selling, 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 bymanagement in measuring the assets and profitability of our segments. Theseamounts include 1) corporate expenses including, but not limited to, treasury,investor relations, legal and finance support services, and general corporatemanagement, 2) charges related to the application of purchase accounting adjustmentsmade in connection with the Acquisition including amortization of intangibleassets and favorable lease commitments and other non-cash items and 3) interestexpense.  These items, while oftenrelated to the operations of a segment, are not considered by segment operatingmanagement, corporate operating management and the chief operating decisionmaker 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).

 

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Thefollowing tables set forth the information for our reportable segments:

 
| ** **                                                         | ** ** | **Thirteen weeks ended**   | ** ** | **Twenty-Six weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(in thousands)**                                                 | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
|                                                               | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                           |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 881,138    |                       | $          | 870,537 |   | $ | 1,602,757 |   | $ | 1,697,663 |   |
| Direct Marketing                                                   |       | 221,223                    |       | 208,842                    |       | 368,504 |   | 367,503 |   |
| Total                                                              |       | $                          | 1,102,361  |                       | $          | 1,079,379 |   | $ | 1,971,261 |   | $ | 2,065,166 |   |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| OPERATING EARNINGS (LOSS)                                          |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 66,485     |                       | $          | (9,637 | ) | $ | 154,907 |   | $ | 84,799 |   |
| Direct Marketing                                                   |       | 40,725                     |       | 17,337                     |       | 62,434 |   | 36,698 |   |
| Corporate expenses                                                 |       | (15,372                    | )          | (13,231                    | )          | (29,010 | ) | (26,921 | ) |
| Other expenses (1)                                                 |       | (6,393                     | )          | (8,998                     | )          | (9,722 | ) | (9,488 | ) |
| Amortization of intangible  assets and favorable lease commitments |       | (18,314                    | )          | (18,037                    | )          | (36,630 | ) | (36,074 | ) |
| Impairment charges (2)                                             |       | —                     |       | (560,159                   | )          | — |   | (560,159 | ) |
| Total                                                              |       | $                          | 67,131     |                       | $          | (592,725 | ) | $ | 141,979 |   | $ | (511,145 | ) |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| CAPITAL EXPENDITURES                                               |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 8,575      |                       | $          | 27,820 |   | $ | 22,756 |   | $ | 57,646 |   |
| Direct Marketing                                                   |       | 2,546                      |       | 3,263                      |       | 5,626 |   | 6,898 |   |
| Total                                                              |       | $                          | 11,121     |                       | $          | 31,083 |   | $ | 28,382 |   | $ | 64,544 |   |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| DEPRECIATION EXPENSE                                               |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 28,921     |                       | $          | 32,787 |   | $ | 59,116 |   | $ | 65,735 |   |
| Direct Marketing                                                   |       | 3,732                      |       | 4,922                      |       | 7,598 |   | 9,234 |   |
| Other                                                              |       | 1,769                      |       | 1,403                      |       | 3,491 |   | 2,742 |   |
| Total                                                              |       | $                          | 34,422     |                       | $          | 39,112 |   | $ | 70,205 |   | $ | 77,711 |   |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| ** **                                                         | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                             |       |                       |       |                       |       |   |   |   |   |   |
| Tangible assets of  Specialty Retail stores                        |       | $                          | 1,634,726  |                       | $          | 1,849,025 |   |   |   |   |   |   |
| Tangible assets of Direct  Marketing                               |       | 143,966                    |       | 154,139                    |       |   |   |   |   |   |
| Corporate assets:                                                  |       |                       |       |                       |       |   |   |   |   |   |
| Intangible assets related  to Specialty Retail stores              |       | 2,775,749                  |       | 2,988,393                  |       |   |   |   |   |   |
| Intangible assets related  to Direct Marketing                     |       | 466,568                    |       | 484,812                    |       |   |   |   |   |   |
| Other                                                              |       | 578,842                    |       | 332,681                    |       |   |   |   |   |   |
| Total                                                              |       | $                          | 5,599,851  |                       | $          | 5,809,050 |   |   |   |   |   |   |

 

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(1)         Other expenses consistsprimarily of costs (primarily professional fees and severance) incurred inconnection with cost reductions and corporate initiatives.

 

(2)         Impairment charges recordedin the second quarter of fiscal year 2009 consist of pretax charges of 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.

 

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**13.**       Condensed Consolidating FinancialInformation

 

***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 an operating subsidiary domiciled in Canada providing supportservices to our Direct Marketing operation through January 2009.

 

Thefollowing condensed consolidating financial information represents the financialinformation of Neiman Marcus, Inc. and its non-guarantor subsidiaries,prepared on the equity basis of accounting. The information is presented inaccordance with the requirements of Rule 3-10 under the Securities andExchange Commission’s Regulation S-X. The financial information may notnecessarily be indicative of results of operations, cash flows or financialposition had the non-guarantor subsidiaries operated as independent entities.

 
| ** **                                       | ** ** | **January 30,  2010** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                               | ** ** | **Company**                | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                       |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       | $                          | —     |   | $ | 500,011 |   | $ | 650 |   | $ | — |   | $ | 500,661 |   |
| Merchandise inventories                          |       | —                     |       | 651,279 |   | 81,010 |   | — |   | 732,289 |   |
| Other current assets                             |       | —                     |       | 84,942 |   | 11,808 |   | — |   | 96,750 |   |
| Total current assets                             |       | —                     |       | 1,236,232 |   | 93,468 |   | — |   | 1,329,700 |   |
| Property and equipment, net                      |       | —                     |       | 831,184 |   | 116,187 |   | — |   | 947,371 |   |
| Goodwill and intangible  assets, net             |       | —                     |       | 1,505,654 |   | 1,736,663 |   | — |   | 3,242,317 |   |
| Other assets                                     |       | —                     |       | 78,650 |   | 1,813 |   | — |   | 80,463 |   |
| Investments in subsidiaries                      |       | 942,861                    |       | 1,834,019 |   | — |   | (2,776,880 | ) | — |   |
| Total assets                                     |       | $                          | 942,861    |   | $ | 5,485,739 |   | $ | 1,948,131 |   | $ | (2,776,880 | ) | $ | 5,599,851 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**   |       |                       |       |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                       |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                          | —     |   | $ | 161,882 |   | $ | 28,167 |   | $ | — |   | $ | 190,049 |   |
| Accrued liabilities                              |       | —                     |       | 285,797 |   | 84,478 |   | — |   | 370,275 |   |
| Other current liabilities                        |       | —                     |       | 45,479 |   | — |   | — |   | 45,479 |   |
| Total current liabilities                        |       | —                     |       | 493,158 |   | 112,645 |   | — |   | 605,803 |   |
| Long-term liabilities:                           |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                     |       | 2,972,222 |   | — |   | — |   | 2,972,222 |   |
| Deferred income taxes                            |       | —                     |       | 684,185 |   | — |   | — |   | 684,185 |   |
| Other long-term liabilities                      |       | —                     |       | 393,313 |   | 1,467 |   | — |   | 394,780 |   |
| Total long-term liabilities                      |       | —                     |       | 4,049,720 |   | 1,467 |   | — |   | 4,051,187 |   |
| Total shareholders’ equity                  |       | 942,861                    |       | 942,861 |   | 1,834,019 |   | (2,776,880 | ) | 942,861 |   |
| Total liabilities and  shareholders’ equity |       | $                          | 942,861    |   | $ | 5,485,739 |   | $ | 1,948,131 |   | $ | (2,776,880 | ) | $ | 5,599,851 |   |

 

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| ** **                                       | ** ** | **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 |   |
|                                             |       |                      |       |   |   |   |   |   |   |   |   |
| ** **                                       | ** ** | **January 31, 2009** | ** ** |
| **(in thousands)**                               | ** ** | **Company**               | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                      |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                      |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       | $                         | —     |   | $ | 221,527 |   | $ | 1,657 |   | $ | — |   | $ | 223,184 |   |
| Merchandise inventories                          |       | —                    |       | 744,180 |   | 96,151 |   | — |   | 840,331 |   |
| Other current assets                             |       | —                    |       | 159,832 |   | 10,151 |   | — |   | 169,983 |   |
| Total current assets                             |       | —                    |       | 1,125,539 |   | 107,959 |   | — |   | 1,233,498 |   |
| Property and equipment, net                      |       | —                    |       | 901,460 |   | 129,825 |   | — |   | 1,031,285 |   |
| Goodwill and intangible  assets, net             |       | —                    |       | 1,610,216 |   | 1,862,989 |   | — |   | 3,473,205 |   |
| Other assets                                     |       | —                    |       | 69,166 |   | 1,896 |   | — |   | 71,062 |   |
| Investments in subsidiaries                      |       | 1,093,579                 |       | 2,004,967 |   | — |   | (3,098,546 | ) | — |   |
| Total assets                                     |       | $                         | 1,093,579  |   | $ | 5,711,348 |   | $ | 2,102,669 |   | $ | (3,098,546 | ) | $ | 5,809,050 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**   |       |                      |       |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                      |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                         | —     |   | $ | 173,182 |   | $ | 22,447 |   | $ | — |   | $ | 195,629 |   |
| Accrued liabilities                              |       | —                    |       | 292,503 |   | 72,906 |   | — |   | 365,409 |   |
| Total current liabilities                        |       | —                    |       | 465,685 |   | 95,353 |   | — |   | 561,038 |   |
| Long-term liabilities:                           |       |                      |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                    |       | 2,946,199 |   | — |   | — |   | 2,946,199 |   |
| Deferred income taxes                            |       | —                    |       | 750,027 |   | — |   | — |   | 750,027 |   |
| Other long-term liabilities                      |       | —                    |       | 455,858 |   | 2,349 |   | — |   | 458,207 |   |
| Total long-term liabilities                      |       | —                    |       | 4,152,084 |   | 2,349 |   | — |   | 4,154,433 |   |
| Total shareholders’ equity                  |       | 1,093,579                 |       | 1,093,579 |   | 2,004,967 |   | (3,098,546 | ) | 1,093,579 |   |
| Total liabilities and  shareholders’ equity |       | $                         | 1,093,579  |   | $ | 5,711,348 |   | $ | 2,102,669 |   | $ | (3,098,546 | ) | $ | 5,809,050 |   |

 

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| ** **                                                                        | ** ** | **Thirteen  weeks ended January 30, 2010** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                               | —     |   | $ | 931,514 |   | $ | 170,847 |   | $ | — |   | $ | 1,102,361 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                          |       | 644,390 |   | 117,095 |   | — |   | 761,485 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                          |       | 208,441 |   | 29,140 |   | — |   | 237,581 |   |
| Income from credit card  program, net                                             |       | —                                          |       | (15,248 | ) | (1,324 | ) | — |   | (16,572 | ) |
| Depreciation expense                                                              |       | —                                          |       | 30,694 |   | 3,728 |   | — |   | 34,422 |   |
| Amortization of intangible  assets and favorable lease commitments                |       | —                                          |       | 15,089 |   | 3,225 |   | — |   | 18,314 |   |
| Operating earnings                                                                |       | —                                          |       | 48,148 |   | 18,983 |   | — |   | 67,131 |   |
| Interest expense, net                                                             |       | —                                          |       | 59,003 |   | 1 |   | — |   | 59,004 |   |
| Intercompany royalty  charges (income)                                            |       | —                                          |       | 53,786 |   | (53,786 | ) | — |   | — |   |
| Equity in (earnings) loss  of subsidiaries                                        |       | (3,964                                          | )          | (72,768 | ) | — |   | 76,732 |   | — |   |
| Earnings (loss) before  income taxes                                              |       | 3,964                                           |       | 8,127 |   | 72,768 |   | (76,732 | ) | 8,127 |   |
| Income tax expense                                                                |       | —                                          |       | 4,163 |   | — |   | — |   | 4,163 |   |
| Net earnings (loss)                                                               |       | $                                               | 3,964      |   | $ | 3,964 |   | $ | 72,768 |   | $ | (76,732 | ) | $ | 3,964 |   |
|                                                                              |       |                                            |       |   |   |   |   |   |   |   |   |
|                                                                              |       | **Thirteen  weeks ended January 31, 2009** |       |
| **(in thousands)**                                                                | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                               | —     |   | $ | 923,020 |   | $ | 156,359 |   | $ | — |   | $ | 1,079,379 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                          |       | 694,798 |   | 126,605 |   | — |   | 821,403 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                          |       | 214,592 |   | 28,988 |   | — |   | 243,580 |   |
| Income from credit card  program, net                                             |       | —                                          |       | (9,023 | ) | (1,164 | ) | — |   | (10,187 | ) |
| Depreciation expense                                                              |       | —                                          |       | 34,310 |   | 4,802 |   | — |   | 39,112 |   |
| Amortization of intangible  assets and favorable lease commitments                |       | —                                          |       | 15,090 |   | 2,947 |   | — |   | 18,037 |   |
| Impairment charges                                                                |       | —                                          |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                          |       | (302,618 | ) | (290,107 | ) | — |   | (592,725 | ) |
| Interest expense, net                                                             |       | —                                          |       | 58,579 |   | 2 |   | — |   | 58,581 |   |
| Intercompany royalty  charges (income)                                            |       | —                                          |       | 58,889 |   | (58,889 | ) | — |   | — |   |
| Equity in loss (earnings)  of subsidiaries                                        |       | 509,256                                         |       | 231,220 |   | — |   | (740,476 | ) | — |   |
| (Loss) earnings before  income taxes                                              |       | (509,256                                        | )          | (651,306 | ) | (231,220 | ) | 740,476 |   | (651,306 | ) |
| Income tax benefit                                                                |       | —                                          |       | (142,050 | ) | — |   | — |   | (142,050 | ) |
| Net (loss) earnings                                                               |       | $                                               | (509,256   | ) | $ | (509,256 | ) | $ | (231,220 | ) | $ | 740,476 |   | $ | (509,256 | ) |

 

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| ** **                                                                        | ** ** | **Twenty-Six  weeks ended January 30, 2010** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                       | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                 | —     |   | $ | 1,647,431 |   | $ | 323,830 |   | $ | — |   | $ | 1,971,261 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                            |       | 1,087,945 |   | 207,764 |   | — |   | 1,295,709 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                            |       | 399,504 |   | 56,893 |   | — |   | 456,397 |   |
| Income from credit card  program, net                                             |       | —                                            |       | (27,129 | ) | (2,530 | ) | — |   | (29,659 | ) |
| Depreciation expense                                                              |       | —                                            |       | 62,528 |   | 7,677 |   | — |   | 70,205 |   |
| Amortization of intangible  assets and favorable lease commitments                |       | —                                            |       | 30,180 |   | 6,450 |   | — |   | 36,630 |   |
| Operating earnings                                                                |       | —                                            |       | 94,403 |   | 47,576 |   | — |   | 141,979 |   |
| Interest expense, net                                                             |       | —                                            |       | 118,368 |   | 1 |   | — |   | 118,369 |   |
| Intercompany royalty  charges (income)                                            |       | —                                            |       | 98,057 |   | (98,057 | ) | — |   | — |   |
| Equity in (earnings) loss  of subsidiaries                                        |       | (12,485                                           | )          | (145,632 | ) | — |   | 158,117 |   | — |   |
| Earnings (loss) before  income taxes                                              |       | 12,485                                            |       | 23,610 |   | 145,632 |   | (158,117 | ) | 23,610 |   |
| Income tax expense                                                                |       | —                                            |       | 11,125 |   | — |   | — |   | 11,125 |   |
| Net earnings (loss)                                                               |       | $                                                 | 12,485     |   | $ | 12,485 |   | $ | 145,632 |   | $ | (158,117 | ) | $ | 12,485 |   |
|                                                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| ** **                                                                        | ** ** | **Twenty-Six  weeks ended January 31, 2009** | ** ** |
| **(in thousands)**                                                                | ** ** | **Company**                                       | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                 | —     |   | $ | 1,740,743 |   | $ | 324,423 |   | $ | — |   | $ | 2,065,166 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                            |       | 1,213,886 |   | 225,260 |   | — |   | 1,439,146 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                            |       | 427,744 |   | 58,664 |   | — |   | 486,408 |   |
| Income from credit card  program, net                                             |       | —                                            |       | (20,556 | ) | (2,631 | ) | — |   | (23,187 | ) |
| Depreciation expense                                                              |       | —                                            |       | 68,625 |   | 9,086 |   | — |   | 77,711 |   |
| Amortization of intangible  assets and favorable lease commitments                |       | —                                            |       | 30,179 |   | 5,895 |   | — |   | 36,074 |   |
| Impairment charges                                                                |       | —                                            |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                            |       | (255,006 | ) | (256,139 | ) | — |   | (511,145 | ) |
| Interest expense, net                                                             |       | —                                            |       | 116,422 |   | 4 |   | — |   | 116,426 |   |
| Intercompany royalty  charges (income)                                            |       | —                                            |       | 115,719 |   | (115,719 | ) | — |   | — |   |
| Equity in loss (earnings)  of subsidiaries                                        |       | 496,378                                           |       | 140,424 |   | — |   | (636,802 | ) | — |   |
| (Loss) earnings before  income taxes                                              |       | (496,378                                          | )          | (627,571 | ) | (140,424 | ) | 636,802 |   | (627,571 | ) |
| Income tax benefit                                                                |       | —                                            |       | (131,193 | ) | — |   | — |   | (131,193 | ) |
| Net (loss) earnings                                                               |       | $                                                 | (496,378   | ) | $ | (496,378 | ) | $ | (140,424 | ) | $ | 636,802 |   | $ | (496,378 | ) |

 

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| ** **                                                                                   | ** ** | **Twenty-Six  weeks ended January 30, 2010** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                       | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                              |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                 | 12,485     |   | $ | 12,485 |   | $ | 145,632 |   | $ | (158,117 | ) | $ | 12,485 |   |
| Adjustments to reconcile  net earnings (loss) to net cash provided by operating activities:  |       |                                              |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization expense                                                       |       | —                                            |       | 101,795 |   | 14,127 |   | — |   | 115,922 |   |
| Paid-in-kind interest                                                                        |       | —                                            |       | 14,362 |   | — |   | — |   | 14,362 |   |
| Deferred income taxes                                                                        |       | —                                            |       | (18,318 | ) | — |   | — |   | (18,318 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans |       | —                                            |       | 2,480 |   | 88 |   | — |   | 2,568 |   |
| Intercompany royalty income  payable (receivable)                                            |       | —                                            |       | 98,057 |   | (98,057 | ) | — |   | — |   |
| Equity in (earnings) loss  of subsidiaries                                                   |       | (12,485                                           | )          | (145,632 | ) | — |   | 158,117 |   | — |   |
| Changes in operating assets  and liabilities, net                                            |       | —                                            |       | 165,707 |   | (60,345 | ) | — |   | 105,362 |   |
| Net cash provided by  operating activities                                                   |       | —                                            |       | 230,936 |   | 1,445 |   | — |   | 232,381 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                              |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                            |       | (26,928 | ) | (1,454 | ) | — |   | (28,382 | ) |
| Net cash used for investing  activities                                                      |       | —                                            |       | (26,928 | ) | (1,454 | ) | — |   | (28,232 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                              |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                            |       | (26,763 | ) | — |   | — |   | (26,763 | ) |
| Net cash used for financing  activities                                                      |       | —                                            |       | (26,763 | ) | — |   | — |   | (26,763 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during  the period                                                       |       | —                                            |       | 177,245 |   | (9 | ) | — |   | 177,236 |   |
| Beginning balance                                                                            |       | —                                            |       | 322,766 |   | 659 |   | — |   | 323,425 |   |
| Ending balance                                                                               |       | $                                                 | —     |   | $ | 500,011 |   | $ | 650 |   | $ | — |   | $ | 500,661 |   |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |
| ** **                                                                                   | ** ** | **Twenty-Six  weeks ended January 31, 2009** | ** ** |
| **(in thousands)**                                                                           | ** ** | **Company**                                       | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                              |       |   |   |   |   |   |   |   |   |
| Net (loss) earnings                                                                          |       | $                                                 | (496,378   | ) | $ | (496,378 | ) | $ | (140,424 | ) | $ | 636,802 |   | $ | (496,378 | ) |
| Adjustments to reconcile  net (loss) earnings to net cash provided by operating activities:  |       |                                              |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization expense                                                       |       | —                                            |       | 105,913 |   | 14,981 |   | — |   | 120,894 |   |
| Deferred income taxes                                                                        |       | —                                            |       | (122,158 | ) | — |   | — |   | (122,158 | ) |
| Impairment charges                                                                           |       | —                                            |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans |       | —                                            |       | 7,698 |   | 759 |   | — |   | 8,457 |   |
| Intercompany royalty income  payable (receivable)                                            |       | —                                            |       | 115,719 |   | (115,719 | ) | — |   | — |   |
| Equity in loss (earnings)  of subsidiaries                                                   |       | 496,378                                           |       | 140,424 |   | — |   | (636,802 | ) | — |   |
| Changes in operating assets  and liabilities, net                                            |       | —                                            |       | 18,139 |   | (39,332 | ) | — |   | (21,193 | ) |
| Net cash provided by  operating activities                                                   |       | —                                            |       | 45,228 |   | 4,553 |   | — |   | 49,781 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                              |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                            |       | (60,672 | ) | (3,872 | ) | — |   | (64,544 | ) |
| Net cash used for investing  activities                                                      |       | —                                            |       | (60,672 | ) | (3,872 | ) | — |   | (64,544 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                              |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                            |       | (1,233 | ) | — |   | — |   | (1,233 | ) |
| Net cash used for financing  activities                                                      |       | —                                            |       | (1,233 | ) | — |   | — |   | (1,233 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| (Decrease) increase during  the period                                                       |       | —                                            |       | (16,677 | ) | 681 |   | — |   | (15,996 | ) |
| Beginning balance                                                                            |       | —                                            |       | 238,204 |   | 976 |   | — |   | 239,180 |   |
| Ending balance                                                                               |       | $                                                 | —     |   | $ | 221,527 |   | $ | 1,657 |   | $ | — |   | $ | 223,184 |   |

 

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***Senior Notes and Senior Subordinated Notes.***  All of NMG’s obligations under the SeniorNotes and the Senior Subordinated Notes, as well as its obligations under theAsset-Based Revolving Credit Facility and the Senior Secured Term LoanFacility, are guaranteed by the Company and certain of NMG’s existing andfuture domestic subsidiaries (principally, Bergdorf Goodman, Inc. throughwhich NMG conducts the operations of its Bergdorf Goodman stores and NM NevadaTrust which holds legal title to certain real property and intangible assetsused by the Company in conducting its operations). The guarantees by theCompany and each subsidiary guarantor are full and unconditional and joint andseveral.  Currently, NMG conducts nooperations through subsidiaries that do not guarantee the Senior Notes or theSenior Subordinated Notes. Previously, the non-guarantor subsidiaries of NMGincluded an operating subsidiary domiciled in Canada providing support servicesto our Direct Marketing operation through January 2009.

 

Informationwith respect to non-guarantor subsidiaries with respect to the Senior Notes andSenior Subordinated Notes is as follows:

 
| **(in thousands)** | ** ** | **January 30,  2010** | ** ** | **August 1,********2009** | ** ** | **January 31,  2009** | ** ** |
|--------------------|------------|----------------------------|------------|--------------------------------|------------|----------------------------|------------|
| Total assets       |       | $                          | —     |                           | $          | 332                        |       | $ | 1,248 |   |
| Net assets         |       | $                          | —     |                           | $          | 332                        |       | $ | (496 | ) |

 
| ** **                                            | ** ** | **Thirteen weeks ended**   | ** ** | **Twenty-Six weeks ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(in thousands)**                                    | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
| Revenues                                              |       | $                          | —     |                       | $          | — |   | $ | — |   | $ | — |   |
| Net loss                                              |       | (32                        | )          | (433                       | )          | — |   | (333 | ) |
| Net cash provided by (used  for) operating activities |       | —                     |       | 424                        |       | (34 | ) | 626 |   |
|                                                       |            |                            |            |                            |            |  |  |  |  |  |  |  |  |

 

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**EXECUTIVE OVERVIEW**

 

The following discussion and analysis of ourfinancial condition and results of operations should be read in conjunctionwith our Annual Report on Form 10-K for the fiscal year ended August 1,2009.  Unless otherwise specified, themeanings of all defined terms in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (MD&A) are consistent withthe meanings of such terms as defined in the Notes to the CondensedConsolidated Financial Statements. This discussion contains forward-lookingstatements.  Please see “Forward-LookingStatements” for a discussion of the risks, uncertainties and assumptionsrelating to our forward-looking 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.

 

Ourfiscal year ends on the Saturday closest to July 31.  All references to the second quarter offiscal year 2010 relate to the thirteen weeks ended January 30, 2010.  All references to the second quarter offiscal year 2009 relate to the thirteen weeks ended January 31, 2009.  All references to year-to-date fiscal 2010relate to the twenty-six weeks ended January 30, 2010.  All references to year-to-date fiscal 2009relate to the twenty-six weeks ended January 31, 2009.

 

**Factors Affecting Our Results**

 

***Revenues.***  We generate our revenues from the sale ofhigh-end merchandise through our Specialty Retail stores and Direct Marketingoperation. Components of our revenues include:

 

·                  Sales of merchandise—Revenues from our Specialty Retail storesare recognized at the later of the point of sale or the delivery of goods tothe customer. Revenues from our Direct Marketing operation are recognized whenthe merchandise is delivered to the customer. We maintain reserves foranticipated sales returns primarily based on our historical trends related toreturns by both our retail and direct marketing customers. Revenues excludesales taxes collected from our customers.

 

·                  Delivery and processing—We generate revenues from deliveryand processing charges related to merchandise delivered to our customers fromboth our retail and direct marketing operation.

 

Ourrevenues can be affected by the following factors:

 

·                  general economic conditions and the prospects for ameaningful recovery in the near-term;

 

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

 

·                  changes in the level of full-price sales;

 

·                  changes in the level of promotional events conducted by ourSpecialty Retail stores and Direct Marketing operation;

 

·                  our ability to successfully implement our store expansionand remodeling strategies; and

 

·                  the rate of growth in internet revenues by our DirectMarketing operation.

 

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

 

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***Cost of goods sold includingbuying and occupancy costs (excluding depreciation) (COGS).***  COGS consists of the following components:

 

·                  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 andsupport facilities. A significant portion of our buying and occupancy costs arefixed in 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.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold. Wereceived vendor allowances of $40.8 million, or 2.1% of revenues, inyear-to-date fiscal 2010 and $62.5 million, or 3.0% of revenues, inyear-to-date fiscal 2009.  The amounts ofvendor allowances we received did not have a significant impact on theyear-over-year change in net markdowns or gross margin during year-to-datefiscal years 2010 and 2009.

 

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

 

·                  our ability to order an appropriate amount of merchandiseto match customer demand and the related impact on the level of net markdownsincurred;

 

·                  customer acceptance of and demand for the merchandise weoffer in a given season and the related impact of such factors on the level offull-price sales;

 

·                  factors affecting revenues generally, including pricingstrategies, product offerings and other actions taken by competitors;

 

·                  changes in occupancy costs primarily associated with theopening of new stores or distribution facilities; and

 

·                  the amount of vendor reimbursements we receive during thefiscal year.

 

***Selling, general andadministrative expenses (excluding depreciation) (SG&A).***  SG&A principally consists of costsrelated to employee compensation and benefits in the selling and administrativesupport areas, advertising and catalog costs and insurance and long-termbenefits expenses. A significant portion of our selling, general andadministrative expenses are variable in nature and are dependent on the saleswe generate.

 

Advertisingcosts consist primarily of 1) print media costs for promotional materialsmailed to our customers incurred by our Specialty Retail segment, 2)advertising costs incurred by our Direct Marketing operation related to theproduction, printing and distribution of our print catalogs and the productionof the photographic content for our websites and 3) online marketing costsincurred by our Direct Marketing operation. We receive advertising allowancesfrom certain of our merchandise vendors. Substantially all the advertisingallowances we receive represent reimbursements of direct, specific andincremental costs that we incur to promote the vendor’s merchandise inconnection with our various advertising programs, primarily catalogs and otherprint media.  As a result, advertisingallowances are recorded as a reduction of our advertising costs when earned.Advertising allowances aggregated approximately $26.1 million, or 1.3% ofrevenues, in year-to-date fiscal 2010 and $41.5 million, or 2.0%

 

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ofrevenues, in year-to-date fiscal 2009. The decrease in advertising allowances in year-to-date fiscal 2010compared to year-to-date fiscal 2009 was consistent with the decrease in grossadvertising expenditures in the periods.

 

Wealso receive allowances from certain merchandise vendors in conjunction withcompensation programs for employees who sell the vendor’s merchandise. Theseallowances are netted against the related compensation expense that we incur.Amounts received from vendors related to compensation programs were $31.4million, or 1.6% of revenues, in year-to-date fiscal 2010 and$35.4 million, or 1.7% of revenues, in year-to-date fiscal 2009.

 

Changesin our selling, general and administrative expenses are affected primarily bythe following factors:

 

·                  changes in the number of sales associates primarily due tonew store openings and expansion of existing stores, including increased healthcare and related benefits expenses;

 

·                  changes in expenses incurred in connection with ouradvertising and marketing programs; and

 

·                  changes in expenses related to employee benefits due togeneral economic conditions such as rising health care costs.

 

***Income from credit card program, net***.  Pursuant to a long-term marketing andservicing alliance with HSBC, HSBC offers credit card and non-card paymentplans bearing our brands and we receive 1) ongoing payments from HSBC based onnet credit 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 decreased based upon the level of utilizationof our proprietary credit cards by our customers;

 

·                  increased or decreased based upon future changes to ourhistorical credit card program related to, among other things, the interestrates applied to unpaid balances, the assessment of late fees and the level ofusage of promotional no-interest credit programs;

 

·                  decreased based upon the level of future services weprovide to HSBC;

 

·                  increased for our allocable share of certain income, ifany, 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 credit cardlosses generated from the credit card portfolio as provided pursuant to ourcontractual agreement with HSBC, or any subsequent amendment thereto.

 

The Program Agreement expires in July 2010.  We are currently in negotiations with HSBCand other providers with respect to a replacement to the ProgramAgreement.  Based upon current marketconditions, we believe the future income to the Company pursuant to anyreplacement arrangement will be lower than the current HSBC Program Incomeearned pursuant to the Program Agreement.

 

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**Seasonality**

 

Weconduct our selling activities in two primary selling seasons—Fall and Spring.The Fall season is comprised of our first and second fiscal quarters and theSpring season is comprised of our third and fourth fiscal quarters.

 

Ourfirst fiscal quarter is generally characterized by a higher level of full-pricesales with a focus on the initial introduction of Fall season fashions.Aggressive in-store marketing activities designed to stimulate customer buying,a lower level of markdowns and higher margins are characteristic of thisquarter. The second fiscal quarter is more focused on promotional activitiesrelated to the December holiday season, the early introduction of resortseason collections from certain designers and the sale of Fall season goods ona marked down basis. As a result, margins are typically lower in the secondfiscal quarter. However, due to the seasonal increase in revenues that occursduring the holiday season, the second fiscal quarter is typically the quarterin which our revenues are the highest and in which expenses as a percentage ofrevenues are the lowest. Our working capital requirements are also the greatestin the first and second fiscal quarters as a result of higher seasonalrequirements.

 

Similarly,the third fiscal quarter is generally characterized by a higher level offull-price sales with a focus on the initial introduction of Spring seasonfashions. Aggressive in-store marketing activities designed to stimulatecustomer buying, a lower level of markdowns and higher margins are again characteristicof this quarter. Revenues are generally the lowest in the fourth fiscal quarterwith a focus on promotional activities offering Spring season goods to thecustomer on a marked down basis, resulting in lower margins during the quarter.Our working capital requirements are typically lower in the third and fourthfiscal quarters than in the other quarters.

 

Alarge percentage of our merchandise assortment, particularly in the apparel,fashion accessories and shoe categories, is ordered months in advance of theintroduction of such goods. For example, women’s apparel, men’s apparel, shoesand handbags are typically ordered six to nine months in advance of theproducts being offered for sale while jewelry and other categories aretypically ordered three to six months in advance. As a result, inherent in thesuccessful execution of our business plans is our ability both to predict thefashion trends that will be of interest to our customers and to anticipatefuture spending patterns of our customer base.

 

Wemonitor the sales performance of our inventories throughout each season. Weseek to order additional goods to supplement our original purchasing decisionswhen the level of customer demand is higher than originally anticipated.However, in certain merchandise categories, particularly fashion apparel, ourability to purchase additional goods can be limited. This can result in lostsales in the event of higher than anticipated demand of the fashion goods weoffer or a higher than anticipated level of consumer spending. Conversely, inthe event we buy fashion goods that are not accepted by the customer or thelevel of consumer spending is less than we anticipated, we typically incur ahigher than anticipated level of markdowns, net of vendor allowances, resultingin lower operating profits. We believe that the experience of our merchandisingand selling organizations helps to minimize the inherent risk in predictingfashion trends.

 

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**OPERATING RESULTS**

 

**Performance Summary**

 

Thefollowing table sets forth certain items expressed as percentages of netrevenues for the periods indicated.

 
| ** **                                                                        | ** ** | **Thirteen weeks ended**   | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                        | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
| ** **                                                                        | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                      | %          | 100.0                      | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 69.1                       |       | 76.1                       |       | 65.7 |   | 69.7 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 21.6                       |       | 22.6                       |       | 23.2 |   | 23.6 |   |
| Income from credit card program, net                                              |       | (1.5                       | )          | (0.9                       | )          | (1.5 | ) | (1.1 | ) |
| Depreciation expense                                                              |       | 3.1                        |       | 3.6                        |       | 3.6 |   | 3.8 |   |
| Amortization of intangible assets                                                 |       | 1.3                        |       | 1.3                        |       | 1.4 |   | 1.3 |   |
| Amortization of favorable lease commitments                                       |       | 0.4                        |       | 0.4                        |       | 0.5 |   | 0.4 |   |
| Impairment charges                                                                |       | —                     |       | 51.9                       |       | — |   | 27.1 |   |
| Operating earnings (loss)                                                         |       | 6.1                        |       | (54.9                      | )          | 7.2 |   | (24.8 | ) |
| Interest expense, net                                                             |       | 5.4                        |       | 5.4                        |       | 6.0 |   | 5.6 |   |
| Earnings (loss) before income taxes                                               |       | 0.7                        |       | (60.3                      | )          | 1.2 |   | (30.4 | ) |
| Income tax expense (benefit)                                                      |       | 0.4                        |       | (13.2                      | )          | 0.6 |   | (6.4 | ) |
| Net earnings (loss)                                                               |       | 0.4                        | %          | (47.2                      | )%         | 0.6 | % | (24.0 | )% |

 

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

** **
| ** **                                                         | ** ** | **Thirteen weeks ended**   | ** ** | **Twenty-Six weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(in millions, except sales per square foot)**                    | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
| REVENUES                                                           |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 881.2      |                       | $          | 870.6 |   | $ | 1,602.8 |   | $ | 1,697.7 |   |
| Direct Marketing                                                   |       | 221.2                      |       | 208.8                      |       | 368.5 |   | 367.5 |   |
| Total                                                              |       | $                          | 1,102.4    |                       | $          | 1,079.4 |   | $ | 1,971.3 |   | $ | 2,065.2 |   |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| OPERATING EARNINGS (LOSS)                                          |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 66.5       |                       | $          | (9.6 | ) | $ | 154.9 |   | $ | 84.8 |   |
| Direct Marketing                                                   |       | 40.7                       |       | 17.3                       |       | 62.4 |   | 36.7 |   |
| Corporate expenses                                                 |       | (15.4                      | )          | (13.3                      | )          | (29.0 | ) | (26.9 | ) |
| Other expenses (1)                                                 |       | (6.4                       | )          | (9.0                       | )          | (9.7 | ) | (9.5 | ) |
| Amortization of intangible  assets and favorable lease commitments |       | (18.3                      | )          | (18.0                      | )          | (36.6 | ) | (36.1 | ) |
| Impairment charges (2)                                             |       | —                     |       | (560.1                     | )          | — |   | (560.1 | ) |
| Total                                                              |       | $                          | 67.1       |                       | $          | (592.7 | ) | $ | 142.0 |   | $ | (511.1 | ) |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| OPERATING PROFIT (LOSS)  MARGIN                                    |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | 7.5                        | %          | (1.1                       | )%         | 9.7 | % | 5.0 | % |
| Direct Marketing                                                   |       | 18.4                       | %          | 8.3                        | %          | 16.9 | % | 10.0 | % |
| Total                                                              |       | 6.1                        | %          | (54.9                      | )%         | 7.2 | % | (24.8 | )% |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| CHANGE IN COMPARABLE  REVENUES (3)                                 |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | (0.6                       | )%         | (25.0                      | )%         | (7.6 | )% | (20.8 | )% |
| Direct Marketing                                                   |       | 5.9                        | %          | (12.1                      | )%         | 0.3 | % | (10.0 | )% |
| Total                                                              |       | 0.6                        | %          | (22.8                      | )%         | (6.2 | )% | (19.0 | )% |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| SALES PER SQUARE FOOT                                              |       |                       |       |                       |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                          | 137        |                       | $          | 139 |   | $ | 249 |   | $ | 271 |   |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| STORE COUNT                                                        |       |                       |       |                       |       |   |   |   |   |
| Neiman Marcus and Bergdorf  Goodman stores:                        |       |                       |       |                       |       |   |   |   |   |
| Open at beginning of period                                        |       | 43                         |       | 42                         |       | 42 |   | 41 |   |
| Opened during the period                                           |       | —                     |       | —                     |       | 1 |   | 1 |   |
| Open at end of period                                              |       | 43                         |       | 42                         |       | 43 |   | 42 |   |
| Clearance centers:                                                 |       |                       |       |                       |       |   |   |   |   |
| Open at beginning of  period                                       |       | 28                         |       | 25                         |       | 27 |   | 24 |   |
| Opened during the period                                           |       | —                     |       | —                     |       | 1 |   | 1 |   |
| Open at end of period                                              |       | 28                         |       | 25                         |       | 28 |   | 25 |   |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| NON-GAAP  FINANCIAL DATA                                           |       |                       |       |                       |       |   |   |   |   |
| EBITDA (4)                                                         |       | $                          | 119.9      |                       | $          | (535.5 | ) | $ | 248.8 |   | $ | (397.3 | ) |
| Adjusted EBITDA (4)                                                |       | $                          | 119.9      |                       | $          | 24.6 |   | $ | 248.8 |   | $ | 162.8 |   |

 

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(1)        Otherexpenses consists primarily of costs (primarily professional fees andseverance) incurred in connection with cost reductions and corporateinitiatives.

 

(2)        Impairmentcharges recorded in the second quarter of fiscal year 2009 consist of pretaxcharges of 1) $291.1 million for the writedown to fair value of goodwill, 2)$242.2 million for the writedown to fair value of the net carrying value oftradenames and 3) $26.8 million for the writedown to fair value of the netcarrying value of certain long-lived assets.

 

(3)        Comparablerevenues include 1) revenues derived from our retail stores open for morethan fifty two weeks, including stores that have been relocated orexpanded and 2) revenues from our Direct Marketing operation.

 

(4)        Foran explanation of EBITDA and Adjusted EBITDA as a measure of our operatingperformance, see “Management’s Discussion and Analysis of Financial Conditionand Results of Operations — Non-GAAP Financial Measure-EBITDA and AdjustedEBITDA.”

 

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**FiscalYear 2010 Summary**

 

While economic conditions and consumer spendingimproved slightly in the second quarter of fiscal year 2010 compared to theprior year, consumer spending remains below historical levels.  We do not anticipate the return of consumerspending to historical levels in the near-term.

 

A summary of our operating results is as follows:

 

·                  **Revenues**—Our revenues in the second quarter of fiscal year2010 were impacted by a slightly higher level of customer demand resulting in favorablecomparable revenues.  As a result, ourrevenues for the second quarter of fiscal year 2010 were $1,102.4 million, anincrease of 2.1% as compared to the second quarter of fiscal year 2009reflecting an increase in comparable revenues of 0.6%.

 

Our revenues foryear-to-date fiscal 2010 were $1,971.3 million, a decrease of 4.5% as comparedto the prior year reflecting a decline in comparable revenues of 6.2%.

 

For Specialty Retail stores,our sales per square foot for the last twelve trailing months were $453 as of January30, 2010, $454 as of October 31, 2009 and $553 as of January 31,2009.

 

·                  **Cost of goods sold including buying andoccupancy costs (excluding depreciation)**—COGS represented 69.1% ofrevenues in the second quarter of fiscal year 2010, an improvement of 7.0% ofrevenues from the second quarter of fiscal year 2009.  COGS represented 65.7% of revenues inyear-to-date fiscal 2010, an improvement of 4.0% of revenues compared toyear-to-date fiscal 2009.  This decreasein COGS as a percentage of revenues was primarily due to lower net markdowns asa result of a closer alignment of on-hand inventories to customer demand infiscal year 2010.

 

·                  **Inventories**—During the first and second quarter of fiscal year 2010, we continued tomaintain tight control over inventory and aligned our inventory purchases withsales expectations for the Fall season. At January 30, 2010, on-hand inventories totaled $732.3 million, a12.9% decrease from the prior year fiscal period.  Excluding inventories held by new stores,inventories decreased by 16.8%.

 

·                  **Selling, general and administrative expenses(excluding depreciation)**— SG&A represented 21.6% of revenues in the secondquarter of fiscal year 2010, a net improvement of 1.0% of revenues compared tothe second quarter of fiscal year 2009. SG&A represented 23.2% of revenues in year-to-date fiscal 2010, anet improvement of 0.4% of revenues compared to year-to-date fiscal 2009.  The lower levels of SG&A expensesprimarily reflect 1) savings realized as a result of our on-going initiativesto control our expenses, 2) lower advertising and promotions costs incurred,offset by 3) higher incentive compensation requirements.

 

·                  **Operatingearnings (loss)—**Total operating earnings in the second quarter of fiscal year 2010 were$67.1 million, or 6.1% of revenues. Total operating losses in the second quarter of fiscal year 2009 were$592.7 million, or 54.9% of revenues,which included impairments of our long-lived assets of $560.1 million, or 51.9%of revenues.  Excluding the impairmentsof our long-lived assets in the second quarter of fiscal year 2009, operatingmargins increased by 9.1% of revenues in the second quarter of fiscal year 2010 primarilydue to:

 

·                  a decrease in COGS by 7.0% of revenues primarily due tolower net markdowns;

 

·                  decreases in both SG&A expenses by 1.0% of revenues anddepreciation and amortization expense by 0.5% of revenues; and

 

·                  an increase in income from our credit card operations by0.6% of revenues primarily due to lower shared credit card losses.

 

Total operating earnings inyear-to-date fiscal 2010 were $142.0 million, or 7.2% of revenues.  Total operating losses in year-to-date fiscalyear 2009 were $511.1 million, or 24.8% of revenues, which included impairmentsof our long-lived assets of $560.1 million, or 27.1% of revenues.  Excluding the impairments in year-to-datefiscal 2009, operating margins increased by 4.9% of revenues in year-to-datefiscal 2010 primarily due to:

 

·                  a decrease in COGS by 4.0% of revenues primarily due tolower net markdowns;

 

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·                  a decrease in SG&A expenses by 0.4% of revenuesprimarily due to 1) savings realized as a result of our on-going initiatives tocontrol our expenses, 2) lower advertising and promotions costs incurred,offset by 3) higher incentive compensation requirements; and

 

·                  an increase in income from our credit card operations by0.4% of revenues primarily due to lower shared credit card losses.

 

·                  **Liquidity—**Cash provided by our operating activities was $232.4million in year-to-date fiscal 2010 compared to $49.8 million in year-to-datefiscal 2009.  This change was primarilydue to the improvement in operating earnings and lower working capitalrequirements attributable to the closer alignment of on-hand inventories tocustomer demand in fiscal year 2010.  Weheld cash balances of $500.7 million at January 30, 2010 compared to$223.2 million at January 31, 2009. At January 30, 2010, we had no borrowings outstanding under ourAsset-Based Revolving Credit Facility, $31.1 million of outstanding letters ofcredit and $430.1 million of unused borrowing availability.

 

Given the dislocation inthe financial markets and the uncertainty as to when reasonable conditionswould return, we elected to pay PIK Interest for the three quarterly interestperiods ending October 14, 2009 and to make such interest payments withthe issuance of additional Senior Notes at the PIK Interest rate of 9.75%instead of paying interest in cash.  As aresult, the original principal amount of Senior Notes of $700.0 millionincreased by $17.1 million on April 14, 2009, $17.4 million on July 14,2009 and $17.9 million on October 14, 2009.

 

For the quarterly periodsending January 15, 2010 and April 15, 2010, we elected to pay cashinterest.  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 tomake all interest payments on the Senior Notes entirely in cash.

 

·                  **Outlook—**We do not anticipate the return of consumer spendingto historical levels in the near-term. We plan to maintain an appropriate alignment of our inventory levels andpurchases with anticipated lower customer demand. Despite the anticipatedcontinuation of weakened economic conditions, we believe the cash generatedfrom our operations along with our cash balances and available sources offinancing will enable us to meet our cash obligations for the remainder offiscal year 2010.

 

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**Thirteen Weeks****Ended January 30,2010 Compared to Thirteen Weeks Ended January 31, 2009**

 

***Revenues.**** *Our revenues for the second quarter of fiscal year 2010 of $1,102.4million increased $23.0 million, or 2.1%, from $1,079.4 million in the secondquarter of fiscal year 2009.  Theincrease in revenues was due to increases in comparable revenues related to aslightly higher level of customer demand.

 

Comparable revenues for the thirteen weeks ended January 30, 2010were $1,084.5 million compared to $1,077.6 million in the second quarter offiscal year 2009, representing an increase of 0.6%.  Comparable revenues decreased in the second quarterof fiscal year 2010 by 0.6% for Specialty Retail stores and increased 5.9% forDirect Marketing.  New stores generatedrevenues of $17.9 million in the second quarter of fiscal year 2010.

 

Internet revenues generated by Direct Marketing were $189.3 million forthe second quarter of fiscal year 2010, an increase of 9.9% compared to theprior year fiscal period.  Catalogrevenues decreased 12.9% compared to the prior year fiscal period as ourcustomers continue to migrate toward on-line retailing in our Direct Marketingoperation.

 

***Cost of goods sold including buying and occupancycosts (excluding depreciation).***  COGS for the second quarter of fiscal year2010 were 69.1% of revenues compared to 76.1% of revenues for the secondquarter of fiscal year 2009.

 

The decrease in COGS by 7.0% of revenues in the second quarter offiscal year 2010 was primarily due to:

 

·                  increasedproduct margins generated by both our Specialty Retail stores and DirectMarketing operation of approximately 6.7% of revenues primarily due to lowernet markdowns as a result of a closer alignment of on-hand inventories tocustomer demand in fiscal year 2010; and

 

·                  lower buyingand occupancy costs of 0.3% of revenues primarily due to savings realized as aresult of our on-going initiatives to control our expenses.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses decreased by $6.0 millionin the second quarter of fiscal year 2010 compared to the prior year fiscalperiod.  SG&A expenses as apercentage of revenues decreased to 21.6% of revenues in the second quarter offiscal year 2010 compared to 22.6% of revenues in the prior year fiscalperiod.  The net decrease in SG&Aexpenses by 1.0% of revenues in the second quarter of fiscal year 2010 wasprimarily due to:

 

·                  lower payrollcosts, net of related benefits, of approximately 1.4% of revenues, primarily asa result of our reduced headcount;

 

·                  a lower levelof advertising and promotions costs incurred in the second quarter of fiscalyear 2010 of approximately 0.2% of revenues, primarily due to a lower level ofcatalog spending by our Direct Marketing operation in connection with planneddecreases in catalog circulation; offset by

 

·                  higherincentive compensation requirements by approximately 0.7% of revenues.

 

***Income from credit card program, net. ***We earned HSBC ProgramIncome of $16.6 million, or 1.5% of revenues, in the second quarter of fiscalyear 2010 compared to $10.2 million, or 0.9% of revenues, in the second quarterof fiscal year 2009 primarily due to lower shared credit card losses.

 

***Depreciation expense. ***Depreciation expense was$34.4 million, or 3.1% of revenues, in the second quarter of fiscal year 2010compared to $39.1 million, or 3.6% of revenues, in the second quarter of fiscalyear 2009.  The decrease in depreciationexpense results primarily from recent lower levels of capital spending anddelays in certain real estate projects in response to current economicconditions.

 

***Amortization expense. ***Amortization of intangibleassets (primarily customer lists and favorable lease commitments) aggregated$18.3 million, or 1.7% of revenues, in the second quarter of fiscal year 2010compared to $18.0 million, or 1.7% of revenues, in the second quarter of fiscalyear 2009.

 

***Impairment charges.***** **In the second quarter offiscal year 2009, we recorded impairment charges, related primarily to ourtradenames and goodwill, aggregating $560.1 million in connection with thereview of our long-lived assets for recoverability, as more fully explained inNote 2 in our notes to condensed consolidated financial statements.

 

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***Segment operating earnings (loss).***  Segment operating earnings (loss) for ourSpecialty Retail stores and Direct Marketing segments do not reflect either theimpact of adjustments to revalue our assets and liabilities to estimated fairvalue at the Acquisition date or impairment charges related to declines in fairvalue subsequent to the Acquisition date. The reconciliation of segment operating earnings (loss) to totaloperating earnings (loss) is as follows:

 
| ** **                                                         | ** ** | **Thirteen weeks ended**   | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|
| **(in  millions)**                                                 | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
| Specialty Retail stores                                            |       | $                          | 66.5       |   | $ | (9.6 | ) |
| Direct Marketing                                                   |       | 40.7                       |       | 17.3 |   |
| Amortization of intangible assets and favorable  lease commitments |       | (18.3                      | )          | (18.0 | ) |
| Corporate expenses                                                 |       | (15.4                      | )          | (13.3 | ) |
| Other expenses                                                     |       | (6.4                       | )          | (9.0 | ) |
| Impairment charges                                                 |       | —                     |       | (560.1 | ) |
| Total operating earnings (loss)                                    |       | $                          | 67.1       |   | $ | (592.7 | ) |

 

Operating earnings for our Specialty Retail stores segment were $66.5million, or 7.5% of Specialty Retail stores revenues, for the second quarter offiscal year 2010 compared to operating losses of $9.6 million, or 1.1% ofSpecialty Retail stores revenues, for the prior year fiscal period.  The increase in operating margin as apercentage of revenues was primarily due to:

 

·                  lower netmarkdowns;

 

·                  lower buyingand occupancy expenses;

 

·                  favorablepayroll, net of related benefits, primarily due to savings realized as a resultof our initiatives to control our expenses; offset by

 

·                  higherincentive compensation requirements.

 

Operating earnings for Direct Marketing were $40.7 million, or 18.4% ofDirect Marketing revenues, in the second quarter of fiscal year 2010 comparedto $17.3 million, or 8.3% of Direct Marketing revenues, for the prior yearfiscal period.  The increase in operatingmargin as a percentage of revenues for Direct Marketing was primarily theresult of:

 

·                  lower netmarkdowns;

 

·                  a lower levelof spending for advertising and promotion costs; and

 

·                  favorable payroll andrelated costs primarily due to our initiatives to control expenses; offset by

 

·                  higher incentivecompensation requirements.

 

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***Interest expense, net*****.**  Net interest expense was $59.0 million, or5.4% of revenues, in the second quarter of fiscal year 2010 and $58.6 million,or 5.4% of revenues, for the prior year fiscal period.  The significant components of interestexpense are as follows:

 
| ** **                        | ** ** | **Thirteen weeks ended**   | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **(in thousands)**                | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
|                              |       |                       |       |   |   |
| Senior Secured Term Loan Facility |       | $                          | 20,787     |   | $ | 23,941 |   |
| 2028 Debentures                   |       | 2,207                      |       | 2,227 |   |
| Senior Notes                      |       | 16,744                     |       | 15,711 |   |
| Senior Subordinated Notes         |       | 12,969                     |       | 13,122 |   |
| Amortization of debt issue costs  |       | 4,679                      |       | 3,554 |   |
| Other                             |       | 1,770                      |       | 865 |   |
| Total interest expense            |       | 59,156                     |       | 59,420 |   |
| Less:                             |       |                       |       |   |   |
| Interest income                   |       | 152                        |       | 666 |   |
| Capitalized interest              |       | —                     |       | 173 |   |
| Interest expense, net             |       | $                          | 59,004     |   | $ | 58,581 |   |

 

***Income tax expense (benefit).***  Our effective income tax rate for the secondquarter of fiscal year 2010 was 51.2% compared to 21.8% for the second quarterof fiscal year 2009.  No income taxbenefit exists related to the $291.1 million of goodwill impairment chargesrecorded in the second quarter of fiscal year 2009.  Excluding the impact of the goodwillimpairment charges, our effective income tax rate was 39.4% for the secondquarter of fiscal year 2009.  Increasesin our effective tax rate for the second quarter of fiscal year 2010 comparedto the corresponding prior year fiscal period is primarily attributable to therelative significance of non-taxable income and non-deductible expenses to ourestimated taxable loss in the current year.

 

TheIRS is examining our federal tax return for fiscal year 2007.  We believe our recorded tax liabilities as ofJanuary 30, 2010 are sufficient to cover any potential assessments to bemade by the IRS upon the completion of their examination. We will continue tomonitor the progress of the IRS examination and review our recorded taxliabilities for potential audit assessments. With respect to state and local jurisdictions, with limited exceptions,the Company and its subsidiaries are no longer subject to income tax audits forfiscal years before 2005.  We believe itis reasonably possible that additional adjustments in the amounts of ourunrecognized tax benefits could occur within the next twelve months as a resultof settlements with tax authorities or expiration of statutes oflimitation.  At this time, we do notbelieve such adjustments will have a material impact on our consolidatedfinancial statements.

 

**Twenty-SixWeeks****Ended January 30, 2010Compared to Twenty-Six Weeks Ended January 31, 2009**

 

***Revenues.**** *Our revenues for year-to-date fiscal 2010 of $1,971.3 million decreased$93.9 million, or 4.5%, from $2,065.2 million in year-to-date fiscal 2009.  The decrease in revenues was due primarily todecreases in comparable revenues in the first quarter of fiscal year 2010.  New stores generated revenues of $36.7million in year-to-date fiscal 2010.

 

Comparable revenues for the twenty-six weeks ended January 30, 2010were $1,934.6 million compared to $2,062.4 million in year-to-date fiscal 2009,representing a decrease of 6.2%.  Changesin comparable revenues, by quarter and by reportable segment, were:

 
| ** **              | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Year-to-Date  Fiscal 2010** | ** ** |
|-------------------------|------------|--------------------|------------|---------------------|------------|-------------------------------|------------|
| Specialty Retail stores |       | (14.9              | )%         | (0.6                | )%         | (7.6                          | )%         |
| Direct Marketing        |       | (7.2               | )%         | 5.9                 | %          | 0.3                           | %          |
| Total                   |       | (13.7              | )%         | 0.6                 | %          | (6.2                          | )%         |

 

Internet revenues generated by Direct Marketing were $308.2 million foryear-to-date fiscal 2010, an increase of 5.1% compared to the prior year fiscalperiod.  Catalog revenues decreased 18.8%compared to the prior year fiscal period as our customers continue to migratetoward on-line retailing in our Direct Marketing operation.

 

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***Cost of goods sold including buying and occupancycosts (excluding depreciation).***  COGS for year-to-date fiscal 2010 were 65.7%of revenues compared to 69.7% of revenues for year-to-date fiscal 2009.

 

The decrease in COGS by 4.0% of revenues in year-to-date fiscal 2010was primarily due to lower net markdowns in both our Specialty Retail storesand Direct Marketing operation as a result of a closer alignment of on-hand inventoriesto customer demand in fiscal year 2010.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses decreased by $30.0 millionin year-to-date fiscal 2010 compared to the prior year fiscal period.  SG&A expenses as a percentage of revenuesdecreased to 23.2% of revenues in year-to-date fiscal 2010 compared to 23.6% ofrevenues in the prior year fiscal period. The net decrease in SG&A expenses by 0.4% of revenues inyear-to-date fiscal 2010 was primarily due to:

 

·                  lower payrollcosts, net of related benefits, of approximately 1.0% of revenues, primarily asa result of our reduced headcount;

 

·                  a lower levelof advertising and promotions costs incurred in year-to-date fiscal 2010 ofapproximately 0.2% of revenues, primarily due to a lower level of catalogspending by our Direct Marketing operation in connection with planned decreasesin catalog circulation; offset by

 

·                  higherincentive compensation requirements by approximately 0.7% of revenues.

 

***Income from credit card program, net. ***We earned HSBC ProgramIncome of $29.7 million, or 1.5% of revenues, in year-to-date fiscal 2010compared to $23.2 million, or 1.1% of revenues, in year-to-date fiscal 2009primarily due to lower shared credit card losses.

 

***Depreciation expense. ***Depreciation expense was$70.2 million, or 3.6% of revenues, in year-to-date fiscal 2010 compared to$77.7 million, or 3.8% of revenues, in year-to-date fiscal 2009.  The decrease in depreciation expense as apercentage of revenues, results primarily from recent lower levels of capitalspending and delays in certain real estate projects in response to currenteconomic conditions.

 

***Amortization expense. ***Amortization of intangibleassets (primarily customer lists and favorable lease commitments) aggregated$36.6 million, or 1.9% of revenues, in year-to-date fiscal 2010 compared to$36.1 million, or 1.7% of revenues, in year-to-date fiscal 2009.

 

***Impairment charges.***** **In the second quarter offiscal year 2009, we recorded impairment charges, related primarily to ourtradenames and goodwill, aggregating $560.1 million in connection with thereview of our long-lived assets for recoverability, as more fully explained inNote 2 in our notes to condensed consolidated financial statements.

 

***Segment operating earnings (loss).***  Segment operating earnings (loss) for ourSpecialty Retail stores and Direct Marketing segments do not reflect either theimpact of adjustments to revalue our assets and liabilities to estimated fairvalue at the Acquisition date or impairment charges related to declines in fairvalue subsequent to the Acquisition date. The reconciliation of segment operating earnings (loss) to totaloperating earnings (loss) is as follows:

 
| ** **                                                         | ** ** | **Twenty-Six weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|
| **(in  millions)**                                                 | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
| Specialty Retail stores                                            |       | $                          | 154.9      |   | $ | 84.8 |   |
| Direct Marketing                                                   |       | 62.4                       |       | 36.7 |   |
| Amortization of intangible assets and favorable  lease commitments |       | (36.6                      | )          | (36.1 | ) |
| Corporate expenses                                                 |       | (29.0                      | )          | (26.9 | ) |
| Other expenses                                                     |       | (9.7                       | )          | (9.5 | ) |
| Impairment charges                                                 |       | —                     |       | (560.1 | ) |
| Total operating earnings (loss)                                    |       | $                          | 142.0      |   | $ | (511.1 | ) |

 

Operating earnings for our Specialty Retail stores segment were $154.9million, or 9.7% of Specialty Retail stores revenues, for year-to-date fiscal2010 compared to $84.8 million, or 5.0% of Specialty Retail stores revenues,for the prior year fiscal period.  Theincrease in operating margin as a percentage of revenues was primarily due to:

 

·                  lower netmarkdowns;

 

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·                  favorablepayroll, net of related benefits, primarily due to savings realized as a resultof our initiatives to control our expenses; offset by

 

·                  higherincentive compensation requirements.

 

Operating earnings for Direct Marketing were $62.4 million, or 16.9% ofDirect Marketing revenues, in year-to-date fiscal 2010 compared to $36.7 million,or 10.0% of Direct Marketing revenues, for the prior year fiscal period.  The increase in operating margin as apercentage of revenues for Direct Marketing was primarily the result of:

 

·                  lower netmarkdowns;

 

·                  a lower levelof spending for advertising and promotion costs; and

 

·                  favorable payroll andrelated costs primarily due to our initiatives to control expenses; offset by

 

·                  higher incentivecompensation requirements.

 

***Interest expense, net*****.**  Net interest expense was $118.4 million, or6.0% of revenues, in year-to-date fiscal 2010 and $116.4 million, or 5.6% ofrevenues, for the prior year fiscal period. The significant components of interest expense are as follows:

 
| ** **                        | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| **(in thousands)**                | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
|                              |       |                       |       |   |   |
| Senior Secured Term Loan Facility |       | $                          | 41,573     |   | $ | 47,871 |   |
| 2028 Debentures                   |       | 4,433                      |       | 4,453 |   |
| Senior Notes                      |       | 34,269                     |       | 31,461 |   |
| Senior Subordinated Notes         |       | 25,795                     |       | 26,091 |   |
| Amortization of debt issue costs  |       | 9,340                      |       | 7,109 |   |
| Other                             |       | 3,480                      |       | 1,691 |   |
| Total interest expense            |       | 118,890                    |       | 118,676 |   |
| Less:                             |       |                       |       |   |   |
| Interest income                   |       | 328                        |       | 1,771 |   |
| Capitalized interest              |       | 193                        |       | 479 |   |
| Interest expense, net             |       | $                          | 118,369    |   | $ | 116,426 |   |

 

***Income tax expense (benefit).***  Our effective income tax rate foryear-to-date fiscal 2010 was 47.1% compared to 20.9% for year-to-date fiscal2009.  No income tax benefit existsrelated to the $291.1 million of goodwill impairment charges recorded in thesecond quarter of fiscal year 2009. Excluding the impact of the goodwill impairment charges, our effectiveincome tax rate was 39.0% for year-to-date fiscal 2009.  Increases in our effective tax rate foryear-to-date fiscal 2010 compared to the corresponding period in fiscal year2009 is primarily attributable to the relative significance of non-taxableincome and non-deductible expenses to our estimated taxable loss in the currentyear.

 

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

 

Wepresent the non-GAAP financial performance measures of EBITDA and AdjustedEBITDA because we use these measures to monitor and evaluate the performance ofour business and believe the presentation of these measures will enhanceinvestors’ ability to analyze trends in our business, evaluate our performancerelative to other companies in our industry and evaluate our ability to serviceour debt.  In addition, we useperformance targets based on Adjusted EBITDA as a component of the measurementof incentive compensation as described in our Annual Report on Form 10-Kfor the fiscal year ended August 1, 2009.

 

EBITDAand Adjusted EBITDA are not presentations made in accordance with GAAP and ourcomputation of EBITDA and Adjusted EBITDA may vary from others in ourindustry.  In addition, EBITDA andAdjusted EBITDA contain some, but not all, adjustments that are taken into accountin the calculation of the components of various covenants in the agreements andindentures governing NMG’s senior secured Asset-Based Revolving CreditFacility, Senior Secured Term Loan Facility, Senior 

 

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Notesand Senior Subordinated Notes.  EBITDAand Adjusted EBITDA should not be considered as alternatives to operatingearnings (loss) or net earnings (loss) as measures of operatingperformance.  In addition, EBITDA andAdjusted 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.

 

Thefollowing table reconciles net earnings (loss) as reflected in our condensedconsolidated statements of operations prepared in accordance with GAAP toEBITDA and Adjusted EBITDA:

 
| ** **                                                         | ** ** | **Thirteen weeks ended**   | ** ** | **Twenty-Six weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **(dollars in millions)**                                          | ** ** | **January 30,  2010** | ** ** | **January 31,  2009**      | ** ** | **January 30,  2010** | ** ** | **January 31,  2009** | ** ** |
|                                                               |       |                       |       |                       |       |   |   |   |   |
| Net earnings (loss)                                                |       | $                          | 4.0        |                       | $          | (509.2 | )(1) | $ | 12.5 |   | $ | (496.3 | )(1) |
| Income tax expense (benefit)                                       |       | 4.2                        |       | (142.0                     | )          | 11.1 |   | (131.2 | ) |
| Interest expense, net                                              |       | 59.0                       |       | 58.6                       |       | 118.4 |   | 116.4 |   |
| Depreciation expense                                               |       | 34.4                       |       | 39.1                       |       | 70.2 |   | 77.7 |   |
| Amortization of intangible assets and favorable  lease commitments |       | 18.3                       |       | 18.0                       |       | 36.6 |   | 36.1 |   |
| EBITDA                                                             |       | $                          | 119.9      |                       | $          | (535.5 | )(1) | $ | 248.8 |   | $ | (397.3 | )(1) |
| EBITDA as a percentage of revenues                                 |       | 10.9                       | %          | (49.6                      | )%         | 12.6 | % | (19.2 | )% |
| Non-cash impairment of long-lived assets                           |       | —                     |       | 560.1                      |       | — |   | 560.1 |   |
| Adjusted EBITDA                                                    |       | $                          | 119.9      |                       | $          | 24.6 |   | $ | 248.8 |   | $ | 162.8 |   |
| Adjusted EBITDA as a percentage of revenues                        |       | 10.9                       | %          | 2.3                        | %          | 12.6 | % | 7.9 | % |

 

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(1)          Forquarter-to-date and year-to-date fiscal 2009, operating loss and EBITDA includepretax impairment charges related to 1) $291.1 million for the writedown tofair value of goodwill, 2) $242.2 million for the writedown to fair value ofthe net carrying value of tradenames and 3) $26.8 million for the writedown tofair value of the net carrying value of certain long-lived assets.

 

**Inflation and Deflation and Foreign Currency ExchangeRates**

 

Webelieve changes in revenues and net earnings that have resulted from inflationor deflation have not been material during the periods presented. In recentyears, we have experienced certain inflationary conditions related to1) increases in product costs primarily due to changes in foreign currencyexchange rates that have reduced the purchasing power of the U.S. dollar and2) increases in SG&A. We purchase a substantial portion of ourinventory from foreign suppliers whose costs are affected by the fluctuation oftheir local currency against the dollar or who price their merchandise incurrencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchangerate affect us most significantly; however, we source goods from numerouscountries and thus are affected by changes in numerous currencies and,generally, by fluctuations in the U.S. dollar relative to such currencies.Accordingly, changes in the value of the dollar relative to foreign currenciesmay increase the retail prices of goods offered for sale and/or increase ourcost of goods sold. If our customers reduce their levels of spending inresponse to increases in retail prices and/or we are unable to pass such costincreases to our customers, our revenues, gross margins, and ultimately ourearnings, could decrease. Foreign currency fluctuations could have a materialadverse effect on our business, financial condition and results of operationsin the future. We attempt to offset the effects of inflation through priceincreases and 

 

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controlof expenses, although our ability to increase prices may be limited by customerresistance and competitive factors. We attempt to offset the effects ofmerchandise deflation, which has occurred on a limited basis in recent years,through control of expenses. There is no assurance, however, that inflation ordeflation will not materially affect our operations in the future.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Ourcash 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.

 

Ourprimary sources of short-term liquidity are comprised of cash on hand,availability under our Asset-Based Revolving Credit Facility and vendorfinancing. The amounts of cash on hand and borrowings under the Asset-BasedRevolving Credit Facility are influenced by a number of factors, includingrevenues, working capital levels, vendor terms, the level of capitalexpenditures, cash requirements related to financing instruments and debtservice obligations, Pension Plan funding obligations and tax paymentobligations, among others.  As to vendorfinancing, some of our vendors have experienced serious cash flow issues,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.

 

Ourworking capital requirements fluctuate during the fiscal year, increasingsubstantially during the first and second quarters of each fiscal year as aresult of higher seasonal levels of inventories.  We have typically financed the increases inworking capital needs during the first and second fiscal quarters withavailable cash balances, cash flows from operations and, if necessary, withcash provided from borrowings under our credit facilities.  We have made no borrowings under ourAsset-Based Revolving Credit Facility during the year-to-date fiscal periods ofeither 2010 or 2009.

 

Webelieve that operating cash flows, cash balances, available vendor financingand amounts available pursuant to our senior secured Asset-Based RevolvingCredit Facility, will be sufficient to fund our operations, anticipated capitalexpenditure requirements, debt service obligations, contractual obligations andcommitments and Pension Plan funding requirements through the remainder offiscal year 2010.

 

AtJanuary 30, 2010, cash and cash equivalents were $500.7 millioncompared to $223.2 million at January 31, 2009. Net cash provided byour operating activities was $232.4 million in year-to-date fiscal 2010compared to $49.8 million in year-to-date fiscal 2009.  This change was primarily due to theimprovement in operating earnings and lower working capital requirementsattributable to the closer alignment of on-hand inventories to customer demandin fiscal year 2010.

 

Netcash used for investing activities, representing capital expenditures, was$28.4 million in year-to-date fiscal 2010 and $64.5 million inyear-to-date fiscal 2009.  We incurredcapital expenditures in year-to-date fiscal 2010 related to the construction ofour new store in Bellevue (suburban Seattle). We incurred significant capital expenditures in year-to-date fiscal 2009related to the construction of new stores in Topanga (the greater Los Angelesarea) and Bellevue. We opened our Topanga store in September 2008 and ourBellevue store in September 2009. In response to current economic conditions and delays in certain realestate projects, we have reduced our current and near-term constructioncommitments and currently project gross capital expenditures for fiscal year2010 to be approximately $70 to $80 million. Net of developer contributions, capital expenditures for fiscal year2010 are projected to be approximately $55 to $65 million.

 

Netcash used for financing activities was $26.8 million in year-to-datefiscal 2010 as compared to $1.2 million in year-to-date fiscal 2009.  In the first quarter of fiscal year 2010,pursuant to the terms of our Senior Secured Term Loan Facility, we prepaid$26.6 million of outstanding borrowings under that facility from excess cashflow that we generated in fiscal year 2009.

 

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**Financing Structure at January 30, 2010**

 

Ourmajor sources of funds are comprised of vendor financing, a $600.0 millionAsset-Based Revolving Credit Facility, $1,598.4 million Senior SecuredTerm Loan Facility, $752.4 million Senior Notes, $500.0 millionSenior Subordinated Notes, $125.0 million 2028 Debentures and operatingleases.

 

***Senior Secured Asset-Based Revolving Credit Facility.***  On July 15, 2009, NMG amended andrestated the terms of its existing asset-based revolving credit facility (whichhad been scheduled to mature on October 6, 2010).  The terms of theamended and restated Asset-Based Revolving Credit Facility include a scheduledmaturity date of January 15, 2013 and a maximum committed borrowingcapacity of $600.0 million (the same amount as in the prior facility). The new facility also provides an uncommitted accordion feature that allows NMGto request 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) thelesser of (i) 80% of eligible inventory (valued at the lower of cost ormarket value) and (ii) 85% of the net orderly liquidation value ofeligible inventory, and (b) 85% of the amounts owed by credit cardprocessors in respect of eligible credit card accounts constituting proceedsarising from the sale or disposition of inventory, less certainreserves.   Through April 30,2011 NMG is required to maintain excess availability under the terms of theAsset-Based Revolving Credit Facility 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.  On January 30, 2010, NMG had noborrowings outstanding under this facility, $31.1 million of outstandingletters of credit and $430.1 million of unused borrowing availability.

 

SeeNote 3 of our Notes to Condensed Consolidated Financial Statements in Item 1and our Annual Report on Form 10-K for the fiscal year ended August 1,2009 for a further description of the terms of the Asset-Based Revolving CreditFacility.

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG entered into a creditagreement and related security and other agreements for a $1,975.0 millionSenior Secured Term Loan Facility.  At January 30,2010, the outstanding balance under the Senior Secured Term Loan Facility was$1,598.4 million.  The principal amountof the loans outstanding is due and payable in full on April 6, 2013.

 

At January 30,2010, borrowings under the Senior Secured Term Loan Facility bore interest at arate per annum equal to, at NMG’s option, either (a) a base ratedetermined by reference to the higher of (1) the prime rate of CreditSuisse and (2) the federal funds effective rate plus 1¤2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. The interest rateon the outstanding borrowings pursuant to the Senior Secured Term Loan Facilitywas 2.26% at January 30, 2010.  Theapplicable margin is subject to adjustment based on contractually defined debtcoverage ratios.  At January 30,2010, the applicable margin with respect to base rate borrowings was 1.00% andthe applicable margin with respect to LIBOR borrowings was 2.00%.

 

SeeNote 3 of our Notes to Condensed Consolidated Financial Statements in Item 1and our Annual Report on Form 10-K for the fiscal year ended August 1,2009 for a further description of the terms of the Senior Secured Term LoanFacility.

 

***2028 Debentures.***  In May 1998, NMG issued$125.0 million aggregate principal amount of its 7.125% 2028Debentures.  NMG’s 2028 Debentures matureon June 1, 2028.

 

SeeNote 3 of our Notes to Condensed Consolidated Financial Statements in Item 1and our Annual Report on Form 10-K for the fiscal year ended August 1,2009 for a further description of the terms of the 2028 Debentures.

 

***Senior Notes.**** *NMG has$752.4 million aggregate principal amount of 9.0% / 9.75% Senior Notesunder a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015.  We negotiated for the right to include thePIK feature in our Senior Notes because of our belief that this feature couldbe a useful tool to enhance liquidity under appropriate circumstances. In thesecond quarter of fiscal year 2009, given the dislocation in the financialmarkets and the uncertainty as to when reasonable conditions would return, webelieved that it was appropriate to utilize this feature, even though we hadunused borrowing capacity under our $600.0 million revolving credit facility.Accordingly, we elected to pay PIK Interest for 

 

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thethree quarterly interest periods ending on October 14, 2009 and to makesuch interest payments with the issuance of additional Senior Notes at the PIKInterest 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, $17.4 million on July 14, 2009 and $17.9 million on October 14,2009.

 

Forthe quarterly periods ending on January 15, 2010 and April 15, 2010,we elected to pay cash interest.  Priorto the beginning of each eligible interest period in the future, we willevaluate whether to continue utilizing this PIK feature, taking into accountmarket conditions and other relevant factors at that time. After October 15,2010, we are required to make all interest payments on the Senior Notesentirely in cash.

 

SeeNote 3 of our Notes to Condensed Consolidated Financial Statements in Item 1and our Annual Report on Form 10-K for the fiscal year ended August 1,2009 for a further description of the terms of the Senior Notes.

 

***Senior Subordinated Notes.**** *NMG has $500.0 million aggregate principal amount of 10.375%Senior Subordinated Notes under a senior subordinated indenture (SeniorSubordinated Indenture).  NMG’s SeniorSubordinated Notes mature on October 15, 2015.

 

SeeNote 3 of our Notes to Condensed Consolidated Financial Statements in Item 1and our Annual Report on Form 10-K for the fiscal year ended August 1,2009 for a further description of the terms of the Senior 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 $1,598.4 million isoutstanding at January 30, 2010. 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 6.882% to 6.983% per quarter through2010 and result in an average fixed rate of 6.930%.

 

***Interest Rate Caps.***  In addition to interest rate swap agreements,we also use interest rate cap agreements to manage our floating rate debt.  Effective January 19, 2010, NMG enteredinto interest rate cap agreements for an aggregate notional amount of $500.0million in order to hedge the variability of our cash flows related to a portionof our floating rate indebtedness once the interest rate swap expires on December 6,2010.  The interest rate cap agreementscommence on December 6, 2010 and expire on December 6, 2012.  Pursuant to the interest rate cap agreements,NMG has capped LIBOR at 2.50% through December 6, 2012 with respect to the$500.0 million notional amount of such agreements.  In the event LIBOR is less than 2.5%, NMGwill pay interest at the lower LIBOR rate. In the event LIBOR is higher than 2.5%, NMG will pay interest at thecapped rate of 2.5%.

 

**OTHER MATTERS**

 

**Factors That May Affect Future Results**

 

Mattersdiscussed in MD&A include forward-looking statements. Forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,”“could,” “should,” “anticipate,” “believe,” “project” or “continue.” We makethese forward-looking statements based on our expectations and beliefsconcerning future events, as well as currently available data.  While we believe there is a reasonable basisfor our forward-looking statements, they involve a number of risks anduncertainties. Therefore, these statements are not guarantees of future performanceand you should not place undue reliance on them. A variety of factors couldcause our actual results to differ materially from the anticipated or expectedresults expressed in our forward-looking statements. Factors that could affectfuture performance include, but are not limited, to:

 

*Political and General Economic Conditions*

 

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

 

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·                  current political andgeneral economic conditions or changes in such conditions includingrelationships between the United States and the countries from which we sourceour merchandise;

 

·                  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;

 

*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 and Supply 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 Competitive Factors*

 

·                  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;

 

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*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 to refinanceour indebtedness under our senior secured credit facilities and the effects ofany refinancing;

 

·                  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;

 

·                  changes in our proprietarycredit card arrangement which may occur upon expiration of our current ProgramAgreement with HSBC in July 2010 and the execution of a replacementagreement;

 

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

 

·                  other risks, uncertaintiesand factors set forth in this Quarterly Report on Form 10-Q, includingthose set forth in Item 1A, “Risk Factors.”

 

Theforegoing factors are not exhaustive, and new factors may emerge or changes tothe foregoing factors may occur that could impact our business. Except to theextent required by law, we undertake no obligation to update or revise(publicly or otherwise) any forward-looking statements to reflect subsequentevents, new information or future circumstances.

 

**Critical Accounting Policies**

** **

Thepreparation of condensed consolidated financial statements in conformity withgenerally accepted accounting principles requires us to make estimates andassumptions about future events.  Theseestimates and assumptions affect amounts of assets, liabilities, revenues andexpenses and the disclosure of gain and loss contingencies at the date of theCondensed Consolidated Financial Statements. Our current estimates are subject to change if different assumptions asto the outcome of future events were 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 are reasonable under the circumstances.  We make adjustments to our assumptions andjudgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolutecertainty, actual results may differ from the estimates we used in preparingthe accompanying Condensed Consolidated Financial Statements.

 

**SeeNote 1 of the Notes to Condensed Consolidated Financial Statements in Item 1for a summary of our critical accounting policies.  A complete description of our criticalaccounting policies is included in our Annual Report to Shareholders on Form 10-Kfor the fiscal year ended August 1, 2009.**

** **

***Recent Accounting Pronouncements. ***In December 2007, the FASB issued guidance thataddresses the recognition and accounting for identifiable assets acquired,liabilities assumed and non-controlling interests in businesscombinations.  In addition, this guidancechanges the accounting treatment for certain acquisition-related items,including requirements to expense acquisition-related costs as incurred,expense restructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a businesscombination as a component of tax expense. These rules are to be applied prospectively to businesscombinations for which the acquisition date is on or after December 15,2008.  Generally, the effect of thisguidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertaintiesremaining as of January 30, 2010 related to the Acquisition will besubject to the provisions of this guidance. As to the future resolution of these tax uncertainties, we do notbelieve these requirements will have a material impact on our future financialstatements.

 

InFebruary 2008, the FASB issued guidance that delays the effective date offair value disclosures required for all nonfinancial assets, such as intangibleassets and goodwill, and nonfinancial liabilities that are recognized ordisclosed at fair

 

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valuein the financial statements on a nonrecurring basis.  We implemented this guidance in thepreparation of our condensed consolidated financial statements for the quarterended October 31, 2009, however, no additional disclosures were required.

 

InDecember 2008, the FASB issued guidance related to an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan.  This guidance iseffective for fiscal years ending after December 15, 2009, or our fiscalyear ending July 31, 2010.  We havenot yet evaluated the impact of adopting the disclosure requirements on ourconsolidated financial statements for our fiscal year ending July 31,2010.

 

InApril 2009, the FASB issued guidance requiring additional disclosures ininterim financial statements regarding determining and reporting fair valuesfor certain assets and liabilities.  Weadopted this guidance in the first quarter of fiscal year 2010 related to thefair value of our debt instruments.

 

InJune 2009, the FASB issued guidance that establishes the AccountingStandards Codification (ASC) as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with generally acceptedaccounting principles.  This guidance iseffective for financial statements issued for interim and annual periods endingafter September 15, 2009, or our first quarter of fiscal year 2010 ending October 31,2009.  The adoption of this guidance didnot have an impact on our consolidated financial statements.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Themarket risk inherent in the Company’s financial instruments represents thepotential loss arising from adverse changes in interest rates. The Company doesnot enter into derivative financial instruments for trading purposes. TheCompany seeks to manage exposure to adverse interest rate changes through itsnormal operating and financing activities. The Company is exposed to interestrate risk through its borrowing activities, which are described in Note 3to our condensed consolidated financial statements.

 

Inconnection with the Acquisition, NMG obtained $2,575.0 million of floating ratedebt agreements, of which $2,125.0 million was outstanding at the Acquisitiondate and $1,598.4 million is outstanding under its Senior Secured Term LoanFacility at January 30, 2010.  Inaddition, as of January 30, 2010, NMG had no borrowings outstanding underits Asset-Based Revolving Credit Facility. Future borrowings under NMG’s Asset-Based Revolving Facility, to theextent of outstanding borrowings, would be affected by interest rate changes.

 

EffectiveDecember 6, 2005, NMG entered into floating to fixed interest rate swapagreements for an aggregate notional amount of $1,000.0 million to limitour exposure to interest rate increases related to a portion of our floatingrate indebtedness.  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 6.882% to 6.983% per quarter through2010 and result in an average fixed rate of 6.930%.  A 1% increase in the rates relating to theportion of our floating rate date that is not hedged would increase annualinterest expense by approximately $6.0 million.

 

Inaddition to interest rate swap agreements, we also use interest rate capagreements to manage our floating rate debt. Effective January 19, 2010, NMG entered into interest rate capagreements for an aggregate notional amount of $500.0 million in order to hedgethe variability of our cash flows related to a portion of our floating rateindebtedness once the interest rate swap expires on December 6, 2010.  The interest rate cap agreements commence on December 6,2010 and expire on December 6, 2012. Pursuant to the interest rate cap agreements, NMG has capped LIBOR at2.50% through December 6, 2012 with respect to the $500.0 million notionalamount of such agreements.  In the eventLIBOR is less than 2.5%, NMG will pay interest at the lower LIBOR rate.  In the event LIBOR is higher than 2.5%, NMGwill pay interest at the capped rate of 2.5%.

 

Theeffects of changes in the U.S. equity and bond markets serve to increase ordecrease the value of pension plan assets, resulting in increased or decreasedcash funding by the Company. The Company seeks to manage exposure to adverseequity and bond returns by maintaining diversified investment portfolios andutilizing professional investment managers.

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

**a. Disclosure Controls and Procedures.**

 

Inaccordance with Exchange Act Rules 13a-15 and 15d-15, we carried out anevaluation as of January 30, 2010, under the supervision and with theparticipation of our Chief Executive Officer and Chief Financial Officer, aswell as other key members of our management, of the design and operating effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e) andRule 15d-15(e) under the Exchange Act). Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, accumulated, processed,summarized, reported and communicated on a timely basis within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**b. Changes in Internal Control over Financial Reporting.**

 

Inthe ordinary course of business, we routinely enhance our information systemsby either upgrading our current systems or implementing new systems. No changeoccurred in our internal controls over financial reporting during the quarterended January 30, 2010 that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

**NEIMAN MARCUS, INC.**

 

**PART II**

 

**ITEM 1.****                                 ****LEGALPROCEEDINGS**

 

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.

 

Note 10 of the Notes to Condensed Consolidated Financial Statements in Part I,Item 1 is incorporated herein by reference as if fully restated herein.  Note 10 contains forward-looking statementsthat are subject to the risks and uncertainties discussed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Factors That May Affect Future Results.”

 

**ITEM 1A.****                        ****RISKFACTORS**

 

**Risks Related to Current Economic Conditions**

 

**Current economic conditions have adversely affected, and maycontinue to adversely affect, our business and results of operations.**

 

Therecent deterioration in economic conditions, both in the domestic and globaleconomies, has had a significant adverse impact on our business.  Instability in the financial markets,tightening of consumer credit and other economic conditions and uncertaintieshave caused a reduction in consumer spending. These conditions have had a significant negative impact on our revenues.

 

Themerchandise we sell consists in large part of luxury retail goods. The purchaseof these goods by customers is discretionary, and therefore highly dependentupon the level of consumer spending, particularly among affluent customers.Accordingly, sales of these products may continue to be adversely affected by acontinuation or worsening of current economic conditions, increases in consumerdebt levels, uncertainties regarding future economic prospects or a decline inconsumer confidence. During an actual or perceived economic downturn (as aresult of increases in consumer debt levels, increases in interest rates, atightening of consumer credit, uncertainties regarding future economicperformance and tax rates and policies, or a decline in consumer confidence,among other factors), fewer customers may shop our stores and websites andthose who do shop may limit the amounts of their purchases.  As a result, we could be required to take significantadditional markdowns and/or increase our marketing and promotional expenses inresponse to the lower than anticipated levels of demand for luxury goods.  In addition, 

 

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promotionaland/or prolonged periods of deep discount pricing by our competitors could havea material adverse effect on our business.

 

Wecontinue to experience a challenging economic and retail environment and expectthese conditions will continue 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.

 

**Currenteconomic conditions may constrain our ability to obtain credit.**

 

Currenteconomic conditions may constrain our ability to obtain credit.  Domestic and global credit and equity marketshave recently undergone significant disruption, making it difficult for manybusinesses to obtain financing on acceptable terms or at all. As a result ofthis disruption, we have experienced an increase in the cost of borrowingsnecessary to operate our business.  Ifthese conditions continue or become worse, our cost of borrowing could continueto increase.  It may also become moredifficult to obtain financing for our operations or to refinance long-termobligations as they become payable.  Inaddition, our borrowing costs can be affected by independent rating agencies’short and long-term debt ratings which are based largely on our performance asmeasured by credit metrics including interest coverage and leverageratios.  A decrease in these ratingswould likely also increase our cost of borrowing and make it more difficult forus to obtain financing.  Based on currenteconomic conditions and our recent operating performance, our long-term debtratings were downgraded in fiscal year 2009 by all three independent ratingagencies.  A significant increase in thecosts we incur in order to finance our operations may have a material adverseimpact on our business results and financial condition.

 

**Risks Related to Our Structure and NMG’s Indebtedness**

 

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

 

We are a holding company.  NMG and its subsidiaries conductsubstantially all of our consolidated operations and own substantially all of ourconsolidated assets.  As a result, we aresubject to all risks applicable to NMG. In addition, NMG’s Asset-Based Revolving Credit Facility, NMG’s SeniorSecured Term Loan Facility and the indentures governing NMG’s senior notes andsenior subordinated notes contain provisions limiting NMG’s ability todistribute earnings to us, in the form of dividends or otherwise.

 

**NMG has a substantial amount of indebtedness, which mayadversely affect NMG’s cash flow and its ability to operate the business, tocomply with debt covenants and make payments on its indebtedness.**

 

Weare highly leveraged.  As of January 30,2010, the principal amount of NMG’s total indebtedness was approximately$2,976.2 million, the unused borrowing availability under the $600.0 million Asset-BasedRevolving Credit Facility was $430.1 million and the outstanding letters ofcredit were $31.1 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 corporate purposes;

 

·                  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 to obtaincredit from our vendors and/or the vendors’ factors; and

 

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

 

Anyof the above listed factors could materially adversely affect NMG’s business,financial condition and results of operations.

 

Inaddition, NMG’s interest expense could increase if interest rates increasebecause the entire amount of the indebtedness under the senior secured creditfacilities bears interest at floating rates. As of January 30, 2010, NMG had approximately $1,598.4 millionprincipal amount of floating rate debt, consisting of outstanding borrowingsunder the Senior Secured Term Loan Facility. In addition, NMG has an Asset-Based Revolving Credit Facility thatprovides committed financing of up to $600.0 million, subject to a borrowingbase.  As of January 30, 2010, NMGhad no borrowings outstanding under this facility, $31.1 million of outstandingletters of credit and $430.1 million of unused borrowing availability.  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.

 

Inaddition to interest rate swap agreements, we also use interest rate capagreements to manage our floating rate debt. Effective January 19, 2010, NMG entered into interest rate capagreements for an aggregate notional amount of $500.0 million in order to hedgethe variability of our cash flows related to a portion of our floating rateindebtedness once the interest rate swap expires on December 6, 2010.  The interest rate cap agreements commence on December 6,2010 and expire on December 6, 2012. Pursuant to the interest rate cap agreements, NMG has capped LIBOR at2.50% through December 6, 2012 with respect to the $500.0 million notionalamount of such agreements.  In the eventLIBOR is less than 2.5%, NMG will pay interest at the lower LIBOR rate.  In the event LIBOR is higher than 2.5%, NMGwill pay interest at the capped rate of 2.5%.

 

**To service NMG’s indebtedness, it will require a significantamount of cash. NMG’s ability to generate cash depends on many factors beyondits control, and any failure to meet its debt service obligations could harmits business, financial condition and results of operations.**

 

NMG’sability to pay interest on and principal of the debt obligations will primarilydepend upon NMG’s future operating performance. As a result, prevailingeconomic conditions and financial, business and other factors, many of whichare beyond our control, will affect its ability to make these payments.

 

IfNMG does not generate sufficient cash flow from operations to satisfy the debtservice obligations, NMG may have to undertake alternative financing plans,such as refinancing or restructuring its indebtedness, selling assets, reducingor delaying capital investments 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.

 

Contractuallimitations on NMG’s ability to execute any necessary alternative financingplans could exacerbate the effects of any failure to generate sufficient cashflow to satisfy 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 

 

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(a) 15%of the lesser 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’sinability to generate sufficient cash flow to satisfy its debt serviceobligations, or to refinance its obligations at all or on commerciallyreasonable terms, would have an adverse effect, which could be material, on NMG’sbusiness, financial condition and results of operations.

 

**The terms of NMG’s****Asset-Based Revolving CreditFacility and Senior Secured Term Loan Facility****and the indentures governing the Senior Notes, the Senior SubordinatedNotes and the 2028 Debentures may restrict NMG’s current and future operations,particularly its ability to respond to changes in its business or to take certainactions.**

 

Thecredit agreements governing NMG’s Asset-Based Revolving Credit Facility andSenior Secured Term Loan Facility and the indentures governing the SeniorNotes, the Senior Subordinated Notes and the 2028 Debentures contain, and anyfuture indebtedness of NMG would likely contain, a number of restrictivecovenants that impose significant operating and financial restrictions,including restrictions on NMG’s ability to engage in acts that may be in itsbest long-term interests. The indentures governing the Senior Notes, the SeniorSubordinated Notes and the 2028 Debentures and the credit agreements governingthe senior secured credit facilities include covenants that, among otherthings, restrict NMG’s ability to:

 

·                  incur additionalindebtedness;

 

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

 

·                  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.

 

Inaddition, NMG’s ability to borrow under the Asset-Based Revolving CreditFacility is limited by the conditions described above.

 

Moreover,NMG’s Asset-Based Revolving Credit Facility provides discretion to the agentbank acting on behalf of the lenders to impose additional availabilityrestrictions and other reserves, which could materially impair the amount ofborrowings that would otherwise be available to us. There can be no assurancethat the agent bank will not impose such reserves or, were it to do so, thatthe resulting impact of this action would not materially and adversely impairNMG’s liquidity.

 

Abreach of any of the restrictive covenants would result in a default under theAsset-Based Revolving Credit Facility and Senior Secured Term LoanFacility.  If any such default occurs,the lenders under the Asset-Based Revolving Credit Facility and Senior SecuredTerm Loan Facility may elect to declare all outstanding borrowings under suchfacilities, together with accrued interest and other fees, to be immediatelydue and payable, or enforce their security interest, any of which would resultin an event of default under NMG’s Senior Notes and Senior Subordinated Notesand 2028 Debentures. The lenders would also have the right in thesecircumstances to terminate any commitments they have to provide furtherborrowings.

 

Theoperating and financial restrictions and covenants in these debt agreements andany future financing agreements may adversely affect NMG’s ability to financefuture operations or capital needs or to engage in other business activities.

 

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**Risks Related to Our Business and Industry**

 

**The specialty retail industry is highly competitive.**

 

Thespecialty retail industry is highly competitive and fragmented. Competition isstrong both to attract and sell to customers and to establish relationshipswith, and obtain merchandise from, key vendors.

 

Anumber of different competitive factors could have a material adverse effect onour business, results of operations and financial condition, including:

 

·                  increased operational efficiencies ofcompetitors;

 

·                  competitive pricing strategies, includingdeep discount pricing by a broad range of retailers during periods of poor consumerconfidence or economic instability;

 

·                  expansion of product offerings by existingcompetitors;

 

·                  entry by new competitors into markets inwhich we currently operate; and

 

·                  adoption by existing competitors ofinnovative retail sales methods.

 

Wecompete for customers with specialty retailers, traditional and high-enddepartment stores, national apparel chains, vendor-owned proprietary boutiques,individual specialty apparel stores and direct marketing firms. We compete forcustomers principally on the basis of quality and fashion, customer service,value, assortment and presentation of merchandise, marketing and customerloyalty programs and, in the case of Neiman Marcus and Bergdorf Goodman, storeambiance. In our Specialty Retail business, merchandise assortment is acritical competitive factor, and retail stores compete for exclusive, preferredand limited distribution arrangements with key designers. Many of ourcompetitors are larger than we are and have greater financial resources than wedo. In addition, certain designers from whom we source merchandise haveestablished competing free-standing retail stores in the same vicinity as ourstores. If we fail to successfully compete for customers or merchandise, ourbusiness will suffer.

 

**We are dependent on our relationships with certain designers,vendors and other sources of merchandise.**

 

Ourrelationships with established and emerging designers are a key factor in ourposition as a retailer of high-fashion merchandise, and a substantial portionof our revenues is attributable to our sales of designer merchandise. Many ofour key vendors limit the number of retail channels they use to sell theirmerchandise and competition among luxury retailers to obtain and sell thesegoods is intense. Our relationships with our designers have been a significantcontributor to our past success. We have no guaranteed supply arrangements withour principal merchandising sources. Accordingly, there can be no assurancethat such sources will continue to meet our quality, style and volumerequirements.

 

Asa result of current economic conditions, some of our vendors have experiencedserious cash flow issues, reductions in available credit from banks, factors orother financial institutions, 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 other relief.  Any of these actions could have an adverseimpact on our relationship with the vendor or constrain the amounts or timingof our purchases from the vendor and, ultimately, have an adverse impact on ourrevenues, profitability and liquidity.

 

Moreover,nearly all of the brands of our top designers are sold by competing retailers,and many of our top designers also have their own dedicated retail stores. Ifone or more of our top designers were to cease providing us with adequatesupplies of merchandise for purchase or, conversely, were to 1) increase salesof merchandise through their own stores, 2) increase the sales of merchandiseto our competitors or 3) alter the form in which their goods were madeavailable to us for resale, our business could be adversely affected. Inaddition, any decline in the popularity or quality of any of our designerbrands could adversely affect our business.

 

**If we significantly overestimate our future sales, ourprofitability may be adversely affected.**

 

Wemake decisions regarding the purchase of our merchandise well in advance of theseason in which it will be sold. For example, women’s apparel, men’s appareland shoes are typically ordered six to nine months in advance of the productsbeing 

 

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offeredfor sale while handbags, jewelry and other categories are typically orderedthree to six months in advance.  If oursales during any season, particularly a peak season, are significantly lowerthan we expect for any reason, we may not be able to adjust our expendituresfor inventory and other expenses in a timely fashion and may be left with asubstantial amount of unsold inventory. If that occurs, we may be forced torely on markdowns or promotional sales to dispose of excess inventory. Thiscould have an adverse effect on our margins and operating income. At the sametime, if we fail to purchase a sufficient quantity of merchandise, we may nothave an adequate supply of products to meet consumer demand. This may cause usto lose sales or harm our customer relationships.

 

**Our failure to identify changes in consumer preferences orfashion trends may adversely affect our performance.**

 

Oursuccess depends in large part on our ability to identify fashion trends as wellas to anticipate, gauge and react to changing consumer demands in a timelymanner. If we fail to adequately match our product mix to prevailing customertastes, we may be required to sell our merchandise at higher average markdownlevels and lower average margins. Furthermore, the products we sell oftenrequire long lead times to order and must appeal to consumers whose preferencescannot be predicted with certainty and often change rapidly. Consequently, wemust stay abreast of emerging lifestyle and consumer trends and anticipatetrends and fashions that will appeal to our consumer base. Any failure on ourpart to anticipate, identify and respond effectively to changing consumerdemands and fashion trends could adversely affect our business.

 

**A breach in information privacy could negatively impact our operations.**

 

Theprotection of our customer, employee and company data is critically importantto us.  We utilize customer data capturedthrough both our proprietary credit card programs and our direct marketingactivities. Our customers have a high expectation that we will adequatelysafeguard and protect their personal information.  The regulatory environment surroundinginformation security and privacy is evolving and increasingly demanding, withthe frequent imposition of new and constantly changing requirements across allour business units.  A significant breachof customer, employee or company data could damage our reputation and relationshipswith our customers and result in lost sales, fines and lawsuits.

 

**Our business and performance may be affected by our abilityto implement our store expansion and remodeling strategies.**

 

Basedupon our expansion strategy, we expect that planned new stores will add over189,000 square feet of new store space over approximately the next four fiscalyears, representing an increase of approximately 3% above the current aggregatesquare footage of our full-line Neiman Marcus and Bergdorf Goodmanstores.  New store openings involvecertain risks, including constructing, furnishing and supplying a store in atimely and cost effective manner, accurately assessing the demographic orretail environment at a given location, hiring and training quality staff,obtaining necessary permits and zoning approvals, obtaining commitments from acore group of vendors to supply the new store, integrating the new store intoour distribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, costeffective manner, minimize disruptions to our existing operations, and succeedin creating an improved shopping environment. If we fail to execute on these orother aspects of our store expansion and remodeling strategy, we could sufferharm to our sales, an increase in costs and expenses and an adverse effect onour business.

 

**We outsource certain business processes to third-partyvendors that subject us to risks, including disruptions in business andincreased costs.**

 

Some business processes that are dependent ontechnology are outsourced to third parties. Such processes include credit card authorization and processing,insurance claims processing, payroll processing, record keeping for retirementand other benefit plans and other accounting processes.  In the second quarter of fiscal year 2010, weentered into agreements to outsource certain information technologyfunctions.  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 of terrorism could adversely affect our business.**

 

Theeconomic downturn that followed the terrorist attacks of September 11,2001 had a material adverse effect on our business. Any further acts ofterrorism or other future conflicts may disrupt commerce and undermine consumerconfidence, cause a downturn in the economy generally, cause consumer spendingor shopping center traffic to decline or reduce the desire of our 

 

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customersto make discretionary purchases. Any of the foregoing factors could negativelyimpact our sales revenue, particularly in the case of any terrorist attacktargeting retail space, such as a shopping center. Furthermore, an act ofterrorism or war, or the threat thereof, could negatively impact our businessby interfering with our ability to obtain merchandise from foreignmanufacturers. Any future inability to obtain merchandise from our foreignmanufacturers or to substitute other manufacturers, at similar costs and in atimely manner, could adversely affect our business.

 

**The loss of any of our senior management team or attritionamong our buyers or key sales associates could adversely affect our business.**

 

Oursuccess in the specialty retail industry will continue to depend to asignificant extent on our senior management team, buyers and key salesassociates. We rely on the experience of our senior management, who havespecific knowledge relating to us and our industry that would be difficult toreplace. If we were to lose a portion of our buyers or key sales associates,our ability to benefit from long-standing relationships with key vendors or toprovide relationship-based customer service may suffer. We may not be able toretain our current senior management team, buyers or key sales associates andthe loss of any of these individuals could adversely affect our business.

 

**Inflation, including price changes resulting from foreignexchange rate exchanges, may adversely affect our business operations in thefuture.**

 

Inrecent years, we have experienced certain inflationary conditions in our costbase due primarily to (1) changes in foreign currency exchange rates thathave reduced the purchasing power of the U.S. dollar, (2) increases inselling, general and administrative expenses, particularly with regard toemployee benefits and (3) increases in fuel prices and costs impacted byincreases in fuel prices, such as freight and transportation costs. Inflationcan harm our margins and profitability if we are unable to increase prices orcut costs enough to offset the effects of inflation in our cost base. Ifinflation in these or other costs worsens, we may not be able to offset theeffects of inflation and cost increases through control of expenses, passingcost increases on to customers or any other method.  Any future inflation could adversely affectour profitability and our business.

 

**Failure to maintain competitive terms under our loyaltyprograms could adversely affect our 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 in our credit card arrangements, applicableregulations and consumer credit patterns could adversely impact our ability tofacilitate the provision of consumer credit to our customers and adverselyaffect 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 certainpolicies and arrangements with our credit card customers and may change thesepolicies and arrangements in ways that affect our relationship with thesecustomers.

 

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 to handlekey customer service functions, including customer inquiries and collections.

 

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 

 

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thecredit card program as a result of certain changes made to the terms of creditextended to our customers and 2) the allocation of certain credit card lossesbetween HSBC and NMG.  We may enter intoadditional amendments to the Program Agreement prior to its maturity in July 2010to alter the allocation of both credit card losses and income in response tocurrent economic conditions and other factors.

 

Creditcard operations are subject to numerous federal and state laws that imposedisclosure and other requirements upon the origination, servicing and enforcementof credit accounts and limitations on the maximum amount of finance chargesthat may be charged by a credit provider. Any regulation or change in theregulation of credit arrangements that would materially limit the availabilityof credit to our customer base could adversely affect our business.  Changes in credit card use, payment patterns,and default rates may result from a variety of economic, legal, social, andother factors that we cannot control or predict with certainty.

 

TheProgram Agreement with HSBC expires in July 2010.  We are currently in negotiations with HSBCand other providers with respect to a replacement to the ProgramAgreement.  Based upon current marketconditions, we believe the future income to the Company pursuant to anyreplacement arrangement will be lower than the current HSBC Program Incomeearned pursuant to the Program Agreement. Any changes in our credit card arrangements may adversely affect ourcredit card program and ultimately, our business.

 

**Our business can be affected by extreme or unseasonableweather 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 are subject to numerous regulations that could affect ouroperations.**

 

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 changewithout our knowledge, or are violated by importers, designers, manufacturersor distributors, we could experience delays in shipments and receipt of goodsor be subject to fines or other penalties under the controlling regulations,any of which could adversely affect our business.

 

**Our revenues and cash requirements are affected by theseasonal nature of our business.**

 

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.

 

**Our business is affected by foreign currency fluctuations.**

 

Wepurchase a substantial portion of our inventory from foreign suppliers whosecosts are 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 the retail prices of goods offered for sale and/orincrease our cost of goods sold.  If ourcustomers reduce their levels of spending in response to increases in retailprices and/or we are unable to pass such cost increases to our customers, ourrevenues, gross margins, and ultimately our earnings, could decrease. Foreigncurrency fluctuations could have a material adverse effect on our business,financial condition and results of operations in the future.

 

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**Conditions in, and the United States’ relationship with, thecountries where we source our merchandise 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.

 

**Significant increases in costs associated with the productionof catalogs and other promotional materials may adversely affect our operatingincome.**

 

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 other transactionsthat, in their judgment, could enhance their equity investments, even thoughsuch transactions might involve risks to holders of our indebtedness.Furthermore, the Sponsors may in the future own businesses that directly orindirectly compete with us. One or more of the Sponsors also may pursueacquisition opportunities that may be complementary to our business, and as aresult, those acquisition opportunities may not be available to us.

 

**If we are unable to enforce our intellectual property rights,or if we are accused of infringing on a third party’s intellectual propertyrights, our net income may decline.**

 

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 time consumingand expensive to defend and could result in our being required to cease usingthe tradename or other rights and selling the allegedly infringing products.This might have an adverse affect on our sales and cause us to incursignificant litigation costs and expenses.

 

**Failure to successfully maintain and update informationtechnology systems and enhance existing systems may adversely affect ourbusiness.**

 

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.

 

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**Delays in receipt of merchandise inconnection with either the manufacturing or shipment of such merchandise canaffect our performance.**

 

Substantially all of our merchandise is delivered tous by our vendors as finished goods and is manufactured in numerous locations,including Europe and the United States and, to a lesser extent, China, Mexicoand South America. Our vendors rely on third party carriers to delivermerchandise to our distribution facilities. In addition, our success depends onour ability to source and distribute merchandise efficiently to our SpecialtyRetail stores and Direct Marketing customers. Events such as U.S. or foreignlabor strikes, natural disasters, work stoppages or boycotts affecting themanufacturing or transportation sectors could increase the cost or reduce thesupply of merchandise available to us and could adversely affect our results ofoperations.

 

###### **ITEM2.**                   UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS

 

None.

 

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

 

None.

 

**ITEM 6.****                  ****EXHIBITS**

 
| 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, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2    |   | Form of 7.125% Senior Notes Due 2028, dated May 27, 1998,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009.                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                          |
| 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, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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, incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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, incorporated herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended August 1, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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                                                                                             |

 

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|   |   | agents and the lenders thereunder, incorporated herein by reference  to the Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009. (2)                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                                                                                                                                                                                     |

 

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| 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 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, incorporated herein by reference  to the Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009. (2)                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31  |   | Servicing Agreement by and between The Neiman Marcus Group, Inc.  and HSBC Bank Nevada, N.A., incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended August 1,  2009. (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. (1)                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                       |

 

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| 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.                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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.                                                                                                                                                                                                                                                                                                                         |

 

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| 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,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009. (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,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009. (2)              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 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,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009. (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, incorporated herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended August 1, 2009. (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, incorporated herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended August 1, 2009.        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 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, incorporated herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended August 1, 2009. (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.,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009. (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, incorporated herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended August 1, 2009. (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, incorporated herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended August 1, 2009. (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., incorporated herein  by reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 10.56* |   | Second Amendment to the Neiman Marcus, Inc. Management Equity  Incentive Plan effective as of November 16, 2009, incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended October 31, 2009.                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 10.57* |   | Form of Amended and Restated Stock Option Agreement between the  Company and certain eligible key employees, incorporated herein by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  October 31, 2009.                                                                                                                  |

 

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| 10.58* |   | Form of Second Amended and Restated Stock Option Grant Agreement  between the Company and certain eligible key employees, incorporated herein  by reference to the Company’s Quarterly Report on Form 10-Q for the  quarter ended October 31, 2009. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                    |
| 10.59  |   | Tenth Amendment to Credit Card Program Agreement dated as of  December 17, 2009 by and among The Neiman Marcus Group, Inc.,  Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A., and HSBC Private Label  Corporation. (1) (2)                           |
|   |   |                                                                                                                                                                                                                                                                    |
| 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 beenomitted pursuant to a request for confidential treatment.

 

*              Current management contract orcompensatory plan or arrangement.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the registrant has duly caused this report to be signed on its behalfby the undersigned hereunto duly authorized.

 

 

NEIMAN MARCUS, INC.

(Registrant)

 
| **Signature**         | ** ** | **Title**                      | ** ** | **Date**           |
|-----------------------|------------|--------------------------------|------------|--------------------|
|                  |       |                           |       |               |
|                  |       |                           |       |               |
| /s/ T. Dale Stapleton |       | Vice President and Controller  |       | March 9, 2010 |
| T. Dale Stapleton     |       | and Duly Authorized Officer    |       |               |
|                  |       | (principal accounting officer) |       |               |

 

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