Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the Quarterly Period Ended January 29, 2011**

 

**OR**

 

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

 

**For the transition period from              to**

 

**Commission file 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) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No  ̈

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  ̈                |   | Accelerated filer  ̈         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company  ̈ |
| (Do not check if a smaller reporting company) |   |                             |

 

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

 

There were 1,014,915 shares of the registrant’s common stock, par value $.01 per share, outstanding at January 29, 2011.

 

 

 

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**NEIMAN MARCUS, INC.**

 

**INDEX**

 
| ** **    | ** **                                                                                   | **Page** |
|---------------|----------------------------------------------------------------------------------------------|----------|
|          |                                                                                         |     |
| Part I.  | Financial Information                                                                        |     |
|          |                                                                                         |     |
| Item   1.     | Condensed Consolidated   Balance Sheets as of January 29, 2011,                         |     |
|          | July 31, 2010 and   January 30, 2010                                               | 1        |
|          |                                                                                         |     |
|          | Condensed Consolidated   Statements of Operations for the Thirteen Weeks Ended               |     |
|          | January 29, 2011 and   January 30, 2010                                            | 2        |
|          |                                                                                         |     |
|          | Condensed Consolidated   Statements of Operations for the Twenty-Six Weeks Ended             |     |
|          | January 29, 2011 and   January 30, 2010                                            | 3        |
|          |                                                                                         |     |
|          | Condensed   Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended             |     |
|          | January 29,   2011 and January 30, 2010                                            | 4        |
|          |                                                                                         |     |
|          | Notes to Condensed Consolidated Financial Statements                                         | 5        |
|          |                                                                                         |     |
| Item 2.       | Management’s   Discussion and Analysis of Financial Condition and Results of Operations | 24       |
|          |                                                                                         |     |
| Item 3.       | Quantitative   and Qualitative Disclosures about Market Risk                                 | 41       |
|          |                                                                                         |     |
| Item 4.       | Controls and   Procedures                                                                    | 42       |
|          |                                                                                         |     |
| Part II. | Other Information                                                                            |     |
|          |                                                                                         |     |
| Item 1.       | Legal Proceedings                                                                            | 42       |
|          |                                                                                         |     |
| Item 1A.      | Risk Factors                                                                                 | 43       |
|          |                                                                                         |     |
| Item   6.     | Exhibits                                                                                     | 51       |
|          |                                                                                         |     |
| Signatures    |                                                                                         | 56       |

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| **(in thousands, except shares)**                                                                                                                                                               | ** ** | **January 29,    2011** | ** ** | **July 31,   2010** | ** ** | **January 30,    2010** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | ** **                        | ** ** | ** **               | ** ** | ** **                        | ** ** |
| **ASSETS**                                                                                                                                                                                                     |       |                              |       |                     |       |                              |       |
| Current assets:                                                                                                                                                                                                |       |                              |       |                     |       |                              |       |
| Cash and cash equivalents                                                                                                                                                                                      |       | $                                 | 530,716    |                     | $          | 421,007                           |       | $ | 500,661 |   |
| Merchandise inventories                                                                                                                                                                                        |       | 772,260                           |       | 790,516                  |       | 732,289                           |       |
| Deferred income taxes                                                                                                                                                                                          |       | 21,831                            |       | 30,755                   |       | 19,136                            |       |
| Other current assets                                                                                                                                                                                           |       | 86,708                            |       | 117,844                  |       | 77,614                            |       |
| Total current assets                                                                                                                                                                                           |       | 1,411,515                         |       | 1,360,122                |       | 1,329,700                         |       |
|                                                                                                                                                                                                           |       |                              |       |                     |       |                              |       |
| Property and equipment, net                                                                                                                                                                                    |       | 882,986                           |       | 905,826                  |       | 947,371                           |       |
| Goodwill and intangible assets, net                                                                                                                                                                            |       | 3,173,293                         |       | 3,205,688                |       | 3,242,317                         |       |
| Other assets                                                                                                                                                                                                   |       | 63,411                            |       | 60,646                   |       | 80,463                            |       |
| Total assets                                                                                                                                                                                                   |       | $                                 | 5,531,205  |                     | $          | 5,532,282                         |       | $ | 5,599,851 |   |
|                                                                                                                                                                                                           |       |                              |       |                     |       |                              |       |
| **LIABILITIES AND SHAREHOLDERS’   EQUITY**                                                                                                                                                                |       |                              |       |                     |       |                              |       |
| Current liabilities:                                                                                                                                                                                           |       |                              |       |                     |       |                              |       |
| Accounts payable                                                                                                                                                                                               |       | $                                 | 216,132    |                     | $          | 270,778                           |       | $ | 190,049 |   |
| Accrued liabilities                                                                                                                                                                                            |       | 389,512                           |       | 361,456                  |       | 370,275                           |       |
| Other current liabilities                                                                                                                                                                                      |       | —                            |       | 30,309                   |       | 45,479                            |       |
| Total current liabilities                                                                                                                                                                                      |       | 605,644                           |       | 662,543                  |       | 605,803                           |       |
|                                                                                                                                                                                                           |       |                              |       |                     |       |                              |       |
| Long-term liabilities:                                                                                                                                                                                         |       |                              |       |                     |       |                              |       |
| Long-term debt                                                                                                                                                                                                 |       | 2,879,769                         |       | 2,879,672                |       | 2,972,222                         |       |
| Deferred income taxes                                                                                                                                                                                          |       | 656,356                           |       | 668,647                  |       | 684,185                           |       |
| Deferred real estate credits                                                                                                                                                                                   |       | 103,221                           |       | 96,093                   |       | 98,493                            |       |
| Other long-term liabilities                                                                                                                                                                                    |       | 294,758                           |       | 299,954                  |       | 296,287                           |       |
| Total long-term liabilities                                                                                                                                                                                    |       | 3,934,104                         |       | 3,944,366                |       | 4,051,187                         |       |
|                                                                                                                                                                                                           |       |                              |       |                     |       |                              |       |
| Common stock (par value $0.01 per share, 5,000,000   shares authorized and 1,014,915 shares issued and outstanding at   January 29, 2011 and 1,013,082 at July 31, 2010 and   January 30, 2010) |       | 10                                |       | 10                       |       | 10                                |       |
| Additional paid-in capital                                                                                                                                                                                     |       | 1,434,676                         |       | 1,434,321                |       | 1,428,513                         |       |
| Accumulated other comprehensive loss                                                                                                                                                                           |       | (87,313                           | )          | (106,274                 | )          | (97,301                           | )          |
| Accumulated deficit                                                                                                                                                                                            |       | (355,916                          | )          | (402,684                 | )          | (388,361                          | )          |
| Total shareholders’ equity                                                                                                                                                                                |       | 991,457                           |       | 925,373                  |       | 942,861                           |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                |       | $                                 | 5,531,205  |                     | $          | 5,532,282                         |       | $ | 5,599,851 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Thirteen weeks ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **January 29,    2011**  | ** ** | **January 30,   2010** | ** ** |
| ** **                                                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Revenues                                                                           |       | $                                  | 1,171,559  |   | $ | 1,102,361 |   |
| Cost of goods sold including buying and occupancy   costs (excluding depreciation) |       | 793,661                            |       | 761,485 |   |
| Selling, general and administrative expenses   (excluding depreciation)            |       | 253,707                            |       | 237,581 |   |
| Income from credit card program, net                                               |       | (12,195                            | )          | (16,572 | ) |
| Depreciation expense                                                               |       | 32,145                             |       | 34,422 |   |
| Amortization of intangible assets                                                  |       | 10,607                             |       | 13,845 |   |
| Amortization of favorable lease commitments                                        |       | 4,469                              |       | 4,469 |   |
|                                                                               |       |                               |       |   |   |
| Operating earnings                                                                 |       | 89,165                             |       | 67,131 |   |
|                                                                               |       |                               |       |   |   |
| Interest expense, net                                                              |       | 55,248                             |       | 59,004 |   |
|                                                                               |       |                               |       |   |   |
| Earnings before income taxes                                                       |       | 33,917                             |       | 8,127 |   |
|                                                                               |       |                               |       |   |   |
| Income tax expense                                                                 |       | 12,890                             |       | 4,163 |   |
|                                                                               |       |                               |       |   |   |
| Net earnings                                                                       |       | $                                  | 21,027     |   | $ | 3,964 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | **Twenty-Six weeks ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **January 29,    2011**    | ** ** | **January 30,   2010** | ** ** |
| ** **                                                                         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Revenues                                                                           |       | $                                    | 2,098,807  |   | $ | 1,971,261 |   |
| Cost of goods sold including buying and occupancy   costs (excluding depreciation) |       | 1,356,319                            |       | 1,295,709 |   |
| Selling, general and administrative expenses   (excluding depreciation)            |       | 476,694                              |       | 456,397 |   |
| Income from credit card program, net                                               |       | (21,488                              | )          | (29,659 | ) |
| Depreciation expense                                                               |       | 65,867                               |       | 70,205 |   |
| Amortization of intangible assets                                                  |       | 23,456                               |       | 27,691 |   |
| Amortization of favorable lease commitments                                        |       | 8,939                                |       | 8,939 |   |
|                                                                               |       |                                 |       |   |   |
| Operating earnings                                                                 |       | 189,020                              |       | 141,979 |   |
|                                                                               |       |                                 |       |   |   |
| Interest expense, net                                                              |       | 113,678                              |       | 118,369 |   |
|                                                                               |       |                                 |       |   |   |
| Earnings before income taxes                                                       |       | 75,342                               |       | 23,610 |   |
|                                                                               |       |                                 |       |   |   |
| Income tax expense                                                                 |       | 28,574                               |       | 11,125 |   |
|                                                                               |       |                                 |       |   |   |
| Net earnings                                                                       |       | $                                    | 46,768     |   | $ | 12,485 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                    | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **January 29,    2011**    | ** ** | **January 30,   2010** | ** ** |
| ** **                                                                                    | ** ** | ** **                           | ** ** | ** ** | ** ** |
| **CASH FLOWS - OPERATING   ACTIVITIES**                                                       |       |                                 |       |   |   |
| Net earnings                                                                                  |       | $                                    | 46,768     |   | $ | 12,485 |   |
| Adjustments to reconcile net earnings to net cash   provided by operating activities:         |       |                                 |       |   |   |
| Depreciation and amortization expense                                                         |       | 106,891                              |       | 115,922 |   |
| Paid-in-kind interest                                                                         |       | —                               |       | 14,362 |   |
| Deferred income taxes                                                                         |       | (15,695                              | )          | (18,318 | ) |
| Other, primarily costs related to defined benefit   pension and other long-term benefit plans |       | 617                                  |       | 2,568 |   |
|                                                                                          |       | 138,581                              |       | 127,019 |   |
| Changes in operating assets and liabilities:                                                  |       |                                 |       |   |   |
| Merchandise inventories                                                                       |       | 18,256                               |       | 34,543 |   |
| Other current assets                                                                          |       | 31,136                               |       | 47,446 |   |
| Other assets                                                                                  |       | (6,508                               | )          | 3,330 |   |
| Accounts payable and accrued liabilities                                                      |       | (27,368                              | )          | 14,859 |   |
| Deferred real estate credits                                                                  |       | 10,402                               |       | 5,184 |   |
| **Net cash provided by operating   activities**                                               |       | 164,499                              |       | 232,381 |   |
| ** **                                                                                    |       |                                 |       |   |   |
| **CASH FLOWS — INVESTING   ACTIVITIES**                                                  |       |                                 |       |   |   |
| Capital expenditures                                                                          |       | (41,235                              | )          | (28,382 | ) |
| **Net cash used for investing   activities**                                                  |       | (41,235                              | )          | (28,382 | ) |
| ** **                                                                                    |       |                                 |       |   |   |
| **CASH FLOWS — FINANCING   ACTIVITIES**                                                  |       |                                 |       |   |   |
| Repayment of borrowings under senior term loan   facility                                     |       | (7,648                               | )          | (26,617 | ) |
| Repayment of borrowings                                                                       |       | —                               |       | (146 | ) |
| Debt issuance costs paid                                                                      |       | (5,907                               | )          | — |   |
| **Net cash used for financing   activities**                                                  |       | (13,555                              | )          | (26,763 | ) |
| ** **                                                                                    |       |                                 |       |   |   |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                 |       |   |   |
| Increase during the period                                                                    |       | 109,709                              |       | 177,236 |   |
| Beginning balance                                                                             |       | 421,007                              |       | 323,425 |   |
| Ending balance                                                                                |       | $                                    | 530,716    |   | $ | 500,661 |   |
|                                                                                          |       |                                 |       |   |   |
| **Supplemental Schedule of Cash   Flow Information**                                          |       |                                 |       |   |   |
| ** **                                                                                    |       |                                 |       |   |   |
| Cash paid (received) during the period for:                                                   |       |                                 |       |   |   |
| Interest                                                                                      |       | $                                    | 108,899    |   | $ | 90,634 |   |
| Income taxes                                                                                  |       | $                                    | 580        |   | $ | (13,355 | ) |

 

*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**

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

 

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

 

The specialty retail industry is seasonal in nature, with a higher level of sales typically generated in the fall and holiday selling seasons.  Due to seasonal and other factors, the results of operations for the second quarter of fiscal year 2011 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

 

Neiman Marcus, Inc. (the Company) is a wholly-owned subsidiary of and is controlled by Newton Holding, LLC (Holding).  Holding is controlled by investment funds affiliated with TPG Capital and Warburg Pincus (collectively, the Sponsors).  The Company was formed by Holding for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG), which acquisition was completed on October 6, 2005 (the Acquisition).  The accompanying unaudited condensed consolidated financial statements include the amounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter of fiscal year 2011 relate to the thirteen weeks ended January 29, 2011.  All references to the second quarter of fiscal year 2010 relate to the thirteen weeks ended January 30, 2010.  All references to year-to-date fiscal 2011 relate to the twenty-six weeks ended January 29, 2011.  All references to year-to-date fiscal 2010 relate to the twenty-six weeks ended January 30, 2010.

 

A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

 

***Use of Estimates.***** **We are required to make estimates and assumptions about future events in preparing financial statements in conformity with generally accepted accounting principles.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the unaudited condensed consolidated financial statements.  While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited condensed consolidated financial statements.

 

We believe the following critical accounting policies, among others, encompass the more significant judgments and estimates used in the preparation of our financial statements:

 

·                  Recognition of revenues;

 

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

 

·                  Determination of impairment of long-lived assets;

 

·                  Recognition of advertising and catalog costs;

 

·                  Measurement of liabilities related to our loyalty programs;

 

·                  Recognition of income taxes; and

 

·                  Measurement of accruals for general liability, workers’ compensation and health insurance claims and pension and postretirement health care benefits.

 

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*** ***

***Fair Value Measurements.***  Under generally accepted accounting principles, we are required 1) to measure certain assets and liabilities at fair value or 2) to disclose the fair value of certain assets and liabilities recorded at cost.  Pursuant to these fair value measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.  The fair value is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.  In addition, the fair value of liabilities includes consideration of non-performance risk, including our own credit risk and the fair value of assets includes consideration of the counterparty’s non-performance risk.  Each fair value measurement is reported in one of the following three levels:

 

·                  Level 1 — valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

 

·                  Level 2 — valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

·                  Level 3 — valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.

 

At January 29, 2011, July 31, 2010 and January 30, 2010, the fair values of cash and cash equivalents, receivables and accounts payable approximated their carrying values due to the short-term nature of these instruments.  See Notes 3 and 4 of the Notes to Condensed Consolidated Financial Statements for the estimated fair values of our long-term debt and derivative financial instruments.

 

**2.****             ****Goodwill and Intangible Assets, Net**

 
| **(in thousands)**             | ** ** | **January 29,   2011** | ** ** | **July 31,   2010** | ** ** | **January 30,   2010** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                |       |                        |       |                     |       |                        |       |
| Goodwill                            |       | $                           | 1,263,433  |                     | $          | 1,263,433                   |       | $ | 1,263,433 |   |
| Tradenames                          |       | 1,233,625                   |       | 1,234,180                |       | 1,234,735                   |       |
| Customer lists, net                 |       | 291,488                     |       | 314,389                  |       | 341,524                     |       |
| Favorable lease commitments, net    |       | 384,747                     |       | 393,686                  |       | 402,625                     |       |
| Goodwill and intangible assets, net |       | $                           | 3,173,293  |                     | $          | 3,205,688                   |       | $ | 3,242,317 |   |

 

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

 

***Intangible Assets Subject to Amortization.***  Customer lists and amortizable tradenames are amortized using the straight-line method over their estimated useful lives, ranging from 4 to 24 years (weighted average life of 13 years).  Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from 9 to 49 years (weighted average life of 33 years).  Total estimated amortization of all Acquisition-related intangible assets for the next five fiscal years is currently estimated as follows (in thousands):

 
| 2012 |   | $      | 50,123 |   |
|------|--------|--------|--------|--------|
| 2013 |   | 47,436 |   |
| 2014 |   | 46,881 |   |
| 2015 |   | 46,615 |   |
| 2016 |   | 40,484 |   |

 

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**3.**              **Long-term Debt**

 

The significant components of our long-term debt are as follows:

 
| **(in thousands)**                                      | ** ** | **Interest   Rate** | ** ** | **January 29,    2011** | ** ** | **July 31,    2010** | ** ** | **January 30,   2010** | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|-----------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
|                                                         |       |                |       |                              |       |                           |       |                        |       |
| Senior Secured Term Loan Facility                            |       | variable            |       | $                                 | 1,505,735  |                           | $          | 1,513,383                   |       | $ | 1,598,383 |   |
| 2028 Debentures                                              |       | 7.125%              |       | 121,589                           |       | 121,492                        |       | 121,394                     |       |
| Senior Notes                                                 |       | 9.0%/9.75%          |       | 752,445                           |       | 752,445                        |       | 752,445                     |       |
| Senior Subordinated Notes                                    |       | 10.375%             |       | 500,000                           |       | 500,000                        |       | 500,000                     |       |
| Total debt                                                   |       |                |       | 2,879,769                         |       | 2,887,320                      |       | 2,972,222                   |       |
| Less: current portion of Senior Secured Term Loan   Facility |       |                |       | —                            |       | (7,648                         | )          | —                      |       |
| Long-term debt                                               |       |                |       | $                                 | 2,879,769  |                           | $          | 2,879,672                   |       | $ | 2,972,222 |   |

 

***Senior Secured Asset-Based Revolving Credit Facility.***  NMG has an asset-based revolving credit facility with a maximum committed borrowing capacity of $600.0 million that matures on January 15, 2013.  The facility also provides an uncommitted accordion feature that allows NMG to request the lenders to provide additional capacity in either the form of increased revolving commitments or incremental term loans, subject to a potential total maximum facility of $800 million.

 

Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice.  The borrowing base for the Asset-Based Revolving Credit Facility is equal to at any time the sum of (a) the lesser of (i) 80% of eligible inventory (valued at the lower of cost or market value) and (ii) 85% of the net orderly liquidation value of eligible inventory, and (b) 85% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds arising from the sale or disposition of inventory, less certain reserves.  Through April 30, 2011, NMG is required to maintain excess availability under the terms of the Asset-Based Revolving Credit Facility of at least the greater of (a) 10% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $50 million.  After April 30, 2011, if at any time, excess availability is less than the greater of (a) 15% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $60 million, NMG will be required to maintain a pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) of at least 1.1 to 1.0.  On January 29, 2011, NMG had no borrowings outstanding under this facility, $17.0 million of outstanding letters of credit and $500.6 million of unused borrowing availability.

 

The Asset-Based Revolving Credit Facility provides that NMG has the right at any time to request up to $300 million of additional revolving facility commitments and/or incremental term loans; provided that the aggregate amount of loan commitments under the Asset-Based Revolving Credit Facility may not exceed $800 million.  However, the lenders are under no obligation to provide any such additional commitments or loans, and any increase in commitments or incremental term loans will be subject to customary conditions precedent.  If NMG were to request any such additional commitments and the existing lenders or new lenders were to agree to provide such commitments, the Asset-Based Revolving Credit Facility size could be increased to up to $800 million, but NMG’s ability 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 senior notes and senior subordinated notes, or the cash proceeds of any incremental term loans may be used to repurchase any of such notes, but neither the incremental term loans nor the proceeds thereof may be used for any other purpose.

 

Borrowings under the Asset-Based Revolving Credit Facility bear interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the highest of (i) a defined prime rate, (ii) the federal funds effective rate plus 1¤2 of 1% or (iii) a one-month LIBOR rate plus 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin.  The applicable margin is up to 3.50% with respect to base rate borrowings and up to 4.50% with respect to LIBOR borrowings, provided that until October 1, 2010, the applicable margin was 3.25% with respect to base rate borrowings and 4.25% with respect to LIBOR borrowings.  The applicable margin is subject to adjustment based on the historical availability under the Asset-Based Revolving Credit Facility.  In addition, NMG is required to pay a commitment fee in respect of unused commitments of (a) 0.75% per annum during any applicable period in which the average revolving loan utilization is 50% or more or (b) 1% per annum during any applicable period in which the average revolving loan utilization is less than 50%.  NMG must also pay customary letter of credit fees and agency fees.

 

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If at any time the aggregate amount of outstanding revolving loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (a) the commitment amount and (b) the borrowing base (including as a result of reductions to the borrowing base that would result from certain non-ordinary course sales of inventory with a value in excess of $25 million, if applicable), NMG will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.  In addition, if at any time the aggregate amount of outstanding revolving loans and incremental term loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the reported value of inventory owned by the borrowers and guarantors, NMG will be required to eliminate such excess within the earlier of 30 days from such occurrence or 5 business days from the first date on or after such occurrence at which excess availability is less than $75 million.  If (a) the amount available under the Asset-Based Revolving Credit Facility is less than the greater of (i) 20% of the lesser of (A) the aggregate revolving commitments and (B) the borrowing base and (ii) $75 million or (b) an event of default has occurred, NMG will be required to repay outstanding loans and cash collateralize letters of credit with the cash NMG would then be required to deposit daily in a collection account maintained with the agent under the Asset-Based Revolving Credit Facility.

 

NMG may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.  There is no scheduled amortization under the Asset-Based Revolving Credit Facility; the principal amount of the revolving loans outstanding thereunder will be due and payable in full on January 15, 2013.

 

All obligations under the Asset-Based Revolving Credit Facility are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries.  All obligations under NMG’s Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of the Company, NMG and the subsidiaries that have guaranteed the Asset-Based Revolving Credit Facility (subsidiary guarantors). As of January 29, 2011, there were no assets or liabilities held by non-guarantor subsidiaries.

 

The Asset-Based Revolving Credit Facility contains covenants, including covenants limiting dividends and other restricted payments; investments, loans, advances and acquisitions; and prepayments or redemptions of other indebtedness.  These covenants permit the restricted actions in an unlimited amount, subject to the satisfaction of certain payment conditions, principally that NMG must have pro forma excess availability under the Asset-Based Revolving Credit Facility equal to at least 25% of the lesser of (a) the revolving commitments under the facility and (b) the borrowing base, NMG delivering projections demonstrating that projected excess availability for the next twelve months will be equal to such thresholds and that NMG have a pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) of at least 1.2 to 1.0 (or 1.1 to 1.0 for prepayments or redemptions of other indebtedness).  The Asset-Based Revolving Credit Facility also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50 million.

 

For a more detailed description of NMG’s Asset-Based Revolving Credit Facility, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility.  At January 29, 2011, the outstanding balance under the Senior Secured Term Loan Facility was $1,505.7 million.  In November 2010, NMG entered into an amendment and restatement (the Amendment) of the credit agreement governing NMG’s Senior Secured Term Loan Facility, which included the following: (i) an extension of the maturity of approximately $1,064.2 million principal amount of the existing term loans thereunder, (ii) an increase in the interest rate payable to holders of the extended term loans, (iii) the ability to incur additional debt to refinance the non-extended term loans and (iv) certain other modifications to the Senior Secured Term Loan Facility.

 

The extended term loans will mature on April 6, 2016, unless $300.0 million or more aggregate principal amount of NMG’s Senior Notes and Senior Subordinated Notes remain outstanding on July 15, 2015, in which case the extended term loans will mature on that date instead.  The approximately $441.5 million principal amount of existing term loans that were not extended continue to have a maturity of April 6, 2013 (as all of the term loans did prior to the Amendment).

 

In addition to extending the maturity of a portion of the existing term loans under the Senior Secured Term Loan Facility, the Amendment increased the “applicable margin” used in calculating the interest rate payable to holders of the extended term loans (but did not change the applicable margin used in calculating the interest rate payable to holders of term loans that were not extended).  Following the Amendment, term loans under the Senior Secured Term Loan Facility (including both the extended and the non-extended term loans) bear interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by 

 

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reference to the higher of (1) the prime rate of Credit Suisse AG (the administrative agent), (2) the federal funds effective rate plus 1¤2 of 1% and (3) the adjusted one-month LIBOR rate plus 1.00% or (b) a LIBOR rate (for a period equal to the relevant interest period), subject to certain adjustments, in each case plus an applicable margin.

 

At January 29, 2011, the applicable margin for the extended term loans is 3.00% for alternate base rate loans and 4.00% for LIBOR rate loans (or if NMG’s consolidated leverage ratio as of the relevant date of determination is less than 5.0 to 1.0, 2.75% for alternate base rate loans and 3.75% for LIBOR rate loans).  At January 29, 2011, the applicable margin for the term loans that were not extended remains 1.00% for alternate base rate loans and 2.00% for LIBOR rate loans (or if NMG’s consolidated leverage ratio as of the relevant date of determination is less than 4.5 to 1.0, 0.75% for alternate base rate loans and 1.75% for LIBOR rate loans).  The weighted average interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 3.71% at January 29, 2011.

 

The Amendment also included provisions permitting NMG (a) to incur debt to refinance the term loans that are not currently being extended (without requiring any further consent under the Senior Secured Term Loan Facility) and (b) to enter into future extensions of any portion of the term loans with the consent of only the lenders electing to extend at that time.

 

The credit agreement governing the Senior Secured Term Loan Facility requires NMG to prepay outstanding term loans with 50% (which percentage will be reduced to 25% if NMG’s total leverage ratio is less than a specified ratio and will be reduced to 0% if NMG’s total leverage ratio is less than a specified ratio) of its annual excess cash flow (as defined in the credit agreement).  For fiscal year 2010, NMG was required to prepay $92.6 million of outstanding term loans pursuant to the annual excess cash flow requirements.  Of such amount, NMG paid $85.0 million in the fourth quarter of fiscal year 2010 and $7.6 million in the first quarter of fiscal year 2011.  If a change of control (as defined in the credit agreement) occurs, NMG will be required to offer 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 the date of prepayment.  NMG also must offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales under certain circumstances.

 

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

 

All obligations under the Senior Secured Term Loan Facility are unconditionally guaranteed by the Company and each direct and indirect domestic subsidiary of NMG that guarantees the obligations of NMG under its Asset-Based Revolving Credit Facility.  All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of the Company, NMG and the subsidiary guarantors.

 

The credit agreement governing the Senior Secured Term Loan Facility contains a number of negative covenants that are substantially similar to those governing the Senior Notes (as described below) and additional covenants related to the security arrangements for the Senior Secured Term Loan Facility.  The credit agreement also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50 million.

 

For a more detailed description of the Senior Secured Term Loan Facility (prior to the Amendment), refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

 

The fair value of the Senior Secured Term Loan Facility was approximately $1,505.7 million at January 29, 2011, $1,426.4 million at July 31, 2010 and $1,454.5 million at January 30, 2010 based on prevailing market rates.

 

***2028 Debentures.***  NMG has outstanding $125.0 million aggregate principal amount of its 7.125% 2028 Debentures.  NMG equally and ratably secures its 2028 Debentures by a first lien security interest on certain collateral subject to liens granted under NMG’s Senior Secured Credit Facilities.  The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company.  The guarantee by the Company is full and unconditional and joint and several.  Currently, the Company’s non-guarantor subsidiaries consist principally of Bergdorf Goodman, Inc. through which NMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust which holds legal title to certain real property and intangible assets used by NMG in conducting its operations.  The 2028 Debentures include a cross-acceleration provision in respect of any other indebtedness that has an aggregate principal amount exceeding $15 million.  NMG’s 2028 Debentures mature on June 1, 2028.

 

For a more detailed description of the 2028 Debentures, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

 

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The fair value of the 2028 Debentures was approximately $115.6 million at January 29, 2011, $114.1 million at July 31, 2010 and $109.4 million at January 30, 2010 based on quoted market prices.

 

***Senior Notes.**** *NMG has outstanding $752.5 million aggregate principal amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture).  NMG’s Senior Notes mature on October 15, 2015.

 

Interest on the Senior Notes is payable quarterly in arrears on each January 15, April 15, July 15 and October 15.  Prior to October 15, 2010, NMG could, at its option, elect to pay interest on the Senior Notes entirely in cash (Cash Interest) or entirely by increasing the principal amount of the outstanding Senior Notes by issuing additional Senior Notes (PIK Interest). Cash Interest on the Senior Notes accrues at the rate of 9% per annum.  PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum.  We negotiated for the right to include the PIK feature in our Senior Notes because of our belief that this feature could be a useful tool to enhance liquidity under appropriate circumstances.  In the second quarter of fiscal year 2009, given the dislocation in the financial markets and the uncertainty as to when reasonable conditions would return, we believed that it was appropriate to utilize this feature, even though we had available borrowing capacity under our $600.0 million Asset-Based Revolving Credit Facility.  Accordingly, we elected to pay PIK Interest for the three quarterly interest periods ending October 14, 2009 and to make such interest payments with the issuance of additional Senior Notes at the PIK Interest rate of 9.75% instead of paying interest in cash.  As a result, the original principal amount of Senior Notes of $700.0 million increased by $17.1 million in April 2009, $17.4 million in July 2009 and $17.9 million in October 2009.  We have elected to pay cash interest since the first quarter of fiscal year 2010.  After October 15, 2010, we are required to make all interest payments on the Senior Notes entirely in cash.

 

The Senior Notes are fully and unconditionally guaranteed, on a joint and several unsecured, senior basis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’s obligations under its Senior Secured Credit Facilities and by the Company.  The Senior Notes and the guarantees thereof are NMG’s and the guarantors’ unsecured, senior obligations and rank (i) equal in the right of payment with all of NMG’s and the guarantors’ existing and future senior indebtedness, including any borrowings under NMG’s Senior Secured Credit Facilities and the guarantees thereof, and NMG’s 2028 Debentures; and (ii) senior to all of NMG’s and its guarantors’ existing and future subordinated indebtedness, including the Senior Subordinated Notes due 2015 and the guarantees thereof. The Senior Notes also are effectively junior in priority to NMG’s and its guarantors’ obligations under all secured indebtedness, including NMG’s Senior Secured Credit Facilities, the 2028 Debentures, and any other secured obligations of NMG, in each case, to the extent of the value of the assets securing such obligations.  In addition, the Senior Notes are structurally subordinated to all existing and future liabilities, including trade payables, of NMG’s subsidiaries that are not providing guarantees.

 

NMG is not required to make any mandatory redemption or sinking fund payments with respect to the Senior Notes.  The indenture governing the Senior Notes contains a number of customary negative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50 million, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all outstanding Senior Notes to be due and payable immediately.

 

For a more detailed description of NMG’s Senior Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

 

The fair value of NMG’s Senior Notes was approximately $789.1 million at January 29, 2011, $767.5 million at July 31, 2010 and $731.8 million at January 30, 2010 based on quoted market prices.

 

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

 

The Senior Subordinated Notes are fully and unconditionally guaranteed, on a joint and several unsecured, senior subordinated basis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’s obligations under its Senior Secured Credit Facilities and by the Company.  The Senior Subordinated Notes and the guarantees thereof are NMG’s and the guarantors’ unsecured, senior subordinated obligations and rank (i) junior to all of NMG’s and the guarantors’ existing and future senior indebtedness, including the Senior Notes and any borrowings under NMG’s Senior Secured Credit Facilities, and the guarantees thereof, and NMG’s 2028 Debentures; (ii) equally with any of NMG’s and the guarantors’ future senior subordinated indebtedness; and (iii) senior to any of NMG’s and the guarantors’ future subordinated indebtedness. In addition, 

 

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the Senior Subordinated Notes are structurally subordinated to all existing and future liabilities, including trade payables, of NMG’s subsidiaries that are not providing guarantees.

 

NMG is not required to make any mandatory redemption or sinking fund payments with respect to the Senior Subordinated Notes.  The indenture governing the Senior Subordinated Notes contains a number of customary negative covenants and events of defaults, including a cross-default provision in respect of any other indebtedness 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 Senior Subordinated Notes to be due and payable immediately, subject to certain exceptions.

 

For a more detailed description of NMG’s Senior Subordinated Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.

 

The fair value of NMG’s Senior Subordinated Notes was approximately $528.8 million at January 29, 2011, $517.5 million at July 31, 2010 and $491.3 million at January 30, 2010 based on quoted market prices.

 

***Maturities of Long-Term Debt.***  At January 29, 2011, annual maturities of long-term debt during the next five fiscal years and thereafter are as follows (in millions):

 
| 2012       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2013       |   | 441.5   |   |
| 2014       |   | —  |   |
| 2015       |   | —  |   |
| 2016       |   | 2,316.7 |   |
| Thereafter |   | 121.6   |   |

 

The above table does not reflect any future excess cash flow pre-payments, if any, that may be required under the Senior Secured Term Loan Facility.  However, the above table does reflect the extended term loans under the Senior Secured Term Loan Facility maturing on April 6, 2016 pursuant to the terms of the Amendment (unless $300.0 million or more aggregate principal amount of NMG’s Senior Notes and Senior Subordinated Notes remain outstanding on July 15, 2015, in which case the extended term loans will mature on that date instead).

 

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

 
| ** **                        | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**           | ** ** | **January 29,********2011**   | ** ** | **January 30,   2010**          | ** ** | **January 29,    2011** | ** ** | **January 30,********2010** | ** ** |
|                              |       |                               |       |                                 |       |   |   |   |   |
| Senior Secured Term Loan Facility |       | $                                  | 17,617     |                                 | $          | 20,787 |   | $ | 38,183 |   | $ | 41,573 |   |
| 2028 Debentures                   |       | 2,202                              |       | 2,207                                |       | 4,428 |   | 4,433 |   |
| Senior Notes                      |       | 16,930                             |       | 16,744                               |       | 33,674 |   | 34,269 |   |
| Senior Subordinated Notes         |       | 12,969                             |       | 12,969                               |       | 25,795 |   | 25,795 |   |
| Amortization of debt issue costs  |       | 3,956                              |       | 4,679                                |       | 8,629 |   | 9,340 |   |
| Other, net                        |       | 1,661                              |       | 1,618                                |       | 3,098 |   | 3,152 |   |
| Capitalized interest              |       | (87                                | )          | —                               |       | (129 | ) | (193 | ) |
| Interest expense, net             |       | $                                  | 55,248     |                                 | $          | 59,004 |   | $ | 113,678 |   | $ | 118,369 |   |

 

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**4.****             ****Derivative Financial Instruments**

 

***Interest Rate Swaps.***  In connection with the Acquisition, we obtained $2,575.0 million of floating rate debt agreements, of which $2,125.0 million was outstanding at the Acquisition date and $1,505.7 million was outstanding at January 29, 2011.  Effective December 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness.  These swap agreements hedged a portion of our contractual floating rate interest commitments through the expiration of the agreements in December 2010.

 

As of the effective date, NMG designated the interest rate swaps as cash flow hedges.  As cash flow hedges, unrealized gains on our outstanding interest rate swaps are recognized as assets while unrealized losses are recognized as liabilities.  Our interest rate swap agreements were highly, but not perfectly, correlated to the changes in interest rates to which we were exposed.  As a result, unrealized gains and losses on our interest rate swap agreements were designated as effective or ineffective.  The effective portion of such gains or losses were recorded as a component of accumulated other comprehensive loss while the ineffective portion of such gains or losses were recorded as a component of interest expense.

 

In addition, we realized a gain or loss on our interest rate swap agreements in connection with each required interest payment on our floating rate indebtedness.  These realized gains or losses were reclassified from accumulated other comprehensive loss to interest expense.  The realized gains and losses effectively adjusted the contractual interest requirements pursuant to the terms of our floating rate indebtedness to the interest requirements at the fixed rates established in the interest rate swaps agreements.  The cash flows from our interest rate swaps were recorded in operating activities in the condensed consolidated statements of cash flows.

 

***Interest Rate Caps.***  Effective January 2010, NMG entered into interest rate cap agreements for an aggregate notional amount of $500.0 million in order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness once the interest rate swap expired in December 2010.  The interest rate cap agreements commenced in December 2010 and will expire in December 2012.  Pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through December 2012 with respect to the $500.0 million notional amount of such agreements.  In the event LIBOR is less than 2.50%, NMG will pay interest at the lower LIBOR rate.  In the event LIBOR is higher than 2.50%, NMG will pay interest at the capped rate of 2.50%.

 

At each balance sheet date, the interest rate caps are recorded at estimated fair value.  Changes in the fair value of the cap are expected to be highly effective in offsetting the unpredictability in expected future cash flows on floating rate indebtedness attributable to fluctuations in LIBOR interest rates above 2.50%.  Unrealized gains and losses on the outstanding balances of the interest rate caps are recorded as a component of accumulated other comprehensive loss.  Gains and losses realized at the time of our quarterly interest payments due to the expiration of applicable portions of the interest rate caps are reclassified to interest expense.

 

***Fair Value.***  The fair values of the interest rate swaps and interest rate caps are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves (Level 2).  A summary of the recorded assets (liabilities) with respect to our derivative financial instruments included in our condensed consolidated balance sheets is as follows:

 
| **(in thousands)**                                       | ** ** | **January 29,    2011** | ** **   | **July 31,    2010** | ** ** | **January 30,   2010** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|--------------|--------------------------------|------------|-----------------------------|------------|
|                                                          |       |                              |         |                           |       |                        |       |
| Interest rate caps (included in other long-term   assets)     |       | $                                 |  606    |                           | $          |  1,040                 |       | $ |  6,114 |   |
|                                                          |       |                              |         |                           |       |                        |       |
| Interest rate swaps (included in other current   liabilities) |       | $                                 |  — |                           | $          | (22,661                     | )          | $ |      (45,479 | ) |
|                                                          |       |                              |         |                           |       |                        |       |
| Accumulated other comprehensive loss, net of taxes            |       | $                                 |  3,747  |                           | $          | 17,281                      |       | $ | 28,290 |   |

 

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A summary of the recorded amounts related to our interest rate swaps reflected in our condensed consolidated statements of operations are as follows:

 
| ** **                                                            | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                               | ** ** | **January 29,    2011**  | ** ** | **January 30,    2010**    | ** ** | **January 29,    2011** | ** ** | **January 30,   2010** | ** ** |
|                                                                  |       |                               |       |                                 |       |   |   |   |   |
| Realized hedging losses — included in interest   expense, net    |       | $                                  | 11,675     |                                 | $          | 11,422 |   | $ | 23,249 |   | $ | 22,520 |   |
|                                                                  |       |                               |       |                                 |       |   |   |   |   |
| Ineffective hedging losses — included in interest   expense, net |       | $                                  | 140        |                                 | $          | 213 |   | $ | 104 |   | $ | 429 |   |

 

The amount of losses recorded in other comprehensive loss at January 29, 2011 that is expected to be reclassified into interest expense in the next twelve months, if interest rates remain unchanged, is approximately $2.2 million.

 

**5.****             ****Employee Benefit Plans**

 

***Description of Benefit Plans.***  We maintain defined contribution plans consisting of a retirement savings plan (RSP), a defined contribution supplemental executive retirement plan (Defined Contribution SERP Plan) and a 401(k) Plan.  Effective January 1, 2011, we transferred the remaining participants’ balances in our 401(k) Plan to our RSP as a result of our ongoing efforts to restructure our long-term benefits programs.  As of January 1, 2011, employees make contributions to the RSP and we match an employee’s contribution up to a maximum of 6% of the employee’s compensation subject to statutory limitations for a potential maximum match of 75% of employee contributions.

 

In addition, we sponsor a defined benefit pension plan (Pension Plan) and an unfunded supplemental executive retirement plan (SERP Plan) which provides certain employees additional pension benefits.  Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.  As of the third quarter of fiscal year 2010, benefits offered to all participants in our Pension Plan and SERP Plan have been frozen.  Retirees and active employees hired prior to March 1, 1989 are eligible for certain limited postretirement health care benefits (Postretirement Plan) if they meet certain service and minimum age requirements.  We also sponsor an unfunded key employee deferred compensation plan, which provides certain employees with additional benefits.

 

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

 
| **(in thousands)**                  | ** ** | **January 29,    2011** | ** ** | **July 31,    2010** | ** ** | **January 30,   2010** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | ** **                        | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Pension Plan                             |       | $                                 | 153,109    |                           | $          | 161,760                     |       | $ | 159,156 |   |
| SERP Plan                                |       | 97,485                            |       | 96,406                         |       | 94,040                      |       |
| Postretirement Plan                      |       | 17,058                            |       | 17,914                         |       | 17,855                      |       |
|                                     |       | 267,652                           |       | 276,080                        |       | 271,051                     |       |
| Less: current portion                    |       | (5,568                            | )          | (5,574                         | )          | (5,069                      | )          |
| Long-term portion of benefit obligations |       | $                                 | 262,084    |                           | $          | 270,506                     |       | $ | 265,982 |   |

 

As of January 29, 2011, we have $83.6 million (net of taxes of $54.3 million) of adjustments to our benefit obligations recorded as increases to accumulated other comprehensive loss.

 

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*** ***

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

 
| ** **                             | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                | ** ** | **January 29,    2011**  | ** ** | **January 30,    2010**    | ** ** | **January 29,    2011** | ** ** | **January 30,   2010** | ** ** |
| Pension Plan:                          |       |                               |       |                                 |       |   |   |   |   |
| Service cost                           |       | $                                  | —     |                                 | $          | 1,429 |   | $ | — |   | $ | 2,857 |   |
| Interest cost                          |       | 6,054                              |       | 6,329                                |       | 12,108 |   | 12,659 |   |
| Expected return on plan assets         |       | (6,553                             | )          | (6,463                               | )          | (13,106 | ) | (12,925 | ) |
| Net amortization of losses             |       | 544                                |       | 282                                  |       | 1,088 |   | 564 |   |
| Pension Plan expense                   |       | $                                  | 45         |                                 | $          | 1,577 |   | $ | 90 |   | $ | 3,155 |   |
|                                   |       |                               |       |                                 |       |   |   |   |   |
| SERP Plan:                             |       |                               |       |                                 |       |   |   |   |   |
| Service cost                           |       | $                                  | —     |                                 | $          | 171 |   | $ | — |   | $ | 342 |   |
| Interest cost                          |       | 1,230                              |       | 1,377                                |       | 2,460 |   | 2,755 |   |
| SERP Plan expense                      |       | $                                  | 1,230      |                                 | $          | 1,548 |   | $ | 2,460 |   | $ | 3,097 |   |
|                                   |       |                               |       |                                 |       |   |   |   |   |
| Postretirement Plan:                   |       |                               |       |                                 |       |   |   |   |   |
| Service cost                           |       | $                                  | 15         |                                 | $          | 18 |   | $ | 30 |   | $ | 36 |   |
| Interest cost                          |       | 218                                |       | 254                                  |       | 436 |   | 508 |   |
| Net amortization of prior service cost |       | (389                               | )          | (172                                 | )          | (778 | ) | (343 | ) |
| Net amortization of losses             |       | 172                                |       | 90                                   |       | 345 |   | 179 |   |
| Postretirement Plan expense            |       | $                                  | 16         |                                 | $          | 190 |   | $ | 33 |   | $ | 380 |   |

 

***Funding Policy and Plan Assets.***  Our policy is to fund the Pension Plan at or above the minimum required by law.  In fiscal year 2010, we were not required to make contributions to the Pension Plan; however, we made a voluntary contribution to our Pension Plan of $30.0 million in fiscal year 2010.  We do not believe we will be required to make contributions to the Pension Plan for fiscal year 2011.  However, we will continue to evaluate voluntary contributions to our Pension Plan based upon the unfunded position of the Pension Plan, our available liquidity and other factors.

 

**6.****             ****Income Taxes**

 

Our effective income tax rate for the second quarter of fiscal year 2011 was 38.0% compared to 51.2% for the second quarter of fiscal year 2010.  Our effective income tax rate for year-to-date fiscal 2011 was 37.9% compared to 47.1% for year-to-date fiscal 2010.  Our effective income tax rates for both the second quarter and year-to-date period of fiscal year 2010 were unfavorably impacted by the relative significance of non-taxable income and non-deductible expenses to our estimated taxable loss for fiscal year 2010.

 

At January 29, 2011, the gross amount of unrecognized tax benefits was $6.0 million, all of which would impact our effective tax rate, if recognized.  We classify interest and penalties as a component of income tax expense and our liability for accrued interest and penalties was $6.4 million as of January 29, 2011.

 

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions.  During the fourth quarter of fiscal year 2010, the IRS closed their examination of our fiscal year 2007 federal income tax return with no changes or assessments.  The IRS began an examination of our fiscal year 2008 federal income tax return in the second quarter of fiscal year 2011.  With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2006.

 

We believe our recorded tax liabilities as of January 29, 2011 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances.  We believe it is reasonably possible that additional adjustments in the amounts of our unrecognized tax benefits could occur within the next twelve months as a result of settlements with tax authorities or expiration of statutes of limitation.  At this time, we do not believe such adjustments will have a material impact on our condensed consolidated financial statements.

 

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**7.****             ****Stock-Based Compensation**

 

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

 

The exercise prices of certain of our options escalate at a 10% compound rate 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) the occurrence of a change in control.  However, in the event the Sponsors cause the sale of shares of the Company to an unaffiliated entity, the exercise price will cease to accrete at the time of the sale with respect to a pro rata portion of the Accreting Options.  The exercise price with respect to all other options (Fixed Price Options) is fixed at the grant date.

 

***Stock Option Modification.***  In the second quarter of fiscal year 2010, the Compensation Committee approved 1) a tender offer for outstanding Accreting Options to purchase 26,614 shares (Eligible Options), 2) the extension of the option 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 purchase 1,378 shares.  In the third quarter of fiscal year 2010, the Compensation Committee approved 1) the modification of Accreting Options to purchase 8,502 shares and 2) the extension of the option term with respect to Fixed Price Options for 7,269 shares to October 6, 2015.  The stock option modifications effected in both the second and third quarters of fiscal year 2010 are collectively referred to as the Modification Transactions.  The Modification Transactions were taken in response to declines in capital markets and general economic conditions that resulted in the exercise prices for the prior options being in excess of the estimated fair value of our common stock.

 

In connection with the Modification Transactions, we incurred additional compensation charges aggregating $1.7 million in the second quarter of fiscal year 2010 and $3.4 million in the third quarter of fiscal year 2010 to recognize the excess of the post-modification fair value of vested options over the pre-modification fair value of such options.

 

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

 

During the year-to-date fiscal 2011 period, we granted 10,000 Fixed Price Options with a weighted average grant date fair value of $807 per option and we granted 650 Accreting Options with a weighted average grant date fair value of $720 per option.  During the year-to-date fiscal 2010 period, we granted 3,395 Accreting Options with a weighted average grant date fair value of $462 per option and we granted 3,395 Fixed Price Options with a weighted average grant date fair value of $541 per option.

 

We recognize compensation expense for stock options on a straight-line basis over the vesting period.  We recognized non-cash stock compensation expense of $2.0 million in year-to-date fiscal 2011 and $2.4 million in year-to-date fiscal 2010, which is included in selling, general and administrative expenses.

 

**8.****             ****Transactions with Sponsors**

 

Pursuant to a management services agreement with affiliates of the Sponsors, and in exchange for ongoing consulting and management advisory services that are provided to us by the Sponsors and their affiliates, affiliates of the Sponsors receive an aggregate annual management fee equal to the lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10 million.  Affiliates of the Sponsors also receive reimbursement for out-of-pocket expenses incurred by them or their affiliates in connection with services provided pursuant to the agreement.  These management fees are payable quarterly in arrears.  We recorded management fees of $5.2 million during year-to-date fiscal 2011 and $4.9 million during year-to-date fiscal 2010, which are included in selling, general and administrative expenses in the condensed consolidated statements of operations.

 

The management services agreement also provides that affiliates of the Sponsors may receive future fees in connection with certain future financing and acquisition or disposition transactions.  The management services agreement includes customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates.

 

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**9.****             ****Income from Credit Card Program, Net**

 

We have a marketing and servicing alliance with HSBC Bank Nevada, N.A. and HSBC Private Label Corporation (collectively referred to as HSBC).  Pursuant to the agreement with HSBC, HSBC offers proprietary credit card accounts to our customers under both the “Neiman Marcus” and “Bergdorf Goodman” brand names.  Our original program agreement with HSBC expired in July 2010.  We have entered into an agreement with HSBC to amend and extend the program to July 2015 (renewable thereafter for three-year terms).  We refer to the agreement with HSBC, including the extension, as the Program Agreement.

 

Under the terms of the Program Agreement, HSBC offers credit cards and non-card payment plans and bears substantially all credit risk with respect to sales transacted on the cards bearing our brands.  We receive payments from HSBC based on sales transacted on our proprietary credit cards.  Such payments are subject to annual adjustments, both increases and decreases, based upon the overall annual profitability and performance of the proprietary credit card portfolio.  In addition, we receive payments from HSBC for marketing and servicing activities as we continue to handle key customer service functions, primarily customer inquiries and collections, for HSBC.

 

**10.****      ****Commitments and Contingencies**

 

***Long-term Incentive Plan.***  We have a long-term incentive plan (Long-term Incentive Plan) that provides for a cash incentive payable to certain employees upon a change of control, as defined, subject to the attainment of certain performance objectives.  Performance objectives and targets are based on cumulative EBITDA (as defined in the plan) percentages for rolling three year periods beginning in fiscal year 2006.  Earned awards for each completed performance period will be credited to a book account and will earn interest at a contractually defined annual rate until the award is paid.  Awards will be paid upon a change of control, as defined, or an initial public offering, as defined, subject to the requirement that, in each case, the internal rate of return to the Sponsors is positive.  As of January 29, 2011, the vested participant balance in the Long-Term Incentive Plan aggregated $6.4 million.

 

***Cash Incentive Plan. ***We also have a cash incentive plan (Cash Incentive Plan) to aid in the retention of certain key executives.  The Cash Incentive Plan provides for the creation of a $14 million cash bonus pool.  Each participant in the Cash Incentive Plan will be entitled to a cash bonus upon the earlier to occur of a change of control, as defined, or an initial public offering, as defined, subject to the requirement that, in each case, the internal rate of return to the Sponsors is positive.

 

***Litigation*****.**  On April 30, 2010, a Class Action Complaint for Injunction and Equitable Relief was filed in the United States District Court for the Central District of California by Sheila Monjazeb, individually and on behalf of other members of the general public similarly situated, against the Company, Newton Holding, LLC, TPG Capital, L.P. and Warburg Pincus, LLC.  On July 12, 2010, all defendants except for the Company were dismissed without prejudice, and on August 20, 2010, this case was refiled in the Superior Court of California for San Francisco County.  This complaint, along with a similar class action lawsuit originally filed by Bernadette Tanguilig in 2007, alleges that the Company has engaged in various violations of the California Labor Code and Business and Professions Code, including without limitation (1) asking employees to work “off the clock,” (2) failing to provide meal and rest breaks to its employees, (3) improperly calculating deductions on paychecks delivered to its employees, and (4) failing to provide a chair or allow employees to sit during shifts.  The plaintiffs in these matters seek certification of their cases as class actions, reimbursement for past wages and temporary, preliminary and permanent injunctive relief preventing defendant from allegedly continuing to violate the laws cited in their complaints.  We intend to vigorously defend our interests in these matters.  Currently, we cannot reasonably estimate the amount of loss, if any, arising from these matters.  However, we do not currently believe the resolution of these matters will have a material adverse impact on our financial position.  We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

 

We are currently involved in various other legal actions and proceedings that arose in the ordinary course of business.  We believe that any liability arising as a result of these actions and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

 

***Other.***  We had approximately $17.0 million of outstanding irrevocable letters of credit relating to purchase commitments and insurance and other liabilities at January 29, 2011.  We had approximately $3.2 million in surety bonds at January 29, 2011 relating primarily to merchandise imports and state sales tax and utility requirements.

 

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**11.****      ****Accumulated Other Comprehensive Loss**

 

The following table shows the components of accumulated other comprehensive loss, net of taxes:

 
| **(in thousands)**                    | ** ** | **January 29,    2011** | ** ** | **July 31,   2010** | ** ** | **January 30,    2010** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|--------------------------|------------|-----------------------------------|------------|
|                                       |       |                              |       |                     |       |                              |       |
| Unrealized loss on financial instruments   |       | $                                 | (3,747     | )                        | $          | (17,281                           | )          | $ | (28,290 | ) |
| Change in unfunded benefit obligations     |       | (83,566                           | )          | (88,993                  | )          | (69,011                           | )          |
| Total accumulated other comprehensive loss |       | $                                 | (87,313    | )                        | $          | (106,274                          | )          | $ | (97,301 | ) |

 

The components of other comprehensive income are:

 
| ** **                                                          | ** ** | **Twenty-Six weeks ended** | ** ** |                              |       |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                                             | ** ** | **January 29,    2011**    | ** ** | **January 30,    2010** | ** ** |   |   |
| Net earnings from condensed consolidated   statements of operations |       | $                                    | 46,768     |                              | $          | 12,485 |   |   |   |
| Change in unrealized loss on financial instruments                  |       | 13,534                               |       | 7,218                             |       |   |   |
| Change in unfunded benefit obligations                              |       | 5,427                                |       | —                            |       |   |   |
| Other                                                               |       | —                               |       | 68                                |       |   |   |
| Total comprehensive income for the period                           |       | $                                    | 65,729     |                              | $          | 19,771 |   |   |   |

 

**12.****      ****Segment Reporting**

 

We have identified two reportable segments: Specialty Retail Stores and Direct Marketing.  The Specialty Retail Stores segment aggregates the activities of our Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus Last Call stores.  The Direct Marketing segment conducts both online and print catalog operations under the Neiman Marcus, Bergdorf Goodman, Last Call and Horchow brand names.  Both the Specialty Retail Stores and Direct Marketing segments derive their revenues from the sales of high-end fashion apparel, accessories, cosmetics and fragrances from leading designers, precious and fashion jewelry and decorative home accessories.

 

Operating earnings for the segments include 1) revenues, 2) cost of sales, 3) direct selling, general, and administrative expenses, 4) other direct operating expenses, 5) income from credit card program and 6) depreciation expense for the respective segment.  Items not allocated to our operating segments include those items not considered by management in measuring the assets and profitability of our segments.  These amounts include 1) corporate expenses including, but not limited to, treasury, investor relations, legal and finance support services, and general corporate management, 2) charges related to the application of purchase accounting adjustments made in connection with the Acquisition including amortization of intangible assets and favorable lease commitments and other non-cash items and 3) interest expense.  These items, while often related to the operations of a segment, are not considered by segment operating management, corporate operating management and the chief operating decision maker in assessing segment operating performance.  The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (except with respect to purchase accounting adjustments not allocated to the operating segments).

 

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The following tables set forth the information for our reportable segments:

 
| ** **                                                          | ** ** | **Thirteen weeks ended**          | ** ** | **Twenty-Six weeks ended**        | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **(in thousands)**                                             | ** ** | **January 29,    2011** | ** ** | **January 30,    2010** | ** ** | **January 29,    2011** | ** ** | **January 30,    2010** | ** ** |
| ** **                                                          | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                            |       |                              |       |                              |       |   |   |   |   |
| Specialty Retail Stores                                             |       | $                                 | 936,454    |                              | $          | 881,138 |   | $ | 1,697,633 |   | $ | 1,602,757 |   |
| Direct Marketing                                                    |       | 235,105                           |       | 221,223                           |       | 401,174 |   | 368,504 |   |
| Total                                                               |       | $                                 | 1,171,559  |                              | $          | 1,102,361 |   | $ | 2,098,807 |   | $ | 1,971,261 |   |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| OPERATING EARNINGS                                                  |       |                              |       |                              |       |   |   |   |   |
| Specialty Retail Stores                                             |       | $                                 | 85,133     |                              | $          | 66,485 |   | $ | 193,114 |   | $ | 154,907 |   |
| Direct Marketing                                                    |       | 36,168                            |       | 40,725                            |       | 61,167 |   | 62,434 |   |
| Corporate expenses                                                  |       | (17,060                           | )          | (15,372                           | )          | (31,109 | ) | (29,010 | ) |
| Other expenses (1)                                                  |       | —                            |       | (6,393                            | )          | (1,757 | ) | (9,722 | ) |
| Amortization of intangible assets and favorable   lease commitments |       | (15,076                           | )          | (18,314                           | )          | (32,395 | ) | (36,630 | ) |
| Total                                                               |       | $                                 | 89,165     |                              | $          | 67,131 |   | $ | 189,020 |   | $ | 141,979 |   |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| CAPITAL EXPENDITURES                                                |       |                              |       |                              |       |   |   |   |   |
| Specialty Retail Stores                                             |       | $                                 | 19,446     |                              | $          | 8,575 |   | $ | 33,593 |   | $ | 22,756 |   |
| Direct Marketing                                                    |       | 3,378                             |       | 2,546                             |       | 7,642 |   | 5,626 |   |
| Total                                                               |       | $                                 | 22,824     |                              | $          | 11,121 |   | $ | 41,235 |   | $ | 28,382 |   |
|                                                                |       |                              |       |                              |       |   |   |   |   |
| DEPRECIATION EXPENSE                                                |       |                              |       |                              |       |   |   |   |   |
| Specialty Retail Stores                                             |       | $                                 | 26,428     |                              | $          | 28,921 |   | $ | 54,115 |   | $ | 59,116 |   |
| Direct Marketing                                                    |       | 3,949                             |       | 3,732                             |       | 8,210 |   | 7,598 |   |
| Other                                                               |       | 1,768                             |       | 1,769                             |       | 3,542 |   | 3,491 |   |
| Total                                                               |       | $                                 | 32,145     |                              | $          | 34,422 |   | $ | 65,867 |   | $ | 70,205 |   |
| ** **                                                          | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **January 29,    2011** | ** ** | **January 30,    2010** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                              |       |                              |       |                              |       |   |   |   |   |
| Tangible assets of Specialty Retail Stores                          |       | $                                 | 1,605,132  |                              | $          | 1,634,726 |   |   |   |   |   |
| Tangible assets of Direct Marketing                                 |       | 162,748                           |       | 143,966                           |       |   |   |   |   |
| Corporate assets:                                                   |       |                              |       |                              |       |   |   |   |   |
| Intangible assets related to Specialty Retail   Stores              |       | 2,721,803                         |       | 2,775,749                         |       |   |   |   |   |
| Intangible assets related to Direct Marketing                       |       | 451,490                           |       | 466,568                           |       |   |   |   |   |
| Other                                                               |       | 590,032                           |       | 578,842                           |       |   |   |   |   |
| Total                                                               |       | $                                 | 5,531,205  |                              | $          | 5,599,851 |   |   |   |   |   |
|                                                                     |            |                                   |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

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(1)          Other expenses consists primarily of costs (primarily professional fees and severance) incurred in connection with corporate initiatives and cost reductions.

 

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**13.  Condensed Consolidating Financial Information**

 

***2028 Debentures.***  All of NMG’s obligations under the 2028 Debentures are guaranteed by the Company.  The guarantee by the Company is full and unconditional and joint and several.  Currently, the Company’s non-guarantor subsidiaries consist principally of Bergdorf Goodman, Inc. through which NMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust which holds legal title to certain real property and intangible assets used by NMG in conducting its operations.  Previously, our non-guarantor subsidiaries also included an operating subsidiary domiciled in Canada providing support services to our Direct Marketing operation through January 2009.

 

The following condensed consolidating financial information represents the financial information of Neiman Marcus, Inc. and its non-guarantor subsidiaries, prepared on the equity basis of accounting.  The information is presented in accordance with the requirements of Rule 3-10 under the Securities and Exchange Commission’s Regulation S-X.  The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities.

 
| ** **                                      | ** ** | **January 29, 2011** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 529,996 |   | $ | 720 |   | $ | — |   | $ | 530,716 |   |
| Merchandise inventories                         |       | —                         |       | 683,348 |   | 88,912 |   | — |   | 772,260 |   |
| Other current assets                            |       | —                         |       | 98,430 |   | 10,109 |   | — |   | 108,539 |   |
| Total current assets                            |       | —                         |       | 1,311,774 |   | 99,741 |   | — |   | 1,411,515 |   |
| Property and equipment, net                     |       | —                         |       | 777,364 |   | 105,622 |   | — |   | 882,986 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,449,529 |   | 1,723,764 |   | — |   | 3,173,293 |   |
| Other assets                                    |       | —                         |       | 61,682 |   | 1,729 |   | — |   | 63,411 |   |
| Investments in subsidiaries                     |       | 991,457                        |       | 1,820,904 |   | — |   | (2,812,361 | ) | — |   |
| Total assets                                    |       | $                              | 991,457    |   | $ | 5,421,253 |   | $ | 1,930,856 |   | $ | (2,812,361 | ) | $ | 5,531,205 |   |
| **LIABILITIES AND SHAREHOLDERS’   EQUITY** |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 187,812 |   | $ | 28,320 |   | $ | — |   | $ | 216,132 |   |
| Accrued liabilities                             |       | —                         |       | 309,662 |   | 79,850 |   | — |   | 389,512 |   |
| Other current liabilities                       |       | —                         |       | — |   | — |   | — |   | — |   |
| Total current liabilities                       |       | —                         |       | 497,474 |   | 108,170 |   | — |   | 605,644 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,879,769 |   | — |   | — |   | 2,879,769 |   |
| Deferred income taxes                           |       | —                         |       | 656,356 |   | — |   | — |   | 656,356 |   |
| Other long-term liabilities                     |       | —                         |       | 396,197 |   | 1,782 |   | — |   | 397,979 |   |
| Total long-term liabilities                     |       | —                         |       | 3,932,322 |   | 1,782 |   | — |   | 3,934,104 |   |
| Total shareholders’ equity                 |       | 991,457                        |       | 991,457 |   | 1,820,904 |   | (2,812,361 | ) | 991,457 |   |
| Total liabilities and shareholders’ equity |       | $                              | 991,457    |   | $ | 5,421,253 |   | $ | 1,930,856 |   | $ | (2,812,361 | ) | $ | 5,531,205 |   |

 

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** **
| ** **                                      | ** ** | **July 31, 2010** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                 | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                        |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                           | —     |   | $ | 420,163 |   | $ | 844 |   | $ | — |   | $ | 421,007 |   |
| Merchandise inventories                         |       | —                      |       | 703,448 |   | 87,068 |   | — |   | 790,516 |   |
| Other current assets                            |       | —                      |       | 136,690 |   | 11,909 |   | — |   | 148,599 |   |
| Total current assets                            |       | —                      |       | 1,260,301 |   | 99,821 |   | — |   | 1,360,122 |   |
| Property and equipment, net                     |       | —                      |       | 795,916 |   | 109,910 |   | — |   | 905,826 |   |
| Goodwill and intangible assets, net             |       | —                      |       | 1,475,475 |   | 1,730,213 |   | — |   | 3,205,688 |   |
| Other assets                                    |       | —                      |       | 58,875 |   | 1,771 |   | — |   | 60,646 |   |
| Investments in subsidiaries                     |       | 925,373                     |       | 1,846,159 |   | — |   | (2,771,532 | ) | — |   |
| Total assets                                    |       | $                           | 925,373    |   | $ | 5,436,726 |   | $ | 1,941,715 |   | $ | (2,771,532 | ) | $ | 5,532,282 |   |
| **LIABILITIES AND SHAREHOLDERS’   EQUITY** |       |                        |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                        |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                           | —     |   | $ | 239,362 |   | $ | 31,416 |   | $ | — |   | $ | 270,778 |   |
| Accrued liabilities                             |       | —                      |       | 298,840 |   | 62,616 |   | — |   | 361,456 |   |
| Other current liabilities                       |       | —                      |       | 30,309 |   | — |   | — |   | 30,309 |   |
| Total current liabilities                       |       | —                      |       | 568,511 |   | 94,032 |   | — |   | 662,543 |   |
| Long-term liabilities:                          |       |                        |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                      |       | 2,879,672 |   | — |   | — |   | 2,879,672 |   |
| Deferred income taxes                           |       | —                      |       | 668,647 |   | — |   | — |   | 668,647 |   |
| Other long-term liabilities                     |       | —                      |       | 394,523 |   | 1,524 |   | — |   | 396,047 |   |
| Total long-term liabilities                     |       | —                      |       | 3,942,842 |   | 1,524 |   | — |   | 3,944,366 |   |
| Total shareholders’ equity                 |       | 925,373                     |       | 925,373 |   | 1,846,159 |   | (2,771,532 | ) | 925,373 |   |
| Total liabilities and shareholders’ equity |       | $                           | 925,373    |   | $ | 5,436,726 |   | $ | 1,941,715 |   | $ | (2,771,532 | ) | $ | 5,532,282 |   |

** **
| ** **                                      | ** ** | **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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| ** **                                                                         | ** ** | **Thirteen weeks ended January 29, 2011** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-********Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                           |       | $                                                                  | —     |   | $ | 978,319 |   | $ | 193,240 |   | $ | — |   | $ | 1,171,559 |   |
| Cost of goods sold including buying and occupancy   costs (excluding depreciation) |       | —                                                             |       | 659,780 |   | 133,881 |   | — |   | 793,661 |   |
| Selling, general and administrative expenses   (excluding depreciation)            |       | —                                                             |       | 223,543 |   | 30,164 |   | — |   | 253,707 |   |
| Income from credit card program, net                                               |       | —                                                             |       | (11,206 | ) | (989 | ) | — |   | (12,195 | ) |
| Depreciation expense                                                               |       | —                                                             |       | 28,674 |   | 3,471 |   | — |   | 32,145 |   |
| Amortization of intangible assets and favorable   lease commitments                |       | —                                                             |       | 11,851 |   | 3,225 |   | — |   | 15,076 |   |
| Operating earnings                                                                 |       | —                                                             |       | 65,677 |   | 23,488 |   | — |   | 89,165 |   |
| Interest expense, net                                                              |       | —                                                             |       | 55,247 |   | 1 |   | — |   | 55,248 |   |
| Intercompany royalty charges (income)                                              |       | —                                                             |       | 55,863 |   | (55,863 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                          |       | (21,027                                                            | )          | (79,350 | ) | — |   | 100,377 |   | — |   |
| Earnings (loss) before income taxes                                                |       | 21,027                                                             |       | 33,917 |   | 79,350 |   | (100,377 | ) | 33,917 |   |
| Income tax expense                                                                 |       | —                                                             |       | 12,890 |   | — |   | — |   | 12,890 |   |
| Net earnings (loss)                                                                |       | $                                                                  | 21,027     |   | $ | 21,027 |   | $ | 79,350 |   | $ | (100,377 | ) | $ | 21,027 |   |

 
| ** **                                                                         | ** ** | **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 |   |

 

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| ** **                                                                         | ** ** | **Twenty-Six weeks ended January 29, 2011** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-********Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                           |       | $                                                                    | —     |   | $ | 1,738,596 |   | $ | 360,211 |   | $ | — |   | $ | 2,098,807 |   |
| Cost of goods sold including buying and occupancy   costs (excluding depreciation) |       | —                                                               |       | 1,127,921 |   | 228,398 |   | — |   | 1,356,319 |   |
| Selling, general and administrative expenses   (excluding depreciation)            |       | —                                                               |       | 417,662 |   | 59,032 |   | — |   | 476,694 |   |
| Income from credit card program, net                                               |       | —                                                               |       | (19,808 | ) | (1,680 | ) | — |   | (21,488 | ) |
| Depreciation expense                                                               |       | —                                                               |       | 58,837 |   | 7,030 |   | — |   | 65,867 |   |
| Amortization of intangible assets and favorable   lease commitments                |       | —                                                               |       | 25,946 |   | 6,449 |   | — |   | 32,395 |   |
| Operating earnings                                                                 |       | —                                                               |       | 128,038 |   | 60,982 |   | — |   | 189,020 |   |
| Interest expense, net                                                              |       | —                                                               |       | 113,676 |   | 2 |   | — |   | 113,678 |   |
| Intercompany royalty charges (income)                                              |       | —                                                               |       | 102,159 |   | (102,159 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                          |       | (46,768                                                              | )          | (163,139 | ) | — |   | 209,907 |   | — |   |
| Earnings (loss) before income taxes                                                |       | 46,768                                                               |       | 75,342 |   | 163,139 |   | (209,907 | ) | 75,342 |   |
| Income tax expense                                                                 |       | —                                                               |       | 28,574 |   | — |   | — |   | 28,574 |   |
| Net earnings (loss)                                                                |       | $                                                                    | 46,768     |   | $ | 46,768 |   | $ | 163,139 |   | $ | (209,907 | ) | $ | 46,768 |   |

 
| ** **                                                                         | ** ** | **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 |   |

 

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| ** **                                                                                    | ** ** | **Twenty-Six weeks ended January 29, 2011** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-********Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                    | 46,768     |   | $ | 46,768 |   | $ | 163,139 |   | $ | (209,907 | ) | $ | 46,768 |   |
| Adjustments to reconcile net earnings (loss) to   net cash provided by operating activities:  |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                         |       | —                                                               |       | 93,412 |   | 13,479 |   | — |   | 106,891 |   |
| Deferred income taxes                                                                         |       | —                                                               |       | (15,695 | ) | — |   | — |   | (15,695 | ) |
| Other, primarily costs related to defined benefit   pension and other long-term benefit plans |       | —                                                               |       | 317 |   | 300 |   | — |   | 617 |   |
| Intercompany royalty income payable (receivable)                                              |       | —                                                               |       | 102,159 |   | (102,159 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                                     |       | (46,768                                                              | )          | (163,139 | ) | — |   | 209,907 |   | — |   |
| Changes in operating assets and liabilities, net                                              |       | —                                                               |       | 98,001 |   | (72,083 | ) | — |   | 25,918 |   |
| Net cash provided by operating activities                                                     |       | —                                                               |       | 161,823 |   | 2,676 |   | — |   | 164,499 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | —                                                               |       | (38,435 | ) | (2,800 | ) | — |   | (41,235 | ) |
| Net cash used for investing activities                                                        |       | —                                                               |       | (38,435 | ) | (2,800 | ) | — |   | (41,235 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                       |       | —                                                               |       | (7,648 | ) | — |   | — |   | (7,648 | ) |
| Debt issuance costs paid                                                                      |       | —                                                               |       | (5,907 | ) | — |   | — |   | (5,907 | ) |
| Net cash used for financing activities                                                        |       | —                                                               |       | (13,555 | ) | — |   | — |   | (13,555 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                         |       | —                                                               |       | 109,833 |   | (124 | ) | — |   | 109,709 |   |
| Beginning balance                                                                             |       | —                                                               |       | 420,163 |   | 844 |   | — |   | 421,007 |   |
| Ending balance                                                                                |       | $                                                                    | —     |   | $ | 529,996 |   | $ | 720 |   | $ | — |   | $ | 530,716 |   |

 
| ** **                                                                                    | ** ** | **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 | ) | — |   | (28,382 | ) |
| **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 |   |

 

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

 

**EXECUTIVE OVERVIEW**

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 31, 2010.  Unless otherwise specified, the meanings of all defined terms in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are consistent with the meanings of such terms as defined in the Notes to Condensed Consolidated Financial Statements.  This discussion contains forward-looking statements.  Please see “Other Matters — Factors That May Affect Future Results” for a discussion of the risks, uncertainties and assumptions relating to our forward-looking statements.

 

**Overview**

 

Neiman Marcus, Inc. (the Company) is a wholly-owned subsidiary of and is controlled by Newton Holding, LLC (Holding).  Holding is controlled by investment funds affiliated with TPG Capital and Warburg Pincus (collectively, the Sponsors).  The Company was formed by Holding for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG), which acquisition was completed on October 6, 2005 (the Acquisition).

 

The Company, together with our operating segments and subsidiaries, is a high-end specialty retailer.  Our operations include the Specialty Retail Stores segment and the Direct Marketing segment.  The Specialty Retail Stores segment consists primarily of Neiman Marcus and Bergdorf Goodman stores.  The Direct Marketing segment conducts both online and print catalog operations under the brand names of Neiman Marcus, Last Call, Bergdorf Goodman and Horchow.

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter of fiscal year 2011 relate to the thirteen weeks ended January 29, 2011.  All references to the second quarter of fiscal year 2010 relate to the thirteen weeks ended January 30, 2010.  All references to year-to-date fiscal 2011 relate to the twenty-six weeks ended January 29, 2011.  All references to year-to-date fiscal 2010 relate to the twenty-six weeks ended January 30, 2010.

 

**Fiscal Year 2011 Summary**

 

A summary of our operating results is as follows:

 

·                  **Revenues**—Our revenues in the second quarter and year-to-date period of fiscal year 2011 were positively impacted by a higher level of customer demand.  As a result, our revenues for the second quarter of fiscal year 2011 were $1,171.6 million, an increase of 6.3% compared to the second quarter of fiscal year 2010.  Comparable revenues increased by 6.0% in the second quarter of fiscal year 2011.

 

Our revenues for year-to-date fiscal 2011 were $2,098.8 million, an increase of 6.5% compared to the prior year reflecting an increase in comparable revenues of 6.2%.

 

For Specialty Retail Stores, our sales per square foot for the last twelve trailing months were $482 as of January 29, 2011, $472 as of October 30, 2010 and $453 as of January 30, 2010.

 

·                  **Cost of goods sold including buying and occupancy costs (excluding depreciation**) **(COGS)**—COGS represented 67.7% of revenues in the second quarter of fiscal year 2011, an improvement of 1.4% of revenues compared to the second quarter of fiscal year 2010.  COGS represented 64.6% of revenues in year-to-date fiscal 2011, an improvement of 1.1% of revenues compared to year-to-date fiscal 2010.  This decrease in COGS was primarily due to 1) higher levels of full-price sales and lower promotions costs and 2) the leveraging of buying and occupancy costs on higher revenues.

 

·                  **Inventories**—During the second quarter of fiscal year 2011, we continued to closely manage inventory.  At January 29, 2011, on-hand inventories totaled $772.3 million, a 5.5% increase from the prior year fiscal period in response to growing customer demand and the planned increase in inventories in certain targeted merchandise categories.  Excluding inventories held by new stores, inventories increased by approximately 5.2%.

 

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·                  **Selling, general and administrative expenses (excluding depreciation) (SG&A)**—SG&A represented 21.7% of revenues in the second quarter of fiscal year 2011, a slight increase of 0.1% of revenues compared to the second quarter of fiscal year 2010.  SG&A represented 22.7% of revenues in year-to-date fiscal 2011, a net improvement of 0.5% of revenues compared to year-to-date fiscal 2010.  The lower level of SG&A expenses in year-to-date fiscal 2011, as a percentage of revenues, primarily reflects 1) lower payroll and related benefits costs and 2) a lower level of aggregate spending on professional fees and corporate initiatives, offset by 3) higher marketing and selling costs.

 

·                  **Operating earnings—**Total operating earnings in the second quarter of fiscal year 2011 were $89.2 million, or 7.6% of revenues.  Total operating earnings in the second quarter of fiscal year 2010 were $67.1 million or 6.1% of revenues.  Our operating earnings margin increased by 1.5% of revenues primarily due to:

 

·            a decrease in COGS by 1.4% of revenues primarily due to higher levels of full-price sales, lower promotions costs and the leveraging of buying and occupancy costs; and

 

·            a decrease in depreciation and amortization expense by 0.8% of revenues reflecting a lower level of capital expenditures in recent years and lower amortization of short-lived intangible assets; offset by

 

·            a decrease in income from our credit card operations by 0.5% of revenues primarily due to the amendment of terms in our amended and extended Program Agreement executed in July 2010.

 

Total operating earnings in year-to-date fiscal 2011 were $189.0 million, or 9.0% of revenues compared to $142.0 million, or 7.2% in year-to-date fiscal 2010.  Operating earnings margin increased by 1.8% of revenues in year-to-date fiscal 2011 primarily due to:

 

·            a decrease in COGS by 1.1% of revenues primarily due to higher levels of full-price sales, lower promotions costs and the leveraging of buying and occupancy costs;

 

·            a decrease in SG&A expenses by 0.5% of revenues primarily due to lower payroll and related benefits costs, a lower level of aggregate spending on professional fees and corporate initiatives, offset by higher spending on marketing and selling costs; and

 

·            a decrease in depreciation and amortization expense by 0.9% of revenues reflecting a lower level of capital expenditures in recent years and lower amortization of short-lived intangible assets; offset by

 

·            a decrease in income from our credit card operations by 0.5% of revenues primarily due to the amendment of terms in our amended and extended Program Agreement executed in July 2010.

 

·                  **Liquidity—**Net****cash provided by our operating activities was $164.5 million in year-to-date fiscal 2011 compared to $232.4 million in year-to-date fiscal 2010.  Cash provided by our operating activities in year-to-date fiscal 2010 was positively impacted by actions taken to align on-hand inventory levels to customer demand.  We held cash balances of $530.7 million at January 29, 2011 compared to $500.7 million at January 30, 2010.  At January 29, 2011, we had no borrowings outstanding under our Asset-Based Revolving Credit Facility, $17.0 million of outstanding letters of credit and $500.6 million of unused borrowing availability.

 

·                  **Outlook—** While economic conditions have continued to improve in recent quarters, we do not anticipate the return of consumer spending to levels achieved in fiscal years 2007 and 2008 in the near-term.  We plan to maintain an appropriate alignment of our inventory levels and purchases with anticipated customer demand.  We believe the cash generated from our operations along with our cash balances and available sources of financing will enable us to meet our cash obligations for the remainder of fiscal year 2011.

 

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**OPERATING RESULTS**

 

**Performance Summary**

 

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

 
| ** **                                                                         | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **January 29,   2011**        | ** ** | **January 30,   2010**          | ** ** | **January 29,   2011** | ** ** | **January 30,   2010** | ** ** |
| ** **                                                                         | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                           |       | 100.0                              | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
|                                                                               |       |                               |       |                                 |       |   |   |   |   |
| Cost of goods sold including buying and occupancy   costs (excluding depreciation) |       | 67.7                               |       | 69.1                                 |       | 64.6 |   | 65.7 |   |
| Selling, general and administrative expenses   (excluding depreciation)            |       | 21.7                               |       | 21.6                                 |       | 22.7 |   | 23.2 |   |
| Income from credit card program, net                                               |       | (1.0                               | )          | (1.5                                 | )          | (1.0 | ) | (1.5 | ) |
| Depreciation expense                                                               |       | 2.7                                |       | 3.1                                  |       | 3.1 |   | 3.6 |   |
| Amortization of intangible assets                                                  |       | 0.9                                |       | 1.3                                  |       | 1.1 |   | 1.4 |   |
| Amortization of favorable lease commitments                                        |       | 0.4                                |       | 0.4                                  |       | 0.4 |   | 0.5 |   |
| Operating earnings                                                                 |       | 7.6                                |       | 6.1                                  |       | 9.0 |   | 7.2 |   |
| Interest expense, net                                                              |       | 4.7                                |       | 5.4                                  |       | 5.4 |   | 6.0 |   |
| Earnings before income taxes                                                       |       | 2.9                                |       | 0.7                                  |       | 3.6 |   | 1.2 |   |
| Income tax expense                                                                 |       | 1.1                                |       | 0.4                                  |       | 1.4 |   | 0.6 |   |
| Net earnings                                                                       |       | 1.8                                | %          | 0.4                                  | %          | 2.2 | % | 0.6 | % |

 

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

 
| ** **                                                                    | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in millions, except sales per square foot)** | ** ** | **January 29,   2011**        | ** ** | **January 30,   2010**          | ** ** | **January 29,   2011** | ** ** | **January 30,   2010** | ** ** |
| REVENUES                                                                      |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail Stores                                                       |       | $                                  | 936.5      |                                 | $          | 881.2 |   | $ | 1,697.6 |   | $ | 1,602.8 |   |
| Direct Marketing                                                              |       | 235.1                              |       | 221.2                                |       | 401.2 |   | 368.5 |   |
| Total                                                                         |       | $                                  | 1,171.6    |                                 | $          | 1,102.4 |   | $ | 2,098.8 |   | $ | 1,971.3 |   |
|                                                                          |       |                               |       |                                 |       |   |   |   |   |
| OPERATING EARNINGS                                                            |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail Stores                                                       |       | $                                  | 85.1       |                                 | $          | 66.5 |   | $ | 193.1 |   | $ | 154.9 |   |
| Direct Marketing                                                              |       | 36.2                               |       | 40.7                                 |       | 61.2 |   | 62.4 |   |
| Corporate expenses                                                            |       | (17.0                              | )          | (15.4                                | )          | (31.1 | ) | (29.0 | ) |
| Other expenses (1)                                                            |       | —                             |       | (6.4                                 | )          | (1.8 | ) | (9.7 | ) |
| Amortization of intangible assets and favorable   lease commitments           |       | (15.1                              | )          | (18.3                                | )          | (32.4 | ) | (36.6 | ) |
| Total                                                                         |       | $                                  | 89.2       |                                 | $          | 67.1 |   | $ | 189.0 |   | $ | 142.0 |   |
|                                                                          |       |                               |       |                                 |       |   |   |   |   |
| OPERATING PROFIT MARGIN                                                       |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail Stores                                                       |       | 9.1                                | %          | 7.5                                  | %          | 11.4 | % | 9.7 | % |
| Direct Marketing                                                              |       | 15.4                               | %          | 18.4                                 | %          | 15.2 | % | 16.9 | % |
| Total                                                                         |       | 7.6                                | %          | 6.1                                  | %          | 9.0 | % | 7.2 | % |
|                                                                          |       |                               |       |                                 |       |   |   |   |   |
| CHANGE IN COMPARABLE REVENUES (2)                                        |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail Stores                                                       |       | 6.0                                | %          | (0.6                                 | )%         | 5.6 | % | (7.6 | )% |
| Direct Marketing                                                              |       | 6.3                                | %          | 5.9                                  | %          | 8.9 | % | 0.3 | % |
| Total                                                                         |       | 6.0                                | %          | 0.6                                  | %          | 6.2 | % | (6.2 | )% |
|                                                                          |       |                               |       |                                 |       |   |   |   |   |
| SALES PER SQUARE FOOT                                                         |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail Stores                                                       |       | $                                  | 146        |                                 | $          | 137 |   | $ | 264 |   | $ | 249 |   |
|                                                                          |       |                               |       |                                 |       |   |   |   |   |
| STORE COUNT                                                                   |       |                               |       |                                 |       |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman full-line   stores:                        |       |                               |       |                                 |       |   |   |   |   |
| Open at beginning of period                                                   |       | 43                                 |       | 43                                   |       | 43 |   | 42 |   |
| Opened during the period                                                      |       | —                             |       | —                               |       | — |   | 1 |   |
| Open at end of period                                                         |       | 43                                 |       | 43                                   |       | 43 |   | 43 |   |
| Neiman Marcus Last Call stores:                                               |       |                               |       |                                 |       |   |   |   |   |
| Open at beginning of period                                                   |       | 28                                 |       | 28                                   |       | 28 |   | 27 |   |
| Opened during the period                                                      |       | 2                                  |       | —                               |       | 2 |   | 1 |   |
| Open at end of period                                                         |       | 30                                 |       | 28                                   |       | 30 |   | 28 |   |
|                                                                          |       |                               |       |                                 |       |   |   |   |   |
| NON-GAAP FINANCIAL   MEASURE EBITDA (3)                                       |       | $                                  | 136.4      |                                 | $          | 119.9 |   | $ | 287.3 |   | $ | 248.8 |   |

 

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(1)          Other expenses consists primarily of costs (primarily professional fees and severance) incurred in connection with corporate initiatives and cost reductions.

 

(2)          Comparable revenues include 1) revenues derived from our retail stores open for more than fifty two weeks, including stores that have been relocated or expanded and 2) revenues from our Direct Marketing operation.

 

(3)          For an explanation of EBITDA as a measure of our operating performance, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measure - EBITDA.”

 

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**Factors Affecting Our Results**

 

***Revenues*****.**  We generate our revenues from the sale of high-end merchandise through our Specialty Retail Stores and Direct Marketing operation.  Components of our revenues include:

 

·                  Sales of merchandise—Revenues from our Specialty Retail Stores are recognized at the later of the point-of-sale or the delivery of goods to the customer.  Revenues from our Direct Marketing operation are recognized when the merchandise is delivered to the customer.  Revenues are reduced when customers return goods previously purchased.  We maintain reserves for anticipated sales returns primarily based on our historical trends related to returns by both our retail and direct marketing customers.  Revenues exclude sales taxes collected from our customers.

 

·                  Delivery and processing—We generate revenues from delivery and processing charges related to merchandise delivered to our customers from both our Specialty Retail Stores and Direct Marketing operation.

 

Our revenues can be affected by the following factors:

 

·                  general economic conditions;

 

·                  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 our Specialty Retail Stores and Direct Marketing operation;

 

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

 

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

 

In addition, our revenues are seasonal, as discussed below under “Seasonality.”

 

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

 

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

 

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

 

·                  Occupancy costs—Occupancy costs consist primarily of rent, property taxes and operating costs of our retail, distribution and support facilities.  A significant portion of our buying and occupancy costs are fixed in nature and are not dependent on the revenues we generate.

 

·                  Delivery and processing costs—Delivery and processing costs consist primarily of delivery charges we pay to third-party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.

 

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale.  Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise.  These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor.  Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise.  These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold.  We received vendor allowances of $46.2 million, or 2.2% of revenues, in year-to-date fiscal 2011 and 

 

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$40.8 million, or 2.1% of revenues, in year-to-date fiscal 2010.  The amounts of vendor allowances we receive fluctuate based on the level of markdowns taken and did not have a significant impact on the year-over-year change in gross margin during year-to-date fiscal 2011 and 2010.

 

Changes in our COGS as a percentage of revenues can be affected by the following factors:

 

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

 

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

 

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

 

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

 

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

 

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

 

Advertising costs consist primarily of 1) print media costs for promotional materials mailed to our customers incurred by our Specialty Retail segment, 2) advertising costs incurred by our Direct Marketing operation related to the production, printing and distribution of our print catalogs and the production of the photographic content for our websites and 3) online marketing costs incurred by our Direct Marketing operation.  We receive advertising allowances from certain of our merchandise vendors.  Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor’s merchandise in connection with our various advertising programs, primarily catalogs and other print media.  Advertising allowances fluctuate based on the level of advertising expenses incurred and are recorded as a reduction of our advertising costs when earned.  Advertising allowances aggregated approximately $28.0 million, or 1.3% of revenues, in year-to-date fiscal 2011 and $26.1 million, or 1.3% of revenues, in year-to-date fiscal 2010.

 

We also receive allowances from certain merchandise vendors in conjunction with compensation programs for employees who sell the vendor’s merchandise.  These allowances are netted against the related compensation expense that we incur.  Amounts received from vendors related to compensation programs were $30.4 million, or 1.5% of revenues, in year-to-date fiscal 2011 and $31.4 million, or 1.6% of revenues, in year-to-date fiscal 2010.

 

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

 

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

 

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

 

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

 

***Income from credit card program, net***.  Pursuant to a long-term marketing and servicing alliance with HSBC, HSBC offers credit card and non-card payment plans bearing our brands and we receive 1) ongoing payments from HSBC based on net credit card sales and 2) compensation for marketing and servicing activities (HSBC Program Income).  The HSBC Program Income is subject to annual adjustments, both increases and decreases, based upon the overall annual profitability and performance of the credit card portfolio.  We recognize HSBC Program Income when earned.  In the future, the HSBC Program Income may be:

 

·                  increased or decreased based upon the level of utilization of our proprietary credit cards by our customers;

 

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

 

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·                  decreased based upon the level of future services we provide to HSBC; and

 

·                  increased or decreased based upon the overall profitability and performance of the credit card portfolio.

 

Our original program agreement with HSBC expired in July 2010.  We have entered into an agreement with HSBC to amend and extend the program to July 2015 (renewable thereafter for three-year terms).  We refer to the agreement with HSBC, including the extension, as the Program Agreement.  Based upon current market conditions and the terms of the extended Program Agreement, we believe the future income earned by the Company will be lower than the income earned pursuant to the original Program Agreement and that a higher portion of such future income will be based upon the future profitability and performance of the credit card portfolio.

 

**Seasonality**

 

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

 

Our first fiscal quarter is generally characterized by a higher level of full-price sales 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 this quarter.  The second fiscal quarter is more focused on promotional activities related to the December holiday season, the early introduction of resort season collections from certain designers and the sale of Fall season goods on a marked down basis.  As a result, margins are typically lower in the second fiscal quarter.  However, due to the seasonal increase in revenues that occurs during the holiday season, the second fiscal quarter is typically the quarter in which our revenues are the highest and in which expenses as a percentage of revenues are the lowest.  Our working capital requirements are also the greatest in the first and second fiscal quarters as a result of higher seasonal requirements.

 

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

 

A large percentage of our merchandise assortment, particularly in the apparel, fashion accessories and shoe categories, is ordered months in advance of the introduction of such goods.  For example, women’s apparel, men’s apparel, shoes and handbags are typically ordered six to nine months in advance of the products being offered for sale while jewelry and other categories are typically ordered three to six months in advance.  As a result, inherent in the successful execution of our business plans is our ability both to predict the fashion trends that will be of interest to our customers and to anticipate future spending patterns of our customer base.

 

We monitor the sales performance of our inventories throughout each season.  We seek to order additional goods to supplement our original purchasing decisions when the level of customer demand is higher than originally anticipated.  However, in certain merchandise categories, particularly fashion apparel, our ability to purchase additional goods can be limited.  This can result in lost sales in the event of higher than anticipated demand for the fashion goods we offer or a higher than anticipated level of consumer spending.  Conversely, in the event we buy fashion goods that are not accepted by the customer or the level of consumer spending is less than we anticipated, we typically incur a higher than anticipated level of markdowns, net of vendor allowances, resulting in lower operating profits.  We believe that the experience of our merchandising and selling organizations helps to minimize the inherent risk in predicting fashion trends.

 

**Thirteen Weeks****Ended January 29, 2011 Compared to Thirteen Weeks Ended January 30, 2010**

 

***Revenues.**** *Our revenues for the second quarter of fiscal year 2011 of $1,171.6 million increased by $69.2 million, or 6.3%, from $1,102.4 million in the second quarter of fiscal year 2010.  The increase in revenues was due to increases in comparable revenues related to a higher level of customer demand.  New stores generated revenues of $2.7 million in the second quarter of fiscal year 2011.

 

Comparable revenues for the thirteen weeks ended January 29, 2011 were $1,168.9 million compared to $1,102.4 million in the second quarter of fiscal year 2010, representing an increase of 6.0%.  The increase in comparable revenues for our 

 

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Specialty Retail Stores in the second quarter of fiscal year 2011 of 6.0% represented an improvement to the 5.1% increase generated in the first quarter of fiscal year 2011.  However, revenue growth for Direct Marketing of 6.3% in the second quarter of fiscal year 2011 was below the 12.8% increase generated in the first quarter of fiscal year 2011.

 

Internet revenues generated by Direct Marketing were $202.9 million for the second quarter of fiscal year 2011, an increase of 7.2% compared to the prior year fiscal period.  Catalog revenues increased 0.9% compared to the prior year fiscal period.

 

***Cost of goods sold including buying and occupancy costs (excluding depreciation).***  COGS for the second quarter of fiscal year 2011 were 67.7% of revenues compared to 69.1% of revenues for the second quarter of fiscal year 2010.  The decrease in COGS by 1.4% of revenues in the second quarter of fiscal year 2011 was primarily due to:

 

·                  increased product margins of approximately 0.9% of revenues due to higher levels of full-price sales and lower net markdowns and promotions costs in our Specialty Retail Stores; and

 

·                  the leveraging of buying and occupancy costs by 0.5% of revenues on higher revenues; partially offset by

 

·                  higher markdowns by our Direct Marketing operation in response to lower than anticipated customer demand and lower delivery and processing net revenues.

 

***Selling, general and administrative expenses (excluding depreciation)*****.**  SG&A expenses as a percentage of revenues increased to 21.7% of revenues in the second quarter of fiscal year 2011 compared to 21.6% of revenues in the prior year fiscal period.  The net increase in SG&A expenses by 0.1% of revenues in the second quarter of fiscal year 2011 was primarily due to:

 

·                  higher marketing and selling costs of approximately 0.3% of revenues; offset by

 

·                  lower professional fees and expenses incurred primarily in connection with corporate initiatives of approximately 0.3% of revenues.

 

***Income from credit card program, net.  ***We earned HSBC Program Income of $12.2 million, or 1.0% of revenues, in the second quarter of fiscal year 2011 compared to $16.6 million, or 1.5% of revenues, in the second quarter of fiscal year 2010.  We amended and extended our Program Agreement in July 2010.  The decrease in HSBC Program Income in the second quarter of fiscal year 2011 compared to the prior year fiscal period is attributable to the impact of the change in the amended contractual terms of our Program Agreement, which became effective July 2010.

 

***Depreciation expense. ***Depreciation expense was $32.1 million, or 2.7% of revenues, in the second quarter of fiscal year 2011 compared to $34.4 million, or 3.1% of revenues, in the second quarter of fiscal year 2010.  The decrease in depreciation resulted primarily from recent lower levels of capital spending.

 

***Amortization expense. ***Amortization of intangible assets (primarily customer lists and favorable lease commitments) aggregated $15.1 million, or 1.3% of revenues, in the second quarter of fiscal year 2011 compared to $18.3 million, or 1.7% of revenues, in the second quarter of fiscal year 2010.  The decrease in amortization is primarily due to certain short-lived intangible assets becoming fully amortized.

 

***Segment operating earnings.***  Segment operating earnings for our Specialty Retail Stores and Direct Marketing segments do not reflect either the impact of adjustments to revalue our assets and liabilities to estimated fair value at the Acquisition date or impairment charges related to declines in fair value subsequent to the Acquisition date.  The reconciliation of segment operating earnings to total operating earnings is as follows:

 
| ** **                                                          | ** ** | **Thirteen weeks ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions)**                                              | ** ** | **January 29,   2011**        | ** ** | **January 30,   2010** | ** ** |
| Specialty Retail Stores                                             |       | $                                  | 85.1       |   | $ | 66.5 |   |
| Direct Marketing                                                    |       | 36.2                               |       | 40.7 |   |
| Amortization of intangible assets and favorable   lease commitments |       | (15.1                              | )          | (18.3 | ) |
| Corporate expenses                                                  |       | (17.0                              | )          | (15.4 | ) |
| Other expenses                                                      |       | —                             |       | (6.4 | ) |
| Total operating earnings                                            |       | $                                  | 89.2       |   | $ | 67.1 |   |

 

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Operating earnings for our Specialty Retail Stores segment were $85.1 million, or 9.1% of Specialty Retail Stores revenues, for the second quarter of fiscal year 2011 compared to operating earnings of $66.5 million, or 7.5% of Specialty Retail Stores revenues, for the prior year fiscal period.  The increase in operating margin as a percentage of revenues was primarily due to:

 

·                  higher levels of full-price sales and lower promotions costs; and

 

·                  the leveraging of a significant portion of our expenses on the higher level of revenues; offset by

 

·                  a lower level of income from our credit card program.

 

Operating earnings for Direct Marketing were $36.2 million, or 15.4% of Direct Marketing revenues, in the second quarter of fiscal year 2011 compared to $40.7 million, or 18.4% of Direct Marketing revenues, for the prior year fiscal period.  The decrease in operating margin as a percentage of revenues for Direct Marketing was primarily the result of:

 

·                  decreased product margins primarily due to higher net markdowns and lower delivery and processing net revenues;

 

·                  higher marketing and advertising costs; and

 

·                  a lower level of income from our credit card program.

 

Other expenses of $6.4 million in the second quarter of fiscal year 2010 consist primarily of costs (professional fees and severance) incurred in connection with corporate initiatives and cost reductions.

 

***Interest expense, net*****.** Net interest expense was $55.2 million, or 4.7% of revenues, in the second quarter of fiscal year 2011 and $59.0 million, or 5.4% of revenues, for the prior year fiscal period. The significant components of interest expense are as follows:

 
| ** **                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|
| **(in thousands)**           | ** ** | **January 29,   2011**        | ** ** | **January 30,   2010** | ** ** |
|                              |       |                               |       |   |   |
| Senior Secured Term Loan Facility |       | $                                  | 17,617     |   | $ | 20,787 |   |
| 2028 Debentures                   |       | 2,202                              |       | 2,207 |   |
| Senior Notes                      |       | 16,930                             |       | 16,744 |   |
| Senior Subordinated Notes         |       | 12,969                             |       | 12,969 |   |
| Amortization of debt issue costs  |       | 3,956                              |       | 4,679 |   |
| Other, net                        |       | 1,661                              |       | 1,618 |   |
| Capitalized interest              |       | (87                                | )          | — |   |
| Interest expense, net             |       | $                                  | 55,248     |   | $ | 59,004 |   |

 

***Income tax expense.***  Our effective income tax rate for the second quarter of fiscal year 2011 was 38.0% compared to 51.2% for the second quarter of fiscal year 2010.  Our effective income tax rate for the second quarter of fiscal year 2010 was unfavorably impacted by the relative significance of non-taxable income and non-deductible expenses to our estimated taxable loss for fiscal year 2010.

 

During the fourth quarter of fiscal year 2010, the Internal Revenue Service (IRS) closed their examination of our fiscal year 2007 federal income tax return with no changes or assessments.  The IRS began an examination of our fiscal year 2008 federal income tax return in the second quarter of fiscal year 2011.  With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2006.  We believe our recorded tax liabilities as of January 29, 2011 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances.  We believe it is reasonably possible that additional adjustments in the amounts of our unrecognized tax benefits could occur within the next twelve months as a result of settlements with tax authorities or expiration of statutes of limitation.  At this time, we do not believe such adjustments will have a material impact on our condensed consolidated financial statements.

 

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**Twenty-Six Weeks****Ended January 29, 2011 Compared to Twenty-Six Weeks Ended January 30, 2010**

 

***Revenues.**** *Our revenues for year-to-date fiscal 2011 of $2,098.8 million increased by $127.5 million, or 6.5%, from $1,971.3 million in year-to-date fiscal 2010.  The increase in revenues was due to increases in comparable revenues related to a higher level of customer demand.  New stores generated revenues of $5.7 million in year-to-date fiscal 2011.

 

Comparable revenues for the twenty-six weeks ended January 29, 2011 were $2,093.1 million compared to $1,971.3 million in year-to-date fiscal 2010, representing an increase of 6.2%. Changes in comparable revenues, by quarter and by reportable segment, were:

 
| ** **              | ** ** | **First Fiscal   Quarter** | ** ** | **Second Fiscal   Quarter** | ** ** | **Year-to-Date   Fiscal 2011** | ** ** |
|-------------------------|------------|---------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| Specialty Retail Stores |       | 5.1                             | %          | 6.0                              | %          | 5.6                                 | %          |
| Direct Marketing        |       | 12.8                            | %          | 6.3                              | %          | 8.9                                 | %          |
| Total                   |       | 6.4                             | %          | 6.0                              | %          | 6.2                                 | %          |

 

Internet revenues generated by Direct Marketing were $341.9 million for year-to-date fiscal 2011, an increase of 10.9% compared to the prior year fiscal period.  Catalog revenues decreased 1.7% compared to the prior year fiscal period as our customers continue to migrate toward on-line retailing in our Direct Marketing operation.

 

***Cost of goods sold including buying and occupancy costs (excluding depreciation).***  COGS for year-to-date fiscal 2011 were 64.6% of revenues compared to 65.7% of revenues for year-to-date fiscal 2010.  The decrease in COGS by 1.1% of revenues in year-to-date fiscal 2011 was primarily due to:

 

·                  increased product margins of approximately 0.9% of revenues due to higher levels of full-price sales and lower promotions costs in our Specialty Retail Stores; and

 

·                  the leveraging of buying and occupancy costs by 0.4% of revenues on higher revenues; partially offset by

 

·                  higher markdowns by our Direct Marketing operation in response to lower than anticipated customer demand and lower delivery and processing net revenues of approximately 0.2% of revenues.

 

***Selling, general and administrative expenses (excluding depreciation)*****.**  SG&A expenses as a percentage of revenues decreased to 22.7% of revenues in year-to-date fiscal 2011 compared to 23.2% of revenues in the prior year fiscal period.  The net decrease in SG&A expenses of 0.5% of revenues in year-to-date fiscal 2011 was primarily due to:

 

·                  favorable payroll and related costs of approximately 0.5% of revenues, primarily due to the leveraging of these expenses on higher revenues and lower benefits costs incurred;

 

·                  lower professional fees and expenses incurred primarily in connection with corporate initiatives of approximately 0.3% of revenues; offset by

 

·                  higher marketing and selling costs of approximately 0.2% of revenues.

 

***Income from credit card program, net. ***We earned HSBC Program Income of $21.5 million, or 1.0% of revenues, in year-to-date fiscal 2011 compared to $29.7 million, or 1.5% of revenues, in year-to-date fiscal 2010.  We amended and extended our Program Agreement in July 2010.  The decrease in HSBC Program Income in year-to-date fiscal 2011 compared to the prior year fiscal period is attributable to the impact of the change in the amended contractual terms of our Program Agreement, which became effective July 2010.

 

***Depreciation expense. ***Depreciation expense was $65.9 million, or 3.1% of revenues, in year-to-date fiscal 2011 compared to $70.2 million, or 3.6% of revenues, in year-to-date fiscal 2010.  The decrease in depreciation resulted primarily from recent lower levels of capital spending.

 

***Amortization expense. ***Amortization of intangible assets (primarily customer lists and favorable lease commitments) aggregated $32.4 million, or 1.5% of revenues, in year-to-date fiscal 2011 compared to $36.6 million, or 1.9% of revenues, in year-to-date fiscal 2010.  The decrease in amortization is primarily due to certain short-lived intangible assets becoming fully amortized.

 

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***Segment operating earnings.***  Segment operating earnings for our Specialty Retail Stores and Direct Marketing segments do not reflect either the impact of adjustments to revalue our assets and liabilities to estimated fair value at the Acquisition date or impairment charges related to declines in fair value subsequent to the Acquisition date.  The reconciliation of segment operating earnings to total operating earnings is as follows:

 
| ** **                                                          | ** ** | **Twenty-Six weeks ended** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in millions)**                                              | ** ** | **January 29,   2011**          | ** ** | **January 30,   2010** | ** ** |
| Specialty Retail Stores                                             |       | $                                    | 193.1      |   | $ | 154.9 |   |
| Direct Marketing                                                    |       | 61.2                                 |       | 62.4 |   |
| Amortization of intangible assets and favorable   lease commitments |       | (32.4                                | )          | (36.6 | ) |
| Corporate expenses                                                  |       | (31.1                                | )          | (29.0 | ) |
| Other expenses                                                      |       | (1.8                                 | )          | (9.7 | ) |
| Total operating earnings                                            |       | $                                    | 189.0      |   | $ | 142.0 |   |

 

Operating earnings for our Specialty Retail Stores segment were $193.1 million, or 11.4% of Specialty Retail Stores revenues, year-to-date fiscal 2011 compared to operating earnings of $154.9 million, or 9.7% of Specialty Retail Stores revenues, for the prior year fiscal period.  The increase in operating margin as a percentage of revenues was primarily due to:

 

·                  higher levels of full-price sales and lower promotions costs; and

 

·                  the leveraging of a significant portion of our expenses on the higher level of revenues; offset by

 

·                  a lower level of income from our credit card program.

 

Operating earnings for Direct Marketing were $61.2 million, or 15.2% of Direct Marketing revenues, in year-to-date fiscal 2011 compared to $62.4 million, or 16.9% of Direct Marketing revenues, for the prior year fiscal period.  The decrease in operating margin as a percentage of revenues for Direct Marketing was primarily the result of:

 

·                  decreased product margins primarily due to higher net markdowns and lower delivery and processing net revenues;

 

·                  higher marketing and advertising costs; and

 

·                  a lower level of income from our credit card program.

 

Other expenses of $1.8 million in year-to-date fiscal 2011 and $9.7 million in year-to-date fiscal 2010 consist primarily of costs (professional fees and severance) incurred in connection with corporate initiatives and cost reductions.

 

***Interest expense, net*****.** Net interest expense was $113.7 million, or 5.4% of revenues, in year-to-date fiscal year 2011 and $118.4 million, or 6.0% of revenues, for the prior year fiscal period. The significant components of interest expense are as follows:

 
| ** **                        | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**           | ** ** | **January 29,   2011**          | ** ** | **January 30,   2010** | ** ** |
|                              |       |                                 |       |   |   |
| Senior Secured Term Loan Facility |       | $                                    | 38,183     |   | $ | 41,573 |   |
| 2028 Debentures                   |       | 4,428                                |       | 4,433 |   |
| Senior Notes                      |       | 33,674                               |       | 34,269 |   |
| Senior Subordinated Notes         |       | 25,795                               |       | 25,795 |   |
| Amortization of debt issue costs  |       | 8,629                                |       | 9,340 |   |
| Other, net                        |       | 3,098                                |       | 3,152 |   |
| Capitalized interest              |       | (129                                 | )          | (193 | ) |
| Interest expense, net             |       | $                                    | 113,678    |   | $ | 118,369 |   |

 

***Income tax expense.***  Our effective income tax rate for year-to-date fiscal 2011 was 37.9% compared to 47.1% for year-to-date fiscal 2010.  Our effective income tax rate for year-to-date fiscal 2010 was unfavorably impacted by the relative significance of non-taxable income and non-deductible expenses to our estimated taxable loss for fiscal year 2010.

 

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**Non-GAAP Financial Measure — EBITDA**

 

We present the financial performance measure of earnings before interest, taxes, depreciation and amortization (EBITDA) because we use this measure to monitor and evaluate the performance of our business and believe the presentation of this measure will enhance investors’ ability to analyze trends in our business, evaluate our performance relative to other companies in our industry and evaluate our ability to service our debt.  EBITDA is not a presentation made in accordance with generally accepted accounting principals in the U.S. (GAAP).  Our computation of EBITDA may vary from others in our industry.

 

The non-GAAP measure of EBITDA contains some, but not all, adjustments that are taken into account in the calculation of the components of various covenants in the indentures governing NMG’s Senior Secured Asset-Based Revolving Credit Facility, Senior Secured Term Loan Facility, Senior Notes and Senior Subordinated Notes.  EBITDA should not be considered as an alternative to operating earnings or net earnings as a measure of operating performance.  In addition, EBITDA is not presented as and should not be considered as an alternative to cash flows as a measure of liquidity.  EBITDA has important limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.  For example, EBITDA:

 

·                  does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

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

 

·                  does not reflect our considerable interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

·                  excludes tax payments that represent a reduction in available cash; and

 

·                  does not reflect any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.

 

The following table reconciles earnings as reflected in our condensed consolidated statements of operations prepared in accordance with GAAP to EBITDA:

 
| ** **                                                          | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollars in millions)**                                 | ** ** | **January 29,   2011**        | ** ** | **January 30,   2010**          | ** ** | **January 29,   2011** | ** ** | **January 30,   2010** | ** ** |
|                                                                |       |                               |       |                                 |       |   |   |   |   |
| Net earnings                                                        |       | $                                  | 21.0       |                                 | $          | 4.0 |   | $ | 46.8 |   | $ | 12.5 |   |
| Income tax expense                                                  |       | 13.0                               |       | 4.2                                  |       | 28.5 |   | 11.1 |   |
| Interest expense, net                                               |       | 55.2                               |       | 59.0                                 |       | 113.7 |   | 118.4 |   |
| Depreciation expense                                                |       | 32.1                               |       | 34.4                                 |       | 65.9 |   | 70.2 |   |
| Amortization of intangible assets and favorable   lease commitments |       | 15.1                               |       | 18.3                                 |       | 32.4 |   | 36.6 |   |
| EBITDA                                                              |       | $                                  | 136.4      |                                 | $          | 119.9 |   | $ | 287.3 |   | $ | 248.8 |   |
| EBITDA as a percentage of revenues                                  |       | 11.6                               | %          | 10.9                                 | %          | 13.7 | % | 12.6 | % |

 

**Inflation and Deflation**

 

We believe changes in revenues and net earnings that have resulted from inflation or deflation have not been material during the periods presented.  In recent years, we have experienced certain inflationary conditions in our cost base due primarily to changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and, to a lesser extent, to increases in selling, general and administrative expenses, particularly with regard to employee benefits, and increases in fuel prices and costs impacted by increases in fuel prices, such as freight and transportation costs.

 

We purchase a substantial portion of our inventory from foreign suppliers whose costs are affected by the fluctuation of their local currency against the dollar or who price their merchandise in currencies other than the dollar.  Fluctuations in the Euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries 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 

 

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value of the dollar relative to foreign currencies may increase the retail prices of goods offered for sale and/or increase our cost of goods sold.  If our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues, gross margins, and ultimately our earnings, could decrease.  Foreign currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirements consist principally of:

 

·                  the funding of our merchandise purchases;

 

·                  capital expenditures for new store construction, store renovations and upgrades of our management information systems;

 

·                  debt service requirements;

 

·                  income tax payments; and

 

·                  obligations related to our defined benefit pension plan (Pension Plan).

 

Our primary sources of short-term liquidity are comprised of cash on hand, availability under our Asset-Based Revolving Credit Facility and vendor financing.  The amounts of cash on hand and borrowings under the Asset-Based Revolving Credit Facility are influenced by a number of factors, including revenues, working capital levels, vendor terms, the level of capital expenditures, cash requirements related to financing instruments and debt service obligations, Pension Plan funding obligations and tax payment obligations, among others.  As to vendor financing, some of our vendors have experienced serious cash flow issues, reductions in available credit from banks, factors or other financial institutions, or increases in the cost of capital as a result of recent economic conditions.  To counteract their cash flow problems, our vendors 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 adverse impact on our relationship with the vendor or constrain the amounts or timing of our purchases from the vendor and, ultimately, have an adverse impact on our revenues, profitability and liquidity.

 

Our working capital requirements fluctuate during the fiscal year, increasing substantially during the first and second quarters of each fiscal year as a result of higher seasonal levels of inventories.  We have typically financed the increases in working capital needs during the first and second fiscal quarters with available cash balances, cash flows from operations and, if necessary, with cash provided from borrowings under our credit facilities.  We have made no borrowings under our Asset-Based Revolving Credit Facility during year-to-date fiscal periods 2011 or 2010.

 

We believe that operating cash flows, cash balances, available vendor financing and amounts available pursuant to our senior secured Asset-Based Revolving Credit Facility will be sufficient to fund our operations, anticipated capital expenditure requirements, debt service obligations, contractual obligations and commitments and Pension Plan funding payments through the remainder of fiscal year 2011.

 

At January 29, 2011, cash and cash equivalents were $530.7 million compared to $500.7 million at January 30, 2010.  Net cash provided by our operating activities was $164.5 million in year-to-date fiscal 2011 compared to $232.4 million in year-to-date fiscal 2010.  Cash provided by our operating activities in year-to-date fiscal 2010 was positively impacted by actions taken to align on-hand inventory levels to customer demand.

 

Net cash used for investing activities, representing capital expenditures, was $41.2 million in year-to-date fiscal 2011 and $28.4 million in year-to-date fiscal 2010.  We incurred capital expenditures in year-to-date fiscal 2011 related to the construction of our new store in Walnut Creek, California scheduled to open in March 2012.  We incurred significant capital expenditures in the year-to-date fiscal 2010 related to the construction of our new store in Bellevue (suburban Seattle) which opened in September 2009.  Currently, we project gross capital expenditures for fiscal year 2011 to be approximately $115 to $120 million.  Net of developer contributions, capital expenditures for fiscal year 2011 are projected to be approximately $100 to $110 million.

 

Net cash used for financing activities was $13.6 million in year-to-date fiscal 2011 as compared to $26.8 million in year-to-date fiscal 2010.  Pursuant to the terms of our Senior Secured Term Loan Facility, in the first quarter of fiscal year 2011, we prepaid $7.6 million of outstanding borrowings under that facility from excess cash flow, as defined in the credit agreement,

 

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that we generated in fiscal year 2010, and in the first quarter of fiscal year 2010, we prepaid $26.6 million of outstanding borrowings under that facility from excess cash flow that we generated in fiscal year 2009.  In addition, in the second quarter of fiscal year 2011, we incurred $5.9 million of debt issuance costs as a result of amending and restating the terms of our Senior Secured Term Loan Facility.

 

**Financing Structure at January 29, 2011**

 

Our major sources of funds are comprised of vendor financing, a $600.0 million Asset-Based Revolving Credit Facility, a $1,505.7 million Senior Secured Term Loan Facility, $752.5 million Senior Notes, $500.0 million Senior Subordinated Notes, $125.0 million 2028 Debentures and operating leases.

 

***Senior Secured Asset-Based Revolving Credit Facility.***  NMG has an asset-based revolving credit facility with a maximum committed borrowing capacity of $600.0 million that matures on January 15, 2013.  The facility also provides an uncommitted accordion feature that allows NMG to request the lenders to provide additional capacity in either the form of increased revolving commitments or incremental term loans, subject to a potential total maximum facility of $800 million.

 

Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice.  The borrowing base for the Asset-Based Revolving Credit Facility is equal to at any time the sum of (a) the lesser of (i) 80% of eligible inventory (valued at the lower of cost or market value) and (ii) 85% of the net orderly liquidation value of eligible inventory, and (b) 85% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds arising from the sale or disposition of inventory, less certain reserves.  Through April 30, 2011 NMG is required to maintain excess availability under the terms of the Asset-Based Revolving Credit Facility of at least the greater of (a) 10% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $50 million.  After April 30, 2011, if at any time, excess availability is less than the greater of (a) 15% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $60 million, NMG will be required to maintain a pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) of at least 1.1 to 1.0.  On January 29, 2011, NMG had no borrowings outstanding under this facility, $17.0 million of outstanding letters of credit and $500.6 million of unused borrowing availability.

 

See Note 3 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 and Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010 for a further description of the terms of the Asset-Based Revolving Credit Facility.

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility.  At January 29, 2011, the outstanding balance under the Senior Secured Term Loan Facility was $1,505.7 million.  In November 2010, NMG entered into an amendment and restatement (the Amendment) of the credit agreement governing NMG’s Senior Secured Term Loan Facility, which included the following: (i) an extension of the maturity of approximately $1,064.2 million principal amount of the existing term loans thereunder, (ii) an increase in the interest rate payable to holders of the extended term loans, (iii) the ability to incur additional debt to refinance the non-extended term loans and (iv) certain other modifications to the Senior Secured Term Loan Facility.

 

The extended term loans will mature on April 6, 2016, unless $300.0 million or more aggregate principal amount of NMG’s Senior Notes and Senior Subordinated Notes remain outstanding on July 15, 2015, in which case the extended term loans will mature on that date instead.  The approximately $441.5 million principal amount of existing term loans that were not extended continue to have a maturity of April 6, 2013 (as all of the term loans did prior to the Amendment).

 

In addition to extending the maturity of a portion of the existing term loans under the Senior Secured Term Loan Facility, the Amendment increased the “applicable margin” used in calculating the interest rate payable to holders of the extended term loans (but did not change the applicable margin used in calculating the interest rate payable to holders of term loans that were not extended).  Following the Amendment, term loans under the Senior Secured Term Loan Facility (including both the extended and the non-extended term loans) bear interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse AG (the administrative agent), (2) the federal funds effective rate plus 1¤2 of 1% and (3) the adjusted one-month LIBOR rate plus 1.00% or (b) a LIBOR rate (for a period equal to the relevant interest period), subject to certain adjustments, in each case plus an applicable margin.

 

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At January 29, 2011, the applicable margin for the extended term loans is 3.00% for alternate base rate loans and 4.00% for LIBOR rate loans (or if NMG’s consolidated leverage ratio as of the relevant date of determination is less than 5.0 to 1.0, 2.75% for alternate base rate loans and 3.75% for LIBOR rate loans).  At January 29, 2011, the applicable margin for the term loans that were not extended remains 1.00% for alternate base rate loans and 2.00% for LIBOR rate loans (or if NMG’s consolidated leverage ratio as of the relevant date of determination is less than 4.5 to 1.0, 0.75% for alternate base rate loans and 1.75% for LIBOR rate loans).  The weighted average interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 3.71% at January 29, 2011.

 

The Amendment also included provisions permitting NMG (a) to incur debt to refinance the term loans that are not currently being extended (without requiring any further consent under the Senior Secured Term Loan Facility) and (b) to enter into future extensions of any portion of the term loans with the consent of only the lenders electing to extend at that time.

 

The credit agreement governing the Senior Secured Term Loan Facility requires NMG to prepay outstanding term loans with 50% (which percentage will be reduced to 25% if NMG’s total leverage ratio is less than a specified ratio and will be reduced to 0% if NMG’s total leverage ratio is less than a specified ratio) of its annual excess cash flow (as defined in the credit agreement).  For fiscal year 2010, NMG was required to prepay $92.6 million of our outstanding term loans pursuant to the annual excess cash flow requirements.  Of such amount, NMG paid $85.0 million in the fourth quarter of fiscal year 2010 and $7.6 million in the first quarter of fiscal year 2011.

 

See Note 3 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 and Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010 for a further description of the terms of the Senior Secured Term Loan Facility.

 

***2028 Debentures.***  NMG has outstanding $125.0 million aggregate principal amount of its 7.125% 2028 Debentures.  NMG’s 2028 Debentures mature on June 1, 2028.

 

See Note 3 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 and Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010 for a further description of the terms of the 2028 Debentures.

 

***Senior Notes.**** *NMG has outstanding $752.5 million aggregate principal amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture).  NMG’s Senior Notes mature on October 15, 2015.  Prior to October 15, 2010, NMG could, at its option, elect to pay interest on the Senior Notes entirely in cash (Cash Interest) or entirely by increasing the principal amount of the outstanding Senior Notes by issuing additional Senior Notes (PIK Interest).  Cash Interest on the Senior Notes accrues at the rate of 9% per annum.  PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum.  We negotiated for the right to include the PIK feature in our Senior Notes because of our belief that this feature could be a useful tool to enhance liquidity under appropriate circumstances.  In the second quarter of fiscal year 2009, given the dislocation in the financial markets and the uncertainty as to when reasonable conditions would return, we believed that it was appropriate to utilize this feature, even though we had unused borrowing capacity under our $600.0 million Asset-Based Revolving Credit Facility.  Accordingly, we elected to pay non-cash interest for the three quarterly interest periods ending on October 14, 2009 and to make such interest payments with the issuance of additional Senior Notes at the non-cash interest rate of 9.75% instead of paying interest in cash.  As a result, the original principal amount of Senior Notes of $700.0 million increased by $17.1 million in April 2009, $17.4 million in July 2009 and $17.9 million in October 2009.  We have elected to pay cash interest since the first quarter of fiscal year 2010.  After October 15, 2010, we are required to make all interest payments on the Senior Notes entirely in cash.

 

See Note 3 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 and Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010 for a further description of the terms of the Senior Notes.

 

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

 

See Note 3 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 and Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010 for a further description of the terms of the Senior Subordinated Notes.

 

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***Interest Rate Swaps.***  In connection with the Acquisition, we obtained $2,575.0 million of floating rate debt agreements, of which $2,125.0 million was outstanding at the Acquisition date and $1,505.7 million was outstanding at January 29, 2011.  Effective December 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness.  These swap agreements hedged a portion of our contractual floating rate interest commitments through the expiration of the agreements in December 2010.

 

***Interest Rate Caps.***  Effective January 2010, NMG entered into interest rate cap agreements for an aggregate notional amount of $500.0 million in order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness once the interest rate swap expired in December 2010.  The interest rate cap agreements commenced in December 2010 and will expire in December 2012.  Pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through December 2012 with respect to the $500.0 million notional amount of such agreements.  In the event LIBOR is less than 2.50%, NMG will pay interest at the lower LIBOR rate.  In the event LIBOR is higher than 2.50%, NMG will pay interest at the capped rate of 2.50%.

 

**OTHER MATTERS**

 

**Factors That May Affect Future Results**

 

Matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements.  Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,” “should,” “anticipate,” “believe,” “project” or “continue.”  We make these forward-looking statements based on our expectations and beliefs concerning future events, as well as currently available data.  While we believe there is a reasonable basis for our forward-looking statements, they involve a number of risks and uncertainties.  Therefore, these statements are not guarantees of future performance and you should not place undue reliance on them.  A variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in our forward-looking statements.  Factors that could affect future performance include, but are not limited, to:

 

*Political and General Economic Conditions*

 

·                  weakness in domestic and global capital markets and other economic conditions and the impact of such conditions on our ability to obtain credit;

 

·                  current political and general economic conditions or changes in such conditions including relationships between the United States and the countries from which we source our merchandise;

 

·                  terrorist activities in the United States and elsewhere;

 

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

 

*Customer Considerations*

 

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

 

·                  changes in the demographic or retail environment;

 

·                  changes in consumer preferences or fashion trends;

 

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

 

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*Merchandise Procurement and Supply Chain Considerations*

 

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

 

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

 

·                  changes in foreign currency exchange or inflation rates;

 

·                  significant increases in paper, printing and postage costs;

 

*Industry and Competitive Factors*

 

·                  competitive responses to our loyalty programs, marketing, merchandising and promotional efforts or inventory liquidations by vendors or other retailers;

 

·                  adverse changes in the financial viability of our competitors;

 

·                  seasonality of the retail business;

 

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

 

·                  delays in anticipated store openings and renovations;

 

·                  our success in enforcing our intellectual property rights;

 

*Employee Considerations*

 

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

 

·                  changes in our relationships with certain of our key sales associates and our ability to retain our key sales associates;

 

*Legal and Regulatory Issues*

 

·                  changes in government or regulatory requirements increasing our costs of operations;

 

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

 

*Leverage Considerations*

 

·                  the effects of incurring a substantial amount of indebtedness under our Senior Secured Credit Facilities and our Senior Notes and Senior Subordinated Notes;

 

·                  the ability to refinance our indebtedness under our Senior Secured Credit Facilities and the effects of any refinancing;

 

·                  the effects upon us of complying with the covenants contained in our Senior Secured Credit Facilities and the indentures governing our Senior Notes and Senior Subordinated Notes;

 

·                  restrictions on the terms and conditions of the indebtedness under our Senior Secured Credit Facilities may place on our ability to respond to changes in our business or to take certain actions;

 

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*Other Factors*

 

·                  the impact of funding requirements related to our Pension Plan;

 

·                  our ability to provide credit to our customers pursuant to our proprietary credit card program arrangement with HSBC, including any future changes in the terms of the such arrangement and/or legislation impacting the extension of credit to our customers;

 

·                  the design and implementation of new information systems as well as enhancements of existing systems; and

 

·                  other risks, uncertainties and factors set forth in this Quarterly Report on Form 10-Q, including those set forth in Part II - Item 1A, “Risk Factors.”

 

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

 

**Critical Accounting Policies**

 

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions about future events.  These estimates and assumptions affect amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the accompanying Condensed Consolidated Financial Statements.  Our current estimates are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates we used in preparing the accompanying Condensed Consolidated Financial Statements.

 

See Note 1 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 for a summary of our critical accounting policies.  A complete description of our critical accounting policies is included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended July 31, 2010.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in the Company’s financial instruments represents the potential loss arising from adverse changes in interest rates.  The Company does not enter into derivative financial instruments for trading purposes.  The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities.  The Company is exposed to interest rate risk through its borrowing activities, which are described in Note 3 of the Notes to Condensed Consolidated Financial Statements.

 

In connection with the Acquisition, NMG obtained $2,575.0 million of floating rate debt agreements, of which $2,125.0 million was outstanding at the Acquisition date and $1,505.7 million was outstanding under its Senior Secured Term Loan Facility at January 29, 2011.  In addition, as of January 29, 2011, NMG had no borrowings outstanding under its Asset-Based Revolving Credit Facility.  Future borrowings under NMG’s Asset-Based Revolving Facility, to the extent of outstanding borrowings, would be affected by interest rate changes.

 

Effective December 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness.  These swap agreements hedged a portion of our contractual floating rate interest commitments through the expiration of the agreements in December 2010.

 

Effective January 2010, NMG entered into interest rate cap agreements for an aggregate notional amount of $500.0 million in order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness once the interest rate swap expired in December 2010.  The interest rate cap agreements commenced in December 2010 and will expire in December 2012.  Pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through December 2012 with respect to the $500.0 million notional amount of such agreements.  In the event LIBOR is less than 2.50%, NMG will pay interest at the lower

 

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LIBOR rate.  In the event LIBOR is higher than 2.50%, NMG will pay interest at the capped rate of 2.50%.  As of January 29, 2011, LIBOR was 0.3034%.  We believe that a 1% increase in LIBOR would increase our annual interest expense by approximately $7.5 million during the remainder of fiscal year 2011.

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**a.  Disclosure Controls and Procedures.**

 

In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation as of January 29, 2011, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the design and operating effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely basis within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

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

 

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. No change occurred in our internal controls over financial reporting during the quarter ended January 29, 2011 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

**NEIMAN MARCUS, INC.**

 

**PART II**

 

**ITEM 1.           LEGAL PROCEEDINGS**

 

On April 30, 2010, a Class Action Complaint for Injunction and Equitable Relief was filed in the United States District Court for the Central District of California by Sheila Monjazeb, individually and on behalf of other members of the general public similarly situated, against the Company, Newton Holding, LLC, TPG Capital, L.P. and Warburg Pincus, LLC.  On July 12, 2010, all defendants except for the Company were dismissed without prejudice, and on August 20, 2010, this case was refiled in the Superior Court of California for San Francisco County.  This complaint, along with a similar class action lawsuit originally filed by Bernadette Tanguilig in 2007, alleges that the Company has engaged in various violations of the California Labor Code and Business and Professions Code, including without limitation (1) asking employees to work “off the clock,” (2) failing to provide meal and rest breaks to its employees, (3) improperly calculating deductions on paychecks delivered to its employees, and (4) failing to provide a chair or allow employees to sit during shifts.  The plaintiffs in these matters seek certification of their cases as class actions, reimbursement for past wages and temporary, preliminary and permanent injunctive relief preventing defendant from allegedly continuing to violate the laws cited in their complaints.  We intend to vigorously defend our interests in these matters.  Currently, we cannot reasonably estimate the amount of loss, if any, arising from these matters.  However, we do not currently believe the resolution of these matters will have a material adverse impact on our financial position.  We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

 

We are currently involved in various other legal actions and proceedings that arose in the ordinary course of business.  We believe that any liability arising as a result of these actions and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

 

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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 statements that are subject to the risks and uncertainties discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results.”

 

**ITEM 1A.        RISK FACTORS**

 

**Risks Related to Recent Economic Conditions**

 

**Recent economic conditions have adversely affected, and may continue to adversely affect, our business and results of operations.**

 

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

 

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

 

While economic conditions have continued to improve in recent quarters, we do not anticipate the return of consumer spending to levels achieved in fiscal years 2007 and 2008 in the near-term.  We plan to maintain an appropriate alignment of our inventory levels and purchases with anticipated customer demand.  The continuation of uncertain market conditions could have a material adverse effect on our business.

 

**Uncertain economic conditions may constrain our ability to obtain credit.**

 

Uncertain economic conditions may constrain our ability to obtain credit.  Domestic and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. As a result of this disruption, we have experienced an increase in the cost of borrowings necessary to operate our business.  If these conditions continue or become worse, our cost of borrowing could continue to increase.  It may also become more difficult to obtain financing for our operations or to refinance long-term obligations as they become payable.  In addition, our borrowing costs can be affected by independent rating agencies’ short and long-term debt ratings, which are based largely on our performance as measured by credit metrics including interest coverage and leverage ratios.  A decrease in these ratings would likely also increase our cost of borrowing and make it more difficult for us to obtain financing.  A significant increase in the costs we incur in order to finance our operations may have a material adverse impact on our business results and financial condition.

 

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

 

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

 

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

 

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

 

We are highly leveraged.  As of January 29, 2011, the principal amount of NMG’s total indebtedness was approximately $2,883.2 million, the unused borrowing availability under the $600.0 million Asset-Based Revolving Credit Facility was $500.6 million and the outstanding letters of credit were $17.0 million.  As of January 29, 2011, NMG had no borrowings outstanding under this facility.  NMG’s substantial indebtedness, combined with its lease and other financial obligations and contractual commitments, could have other important consequences.  For example, it could:

 

·                  make it more difficult for NMG to satisfy its obligations with respect to its indebtedness and any failure to comply with the obligations of any of its debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing NMG’s indebtedness;

 

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

 

·                  require NMG to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, thereby reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

 

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

 

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

 

·                  limit NMG’s ability to obtain credit from our vendors and/or the vendors’ factors and other financing sources; and

 

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

 

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

 

In addition, NMG’s interest expense could increase if interest rates increase because the entire amount of the indebtedness under the senior secured credit facilities bears interest at floating rates.  As of January 29, 2011, NMG had approximately $1,505.7 million principal amount of floating rate debt, consisting of outstanding borrowings under the Senior Secured Term Loan Facility.

 

Effective December 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness.  The interest rate swap agreements expired in December 2010.

 

Effective January 2010, NMG entered into interest rate cap agreements for an aggregate notional amount of $500.0 million in order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness once the interest rate swap agreements expired in December 2010.  The interest rate cap agreements commenced in December 2010 and will expire in December 2012.  Pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through December 2012 with respect to the $500.0 million notional amount of such agreements.  In the event LIBOR is less than 2.50%, NMG will pay interest at the lower LIBOR rate.  In the event LIBOR is higher than 2.50%, NMG will pay interest at the capped rate of 2.50%.

 

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

 

NMG’s ability to pay interest on and principal of the debt obligations will primarily depend upon NMG’s future operating performance.  As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect its ability to make these payments.

 

If NMG does not generate sufficient cash flow from operations to satisfy the debt service obligations, NMG may have to

 

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undertake alternative financing plans, such as refinancing or restructuring its indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital.  Our ability to restructure or refinance NMG’s debt will depend on the condition of the capital markets and our financial condition at such time.  Any refinancing of NMG’s debt could be at higher interest rates and may require it to comply with more onerous covenants, which could further restrict its business operations.  The terms of existing or future debt instruments may restrict NMG from adopting some of these alternatives.  In addition, our borrowing costs and ability to refinance may be affected by short-term and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on NMG’s performance as measured by indicators such as interest coverage and leverage ratios.  Furthermore, any failure to make payments of interest and principal on NMG’s outstanding indebtedness on a timely basis would likely result in a reduction of NMG’s credit rating, which could harm its ability to incur additional indebtedness on acceptable terms.

 

Contractual limitations on NMG’s ability to execute any necessary alternative financing plans could exacerbate the effects of any failure to generate sufficient cash flow 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 of credit (including amendments, renewals and extensions of letters of credit) thereunder is limited by a borrowing base, which at any time will equal the sum of (a) the lesser of (i) 80% of eligible inventory (valued at the lower of cost or market value) and (ii) 85% of the net orderly liquidation value of eligible inventory, and (b) 85% of the amounts owed by credit card processors to the borrowers under the Asset-Based Revolving Credit Facility in respect of eligible credit card accounts constituting proceeds arising from the sale or disposition of inventory, less certain reserves.  In addition, if at any time the aggregate amount of outstanding revolving loans and incremental term loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the reported value of inventory as calculated under that facility, NMG will be required to eliminate such excess.  Further, if (a) the amount available under the Asset-Based Revolving Credit Facility is less than the greater of (i) 20% of the lesser of (A) the aggregate revolving commitments and (B) the borrowing base and (ii) $75 million or (b) an event of default has occurred, NMG will be required to repay outstanding loans and cash collateralize letters of credit.  In addition, under the terms of the Asset-Based Revolving Credit Facility, through April 30, 2011 NMG is required to maintain excess availability of at least the greater of (a) 10% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $50 million.  After April 30, 2011, if at any time, excess availability is less than the greater of (a) 15% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $60 million, NMG will be required to maintain a pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) of at least 1.1 to 1.0.  Our ability to meet the conditions described in this paragraph may be affected by events beyond our control.

 

NMG’s inability to generate sufficient cash flow to satisfy its debt service obligations, or to refinance its obligations at all or on commercially reasonable terms, would have an adverse effect, which could be material, on NMG’s business, financial condition and results of operations.

 

**The terms of NMG’s Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility and the indentures governing the Senior Notes, the Senior Subordinated Notes 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 certain actions.**

 

The credit agreements governing NMG’s Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility and the indentures governing the Senior Notes, the Senior Subordinated Notes and the 2028 Debentures contain, and any future indebtedness of NMG would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on NMG’s ability to engage in acts that may be in its best long-term interests.  The indentures governing the Senior Notes, the Senior Subordinated Notes and the 2028 Debentures and the credit agreements governing the senior secured credit facilities include covenants that, among other things, restrict NMG’s ability to:

 

·                  incur additional indebtedness;

 

·                  pay dividends on NMG’s capital stock or redeem, repurchase or retire its capital stock or indebtedness;

 

·                  make investments;

 

·                  create restrictions on the payment of dividends or other amounts to NMG from NMG’s restricted subsidiaries;

 

·                  engage in transactions with its affiliates;

 

·                  sell assets, including capital stock of NMG’s subsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and lease back transactions.

 

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

 

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

 

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

 

The operating and financial restrictions and covenants in these debt agreements and any future financing agreements may adversely affect NMG’s ability to finance future operations or capital needs or to engage in other business activities.

 

**Risks Related to Our Business and Industry**

 

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

 

The specialty retail industry is highly competitive and fragmented.  Competition is strong both to attract and sell to customers and to establish relationships with, and obtain merchandise from, key vendors.

 

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

 

·                  increased operational efficiencies of competitors;

 

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

 

·                  expansion of product offerings by existing competitors;

 

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

 

·                  adoption by existing competitors of innovative retail sales methods.

 

We compete for customers with specialty retailers, traditional and high-end department stores, national apparel chains, vendor-owned proprietary boutiques, individual specialty apparel stores and direct marketing firms.  We compete for customers principally on the basis of quality and fashion, customer service, value, assortment and presentation of merchandise, marketing and customer loyalty programs and, in the case of Neiman Marcus and Bergdorf Goodman, store ambiance.  In our Specialty Retail business, merchandise assortment is a critical competitive factor, and retail stores compete for exclusive, preferred and limited distribution arrangements with key designers.  Many of our competitors are larger than we are and have greater financial resources than we do.  In addition, certain designers from whom we source merchandise have established competing free-standing retail stores in the same vicinity as our stores.  If we fail to successfully compete for customers or merchandise, our business will suffer.

 

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

 

Our relationships with established and emerging designers are a key factor in our position as a retailer of high-fashion merchandise, and a substantial portion of our revenues is attributable to our sales of designer merchandise.  Many of our key vendors limit the number of retail channels they use to sell their merchandise and competition among luxury retailers to obtain and sell these goods is intense.  Our relationships with our designers have been a significant contributor to our past success.  We have no guaranteed supply arrangements with our principal merchandising sources.  Accordingly, there can be no assurance that such sources will continue to meet our quality, style and volume requirements.

 

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As a result of recent economic conditions, some of our vendors have experienced serious cash flow issues, reductions in available credit from banks, factors or other financial institutions, or increases in the cost of capital.  To counteract their cash flow problems, our vendors 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 adverse impact on our relationship with the vendor or constrain the amounts or timing of our purchases from the vendor and, ultimately, have an adverse impact on our revenues, 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.  If one or more of our top designers were to cease providing us with adequate supplies of merchandise for purchase or, conversely, were to 1) increase sales of merchandise through their own stores, 2) increase the sales of merchandise to our competitors or 3) alter the form in which their goods were made available to us for resale, our business could be adversely affected.  In addition, any decline in the popularity or quality of any of our designer brands could adversely affect our business.

 

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

 

We make decisions regarding the purchase of our merchandise well in advance of the season in which it will be sold.  For example, women’s apparel, men’s apparel, shoes and handbags are typically ordered six to nine months in advance of the products being offered for sale while jewelry and other categories are typically ordered three to six months in advance.  If our sales during any season, particularly a peak season, are significantly lower than we expect for any reason, we may not be able to adjust our expenditures for inventory and other expenses in a timely fashion and may be left with a substantial amount of unsold inventory.  If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess inventory.  This could have an adverse effect on our margins and operating income.  At the same time, if we fail to purchase a sufficient quantity of merchandise, we may not have an adequate supply of products to meet consumer demand.  This may cause us to lose sales or harm our customer relationships.

 

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

 

Our success depends in large part on our ability to identify fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner.  If we fail to adequately match our product mix to prevailing customer tastes, we may be required to sell our merchandise at higher average markdown levels and lower average margins.  Furthermore, the products we sell often require long lead times to order and must appeal to consumers whose preferences cannot be predicted with certainty and often change rapidly.  Consequently, we must stay abreast of emerging lifestyle and consumer trends and anticipate trends and fashions that will appeal to our consumer base.  Any failure on our part to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect our business.

 

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

 

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

 

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

 

We expect that planned new full-line stores will add over 89,000 square feet of new store space over approximately the next three fiscal years, representing an increase of approximately 1.5% above the current aggregate square footage of our full-line Neiman Marcus and Bergdorf Goodman stores.  In addition, we anticipate opening approximately 3 to 5 new Neiman Marcus Last Call stores annually in each of the next three fiscal years.  New store openings involve certain risks, including constructing, furnishing and supplying a store in a timely and cost effective manner, accurately assessing the demographic or retail environment at a given location, negotiating favorable lease terms, hiring and training quality staff, obtaining necessary permits and zoning approvals, obtaining commitments from a core group of vendors to supply the new store, integrating the new store into our distribution network and building customer awareness and loyalty.

 

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We routinely evaluate the need to remodel our existing stores.  In undertaking store remodels, we must complete the remodel in a timely, cost effective manner, minimize disruptions to our existing operations, and succeed in creating an improved shopping environment.  If we fail to execute on these or other aspects of our store expansion and remodeling strategy, we could suffer harm to our sales, an increase in costs and expenses and an adverse effect on our business.

 

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

 

Some business processes that are dependent on technology are outsourced to third parties.  Such processes include credit card authorization and processing, insurance claims processing, payroll processing, record keeping for retirement and other benefit plans and other accounting processes.  In the second quarter of fiscal year 2010, we entered into agreements to outsource certain information technology functions.  In addition, we review outsourcing alternatives on a routine basis and may decide to outsource additional business processes in the future.  We make a diligent effort to ensure that all providers of outsourced services are observing proper internal control practices, such as redundant processing facilities; however, there are no guarantees that failures will not occur.  Failure of third parties to provide adequate services could have an adverse effect on our results of operations, financial condition or ability to accomplish our financial and management reporting.

 

**Acts of terrorism could adversely affect our business.**

 

The economic downturn that followed the terrorist attacks of September 11, 2001 had a material adverse effect on our business.  Any further acts of terrorism or other future conflicts may disrupt commerce and undermine consumer confidence, cause a downturn in the economy generally, cause consumer spending or shopping center traffic to decline or reduce the desire of our customers to make discretionary purchases.  Any of the foregoing factors could negatively impact our sales revenue, particularly in the case of any terrorist attack targeting retail space, such as a shopping center.  Furthermore, an act of terrorism or war, or the threat thereof, could negatively impact our business by interfering with our ability to obtain merchandise from foreign manufacturers.  Any future inability to obtain merchandise from our foreign manufacturers or to substitute other manufacturers, at similar costs and in a timely manner, could adversely affect our business.

 

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

 

Our success in the specialty retail industry will continue to depend to a significant extent on our senior management team, buyers and key sales associates.  We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that would be difficult to replace.  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 to provide relationship-based customer service may suffer.  We may not be able to retain our current senior management team, buyers or key sales associates and the loss of any of these individuals could adversely affect our business.

 

**Inflation, including price changes resulting from foreign exchange rate exchanges, may adversely affect our business operations in the future.**

 

In recent years, we have experienced certain inflationary conditions in our cost base due primarily to changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and, to a lesser extent, to increases in selling, general and administrative expenses, particularly with regard to employee benefits, and increases in fuel prices and costs impacted by increases in fuel prices, such as freight and transportation costs.  Inflation can harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base.  If inflation in these or other costs worsens, we may not be able to offset the effects of inflation and cost increases through control of expenses, passing cost increases on to customers or any other method.  Any future inflation could adversely affect our profitability and our business.

 

**Failure to maintain competitive terms under our loyalty programs could adversely affect our business.**

 

We maintain loyalty programs that are designed to cultivate long-term relationships with our customers and enhance the quality of service we provide to our customers.  We must constantly monitor and update the terms of our loyalty programs so that they continue to meet the demands and needs of our customers and remain competitive with loyalty programs offered by other high-end specialty retailers.  Approximately 35% of our total revenues during each of the last two calendar years was generated by our InCircle loyalty program members.  If our InCircle loyalty program were to fail to provide competitive rewards and quality service to our customers, our business could be adversely affected.

 

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**Changes in our credit card arrangements, applicable regulations and consumer credit patterns could adversely impact our ability to facilitate the provision of consumer credit to our customers and adversely affect our business.**

 

We maintain a proprietary credit card program through which credit is extended to customers under the “Neiman Marcus” and “Bergdorf Goodman” names.  Because a majority of our revenues is transacted through our proprietary credit cards, changes in our proprietary credit card arrangement that adversely impact our ability to facilitate the provision of consumer credit may adversely affect our performance.

 

We have a marketing and servicing alliance with HSBC Bank Nevada, N.A. and HSBC Private Label Corporation (collectively referred to as HSBC).  Pursuant to the agreement with HSBC, HSBC offers proprietary credit card accounts to our customers under both the “Neiman Marcus” and “Bergdorf Goodman” brand names.  Our original program agreement with HSBC expired in July 2010.  We have entered into an agreement with HSBC to amend and extend the program to July 2015 (renewable thereafter for three-year terms).

 

Under the terms of the Program Agreement, HSBC offers credit cards and non-card payment plans and bears substantially all credit risk with respect to sales transacted on the cards bearing our brands.  We receive payments from HSBC based on sales transacted on our proprietary credit cards.  Such payments are subject to annual adjustments, both increases and decreases, based upon the overall annual profitability and performance of the proprietary credit card portfolio.  Based upon current market conditions and the terms of the extended Program Agreement, we believe the future income earned by the Company will be lower than the income earned pursuant to the original Program Agreement and that a higher portion of such future income will be based upon the future profitability and performance of the credit card portfolio.  In addition, we receive payments from HSBC for marketing and servicing activities as we continue to handle key customer service functions, primarily customer inquiries and collections, for HSBC.

 

In connection with our Program Agreement, we have changed and may continue to change the terms of credit offered to our customers.  In addition, HSBC has discretion over certain policies and arrangements with credit card customers and may change these policies and arrangements in ways that affect our relationships with these customers.  Any such changes in our credit card arrangements may adversely affect our credit card program and ultimately, our business.

 

Credit card operations are subject to numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider.  Any regulation or change in the regulation of credit arrangements that would materially limit the availability of 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, and other factors that we cannot control or predict with certainty.

 

**Our business can be affected by extreme or unseasonable weather conditions.**

 

Extreme weather conditions in the areas in which our stores are located could adversely affect our business.  For example, heavy snowfall, rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability.  Our business is also susceptible to unseasonable weather conditions.  For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions.  Reduced sales from extreme or prolonged unseasonable weather conditions would adversely affect our business.

 

**We are subject to numerous regulations that could affect our operations.**

 

We are subject to customs, truth-in-advertising, labor and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or 1) govern the importation, promotion and sale of merchandise 2) regulate wage and hour matters with respect to our employees and 3) govern the operation of our retail stores and warehouse facilities.  Although we undertake to monitor changes in these laws, if these laws or the interpretations of these laws change without our knowledge, or are violated by importers, designers, manufacturers or distributors, we could experience delays in shipments and receipt of goods, suffer damage to our reputation or be subject to fines or other penalties under the controlling regulations, any of which could adversely affect our business.

 

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

 

The specialty retail industry is seasonal in nature, with a higher level of sales typically generated in the fall and holiday selling seasons.  We have in the past experienced significant fluctuation in our revenues from quarter to quarter with a disproportionate amount of our revenues falling in our second fiscal quarter, which coincides with the holiday season.  In addition, we have significant additional cash requirements in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including payments relating to additional inventory, advertising and employees.

 

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

 

We purchase a substantial portion of our inventory from foreign suppliers whose costs are affected by the fluctuation of their local currency against the dollar or who price their merchandise in currencies other than the dollar.  Fluctuations in the Euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries 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 currencies may increase the retail prices of goods offered for sale and/or increase our cost of goods sold.  If our customers reduce their levels of spending in response to increases in retail prices and/or we are unable to pass such cost increases to our customers, our revenues, gross margins, and ultimately our earnings, could decrease.  Foreign currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future.

 

**Conditions in, and the United States’ relationship with, the countries where we source our merchandise could affect our sales.**

 

A substantial majority of our merchandise is manufactured overseas, mostly in Europe.  As a result, political instability or other events resulting in the disruption of trade from other countries or the imposition of additional regulations relating to or duties upon imports could cause significant delays or interruptions in the supply of our merchandise or increase our costs, either of which could have a material adverse effect on our business.  If we are forced to source merchandise from other countries, those goods may be more expensive or of a different or inferior quality from the ones we now sell.  The importance to us of our existing designer relationships could present additional difficulties, as it may not be possible to source merchandise from a given designer from alternative jurisdictions.  If we were unable to adequately replace the merchandise we currently source with merchandise produced elsewhere, our business could be adversely affected.

 

**Significant increases in costs associated with the production of catalogs and other promotional materials may adversely affect our operating income.**

 

We advertise and promote in-store events, new merchandise and fashion trends through print catalogs and other promotional materials mailed on a targeted basis to our customers.  Significant increases in paper, printing and postage costs could affect the cost of producing these materials and as a result, may adversely affect our operating income.

 

**We are indirectly owned and controlled by the Sponsors, and their interests as equity holders may conflict with those of our creditors.**

 

We are indirectly owned and controlled by the Sponsors and certain other equity investors, 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 our creditors.  For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with our creditors’ interests.  In addition, our equity holders may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to holders of our indebtedness.  Furthermore, the Sponsors may in the future own businesses that directly or indirectly compete with us.  One or more of the Sponsors also may pursue acquisition opportunities that may be complementary to our business, and as a result, 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 property rights, our net income may decline.**

 

We and our subsidiaries currently own our tradenames and service marks, including the “Neiman Marcus” and “Bergdorf Goodman” marks.  Our tradenames and service marks are registered in the United States and in various foreign countries, primarily in Europe.  The laws of some foreign countries do not protect proprietary 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 or domestic intellectual property legislation or regulation may have on our existing or future business.  The loss or reduction of any of our significant proprietary rights could have an adverse effect on our business.

 

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

 

**Failure to successfully maintain and update information technology systems and enhance existing systems may adversely affect our business.**

 

To keep pace with changing technology, we must continuously provide for the design and implementation of new information technology systems as well as enhancements of our existing systems. Any failure to adequately maintain and update the information technology systems supporting our online operations, sales operations or inventory control could prevent our customers from purchasing merchandise on our websites or prevent us from processing and delivering merchandise, which could adversely affect our business.

 

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

 

Substantially all of our merchandise is delivered to us by our vendors as finished goods and is manufactured in numerous locations, including Europe and the United States and, to a lesser extent, China, Mexico and South America.  Our vendors rely on third party carriers to deliver merchandise to our distribution facilities. In addition, our success depends on our ability to source and distribute merchandise efficiently to our Specialty Retail Stores and Direct Marketing customers.  Events such as U.S. or foreign labor strikes, natural disasters, work stoppages or boycotts affecting the manufacturing or transportation sectors and increases in fuel costs could increase the cost or reduce the supply of merchandise available to us and could adversely affect our results of operations.

 

**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 Company’s Annual   Report on Form 10-K for the fiscal year ended July 31, 2010.                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 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 Company’s Annual Report on Form 10-K for the fiscal year ended   July 31, 2010.                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 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 Company’s Quarterly Report on   Form 10-Q for the quarter ended October 30, 2010.              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                            |
| 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 Company’s Quarterly Report on   Form 10-Q for the quarter ended October 30, 2010. |

 

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| 4.5    |   | Form of   9%/9 3/4% Senior Notes due 2015, incorporated herein by reference to the   Company’s Quarterly Report on Form 10-Q for the quarter ended   October 30, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Form of   10 3/8% Senior Subordinated Notes due 2015, incorporated herein by reference   to the Company’s Quarterly Report on From 10-Q for the quarter ended   October 30, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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 Company’s Quarterly   Report on Form 10-Q for the quarter ended October 30, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3*  |   | Second   Amendment to Letter Agreement dated April 26, 2010 by and between Neiman   Marcus, Inc., a Delaware corporation, and Burton M. Tansky incorporated   herein by reference to the Company’s Current Report on Form 8-K dated   April 28, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4*  |   | Director   Services Agreement dated April 26, 2010 by and among Neiman   Marcus, Inc., The Neiman Marcus Group, Inc., and Burton M. Tansky,   incorporated herein by reference to the Company’s Current Report on   Form 8-K dated April 28, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6   |   | 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.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7   |   | Credit   Agreement dated as of October 6, 2005, among Newton   Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman   Marcus Group, Inc., the Subsidiary Guarantors, Credit Suisse, as   administrative agent and collateral agent, Credit Suisse and Deutsche Bank   Securities Inc. as joint lead arrangers, Banc of America Securities LLC and   Goldman Sachs Credit Partners L.P. as co-arrangers, Credit Suisse, Deutsche   Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit   Partners L.P. as joint bookrunners, Deutsche Bank Securities Inc., Banc of   America Securities LLC and Goldman Sachs Credit Partners L.P. as   co-syndication agents and the lenders thereunder, incorporated herein by   reference to the Company’s Annual Report on Form 10-K for the fiscal   year ended August 1, 2009. (2) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   |   | Credit   Agreement dated as of October 6, 2005 as amended and restated as of   November 17, 2010, among the lenders thereunder, Credit Suisse, as   administrative agent and as collateral agent for the lenders, Neiman   Marcus, Inc., The Neiman Marcus Group, Inc. and each subsidiary of   The Neiman Marcus Group, Inc. from time to time party thereto,   incorporated herein by reference to the Company’s Current Report on   Form 8-K dated November 17, 2010. (3)                                                                                                                                                                                                                                                                                                                                                                                |

 

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| 10.9   |   | Amended   and Restated Pledge and Security Agreement dated as of July 15, 2009 by   and among The Neiman Marcus Group, Inc., the Company, subsidiaries named   therein and Bank of America, N.A., as administrative agent and co-collateral   agent, incorporated herein by reference to Neiman Marcus, Inc.’s Current   Report on Form 8-K dated July 16, 2009.                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.10  |   | Substitution   of Agent and Joinder Agreement, dated as of July 15, 2009, among   Deutsche Bank Trust Company Americas, Credit Suisse and Bank of America,   N.A., incorporated herein by reference to Neiman Marcus, Inc.’s Current   Report on Form 8-K dated July 16, 2009.                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.11  |   | Pledge   and Security and Intercreditor Agreement dated as of October 6, 2005,   among Newton Acquisition Merger Sub, Inc., The Neiman Marcus   Group, Inc., Newton Acquisition, Inc., the Subsidiary Guarantors   and Credit Suisse, as administrative agent and collateral agent, 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 Company’s Quarterly Report on Form 10-Q   for the quarter ended October 30, 2010. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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 Company’s Quarterly Report on   Form 10-Q for the quarter ended October 30, 2010.                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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 Company’s Quarterly   Report on Form 10-Q for the quarter ended October 30, 2010.                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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   Company’s Quarterly Report on Form 10-Q for the quarter ended   October 30, 2010.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 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   Company’s Quarterly Report on Form 10-Q for the quarter ended   October 30, 2010.                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.17* |   | Neiman   Marcus, Inc. Management Equity Incentive Plan. (1)                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.18* |   | Amendment   to the Neiman Marcus, 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.                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.19* |   | Amendment   No. Three to the Neiman Marcus, Inc. Management Equity Incentive   Plan effective as of January 4, 2011. (1)                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.20* |   | Amended   and Restated Stock Option Grant Agreement dated April 2, 2010 between   Neiman Marcus, Inc. and Burton M. Tansky incorporated herein by   reference to the Company’s Current Report on Form 8-K dated   April 28, 2010.                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.21* |   | Amended   and Restated Stock Option Grant Agreement dated December 15, 2009   between Neiman Marcus , Inc. and Karen Katz. (1)                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.22* |   | Stock   Option Grant Agreement dated September 30, 2010 between Neiman   Marcus, Inc. and Karen Katz. (1)                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.23* |   | Amended   and Restated Stock Option Agreement dated December 15, 2009 between Neiman   Marcus, Inc. and James E. Skinner. (1)                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.24* |   | Stock   Option Grant Agreement dated September 30, 2010 between Neiman Marcus.   Inc. and James E. Skinner. (1)                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.25* |   | Amended   and Restated Stock Option Grant Agreement dated December 15, 2009 between   Neiman Marcus, Inc. and James J. Gold. (1)                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.26* |   | Stock   Option Grant Agreement dated September 30, 2010 between Neiman   Marcus, Inc. and James J. Gold. (1)                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.27* |   | Amended   and Restated Stock Option Grant Agreement dated December 15, 2009 between   Neiman Marcus, Inc. and Gerald A. Barnes. (1)                                                                                                                                                                                                                                                                                                           |

 

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| 10.28*   |   | Stock   Option Grant Agreement dated October 5, 2009 between Neiman   Marcus, Inc. and Gerald A. Barnes. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.29*   |   | Employment   Agreement dated April 26, 2010 by and between The Neiman Marcus   Group, Inc. and Karen Katz incorporated herein by reference to the   Company’s Current Report on Form 8-K dated April 28, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.30*   |   | Amendment   to Employment Agreement effective December 31, 2010 by and between the   Company, The Neiman Marcus Group, Inc. and Karen Katz, incorporated   herein by reference to the Company’s Current Report on Form 8-K dated   December 2, 2010.                                                                                                                                                                                                                                                                                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.31    |   | 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.                                                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.32    |   | 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. (1)                                                                                                                                                                                                                                                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.33    |   | 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. (1)                                                                                                                                                                                                                                                                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.34    |   | Amended   and Restated Credit Card Program Agreement, dated as of September 23,   2010, by and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,   HSBC Bank Nevada, N.A. and HSB Card Services, Inc., incorporated herein   by reference to the Company’s Annual Report on Form 10-K for the fiscal   year ended July 31, 2010. (2)                                                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.35    |   | Amended   and Restated Servicing Agreement, dated as of September 23, 2010, 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 July 31, 2010. (2)                                                                                                                                                                                                                                                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.36*   |   | 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.                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.37    |   | 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 Company’s Quarterly Report   on Form 10-Q for the quarter ended May 1, 2010.                                                                                                                                                                                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.38*   |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.39    |   | 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.   40 |   | 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. |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.41*   |   | 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.                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.42*   |   | 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.                                                                                                                                                                                                                                                                                                                                                                  |

 

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| 10.43    |   | The   Neiman Marcus Group, Inc. Supplemental Executive Retirement Plan as   amended and restated effective January 1, 2009 incorporated herein by   reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q   for the quarter ended January 31, 2009.                                                           |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.   44 |   | The   Neiman Marcus Group, Inc. Defined Contribution Supplemental Executive   Retirement Plan, as amended and restated effective as of January 1,   2008, incorporated herein by reference to the Neiman Marcus, Inc. Annual   Report on Form 10-K for the fiscal year ended August 2, 2008.                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.45    |   | Amendment   No. 1 effective January 1, 2009 to the Amended and Restated Neiman   Marcus Group, Inc. Defined Contribution Supplemental Executive   Retirement Plan incorporated herein by reference to Neiman   Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended   January 31, 2009.               |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.46    |   | 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. |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.47*   |   | 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.                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.48*   |   | Employment   Agreement dated July 22, 2010 by and among the Company, The Neiman   Marcus Group, Inc., and James E. Skinner, incorporated herein by   reference to the Company’s Current Report on Form 8-K dated   July 28, 2010.                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.49*   |   | Employment   Agreement dated July 22, 2010 by and among the Company, The Neiman   Marcus Group, Inc. and James J. Gold, incorporated herein by reference   to the Company’s Current Report on Form 8-K dated July 28, 2010.                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.50    |   | Amendment   No. 2 to the Amended and Restated Neiman Marcus Group, Inc. Defined   Contribution Supplemental Executive Retirement Plan dated July 17, 2010,   incorporated herein by reference to the Company’s Annual Report on   Form 10-K for the fiscal year ended July 31, 2010.                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.51    |   | Amendment   No. 1 to The Neiman Marcus Group, Inc. Defined Contribution   Supplemental Executive Retirement Plan dated July 17, 2010, incorporated   herein by reference to the Company’s Annual Report on Form 10-K for the   fiscal year ended July 31, 2010.                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                   |
| 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)                                                                                                                                                                                                          |

 

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| (1)    |   | Filed   herewith.                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    |   | Portions   of these exhibits have been omitted pursuant to a request for confidential   treatment.                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    |   | Exhibits   and schedules relating to the agreement that is filed in this exhibit have   not been amended and restated and were filed with Exhibit 10.8 to Neiman   Marcus, Inc.’s Annual Report on Form 10-K for the fiscal year ended   August 1, 2009 (referenced as Exhibit 10.7 above). Portions thereof   were omitted pursuant to a request for confidential treatment. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| *      |   | Current   management contract or compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                          |

 

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SIGNATURES

 

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

 

 

NEIMAN MARCUS, INC.

(Registrant)

 
| **Signature**           | ** ** | **Title**                                                                                                                  | ** ** | **Date**            |
|-------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
|                    |       |                                                                                                                       |       |                |
|                    |       |                                                                                                                       |       |                |
| /s/   T. Dale Stapleton |       | Senior   Vice President and Chief Accounting Officer   (on behalf of the registrant and   as principal accounting officer) |       | March 10, 2011 |
| T.   Dale Stapleton     |       |

 

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