Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 theQuarterly Period Ended October 31, 2009**

 

**OR**

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

 

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

 

**Neiman Marcus, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**(State or other jurisdiction of  incorporation or organization) | ** ** | **20-3509435**(I.R.S. Employer  Identification No.) |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------|
| ** **                                                                  | ** ** | ** **                                          |
| **1618 Main Street  Dallas, Texas**(Address of principal executive offices) | ** ** | **75201**(Zip code)                                 |

 

Registrant’s telephonenumber, including area code: **(214) 743-7600**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes x  No  ̈

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData file required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes  ̈  No  ̈

 

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

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

 

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

 

Therewere 1,013,082 shares of the registrant’s common stock, par value $.01 pershare, outstanding at October 31, 2009.

 

 

 

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**NEIMAN MARCUS, INC.**

 

#### **INDEX**

 
| ** **    | ** **                                                                                                                    | **Page** |
|---------------|-------------------------------------------------------------------------------------------------------------------------------|----------|
| Part I.       | Financial Information                                                                                                         |     |
|          |                                                                                                                          |     |
| Item 1.       | Condensed  Consolidated Balance Sheets as of October 31, 2009, August 1, 2009  and November 1, 2008            | 1        |
|          |                                                                                                                          |     |
|          | Condensed Consolidated Statements of Operations for  the Thirteen Weeks Ended October 31, 2009 and November 1, 2008 | 2        |
|          |                                                                                                                          |     |
|          | Condensed Consolidated Statements of Cash Flows for  the Thirteen Weeks Ended October 31, 2009 and November 1, 2008 | 3        |
|          |                                                                                                                          |     |
|          | Notes to Condensed Consolidated Financial Statements                                                                          | 4        |
|          |                                                                                                                          |     |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   | 23       |
|          |                                                                                                                          |     |
| Item 3.       | Quantitative  and Qualitative Disclosures about Market Risk                                                                   | 39       |
|          |                                                                                                                          |     |
| Item 4.       | Controls  and Procedures                                                                                                      | 40       |
|          |                                                                                                                          |     |
| Part II. | Other  Information                                                                                                            |     |
|          |                                                                                                                          |     |
| Item 1.       | Legal Proceedings                                                                                                             | 41       |
|          |                                                                                                                          |     |
| Item 1A.      | Risk Factors                                                                                                                  | 41       |
|          |                                                                                                                          |     |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                  | 49       |
|          |                                                                                                                          |     |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                          | 49       |
|          |                                                                                                                          |     |
| Item  6.      | Exhibits                                                                                                                      | 49       |
|          |                                                                                                                          |     |
| Signatures    | 56                                                                                                                            |

 

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**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| **(in  thousands, except shares)**                                                                                                                                                                                                         | ** ** | **October 31,********2009** | ** ** | **August 1,********2009** | ** ** | **November 1,******** 2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                             | ** ** |
| **ASSETS**                                                                                                                                                                                                                                 |       |                             |       |                           |       |                                   |       |
| Current assets:                                                                                                                                                                                                                            |       |                             |       |                           |       |                                   |       |
| Cash and cash equivalents                                                                                                                                                                                                                  |       | $                                | 319,215    |                           | $          | 323,425                                |       | $ | 115,350 |   |
| Merchandise inventories                                                                                                                                                                                                                    |       | 863,682                          |       | 755,034                        |       | 1,084,308                              |       |
| Deferred income taxes                                                                                                                                                                                                                      |       | 19,136                           |       | 19,136                         |       | 32,659                                 |       |
| Other current assets                                                                                                                                                                                                                       |       | 103,757                          |       | 123,932                        |       | 115,352                                |       |
| Total current assets                                                                                                                                                                                                                       |       | 1,305,790                        |       | 1,221,527                      |       | 1,347,669                              |       |
|                                                                                                                                                                                                                                       |       |                             |       |                           |       |                                   |       |
| Property and equipment, net                                                                                                                                                                                                                |       | 973,630                          |       | 992,715                        |       | 1,068,467                              |       |
| Goodwill and intangible  assets, net                                                                                                                                                                                                       |       | 3,260,633                        |       | 3,278,947                      |       | 4,024,580                              |       |
| Other assets                                                                                                                                                                                                                               |       | 88,075                           |       | 87,837                         |       | 74,776                                 |       |
| Total assets                                                                                                                                                                                                                               |       | $                                | 5,628,128  |                           | $          | 5,581,026                              |       | $ | 6,515,492 |   |
|                                                                                                                                                                                                                                       |       |                             |       |                           |       |                                   |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                             |       |                             |       |                           |       |                                   |       |
| Current liabilities:                                                                                                                                                                                                                       |       |                             |       |                           |       |                                   |       |
| Accounts payable                                                                                                                                                                                                                           |       | $                                | 237,972    |                           | $          | 233,990                                |       | $ | 249,624 |   |
| Accrued liabilities                                                                                                                                                                                                                        |       | 349,130                          |       | 302,886                        |       | 400,604                                |       |
| Current maturities of  long-term liabilities                                                                                                                                                                                               |       | —                           |       | 26,617                         |       | —                                 |       |
| Total current liabilities                                                                                                                                                                                                                  |       | 587,102                          |       | 563,493                        |       | 650,228                                |       |
|                                                                                                                                                                                                                                       |       |                             |       |                           |       |                                   |       |
| Long-term liabilities:                                                                                                                                                                                                                     |       |                             |       |                           |       |                                   |       |
| Long-term debt                                                                                                                                                                                                                             |       | 2,972,173                        |       | 2,954,221                      |       | 2,946,150                              |       |
| Deferred income taxes                                                                                                                                                                                                                      |       | 690,970                          |       | 697,810                        |       | 916,072                                |       |
| Deferred real estate  credits                                                                                                                                                                                                              |       | 100,239                          |       | 96,420                         |       | 89,865                                 |       |
| Other long-term liabilities                                                                                                                                                                                                                |       | 346,146                          |       | 350,247                        |       | 230,576                                |       |
| Total long-term liabilities                                                                                                                                                                                                                |       | 4,109,528                        |       | 4,098,698                      |       | 4,182,663                              |       |
|                                                                                                                                                                                                                                       |       |                             |       |                           |       |                                   |       |
| Common stock (par value  $0.01 per share, 5,000,000 shares authorized and 1,013,082 shares issued and  outstanding at October 31, 2009 and August 1, 2009 and 1,012,919  shares issued and outstanding at November 1, 2008) |       | 10                               |       | 10                             |       | 10                                     |       |
| Additional paid-in capital                                                                                                                                                                                                                 |       | 1,425,385                        |       | 1,424,258                      |       | 1,420,106                              |       |
| Accumulated other  comprehensive loss                                                                                                                                                                                                      |       | (101,572                         | )          | (104,587                       | )          | (17,593                                | )          |
| Retained (deficit) earnings                                                                                                                                                                                                                |       | (392,325                         | )          | (400,846                       | )          | 280,078                                |       |
| Total shareholders’ equity                                                                                                                                                                                                            |       | 931,498                          |       | 918,835                        |       | 1,682,601                              |       |
| Total liabilities and  shareholders’ equity                                                                                                                                                                                           |       | $                                | 5,628,128  |                           | $          | 5,581,026                              |       | $ | 6,515,492 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

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**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirteen  weeks ended**        | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in  thousands)**                                                               | ** ** | **October 31,********2009** | ** ** | **November 1,********2008** | ** ** |
|                                                                              |       |                             |       |   |   |
| Revenues                                                                          |       | $                                | 868,900    |   | $ | 985,787 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 534,223                          |       | 617,743 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 218,819                          |       | 242,829 |   |
| Income from credit card program, net                                              |       | (13,087                          | )          | (13,001 | ) |
| Depreciation expense                                                              |       | 35,782                           |       | 38,599 |   |
| Amortization of intangible assets                                                 |       | 13,845                           |       | 13,568 |   |
| Amortization of favorable lease commitments                                       |       | 4,469                            |       | 4,469 |   |
|                                                                              |       |                             |       |   |   |
| Operating earnings                                                                |       | 74,849                           |       | 81,580 |   |
|                                                                              |       |                             |       |   |   |
| Interest expense, net                                                             |       | 59,365                           |       | 57,845 |   |
|                                                                              |       |                             |       |   |   |
| Earnings before income taxes                                                      |       | 15,484                           |       | 23,735 |   |
|                                                                              |       |                             |       |   |   |
| Income tax expense                                                                |       | 6,963                            |       | 10,857 |   |
|                                                                              |       |                             |       |   |   |
| Net earnings                                                                      |       | $                                | 8,521      |   | $ | 12,878 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

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**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                   | ** ** | **Thirteen  weeks ended**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **October 31,****2009** | ** ** | **November 1,****2008** | ** ** |
| ** **                                                                                   | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **CASH FLOWS  - OPERATING ACTIVITIES**                                                       |       |                         |       |   |   |
| Net earnings                                                                                 |       | $                            | 8,521      |   | $ | 12,878 |   |
| Adjustments to reconcile  net earnings to net cash provided by operating activities:         |       |                         |       |   |   |
| Depreciation and amortization  expense                                                       |       | 58,611                       |       | 60,190 |   |
| Paid-in-kind interest                                                                        |       | 14,362                       |       | — |   |
| Deferred income taxes                                                                        |       | (8,756                       | )          | (8,722 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans |       | 4,318                        |       | 4,143 |   |
|                                                                                         |       | 77,056                       |       | 68,489 |   |
| Changes in operating assets  and liabilities:                                                |       |                         |       |   |   |
| Merchandise inventories                                                                      |       | (108,648                     | )          | (106,264 | ) |
| Other current assets                                                                         |       | 20,175                       |       | (1,576 | ) |
| Other assets                                                                                 |       | (5,379                       | )          | (3,293 | ) |
| Accounts payable and  accrued liabilities                                                    |       | 51,231                       |       | (54,209 | ) |
| Deferred real estate  credits                                                                |       | 5,379                        |       | 6,973 |   |
| **Net cash  provided by (used for) operating activities**                                    |       | 39,814                       |       | (89,880 | ) |
| **CASH FLOWS  – INVESTING ACTIVITIES**                                                  |       |                         |       |   |   |
| Capital expenditures                                                                         |       | (17,261                      | )          | (33,461 | ) |
| **Net cash  used for investing activities**                                                  |       | (17,261                      | )          | (33,461 | ) |
| **CASH FLOWS  – FINANCING ACTIVITIES**                                                  |       |                         |       |   |   |
| Repayment of borrowings  under senior term loan facility                                     |       | (26,617                      | )          | — |   |
| Repayment of borrowings                                                                      |       | (146                         | )          | (489 | ) |
| **Net cash  used for financing activities**                                                  |       | (26,763                      | )          | (489 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                               |       |                         |       |   |   |
| Decrease during the period                                                                   |       | (4,210                       | )          | (123,830 | ) |
| Beginning balance                                                                            |       | 323,425                      |       | 239,180 |   |
| Ending balance                                                                               |       | $                            | 319,215    |   | $ | 115,350 |   |
|                                                                                         |       |                         |       |   |   |
| **Supplemental  Schedule of Cash Flow Information**                                          |       |                         |       |   |   |
| ** **                                                                                   |       |                         |       |   |   |
| Cash paid (received) during  the period for:                                                 |       |                         |       |   |   |
| Interest                                                                                     |       | $                            | 48,378     |   | $ | 66,643 |   |
| Income taxes                                                                                 |       | $                            | (3,310     | ) | $ | 1,849 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

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**NEIMANMARCUS, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.****             ****Basis of Presentation**

 

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

 

In our opinion, theaccompanying unaudited condensed consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, necessary to presentfairly our financial position, results of operations and cash flows for theapplicable interim periods.

 

The specialty retailindustry is seasonal in nature, with a higher level of sales typicallygenerated in the fall and holiday selling seasons.  Due to seasonal and other factors, theresults of operations for the first quarter of fiscal year 2010 are notnecessarily comparable to, or indicative of, results of any other interimperiod or for the fiscal year as a whole.

 

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

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the first quarter of fiscal year 2010 relate to thethirteen weeks ended October 31, 2009. All references to the first quarter of fiscal year 2009 relate to thethirteen weeks ended November 1, 2008.

 

A detailed description ofour critical accounting policies is included in our Annual Report on Form 10-Kfor the fiscal year ended August 1, 2009.

 

We have evaluated allmaterial events occurring subsequent to the date of the financial statements upto the date and time this Quarterly Report on Form 10-Q was filed.

 

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

 

We believe the followingcritical accounting policies, among others, encompass the more significantjudgments and estimates used in the preparation of our financial statements:

 

·                  Recognition of revenues;

 

·                  Valuation of merchandise inventories, including determination oforiginal 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 loyaltyprograms;

 

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·                  Recognition of income taxes; and

 

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

 

***Fair Value Measurements.***  Undergenerally accepted accounting principles, we are required 1) to measure certainassets and liabilities at fair value or 2) to disclose the fair value ofcertain assets and liabilities recorded at cost.  Pursuant to these fair value measurement anddisclosure requirements, fair value is defined as the price that would bereceived upon sale of an asset or paid upon transfer of a liability in anorderly transaction between market participants at the measurement date and inthe principal or most advantageous market for that asset or liability. The fairvalue is calculated based on assumptions that market participants would use inpricing the asset or liability, not on assumptions specific to the entity. Inaddition, the fair value of liabilities includes consideration ofnon-performance risk, including our own credit risk.  Each fair value measurement is reported inone of the following three levels:

 

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

 

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

 

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

 

At October 31, 2009,August 1, 2009 and November 1, 2008, the fair values of cash and cashequivalents, receivables and accounts payable approximated their carryingvalues due to the short-term nature of these instruments.  See Notes 3 and 4 to the condensedconsolidated financial statements for the estimated fair values of our debtinstruments and interest rate swap financial instruments subject to fair valuedisclosures.

 

***Recent Accounting Pronouncements. ***In December 2007, the FASB issued guidance thataddresses the recognition and accounting for identifiable assets acquired,liabilities assumed and non-controlling interests in businesscombinations.  In addition, this guidancechanges the accounting treatment for certain acquisition-related items,including requirements to expense acquisition-related costs as incurred,expense restructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a businesscombination as a component of tax expense. These rules are to be applied prospectively to businesscombinations for which the acquisition date is on or after December 15,2008.  Generally, the effect of thisguidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertaintiesremaining as of October 31, 2009 related to the Acquisition will besubject to the provisions of this guidance. As to the future resolution of these tax uncertainties, we do notbelieve these requirements will have a material impact on our future financialstatements.

 

In February 2008,the FASB issued guidance that delays the effective date of fair valuedisclosures required for all nonfinancial assets, such as intangible assets andgoodwill, and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis.  We implemented this guidance in the preparationof our condensed consolidated financial statements for the quarter ended October 31,2009, however, no additional disclosures were required.

 

In December 2008,the FASB issued guidance related to an employer’s disclosures about plan assetsof a defined benefit pension or other postretirement plan.  This guidance is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have not yet evaluated theimpact of adopting the disclosure requirements on our consolidated financialstatements for our fiscal year ending July 31, 2010.

 

In April 2009, theFASB issued guidance requiring additional disclosures in interim financialstatements regarding determining and reporting fair values for certain assetsand liabilities.  We adopted thisguidance in the first quarter of fiscal year 2010 related to the fair value ofour debt instruments.

 

In June 2009, theFASB issued guidance that establishes the Accounting Standards Codification(ASC) as the source of authoritative accounting principles recognized by theFASB to be applied by nongovernmental entities in the preparation of 

 

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financial statements inconformity with generally accepted accounting principles.  This guidance is effective for financialstatements issued for interim and annual periods ending after September 15,2009, or our first quarter of fiscal year 2010 ending October 31,2009.  The adoption of this guidance didnot have an impact on our consolidated financial statements.

 

**2.****             ****Goodwill and IntangibleAssets, Net**

 
| **(in thousands)**                   | ** ** | **October 31,********2009** | ** ** | **August 1,********2009** | ** ** | **November 1,********2008** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
|                                 |       |                             |       |                           |       |                             |       |
| Goodwill                             |       | $                                | 1,263,433  |                           | $          | 1,263,433                        |       | $ | 1,611,191 |   |
| Tradenames                           |       | 1,235,012                        |       | 1,235,290                      |       | 1,579,054                        |       |
| Customer  lists, net                 |       | 355,093                          |       | 368,660                        |       | 409,363                          |       |
| Favorable  lease commitments, net    |       | 407,095                          |       | 411,564                        |       | 424,972                          |       |
| Goodwill  and intangible assets, net |       | $                                | 3,260,633  |                           | $          | 3,278,947                        |       | $ | 4,024,580 |   |

 

***Indefinite-Lived Intangible Assets and Goodwill.*** Indefinite-lived intangible assets, such as tradenames and goodwill, arenot subject to amortization. Rather, we assess the recoverability ofindefinite-lived intangible assets and goodwill in the fourth quarter of eachfiscal year and upon the occurrence of certain events.

 

***Intangible Assets Subject to Amortization.*** Customer lists and amortizable tradenames are amortized using thestraight-line method over their estimated useful lives, ranging from 5 to 24years (weighted average life of 13 years). Favorable lease commitments are amortized straight-line over theremaining lives of the leases, ranging from 6 to 49 years (weighted averagelife of 33 years).  Total estimatedamortization of all acquisition-related intangible assets for the next fivefiscal years is currently estimated as follows (in thousands):

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

 

***Impairment of Long-Lived Assets.**** *We assess the recoverability of indefinite-livedassets and goodwill in the fourth quarter of each year and upon the occurrenceof certain events.  In connection withthe preparation of our consolidated financial statements for the second quarterof fiscal year 2009, we concluded that it was appropriate to test ourlong-lived assets for recoverability in light of the significant declines inthe domestic and global financial markets during the first and second quartersof fiscal year 2009. Utilizing our then-current operating forecasts to estimatethe fair values of our Neiman Marcus stores, Bergdorf Goodman stores and DirectMarketing operation, we determined certain of our property and equipment,tradenames and goodwill to be impaired and recorded impairment charges in thesecond quarter of fiscal year 2009 aggregating $560.1 million.

 

In the fourth quarter offiscal year 2009, we updated our short-term and long-term operating forecastsin connection with our annual planning process in light of our updatedexpectations of future business conditions and trends.  Utilizing these updated operating forecaststo estimate the fair values of our reporting units, we determined furtherimpairment with respect to certain of our property and equipment, tradenamesand goodwill and recorded additional impairment charges in the fourth quarter offiscal year 2009 aggregating $143.1 million.

 

Total impairment chargesrecorded in fiscal year 2009 were as follows:

 
| **(in thousands)**      | ** ** | **Specialty********Retail stores** | ** ** | **Direct********Marketing** | ** ** | **Total** | ** ** |
|-------------------------|------------|------------------------------------|------------|-----------------------------|------------|-----------|------------|
|                    |       |                               |       |                        |       |      |       |
| Property  and equipment |       | $                                  | 30,348     |                        | $          | —    |       | $ | 30,348 |   |
| Tradenames              |       | 311,835                            |       | 31,374                      |       | 343,209   |       |
| Goodwill                |       | 329,709                            |       | —                      |       | 329,709   |       |
|                    |       | $                                  | 671,892    |                        | $          | 31,374    |       | $ | 703,266 |   |

 

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

 

The significantcomponents of our long-term debt are as follows:

 
| **(in thousands)**                                          | ** ** | **Interest********Rate** | ** ** | **October 31,********2009** | ** ** | **August 1,********2009** | ** ** | **November 1,********2008** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
|                                                        |       |                     |       |                             |       |                           |       |                             |       |
| Senior  Secured Term Loan Facility                          |       | variable                 |       | $                                | 1,598,383  |                           | $          | 1,625,000                        |       | $ | 1,625,000 |   |
| 2028  Debentures                                            |       | 7.125%                   |       | 121,345                          |       | 121,297                        |       | 121,150                          |       |
| Senior  Notes                                               |       | 9.0%/9.75%               |       | 752,445                          |       | 734,541                        |       | 700,000                          |       |
| Senior  Subordinated Notes                                  |       | 10.375%                  |       | 500,000                          |       | 500,000                        |       | 500,000                          |       |
| Total  debt                                                 |       |                     |       | 2,972,173                        |       | 2,980,838                      |       | 2,946,150                        |       |
| Less:  current portion of Senior Secured Term Loan Facility |       |                     |       | —                           |       | (26,617                        | )          | —                           |       |
| Long-term  debt                                             |       |                     |       | $                                | 2,972,173  |                           | $          | 2,954,221                        |       | $ | 2,946,150 |   |

 

***Senior Secured Asset-Based Revolving Credit Facility.*** On July 15, 2009, NMG amended and restated the terms of its priorasset-based revolving credit facility (which had been scheduled to mature on October 6,2010).  The terms of the amended and restated Asset-Based Revolving CreditFacility include a scheduled maturity date of January 15, 2013 and amaximum committed borrowing capacity of $600.0 million (the same amount as theprior facility).  The new facility also provides an uncommitted accordionfeature that allows NMG to request the lenders to provide additional capacityin either the form of increased revolving commitments or incremental termloans, subject to a potential total maximum facility of $800 million.

 

The Asset-Based RevolvingCredit Facility provides committed financing of up to $600.0 million, subjectto a borrowing base.  The Asset-BasedRevolving Credit Facility includes borrowing capacity available for letters ofcredit and for borrowings on same-day notice. The borrowing base for the Asset-Based Revolving Credit Facility isequal to at any time the sum of (a) the lesser of (i) 80% of eligibleinventory (valued at the lower of cost or market value) and (ii) 85% ofthe net orderly liquidation value of eligible inventory, and (b) 85% ofthe amounts owed by credit card processors in respect of eligible credit cardaccounts constituting proceeds arising from the sale or disposition ofinventory, less certain reserves. Through April 30, 2011, NMG is required to maintain excessavailability under the terms of the Asset-Based Revolving Credit Facility of atleast the greater of (a) 10% of the lesser of (i) the aggregaterevolving commitments and (ii) the borrowing base and (b) $50million.  After April 30, 2011, if at any time, excess availabilityis less than the greater of (a) 15% of the lesser of (i) theaggregate revolving commitments and (ii) the borrowing base and (b) $60million, NMG will be required to maintain a pro forma ratio of consolidatedEBITDA to consolidated Fixed Charges (as such terms are defined in the creditagreement) of at least 1.1 to 1.0.  On October 31, 2009, NMG had noborrowings outstanding under this facility, $32.6 million of outstandingletters of credit and $507.4 million of unused borrowing availability.

 

The Asset-Based RevolvingCredit Facility provides that NMG has the right at any time to request up to$300 million of additional revolving facility commitments and/or incrementalterm loans; provided that the aggregate amount of loan commitments under theAsset-Based Revolving Credit Facility may not exceed $800 million. However, thelenders are under no obligation to provide any such additional commitments orloans, and any increase in commitments or incremental term loans will besubject to customary conditions precedent.  If NMG were to request anysuch additional commitments and the existing lenders or new lenders were toagree to provide such commitments, the Asset-Based Revolving Credit Facilitysize could be increased to up to $800 million, but NMG’s ability to borrowwould still be limited by the amount of the borrowing base. Incremental termloans may be exchanged by NMG for any of NMG’s existing senior notes and seniorsubordinated notes, or the cash proceeds of any incremental term loans may beused to repurchase any of such notes, but neither the incremental term loansnor the proceeds thereof may be used for any other purpose.

 

Borrowings under theAsset-Based Revolving Credit Facility bear interest at a rate per annum equalto, at NMG’s option, either (a) a base rate determined by reference to thehighest of (i) a defined prime rate, (ii) the federal funds effectiverate plus 1/2 of 1% or (iii) a one-month LIBOR rate plus 1% or (b) aLIBOR rate, subject to certain adjustments, in each case plus an applicablemargin.  The applicable margin is up to 3.50% with respect to base rateborrowings and up to 4.50% with respect to LIBOR borrowings, provided thatuntil October 1, 2010, the applicable margin will be 3.25% with respect tobase rate borrowings and 4.25% with respect to LIBOR borrowings. The applicablemargin is subject to adjustment based on the historical availability under theAsset-Based Revolving Credit Facility. In addition, NMG is required to pay acommitment fee in respect of unused commitments of (a) 0.750% per annumduring any applicable period in which the average revolving loan 

 

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utilization is 50% ormore or (b) 1% per annum during any applicable period in which the averagerevolving loan utilization is less than 50%.  NMG must also pay customaryletter of credit fees and agency fees.

 

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

 

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

 

All obligations under theAsset-Based Revolving Credit Facility are guaranteed by the Company and certainof NMG’s existing and future domestic subsidiaries.  All obligationsunder NMG’s Asset-Based Revolving Credit Facility, and the guarantees of thoseobligations, are secured, subject to certain significant exceptions, bysubstantially all of the assets of the Company, NMG and the subsidiaries thathave guaranteed the Asset-Based Revolving Credit Facility (subsidiaryguarantors).  As of October 31,2009, there were no assets or liabilities held by non-guarantor subsidiaries.

 

The Asset-Based RevolvingCredit Facility contains covenants (which are described in our Annual Report onForm 10-K for the fiscal year ended August 1, 2009), includingcovenants limiting dividends and other restricted payments; investments, loans,advances and acquisitions; and prepayments or redemptions of otherindebtedness. These covenants permit the restricted actions in an unlimited amount,subject to the satisfaction of certain payment conditions, principally that NMGmust have pro forma excess availability under the Asset-Based Revolving CreditFacility equal to at least 25% of the lesser of (a) the revolvingcommitments under the facility and (b) the borrowing base, NMG deliveringprojections demonstrating that projected excess availability for the nexttwelve months will be equal to such thresholds and that NMG have a pro formaratio of consolidated EBITDA to consolidated Fixed Charges (as such terms aredefined in the credit agreement) of at least 1.2 to 1.0 (or 1.1 to 1.0 forprepayments or redemptions of other indebtedness).  The Asset-Based Revolving Credit Facilityalso contains customary affirmative covenants and events of default, includinga cross-default provision in respect of any other indebtedness that has anaggregate principal amount exceeding $50 million.

 

For a more detaileddescription of NMG’s Asset-Based Revolving Credit Facility, refer to our AnnualReport on Form 10-K for the fiscal year ended August 1, 2009.

 

***Senior Secured Term Loan Facility.*** In October 2005, NMG entered into a credit agreement and relatedsecurity and other agreements for a $1,975.0 million Senior Secured TermLoan Facility.  At October 31, 2009,the outstanding balance under the Senior Secured Term Loan Facility was$1,598.4 million.  The principal amountof the loans outstanding is due and payable in full on April 6, 2013.

 

At October 31, 2009,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and (2) thefederal funds effective rate plus  1⁄2 of1% or (b) a LIBOR rate, subject to certain adjustments, in each case plusan applicable margin. The interest rate on the outstanding borrowings pursuantto the Senior Secured Term Loan Facility was 2.29% at October 31,2009.  The applicable margin is subjectto adjustment based on contractually defined debt coverage ratios.  At October 31, 2009, the applicablemargin with respect to base rate borrowings was 1.00% and the applicable marginwith respect to LIBOR borrowings was 2.00%.

 

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The credit agreementgoverning the Senior Secured Term Loan Facility requires NMG to prepayoutstanding term loans with 50% (which percentage will be reduced to 25% if NMG’stotal 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 annualexcess cash flow (as defined in the credit agreement). For fiscal year 2009,NMG was required to prepay $26.6 million of outstanding term loans in the firstquarter of fiscal year 2010 pursuant to the annual excess cash flowrequirements.  If a change of control (asdefined in the credit agreement) occurs, NMG will be required to offer toprepay all outstanding term loans, at a prepayment price equal to 101% of theprincipal amount to be prepaid, plus accrued and unpaid interest to the date ofprepayment. NMG also must offer to prepay outstanding term loans at 100% of theprincipal amount to be prepaid, plus accrued and unpaid interest, with theproceeds of certain asset sales under certain circumstances.

 

NMG may voluntarilyprepay outstanding loans under the Senior Secured Term Loan Facility at anytime without premium or penalty other than customary “breakage” costs withrespect to LIBOR loans. There is no scheduled amortization under the SeniorSecured Term Loan Facility.

 

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

 

The credit agreementgoverning the Senior Secured Term Loan Facility contains a number of negativecovenants that are substantially similar to those governing the Senior Notesand additional covenants related to the security arrangements for the SeniorSecured Term Loan Facility. The credit agreement also contains customaryaffirmative covenants and events of default, including a cross-default provisionin respect of any other indebtedness that has an aggregate principal amountexceeding $50 million.

 

For a more detaileddescription of the Senior Secured Term Loan Facility, refer to our AnnualReport on Form 10-K for the fiscal year ended August 1, 2009.

 

The fair value of theSenior Secured Term Loan Facility was approximately $1,382.6 million at October 31,2009, $1,332.5 million at August 1, 2009 and $1,235.0 million at November 1,2008 based on prevailing market rates at this time.

 

***2028 Debentures.***  In May 1998,NMG issued $125.0 million aggregate principal amount of its 7.125% 2028Debentures. NMG equally and ratably secures its 2028 Debentures by a first liensecurity interest on certain collateral subject to liens granted under NMG’sSenior Secured Credit Facilities. The 2028 Debentures are guaranteed on anunsecured, senior basis by the Company. The 2028 Debentures are not guaranteed by certain subsidiaries ofNMG.  The 2028 Debentures include across-acceleration provision in respect of any other indebtedness that has anaggregate principal amount exceeding $15 million.  NMG’s 2028 Debentures mature on June 1,2028.

 

For a more detaileddescription of the 2028 Debentures, refer to our Annual Report on Form 10-Kfor the fiscal year ended August 1, 2009.

 

The fair value of the2028 Debentures was approximately $105.6 million at October 31, 2009,$95.6 million at August 1, 2009 and $106.3 million at November 1,2008 based on quoted market prices.

 

***Senior Notes.**** *NMG has$752.4 million aggregate principal amount of 9.0% / 9.75% Senior Notesunder a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015.

 

Interest on the SeniorNotes is payable quarterly in arrears on each January 15, April 15, July 15and October 15.  For any interestpayment period through October 15, 2010, NMG may, at its option, elect topay interest on the Senior Notes entirely in cash (Cash Interest) or entirelyby increasing the principal amount of the outstanding Senior Notes by issuingadditional Senior Notes (PIK Interest). Cash Interest on the Senior Notesaccrues at the rate of 9% per annum. PIK Interest on the Senior Notes accruesat the rate of 9.75% per annum. We negotiated for the right to include the PIKfeature in our Senior Notes because of our belief that this feature could be auseful tool to enhance liquidity under appropriate circumstances. In the secondquarter of fiscal year 2009, given the dislocation in the financial markets andthe uncertainty as to when reasonable conditions will return, we believed thatit was appropriate to utilize this feature, even though we had availableborrowing capacity under our $600.0 million revolving credit facility.Accordingly, we elected to pay PIK Interest for the three quarterly interestperiods ending October 14, 2009 and to make such interest payments withthe issuance of additional Senior Notes at the PIK Interest rate of 

 

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9.75% instead of payinginterest in cash.  As a result, theoriginal principal amount of Senior Notes of $700.0 million increased by $17.1million on April 14, 2009, $17.4 million on July 14, 2009 and $17.9million on October 14, 2009.

 

For the quarterlyinterest period ending on January 15, 2010, we have elected to pay cashinterest.  Prior to the beginning of eacheligible interest period in the future, we will evaluate whether to continueutilizing this PIK feature, taking into account market conditions and otherrelevant factors at that time. After October 15, 2010, we are required tomake all interest payments on the Senior Notes entirely in cash.

 

The Senior Notes arefully and unconditionally guaranteed, on a joint and several unsecured, seniorbasis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’sobligations under its Senior Secured Credit Facilities and by the Company. TheSenior Notes and the guarantees thereof are NMG’s and the guarantors’unsecured, senior obligations and rank (i) equal in the right of paymentwith all of NMG’s and the guarantors’ existing and future senior indebtedness,including any borrowings under NMG’s Senior Secured Credit Facilities and theguarantees thereof and NMG’s 2028 Debentures; and (ii) senior to all ofNMG’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 SecuredCredit Facilities, the 2028 Debentures, and any other secured obligations ofNMG, in each case, to the extent of the value of the assets securing suchobligations. In addition, the Senior Notes are structurally subordinated to allexisting and future liabilities, including trade payables, of NMG’ssubsidiaries that are not providing guarantees.

 

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

 

For a more detaileddescription of NMG’s Senior Notes, refer to our Annual Report on Form 10-Kfor the fiscal year ended August 1, 2009.

 

The fair value of NMG’sSenior Notes was approximately $667.8 million at October 31, 2009, $539.9million at August 1, 2009 and $476.0 million at November 1, 2008based on quoted market prices.

 

***Senior Subordinated Notes.**** *NMG has $500.0 million aggregate principal amountof 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 SubordinatedNotes are fully and unconditionally guaranteed, on a joint and severalunsecured, senior subordinated basis, by each of NMG’s wholly-owned domesticsubsidiaries that guarantee NMG’s obligations under its Senior Secured CreditFacilities and by the Company. The Senior Subordinated Notes and the guaranteesthereof are NMG’s and the guarantors’ unsecured, senior subordinatedobligations and rank (i) junior to all of NMG’s and the guarantors’existing and future senior indebtedness, including the Senior Notes and anyborrowings under NMG’s Senior Secured Credit Facilities, and the guaranteesthereof and NMG’s 2028 Debentures; (ii) equally with any of NMG’s and theguarantors’ future senior subordinated indebtedness; and (iii) senior toany of NMG’s and the guarantors’ future subordinated indebtedness. In addition,the Senior Subordinated Notes are structurally subordinated to all existing andfuture liabilities, including trade payables, of NMG’s subsidiaries that arenot providing guarantees.

 

NMG is not required tomake any mandatory redemption or sinking fund payments with respect to theSenior Subordinated Notes. The indenture governing the Senior SubordinatedNotes contains a number of customary negative covenants and events of defaults,including a cross-default provision in respect of any other indebtedness thathas an aggregate principal amount exceeding $50 million, which, if any of themoccurs, would permit or require the principal, premium, if any, interest andany other monetary obligations on all outstanding Senior Subordinated Notes tobe due and payable immediately, subject to certain exceptions.

 

For a more detaileddescription of NMG’s Senior Subordinated Notes, refer to our Annual Report on Form 10-Kfor the fiscal year ended August 1, 2009.

 

The fair value of NMG’sSenior Subordinated Notes was approximately $440.0 million at October 31,2009, $355.0 million at August 1, 2009 and $342.5 million at November 1,2008 based on quoted market prices.

 

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***Maturities of Long-Term Debt.*** At October 31, 2009, annual maturities of long-term debt during thenext five fiscal years and thereafter are as follows (in millions):

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

 

The above table does notreflect either future excess cash flow prepayments, if any, that may berequired under the Senior Secured Term Loan Facility or any future PIK Interestelection that we may make through October 15, 2010.

 

***Interest expense.***  Thesignificant components of interest expense are as follows:

 
| ** **                         | ** ** | **Thirteen weeks ended**         | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                 | ** ** | **October 31,********2009** | ** ** | **November 1,********2008** | ** ** |
|                               |       |                             |       |   |   |
| Senior  Secured Term Loan Facility |       | $                                | 20,786     |   | $ | 23,930 |   |
| 2028  Debentures                   |       | 2,227                            |       | 2,227 |   |
| Senior  Notes                      |       | 17,525                           |       | 15,750 |   |
| Senior  Subordinated Notes         |       | 12,826                           |       | 12,969 |   |
| Amortization  of debt issue costs  |       | 4,661                            |       | 3,554 |   |
| Other                              |       | 1,738                            |       | 825 |   |
| Total  interest expense            |       | 59,763                           |       | 59,255 |   |
| Less:                              |       |                             |       |   |   |
| Interest  income                   |       | 177                              |       | 1,104 |   |
| Capitalized  interest              |       | 221                              |       | 306 |   |
| Interest  expense, net             |       | $                                | 59,365     |   | $ | 57,845 |   |

 

**4.****             ****Interest Rate Swaps**

 

In connection with theAcquisition, we obtained $2,575.0 million of floating rate debt agreements, ofwhich $2,125.0 million was outstanding at the Acquisition date and $1,598.4million is outstanding at October 31, 2009.  Effective December 6, 2005, NMG enteredinto floating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness.  These swap agreements hedge a portion of ourcontractual floating rate interest commitments through the expiration of theagreements in December 2010.  As aresult of the swap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.850% to 6.983% per quarter through 2010 and result in an average fixed rateof 6.914%.

 

As of the effective date,NMG designated the interest rate swaps as cash flow hedges. As cash flowhedges, unrealized gains on our outstanding interest rate swaps are recognizedas assets while unrealized losses are recognized as liabilities.  Our interest rate swap agreements are highly,but not perfectly, correlated to the changes in interest rates to which we areexposed.  As a result, unrealized gainsand losses on our interest rate swap agreements are designated as effective orineffective.  The effective portion ofsuch gains or losses is recorded as a component of accumulated othercomprehensive loss while the ineffective portion of such gains or losses isrecorded as a component of interest expense.

 

In addition, we realize again or loss on our interest rate swap agreements in connection with eachrequired interest payment on our floating rate indebtedness.  These realized gains or losses arereclassified from accumulated other comprehensive loss to interest expense.  The realized gains and losses effectivelyadjust the contractual interest requirements pursuant to the terms of ourfloating rate indebtedness to the interest requirements at the fixed ratesestablished in the interest rate swaps agreements.  The cash flows from our interest rate swapsare recorded in operating activities in the condensed consolidated statementsof cash flows.

 

The fair values of theinterest rate swaps are estimated using industry standard valuation modelsusing market-based observable inputs including interest rate curves (Level2).  A summary of the recorded balanceswith respect to our interest rate swaps 

 

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included in our condensedconsolidated balance sheets is as follows:

 
| **(in thousands)**                                                 | ** ** | **October 31,********2009** | ** ** | **August 1,********2009** | ** ** | **November 1,********2008** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
|                                                               |       |                             |       |                           |       |                             |       |
| Unrecognized  losses – included in otherlong-term liabilities |       | $                                | 53,104     |                           | $          | 57,750                           |       | $ | 47,662 |   |
|                                                               |       |                             |       |                           |       |                             |       |
| Accumulated  other comprehensive loss, net of taxes                |       | $                                | 32,561     |                           | $          | 35,508                           |       | $ | 29,717 |   |

 

A summary of the recordedamounts related to our interest rate swaps reflected in our condensedconsolidated statements of operations are as follows:

 
| ** **                                                         | ** ** | **Thirteen  weeks ended**        | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| **(in  thousands)**                                                | ** ** | **October 31,********2009** | ** ** | **November 1,********2008** | ** ** |
|                                                               |       |                             |       |   |   |
| Realized hedging losses – included ininterest expense, net    |       | $                                | 11,098     |   | $ | 5,111 |   |
|                                                               |       |                             |       |   |   |
| Ineffective hedging losses – included ininterest expense, net |       | $                                | 216        |   | $ | 137 |   |

 

The amount of lossesrecorded in other comprehensive loss at October 31, 2009 that is expectedto be reclassified into interest expense in the next twelve months, if interestrates remain unchanged, is approximately $43.9 million.

 

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

 

***Description of Benefit Plans.*** We sponsor a defined benefit pension plan (Pension Plan) and an unfundedsupplemental executive retirement plan (SERP Plan) which provides certainemployees additional pension benefits. Benefits under both plans are based onthe employees’ years of service and compensation over defined periods ofemployment.  We froze benefits offeredunder our Pension and SERP Plans effective December 31, 2007.  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 agerequirements.

 

We also maintain definedcontribution plans consisting of a 401(k) Plan, a retirement savings plan(RSP) and defined contribution supplemental executive retirement plan (DefinedContribution SERP Plan).  Employees makecontributions to the 401(k) Plan and RSP and we match an employee’scontribution up to a maximum of 6% of the employee’s compensation subject tostatutory limitations for a potential maximum match of 50% of employeecontributions to the 401(k) Plan and 75% of employee contributions to theRSP. We also sponsor an unfunded key employee deferred compensation plan, whichprovides certain employees with additional benefits.

 

***Benefit Obligations.***  Obligationsfor our employee benefit plans, included in other long-term liabilities, are asfollows:

 
| **(in  thousands)**                      | ** ** | **October 31,********2009** | ** ** | **August 1,********2009** | ** ** | **November 1,********2008** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** **                       | ** ** |
| Pension Plan                             |       | $                                | 157,576    |                           | $          | 156,001                          |       | $ | 41,765 |   |
| SERP Plan                                |       | 93,083                           |       | 92,152                         |       | 78,524                           |       |
| Postretirement Plan                      |       | 17,941                           |       | 17,920                         |       | 20,425                           |       |
|                                     |       | 268,600                          |       | 266,073                        |       | 140,714                          |       |
| Less: current portion                    |       | (5,069                           | )          | (5,069                         | )          | (4,165                           | )          |
| Long-term portion of benefit obligations |       | $                                | 263,531    |                           | $          | 261,004                          |       | $ | 136,549 |   |

 

As of October 31,2009, we have $69.0 million (net of taxes of $44.8 million) of adjustments toour benefit obligations recorded as increases to accumulated othercomprehensive loss.

 

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***Costs ofBenefits. ***The components of the expenses weincurred under our Pension Plan, SERP Plan and Postretirement Plan are asfollows:

 
| ** **                             | ** ** | **Thirteen weeks ended** | ** ** |
|----------------------------------------|------------|------------------------------------|------------|
| **(in  thousands)**                    | ** ** | **October 31,********2009**   | ** ** | **November 1,********2008** | ** ** |
| Pension  Plan:                         |       |                               |       |   |   |
| Service  cost                          |       | $                                  | 1,429      |   | $ | 1,431 |   |
| Interest cost                          |       | 6,329                              |       | 6,038 |   |
| Expected return on plan assets         |       | (6,463                             | )          | (6,507 | ) |
| Net amortization of losses             |       | 282                                |       | — |   |
| Pension Plan expense                   |       | $                                  | 1,577      |   | $ | 962 |   |
|                                   |       |                               |       |   |   |
| SERP Plan:                             |       |                               |       |   |   |
| Service cost                           |       | $                                  | 171        |   | $ | 162 |   |
| Interest cost                          |       | 1,377                              |       | 1,336 |   |
| SERP Plan expense                      |       | $                                  | 1,548      |   | $ | 1,498 |   |
|                                   |       |                               |       |   |   |
| Postretirement Plan:                   |       |                               |       |   |   |
| Service cost                           |       | $                                  | 18         |   | $ | 23 |   |
| Interest cost                          |       | 254                                |       | 336 |   |
| Net amortization of prior service cost |       | (172                               | )          | — |   |
| Net amortization of losses             |       | 90                                 |       | 70 |   |
| Postretirement Plan expense            |       | $                                  | 190        |   | $ | 429 |   |

 

***Funding Policy and Plan Assets.*** Our policy is to fund the Pension Plan at or above the minimum requiredby law. In fiscal year 2009, we were not required to make contributions to thePension Plan; however, we made a voluntary $15.0 million contribution to ourPension Plan in the fourth quarter of fiscal year 2009.  Based upon currently available information,we will not be required to make contributions to the Pension Plan during fiscalyear 2010.  However, we will continue toevaluate voluntary contributions to our Pension Plan based upon the unfundedposition of the Pension Plan, our available liquidity and other factors.

 

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

 

Our effective income taxrate for the first quarter of fiscal year 2010 was 45.0% compared to 45.7% forthe first quarter of fiscal year 2009. Our effective tax rates for the first quarter of fiscal years 2010 and2009 were unfavorably impacted by a lower level of projected earnings forfiscal years 2010 and 2009.

 

At October 31, 2009,the gross amount of unrecognized tax benefits was $6.7 million, all of whichwould impact our effective tax rate, if recognized.  We classify interest and penalties as acomponent of income tax expense and our liability for accrued interest andpenalties was $6.0 million as of October 31, 2009.

 

We file income taxreturns in the U.S. federal jurisdiction and various state and localjurisdictions.  During the third quarterof fiscal year 2009, we closed the IRS examination of fiscal years 2005 and2006 and received net refunds of approximately $2.8 million.  In addition, as a result of the completion ofthe audit and IRS determination regarding certain deductions taken inconnection with the Acquisition, we recorded a decrease in the gross amount ofunrecognized tax benefits of $13.7 million and a decrease in accrued interestand penalties of $2.2 million. This $15.9 million reduction in our liabilityfor unrecognized tax benefits resulted in a decrease to goodwill of $17.3million and a tax benefit of $1.3 million, offset by a decrease to deferred taxliabilities of $2.7 million.

 

The IRS is examining ourfederal tax return for fiscal year 2007. We believe our recorded tax liabilities as of October 31, 2009 aresufficient to cover any potential assessments to be made by the IRS upon thecompletion of their examination. We will continue to monitor the progress ofthe IRS examination and review our recorded tax liabilities for potential auditassessments.  With respect to state andlocal jurisdictions, with limited exceptions, the Company and its subsidiariesare no longer subject to income tax audits for fiscal years before 2005.  We believe it is reasonably possible thatadditional adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 12 months as a result of settlements with tax authoritiesor

 

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expiration of statutes oflimitation.  At this time, we do notbelieve such adjustments will have a material impact on our consolidatedfinancial statements.

 

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

 

The Company has approvedequity-based management arrangements which authorize equity awards to begranted to certain management employees for up to 87,992.0 shares of the commonstock of the Company.  Options generallyvest over four to five years and expire 10 years from the date of grant.

 

A summary of the statusof our stock option plan is as follows:

 
| ** **                           | ** ** | **October 31,  2009** | ** ** | **August 1,  2009**                  | ** **  | **November 1,  2008** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-------------------------------------------|-------------|----------------------------|------------|
| ** **                           | ** ** | **Shares**                 | ** ** | **Weighted   Average   Exercise   Price** | ** **  | **Shares**                 | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Shares** | ** ** | **Weighted   Average   Exercise   Price** | ** ** |
| Outstanding  at beginning of period  |       | 79,399.0                   |       | $                                         |  1,585 |                       | 83,146.6   |   | $ |  1,507 |   | 83,146.6 |   | $ |  1,507 |   |
| Granted                              |       | 6,790.0                    |       | 1,000                                     |        | —                     |       | — |   | — |   | — |   |
| Exercised                            |       | —                     |       | —                                    |        | (854.5                     | )          | 1,684 |   | — |   | — |   |
| Forfeited                            |       | (3,115.6                   | )          | 1,684                                     |        | (2,893.1                   | )          | 1,617 |   | — |   | — |   |
| Outstanding at end of period         |       | 83,073.4                   |       | $                                         |  1,611 |                       | 79,399.0   |   | $ |  1,585 |   | 83,146.6 |   | $ |  1,585 |   |
| Options exercisable at end of period |       | 64,942.4                   |       | $                                         |  1,637 |                       | 60,856.7   |   | $ |  1,542 |   | 54,084.1 |   | $ |  1,517 |   |

 

All grants of stockoptions have an exercise price equaling or exceeding the fair market value ofour common stock on the date of grant. Because we are privately held and there is no public market for ourcommon stock, the fair market value of our common stock is determined by ourCompensation Committee at the time option grants are awarded (Level 3 determinationof fair value).  In determining the fairvalue of our common stock, the Compensation Committee considers such factors asthe Company’s actual and projected financial results, the principal amount ofthe Company’s indebtedness, valuations of the Company performed by thirdparties and other factors it believes are material to the valuation process.

 

The exercise price ofapproximately 50% of our options escalate at a 10% compound rate per year(Accreting Options) until the earlier to occur of (i) exercise, (ii) thefifth anniversary of the date of grant or (iii) the occurrence of a changein control. However, in the event the Sponsors cause the sale of shares of theCompany to an unaffiliated entity, the exercise price will cease to accrete atthe time of the sale with respect to a pro rata portion of the accretingoptions.  The exercise price with respectto all other options (Fixed Price Options) is fixed at the grant date.  At October 31, 2009, Accreting Optionswere outstanding for 38,511 shares and Fixed Price Options were outstanding for44,562 shares.

 

We use the Black-Scholesoption-pricing model to determine the fair value of our options as of the dateof grant.  A summary of our fiscal year2010 grants and fair value assumptions is as follows:

 
| ** **                              | ** ** | **Fixed  Price   Options** | ** ** | **Accreting   Options** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| Options Granted                         |       | 3,395.0                    |       | 3,395.0                 |       |
| Exercise Price at October 31, 2009 |       | $                          | 1,000      |                    | $          | 1,000 |   |
| Term                                    |       | 8                          |       | 8                       |       |
| Volatility                              |       | 53.4                       | %          | 53.4                    | %          |
| Risk-Free Rate                          |       | 3.3                        | %          | 3.3                     | %          |
| Dividend Yield                          |       | —                     |       | —                  |       |
| Fair Value                              |       | $                          |  541  |                    | $          |  462 |   |

 

Expected volatility isbased on a combination of NMG’s historical volatility adjusted for our leverageand estimates of implied volatility of our peer group.

 

We recognize compensationexpense for stock options on a straight-line basis over the vestingperiod.  We recognized non-cash stockcompensation expense of $1.1 million in the first quarter of fiscal year2010 and $1.6 million in the first quarter of fiscal year 2009, which isincluded in selling, general and administrative expenses.  At October 31, 2009, unearned non-cashstock-based compensation that we expect to recognize as expense through fiscalyear 2015 aggregates approximately $8.4 million.

 

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In September 2009,the Compensation Committee approved 1) a tender offer for outstanding AccretingOptions to purchase approximately 26,614 shares (Eligible Options) and 2) theextension of the option term with respect to Fixed Price Options, which arecurrently out of the money, for 26,614 shares to October 6, 2017.  These actions were taken in response torecent declines in capital markets and general economic conditions that haveresulted in the current exercise prices for these options to be in excess ofthe current estimated fair value of our common stock.

 

In connection with thetender offer to purchase certain Accreting Options and pursuant to the IssuerTender Offer Statement on Schedule TO initially filed with the Securities andExchange Commission on November 17, 2009 and amended on November 24, 2009,option holders will be allowed to tender their Eligible Options (with anaverage exercise price at October 31, 2009 of $2,131 per share) for newoptions at an exchange rate of 1.5 Eligible Options to 1.0 new option.  The new options will 1) have an initialexercise price of $1,000 per share which exercise price will escalate at a 10%compound rate per year, 2) vest over four years and 3) expire eight years afterthe grant date.  The tender offercommenced in November 2009 and is expected to be completed in December 2009.

 

The CompensationCommittee is still evaluating modifications with respect to Accreting Optionsand Fixed Price Options for an additional 23,054 shares, which were not part ofthe programs described above.

 

**8.****             ****Transactions withSponsors**

 

Pursuant to a managementservices agreement with affiliates of the Sponsors, and in exchange foron-going consulting and management advisory services that are provided to us bythe Sponsors and their affiliates, affiliates of the Sponsors receive anaggregate annual management fee equal to the lesser of (i) 0.25% of ourconsolidated annual revenues or (ii) $10 million. Affiliates of theSponsors also receive reimbursement for out-of-pocket expenses incurred by themor their affiliates in connection with services provided pursuant to theagreement. These management fees are payable quarterly in arrears.  We recorded management fees of $2.2 millionduring the first quarter of fiscal year 2010 and $2.5 million during the firstquarter of fiscal year 2009, which are included in selling, general andadministrative expenses in the condensed consolidated statements of operations.

 

The management servicesagreement also provides that affiliates of the Sponsors may receive future feesin connection with certain future financing and acquisition or dispositiontransactions. The management services agreement includes customary exculpationand indemnification provisions in favor of the Sponsors and their affiliates.

 

**9.****             ****Income from Credit CardProgram, Net**

 

In June 2005, weentered into a marketing and servicing alliance with HSBC.  Pursuant to the agreement with HSBC (ProgramAgreement), HSBC offers credit cards and non-card payment plans and bearssubstantially all credit risk with respect to sales transacted on the cardsbearing our brands. We receive ongoing payments from HSBC related to creditcard sales and compensation for marketing and servicing activities (HSBCProgram Income).  The Program Agreementexpires in June 2010.  We recognizeHSBC Program Income when earned.

 

The Program Agreement, asamended, provides for 1) the allocation between HSBC and NMG of additionalincome, if any, to be generated from the credit card program as a result ofcertain changes made to the terms of credit extended to our customers since theinception of the Program Agreement and 2) the allocation of certain credit cardlosses between HSBC and NMG.  In light ofcurrent economic conditions that have led to higher delinquencies and losses onconsumer indebtednesses, net losses are currently allocable to NMG.  Our reserve for credit card net lossesaggregated $3.5 million as of October 31, 2009 and August 1, 2009 and$2.9 million as of November 1, 2008, which is included in accruedliabilities in the condensed consolidated balance sheets.

 

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

 

***Long-term Incentive Plan.***  The Companyhas a long-term incentive plan (Long-term Incentive Plan) that provides for acash incentive payable to certain employees upon a change of control, asdefined, subject to the attainment of certain performance objectives.  Performance objectives and targets are basedon cumulative EBITDA percentages for three year periods beginning in fiscal year2006.  Earned awards for each completedperformance period will be credited to a book account and will earn interest ata contractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% ofour total outstanding common stock.  Asof October 31, 2009, the vested participant balance in the Long-TermIncentive Plan aggregated $5.3 million.

 

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***Cash Incentive Plan. ***The Company also has a cash incentiveplan (Cash Incentive Plan) to aid in the retention of certain keyexecutives.  The Cash Incentive Plan providesfor the creation of a $14 million cash bonus pool. Each participant in the CashIncentive Plan will be entitled to a cash bonus upon the earlier to occur of achange of control or an initial public offering, as defined in the CashIncentive Plan, provided that the internal rate of return to the Sponsors ispositive.

 

***Litigation.***  We arecurrently involved in various legal actions and proceedings that arose in theordinary course of business. We believe that any liability arising as a resultof these actions and proceedings will not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

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

 

The following table showsthe components of accumulated other comprehensive loss (amounts are recordednet of related income taxes):

 
| **(in  thousands)**                        | ** ** | **October 31,********2009** | ** **     | **August 1,********2009** | ** ** | **November 1,********2008** | ** ** |
|--------------------------------------------|------------|----------------------------------|----------------|--------------------------------|------------|----------------------------------|------------|
|                                       |       |                             |           |                           |       |                             |       |
| Unrealized loss on financial instruments   |       | $                                |  (32,561  | )                              | $          |  (35,508                    | )          | $ |  (29,717 | ) |
| Change in unfunded benefit obligations     |       | (69,011                          | )              | (69,011                        | )          | 12,302                           |       |
| Other                                      |       | —                           |           | (68                            | )          | (178                             | )          |
| Total accumulated other comprehensive loss |       | $                                |  (101,572 | )                              | $          |  (104,587                   | )          | $ |  (17,593 | ) |

 
|                                                               |   | **Thirteen  weeks ended**        |         |
|--------------------------------------------------------------------|--------|----------------------------------|--------------|
| **(in thousands)**                                                 |   | **October 31,********2009** |         |   |   | **November 1,********2008** |   |
| Net earnings from condensed consolidated statements  of operations |   | $                                |  8,521  |   |   |   | $ |  12,878 |   |
| Change in unrealized loss on financial instruments                 |   | 2,947                            |         |   |   | (7,962 | ) |
| Other                                                              |   | 68                               |         |   |   | (467 | ) |
| Total comprehensive income for the period                          |   | $                                |  11,536 |   |   |   | $ |  4,449 |   |

 

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

 

We have identified tworeportable segments: Specialty Retail stores and Direct Marketing. TheSpecialty Retail stores segment aggregates the activities of our Neiman Marcusand Bergdorf Goodman retail stores, including Neiman Marcus clearance stores.The Direct Marketing segment conducts both online and print catalog operationsunder the Neiman Marcus, Bergdorf Goodman and Horchow brand names.  Both the Specialty Retail stores and DirectMarketing segments derive their revenues from the sales of high-end fashionapparel, accessories, cosmetics and fragrances from leading designers, preciousand fashion jewelry and decorative home accessories.

 

Operating earnings forthe segments include 1) revenues, 2) cost of sales, 3) direct selling, general,and administrative expenses, 4) other direct operating expenses, 5) income fromcredit card program and 6) depreciation expense for the respectivesegment.  Items not allocated to ouroperating segments include those items not considered by management in measuringthe 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 adjustmentsmade in connection with the Acquisition including amortization of intangibleassets and favorable lease commitments and other non-cash items and 3) interestexpense.  These items, while oftenrelated to the operations of a segment, are not considered by segment operatingmanagement, corporate operating management and the chief operating decisionmaker in assessing segment operating performance.  The accounting policies of the operatingsegments are the same as those described in the summary of significantaccounting policies (except with respect to purchase accounting adjustments notallocated to the operating segments).

 

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The following tables setforth the information for our reportable segments:

 
| ** **                                                         | ** ** | **Thirteen  weeks ended**        | ** **    |
|--------------------------------------------------------------------|------------|----------------------------------|---------------|
| **(in  thousands)**                                                | ** ** | **October 31,********2009** | ** **    | **November 1,    2008** | ** ** |
| ** **                                                         | ** ** | ** **                       | ** **    | ** ** | ** ** |
| REVENUES                                                           |       |                             |          |   |   |
| Specialty Retail stores                                            |       | $                                |  721,619 |   | $ |  827,126 |   |
| Direct Marketing                                                   |       | 147,281                          |          | 158,661 |   |
| Total                                                              |       | $                                |  868,900 |   | $ |  985,787 |   |
|                                                               |       |                             |          |   |   |
| OPERATING EARNINGS                                                 |       |                             |          |   |   |
| Specialty Retail stores                                            |       | $                                |  87,198  |   | $ |  94,436 |   |
| Direct Marketing                                                   |       | 21,682                           |          | 19,361 |   |
| Corporate expenses                                                 |       | (15,717                          | )             | (14,180 | ) |
| Amortization of intangible  assets and favorable lease commitments |       | (18,314                          | )             | (18,037 | ) |
| Total                                                              |       | $                                |  74,849  |   | $ |  81,580 |   |
|                                                               |       |                             |          |   |   |
| CAPITAL EXPENDITURES                                               |       |                             |          |   |   |
| Specialty Retail stores                                            |       | $                                |  14,181  |   | $ |  29,826 |   |
| Direct Marketing                                                   |       | 3,080                            |          | 3,635 |   |
| Total                                                              |       | $                                |  17,261  |   | $ |  33,461 |   |
|                                                               |       |                             |          |   |   |
| DEPRECIATION EXPENSE                                               |       |                             |          |   |   |
| Specialty Retail stores                                            |       | $                                |  30,195  |   | $ |  32,948 |   |
| Direct Marketing                                                   |       | 3,866                            |          | 4,312 |   |
| Other                                                              |       | 1,721                            |          | 1,339 |   |
| Total                                                              |       | $                                |  35,782  |   | $ |  38,599 |   |

 
| ** **                                            | ** ** | **October 31,**** ****   2009** | ** **      | **November 1,   2008** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------|-----------------|----------------------------------|------------|
| ASSETS                                                |       |                                           |            |                             |       |
| Tangible assets of Specialty Retail stores            |       | $                                              |  1,769,973 |                             | $          |  2,083,389 |   |
| Tangible assets of Direct  Marketing                  |       | 168,730                                        |            | 203,516                          |       |
| Corporate assets:                                     |       |                                           |            |                             |       |
| Intangible assets related  to Specialty Retail stores |       | 2,790,095                                      |            | 3,504,700                        |       |
| Intangible assets related  to Direct Marketing        |       | 470,538                                        |            | 519,880                          |       |
| Other                                                 |       | 428,792                                        |            | 204,007                          |       |
| Total                                                 |       | $                                              |  5,628,128 |                             | $          |  6,515,492 |   |

 

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**13.  CondensedConsolidating Financial Information**

 

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

 

The following condensedconsolidating financial information represents the financial information ofNeiman Marcus, Inc. and its non-guarantor subsidiaries, prepared on theequity basis of accounting. The information is presented in accordance with therequirements of Rule 3-10 under the Securities and Exchange Commission’sRegulation S-X. The financial information may not necessarily beindicative of results of operations, cash flows or financial position had thenon-guarantor subsidiaries operated as independent entities.

 
| ** **                                       | ** ** | **October 31,  2009** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                               | ** ** | **Company**                | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                       |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       | $                          | —     |   | $ | 318,421 |   | $ | 794 |   | $ | — |   | $ | 319,215 |   |
| Merchandise inventories                          |       | —                     |       | 765,673 |   | 98,009 |   | — |   | 863,682 |   |
| Other current assets                             |       | —                     |       | 112,159 |   | 10,734 |   | — |   | 122,893 |   |
| Total current assets                             |       | —                     |       | 1,196,253 |   | 109,537 |   | — |   | 1,305,790 |   |
| Property and equipment, net                      |       | —                     |       | 854,515 |   | 119,115 |   | — |   | 973,630 |   |
| Goodwill and intangible  assets, net             |       | —                     |       | 1,520,745 |   | 1,739,888 |   | — |   | 3,260,633 |   |
| Other assets                                     |       | —                     |       | 86,242 |   | 1,833 |   | — |   | 88,075 |   |
| Investments in subsidiaries                      |       | 931,498                    |       | 1,871,910 |   | — |   | (2,803,408 | ) | — |   |
| Total assets                                     |       | $                          | 931,498    |   | $ | 5,529,665 |   | $ | 1,970,373 |   | $ | (2,803,408 | ) | $ | 5,628,128 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                       |       |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                       |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                          | —     |   | $ | 209,321 |   | $ | 28,651 |   | $ | — |   | $ | 237,972 |   |
| Accrued liabilities                              |       | —                     |       | 280,762 |   | 68,368 |   | — |   | 349,130 |   |
| Total current liabilities                        |       | —                     |       | 490,083 |   | 97,019 |   | — |   | 587,102 |   |
| Long-term liabilities:                           |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                     |       | 2,972,173 |   | — |   | — |   | 2,972,173 |   |
| Deferred income taxes                            |       | —                     |       | 690,970 |   | — |   | — |   | 690,970 |   |
| Other long-term liabilities                      |       | —                     |       | 444,941 |   | 1,444 |   | — |   | 446,385 |   |
| Total long-term liabilities                      |       | —                     |       | 4,108,084 |   | 1,444 |   | — |   | 4,109,528 |   |
| Total shareholders’ equity                  |       | 931,498                    |       | 931,498 |   | 1,871,910 |   | (2,803,408 | ) | 931,498 |   |
| Total liabilities and  shareholders’ equity |       | $                          | 931,498    |   | $ | 5,529,665 |   | $ | 1,970,373 |   | $ | (2,803,408 | ) | $ | 5,628,128 |   |

 

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| ** **                                       | ** ** | **August 1,  2009** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                               | ** ** | **Company**              | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                     |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                     |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       | $                        | —     |   | $ | 322,766 |   | $ | 659 |   | $ | — |   | $ | 323,425 |   |
| Merchandise inventories                          |       | —                   |       | 676,973 |   | 78,061 |   | — |   | 755,034 |   |
| Other current assets                             |       | —                   |       | 133,438 |   | 9,630 |   | — |   | 143,068 |   |
| Total current assets                             |       | —                   |       | 1,133,177 |   | 88,350 |   | — |   | 1,221,527 |   |
| Property and equipment, net                      |       | —                   |       | 870,300 |   | 122,415 |   | — |   | 992,715 |   |
| Goodwill and intangible  assets, net             |       | —                   |       | 1,535,834 |   | 1,743,113 |   | — |   | 3,278,947 |   |
| Other assets                                     |       | —                   |       | 85,983 |   | 1,854 |   | — |   | 87,837 |   |
| Investments in subsidiaries                      |       | 918,835                  |       | 1,868,405 |   | — |   | (2,787,240 | ) | — |   |
| Total assets                                     |       | $                        | 918,835    |   | $ | 5,493,699 |   | $ | 1,955,732 |   | $ | (2,787,240 | ) | $ | 5,581,026 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                     |       |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                     |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                        | —     |   | $ | 210,219 |   | $ | 23,771 |   | $ | — |   | $ | 233,990 |   |
| Accrued liabilities                              |       | —                   |       | 240,750 |   | 62,136 |   | — |   | 302,886 |   |
| Current maturities of  long-term liabilities     |       | —                   |       | 26,617 |   | — |   | — |   | 26,617 |   |
| Total current liabilities                        |       | —                   |       | 477,586 |   | 85,907 |   | — |   | 563,493 |   |
| Long-term liabilities:                           |       |                     |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                   |       | 2,954,221 |   | — |   | — |   | 2,954,221 |   |
| Deferred income taxes                            |       | —                   |       | 697,810 |   | — |   | — |   | 697,810 |   |
| Other long-term liabilities                      |       | —                   |       | 445,247 |   | 1,420 |   | — |   | 446,667 |   |
| Total long-term liabilities                      |       | —                   |       | 4,097,278 |   | 1,420 |   | — |   | 4,098,698 |   |
| Total shareholders’ equity                  |       | 918,835                  |       | 918,835 |   | 1,868,405 |   | (2,787,240 | ) | 918,835 |   |
| Total liabilities and  shareholders’ equity |       | $                        | 918,835    |   | $ | 5,493,699 |   | $ | 1,955,732 |   | $ | (2,787,240 | ) | $ | 5,581,026 |   |

** **
| ** **                                       | ** ** | **November 1,  2008** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                               | ** ** | **Company**                | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                       |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       | $                          | —     |   | $ | 114,309 |   | $ | 1,041 |   | $ | — |   | $ | 115,350 |   |
| Merchandise inventories                          |       | —                     |       | 958,320 |   | 125,988 |   | — |   | 1,084,308 |   |
| Other current assets                             |       | —                     |       | 136,494 |   | 11,517 |   | — |   | 148,011 |   |
| Total current assets                             |       | —                     |       | 1,209,123 |   | 138,546 |   | — |   | 1,347,669 |   |
| Property and equipment, net                      |       | —                     |       | 935,188 |   | 133,279 |   | — |   | 1,068,467 |   |
| Goodwill and intangible  assets, net             |       | —                     |       | 1,874,355 |   | 2,150,225 |   | — |   | 4,024,580 |   |
| Other assets                                     |       | —                     |       | 74,776 |   | — |   | — |   | 74,776 |   |
| Investments in subsidiaries                      |       | 1,682,601                  |       | 2,323,610 |   | — |   | (4,006,211 | ) | — |   |
| Total assets                                     |       | $                          | 1,682,601  |   | $ | 6,417,052 |   | $ | 2,422,050 |   | $ | (4,006,211 | ) | $ | 6,515,492 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                       |       |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                       |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                          | —     |   | $ | 220,070 |   | $ | 29,554 |   | $ | — |   | $ | 249,624 |   |
| Accrued liabilities                              |       | —                     |       | 331,156 |   | 69,448 |   | — |   | 400,604 |   |
| Total current liabilities                        |       | —                     |       | 551,226 |   | 99,002 |   | — |   | 650,228 |   |
| Long-term liabilities:                           |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                     |       | 2,946,150 |   | — |   | — |   | 2,946,150 |   |
| Deferred income taxes                            |       | —                     |       | 916,072 |   | — |   | — |   | 916,072 |   |
| Other long-term liabilities                      |       | —                     |       | 321,003 |   | (562 | ) | — |   | 320,441 |   |
| Total long-term liabilities                      |       | —                     |       | 4,183,225 |   | (562 | ) | — |   | 4,182,663 |   |
| Total shareholders’ equity                  |       | 1,682,601                  |       | 1,682,601 |   | 2,323,610 |   | (4,006,211 | ) | 1,682,601 |   |
| Total liabilities and  shareholders’ equity |       | $                          | 1,682,601  |   | $ | 6,417,052 |   | $ | 2,422,050 |   | $ | (4,006,211 | ) | $ | 6,515,492 |   |

 

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| ** **                                                                        | ** ** | **Thirteen  weeks ended October 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                               | —     |   | $ | 715,918 |   | $ | 152,982 |   | $ | — |   | $ | 868,900 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                          |       | 443,554 |   | 90,669 |   | — |   | 534,223 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                          |       | 191,066 |   | 27,753 |   | — |   | 218,819 |   |
| Income from credit card  program, net                                             |       | —                                          |       | (11,881 | ) | (1,206 | ) | — |   | (13,087 | ) |
| Depreciation expense                                                              |       | —                                          |       | 31,833 |   | 3,949 |   | — |   | 35,782 |   |
| Amortization of intangible  assets and favorable lease commitments                |       | —                                          |       | 15,089 |   | 3,225 |   | — |   | 18,314 |   |
| Operating earnings                                                                |       | —                                          |       | 46,257 |   | 28,592 |   | — |   | 74,849 |   |
| Interest expense, net                                                             |       | —                                          |       | 59,364 |   | 1 |   | — |   | 59,365 |   |
| Intercompany royalty  charges (income)                                            |       | —                                          |       | 44,271 |   | (44,271 | ) | — |   | — |   |
| Equity in (earnings) loss  of subsidiaries                                        |       | (8,521                                          | )          | (72,862 | ) | — |   | 81,383 |   | — |   |
| Earnings (loss) before  income taxes                                              |       | 8,521                                           |       | 15,484 |   | 72,862 |   | (81,383 | ) | 15,484 |   |
| Income tax expense                                                                |       | —                                          |       | 6,963 |   | — |   | — |   | 6,963 |   |
| Net earnings (loss)                                                               |       | $                                               | 8,521      |   | $ | 8,521 |   | $ | 72,862 |   | $ | (81,383 | ) | $ | 8,521 |   |

** **
| ** **                                                                        | ** ** | **Thirteen  weeks ended November 1, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                               | —     |   | $ | 817,724 |   | $ | 168,063 |   | $ | — |   | $ | 985,787 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                          |       | 519,088 |   | 98,655 |   | — |   | 617,743 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                          |       | 213,152 |   | 29,677 |   | — |   | 242,829 |   |
| Income from credit card  program, net                                             |       | —                                          |       | (11,534 | ) | (1,467 | ) | — |   | (13,001 | ) |
| Depreciation expense                                                              |       | —                                          |       | 34,316 |   | 4,283 |   | — |   | 38,599 |   |
| Amortization of intangible  assets and favorable lease commitments                |       | —                                          |       | 15,090 |   | 2,947 |   | — |   | 18,037 |   |
| Operating earnings                                                                |       | —                                          |       | 47,612 |   | 33,968 |   | — |   | 81,580 |   |
| Interest expense, net                                                             |       | —                                          |       | 57,843 |   | 2 |   | — |   | 57,845 |   |
| Intercompany royalty  charges (income)                                            |       | —                                          |       | 56,830 |   | (56,830 | ) | — |   | — |   |
| Equity in (earnings) loss  of subsidiaries                                        |       | (12,878                                         | )          | (90,796 | ) | — |   | 103,674 |   | — |   |
| Earnings (loss) before  income taxes                                              |       | 12,878                                          |       | 23,735 |   | 90,796 |   | (103,674 | ) | 23,735 |   |
| Income tax expense                                                                |       | —                                          |       | 10,857 |   | — |   | — |   | 10,857 |   |
| Net earnings (loss)                                                               |       | $                                               | 12,878     |   | $ | 12,878 |   | $ | 90,796 |   | $ | (103,674 | ) | $ | 12,878 |   |

 

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| ** **                                                                                   | ** ** | **Thirteen  weeks ended October 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                               | 8,521      |   | $ | 8,521 |   | $ | 72,862 |   | $ | (81,383 | ) | $ | 8,521 |   |
| Adjustments to reconcile  net earnings (loss) to net cash provided by operating activities:  |       |                                            |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization expense                                                       |       | —                                          |       | 51,437 |   | 7,174 |   | — |   | 58,611 |   |
| Paid-in-kind interest                                                                        |       | —                                          |       | 14,362 |   | — |   | — |   | 14,362 |   |
| Deferred income taxes                                                                        |       | —                                          |       | (8,756 | ) | — |   | — |   | (8,756 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans |       | —                                          |       | 4,273 |   | 45 |   | — |   | 4,318 |   |
| Intercompany royalty income  payable (receivable)                                            |       | —                                          |       | 44,271 |   | (44,271 | ) | — |   | — |   |
| Equity in (earnings) loss  of subsidiaries                                                   |       | (8,521                                          | )          | (72,862 | ) | — |   | 81,383 |   | — |   |
| Changes in operating assets  and liabilities, net                                            |       | —                                          |       | (1,921 | ) | (35,321 | ) | — |   | (37,242 | ) |
| Net cash provided by operating  activities                                                   |       | —                                          |       | 39,325 |   | 489 |   | — |   | 39,814 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                          |       | (16,907 | ) | (354 | ) | — |   | (17,261 | ) |
| Net cash used for investing  activities                                                      |       | —                                          |       | (16,907 | ) | (354 | ) | — |   | (17,261 | ) |
| **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**                                                               |       |                                            |       |   |   |   |   |   |   |   |   |
| (Decrease) increase during  the period                                                       |       | —                                          |       | (4,345 | ) | 135 |   | — |   | (4,210 | ) |
| Beginning balance                                                                            |       | —                                          |       | 322,766 |   | 659 |   | — |   | 323,425 |   |
| Ending balance                                                                               |       | $                                               | —     |   | $ | 318,421 |   | $ | 794 |   | $ | — |   | $ | 319,215 |   |

 
| ** **                                                                                   | ** ** | **Thirteen  weeks ended November 1, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                               | 12,878     |   | $ | 12,878 |   | $ | 90,796 |   | $ | (103,674 | ) | $ | 12,878 |   |
| Adjustments to reconcile  net earnings (loss) to net cash provided by operating activities:  |       |                                            |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization expense                                                       |       | —                                          |       | 52,960 |   | 7,230 |   | — |   | 60,190 |   |
| Deferred income taxes                                                                        |       | —                                          |       | (8,722 | ) | — |   | — |   | (8,722 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans |       | —                                          |       | 4,063 |   | 80 |   | — |   | 4,143 |   |
| Intercompany royalty income  payable (receivable)                                            |       | —                                          |       | 56,830 |   | (56,830 | ) | — |   | — |   |
| Equity in (earnings) loss  of subsidiaries                                                   |       | (12,878                                         | )          | (90,796 | ) | — |   | 103,674 |   | — |   |
| Changes in operating assets  and liabilities, net                                            |       | —                                          |       | (119,546 | ) | (38,823 | ) | — |   | (158,369 | ) |
| Net cash (used for)  provided by operating activities                                        |       | —                                          |       | (92,333 | ) | 2,453 |   | — |   | (89,880 | ) |
| **CASH FLOWS—INVESTING  ACTIVITIES**                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                          |       | (31,073 | ) | (2,388 | ) | — |   | (33,461 | ) |
| Net cash used for investing  activities                                                      |       | —                                          |       | (31,073 | ) | (2,388 | ) | — |   | (33,461 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                            |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                          |       | (489 | ) | — |   | — |   | (489 | ) |
| Net cash used for financing  activities                                                      |       | —                                          |       | (489 | ) | — |   | — |   | (489 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                               |       |                                            |       |   |   |   |   |   |   |   |   |
| (Decrease) increase during  the period                                                       |       | —                                          |       | (123,895 | ) | 65 |   | — |   | (123,830 | ) |
| Beginning balance                                                                            |       | —                                          |       | 238,204 |   | 976 |   | — |   | 239,180 |   |
| Ending balance                                                                               |       | $                                               | —     |   | $ | 114,309 |   | $ | 1,041 |   | $ | — |   | $ | 115,350 |   |

 

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***Senior Notes and Senior Subordinated Notes.*** All of NMG’s obligations under the Senior Notes and the SeniorSubordinated Notes, as well as its obligations under the Asset-Based RevolvingCredit Facility and the Senior Secured Term Loan Facility, are guaranteed bythe Company and certain of NMG’s existing and future domestic subsidiaries(principally, Bergdorf Goodman, Inc. through which NMG conducts theoperations of its Bergdorf Goodman stores and NM Nevada Trust which holds legaltitle to certain real property and intangible assets used by the Company inconducting its operations). The guarantees by the Company and each subsidiaryguarantor are full and unconditional and joint and several.  Currently, NMG conducts no operations throughsubsidiaries that do not guarantee the Senior Notes or the Senior SubordinatedNotes. Previously, the non-guarantor subsidiaries of NMG included an operatingsubsidiary domiciled in Canada providing support services to our DirectMarketing operation through January 2009.

 

Information with respectto non-guarantor subsidiaries with respect to the Senior Notes and SeniorSubordinated Notes is as follows:

 
| **(in thousands)** | ** ** | **October 31,********2009** | ** ** | **August 1,********2009** | ** ** | **November 1,********2008** | ** ** |
|--------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| Total assets       |       | $                                | —     |                           | $          | 332                              |       | $ | 1,133 |   |
| Net assets         |       | $                                | —     |                           | $          | 332                              |       | $ | 1,117 |   |

 
| ** **                                            | ** ** | **Thirteen weeks ended**         | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                                    | ** ** | **October 31,********2009** | ** ** | **November 1,********2008** | ** ** |
| Revenues                                              |       | $                                | —     |   | $ | — |   |
| Net earnings                                          |       | 32                               |       | 100 |   |
| Net cash (used for) provided by operating  activities |       | (34                              | )          | 202 |   |
|                                                       |            |                                  |            |  |  |  |  |

 

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

 

**EXECUTIVE OVERVIEW**

 

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with our Annual Report on Form 10-K for the fiscalyear ended August 1, 2009.  Unlessotherwise specified, the meanings of all defined terms in Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) are consistent with the meanings of such terms as defined in theNotes to the Condensed Consolidated Financial Statements. This discussioncontains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the risks,uncertainties and assumptions relating to our forward-looking statements.

 

**Overview**

 

Neiman Marcus, Inc.(the Company), together with our operating segments and subsidiaries, is ahigh-end specialty retailer. Our operations include the Specialty Retail storessegment and the Direct Marketing segment. The Specialty Retail stores segmentconsists primarily of Neiman Marcus and Bergdorf Goodman stores. The DirectMarketing segment conducts both online and print catalog operations under thebrand names of Neiman Marcus, Bergdorf Goodman and Horchow.

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the first quarter of fiscal year 2010 relate to thethirteen weeks ended October 31, 2009. All references to the first quarter of fiscal year 2009 relate to thethirteen weeks ended November 1, 2008.

 

**FactorsAffecting Our Results**

 

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

 

·                  Sales of merchandise—Revenues from ourSpecialty Retail stores are recognized at the later of the point of sale or thedelivery of goods to the customer. Revenues from our Direct Marketing operationare recognized when the merchandise is delivered to the customer. We maintainreserves for anticipated sales returns primarily based on our historical trendsrelated to returns by both our retail and direct marketing customers. Revenuesexclude sales taxes collected from our customers.

 

·                  Delivery and processing—We generaterevenues from delivery and processing charges related to merchandise deliveredto our customers from both our retail and direct marketing operation.

 

Our revenues can beaffected by the following factors:

 

·                  general economic conditions and theprospects for a meaningful recovery in the near-term;

 

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

 

·                  changes in the level of full-price sales;

 

·                  changes in the level of promotionalevents conducted by our Specialty Retail stores and Direct Marketing operation;

 

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

 

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

 

In addition, our revenuesare seasonal. For a description of the seasonality of our business, see “Seasonality.”

 

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

 

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

 

·                  Buying costs—Buying costs consistprimarily of salaries and expenses incurred by our merchandising and buyingoperations.

 

·                  Occupancy costs—Occupancy costs consistprimarily of rent, property taxes and operating costs of our retail,distribution and support facilities. A significant portion of our buying andoccupancy costs are fixed in nature and are not dependent on the revenues wegenerate.

 

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

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold. Wereceived vendor allowances of $10.1 million, or 1.2% of revenues, in thefirst quarter of fiscal year 2010 and $12.1 million, or 1.2% of revenues,in the first quarter of fiscal year 2009. The amounts of vendor allowances we received did not have a significantimpact on the year-over-year change in gross margin during the first quarter offiscal years 2010 and 2009.

 

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

 

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

 

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

 

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

 

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

 

·                  the amount of vendor reimbursements wereceive during the fiscal year.

 

***Selling, generaland administrative expenses (excluding depreciation) (SG&A).*** SG&A principally consists of costs related to employee compensationand benefits in the selling and administrative support areas, advertising andcatalog costs and insurance and long-term benefits expenses. A significantportion of our selling, general and administrative expenses are variable innature and are dependent on the sales we generate.

 

Advertising costs consistprimarily of 1) print media costs for promotional materials mailed to ourcustomers incurred by our Specialty Retail segment, 2) advertising costsincurred by our Direct Marketing operation related to the production, printingand distribution of our print catalogs and the production of the photographiccontent for our websites and 3) online marketing costs incurred by our DirectMarketing operation. We receive advertising allowances from certain of ourmerchandise vendors. Substantially all the advertising allowances we receiverepresent reimbursements of direct, specific and incremental costs that weincur to promote the vendor’s merchandise in connection with our variousadvertising programs, primarily catalogs and other print media.  As a result, advertising allowances arerecorded as a reduction of our advertising costs when earned. Advertisingallowances aggregated approximately $15.4 million, or 1.8% of revenues, in thefirst quarter of fiscal year 2010 and $24.2 

 

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million, or 2.5% ofrevenues, in the first quarter of fiscal year 2009.  The decrease in advertising allowances in thefirst quarter of fiscal year 2010 compared to the first quarter of fiscal year2009 was consistent with the decrease in gross advertising expenditures in theperiods.

 

We also receiveallowances from certain merchandise vendors in conjunction with compensationprograms for employees who sell the vendor’s merchandise. These allowances arenetted against the related compensation expense that we incur. Amounts receivedfrom vendors related to compensation programs were $15.5 million, or 1.8% of revenues,in the first quarter of fiscal year 2010 and $17.9 million, or 1.8% ofrevenues, in the first quarter of fiscal year 2009.

 

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

 

·                  changes in the number of sales associatesprimarily due to new store openings and expansion of existing stores, includingincreased health care and related benefits expenses;

 

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

 

·                  changes in expenses related to employeebenefits 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, HSBCoffers credit card and non-card payment plans bearing our brands and we receive1) ongoing payments from HSBC based on net credit card sales, 2) compensationfor marketing and servicing activities, 3) our allocable share of certainincome generated from the credit card program and 4) our allocable share ofcertain credit card losses generated from the credit card portfolio (HSBCProgram Income). We recognize HSBC Program Income when earned.  In the future, the HSBC Program Income maybe:

 

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

 

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

 

·                  decreased based upon the level of futureservices we provide to HSBC;

 

·                  increased for our allocable share ofcertain income, if any, generated from the credit card program as providedpursuant to our contractual agreement with HSBC, or any subsequent amendmentthereto; and

 

·                  decreased for our allocable share ofcertain credit card losses generated from the credit card portfolio as providedpursuant to our contractual agreement with HSBC, or any subsequent amendmentthereto.

 

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**Seasonality**

 

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

 

Our first fiscal quarteris generally characterized by a higher level of full-price sales with a focuson the initial introduction of Fall season fashions. Aggressive in-storemarketing activities designed to stimulate customer buying, a lower level ofmarkdowns and higher margins are characteristic of this quarter. The secondfiscal quarter is more focused on promotional activities related to the December holidayseason, the early introduction of resort season collections from certaindesigners and the sale of Fall season goods on a marked down basis. As aresult, margins are typically lower in the second fiscal quarter. However, dueto the seasonal increase in revenues that occurs during the holiday season, thesecond fiscal quarter is typically the quarter in which our revenues are the highestand in which expenses as a percentage of revenues are the lowest. Our workingcapital requirements are also the greatest in the first and second fiscalquarters as a result of higher seasonal requirements.

 

Similarly, the thirdfiscal quarter is generally characterized by a higher level of full-price saleswith a focus on the initial introduction of Spring season fashions. Aggressivein-store marketing activities designed to stimulate customer buying, a lowerlevel of markdowns and higher margins are again characteristic of this quarter.Revenues are generally the lowest in the fourth fiscal quarter with a focus onpromotional activities offering Spring season goods to the customer on a markeddown basis, resulting in lower margins during the quarter. Our working capitalrequirements are typically lower in the third and fourth fiscal quarters thanin the other quarters.

 

A large percentage of ourmerchandise assortment, particularly in the apparel, fashion accessories andshoe categories, is ordered months in advance of the introduction of suchgoods. For example, women’s apparel, men’s apparel, shoes and handbags aretypically ordered six to nine months in advance of the products being offeredfor sale while jewelry and other categories are typically ordered three to sixmonths in advance. As a result, inherent in the successful execution of ourbusiness plans is our ability both to predict the fashion trends that will beof interest to our customers and to anticipate future spending patterns of ourcustomer base.

 

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

 

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**OPERATINGRESULTS**

 

**PerformanceSummary**

 

The followingtable sets forth certain items expressed as percentages of net revenues for theperiods indicated.

 
| ** **                                                                        | ** ** | **Thirteen  weeks ended**        | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **October 31,********2009** | ** ** | **November 1,  2008** | ** ** |
| ** **                                                                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                            | %          | 100.0 | % |
|                                                                              |       |                             |       |   |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 61.5                             |       | 62.7 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 25.2                             |       | 24.6 |   |
| Income from credit card program, net                                              |       | (1.5                             | )          | (1.3 | ) |
| Depreciation expense                                                              |       | 4.1                              |       | 3.9 |   |
| Amortization of intangible assets                                                 |       | 1.6                              |       | 1.4 |   |
| Amortization of favorable lease commitments                                       |       | 0.5                              |       | 0.5 |   |
| Operating earnings                                                                |       | 8.6                              |       | 8.3 |   |
| Interest expense, net                                                             |       | 6.8                              |       | 5.9 |   |
| Earnings before income taxes                                                      |       | 1.8                              |       | 2.4 |   |
| Income tax expense                                                                |       | 0.8                              |       | 1.1 |   |
| Net earnings                                                                      |       | 1.0                              | %          | 1.3 | % |

 

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Set forth in thefollowing table is certain summary information with respect to our operationsfor the periods indicated.

** **
| ** **                                                         | ** ** | **Thirteen  weeks ended**        | ** **  |
|--------------------------------------------------------------------|------------|----------------------------------|-------------|
| **(in  millions, except sales per square foot)**                   | ** ** | **October 31,********2009** | ** **  | **November 1,  2008** | ** ** |
| REVENUES                                                           |       |                             |        |   |   |
| Specialty Retail stores                                            |       | $                                |  721.6 |   | $ |  827.1 |   |
| Direct Marketing                                                   |       | 147.3                            |        | 158.7 |   |
| Total                                                              |       | $                                |  868.9 |   | $ |  985.8 |   |
|                                                               |       |                             |        |   |   |
| OPERATING EARNINGS                                                 |       |                             |        |   |   |
| Specialty Retail stores                                            |       | $                                |  87.2  |   | $ |  94.4 |   |
| Direct Marketing                                                   |       | 21.7                             |        | 19.4 |   |
| Corporate expenses                                                 |       | (15.8                            | )           | (14.2 | ) |
| Amortization of intangible assets and favorable  lease commitments |       | (18.3                            | )           | (18.0 | ) |
| Total                                                              |       | $                                |  74.8  |   | $ |  81.6 |   |
|                                                               |       |                             |        |   |   |
| OPERATING PROFIT MARGIN                                            |       |                             |        |   |   |
| Specialty Retail stores                                            |       | 12.1                             | %           | 11.4 | % |
| Direct Marketing                                                   |       | 14.7                             | %           | 12.2 | % |
| Total                                                              |       | 8.6                              | %           | 8.3 | % |
|                                                               |       |                             |        |   |   |
| CHANGE IN COMPARABLE REVENUES (1)                                  |       |                             |        |   |   |
| Specialty Retail stores                                            |       | (14.9                            | )%          | (15.8 | )% |
| Direct Marketing                                                   |       | (7.2                             | )%          | (7.0 | )% |
| Total                                                              |       | (13.7                            | )%          | (14.5 | )% |
|                                                               |       |                             |        |   |   |
| SALES PER SQUARE FOOT                                              |       |                             |        |   |   |
| Specialty Retail stores                                            |       | $                                |  112   |   | $ |  133 |   |
|                                                               |       |                             |        |   |   |
| STORE COUNT                                                        |       |                             |        |   |   |
| Neiman Marcus and Bergdorf Goodman stores:                         |       |                             |        |   |   |
| Open at beginning of period                                        |       | 42                               |        | 41 |   |
| Opened during the period                                           |       | 1                                |        | 1 |   |
| Open at end of period                                              |       | 43                               |        | 42 |   |
| Clearance centers:                                                 |       |                             |        |   |   |
| Open at beginning of period                                        |       | 27                               |        | 24 |   |
| Opened during the period                                           |       | 1                                |        | 1 |   |
| Open at end of period                                              |       | 28                               |        | 25 |   |
|                                                               |       |                             |        |   |   |
| NON-GAAP FINANCIAL DATA EBITDA (2)                                 |       | $                                |  128.9 |   | $ |  138.2 |   |

 

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(1)        Comparable revenues include1) revenues derived from our retail stores open for more than fiftytwo weeks, including stores that have been relocated or expanded and2) revenues from our Direct Marketing operation.

 

(2)        For an explanation of EBITDA as a measureof our operating performance, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Non-GAAP FinancialMeasure-EBITDA.”

 

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**FirstQuarter Fiscal Year 2010 Summary**

 

We continue to experiencea challenging economic and retail environment and expect these conditions willcontinue for an extended period of time. Consistent with the significant declines in overall macroeconomicfactors, capital markets and consumer confidence that existed during fiscalyear 2009, customer demand has remained weak during the first quarter of fiscalyear 2010.  The current softness incustomer demand exists across all geographic areas, all distribution channelsand all merchandise categories, particularly the apparel and home décorcategories.  We believe affluentcustomers are continuing to react to the economic conditions mentionedabove.  However, based on our experiencein previous business cycles, we believe our customers’ buying levels willincrease once the economic environment improves.

 

A summary of ouroperating results is as follows:

 

·                  **Revenues**—Our revenues in the first quarter offiscal year 2010 were impacted by a lower level of customer demand.  As a result, our revenues for the firstquarter of fiscal year 2010 were $868.9 million, a decrease of 11.9% ascompared to the first quarter of fiscal year 2009 reflecting a decline incomparable revenues of 13.7%.  Comparablerevenues decreased in fiscal year 2010 for both our Specialty Retail stores andDirect Marketing operation.

 

For Specialty Retailstores, our sales per square foot for the last twelve trailing months were $454as ofOctober 31,2009 and $605 as of November 1, 2008.

 

·                  **Cost of goods soldincluding buying and occupancy costs (excluding depreciation)**—COGS represented 61.5% of revenues inthe first quarter of fiscal year 2010 and 62.7% of revenues in the firstquarter of fiscal year 2009.  Thisdecrease in COGS was primarily due to 1) lower net markdowns and promotionalactivities resulting in higher product margins, offset by 2) the deleveragingof our fixed buying and occupancy costs on lower revenues.

 

·                  **Inventories**—During the first quarter of fiscal year2010, we continued to maintain tight control of inventory and aligned ourinventory purchases with sales expectations for the Fall season.  In response to the lower levels of customerdemand we continue to experience, we reduced our purchases in the first quarterof fiscal year 2010 by 12.6% compared to the prior year.

 

At October 31,2009, on-hand inventories totaled $863.7 million, a 20.3% decrease from theprior year fiscal period.  Inventoriesdecreased by 22.5% on a comparable basis.

 

·                  **Selling, general andadministrative expenses (excluding depreciation)**—Compared to the first quarter of fiscal year 2009, wereduced SG&A by $24.0 million in the first quarter of fiscal year2010.  The lower levels of SG&Aexpenses primarily reflect 1) savings in variable costs, primarily commissions,on lower revenues and 2) savings realized as a result of our on-goinginitiatives to control our expenses.

 

Despite thedecrease in SG&A incurred, SG&A deleveraged in the first quarter offiscal year 2010.  SG&A represented25.2% of revenues in the first quarter of fiscal year 2010 and 24.6% ofrevenues in the first quarter of fiscal year 2009.  The increases in SG&A as percentages ofrevenues are primarily due to 1) the deleveraging of certain benefits costs onthe decreases in revenues and 2) higher incentive compensation requirements,offset by 3) lower payroll costs and 4) lower advertising and promotions costsincurred.

 

·                  **Operating earnings—**Total operating earnings in the firstquarter of fiscal year 2010 were $74.8 million, or 8.6% of revenues.  Total operating earnings in the first quarterof fiscal year 2009 were $81.6 million, or 8.3% of revenues.  Operating earnings margin increased as apercentage of revenues, by 0.3% primarily due to:

 

·                  a decrease in COGS by 1.2% of revenues asa result of 1) lower net markdowns and lower promotional costs incurred, offsetby 2) the deleveraging of our buying and occupancy expenses on lower revenues;offset by

 

·                  increases in both SG&A expenses by0.6% of revenues and depreciation and amortization expense by 0.4% of revenues,primarily due to the deleveraging of these expenses on lower revenues.

 

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·                  **Liquidity—**Cash provided by our operating activitieswas $39.8 million in the first quarter of fiscal year 2010 compared to cashused in our operating activities of $89.9 million in the first quarter offiscal year 2009.  This change wasprimarily due to a lower net investment in on-hand inventories in the firstquarter of fiscal year 2010 reflecting the closer alignment of purchases andinventories to customer demand.  Inaddition, we held cash balances of $319.2 million at October 31, 2009compared to $115.4 million at November 1, 2008.  At October 31, 2009, we had noborrowings outstanding under our Asset-Based Revolving Credit Facility, $32.6million of outstanding letters of credit and $507.4 million of unused borrowingavailability.

 

Given the dislocation in the financial markets and the uncertainty asto when reasonable conditions would return, we elected to pay PIK Interest forthe three quarterly interest periods ending October 14, 2009 and to makesuch interest payments with the issuance of additional Senior Notes at the PIKInterest rate of 9.75% instead of paying interest in cash.  As a result, the original principal amount ofSenior Notes of $700.0 million increased by $17.1 million on April 14,2009, $17.4 million on July 14, 2009 and $17.9 million on October 14,2009.

 

For the quarterly period ending January 15, 2010, we have electedto pay cash interest.  Prior to thebeginning of each eligible interest period in the future, we will evaluatewhether to continue utilizing this PIK feature, taking into account marketconditions and other relevant factors at that time. After October 15,2010, we are required to make all interest payments on the Senior Notesentirely in cash.

 

·                  **Outlook—**We expect retail demand and revenues willremain weak for an extended period of time. We will continue to maintain an appropriate alignment of our inventorylevels and purchases with anticipated lower customer demand. Despite theanticipated continuation of current economic conditions, we believe the cashgenerated from our operations along with our available sources of financingwill enable us to meet our cash obligations for the remainder of fiscal year2010.

 

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**ThirteenWeeks Ended October 31, 2009 Compared to Thirteen Weeks Ended November 1,2008**

 

***Revenues.**** *Ourrevenues for the first quarter of fiscal year 2010 of $868.9 million decreased$116.9 million, or 11.9%, from $985.8 million in the first quarter of fiscalyear 2009.  The decrease in revenues wasdue to decreases in comparable revenues for both our Specialty Retail stores andDirect Marketing operation as a result of the current challenging economicenvironment and lower customer demand.

 

Comparable revenues forthe thirteen weeks ended October 31, 2009 were $850.1 million compared to$984.8 million in the first quarter of fiscal year 2009, representing a decreaseof 13.7%.  Comparable revenues decreasedin the first quarter of fiscal year 2010 by 14.9% for Specialty Retail storesand 7.2% for Direct Marketing.  Newstores generated revenues of $18.8 million in the first quarter of fiscal year2010.

 

Internet revenuesgenerated by Direct Marketing were $118.9 million for the first quarter offiscal year 2010, a decrease of 1.8% compared to the prior year fiscalperiod.  In addition, catalog revenuesdecreased 24.6% compared to the prior year fiscal period as we continue tomigrate toward on-line retailing in our Direct Marketing operation.

 

***Cost of goods sold including buying and occupancy costs(excluding depreciation).***  COGS for thefirst quarter of fiscal year 2010 were 61.5% of revenues compared to 62.7% ofrevenues for the first quarter of fiscal year 2009.

 

The decrease in COGS as apercentage of revenues in the first quarter of fiscal year 2010 was primarilydue to:

 

·                  increased product margins generated by both our Specialty Retail storesand Direct Marketing operation of approximately 1.5% of revenues primarily dueto lower net markdowns and sales promotions costs; offset by

 

·                  higher buying and occupancy costs of 0.3% of revenues primarily due tothe deleveraging of rent and other fixed costs on the lower level of revenuesgenerated.

 

***Selling, general and administrative expenses (excludingdepreciation)*****.**  SG&A expenses decreased by $24.0 millionin the first quarter of fiscal year 2010 compared to the prior year fiscalperiod.  The decrease in SG&Aexpenses reflects 1) savings in variable costs, primarily commissions, on lowerrevenues and 2) savings realized as a result of our initiatives to control ourexpenses.

 

Despite a decrease inSG&A expenses, SG&A expenses as a percentage of revenues increased to25.2% of revenues in the first quarter of fiscal year 2010 compared to 24.6% ofrevenues in the prior year fiscal period. The net increase in SG&A expenses as a percentage of revenues in thefirst quarter of fiscal year 2010 of approximately 0.6% of revenues wasprimarily due to:

 

·                  the deleveraging of a portion of our SG&A expenses, primarilybenefits, by approximately 0.4% of revenues;

 

·                  higher incentive compensation requirements by approximately 0.7% ofrevenues; and

 

·                  higher professional fees and other expenses aggregating $3.4 million,or 0.3% of revenues, incurred primarily in connection with our initiatives tocontrol expenses, reduce our cost structure and realign certain operationalfunctions; offset by

 

·                  a lower level of advertising and promotions costs incurred in the firstquarter of fiscal year 2010 of approximately 0.2% of revenues, primarily due toa lower level of catalog spending by our Direct Marketing operation inconnection with planned decreases in catalog circulation; and

 

·                  lower payroll costs of approximately 0.7% of revenues, primarily as aresult of our reduced headcount.

 

***Income from credit card program, net. ***We earned HSBC Program Income of $13.1 million, or1.5% of revenues, in the first quarter of fiscal year 2010 compared to $13.0million, or 1.3% of revenues, in the first quarter of fiscal year 2009.

 

***Depreciation expense. ***Depreciationexpense was $35.8 million, or 4.1% of revenues, in the first quarter of fiscalyear 2010 compared to $38.6 million, or 3.9% of revenues, in the first quarterof fiscal year 2009.  The increase indepreciation expense as a percentage of revenues results primarily from thedeleveraging of these costs on lower revenues.

 

***Amortization expense. ***Amortizationof intangible assets (primarily customer lists and favorable lease commitments)aggregated $18.3 million, or 2.1% of revenues, in the first quarter of fiscalyear 2010 compared to $18.0 million, or 1.9% of 

 

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revenues, in the firstquarter of fiscal year 2009.  Theincrease in amortization expense as a percentage of revenues results primarilyfrom the deleveraging of these costs on lower revenues.

 

***Segment operating earnings.*** Segment operating earnings for our Specialty Retail stores and DirectMarketing segments do not reflect either the impact of adjustments to revalueour assets and liabilities to estimated fair value at the Acquisition date orimpairment charges related to declines in fair value subsequent to theAcquisition date.  The reconciliation ofsegment operating earnings to total operating earnings is as follows:

 
| ** **                                                         | ** ** | **Thirteen weeks ended**    | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in millions)**                                                  | ** ** | **October 31,   2009** | ** ** | **November 1,   2008** | ** ** |
| Specialty  Retail stores                                           |       | $                           | 87.2       |   | $ | 94.4 |   |
| Direct  Marketing                                                  |       | 21.7                        |       | 19.4 |   |
| Amortization  of intangible assets and favorable lease commitments |       | (18.3                       | )          | (18.0 | ) |
| Corporate  expenses                                                |       | (15.8                       | )          | (14.2 | ) |
| Total  operating earnings                                          |       | $                           | 74.8       |   | $ | 81.6 |   |

 

Operating earnings forour Specialty Retail stores segment were $87.2 million, or 12.1% of SpecialtyRetail stores revenues, for the first quarter of fiscal year 2010 compared to$94.4 million, or 11.4% of Specialty Retail stores revenues, for the prior yearfiscal period.  The increase in operatingmargin as a percentage of revenues was primarily due to:

 

·                  lower net markdowns and promotional costs incurred; and

 

·                  a lower level of spending for advertising and promotion costs; offsetby

 

·                  the deleveraging of fixed expenses on the lower level of revenues, netof savings realized as a result of our initiatives to control our expenses; and

 

·                  higher incentive compensation requirements.

 

Operating earnings forDirect Marketing were $21.7 million, or 14.7% of Direct Marketing revenues, inthe first quarter of fiscal year 2010 compared to $19.4 million, or 12.2% ofDirect Marketing revenues, for the prior year fiscal period.  The increase in operating margin as apercentage of revenues for Direct Marketing was primarily the result of:

 

·                  lower net markdowns and promotional costs incurred;

 

·                  a lower level of spending for advertising and promotion costs; and

 

·                  favorable payroll and related costs primarily due to our initiatives tocontrol expenses; offset by

 

·                  higher incentive compensation requirements.

 

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***Interest expense, net*****.**  Net interestexpense was $59.4 million, or 6.8% of revenues, in the first quarter of fiscalyear 2010 and $57.8 million, or 5.9% of revenues, for the prior year fiscalperiod.  The net increase in interestexpense is primarily due to 1) incremental PIK interest on the Senior Notes and2) lower interest income, offset by 3) the decrease in interest rates on ourvariable-rate indebtedness.  Thesignificant components of interest expense are as follows:

 
| ** **                         | ** ** | **Thirteen weeks ended**         | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| **(in thousands)**                 | ** ** | **October 31,********2009** | ** ** | **November 1,********2008** | ** ** |
|                               |       |                             |       |   |   |
| Senior  Secured Term Loan Facility |       | $                                | 20,786     |   | $ | 23,930 |   |
| 2028  Debentures                   |       | 2,227                            |       | 2,227 |   |
| Senior  Notes                      |       | 17,525                           |       | 15,750 |   |
| Senior  Subordinated Notes         |       | 12,826                           |       | 12,969 |   |
| Amortization  of debt issue costs  |       | 4,661                            |       | 3,554 |   |
| Other                              |       | 1,738                            |       | 825 |   |
| Total  interest expense            |       | 59,763                           |       | 59,255 |   |
| Less:                              |       |                             |       |   |   |
| Interest  income                   |       | 177                              |       | 1,104 |   |
| Capitalized  interest              |       | 221                              |       | 306 |   |
| Interest  expense, net             |       | $                                | 59,365     |   | $ | 57,845 |   |

 

***Income tax expense.***  Our effectiveincome tax rate for the first quarter of fiscal year 2010 was 45.0% compared to45.7% for the first quarter of fiscal year 2009.  Our effective tax rates for the first quarterof fiscal years 2010 and 2009 were unfavorably impacted by a lower level ofprojected earnings for fiscal years 2010 and 2009.

 

The IRS is examining ourfederal tax return for fiscal year 2007. We believe our recorded tax liabilities as of October 31, 2009 aresufficient to cover any potential assessments to be made by the IRS upon thecompletion of their examination. We will continue to monitor the progress ofthe IRS examination and review our recorded tax liabilities for potential auditassessments.  With respect to state andlocal jurisdictions, with limited exceptions, the Company and its subsidiariesare no longer subject to income tax audits for fiscal years before 2005.  We believe it is reasonably possible thatadditional adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 12 months as a result of settlements with tax authoritiesor expiration of statutes of limitation. At this time, we do not believe such adjustments will have a materialimpact on our consolidated financial statements.

 

**Non-GAAPFinancial Measure — EBITDA**

 

We present the non-GAAPfinancial performance measure of EBITDA because we use this measure to monitorand evaluate the performance of our business and believe the presentation ofthis measure will enhance investors’ ability to analyze trends in our business,evaluate our performance relative to other companies in our industry andevaluate our ability to service our debt. In addition, we use performance targets based on EBITDA as a componentof the measurement of incentive compensation.

 

EBITDA is not apresentation made in accordance with GAAP and our computation of EBITDA mayvary from others in our industry.  Inaddition, EBITDA contains some, but not all, adjustments that are taken intoaccount in the calculation of the components of various covenants in theindentures governing NMG’s senior secured Asset-Based Revolving CreditFacility, Senior Secured Term Loan Facility, Senior Notes and SeniorSubordinated Notes.  EBITDA should not beconsidered as an alternative to operating earnings or net earnings as a measureof operating performance.  In addition,EBITDA is not presented as and should not be considered as an alternative tocash flows as a measure of liquidity. EBITDA has important limitations as a analytical tool and should not beconsidered in isolation, or as a substitute for analysis of our results asreported under GAAP.  For example,EBITDA:

 

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

 

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

 

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

 

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·                  excludes tax payments that represent a reduction inavailable cash; and

 

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

 

The following tablereconciles earnings as reflected in our condensed consolidated statements ofoperations prepared in accordance with GAAP to EBITDA:

 
| ** **                                                         | ** ** | **Thirteen weeks ended**         | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| **(dollars  in millions)**                                         | ** ** | **October 31,********2009** | ** ** | **November 1,********2008** | ** ** |
|                                                               |       |                             |       |   |   |
| Net earnings                                                       |       | $                                | 8.5        |   | $ | 12.9 |   |
| Income tax expense                                                 |       | 6.9                              |       | 10.9 |   |
| Interest expense, net                                              |       | 59.4                             |       | 57.8 |   |
| Depreciation expense                                               |       | 35.8                             |       | 38.6 |   |
| Amortization of intangible assets and favorable  lease commitments |       | 18.3                             |       | 18.0 |   |
| EBITDA                                                             |       | $                                | 128.9      |   | $ | 138.2 |   |
| EBITDA as a percentage of revenues                                 |       | 14.8                             | %          | 14.0 | % |

 

**Inflationand Deflation and Foreign Currency Exchange Rates**

 

We believe changes inrevenues and net earnings that have resulted from inflation or deflation havenot been material during the periods presented. In recent years, we haveexperienced certain inflationary conditions related to 1) increases inproduct costs primarily due to changes in foreign currency exchange rates thathave reduced the purchasing power of the U.S. dollar and 2) increases inSG&A. We purchase a substantial portion of our inventory from foreignsuppliers whose costs are affected by the fluctuation of their local currencyagainst the dollar or who price their merchandise in currencies other than thedollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us mostsignificantly; however, we source goods from numerous countries and thus areaffected by changes in numerous currencies and, generally, by fluctuations inthe U.S. dollar relative to such currencies. Accordingly, changes in the valueof the dollar relative to foreign currencies may increase the retail prices ofgoods offered for sale and/or increase our cost of goods sold. If our customersreduce their levels of spending in response to increases in retail pricesand/or we are unable to pass such cost increases to our customers, ourrevenues, gross margins, and ultimately our earnings, could decrease. Foreigncurrency fluctuations could have a material adverse effect on our business,financial condition and results of operations in the future. We attempt tooffset the effects of inflation through price increases and control ofexpenses, although our ability to increase prices may be limited by customerresistance and competitive factors. We attempt to offset the effects ofmerchandise deflation, which has occurred on a limited basis in recent years,through control of expenses. There is no assurance, however, that inflation ordeflation will not materially affect our operations in the future.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirementsconsist principally of:

 

·                  the funding of our merchandise purchases;

 

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

 

·                  debt service requirements;

 

·                  income tax payments; and

 

·                  obligations related to our Pension Plan.

 

Our primary sources ofshort-term liquidity are comprised of cash on hand, availability under ourAsset-Based Revolving Credit Facility and vendor financing. The amounts of cashon hand and borrowings under the Asset-Based Revolving Credit Facility are 

 

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influenced by a number offactors, including revenues, working capital levels, vendor terms, the level ofcapital expenditures, cash requirements related to financing instruments anddebt service obligations, Pension Plan funding obligations and tax paymentobligations, among others.  As to vendorfinancing, some of our vendors have experienced serious cash flow issues,reductions in available credit from banks, factors or other financialinstitutions, or increases in the cost of capital as a result of currenteconomic conditions.  To counteract theircash flow problems, our vendors may attempt to increase their prices, pass throughincreased costs, alter historical credit and payment terms available to us orseek other relief.  Any of these actionscould have an adverse impact on our relationship with the vendor or constrainthe amounts or timing of our purchases from the vendor and, ultimately, have anadverse impact on our revenues, profitability and liquidity.

 

Our working capitalrequirements fluctuate during the fiscal year, increasing substantially duringthe first and second quarters of each fiscal year as a result of higherseasonal levels of inventories.  We havetypically financed the increases in working capital needs during the first andsecond fiscal quarters with available cash balances, cash flows from operationsand, if necessary, with cash provided from borrowings under our creditfacilities.  We have made no borrowingsunder our Asset-Based Revolving Credit Facility during the first quarters ofeither fiscal year 2010 or 2009.

 

We believe that operatingcash flows, available vendor financing and amounts available pursuant to oursenior secured Asset-Based Revolving Credit Facility, will be sufficient tofund our operations, anticipated capital expenditure requirements, debt serviceobligations, contractual obligations and commitments and Pension Plan fundingrequirements through the remainder of fiscal year 2010.

 

At October 31, 2009,cash and cash equivalents were $319.2 million compared to$115.4 million at November 1, 2008. Net cash provided by ouroperating activities was $39.8 million in the first quarter of fiscal year 2010compared to net cash used in our operating activities of $89.9 million in thefirst quarter of fiscal year 2009.  Thischange was primarily due to a lower net investment in on-hand inventories inthe first quarter of fiscal year 2010 reflecting the closer alignment ofpurchases and inventories to customer demand.

 

Net cash used forinvesting activities, representing capital expenditures, was $17.3 millionin the first quarter of fiscal year 2010 and $33.5 million in the firstquarter of fiscal year 2009.  We incurredcapital expenditures in the first quarter of fiscal year 2010 related to theconstruction of our new store in Bellevue (suburban Seattle).  We incurred significant capital expendituresin the first quarter of fiscal year 2009 related to the construction of newstores in Topanga (the greater Los Angeles area) and Bellevue. We opened ourTopanga store in September 2008 and our Bellevue store in September 2009.  In light of current economic conditions anddelays in certain real estate projects, we have reduced our current andnear-term construction commitments and currently project gross capitalexpenditures for fiscal year 2010 to be approximately $70 to $80 million.  Net of developer contributions, capitalexpenditures for fiscal year 2010 are projected to be approximately $55 to $65million.

 

Net cash used forfinancing activities was $26.8 million in the first quarter of fiscal year2010 as compared to $0.5 million in the first quarter of fiscal year2009.  In the first quarter of fiscalyear 2010, pursuant to the terms of our Senior Secured Term Loan Facility, weprepaid $26.6 million of outstanding borrowings under that facility from excesscash flow that we generated in fiscal year 2009.

 

**FinancingStructure at October 31, 2009**

 

Our major sources offunds are comprised of vendor financing, a $600.0 million Asset-BasedRevolving Credit Facility, $1,598.4 million Senior Secured Term LoanFacility, $752.4 million Senior Notes, $500.0 million SeniorSubordinated Notes, $125.0 million 2028 Debentures and operating leases.

 

***Senior Secured Asset-Based Revolving Credit Facility.*** On July 15, 2009, NMG amended and restated the terms of itsexisting asset-based revolving credit facility (which had been scheduled tomature on October 6, 2010).  The terms of the amended and restatedAsset-Based Revolving Credit Facility include a scheduled maturity date of January 15,2013 and a maximum committed borrowing capacity of $600.0 million (the sameamount as in the prior facility).  The new facility also provides anuncommitted accordion feature that allows NMG to request the lenders to provideadditional capacity in either the form of increased revolving commitments orincremental term loans, subject to a potential total maximum facility of $800million.

 

The Asset-Based RevolvingCredit Facility provides committed financing of up to $600.0 million, subjectto a borrowing base.  The Asset-BasedRevolving Credit Facility includes borrowing capacity available for letters ofcredit and for borrowings on same-day notice. The borrowing base for the Asset-Based Revolving Credit Facility isequal to at any time the sum of (a) the lesser of (i) 80% of eligibleinventory (valued at the lower of cost or market value) and (ii) 85% ofthe net 

 

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orderly liquidation valueof eligible inventory, and (b) 85% of the amounts owed by credit cardprocessors in respect of eligible credit card accounts constituting proceedsarising from the sale or disposition of inventory, less certainreserves.   Through April 30,2011 NMG is required to maintain excess availability under the terms of theAsset-Based Revolving Credit Facility of at least the greater of (a) 10%of the lesser of (i) the aggregate revolving commitments and (ii) theborrowing base and (b) $50 million.  After April 30, 2011, if atany time, excess availability is less than the greater of (a) 15% of thelesser of (i) the aggregate revolving commitments and (ii) theborrowing base and (b) $60 million, NMG will be required to maintain a proforma ratio of consolidated EBITDA to consolidated Fixed Charges (as such termsare defined in the credit agreement) of at least 1.1 to 1.0.  On October 31, 2009, NMG had noborrowings outstanding under this facility, $32.6 million of outstandingletters of credit and $507.4 million of unused borrowing availability.

 

See Note 3 of our Notesto Condensed Consolidated Financial Statements in Item 1 and our Annual Reporton Form 10-K for the fiscal year ended August 1, 2009 for a furtherdescription 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 relatedsecurity and other agreements for a $1,975.0 million Senior Secured TermLoan Facility.  At October 31, 2009,the outstanding balance under the Senior Secured Term Loan Facility was$1,598.4 million.  The principal amountof the loans outstanding is due and payable in full on April 6, 2013.

 

At October 31, 2009,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and (2) thefederal funds effective rate plus 1/2 of 1% or (b) aLIBOR rate, subject to certain adjustments, in each case plus an applicablemargin. The interest rate on the outstanding borrowings pursuant to the SeniorSecured Term Loan Facility was 2.29% at October 31, 2009.  The applicable margin is subject toadjustment based on contractually defined debt coverage ratios.  At October 31, 2009, the applicablemargin with respect to base rate borrowings was 1.00% and the applicable marginwith respect to LIBOR borrowings was 2.00%.

 

See Note 3 of our Notesto Condensed Consolidated Financial Statements in Item 1 and our Annual Reporton Form 10-K for the fiscal year ended August 1, 2009 for a furtherdescription of the terms of the Senior Secured Term Loan Facility.

 

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

 

See Note 3 of our Notesto Condensed Consolidated Financial Statements in Item 1 and our Annual Reporton Form 10-K for the fiscal year ended August 1, 2009 for a furtherdescription of the terms of the 2028 Debentures.

 

***Senior Notes.**** *NMG has$752.4 million aggregate principal amount of 9.0% / 9.75% Senior Notesunder a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015.  We negotiated for the right to include thePIK feature in our Senior Notes because of our belief that this feature couldbe a useful tool to enhance liquidity under appropriate circumstances. In thesecond quarter of fiscal year 2009, given the dislocation in the financialmarkets and the uncertainty as to when reasonable conditions would return, webelieved that it was appropriate to utilize this feature, even though we hadunused borrowing capacity under our $600.0 million revolving credit facility.Accordingly, we elected to pay PIK Interest for the three quarterly interestperiods ending on October 14, 2009 and to make such interest payments withthe issuance of additional Senior Notes at the PIK Interest rate of 9.75%instead of paying interest in cash.  As aresult, the original principal amount of Senior Notes of $700.0 millionincreased by $17.1 million on April 14, 2009, $17.4 million on July 14,2009 and $17.9 million on October 14, 2009.

 

For the quarterly periodending on January 15, 2010, we have elected to pay cash interest.  Prior to the beginning of each eligibleinterest period in the future, we will evaluate whether to continue utilizing thisPIK feature, taking into account market conditions and other relevant factorsat that time. After October 15, 2010, we are required to make all interestpayments on the Senior Notes entirely in cash.

 

See Note 3 of our Notesto Condensed Consolidated Financial Statements in Item 1 and our Annual Reporton Form 10-K for the fiscal year ended August 1, 2009 for a furtherdescription of the terms of the Senior Notes.

 

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

 

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See Note 3 of our Notesto Condensed Consolidated Financial Statements in Item 1 and our Annual Reporton Form 10-K for the fiscal year ended August 1, 2009 for a furtherdescription of the terms of the Senior Subordinated Notes.

 

***Interest Rate Swaps.***  In connectionwith the Acquisition, we obtained $2,575.0 million of floating rate debtagreements, of which $2,125.0 million was outstanding at the Acquisition dateand $1,598.4 million is outstanding at October 31, 2009.  Effective December 6, 2005, NMG enteredinto floating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness.  These swap agreements hedge a portion of ourcontractual floating rate interest commitments through the expiration of theagreements in December 2010.  As aresult of the swap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.850% to 6.983% per quarter through 2010 and result in an average fixed rateof 6.914%.

 

**OTHER MATTERS**

 

**FactorsThat May Affect Future Results**

 

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

 

*Politicaland General Economic Conditions*

 

·                  prolonged weakness in domestic and global capital markets and othereconomic conditions and the impact of such conditions on our ability to obtaincredit;

 

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

 

·                  terrorist activities in the United States and elsewhere;

 

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

 

*CustomerConsiderations*

 

·                  changes in consumer confidence resulting in a reduction ofdiscretionary 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 cardarrangement or 3) our failure to protect customer data or comply withregulations surrounding information security and privacy;

 

*MerchandiseProcurement and Supply Chain Considerations*

 

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

 

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

 

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·                  changes in foreign currency exchange or inflation rates;

 

·                  significant increases in paper, printing and postage costs;

 

*Industryand Competitive Factors*

 

·                  competitive responses to our loyalty programs, marketing, merchandisingand promotional efforts or inventory liquidations by vendors or otherretailers;

 

·                  adverse changes in the financial viability of our competitors;

 

·                  seasonality of the retail business;

 

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

 

·                  delays in anticipated store openings and renovations;

 

·                  our success in enforcing our intellectual property rights;

 

*EmployeeConsiderations*

 

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

 

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

 

*Legaland Regulatory Issues*

 

·                  changes in government or regulatory requirements increasing our costsof operations;

 

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

 

*LeverageConsiderations*

 

·                  the effects of incurring a substantial amount of indebtedness under oursenior secured credit facilities and our senior notes and senior subordinatednotes;

 

·                  the ability to refinance our indebtedness under our senior securedcredit facilities and the effects of any refinancing;

 

·                  the effects upon us of complying with the covenants contained in oursenior secured credit facilities and the indentures governing our senior notesand senior subordinated notes;

 

·                  restrictions the terms and conditions of the indebtedness under oursenior secured credit facilities may place on our ability to respond to changesin our business or to take certain actions;

 

*OtherFactors*

 

·                  impact of funding requirements related to our noncontributory definedbenefit pension plan;

 

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

 

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

 

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

 

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**CriticalAccounting Policies**

 

The preparation ofcondensed consolidated financial statements in conformity with generallyaccepted accounting principles requires us to make estimates and assumptionsabout future events.  These estimates andassumptions affect amounts of assets, liabilities, revenues and expenses andthe disclosure of gain and loss contingencies at the date of the CondensedConsolidated Financial Statements.  Ourcurrent estimates are subject to change if different assumptions as to theoutcome of future events were made.  Weevaluate our estimates and judgments on an ongoing basis and predicate thoseestimates and judgments on historical experience and on various other factorsthat we believe are reasonable under the circumstances.  We make adjustments to our assumptions andjudgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolutecertainty, actual results may differ from the estimates we used in preparingthe accompanying Condensed Consolidated Financial Statements.

 

See Note 1 of the Notesto Condensed Consolidated Financial Statements in Item 1 for a summary of ourcritical accounting policies.  A completedescription of our critical accounting policies is included in our AnnualReport to Shareholders on Form 10-K for the fiscal year ended August 1,2009.

 

***Recent Accounting Pronouncements. ***In December 2007, the FASB issued guidance thataddresses the recognition and accounting for identifiable assets acquired,liabilities assumed and non-controlling interests in businesscombinations.  In addition, this guidancechanges the accounting treatment for certain acquisition-related items,including requirements to expense acquisition-related costs as incurred,expense restructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a businesscombination as a component of tax expense. These rules are to be applied prospectively to businesscombinations for which the acquisition date is on or after December 15,2008.  Generally, the effect of thisguidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertaintiesremaining as of October 31, 2009 related to the Acquisition will besubject to the provisions of this guidance. As to the future resolution of these tax uncertainties, we do not believethese requirements will have a material impact on our future financialstatements.

 

In February 2008,the FASB issued guidance that delays the effective date of fair valuedisclosures required for all nonfinancial assets, such as intangible assets andgoodwill, and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis.  We implemented this guidance in thepreparation of our condensed consolidated financial statements for the quarterended October 31, 2009, however, no additional disclosures were required.

 

In December 2008,the FASB issued guidance related to an employer’s disclosures about plan assetsof a defined benefit pension or other postretirement plan.  This guidance is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have not yet evaluated theimpact of adopting the disclosure requirements on our consolidated financialstatements for our fiscal year ending July 31, 2010.

 

In April 2009, theFASB issued guidance requiring additional disclosures in interim financialstatements regarding determining and reporting fair values for certain assetsand liabilities.  We adopted thisguidance in the first quarter of fiscal year 2010 related to the fair value ofour debt instruments.

 

In June 2009, theFASB issued guidance that establishes the Accounting Standards Codification(ASC) as the source of authoritative accounting principles recognized by theFASB to be applied by nongovernmental entities in the preparation of financialstatements in conformity with generally accepted accounting principles.  This guidance is effective for financialstatements issued for interim and annual periods ending after September 15,2009, or our first quarter of fiscal year 2010 ending October 31,2009.  The adoption of this guidance didnot have an impact on our consolidated financial statements.

 

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

 

The market risk inherentin the Company’s financial instruments represents the potential loss arisingfrom adverse changes in interest rates. The Company does not enter intoderivative financial instruments for trading purposes. The Company seeks tomanage exposure to adverse interest rate changes through its normal operatingand financing activities. The Company is exposed to interest rate risk throughits borrowing activities, which are described in Note 3 to our condensedconsolidated financial statements.

 

In connection with theAcquisition, NMG obtained $2,575.0 million of floating rate debt agreements, ofwhich $2,125.0 million was outstanding at the Acquisition date and $1,598.4million is outstanding under its Senior Secured Term Loan Facility at October 31,2009.  In addition, as of October 31,2009, NMG had no borrowings outstanding under its Asset-Based 

 

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Revolving CreditFacility.  Future borrowings under NMG’sAsset-Based Revolving Facility, to the extent of outstanding borrowings, wouldbe affected by interest rate changes.

 

Effective December 6,2005, NMG entered into floating to fixed interest rate swap agreements for anaggregate notional amount of $1,000.0 million to limit our exposure tointerest rate increases related to a portion of our floating rateindebtedness.  These swap agreementshedge a portion of our contractual floating rate interest commitments throughthe expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.850% to 6.983% per quarter through2010 and result in an average fixed rate of 6.914%.  A 1% increase in the rates relating to theportion of our floating rate date that is not hedged would increase annualinterest expense by approximately $6.0 million.

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**a.  DisclosureControls and Procedures.**

 

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of October 31,2009, under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, as well as other key members of ourmanagement, of the design and operating effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act). Based on that evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,accumulated, processed, summarized, reported and communicated on a timely basiswithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**b.  Changesin Internal Control over Financial Reporting.**

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter ended October 31,2009 that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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**NEIMANMARCUS, INC.**

 

**PART II**

 

**ITEM 1.      LEGAL PROCEEDINGS**

 

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

 

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

 

**ITEM 1A.   RISK FACTORS**

 

**RisksRelated to Current Economic Conditions**

 

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

 

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

 

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

 

We continue toexperience a challenging economic and retail environment and expect theseconditions will continue for an extended period of time.  The current softness in customer demandexists across all geographic areas, all distribution channels and allmerchandise categories, particularly the apparel and home décor categories.  We expect retail demand and revenues willremain weak for an extended period of time. We will continue to align our inventory levels and purchases withanticipated lower customer demand.  Theprolonged continuation of current market conditions could have a materialadverse effect on our business.

 

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

 

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

 

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by all threeindependent rating agencies.  Asignificant increase in the costs we incur in order to finance our operationsmay have a material adverse impact on our business results and financialcondition.

 

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

 

**Becauseour ownership of NMG accounts for substantially all of our assets andoperations, we are subject to all risks applicable to NMG.**

 

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

 

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

 

We are highlyleveraged.  As of October 31, 2009,the principal amount of NMG’s total indebtedness was approximately $2,976.3million, the unused borrowing availability under the $600.0 million Asset-BasedRevolving Credit Facility was $507.4 million and the outstanding letters ofcredit were $32.6 million.  NMG’ssubstantial indebtedness, combined with its lease and other financialobligations and contractual commitments, could have other importantconsequences. For example, it could:

 

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

 

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

 

·                  require NMG to dedicate a substantialportion 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 itoperates;

 

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

 

·                  limit NMG’s ability to obtain credit fromour vendors and/or the vendors’ factors; and

 

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

 

Any of the abovelisted factors could materially adversely affect NMG’s business, financialcondition and results of operations.

 

In addition, NMG’sinterest expense could increase if interest rates increase because the entireamount of the indebtedness under the senior secured credit facilities bearsinterest at floating rates.  As of October 31,2009, NMG had approximately $1,598.4 million principal amount of floatingrate debt, consisting of outstanding borrowings under the Senior Secured TermLoan Facility.  In addition, NMG has anAsset-Based Revolving Credit Facility that provides committed financing of upto $600.0 million, subject to a borrowing base.  As of October 31, 2009, NMG had noborrowings outstanding under this facility, $32.6 million of outstandingletters of credit and $507.4 million of unused borrowing availability.  Effective December 6, 2005, NMG enteredinto floating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit our exposure to interest rate increasesrelated to a portion of our floating rate indebtedness.

 

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**Toservice NMG’s indebtedness, it will require a significant amount of cash. NMG’sability to generate cash depends on many factors beyond its control, and anyfailure to meet its debt service obligations could harm its business, financialcondition and results of operations.**

 

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

 

If NMG does notgenerate sufficient cash flow from operations to satisfy the debt serviceobligations, NMG may have to undertake alternative financing plans, such asrefinancing or restructuring its indebtedness, selling assets, reducing ordelaying capital investments or seeking to raise additional capital.  Our ability to restructure or refinance NMG’sdebt will depend on the condition of the capital markets and our financialcondition at such time.  Any refinancingof NMG’s debt could be at higher interest rates and may require it to complywith more onerous covenants, which could further restrict its business operations.  The terms of existing or future debtinstruments may restrict NMG from adopting some of these alternatives.  In addition, our borrowing costs and abilityto refinance may be affected by short-term and long-term debt ratings assignedby independent rating agencies, which are based, in significant part, on NMG’sperformance as measured by indicators such as interest coverage and leverageratios.  Furthermore, any failure to makepayments of interest and principal on NMG’s outstanding indebtedness on a timelybasis would likely result in a reduction of NMG’s credit rating, which couldharm its ability to incur additional indebtedness on acceptable terms.

 

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

 

NMG’s inability togenerate sufficient cash flow to satisfy its debt service obligations, or torefinance its obligations at all or on commercially reasonable terms, wouldhave an adverse effect, which could be material, on NMG’s business, financialcondition and results of operations.

 

**Theterms of NMG’s Asset-Based Revolving Credit Facility and Senior Secured TermLoan Facility and the indentures governing the Senior Notes, the SeniorSubordinated Notes and the 2028 Debentures may restrict NMG’s current andfuture operations, particularly its ability to respond to changes in itsbusiness or to take certain actions.**

 

The creditagreements governing NMG’s Asset-Based Revolving Credit Facility and SeniorSecured Term Loan Facility and the indentures governing the Senior Notes, theSenior Subordinated Notes and the 2028 Debentures contain, and any futureindebtedness of NMG would likely contain, a number of restrictive covenantsthat impose significant operating and financial restrictions, includingrestrictions on NMG’s ability to engage in acts that may be in its bestlong-term interests. The indentures governing the Senior Notes, the SeniorSubordinated Notes and the 2028 Debentures and the credit agreements governingthe senior secured credit facilities include covenants that, among otherthings, restrict NMG’s ability to:

 

·                  incur additional indebtedness;

 

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

 

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·                  make investments;

 

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

 

·                  engage in transactions with itsaffiliates;

 

·                  sell assets, including capital stock ofNMG’s subsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and lease backtransactions.

 

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

 

Moreover, NMG’sAsset-Based Revolving Credit Facility provides discretion to the agent bankacting on behalf of the lenders to impose additional availability restrictionsand other reserves, which could materially impair the amount of borrowings thatwould otherwise be available to us. There can be no assurance that the agentbank will not impose such reserves or, were it to do so, that the resultingimpact of this action would not materially and adversely impair NMG’sliquidity.

 

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

 

The operating andfinancial restrictions and covenants in these debt agreements and any futurefinancing agreements may adversely affect NMG’s ability to finance futureoperations or capital needs or to engage in other business activities.

 

**Risks Related to Our Business andIndustry**

 

**The specialty retail industry ishighly competitive.**

 

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

 

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

 

·                  increased operational efficiencies of competitors;

 

·                  competitive pricing strategies, including deep discount pricing by abroad range of retailers during periods of poor consumer confidence or economicinstability;

 

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

 

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retail stores in the samevicinity as our stores. If we fail to successfully compete for customers ormerchandise, our business will suffer.

 

**Weare dependent on our relationships with certain designers, vendors and othersources of merchandise.**

 

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

 

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

 

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

 

**Ifwe significantly overestimate our future sales, our profitability may beadversely affected.**

 

We make decisionsregarding the purchase of our merchandise well in advance of the season inwhich it will be sold. For example, women’s apparel, men’s apparel and shoesare typically ordered six to nine months in advance of the products beingoffered for sale while handbags, jewelry and other categories are typicallyordered three to six months in advance. If our sales during any season, particularly a peak season, aresignificantly lower than we expect for any reason, we may not be able to adjustour expenditures for inventory and other expenses in a timely fashion and maybe left with a substantial amount of unsold inventory. If that occurs, we maybe forced to rely on markdowns or promotional sales to dispose of excessinventory. This could have an adverse effect on our margins and operatingincome. At the same time, if we fail to purchase a sufficient quantity ofmerchandise, we may not have an adequate supply of products to meet consumerdemand. This may cause us to lose sales or harm our customer relationships.

 

**Ourfailure to identify changes in consumer preferences or fashion trends mayadversely affect our performance.**

 

Our success depends inlarge 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 toadequately match our product mix to prevailing customer tastes, we may berequired to sell our merchandise at higher average markdown levels and loweraverage margins. Furthermore, the products we sell often require long leadtimes to order and must appeal to consumers whose preferences cannot bepredicted with certainty and often change rapidly. Consequently, we must stayabreast of emerging lifestyle and consumer trends and anticipate trends andfashions that will appeal to our consumer base. Any failure on our part toanticipate, identify and respond effectively to changing consumer demands andfashion trends could adversely affect our business.

 

**Abreach in information privacy could negatively impact our operations.**

 

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

 

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

 

Based upon our expansionstrategy, we expect that planned new stores will add over 189,000 square feetof new store space over approximately the next four fiscal years, representingan increase of approximately 3% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores.  New store openings involve certain risks,including constructing, furnishing and supplying a store in a timely and costeffective manner, accurately assessing the demographic or retail environment ata given location, hiring and training quality staff, obtaining necessarypermits and zoning approvals, obtaining commitments from a core group of vendorsto supply the new store, integrating the new store into our distributionnetwork and building customer awareness and loyalty. In undertaking storeremodels, we must complete the remodel in a timely, cost effective manner,minimize disruptions to our existing operations, and succeed in creating animproved shopping environment. If we fail to execute on these or other aspectsof our store expansion and remodeling strategy, we could suffer harm to oursales, an increase in costs and expenses and an adverse effect on our business.

 

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

 

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

 

**Actsof terrorism could adversely affect our business.**

 

The economic downturnthat followed the terrorist attacks of September 11, 2001 had a materialadverse effect on our business. Any further acts of terrorism or other futureconflicts may disrupt commerce and undermine consumer confidence, cause adownturn in the economy generally, cause consumer spending or shopping centertraffic to decline or reduce the desire of our customers to make discretionarypurchases. Any of the foregoing factors could negatively impact our salesrevenue, particularly in the case of any terrorist attack targeting retailspace, such as a shopping center. Furthermore, an act of terrorism or war, orthe threat thereof, could negatively impact our business by interfering withour ability to obtain merchandise from foreign manufacturers. Any futureinability to obtain merchandise from our foreign manufacturers or to substituteother manufacturers, at similar costs and in a timely manner, could adverselyaffect our business.

 

**Theloss of any of our senior management team or attrition among our buyers or keysales associates could adversely affect our business.**

 

Our success in thespecialty retail industry will continue to depend to a significant extent onour senior management team, buyers and key sales associates. We rely on theexperience of our senior management, who have specific knowledge relating to usand our industry that would be difficult to replace. If we were to lose aportion of our buyers or key sales associates, our ability to benefit fromlong-standing relationships with key vendors or to provide relationship-basedcustomer service may suffer. We may not be able to retain our current seniormanagement team, buyers or key sales associates and the loss of any of theseindividuals could adversely affect our business.

 

**Inflation, including price changesresulting from foreign exchange rate exchanges, may adversely affect ourbusiness operations in the future.**

 

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

 

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**Failureto maintain competitive terms under our loyalty programs could adversely affectour business.**

 

We maintain loyaltyprograms that are designed to cultivate long-term relationships with ourcustomers and enhance the quality of service we provide to our customers. Wemust constantly monitor and update the terms of our loyalty programs so thatthey continue to meet the demands and needs of our customers and remaincompetitive with loyalty programs offered by other high-end specialtyretailers. Given that approximately 40% of our total revenues during each ofthe last two calendar years was generated by our InCircle loyalty programmembers, our failure to continue to provide quality service and competitiverewards to our customers through the InCircle loyalty program could adverselyaffect our business.

 

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

 

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

 

We entered into afive-year program agreement with HSBC in June 2005 which provides for along-term marketing and servicing alliance under which HSBC offers proprietarycredit card accounts to our customers under both the “Neiman Marcus” and “BergdorfGoodman” brand names.  Under the terms ofthis alliance, HSBC offers credit cards and non-card payment plans and bearssubstantially all credit risk with respect to sales transacted on the cardsbearing our brands. HSBC has discretion over certain policies and arrangementswith our credit card customers and may change these policies and arrangementsin ways that affect our relationship with these customers.

 

We receive ongoingpayments from HSBC related to credit card sales and compensation for marketingand servicing activities. During fiscal year 2006, we outsourced variousadministrative elements of the proprietary credit card program to HSBC,including the processing of data, although we continue to handle key customerservice functions, including customer inquiries and collections.

 

We have entered intovarious amendments to the Program Agreement with HSBC since its inception. Theseamendments, among other things, provide for 1) the allocation between HSBC andNMG of additional income, if any, to be generated from the credit card programas a result of certain changes made to the terms of credit extended to ourcustomers and 2) the allocation of certain credit card losses between HSBC andNMG.  We may enter into additionalamendments to the Program Agreement prior to its maturity in July 2010 toalter the allocation of both credit card losses and income in response tocurrent economic conditions and other factors.

 

Credit card operationsare subject to numerous federal and state laws that impose disclosure and otherrequirements upon the origination, servicing and enforcement of credit accountsand limitations on the maximum amount of finance charges that may be charged bya credit provider. Any regulation or change in the regulation of creditarrangements that would materially limit the availability of credit to ourcustomer base could adversely affect our business.  Changes in credit card use, payment patterns,and default rates may result from a variety of economic, legal, social, andother factors that we cannot control or predict with certainty.  In addition, there can be no assurance that,upon expiration of our current alliance with HSBC, that we will be able toenter into a replacement arrangement on terms comparable to the currentarrangement. Any changes in our credit card arrangements may adversely affectour credit card program and ultimately, our business.

 

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

 

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

 

**Weare subject to numerous regulations that could affect our operations.**

 

We are subject tocustoms, truth-in-advertising and other laws, including consumer protectionregulations and zoning and occupancy ordinances that regulate retailers generallyand/or govern the importation, promotion and sale of merchandise and the 

 

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operation of retailstores and warehouse facilities. Although we undertake to monitor changes inthese laws, if these laws change without our knowledge, or are violated byimporters, designers, manufacturers or distributors, we could experience delaysin shipments and receipt of goods or be subject to fines or other penaltiesunder the controlling regulations, any of which could adversely affect ourbusiness.

 

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

 

The specialty retailindustry is seasonal in nature, with a higher level of sales typicallygenerated in the fall and holiday selling seasons. We have in the pastexperienced significant fluctuation in our revenues from quarter to quarterwith a disproportionate amount of our revenues falling in our second fiscalquarter, which coincides with the holiday season. In addition, we havesignificant additional cash requirements in the period leading up to the monthsof November and December in anticipation of higher sales volume inthose periods, including payments relating to additional inventory, advertisingand employees.

 

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

 

We purchase a substantialportion of our inventory from foreign suppliers whose costs are affected by thefluctuation of their local currency against the dollar or who price theirmerchandise in currencies other than the dollar. Fluctuations in the Euro-U.S.dollar exchange rate affect us most significantly; however, we source goodsfrom numerous countries and thus are affected by changes in numerous currenciesand, generally, by fluctuations in the U.S. dollar relative to suchcurrencies.  Accordingly, changes in thevalue of the dollar relative to foreign currencies may increase the retailprices of goods offered for sale and/or increase our cost of goods sold.  If our customers reduce their levels ofspending in response to increases in retail prices and/or we are unable to passsuch cost increases to our customers, our revenues, gross margins, andultimately our earnings, could decrease. Foreign currency fluctuations couldhave a material adverse effect on our business, financial condition and resultsof operations in the future.

 

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

 

A substantial majority ofour merchandise is manufactured overseas, mostly in Europe. As a result,political instability or other events resulting in the disruption of trade fromother countries or the imposition of additional regulations relating to orduties upon imports could cause significant delays or interruptions in thesupply of our merchandise or increase our costs, either of which could have amaterial adverse effect on our business. If we are forced to source merchandisefrom other countries, those goods may be more expensive or of a different orinferior quality from the ones we now sell. The importance to us of ourexisting designer relationships could present additional difficulties, as itmay not be possible to source merchandise from a given designer from alternativejurisdictions. If we were unable to adequately replace the merchandise wecurrently source with merchandise produced elsewhere, our business could beadversely affected.

 

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

 

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

 

**We areindirectly owned and controlled by the Sponsors, and their interests as equityholders may conflict with those of our creditors.**

 

We are indirectly ownedand controlled by the Sponsors and certain other equity investors, and theSponsors have the ability to control our policies and operations. The interestsof 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 ourdebts as they mature, the interests of our equity holders might conflict withour creditors’ interests. In addition, our equity holders may have an interestin pursuing acquisitions, divestitures, financings or other transactions that,in their judgment, could enhance their equity investments, even though suchtransactions might involve risks to holders of our indebtedness. Furthermore, theSponsors may in the future own businesses that directly or indirectly competewith us. One or more of the Sponsors also may pursue acquisition opportunitiesthat may be complementary to our business, and as a result, those acquisitionopportunities may not be available to us.

 

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**Ifwe are unable to enforce our intellectual property rights, or if we are accusedof infringing on a third party’s intellectual property rights, our net income maydecline.**

 

We and our subsidiariescurrently own our tradenames and service marks, including the “Neiman Marcus”and “Bergdorf Goodman” marks. Our tradenames and service marks are registeredin the United States and in various foreign countries, primarily in Europe. Thelaws of some foreign countries do not protect proprietary rights to the sameextent as do the laws of the United States. Moreover, we are unable to predictthe effect that any future foreign or domestic intellectual propertylegislation or regulation may have on our existing or future business. The lossor reduction of any of our significant proprietary rights could have an adverseeffect on our business.

 

Additionally, thirdparties may assert claims against us alleging infringement, misappropriation orother violations of their tradename or other proprietary rights, whether or notthe claims have merit. Claims like these may be time consuming and expensive todefend and could result in our being required to cease using the tradename or otherrights and selling the allegedly infringing products. This might have anadverse affect on our sales and cause us to incur significant litigation costsand expenses.

 

**Failureto successfully maintain and update information technology systems and enhanceexisting systems may adversely affect our business.**

 

To keep pace withchanging technology, we must continuously provide for the design andimplementation of new information technology systems as well as enhancements ofour existing systems. Any failure to adequately maintain and update theinformation technology systems supporting our online operations, salesoperations or inventory control could prevent our customers from purchasingmerchandise on our websites or prevent us from processing and deliveringmerchandise, which could adversely affect our business.

 

**Delaysin receipt of merchandise in connection with either the manufacturing orshipment of such merchandise can affect our performance.**

 

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

 

**ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS**

 

None.

 

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

 

None.

 

**ITEM 6.      EXHIBITS**

 
| 2.1    |   | Agreement and  Plan of Merger, dated May 1, 2005, among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and Newton Merger  Sub, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                             |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 2.2    |   | Purchase, Sale  and Servicing Transfer Agreement dated as of June 8, 2005, among The  Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada,  N.A. and HSBC Finance Corporation, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 3.1    |   | Amended and  Restated Certificate of Incorporation of Neiman Marcus, Inc.,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Registration Statement on Form S-1 (Registration No. 333-133184)  dated April 10, 2006.                                                                                 |

 

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| 3.2    |   | Amended and  Restated Bylaws of Neiman Marcus, Inc., incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Registration Statement on  Form S-1 (Registration No. 333-133184) dated April 10, 2006.                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1    |   | Indenture, dated  as of May 27, 1998, between The Neiman Marcus Group, Inc. and The  Bank of New York, as trustee, incorporated herein by reference to the  Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009.                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2    |   | Form of  7.125% Senior Notes Due 2028, dated May 27, 1998, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3    |   | Senior Indenture  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo  Bank, National Association, trustee, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4    |   | Senior Subordinated  Indenture dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Form of  9%/9 3/4% Senior Notes due 2015, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Form of 10  3/8% Senior Subordinated Notes due 2015, incorporated herein by reference to  The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.7    |   | Registration  Rights Agreement dated October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial  Purchasers, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8    |   | First Supplemental  Indenture, dated as of July 11, 2006, to the Indenture, dated as of  May 27, 1998, among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor  trustee, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated July 11, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9    |   | Second  Supplemental Indenture, dated as of August 14, 2006, to the Indenture,  dated as of May 27, 1998, among The Neiman Marcus Group, Inc.,  Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as  successor trustee, incorporated herein by reference to the Company’s Current  Report on Form 8-K dated August 15, 2006.                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1*  |   | Employment  Agreement dated as of October 6, 2005 by and among The Neiman Marcus  Group, Inc., Newton Acquisition Merger Sub, Inc., Newton  Acquisition, Inc., and Burton M. Tansky, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2*  |   | First Amendment  to Employment Agreement by and between The Neiman Marcus Group, Inc., a  Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and  Burton M. Tansky effective December 21, 2007, incorporated herein by  reference to the Neiman Marcus, Inc.’s Current Report on Form 8-K  dated December 21, 2007.                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3*  |   | Second Amendment  to Employment Agreement by and between The Neiman Marcus Group, Inc., a  Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and  Burton M. Tansky effective January 1, 2009, incorporated herein by  reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4*  |   | Rollover  Agreement dated as of October 4, 2005 by and among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and Burton M. Tansky,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009.                                                                                                 |

 

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| 10.5*  |   | Amendment to  Letter Agreement effective as of January 1, 2009 by and between Neiman  Marcus, Inc., a Delaware corporation, and Burton M. Tansky, incorporated  herein by reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6*  |   | Form of  Rollover Agreement by and among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., and certain members of management, incorporated  herein by reference to the Company’s Annual Report on Form 10-K for the  fiscal year ended August 1, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Amended and  Restated Credit Agreement dated as of July 15, 2009, among The Neiman  Marcus Group, Inc., the Company, the other borrowers and guarantors  named therein, Bank of America, N.A., as administrative agent and  co-collateral agent, Wells Fargo Retail Finance, LLC as co-collateral agent,  Banc of America Securities LLC, Wells Fargo Retail Finance, LLC, J.P. Morgan  Securities Inc. and Regions Business Capital Corporation as joint lead arrangers  and joint bookrunners, Wells Fargo Retail Finance, LLC as syndication agent,  JPMorgan Chase Bank, N.A. and Regions Bank as co-documentation agents and the  lenders thereunder, incorporated herein by reference to Neiman  Marcus, Inc.’s Current Report on Form 8-K dated July 16, 2009.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Credit Agreement  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., the  Subsidiary Guarantors, Credit Suisse, as administrative agent and collateral  agent, Credit Suisse and Deutsche Bank Securities Inc. as joint lead  arrangers, Banc of America Securities LLC and Goldman Sachs Credit Partners  L.P. as co-arrangers, Credit Suisse, Deutsche Bank Securities Inc., Banc of  America Securities LLC and Goldman Sachs Credit Partners L.P. as joint  bookrunners, Deutsche Bank Securities Inc., Banc of America Securities LLC  and Goldman Sachs Credit Partners L.P. as co-syndication agents and the  lenders thereunder, incorporated herein by reference to the Company’s Annual  Report on Form 10-K for the fiscal year ended August 1, 2009. (2) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Amended and  Restated Pledge and Security Agreement dated as of July 15, 2009 by and  among The Neiman Marcus Group, Inc., the Company, subsidiaries named  therein and Bank of America, N.A., as administrative agent and co-collateral  agent, incorporated herein by reference to Neiman Marcus, Inc.’s Current  Report on Form 8-K dated July 16, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Substitution of  Agent and Joinder Agreement, dated as of July 15, 2009, among Deutsche  Bank Trust Company Americas, Credit Suisse and Bank of America, N.A.,  incorporated herein by reference to Neiman Marcus, Inc.’s Current Report  on Form 8-K dated July 16, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Pledge and  Security and Intercreditor Agreement dated as of October 6, 2005, among  Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc.,  Newton Acquisition, Inc., the Subsidiary Guarantors and Credit Suisse,  as administrative agent and collateral agent, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.12  |   | Lien  Subordination and Intercreditor Agreement dated as of October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger  Sub, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company  Americas, as revolving facility agent, and Credit Suisse, as term loan agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.13  |   | Form of  First Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from The Neiman Marcus Group, Inc. to Credit  Suisse, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.14  |   | Form of  First Priority Leasehold Mortgage, Assignment of Leases and Rents, Security  Agreement and Financing Statement from The Neiman Marcus Group, Inc. to  Credit Suisse, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.15  |   | Form of  Second Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from The Neiman Marcus Group, Inc. to Deutsche  Bank Trust Company Americas, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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| 10.16  |   | Form of  Second Priority Leasehold Mortgage, Assignment of Lease and Rents, Security  Agreement and Financing Statement from The Neiman Marcus Group, Inc. to  Deutsche Bank Trust Company Americas, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  |   | Amendment  No. 1 dated as of October 6, 2005 to the Credit Agreement dated as  of October 6, 2005 among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc.  from time to time party thereto, the Lenders thereunder, and Credit Suisse,  as administrative agent and as collateral agent for the Lenders, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18* |   | Newton  Acquisition, Inc. Management Equity Incentive Plan, incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.19* |   | Amendment to the  Newton Acquisition, Inc. Management Equity Incentive Plan effective as  of January 1, 2009, incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.20* |   | Stock Option Grant  Agreement made as of November 29, 2005 between Newton  Acquisition, Inc. and Burton M. Tansky, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  December 5, 2005.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21* |   | Amendment to the  Stock Option Grant Agreement effective as of January 1, 2009 by and  between Neiman Marcus, Inc., a Delaware corporation, and Burton M.  Tansky, incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.22* |   | Form of  Stock Option Grant Agreement made as of November 29, 2005 between Newton  Acquisition, Inc. and certain eligible key employees, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.23* |   | Amendment to the  Form of Stock Option Grant Agreement effective as of January 1,  2009 by and between Neiman Marcus, Inc., a Delaware corporation, and  certain eligible key employees incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.24  |   | Amendment  No. 2 dated as of January 26, 2006 to the Credit Agreement dated as  of October 6, 2005, as amended, among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., each subsidiary of The  Neiman Marcus Group, Inc. from time to time party thereto, the Lenders  thereunder and Credit Suisse, as administrative agent and collateral agent  for the Lenders, incorporated by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated January 30,  2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.25* |   | Employment  Agreement between The Neiman Marcus Group, Inc. and Karen Katz, dated  February 1, 2006, effective as of October 6, 2005, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated February 1, 2006.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.26* |   | Amendment to  Employment Agreement effective as of January 1, 2009 by and between The  Neiman Marcus Group, Inc., a Delaware corporation, and Karen Katz  incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.27  |   | Management  Services Agreement, dated as of October 6, 2005 among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P.,  TPG GenPar III, L.P. and Warburg Pincus LLC, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 28, 2006.                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.28  |   | Registration  Rights Agreement, dated as of October 6, 2005, among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and  the “Holders” identified therein as parties thereto, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 28, 2006.                                                                                                                                        |

 

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| 10.29  |   | Amendment  No. 1, dated as of March 28, 2006, to the Pledge and Security  Intercreditor Agreement dated as of October 6, 2005, among Neiman  Marcus, Inc., The Neiman Marcus Group, Inc., the Subsidiaries party  thereto and Credit Suisse, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated March 29, 2006.                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.30  |   | Credit Card  Program Agreement, dated as of June 8, 2005, by and among The Neiman  Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A.  and Household Corporation, incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended August 1,  2009. (2)                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.31  |   | Servicing  Agreement by and between The Neiman Marcus Group, Inc. and HSBC Bank  Nevada, N.A., incorporated herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended August 1, 2009. (2)                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.32* |   | Confidentiality,  Non-Competition and Termination Benefits Agreement by and between Bergdorf  Goodman, Inc., a New York corporation and a wholly owned subsidiary of  The Neiman Marcus Group, Inc., and James J. Gold dated May 3, 2004,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.33* |   | Amendment to the  Confidentiality, Non-Competition and Termination Benefits Agreement effective  as of January 1, 2009 by and between Bergdorf Goodman, Inc., a New  York corporation and wholly owned subsidiary of The Neiman Marcus  Group, Inc. and James J. Gold incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.34* |   | Form of  Amendment to the Confidentiality, Non-Competition and Termination Benefits  Agreement effective as of January 1, 2009 by and between The Neiman  Marcus Group, Inc., a Delaware corporation, and certain eligible key  employees incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.35  |   | Stockholder  Agreement, dated as of May 1, 2005, among Newton Acquisition, Inc.,  Newton Acquisition Merger Sub, Inc. and the other parties signatory  thereto, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.36* |   | Neiman  Marcus, Inc. Cash Incentive Plan amended as of January 21, 2008,  incorporated herein by reference to the Neiman Marcus, Inc. Quarterly  Report on Form 10-Q for the quarter ended April 26, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.37  |   | Management  Stockholders’ Agreement dated as of October 6, 2005 between Newton  Acquisition, Inc., Newton Holding, LLC, TPG Newton III, LLC, TPG  Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg Pincus Private Equity  VIII, L.P., Warburg Pincus Netherlands Private Equity VIII C.V. I, Warburg  Pincus Germany Private Equity VIII K.G , Warburg Pincus Private Equity IX,  L.P., and the other parties signatory thereto, incorporated herein by  reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for  the fiscal year ended July 29, 2006.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.38  |   | Amendment to the  Management Stockholders’ Agreement effective as of January 1, 2009 by  and between Neiman Marcus, Inc., a Delaware corporation, Newton Holding,  LLC, TPG Newton III, LLC, TPG Partners IV, L.P., TPG Newton Co-Invest I, LLC,  Warburg Pincus Private Equity VIII, L.P., Warburg Pincus Netherlands Private  Equity VIII C.V. I, Warburg Pincus Germany Private Equity VIII K.G., Warburg  Pincus Private Equity IX, L.P., and the other parties signatory thereto  incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.39* |   | The Neiman  Marcus Group, Inc. Key Employee Deferred Compensation Plan amended and  restated effective January 1, 2008, incorporated herein by reference to  the Neiman Marcus, Inc. Quarterly Report on Form 10-Q for the  quarter ended April 26, 2008.                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.40* |   | Amendment  No. 1 effective as of January 1, 2009 to The Neiman Marcus  Group, Inc. Key Employee Deferred Compensation Plan incorporated herein  by reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                            |

 

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| 10.41  |   | Amendment  No. 3 dated as of October 12, 2006 to the Credit Agreement dated as  of October 6, 2005 among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from  time to time party thereto, the Lenders thereunder and Credit Suisse, as  administrative agent and collateral agent for the Lenders, incorporated by  reference to Neiman Marcus, Inc.’s Current Report on Form 8-K dated  October 17, 2006.                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.42  |   | Amendment  No. 4 dated as of February 8, 2007 to the Credit Agreement dated as  of October 6, 2005, among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from  time to time party thereto, the lenders thereunder, and Credit Suisse, as  administrative agent and collateral agent for the lenders incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated February 14, 2007. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.43  |   | The Neiman  Marcus Group, Inc. Supplemental Executive Retirement Plan as amended and  restated effective January 1, 2009 incorporated herein by reference to  Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter  ended January 31, 2009.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.44  |   | The Neiman  Marcus Group, Inc. Defined Contribution Supplemental Executive  Retirement Plan, as amended and restated effective as of January 1,  2008, incorporated herein by reference to the Neiman Marcus, Inc. Annual  Report on Form 10-K for the fiscal year ended August 2, 2008.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.45  |   | Amendment  No. 1 effective January 1, 2009 to the Amended and Restated Neiman  Marcus Group, Inc. Defined Contribution Supplemental Executive  Retirement Plan incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.46  |   | First Amendment  to Credit Card Program Agreement dated as of April 30, 2006 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and Household Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009. (2)                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.47  |   | Second Amendment  to Credit Card Program Agreement dated as of June 28, 2006 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A. and Household Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009. (2)                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.48  |   | Third Amendment  to Credit Card Program Agreement dated as of August 1, 2006 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and Household Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009. (2)                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.49  |   | Fourth Amendment  to Credit Card Program Agreement dated as of April 3, 2007 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009. (2)                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.50  |   | Fifth Amendment  to Credit Card Program Agreement dated as of March 13, 2007 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.51  |   | Sixth Amendment  to Credit Card Program Agreement dated as of July 17, 2007 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada,  N.A., and HSBC Private Label Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009. (2)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.52  |   | Seventh  Amendment to Credit Card Program Agreement dated April 21, 2008 by and  among The Neiman Marcus Group, Inc., Bergdorf Goodman, HSBC Private  Label Corporation, and HSBC Bank Nevada, N.A., incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009. (2)                                                                                                                                                                             |

 

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| 10.53  |   | Eighth Amendment  to Credit Card Program Agreement dated as of October 17, 2008 by and  among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC  Bank Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009. (2) |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.54  |   | Ninth Amendment  to Credit Card Program Agreement dated as of December 3, 2008 by and  among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC  Bank Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009. (2)  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.55  |   | Form of  First Amendment to Second Priority Mortgage, Assignment of Leases and Rents,  Security Agreement and Financing Statement from The Neiman Marcus  Group, Inc. to Bank of America, N.A., incorporated herein by reference  to the Company’s Annual Report on Form 10-K for the fiscal year ended  August 1, 2009.                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.56* |   | Second Amendment  to the Neiman Marcus, Inc. Management Equity Incentive Plan effective as  of November 16, 2009. (1)                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.57* |   | Form of  Amended and Restated Stock Option Agreement between the Company and certain  eligible key employees. (1)                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 10.58* |   | Form of  Second Amended and Restated Stock Option Grant Agreement between the Company  and certain eligible key employees. (1)                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 31.1   |   | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (1)                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2   |   | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. (1)                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                         |
| 32     |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                  |

 

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

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedhereunto duly authorized.

 

 

NEIMAN MARCUS, INC.

(Registrant)

 
| **Signature**          | ** ** | **Title**                       | ** ** | **Date**              | ** ** |
|------------------------|------------|---------------------------------|------------|-----------------------|------------|
|                   |       |                            |       |                  |       |
|                   |       |                            |       |                  |       |
| /s/ T. Dale  Stapleton |       | Vice President  and Controller  |       | December 8, 2009 |       |
| T. Dale  Stapleton     |       | and Duly  Authorized Officer    |       |                  |       |
|                   |       | (principal  accounting officer) |       |                  |       |

 

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