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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended October 30,2010**

 

**OR**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from             to            **

 

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

 

**Neiman Marcus, Inc.**

(Exact name of registrant as specified in itscharter)

 

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

** **

Registrant’s telephone number, including areacode: **(214) 743-7600**

 

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

 

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

 

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

 

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

 

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

 

There were 1,014,915 shares of the registrant’s commonstock, par value $.01 per share, outstanding at October 30, 2010.

 

 

 

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**NEIMANMARCUS, INC.**

 

**INDEX**

 
| ** **    | ** **                                                                                                                     | ** ** | **Page** |
|---------------|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|          |                                                                                                                           |       |     |
| Part I.  | Financial Information                                                                                                          |       |     |
|          |                                                                                                                           |       |     |
| Item 1.       | Condensed  Consolidated Balance Sheets as of October 30, 2010, July 31, 2010  and October 31, 2009              |       | 1        |
|          |                                                                                                                           |       |     |
|          | Condensed Consolidated  Statements of Operations for the Thirteen Weeks Ended October 30, 2010  and October 31, 2009 |       | 2        |
|          |                                                                                                                           |       |     |
|          | Condensed Consolidated  Statements of Cash Flows for the Thirteen Weeks Ended October 30, 2010  and October 31, 2009 |       | 3        |
|          |                                                                                                                           |       |     |
|          | Notes  to Condensed Consolidated Financial Statements                                                                          |       | 4        |
|          |                                                                                                                           |       |     |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    |       | 22       |
|          |                                                                                                                           |       |     |
| Item 3.       | Quantitative  and Qualitative Disclosures about Market Risk                                                                    |       | 36       |
|          |                                                                                                                           |       |     |
| Item 4.       | Controls and  Procedures                                                                                                       |       | 37       |
|          |                                                                                                                           |       |     |
| Part II. | Other  Information                                                                                                             |       |     |
|          |                                                                                                                           |       |     |
| Item 1.       | Legal Proceedings                                                                                                              |       | 37       |
|          |                                                                                                                           |       |     |
| Item 1A.      | Risk  Factors                                                                                                                  |       | 38       |
|          |                                                                                                                           |       |     |
| Item 6.       | Exhibits                                                                                                                       |       | 46       |
|          |                                                                                                                           |       |     |
| Signatures    |                                                                                                                           |       | 51       |

 

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**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| **(in thousands, except shares)**                                                                                                                                                            | ** ** | **October 30,****2010** | ** ** | **July 31,****2010** | ** ** | **October 31,**** 2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | ** **                   | ** ** | ** **                | ** ** | ** **                         | ** ** |
| **ASSETS**                                                                                                                                                                                                  |       |                         |       |                      |       |                               |       |
| Current assets:                                                                                                                                                                                             |       |                         |       |                      |       |                               |       |
| Cash and cash equivalents                                                                                                                                                                                   |       | $                            | 375,856    |                      | $          | 421,007                            |       | $ | 319,215 |   |
| Merchandise inventories                                                                                                                                                                                     |       | 945,902                      |       | 790,516                   |       | 875,833                            |       |
| Deferred income taxes                                                                                                                                                                                       |       | 26,437                       |       | 30,755                    |       | 19,136                             |       |
| Other current assets                                                                                                                                                                                        |       | 76,324                       |       | 117,844                   |       | 104,835                            |       |
| Total current assets                                                                                                                                                                                        |       | 1,424,519                    |       | 1,360,122                 |       | 1,319,019                          |       |
|                                                                                                                                                                                                        |       |                         |       |                      |       |                               |       |
| Property and equipment, net                                                                                                                                                                                 |       | 892,628                      |       | 905,826                   |       | 973,630                            |       |
| Goodwill and intangible  assets, net                                                                                                                                                                        |       | 3,188,370                    |       | 3,205,688                 |       | 3,260,633                          |       |
| Other assets                                                                                                                                                                                                |       | 55,041                       |       | 60,646                    |       | 88,075                             |       |
| Total assets                                                                                                                                                                                                |       | $                            | 5,560,558  |                      | $          | 5,532,282                          |       | $ | 5,641,357 |   |
|                                                                                                                                                                                                        |       |                         |       |                      |       |                               |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                              |       |                         |       |                      |       |                               |       |
| Current liabilities:                                                                                                                                                                                        |       |                         |       |                      |       |                               |       |
| Accounts payable                                                                                                                                                                                            |       | $                            | 273,319    |                      | $          | 270,778                            |       | $ | 237,972 |   |
| Accrued liabilities                                                                                                                                                                                         |       | 375,612                      |       | 361,456                   |       | 362,359                            |       |
| Other current liabilities                                                                                                                                                                                   |       | 11,664                       |       | 30,309                    |       | —                             |       |
| Total current liabilities                                                                                                                                                                                   |       | 660,595                      |       | 662,543                   |       | 600,331                            |       |
|                                                                                                                                                                                                        |       |                         |       |                      |       |                               |       |
| Long-term liabilities:                                                                                                                                                                                      |       |                         |       |                      |       |                               |       |
| Long-term debt                                                                                                                                                                                              |       | 2,879,721                    |       | 2,879,672                 |       | 2,972,173                          |       |
| Deferred income taxes                                                                                                                                                                                       |       | 663,568                      |       | 668,647                   |       | 690,970                            |       |
| Deferred real estate credits                                                                                                                                                                                |       | 99,213                       |       | 96,093                    |       | 100,239                            |       |
| Other long-term liabilities                                                                                                                                                                                 |       | 293,618                      |       | 299,954                   |       | 346,146                            |       |
| Total long-term liabilities                                                                                                                                                                                 |       | 3,936,120                    |       | 3,944,366                 |       | 4,109,528                          |       |
|                                                                                                                                                                                                        |       |                         |       |                      |       |                               |       |
| Common stock (par value  $0.01 per share, 5,000,000 shares authorized and 1,014,915 shares issued and outstanding  at October 30, 2010 and 1,013,082 at July 31, 2010 and  October 31, 2009) |       | 10                           |       | 10                        |       | 10                                 |       |
| Additional paid-in capital                                                                                                                                                                                  |       | 1,435,370                    |       | 1,434,321                 |       | 1,425,385                          |       |
| Accumulated other  comprehensive loss                                                                                                                                                                       |       | (94,594                      | )          | (106,274                  | )          | (101,572                           | )          |
| Accumulated deficit                                                                                                                                                                                         |       | (376,943                     | )          | (402,684                  | )          | (392,325                           | )          |
| Total shareholders’ equity                                                                                                                                                                             |       | 963,843                      |       | 925,373                   |       | 931,498                            |       |
| Total liabilities and  shareholders’ equity                                                                                                                                                            |       | $                            | 5,560,558  |                      | $          | 5,532,282                          |       | $ | 5,641,357 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **October 30,****2010**       | ** ** | **October 31,****2009** | ** ** |
| ** **                                                                        | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                  | 927,248    |   | $ | 868,900 |   |
| Cost of goods sold including  buying and occupancy costs (excluding depreciation) |       | 562,658                            |       | 534,223 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 222,988                            |       | 218,819 |   |
| Income from credit card  program, net                                             |       | (9,293                             | )          | (13,087 | ) |
| Depreciation expense                                                              |       | 33,722                             |       | 35,782 |   |
| Amortization of intangible  assets                                                |       | 12,849                             |       | 13,845 |   |
| Amortization of favorable  lease commitments                                      |       | 4,469                              |       | 4,469 |   |
|                                                                              |       |                               |       |   |   |
| Operating earnings                                                                |       | 99,855                             |       | 74,849 |   |
|                                                                              |       |                               |       |   |   |
| Interest expense, net                                                             |       | 58,430                             |       | 59,365 |   |
|                                                                              |       |                               |       |   |   |
| Earnings before income taxes                                                      |       | 41,425                             |       | 15,484 |   |
|                                                                              |       |                               |       |   |   |
| Income tax expense                                                                |       | 15,684                             |       | 6,963 |   |
|                                                                              |       |                               |       |   |   |
| Net earnings                                                                      |       | $                                  | 25,741     |   | $ | 8,521 |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                      | ** ** | **Thirteen weeks ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                                                         | ** ** | **October 30,****2010**       | ** ** | **October 31,****2009** | ** ** |
| ** **                                                                                      | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **CASH  FLOWS - OPERATING ACTIVITIES**                                                          |       |                               |       |   |   |
| Net earnings                                                                                    |       | $                                  | 25,741     |   | $ | 8,521 |   |
| Adjustments to reconcile net  earnings to net cash (used for) provided by operating activities: |       |                               |       |   |   |
| Depreciation and  amortization expense                                                          |       | 55,714                             |       | 58,611 |   |
| Paid-in-kind interest                                                                           |       | —                             |       | 14,362 |   |
| Deferred income taxes                                                                           |       | (8,353                             | )          | (8,756 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans    |       | 1,866                              |       | 4,318 |   |
|                                                                                            |       | 74,968                             |       | 77,056 |   |
| Changes in operating assets  and liabilities:                                                   |       |                               |       |   |   |
| Merchandise inventories                                                                         |       | (155,386                           | )          | (109,002 | ) |
| Other current assets                                                                            |       | 41,520                             |       | 20,225 |   |
| Other assets                                                                                    |       | (21                                | )          | (5,379 | ) |
| Accounts payable and accrued  liabilities                                                       |       | 15,077                             |       | 51,535 |   |
| Deferred real estate credits                                                                    |       | 4,750                              |       | 5,379 |   |
| **Net cash  (used for) provided by operating activities**                                       |       | (19,092                            | )          | 39,814 |   |
|                                                                                            |       |                               |       |   |   |
| **CASH  FLOWS — INVESTING ACTIVITIES**                                                     |       |                               |       |   |   |
| Capital expenditures                                                                            |       | (18,411                            | )          | (17,261 | ) |
| **Net cash  used for investing activities**                                                     |       | (18,411                            | )          | (17,261 | ) |
|                                                                                            |       |                               |       |   |   |
| **CASH  FLOWS — FINANCING ACTIVITIES**                                                     |       |                               |       |   |   |
| Repayment of borrowings  under senior term loan facility                                        |       | (7,648                             | )          | (26,617 | ) |
| Repayment of borrowings                                                                         |       | —                             |       | (146 | ) |
| **Net cash  used for financing activities**                                                     |       | (7,648                             | )          | (26,763 | ) |
|                                                                                            |       |                               |       |   |   |
| **CASH AND  CASH EQUIVALENTS**                                                                  |       |                               |       |   |   |
| Decrease during the period                                                                      |       | (45,151                            | )          | (4,210 | ) |
| Beginning balance                                                                               |       | 421,007                            |       | 323,425 |   |
| Ending balance                                                                                  |       | $                                  | 375,856    |   | $ | 319,215 |   |
|                                                                                            |       |                               |       |   |   |
| **Supplemental  Schedule of Cash Flow Information**                                             |       |                               |       |   |   |
|                                                                                            |       |                               |       |   |   |
| Cash paid (received) during  the period for:                                                    |       |                               |       |   |   |
| Interest                                                                                        |       | $                                  | 64,247     |   | $ | 48,378 |   |
| Income taxes                                                                                    |       | $                                  | (1,935     | ) | $ | (3,310 | ) |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

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

 

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

 

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

 

The specialty retail industry is seasonal in nature,with a higher level of sales typically generated in the fall and holidayselling seasons. Due to seasonal and other factors, the results of operationsfor the first quarter of fiscal year 2011 are not necessarily comparable to, orindicative of, results of any other interim period or for the fiscal year as awhole.

 

Neiman Marcus, Inc. (the Company) is a wholly-ownedsubsidiary of and is controlled by Newton Holding, LLC (Holding). Holding iscontrolled by investment funds affiliated with TPG Capital and Warburg Pincus(collectively, the Sponsors). The Company was formed by Holding for the purposeof acquiring The Neiman Marcus Group, Inc. (NMG), which acquisition wascompleted on October 6, 2005 (the Acquisition). The accompanying unauditedcondensed consolidated financial statements include the amounts of the Companyand its subsidiaries. All significant intercompany accounts and transactionshave been eliminated.

 

Our fiscal year ends on the Saturday closest toJuly 31. All references to the first quarter of fiscal year 2011 relate tothe thirteen weeks ended October 30, 2010. All references to the firstquarter of fiscal year 2010 relate to the thirteen weeks ended October 31,2009.

 

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

 

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

 

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

 

·                  Recognition ofrevenues;

 

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

 

·                  Determinationof impairment of long-lived assets;

 

·                  Recognitionof advertising and catalog costs;

 

·                  Measurementof liabilities related to our loyalty programs;

 

·                  Recognitionof income taxes; and

 

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

 

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

 

·                  Level1 — valuation inputs are based upon unadjusted quoted prices for identicalinstruments traded in active markets.

 

·                  Level2 — valuation inputs are based upon quoted prices for similar instruments inactive markets, quoted prices for identical or similar instruments in marketsthat are not active, and model-based valuation techniques for which allsignificant assumptions are observable in the market or can be corroborated byobservable market data for substantially the full term of the assets orliabilities.

 

·                  Level3 — valuation inputs are unobservable and typically reflect management’sestimates of assumptions that market participants would use in pricing theasset or liability. The fair values are therefore determined using model-basedtechniques that include option pricing models, discounted cash flow models andsimilar techniques.

 

At October 30, 2010, July 31, 2010 and October 31,2009, the fair values of cash and cash equivalents, receivables and accountspayable approximated their carrying values due to the short-term nature ofthese instruments. See Notes 3 and 4 of the Notes to Condensed ConsolidatedFinancial Statements for the estimated fair values of our long-term debt andderivative financial instruments.

 

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

 
| **(in thousands)**              | ** ** | **October 30,****2010** | ** ** | **July 31,****2010** | ** ** | **October 31,****2009** | ** ** |
|--------------------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------------|------------|
|                                 |       |                         |       |                      |       |                         |       |
| Goodwill                             |       | $                            | 1,263,433  |                      | $          | 1,263,433                    |       | $ | 1,263,433 |   |
| Tradenames                           |       | 1,233,902                    |       | 1,234,180                 |       | 1,235,012                    |       |
| Customer lists, net                  |       | 301,818                      |       | 314,389                   |       | 355,093                      |       |
| Favorable lease commitments,  net    |       | 389,217                      |       | 393,686                   |       | 407,095                      |       |
| Goodwill and intangible  assets, net |       | $                            | 3,188,370  |                      | $          | 3,205,688                    |       | $ | 3,260,633 |   |

 

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

 

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

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

 

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

 

The significant components of our long-term debt are asfollows:

 
| ** **                                                  | ** ** | **Interest** | ** ** | **October 30,** | ** ** | **July 31,** | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|
| **(in thousands)**                                     | ** ** | **Rate**     | ** ** | **2010**             | ** ** | **2010**          | ** ** | **2009**             | ** ** |
|                                                        |       |         |       |                 |       |              |       |                 |       |
| Senior Secured Term Loan  Facility                          |       | variable     |       | $                    | 1,505,735  |              | $          | 1,513,383            |       | $ | 1,598,383 |   |
| 2028 Debentures                                             |       | 7.125%       |       | 121,541              |       | 121,492           |       | 121,345              |       |
| Senior Notes                                                |       | 9.0%/9.75%   |       | 752,445              |       | 752,445           |       | 752,445              |       |
| Senior Subordinated Notes                                   |       | 10.375%      |       | 500,000              |       | 500,000           |       | 500,000              |       |
| Total debt                                                  |       |         |       | 2,879,721            |       | 2,887,320         |       | 2,972,173            |       |
| Less: current portion of  Senior Secured Term Loan Facility |       |         |       | —               |       | (7,648            | )          | —               |       |
| Long-term debt                                              |       |         |       | $                    | 2,879,721  |              | $          | 2,879,672            |       | $ | 2,972,173 |   |

 

***Senior Secured Asset-Based Revolving CreditFacility.*** NMG has an asset-basedrevolving credit facility with a maximum committed borrowing capacity of $600.0million that matures on January 15, 2013. The 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.

 

Availability under the Asset-Based Revolving Credit Facilityis subject to a borrowing base. The Asset-Based Revolving Credit Facilityincludes borrowing capacity available for letters of credit and for borrowingson same-day notice. The borrowing base for the Asset-Based Revolving CreditFacility is equal to at any time the sum of (a) the lesser of (i) 80%of eligible inventory (valued at the lower of cost or market value) and(ii) 85% of the net orderly liquidation value of eligible inventory, and(b) 85% of the amounts owed by credit card processors in respect ofeligible credit card accounts constituting proceeds arising from the sale ordisposition of inventory, less certain reserves. 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 30,2010, NMG had no borrowings outstanding under this facility, $17.0 million ofoutstanding letters of credit and $523.0 million of unused borrowingavailability.

 

The Asset-Based Revolving Credit Facility provides thatNMG has the right at any time to request up to $300 million of additionalrevolving facility commitments and/or incremental term loans; provided that theaggregate amount of loan commitments under the Asset-Based Revolving CreditFacility may not exceed $800 million. However, the lenders are under noobligation to provide any such additional commitments or loans, and anyincrease in commitments or incremental term loans will be subject to customaryconditions precedent.  If NMG were to request any such additionalcommitments and the existing lenders or new lenders were to agree to providesuch commitments, the Asset-Based Revolving Credit Facility size could beincreased to up to $800 million, but NMG’s ability to borrow would still belimited by the amount of the borrowing base. Incremental term loans may beexchanged by NMG for any of NMG’s existing senior notes and senior subordinatednotes, or the cash proceeds of any incremental term loans may be used torepurchase any of such notes, but neither the incremental term loans nor theproceeds thereof may be used for any other purpose.

 

Borrowings under the Asset-Based Revolving CreditFacility bear interest at a rate per annum equal to, at NMG’s option, either(a) a base rate determined by reference to the highest of (i) adefined prime rate, (ii) the federal funds effective rate plus 1¤2 of 1% or (iii) a one-monthLIBOR rate plus 1% or (b) a LIBOR rate, subject to certain adjustments, ineach case plus an applicable margin.  The applicable margin is up to 3.50%with respect to base rate borrowings and up to 4.50% with respect to LIBORborrowings, provided that until October 1, 2010, the applicable margin was3.25% with respect to base rate borrowings and 4.25% with respect to LIBORborrowings. The applicable margin is subject to adjustment based on thehistorical availability under the Asset-Based Revolving Credit Facility. Inaddition, NMG is required to pay a commitment fee in respect of unusedcommitments of (a) 0.75% per annum during any applicable period in whichthe average revolving loan utilization is 50% or more or (b) 1% per annumduring any applicable period in which the average revolving loan utilization isless than 50%.  NMG must also pay customary letter of credit fees andagency fees.

 

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

 

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

 

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

 

TheAsset-Based Revolving Credit Facility contains covenants, including covenantslimiting dividends and other restricted payments; investments, loans, advancesand acquisitions; and prepayments or redemptions of other indebtedness.  These covenants permit the restricted actionsin an unlimited amount, subject to the satisfaction of certain paymentconditions, principally that NMG must have pro forma excess availability underthe Asset-Based Revolving Credit Facility equal to at least 25% of the lesserof (a) the revolving commitments under the facility and (b) the borrowingbase, NMG delivering projections demonstrating that projected excessavailability for the next twelve months will be equal to such thresholds andthat NMG have a pro forma ratio of consolidated EBITDA to consolidated FixedCharges (as such terms are defined in the credit agreement) of at least 1.2 to1.0 (or 1.1 to 1.0 for prepayments 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 detailed description of NMG’s Asset-BasedRevolving Credit Facility, refer to Note 7 of the Notes to ConsolidatedFinancial Statements in our Annual Report on Form 10-K for the fiscal yearended July 31, 2010.

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG enteredinto a credit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility.  At October 30, 2010, the outstandingbalance under the Senior Secured Term Loan Facility was $1,505.7 million.  In November 2010, NMG entered into anamendment and restatement (the Amendment) of the credit agreement governing NMG’sSenior Secured Term Loan Facility, which included the following: (i) anextension of the maturity of approximately $1,064.0 million principal amount ofthe existing term loans thereunder, (ii) an increase in the interest ratepayable to holders of the extended term loans, (iii) the ability to incuradditional debt to refinance the non-extended term loans and (iv) certainother modifications to the Senior Secured Term Loan Facility.  For a more detailed description of theAmendment, see Note 14 of the Notes to Condensed Consolidated FinancialStatements.

 

The extended term loans will mature on April 6, 2016, unless$300.0 million or more aggregate principal amount of NMG’s Senior Notes andSenior Subordinated Notes remain outstanding on July 15, 2015, in whichcase the extended term loans will mature on that date instead.  The approximately $441.7 million principalamount of existing term loans that were not extended continue to have amaturity of April 6, 2013 (as all of the term loans did prior to theAmendment).

 

At October 30, 2010 (prior to the Amendment),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) the federal funds effective rate plus 1¤2 of 1% or (b) a LIBOR rate, subject to certainadjustments, in each case plus an applicable margin.  The interest rate on the outstandingborrowings pursuant to the Senior Secured Term Loan Facility was 2.29% at October 30,2010.  The applicable margin is subjectto adjustment based on contractually defined debt coverage ratios.  At October 30, 2010, the applicablemargin with respect to base rate borrowings was 1.00% and the applicable marginwith

 

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respect to LIBOR borrowings was 2.00%.  For a description of interest payable on theterm loans after giving effect to the Amendment, see Note 14 of the Notes toCondensed Consolidated Financial Statements.

 

The credit agreement governing the Senior Secured TermLoan Facility requires NMG to prepay outstanding term loans with 50% (whichpercentage will be reduced to 25% if NMG’s total leverage ratio is less than aspecified ratio and will be reduced to 0% if NMG’s total leverage ratio is lessthan a specified ratio) of its annual excess cash flow (as defined in thecredit agreement).  For fiscal year 2010,NMG was required to prepay $92.6 million of outstanding term loans pursuant tothe annual excess cash flow requirements. Of such amount, NMG paid $85.0 million in the fourth quarter of fiscalyear 2010 and made the remaining $7.6 million payment in the first quarter offiscal year 2011.  If a change of control(as defined 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 toprepay outstanding term loans at 100% of the principal amount to be prepaid,plus accrued and unpaid interest, with the proceeds of certain asset salesunder certain circumstances.

 

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

 

All obligations under the Senior Secured Term LoanFacility are unconditionally guaranteed by the Company and each direct andindirect domestic subsidiary of NMG that guarantees the obligations of NMGunder its Asset-Based Revolving Credit Facility.  All obligations under the Senior Secured TermLoan Facility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiary guarantors.

 

The credit agreement governing the Senior Secured TermLoan Facility contains a number of negative covenants that are substantiallysimilar to those governing the Senior Notes (as described below) and additionalcovenants related to the security arrangements for the Senior Secured Term LoanFacility.  The credit agreement alsocontains customary affirmative covenants and events of default, including across-default provision in respect of any other indebtedness that has anaggregate principal amount exceeding $50 million.

 

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

 

The fair value of the Senior Secured Term Loan Facilitywas approximately $1,464.3 million at October 30, 2010, $1,426.4 millionat July 31, 2010 and $1,382.6 million at October 31, 2009 based onprevailing market rates.

 

***2028 Debentures.***  NMG has outstanding $125.0 millionaggregate principal amount of its 7.125% 2028 Debentures. NMG equally andratably secures its 2028 Debentures by a first lien security interest oncertain collateral subject to liens granted under NMG’s Senior Secured CreditFacilities.  The 2028 Debentures areguaranteed on an unsecured, senior basis by the Company.  The 2028 Debentures are not guaranteed bycertain subsidiaries of NMG.  The 2028Debentures include a cross-acceleration provision in respect of any otherindebtedness that has an aggregate principal amount exceeding $15 million.  NMG’s 2028 Debentures mature on June 1,2028.

 

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

 

The fair value of the 2028 Debentures was approximately$118.1 million at October 30, 2010, $114.1 million at July 31, 2010and $105.6 million at October 31, 2009 based on quoted market prices.

 

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

 

Interest on the Senior Notes is payable quarterly inarrears on each January 15, April 15, July 15 andOctober 15.  Prior toOctober 15, 2010, NMG could, at its option, elect to pay interest on theSenior Notes entirely in cash (Cash Interest) or entirely by increasing the principalamount of the outstanding Senior Notes by issuing additional Senior Notes (PIKInterest).  Cash Interest on the SeniorNotes accrues at the rate of 9% per annum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum.  We negotiated for the right to include thePIK feature in our Senior Notes because of our belief that this feature couldbe a useful tool to enhance liquidity under appropriate circumstances.  In the second quarter of fiscal year 2009,given the dislocation in the financial markets and the uncertainty as to whenreasonable conditions would return, we believed that it was appropriate toutilize this feature, even though we had available borrowing capacity under our$600.0 million Asset-Based Revolving Credit Facility.  Accordingly, we elected to pay PIK Interestfor the three quarterly interest periods

 

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ending October 14, 2009 and to make such interestpayments with the issuance of additional Senior Notes at the PIK Interest rateof 9.75% instead of paying interest in cash. As a result, the original principal amount of Senior Notes of $700.0million increased by $17.1 million in April 2009, $17.4 million in July 2009and $17.9 million in October 2009. We have elected to pay cash interest since the first quarter of fiscalyear 2010.  After October 15, 2010,we are required to make all interest payments on the Senior Notes entirely incash.

 

The Senior Notes are fully and unconditionally guaranteed,on a joint and several unsecured, senior basis, by each of NMG’s wholly-owneddomestic subsidiaries that guarantee NMG’s obligations under its Senior SecuredCredit Facilities and by the Company. The Senior 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 the guaranteesthereof, and NMG’s 2028 Debentures; and (ii) senior to all of NMG’s andits guarantors’ existing and future subordinated indebtedness, including theSenior Subordinated Notes due 2015 and the guarantees thereof. The Senior Notesalso 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 SeniorNotes are structurally subordinated to all existing and future liabilities,including trade payables, of NMG’s subsidiaries that are not providingguarantees.

 

NMG is not required to make any mandatory redemption orsinking fund payments with respect to the Senior Notes.  The indenture governing the Senior Notescontains a number of customary negative covenants and events of default,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 Notes to be due andpayable immediately.

 

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

 

The fair value of NMG’s Senior Notes was approximately$786.3 million at October 30, 2010, $767.5 million at July 31, 2010and $667.8 million at October 31, 2009 based on quoted market prices.

 

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

 

The Senior Subordinated Notes are fully andunconditionally guaranteed, on a joint and several unsecured, seniorsubordinated basis, by each of NMG’s wholly-owned domestic subsidiaries thatguarantee NMG’s obligations under its Senior Secured Credit Facilities and bythe Company.  The Senior SubordinatedNotes and the guarantees thereof are NMG’s and the guarantors’ unsecured,senior subordinated obligations and rank (i) junior to all of NMG’s andthe guarantors’ existing and future senior indebtedness, including the SeniorNotes and any borrowings under NMG’s Senior Secured Credit Facilities, and theguarantees thereof, and NMG’s 2028 Debentures; (ii) equally with any ofNMG’s and the guarantors’ future senior subordinated indebtedness; and(iii) senior to any of NMG’s and the guarantors’ future subordinatedindebtedness. In addition, the Senior Subordinated Notes are structurallysubordinated to all existing and future liabilities, including trade payables,of NMG’s subsidiaries that are not providing guarantees.

 

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

 

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

 

The fair value of NMG’s Senior Subordinated Notes wasapproximately $527.5 million at October 30, 2010, $517.5 million at July 31,2010 and $440.0 million at October 31, 2009 based on quoted market prices.

 

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***Maturities of Long-Term Debt.***  Annual maturities of long-termdebt, after giving effect to the Amendment of the Senior Secured Term LoanFacility in November 2010, during the next five fiscal years andthereafter are as follows (in millions):

 
| 2012       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2013       |   | 441.7   |   |
| 2014       |   | —  |   |
| 2015       |   | —  |   |
| 2016       |   | 2,316.5 |   |
| Thereafter |   | 121.5   |   |

 

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

 

***Interest expense.***  The significant components ofinterest expense are as follows:

 
| ** **                         | ** ** | **Thirteen weeks ended** | ** ** |
|------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**            | ** ** | **October 30,********2010**   | ** ** | **October 31,********2009** | ** ** |
|                               |       |                               |       |   |   |
| Senior Secured Term Loan  Facility |       | $                                  | 20,566     |   | $ | 20,786 |   |
| 2028 Debentures                    |       | 2,226                              |       | 2,227 |   |
| Senior Notes                       |       | 16,744                             |       | 17,525 |   |
| Senior Subordinated Notes          |       | 12,826                             |       | 12,826 |   |
| Amortization of debt issue  costs  |       | 4,674                              |       | 4,661 |   |
| Other , net                        |       | 1,436                              |       | 1,561 |   |
| Capitalized interest               |       | (42                                | )          | (221 | ) |
| Interest expense, net              |       | $                                  | 58,430     |   | $ | 59,365 |   |

 

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

 

***Interest Rate Swaps.***  In connection with the Acquisition, weobtained $2,575.0 million of floating rate debt agreements, of which $2,125.0million was outstanding at the Acquisition date and $1,505.7 million wasoutstanding at October 30, 2010. Effective December 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rateinterest commitments through the expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.947% to 6.979% through December 2010and result in an average fixed rate of 6.963%.  The interest rate swaps expire in December 2010.

 

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

 

In addition, we realize a gain or loss on our interestrate swap agreements in connection with each required interest payment on ourfloating rate indebtedness.  Theserealized gains or losses are reclassified from accumulated other comprehensiveloss to interest expense.  The realizedgains and losses effectively adjust the contractual interest requirementspursuant to the terms of our floating rate indebtedness to the interestrequirements at the fixed rates established in the interest rate swapsagreements.  The cash flows from ourinterest rate swaps are recorded in operating activities in the condensedconsolidated statements of cash flows.

 

***Interest Rate Caps.***  Effective January 2010, NMGentered into interest rate cap agreements for an aggregate notional amount of$500.0 million in order to hedge the variability of our cash flows related to aportion of our floating rate indebtedness once

 

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the interest rate swap expires in December 2010.  The interest rate cap agreements commence in December 2010and expire in December 2012. Pursuant to the interest rate cap agreements, NMG has capped LIBOR at2.50% through December 2012 with respect to the $500.0 million notionalamount of such agreements.  In the eventLIBOR is less than 2.50%, NMG will pay interest at the lower LIBOR rate.  In the event LIBOR is higher than 2.50%, NMGwill pay interest at the capped rate of 2.50%.

 

At each balance sheet date, the interest rate caps arerecorded at estimated fair value. Changes in the fair value of the cap are expected to be highly effectivein offsetting the unpredictability in expected future cash flows on floatingrate indebtedness attributable to fluctuations in LIBOR interest rates above2.50%.  Unrealized gains and losses onthe outstanding balances of the interest rate caps are recorded as a componentof accumulated other comprehensive loss. Gains and losses realized at the time of our quarterly interest paymentsdue to the expiration of applicable portions of the interest rate caps arereclassified to interest expense.

 

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

 
| **(in thousands)**                                         | ** ** | **October 30,****2010** | ** ** | **July 31,****2010** | ** ** | **October 31,****2009** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------------|------------|
|                                                            |       |                         |       |                      |       |                         |       |
| Interest rate caps (included  in other long-term assets)        |       | $                            | 394        |                      | $          | 1,040                        |       | $ | — |   |
|                                                            |       |                         |       |                      |       |                         |       |
| Interest rate swaps  (included in other current  liabilities)   |       | $                            | (11,664    | )                         | $          | (22,661                      | )          | $ | — |   |
|                                                            |       |                         |       |                      |       |                         |       |
| Interest rate swaps  (included in other long-term  liabilities) |       | $                            | —     |                      | $          | —                       |       | $ | (53,104 | ) |
|                                                            |       |                         |       |                      |       |                         |       |
| Accumulated other  comprehensive loss, net of taxes             |       | $                            | 11,028     |                      | $          | 17,281                       |       | $ | 32,561 |   |

 

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

 
| ** **                                                                     | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                                        | ** ** | **October 30,****2010**       | ** ** | **October 31,****2009** | ** ** |
|                                                                           |       |                               |       |   |   |
| Realized hedging losses —  included in  interest  expense, net            |       | $                                  | 11,574     |   | $ | 11,098 |   |
|                                                                           |       |                               |       |   |   |
| Ineffective hedging (gains)  losses — included in  interest  expense, net |       | $                                  | (36        | ) | $ | 216 |   |

 

Theamount of losses recorded in other comprehensive loss at October 30, 2010that is expected to be reclassified into interest expense in the next twelvemonths, if interest rates remain unchanged, is approximately $11.7 million.

 

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

 

***Description of Benefit Plans.***  We maintain defined contributionplans consisting of a 401(k) Plan, a retirement savings plan (RSP) anddefined 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.

 

In addition, we sponsor a defined benefit pension plan(Pension Plan) and an unfunded supplemental executive retirement plan (SERPPlan) which provides certain employees additional pension benefits.  Benefits under both plans are based on theemployees’ years of service and compensation over defined periods ofemployment.  As of the third quarter offiscal year 2010, benefits offered to all participants in our Pension Plan andSERP Plan have been frozen.  Retirees andactive employees hired prior to March 1, 1989 are eligible for certainlimited postretirement health care benefits (Postretirement Plan) if they meetcertain

 

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service and minimum age requirements. We also sponsor anunfunded key employee deferred compensation plan, which provides certainemployees with additional benefits.

 

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

 
| **(in thousands)**                   | ** ** | **October 30,****2010** | ** ** | **July 31,****2010** | ** ** | **October 31,****2009** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | ** **                   | ** ** | ** **                | ** ** | ** **                   | ** ** |
| Pension Plan                              |       | $                            | 153,064    |                      | $          | 161,760                      |       | $ | 157,576 |   |
| SERP Plan                                 |       | 97,155                       |       | 96,406                    |       | 93,083                       |       |
| Postretirement Plan                       |       | 17,291                       |       | 17,914                    |       | 17,941                       |       |
|                                      |       | 267,510                      |       | 276,080                   |       | 268,600                      |       |
| Less: current portion                     |       | (5,568                       | )          | (5,574                    | )          | (5,069                       | )          |
| Long-term portion of benefit  obligations |       | $                            | 261,942    |                      | $          | 270,506                      |       | $ | 263,531 |   |

 

As of October 30, 2010, we have $83.6million (net of taxes of $54.3 million) of adjustments to our benefitobligations recorded as increases to accumulated other comprehensive loss.

 

***Costs of Benefits. ***Thecomponents of the expenses we incurred under our Pension Plan, SERP Plan andPostretirement Plan are as follows:

** **
| ** **                              | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                 | ** ** | **October 30,****2010**       | ** ** | **October 31,****2009** | ** ** |
| Pension Plan:                           |       |                               |       |   |   |
| Service cost                            |       | $                                  | —     |   | $ | 1,429 |   |
| Interest cost                           |       | 6,054                              |       | 6,329 |   |
| Expected return on plan  assets         |       | (6,553                             | )          | (6,463 | ) |
| Net amortization of losses              |       | 544                                |       | 282 |   |
| Pension Plan expense                    |       | $                                  | 45         |   | $ | 1,577 |   |
|                                    |       |                               |       |   |   |
| SERP Plan:                              |       |                               |       |   |   |
| Service cost                            |       | $                                  | —     |   | $ | 171 |   |
| Interest cost                           |       | 1,230                              |       | 1,377 |   |
| SERP Plan expense                       |       | $                                  | 1,230      |   | $ | 1,548 |   |
|                                    |       |                               |       |   |   |
| Postretirement Plan:                    |       |                               |       |   |   |
| Service cost                            |       | $                                  | 15         |   | $ | 18 |   |
| Interest cost                           |       | 218                                |       | 254 |   |
| Net amortization of prior  service cost |       | (389                               | )          | (172 | ) |
| Net amortization of losses              |       | 173                                |       | 90 |   |
| Postretirement Plan expense             |       | $                                  | 17         |   | $ | 190 |   |

 

***Funding Policy andPlan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law.  Infiscal year 2010, we were not required to make contributions to the PensionPlan; however, we made a voluntary contribution to our Pension Plan of $30.0million in fiscal year 2010.  We do notbelieve we will be required to make contributions to the Pension Plan forfiscal year 2011.  However, we willcontinue to evaluate voluntary contributions to our Pension Plan based upon theunfunded position of the Pension Plan, our available liquidity and otherfactors.

 

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

 

Our effective income tax rate for the first quarter offiscal year 2011 was 37.9% compared to 45.0% for the first quarter of fiscalyear 2010.  Our effective income tax ratefor the first quarter of fiscal year 2010 was unfavorably impacted by a lowerlevel of projected earnings for fiscal year 2010.

 

At October 30, 2010, the gross amount ofunrecognized tax benefits was $6.7 million, all of which would impact our effectivetax rate, if recognized.  We classifyinterest and penalties as a component of income tax expense and our liabilityfor accrued interest and penalties was $6.5 million as of October 30,2010.

 

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We file income tax returns in the U.S. federaljurisdiction and various state and local jurisdictions.  During the fourth quarter of fiscal year2010, the IRS closed their examination of our fiscal year 2007 federal incometax return with no changes or assessments. The IRS will begin an examination of our fiscal year 2008 federal incometax return in the second quarter of fiscal year 2011.  With respect to state and localjurisdictions, with limited exceptions, the Company and its subsidiaries are nolonger subject to income tax audits for fiscal years before 2006.

 

We believe our recorded tax liabilities as of October 30,2010 are sufficient to cover any potential assessments to be made by the IRS orother taxing authorities upon the completion of their examinations and we willcontinue to review our recorded tax liabilities for potential audit assessmentsbased upon subsequent events, new information and future circumstances.  We believe it is reasonably possible thatadditional adjustments in the amounts of our unrecognized tax benefits couldoccur within the next twelve months as a result of settlements with taxauthorities or expiration of statutes of limitation.  At this time, we do not believe suchadjustments will have a material impact on our condensed consolidated financialstatements.

 

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

 

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

 

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

 

***Stock Option Modification.***  In the second quarter of fiscalyear 2010, the Compensation Committee approved 1) a tender offer foroutstanding Accreting Options to purchase 26,614 shares (Eligible Options), 2)the extension of the option term with respect to Fixed Price Options for 25,236shares to October 6, 2017 and 3) the modification of additional FixedPrice Options to purchase 1,378 shares. In the third quarter of fiscal year 2010, the Compensation Committeeapproved 1) the modification of Accreting Options to purchase 8,502 shares and2) the extension of the option term with respect to Fixed Price Options for7,269 shares to October 6, 2015. The stock option modifications effected in both the second and thirdquarters of fiscal year 2010 are collectively referred to as the ModificationTransactions.  The ModificationTransactions were taken in response to declines in capital markets and generaleconomic conditions that resulted in the exercise prices for the prior optionsbeing in excess of the estimated fair value of our common stock.

 

In connection with the Modification Transactions, weincurred additional compensation charges aggregating $5.1 million during fiscalyear 2010 to recognize the excess of the post-modification fair value of vestedoptions over the pre-modification fair value of such options.

 

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

 

During the first quarter of fiscal year 2011, we granted8,700 Fixed Price Options with a weighted average grant date fair value of $798per option.  During the first quarter offiscal year 2010, we granted 3,395 Accreting Options with a weighted averagegrant date fair value of $462 per option and we granted 3,395 Fixed PriceOptions with a weighted average grant date fair value of $541 per option.

 

We recognize compensation expense for stock options on astraight-line basis over the vesting period. We recognized non-cash stock compensation expense of $1.1 millionin both the first quarter of fiscal year 2011 and the first quarter of fiscalyear 2010, which is included in selling, general and administrative expenses.

 

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

 

Pursuant to a management services agreement withaffiliates of the Sponsors, and in exchange for ongoing consulting andmanagement advisory services that are provided to us by the Sponsors and theiraffiliates, affiliates of the Sponsors receive an aggregate annual managementfee equal to the lesser of (i) 0.25% of our consolidated annual revenuesor (ii) $10 million. Affiliates of the Sponsors also receive reimbursement for out-of-pocketexpenses incurred by them or their affiliates in connection with servicesprovided pursuant to the agreement. These management fees are payable quarterly in arrears.  We recorded management fees of $2.3 millionduring the first quarter of fiscal year 2011 and $2.2 million during the firstquarter of fiscal year 2010, which are included in selling, general andadministrative expenses in the condensed consolidated statements of operations.

 

The management services agreement also provides thataffiliates of the Sponsors may receive future fees in connection with certainfuture financing and acquisition or disposition transactions.  The management services agreement includescustomary exculpation and indemnification provisions in favor of the Sponsorsand their affiliates.

 

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

 

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

 

Under the terms of the Program Agreement, HSBC offerscredit cards and non-card payment plans and bears substantially all credit riskwith respect to sales transacted on the cards bearing our brands.  We receive payments from HSBC based on salestransacted on our proprietary credit cards. Such payments are subject to annual adjustments, both increases anddecreases, based upon the overall annual profitability and performance of theproprietary credit card portfolio.  Inaddition, we receive payments from HSBC for marketing and servicing activitiesas we continue to handle key customer service functions, primarily customerinquiries and collections, for HSBC.

 

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

 

***Long-term Incentive Plan.***  We have a long-term incentiveplan (Long-term Incentive Plan) that provides for a cash incentive payable tocertain employees upon a change of control, as defined, subject to theattainment of certain performance objectives. Performance objectives and targets are based on cumulative EBITDA (asdefined in the plan) percentages for rolling three year periods beginning infiscal year 2006.  Earned awards for eachcompleted performance period will be credited to a book account and will earninterest at a contractually defined annual rate until the award is paid.  Awards will be paid upon a change of control,as defined, or an initial public offering, as defined, subject to therequirement that, in each case, the internal rate of return to the Sponsors ispositive.  As of October 30, 2010,the vested participant balance in the Long-Term Incentive Plan aggregated $6.5million.

 

***Cash Incentive Plan. ***Wealso have a cash incentive plan (Cash Incentive Plan) to aid in the retentionof certain key executives.  The CashIncentive Plan provides for the creation of a $14 million cash bonus pool.  Each participant in the Cash Incentive Planwill be entitled to a cash bonus upon the earlier to occur of a change ofcontrol, as defined, or an initial public offering, as defined, subject to therequirement that, in each case, the internal rate of return to the Sponsors ispositive.

 

***Litigation*****.**  On April 30, 2010, a Class ActionComplaint for Injunction and Equitable Relief was filed in the United StatesDistrict Court for the Central District of California by Sheila Monjazeb,individually and on behalf of other members of the general public similarlysituated, against the Company, Newton Holding, LLC, TPG Capital, L.P. andWarburg Pincus, LLC.  On July 12,2010, all defendants except for the Company were dismissed without prejudice,and on August 20, 2010, this case was refiled in the Superior Court ofCalifornia for San Francisco County. This complaint, along with a similar class action lawsuit originallyfiled by Bernadette Tanguilig in 2007, alleges that the Company has engaged invarious violations of the California Labor Code and Business and ProfessionsCode, including without limitation (1) asking employees to work “off theclock,” (2) failing to provide meal and rest breaks to its employees, (3) improperlycalculating deductions on paychecks delivered to its employees, and (4) failingto provide a chair or allow employees to sit during shifts.  The plaintiffs in these matters seekcertification of their cases as class actions, reimbursement for past wages andtemporary, preliminary and permanent injunctive relief preventing defendantfrom allegedly continuing to violate the laws cited in their complaints.  We intend to vigorously defend our interestsin these matters.  Currently, we cannotreasonably estimate the amount of loss, if any, arising from thesematters.  However, we do not currentlybelieve the resolution of these matters will have a material adverse

 

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impact on our financial position.  We will continue to evaluate these mattersbased on subsequent events, new information and future circumstances.

 

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

 

***Other.***  We had approximately$17.0 million of outstanding irrevocable letters of credit relating topurchase commitments and insurance and other liabilities at October 30,2010.  We had approximately$3.1 million in surety bonds at October 30, 2010 relating primarilyto merchandise imports and state sales tax and utility requirements.

 

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

 

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

 
| **(in thousands)**                     | ** ** | **October 30,  2010** | ** ** | **July 31,****2010** | ** ** | **October 31,  2009** | ** ** |
|---------------------------------------------|------------|----------------------------|------------|---------------------------|------------|----------------------------|------------|
|                                        |       |                       |       |                      |       |                       |       |
| Unrealized loss on financial  instruments   |       | $                          | (11,028    | )                         | $          | (17,281                    | )          | $ | (32,561 | ) |
| Change in unfunded benefit  obligations     |       | (83,566                    | )          | (88,993                   | )          | (69,011                    | )          |
| Total accumulated other  comprehensive loss |       | $                          | (94,594    | )                         | $          | (106,274                   | )          | $ | (101,572 | ) |

 

The components of other comprehensive income are:

 
| ** **                                                         | ** ** | **Thirteen weeks ended** | ** ** |                       |       |
|--------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                                            | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009** | ** ** |   |   |
| Net earnings from condensed  consolidated statements of operations |       | $                                  | 25,741     |                       | $          | 8,521 |   |   |   |
| Change in unrealized loss on  financial instruments                |       | 6,253                              |       | 2,947                      |       |   |   |
| Change in unfunded benefit  obligations                            |       | 5,427                              |       | —                     |       |   |   |
| Other                                                              |       | —                             |       | 68                         |       |   |   |
| Total comprehensive income  for the period                         |       | $                                  | 37,421     |                       | $          | 11,536 |   |   |   |

 

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

 

We have identified two reportable segments: SpecialtyRetail stores and Direct Marketing.  TheSpecialty Retail stores segment aggregates the activities of our Neiman Marcusand Bergdorf Goodman retail stores, including Neiman Marcus Last Callstores.  The Direct Marketing segmentconducts both online and print catalog operations under the Neiman Marcus,Bergdorf Goodman, Last Call 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 for the segments include 1) revenues,2) cost of sales, 3) direct selling, general, and administrative expenses, 4)other direct operating expenses, 5) income from credit card program and 6)depreciation expense for the respective segment.  Items not allocated to our operating segmentsinclude those items not considered by management in measuring the assets andprofitability of our segments.  Theseamounts include 1) corporate expenses including, but not limited to, treasury,investor relations, legal and finance support services, and general corporatemanagement, 2) charges related to the application of purchase accountingadjustments made in connection with the Acquisition including amortization ofintangible assets and favorable lease commitments and other non-cash items and3) interest expense.  These items, whileoften related to the operations of a segment, are not considered by segmentoperating management, corporate operating management and the chief operatingdecision maker in assessing segment operating performance.  The accounting policies of the operatingsegments are the same as those described in the summary of significantaccounting policies (except with respect to purchase accounting adjustments notallocated to the operating segments).

 

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The following tables set forth the informationfor our reportable segments:

 
| ** **                                                         | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                            | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009** | ** ** |
| ** **                                                         | ** ** | ** **                         | ** ** | ** ** | ** ** |
| REVENUES                                                           |       |                               |       |   |   |
| Specialty Retail stores                                            |       | $                                  | 761,178    |   | $ | 721,619 |   |
| Direct Marketing                                                   |       | 166,070                            |       | 147,281 |   |
| Total                                                              |       | $                                  | 927,248    |   | $ | 868,900 |   |
|                                                               |       |                               |       |   |   |
| OPERATING EARNINGS                                                 |       |                               |       |   |   |
| Specialty Retail stores                                            |       | $                                  | 107,981    |   | $ | 88,423 |   |
| Direct Marketing                                                   |       | 24,999                             |       | 21,709 |   |
| Corporate expenses                                                 |       | (14,050                            | )          | (13,639 | ) |
| Other expenses (1)                                                 |       | (1,757                             | )          | (3,330 | ) |
| Amortization of intangible  assets and favorable lease commitments |       | (17,318                            | )          | (18,314 | ) |
| Total                                                              |       | $                                  | 99,855     |   | $ | 74,849 |   |
|                                                               |       |                               |       |   |   |
| CAPITAL EXPENDITURES                                               |       |                               |       |   |   |
| Specialty Retail stores                                            |       | $                                  | 14,147     |   | $ | 14,181 |   |
| Direct Marketing                                                   |       | 4,264                              |       | 3,080 |   |
| Total                                                              |       | $                                  | 18,411     |   | $ | 17,261 |   |
|                                                               |       |                               |       |   |   |
| DEPRECIATION EXPENSE                                               |       |                               |       |   |   |
| Specialty Retail stores                                            |       | $                                  | 27,686     |   | $ | 30,195 |   |
| Direct Marketing                                                   |       | 4,261                              |       | 3,866 |   |
| Other                                                              |       | 1,775                              |       | 1,721 |   |
| Total                                                              |       | $                                  | 33,722     |   | $ | 35,782 |   |

 
| ** **                                            | ** ** | **October 30,  2010** | ** ** | **October 31,  2009** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ASSETS                                                |       |                       |       |                       |       |
| Tangible assets of Specialty  Retail stores           |       | $                          | 1,727,225  |                       | $          | 1,783,202 |   |
| Tangible assets of Direct  Marketing                  |       | 197,005                    |       | 168,730                    |       |
| Corporate assets:                                     |       |                       |       |                       |       |
| Intangible assets related to  Specialty Retail stores |       | 2,733,525                  |       | 2,790,095                  |       |
| Intangible assets related to  Direct Marketing        |       | 454,845                    |       | 470,538                    |       |
| Other                                                 |       | 447,958                    |       | 428,792                    |       |
| Total                                                 |       | $                          | 5,560,558  |                       | $          | 5,641,357 |   |

 

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(1)          Other expenses consists primarily of costs (primarily professional feesand severance) incurred in connection with cost reductions and corporateinitiatives.

 

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**13.****      ****Condensed Consolidating Financial Information**

 

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

 

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

 
| ** **                                       | ** ** | **October 30, 2010** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                        |       | $                              | —     |   | $ | 375,108 |   | $ | 748 |   | $ | — |   | $ | 375,856 |   |
| Merchandise inventories                          |       | —                         |       | 832,824 |   | 113,078 |   | — |   | 945,902 |   |
| Other current assets                             |       | —                         |       | 93,359 |   | 9,402 |   | — |   | 102,761 |   |
| Total current assets                             |       | —                         |       | 1,301,291 |   | 123,228 |   | — |   | 1,424,519 |   |
| Property and equipment, net                      |       | —                         |       | 784,879 |   | 107,749 |   | — |   | 892,628 |   |
| Goodwill and intangible  assets, net             |       | —                         |       | 1,461,382 |   | 1,726,988 |   | — |   | 3,188,370 |   |
| Other assets                                     |       | —                         |       | 53,291 |   | 1,750 |   | — |   | 55,041 |   |
| Investments in subsidiaries                      |       | 963,843                        |       | 1,861,376 |   | — |   | (2,825,219 | ) | — |   |
| Total assets                                     |       | $                              | 963,843    |   | $ | 5,462,219 |   | $ | 1,959,715 |   | $ | (2,825,219 | ) | $ | 5,560,558 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                              | —     |   | $ | 241,694 |   | $ | 31,625 |   | $ | — |   | $ | 273,319 |   |
| Accrued liabilities                              |       | —                         |       | 310,667 |   | 64,945 |   | — |   | 375,612 |   |
| Other current liabilities                        |       | —                         |       | 11,664 |   | — |   | — |   | 11,664 |   |
| Total current liabilities                        |       | —                         |       | 564,025 |   | 96,570 |   | — |   | 660,595 |   |
| Long-term liabilities:                           |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                         |       | 2,879,721 |   | — |   | — |   | 2,879,721 |   |
| Deferred income taxes                            |       | —                         |       | 663,568 |   | — |   | — |   | 663,568 |   |
| Other long-term liabilities                      |       | —                         |       | 391,062 |   | 1,769 |   | — |   | 392,831 |   |
| Total long-term liabilities                      |       | —                         |       | 3,934,351 |   | 1,769 |   | — |   | 3,936,120 |   |
| Total shareholders’ equity                  |       | 963,843                        |       | 963,843 |   | 1,861,376 |   | (2,825,219 | ) | 963,843 |   |
| Total liabilities and  shareholders’ equity |       | $                              | 963,843    |   | $ | 5,462,219 |   | $ | 1,959,715 |   | $ | (2,825,219 | ) | $ | 5,560,558 |   |

 

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

 
| ** **                                       | ** ** | **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                          |       | —                         |       | 777,824 |   | 98,009 |   | — |   | 875,833 |   |
| Other current assets                             |       | —                         |       | 113,237 |   | 10,734 |   | — |   | 123,971 |   |
| Total current assets                             |       | —                         |       | 1,209,482 |   | 109,537 |   | — |   | 1,319,019 |   |
| 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    |   | $ | 5,542,894 |   | $ | 1,970,373 |   | $ | (2,803,408 | ) | $ | 5,641,357 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                             |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                              | —     |   | $ | 209,321 |   | $ | 28,651 |   | $ | — |   | $ | 237,972 |   |
| Accrued liabilities                              |       | —                         |       | 293,991 |   | 68,368 |   | — |   | 362,359 |   |
| Total current liabilities                        |       | —                         |       | 503,312 |   | 97,019 |   | — |   | 600,331 |   |
| 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    |   | $ | 5,542,894 |   | $ | 1,970,373 |   | $ | (2,803,408 | ) | $ | 5,641,357 |   |

 

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| ** **                                                                        | ** ** | **Thirteen weeks ended October 30, 2010** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 760,277 |   | $ | 166,971 |   | $ | — |   | $ | 927,248 |   |
| Cost of goods sold including  buying and occupancy costs (excluding depreciation) |       | —                                                             |       | 468,179 |   | 94,479 |   | — |   | 562,658 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                             |       | 194,085 |   | 28,903 |   | — |   | 222,988 |   |
| Income from credit card  program, net                                             |       | —                                                             |       | (8,603 | ) | (690 | ) | — |   | (9,293 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 30,162 |   | 3,560 |   | — |   | 33,722 |   |
| Amortization of intangible  assets and favorable lease commitments                |       | —                                                             |       | 14,093 |   | 3,225 |   | — |   | 17,318 |   |
| Operating earnings                                                                |       | —                                                             |       | 62,361 |   | 37,494 |   | — |   | 99,855 |   |
| Interest expense, net                                                             |       | —                                                             |       | 58,429 |   | 1 |   | — |   | 58,430 |   |
| Intercompany royalty charges  (income)                                            |       | —                                                             |       | 46,296 |   | (46,296 | ) | — |   | — |   |
| Equity in (earnings) loss of  subsidiaries                                        |       | (25,741                                                            | )          | (83,789 | ) | — |   | 109,530 |   | — |   |
| Earnings (loss) before  income taxes                                              |       | 25,741                                                             |       | 41,425 |   | 83,789 |   | (109,530 | ) | 41,425 |   |
| Income tax expense                                                                |       | —                                                             |       | 15,684 |   | — |   | — |   | 15,684 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 25,741     |   | $ | 25,741 |   | $ | 83,789 |   | $ | (109,530 | ) | $ | 25,741 |   |

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

 

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| ** **                                                                                             | ** ** | **Thirteen weeks ended October 30, 2010** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                                | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                                    |       | $                                                                  | 25,741     |   | $ | 25,741 |   | $ | 83,789 |   | $ | (109,530 | ) | $ | 25,741 |   |
| Adjustments to reconcile net  earnings (loss) to net cash (used for) provided by operating activities: |       |                                                               |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization expense                                                                 |       | —                                                             |       | 48,929 |   | 6,785 |   | — |   | 55,714 |   |
| Paid-in-kind interest                                                                                  |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Deferred income taxes                                                                                  |       | —                                                             |       | (8,353 | ) | — |   | — |   | (8,353 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans           |       | —                                                             |       | 1,600 |   | 266 |   | — |   | 1,866 |   |
| Intercompany royalty income  payable (receivable)                                                      |       | —                                                             |       | 46,297 |   | (46,297 | ) | — |   | — |   |
| Equity in (earnings) loss of  subsidiaries                                                             |       | (25,741                                                            | )          | (83,789 | ) | — |   | 109,530 |   | — |   |
| Changes in operating assets  and liabilities, net                                                      |       | —                                                             |       | (50,682 | ) | (43,378 | ) | — |   | (94,060 | ) |
| Net cash (used for) provided  by operating activities                                                  |       | —                                                             |       | (20,257 | ) | 1,165 |   | — |   | (19,092 | ) |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                                   |       | —                                                             |       | (17,150 | ) | (1,261 | ) | — |   | (18,411 | ) |
| Net cash used for investing  activities                                                                |       | —                                                             |       | (17,150 | ) | (1,261 | ) | — |   | (18,411 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                                |       | —                                                             |       | (7,648 | ) | — |   | — |   | (7,648 | ) |
| Net cash used for financing  activities                                                                |       | —                                                             |       | (7,648 | ) | — |   | — |   | (7,648 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Decrease during the period                                                                             |       | —                                                             |       | (45,055 | ) | (96 | ) | — |   | (45,151 | ) |
| Beginning balance                                                                                      |       | —                                                             |       | 420,163 |   | 844 |   | — |   | 421,007 |   |
| Ending balance                                                                                         |       | $                                                                  | —     |   | $ | 375,108 |   | $ | 748 |   | $ | — |   | $ | 375,856 |   |

 
| ** **                                                                                   | ** ** | **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 |   |
| Deferred income taxes                                                                        |       | —                                                             |       | (8,756 | ) | — |   | — |   | (8,756 | ) |
| Paid-in-kind interest                                                                        |       | —                                                             |       | 14,362 |   | — |   | — |   | 14,362 |   |
| 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 |   |

 

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**14.****      ****Subsequent Event**

 

In November 2010, NMG and certain of itssubsidiaries entered into the Amendment of the credit agreement governing NMG’sSenior Secured Term Loan Facility, thereby extending the maturity ofapproximately $1,064.0 million principal amount of NMG’s existing term loansthereunder.

 

The extended term loans will mature on April 6,2016, unless $300.0 million or more aggregate principal amount of NMG’s SeniorNotes and Senior Subordinated Notes remain outstanding on July 15, 2015,in which case the extended term loans will mature on that date instead.  The approximately $441.7 million principalamount of existing term loans that were not extended continue to have amaturity of April 6, 2013 (as all of the term loans did prior to theAmendment).

 

In addition to extending the maturity of a portion ofthe existing term loans under the Senior Secured Term Loan Facility, theAmendment increases the “applicable margin” used in calculating the interestrate payable to holders of the extended term loans (but does not change theapplicable margin used in calculating the interest rate payable to holders ofterm loans that are not being extended). Following the Amendment, term loans under the Senior Secured Term LoanFacility (including both the extended and the non-extended term loans) bearinterest at a rate per annum equal to, at NMG’s option, either (a) a baserate determined by reference to the higher of (1) the prime rate of CreditSuisse AG (the administrative agent), (2) the federal funds effective rateplus 1¤2 of 1% and (3) the adjusted one-monthLIBOR rate plus 1.00% or (b) a LIBOR rate (for a period equal to therelevant interest period), subject to certain adjustments, in each case plus anapplicable margin.

 

The applicable margin for the extended term loans willbe 3.00% for alternate base rate loans and 4.00% for LIBOR rate loans (or ifNMG’s consolidated leverage ratio as of the relevant date of determination isless than 5.00 to 1.00, 2.75% for alternate base rate loans and 3.75% for LIBORrate loans).  The applicable margin forthe term loans that were not extended remains 1.00% for alternate base rateloans and 2.00% for LIBOR rate loans (or if NMG’s consolidated leverage ratioas of the relevant date of determination is less than 4.50 to 1.00, 0.75% for alternatebase rate loans and 1.75% for LIBOR rate loans).

 

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

 

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**ITEM2.****                   ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**EXECUTIVE OVERVIEW**

 

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

 

**Overview**

 

NeimanMarcus, Inc. (the Company), together with our operating segments andsubsidiaries, is a high-end specialty retailer. Our operations include the Specialty Retail stores segment and theDirect Marketing segment.  The SpecialtyRetail stores segment consists primarily of Neiman Marcus and Bergdorf Goodmanstores.  The Direct Marketing segmentconducts both online and print catalog operations under the brand names ofNeiman Marcus, Last Call, Bergdorf Goodman and Horchow.

 

Our fiscal year ends on the Saturday closest toJuly 31.  All references to thefirst quarter of fiscal year 2011 relate to the thirteen weeks ended October 30,2010.  All references to the firstquarter of fiscal year 2010 relate to the thirteen weeks ended October 31,2009.

 

**Fiscal Year 2011 Summary**

 

A summary of ouroperating results is as follows:

 

·                  **Revenues**—Our revenuesin the first quarter of fiscal year 2011 were positively impacted by a higherlevel of customer demand.  As a result,our revenues for the first quarter of fiscal year 2011 were $927.2 million, anincrease of 6.7% compared to the first quarter of fiscal year 2010.  Comparable revenues increased by 6.4% in thefirst quarter of fiscal year 2011.

 

For Specialty Retail stores, our sales per square footfor the last twelve trailing months were $472 as of October 30, 2010 and$454 as of October 31, 2009.

 

·                  **Cost of goods sold includingbuying and occupancy costs (excluding depreciation**) **(COGS)**—COGS represented 60.7% of revenues in the firstquarter of fiscal year 2011 and 61.5% of revenues in the first quarter offiscal year 2010.  This decrease in COGSof 0.8% of revenues compared to the prior year fiscal period was primarily dueto 1) higher customer demand and higher levels of full-price sales, net ofpromotional costs and 2) the leveraging of buying and occupancy costs on higherrevenues.

 

·                  **Inventories**—During thefirst quarter of fiscal year 2011, we continued to maintain control overinventory.  At October 30, 2010,on-hand inventories totaled $945.9 million, an 8.0% increase from the prioryear fiscal period in response to growing customer demand and the plannedincrease in inventories in certain targeted merchandise categories.  Excluding inventories held by new stores,inventories increased by approximately 7.8%.

 

·                  **Selling,general and administrative expenses (excluding depreciation) (SG&A)**—SG&Arepresented 24.0% of revenues in the first quarter of fiscal year 2011, a netimprovement of 1.2% of revenues compared to the first quarter of fiscal year2010.  The lower levels of SG&Aexpenses, as a percentage of revenues, primarily reflect 1) lower payroll andrelated benefits costs, 2) favorable pre-opening expenses and 3) a lower levelof spending on corporate initiatives in the current year.

 

·                  **Operatingearnings—**Total operating earnings in the first quarter offiscal year 2011 were $99.8 million, or 10.8% of revenues.  Total operating earnings in the first quarterof fiscal year 2010 were $74.8 million, or 8.6% of revenues.  Our operating earnings margin increased by 2.2%of revenues primarily due to:

 

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·            a decrease in COGS by 0.8%of revenues primarily due to higher customer demand, higher levels offull-price sales and the leveraging of buying and occupancy costs;

 

·            a decrease in SG&Aexpenses by 1.2% of revenues primarily due to lower payroll and relatedbenefits costs, favorable pre-opening costs and lower spending on corporateinitiatives;

 

·            a decrease in depreciationand amortization expense by 0.7% of revenues reflecting a lower level ofcapital expenditures in recent years; offset by

 

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

 

·                  **Liquidity—**Net****cash used for our operating activities was $19.1 millionfor the first quarter of fiscal year 2011 compared to net cash provided by ouroperating activities of $39.8 million for the first quarter of fiscal year2010.  This increase in net cash used forour operating activities was primarily due to a higher net investment ininventories to support the increase in customer demand in the currentyear.  We held cash balances of$375.9 million at October 30, 2010 compared to $319.2 million at October 31,2009.  At October 30, 2010, we hadno borrowings outstanding under our Asset-Based Revolving Credit Facility,$17.0 million of outstanding letters of credit and $523.0 million of unusedborrowing availability.

 

·                  **Outlook—** While economicconditions have continued to improve in recent quarters, we do not anticipatethe return of consumer spending to levels achieved in fiscal years 2007 and2008 in the near-term.  We plan tomaintain an appropriate alignment of our inventory levels and purchases withanticipated customer demand.  We believethe cash generated from our operations along with our cash balances andavailable sources of financing will enable us to meet our cash obligations forthe remainder of fiscal year 2011.

 

**OPERATING RESULTS**

 

**Performance Summary**

 

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

 
| ** **                                                                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                        | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009** | ** ** |
| ** **                                                                        | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                              | %          | 100.0 | % |
| Cost of goods sold including  buying and occupancy costs (excluding depreciation) |       | 60.7                               |       | 61.5 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 24.0                               |       | 25.2 |   |
| Income from credit card  program , net                                            |       | (1.0                               | )          | (1.5 | ) |
| Depreciation expense                                                              |       | 3.6                                |       | 4.1 |   |
| Amortization of intangible  assets                                                |       | 1.4                                |       | 1.6 |   |
| Amortization of favorable  lease commitments                                      |       | 0.5                                |       | 0.5 |   |
| Operating earnings                                                                |       | 10.8                               |       | 8.6 |   |
| Interest expense, net                                                             |       | 6.3                                |       | 6.8 |   |
| Earnings before income taxes                                                      |       | 4.5                                |       | 1.8 |   |
| Income tax expense                                                                |       | 1.7                                |       | 0.8 |   |
| Net earnings                                                                      |       | 2.8                                | %          | 1.0 | % |

 

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

 
| ** **                                                                    | ** ** | **Thirteen weeks ended** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions, except sales per square foot)** | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009** | ** ** |
| REVENUES                                                                      |       |                               |       |   |   |
| Specialty Retail stores                                                       |       | $                                  | 761.1      |   | $ | 721.6 |   |
| Direct Marketing                                                              |       | 166.1                              |       | 147.3 |   |
| Total                                                                         |       | $                                  | 927.2      |   | $ | 868.9 |   |
|                                                                          |       |                               |       |   |   |
| OPERATING EARNINGS                                                            |       |                               |       |   |   |
| Specialty Retail stores                                                       |       | $                                  | 108.0      |   | $ | 88.4 |   |
| Direct Marketing                                                              |       | 25.0                               |       | 21.7 |   |
| Corporate expenses                                                            |       | (14.1                              | )          | (13.7 | ) |
| Other expenses (1)                                                            |       | (1.8                               | )          | (3.3 | ) |
| Amortization of intangible  assets and favorable lease commitments            |       | (17.3                              | )          | (18.3 | ) |
| Total                                                                         |       | $                                  | 99.8       |   | $ | 74.8 |   |
|                                                                          |       |                               |       |   |   |
| OPERATING PROFIT MARGIN                                                       |       |                               |       |   |   |
| Specialty Retail stores                                                       |       | 14.2                               | %          | 12.3 | % |
| Direct Marketing                                                              |       | 15.1                               | %          | 14.7 | % |
| Total                                                                         |       | 10.8                               | %          | 8.6 | % |
|                                                                          |       |                               |       |   |   |
| CHANGE IN COMPARABLE  REVENUES (2)                                            |       |                               |       |   |   |
| Specialty Retail stores                                                       |       | 5.1                                | %          | (14.9 | )% |
| Direct Marketing                                                              |       | 12.8                               | %          | (7.2 | )% |
| Total                                                                         |       | 6.4                                | %          | (13.7 | )% |
|                                                                          |       |                               |       |   |   |
| SALES PER SQUARE FOOT                                                         |       |                               |       |   |   |
| Specialty Retail stores                                                       |       | $                                  | 118        |   | $ | 112 |   |
|                                                                          |       |                               |       |   |   |
| STORE COUNT                                                                   |       |                               |       |   |   |
| Neiman Marcus and Bergdorf  Goodman full-line stores:                         |       |                               |       |   |   |
| Open at beginning of period                                                   |       | 43                                 |       | 42 |   |
| Opened during the period                                                      |       | —                             |       | 1 |   |
| Open at end of period                                                         |       | 43                                 |       | 43 |   |
| Neiman Marcus Last Call  stores:                                              |       |                               |       |   |   |
| Open at beginning of period                                                   |       | 28                                 |       | 27 |   |
| Opened during the period                                                      |       | —                             |       | 1 |   |
| Open at end of period                                                         |       | 28                                 |       | 28 |   |
|                                                                          |       |                               |       |   |   |
| NON-GAAP  FINANCIAL MEASURE EBITDA (3)                                        |       | $                                  | 150.9      |   | $ | 128.9 |   |

 

----

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

 

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

 

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

 

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**Factors Affecting Our Results**

 

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

 

·                  Sales ofmerchandise—Revenues from our Specialty Retail stores are recognized at thelater of the point-of-sale or the delivery of goods to the customer.  Revenues from our Direct Marketing operationare recognized when the merchandise is delivered to the customer.  Revenues are reduced when customers returngoods previously purchased.  We maintainreserves for anticipated sales returns primarily based on our historical trendsrelated to returns by both our retail and direct marketing customers.  Revenues exclude sales taxes collected fromour customers.

 

·                  Delivery and processing—Wegenerate revenues from delivery and processing charges related to merchandisedelivered to our customers from both our Specialty Retail stores and DirectMarketing operation.

 

Our revenues can be affected by the followingfactors:

 

·                  general economic conditions;

 

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

 

·                  changes in the level offull-price sales;

 

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

 

·                  our ability to successfullyimplement our store expansion and remodeling strategies; and

 

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

 

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

 

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

 

·                  Inventory costs—We utilizethe retail method of accounting.  Underthe retail inventory method, the valuation of inventories at cost and theresulting gross margins are determined by applying a calculated cost-to-retailratio, for various groupings of similar items, to the retail value of ourinventories.  The cost of the inventoryreflected on the consolidated balance sheet is decreased by charges to cost ofgoods sold at the time the retail value of the inventory is lowered through theuse of markdowns.  Hence, earnings arenegatively impacted when merchandise is marked down.  With the introduction of new fashions in thefirst and third fiscal quarters and our emphasis on full-price selling in thesequarters, a lower level of markdowns and higher margins are characteristic ofthese quarters.

 

·                  Buying costs—Buying costsconsist primarily of salaries and expenses incurred by our merchandising andbuying operations.

 

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

 

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

 

Consistentwith industry business practice, we receive allowances from certain of ourvendors in support of the merchandise we purchase for resale.  Certain allowances are received to reimburse usfor markdowns taken or to support the gross margins that we earn in connectionwith the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn theallowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we payto acquire the merchandise.  Theseallowances reduce the cost of the acquired merchandise and are recognized atthe time the goods are sold.  We received vendor allowances of $5.5 million,or 0.6% of revenues, in the first quarter of fiscal year 2011 and$10.1 million, or 1.2% of revenues, in the first quarter of fiscal year2010.  The amounts of vendorallowances we receive 

 

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fluctuatebased on the level of markdowns taken and did not have a significant impact onthe year-over-year change in gross margin during the first quarter of fiscalyears 2011 and 2010.

 

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

 

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

 

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

 

·                  factorsaffecting revenues generally, including pricing strategies, product offeringsand other actions taken by competitors;

 

·                  changes inoccupancy costs primarily associated with the opening of new stores ordistribution facilities; and

 

·                  the amount ofvendor reimbursements we receive during the fiscal year.

 

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

 

Advertising costsconsist primarily of 1) print media costs for promotional materials mailed toour customers 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 receiveadvertising allowances from certain of our merchandise vendors.  Substantially all the advertising allowanceswe receive represent reimbursements of direct, specific and incremental coststhat we incur to promote the vendor’s merchandise in connection with ourvarious advertising programs, primarily catalogs and other print media.  Advertising allowances fluctuate based on thelevel of advertising expenses incurred and are recorded as a reduction of ouradvertising costs when earned. Advertising allowances aggregated approximately $16.2 million, or 1.7%of revenues, in the first quarter of fiscal year 2011 and $15.4 million, or1.8% of revenues, in the first quarter of fiscal year 2010.

 

We also receive allowances from certain merchandisevendors in conjunction with compensation programs for employees who sell thevendor’s merchandise.  These allowancesare netted against the related compensation expense that we incur.  Amounts received from vendors related tocompensation programs were $15.6 million, or 1.7% of revenues, in the firstquarter of fiscal year 2011 and $15.5 million, or 1.8% of revenues, in thefirst quarter of fiscal year 2010.

 

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

 

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

 

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

 

·                  changes in expenses relatedto employee benefits due to general economic conditions such as rising healthcare costs.

 

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

 

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

 

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

 

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

 

·                  increased or decreasedbased upon the overall profitability and performance of the credit cardportfolio.

 

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Our original program agreement with HSBC expired in July 2010.  We have subsequently entered into anagreement with HSBC to extend the program to July 2015 (renewablethereafter for three-year terms).  Werefer to the agreement with HSBC, including the extension, as the ProgramAgreement.  Based upon current marketconditions and the terms of the extended Program Agreement, we believe thefuture income earned by the Company will be lower than the income earnedpursuant to the original Program Agreement and that a higher portion of suchfuture income will be based upon the future profitability and performance ofthe credit card portfolio.

 

**Seasonality**

 

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

 

Our first fiscalquarter is generally characterized by a higher level of full-price sales with afocus on the initial introduction of Fall season fashions.  Aggressive in-store marketing activitiesdesigned to stimulate customer buying, a lower level of markdowns and highermargins are characteristic of this quarter. The second fiscal quarter is more focused on promotional activitiesrelated to the December holiday season, the early introduction of resortseason collections from certain designers and the sale of Fall season goods ona marked down basis.  As a result,margins are typically lower in the second fiscal quarter.  However, due to the seasonal increase inrevenues that occurs during the holiday season, the second fiscal quarter istypically the quarter in which our revenues are the highest and in whichexpenses as a percentage of revenues are the lowest.  Our working capital requirements are also thegreatest in the first and second fiscal quarters as a result of higher seasonalrequirements.

 

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.  Aggressive in-store marketing activitiesdesigned to stimulate customer buying, a lower level of markdowns and highermargins are again characteristic of this quarter.  Revenues are generally the lowest in thefourth fiscal quarter with a focus on promotional activities offering Springseason goods to the customer on a marked down basis, resulting in lower marginsduring the quarter.  Our working capitalrequirements are typically lower in the third and fourth fiscal quarters thanin the other quarters.

 

A large percentage ofour merchandise assortment, particularly in the apparel, fashion accessoriesand shoe categories, is ordered months in advance of the introduction of suchgoods.  For example, women’s apparel, men’sapparel, shoes and handbags are typically ordered six to nine months in advanceof the products being offered for sale while jewelry and other categories aretypically ordered three to six months in advance.  As a result, inherent in the successfulexecution of our business plans is our ability both to predict the fashiontrends that will be of interest to our customers and to anticipate futurespending patterns of our customer base.

 

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

 

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

 

***Revenues.**** *Ourrevenues for the first quarter of fiscal year 2011 of $927.2 million increasedby $58.3 million, or 6.7%, from $868.9 million in the first quarter of fiscalyear 2010.  The increase in revenues wasdue to increases in comparable revenues related to a higher level of customerdemand.

 

Comparable revenues for the thirteen weeks ended October 30,2010 were $924.2 million compared to $868.9 million in the first quarter offiscal year 2010, representing an increase of 6.4%.  Comparable revenues increased in the firstquarter of fiscal year 2011 by 5.1% for Specialty Retail stores and 12.8% forDirect Marketing.  New stores generatedrevenues of $3.0 million in the first quarter of fiscal year 2011.

 

Internet revenues generated by Direct Marketing were$139.0 million for the first quarter of fiscal year 2011, an increase of 16.9%compared to the prior year fiscal period. Catalog revenues decreased 4.6% compared to the prior year fiscal periodas our customers continued to migrate toward online retailing in our DirectMarketing operation.

 

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***Cost of goods sold including buying andoccupancy costs (excluding depreciation).***  COGS for the first quarter of fiscal year2011 were 60.7% of revenues compared to 61.5% of revenues for the first quarterof fiscal year 2010.  The decrease inCOGS by 0.8% of revenues in the first quarter of fiscal year 2011 was primarilydue to:

 

·                  increasedproduct margins generated by our Specialty Retail stores of approximately 0.9%primarily due to increases in customer demand and higher levels of full-price sales, net ofpromotional costs; and

 

·                  theleveraging of buying and occupancy costs by 0.3% of revenues on higherrevenues; offset by

 

·                  decreasedproduct margins generated by our Direct Marketing operation of approximately0.5% primarily due to 1) higher net markdowns and 2) lower delivery andprocessing net revenues.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses as a percentageof revenues decreased to 24.0% of revenues in the first quarter of fiscal year2011 compared to 25.2% of revenues in the prior year fiscal period.  The net decrease in SG&A expenses by 1.2%of revenues in the first quarter of fiscal year 2011 was primarily due to:

 

·                  favorablepayroll and related costs of approximately 0.8% of revenues, primarily due tothe leveraging of these expenses on higher revenues and lower benefits costsincurred;

 

·                  lowerprofessional fees and other expenses of approximately 0.2% of revenues,incurred primarily in connection with corporate initiatives; and

 

·                  lowerpre-opening costs of approximately 0.3% of revenues, primarily due to theopening of no new stores in the first quarter of fiscal year 2011.

 

***Income from credit card program, net.  ***Weearned HSBC Program Income of $9.3 million, or 1.0% of revenues, in the firstquarter of fiscal year 2011 compared to $13.1 million, or 1.5% of revenues, inthe first quarter of fiscal year 2010. We amended and extended our Program Agreement in July 2010.  The decrease in HSBC Program Income in thefirst quarter of fiscal year 2011 compared to the prior year fiscal period isattributable to the impact of the change in the amended contractual terms ofour Program Agreement, which became effective July 2010.

 

***Depreciation expense. ***Depreciationexpense was $33.7 million, or 3.6% of revenues, in the first quarter of fiscalyear 2011 compared to $35.8 million, or 4.1% of revenues, in the first quarterof fiscal year 2010.  The decrease indepreciation resulted primarily from recent lower levels of capital spending.

 

***Amortization expense. ***Amortizationof intangible assets (primarily customer lists and favorable lease commitments)aggregated $17.3 million, or 1.9% of revenues, in the first quarter of fiscal year2011 compared to $18.3 million, or 2.1% of revenues, in the first quarter offiscal year 2010.

 

***Segment operating earnings.***  Segment operating earnings forour Specialty Retail stores and Direct Marketing segments do not reflect eitherthe impact of adjustments to revalue our assets and liabilities to estimatedfair value at the Acquisition date or impairment charges related to declines infair value subsequent to the Acquisition date. The reconciliation of segment operating earnings to total operatingearnings is as follows:

 
| ** **                                                         | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in millions)**                                             | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009** | ** ** |
| Specialty Retail stores                                            |       | $                                  | 108.0      |   | $ | 88.4 |   |
| Direct Marketing                                                   |       | 25.0                               |       | 21.7 |   |
| Amortization of intangible  assets and favorable lease commitments |       | (17.3                              | )          | (18.3 | ) |
| Corporate expenses                                                 |       | (14.1                              | )          | (13.7 | ) |
| Other expenses                                                     |       | (1.8                               | )          | (3.3 | ) |
| Total operating earnings                                           |       | $                                  | 99.8       |   | $ | 74.8 |   |

 

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Operating earnings for our Specialty Retail storessegment were $108.0 million, or 14.2% of Specialty Retail stores revenues, forthe first quarter of fiscal year 2011 compared to operating earnings of $88.4million, or 12.3% of Specialty Retail stores revenues, for the prior yearfiscal period.  The increase in operatingmargin as a percentage of revenues was primarily due to:

 

·                  anincrease in customer demand and higher levels of full-price sales, net ofpromotional costs;

 

·                  theleveraging of a significant portion of our expenses on the higher level ofrevenues; and

 

·                  alower level of spending for pre-opening costs due to the opening of no newstores in the first quarter of fiscal year 2011; offset by

 

·                  alower level of income from our credit card program.

 

Operating earnings for Direct Marketing were $25.0million, or 15.1% of Direct Marketing revenues, in the first quarter of fiscalyear 2011 compared to $21.7 million, or 14.7% of Direct Marketing revenues, forthe prior year fiscal period.  Theincrease in operating margin as a percentage of revenues for Direct Marketingwas primarily the result of:

 

·                  theleveraging of a significant portion of our expenses on the higher level ofrevenues; offset by

 

·                  decreasedproduct margins primarily due to higher net markdowns and lower delivery andprocessing net revenues; and

 

·                  alower level of income from our credit card program.

 

***Interest expense, net*****.**  Net interest expense was $58.4 million, or6.3% of revenues, in the first quarter of fiscal year 2011 and $59.4 million,or 6.8% of revenues, for the prior year fiscal period.  The significant components of interestexpense are as follows:

 
| ** **                         | ** ** | **Thirteen weeks ended** | ** ** |
|------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**            | ** ** | **October 30,  2010**         | ** ** | **October 31,  2009** | ** ** |
|                               |       |                               |       |   |   |
| Senior Secured Term Loan  Facility |       | $                                  | 20,566     |   | $ | 20,786 |   |
| 2028 Debentures                    |       | 2,226                              |       | 2,227 |   |
| Senior Notes                       |       | 16,744                             |       | 17,525 |   |
| Senior Subordinated Notes          |       | 12,826                             |       | 12,826 |   |
| Amortization of debt issue  costs  |       | 4,674                              |       | 4,661 |   |
| Other , net                        |       | 1,436                              |       | 1,561 |   |
| Capitalized interest               |       | (42                                | )          | (221 | ) |
| Interest expense, net              |       | $                                  | 58,430     |   | $ | 59,365 |   |

 

***Income tax expense.***  Our effective income tax rate forthe first quarter of fiscal year 2011 was 37.9% compared to 45.0% for the firstquarter of fiscal year 2010.  Oureffective tax rate for the first quarter of fiscal year 2010 was unfavorablyimpacted by a lower level of projected earnings for fiscal year 2010.

 

During the fourth quarter of fiscal year 2010, theInternal Revenue Service (IRS) closed their examination of our fiscal year 2007federal income tax return with no changes or assessments.  The IRS will begin an examination of ourfiscal year 2008 federal income tax return in the second quarter of fiscal year2011.  With respect to state and localjurisdictions, with limited exceptions, the Company and its subsidiaries are nolonger subject to income tax audits for fiscal years before 2006.  We believe our recorded tax liabilities as ofOctober 30, 2010 are sufficient to cover any potential assessments to bemade by the IRS or other taxing authorities upon the completion of theirexaminations and we will continue to review our recorded tax liabilities forpotential audit assessments based upon subsequent events, new information andfuture circumstances.  We believe it isreasonably possible that additional adjustments in the amounts of ourunrecognized tax benefits could occur within the next twelve months as a resultof settlements with tax authorities or expiration of statutes oflimitation.  At this time, we do notbelieve such adjustments will have a material impact on our condensedconsolidated financial statements.

 

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**Non-GAAP Financial Measure — EBITDA**

 

We present the financial performance measure of earningsbefore interest, taxes, depreciation and amortization (EBITDA) because we usethis measure to monitor and evaluate the performance of our business andbelieve the presentation of this measure will enhance investors’ ability toanalyze trends in our business, evaluate our performance relative to othercompanies in our industry and evaluate our ability to service our debt.  EBITDA is not a presentation made inaccordance with generally accepted accounting principals in the U.S.(GAAP).  Our computation of EBITDA mayvary from others in our industry.

 

The non-GAAP measure ofEBITDA contains some, but not all, adjustments that are taken into account inthe calculation of the components of various covenants in the indenturesgoverning NMG’s Senior Secured Asset-Based Revolving Credit Facility, SeniorSecured Term Loan Facility, Senior Notes and Senior Subordinated Notes.  EBITDA should not be considered as analternative to operating earnings or net earnings as a measure of operatingperformance.  In addition, EBITDA is notpresented as and should not be considered as an alternative to cash flows as ameasure of liquidity.  EBITDA hasimportant limitations as an analytical tool and should not be considered inisolation, or as a substitute for analysis of our results as reported underGAAP.  For example, EBITDA:

 

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

 

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

 

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

 

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

 

·                  does not reflect any cashrequirements for assets being depreciated and amortized that may have to bereplaced 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 30,  2010**         | ** ** | **October 31,  2009** | ** ** |
|                                                               |       |                               |       |   |   |
| Net earnings                                                       |       | $                                  | 25.7       |   | $ | 8.5 |   |
| Income tax expense                                                 |       | 15.8                               |       | 6.9 |   |
| Interest expense, net                                              |       | 58.4                               |       | 59.4 |   |
| Depreciation expense                                               |       | 33.7                               |       | 35.8 |   |
| Amortization of intangible  assets and favorable lease commitments |       | 17.3                               |       | 18.3 |   |
| EBITDA                                                             |       | $                                  | 150.9      |   | $ | 128.9 |   |
| EBITDA as a percentage of revenues                                 |       | 16.3                               | %          | 14.8 | % |

 

**Inflation and Deflation**

 

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

 

We purchase a substantial portion of our inventory fromforeign suppliers whose costs are affected by the fluctuation of their localcurrency against the dollar or who price their merchandise in currencies otherthan the dollar.  Fluctuations in theEuro-U.S. dollar exchange rate affect us most significantly; however, we sourcegoods from numerous countries and thus are affected by changes in numerouscurrencies and, 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 could have a material adverse effect onour business, financial condition and results of operations in the future.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirementsconsist principally of:

 

·                  thefunding of our merchandise purchases;

 

·                  capitalexpenditures for new store construction, store renovations and upgrades of ourmanagement information systems;

 

·                  debtservice requirements;

 

·                  incometax payments; and

 

·                  obligationsrelated to our defined benefit pension plan (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 cash on hand and borrowingsunder the Asset-Based Revolving Credit Facility are 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 recenteconomic conditions.  To counteract theircash flow problems, our vendors may attempt to increase their prices, passthrough increased costs, alter historical credit and payment terms available tous or seek other relief. Any of these actions could have an adverse impact onour relationship with the vendor or constrain the amounts or timing of ourpurchases from the vendor and, ultimately, have an adverse impact on ourrevenues, profitability and liquidity.

 

Our working capital requirements fluctuate during thefiscal year, increasing substantially during the first and second quarters ofeach fiscal year as a result of higher seasonal levels of inventories.  We have typically financed the increases inworking capital needs during the first and second fiscal quarters withavailable cash balances, cash flows from operations and, if necessary, withcash provided from borrowings under our credit facilities.  We have made no borrowings under ourAsset-Based Revolving Credit Facility during fiscal year 2010 or the firstquarter of fiscal year 2011.

 

We believe thatoperating cash flows, cash balances, available vendor financing and amountsavailable pursuant to our senior secured Asset-Based Revolving Credit Facilitywill be sufficient to fund our operations, anticipated capital expenditurerequirements, debt service obligations, contractual obligations and commitmentsand Pension Plan funding payments through the remainder of fiscal year 2011.

 

At October 30,2010, cash and cash equivalents were $375.9 million compared to$319.2 million at October 31, 2009. Net cash used for our operating activities was $19.1 million for thefirst quarter of fiscal year 2011 compared to cash provided by our operatingactivities of $39.8 million for the first quarter of fiscal year 2010.  This change was primarily due to a higher netinvestment in inventories to support the increase in customer demand in thecurrent year.

 

Net cash used for investing activities, representingcapital expenditures, was $18.4 million in the first quarter of fiscalyear 2011 and $17.3 million in the first quarter of fiscal year 2010.  We incurred capital expenditures in the firstquarter of fiscal year 2011 related to the construction of our new store inWalnut Creek, California scheduled to open in March 2012.  We incurred significant capital expendituresin the first quarter of fiscal year 2010 related to the construction of our newstore in Bellevue (suburban Seattle) which opened in September 2009.  Currently, we project gross capitalexpenditures for fiscal year 2011 to be approximately $120 to $130million.  Net of developer contributions,capital expenditures for fiscal year 2011 are projected to be approximately$105 to $115 million.

 

Net cash used forfinancing activities was $7.6 million in the first quarter of fiscal year2011 as compared to $26.8 million in the first quarter of fiscal year2010.  Pursuant to the terms of ourSenior Secured Term Loan Facility, in the first quarter of fiscal year 2011, weprepaid $7.6 million of outstanding borrowings under that facility from excesscash flow, as defined in the credit agreement, that we generated in fiscal year2010 and in the first quarter of fiscal year 2010, we prepaid $26.6 million ofoutstanding borrowings under that facility from excess cash flow that wegenerated in fiscal year 2009.

 

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**Financing Structure at October 30,2010**

 

Our major sources offunds are comprised of vendor financing, a $600.0 million Asset-BasedRevolving Credit Facility, a $1,505.7 million Senior Secured Term LoanFacility, $752.5 million Senior Notes, $500.0 million SeniorSubordinated Notes, $125.0 million 2028 Debentures and operating leases.

 

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

 

Availabilityunder the Asset-Based Revolving Credit Facility is subject to a borrowingbase.  The Asset-Based Revolving CreditFacility includes borrowing capacity available for letters of credit and forborrowings on same-day notice.  Theborrowing base for the Asset-Based Revolving Credit Facility is equal to at anytime the sum of (a) the lesser of (i) 80% of eligible inventory(valued at the lower of cost or market value) and (ii) 85% of the netorderly liquidation value of eligible inventory, and (b) 85% of theamounts 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 isrequired to maintain excess availability under the terms of the Asset-Based RevolvingCredit Facility of at least the greater of (a) 10% of the lesser of(i) the aggregate revolving commitments and (ii) the borrowing baseand (b) $50 million.  After April 30, 2011, if at any time,excess availability is less than the greater of (a) 15% of the lesser of(i) the aggregate revolving commitments and (ii) the borrowing baseand (b) $60 million, NMG will be required to maintain a pro forma ratio ofconsolidated EBITDA to consolidated Fixed Charges (as such terms are defined inthe credit agreement) of at least 1.1 to 1.0. On October 30, 2010, NMG had no borrowings outstanding under thisfacility, $17.0 million of outstanding letters of credit and $523.0 million ofunused borrowing availability.

 

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

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG enteredinto a credit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility.  At October 30, 2010, the outstandingbalance under the Senior Secured Term Loan Facility was $1,505.7 million.  In November 2010, NMG entered into anamendment and restatement (the Amendment) of the credit agreement governing NMG’sSenior Secured Term Loan Facility, which included the following: (i) anextension of the maturity of approximately $1,064.0 million principal amount ofthe existing term loans thereunder, (ii) an increase in the interest ratepayable to holders of the extended term loans, (iii) the ability to incuradditional debt to refinance the non-extended term loans and (iv) certainother modifications to the Senior Secured Term Loan Facility.  For a more detailed description of theAmendment, see Note 14 of the Notes to Condensed Consolidated FinancialStatements.

 

The extended term loans will mature on April 6, 2016, unless$300.0 million or more aggregate principal amount of NMG’s Senior Notes andSenior Subordinated Notes remain outstanding on July 15, 2015, in whichcase the extended term loans will mature on that date instead.  The approximately $441.7 million principalamount of existing term loans that were not extended continue to have amaturity of April 6, 2013 (as all of the term loans did prior to theAmendment).

 

At October 30, 2010 (prior to the Amendment),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) the federal funds effective rate plus 1⁄2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin.  The interest rate on the outstandingborrowings pursuant to the Senior Secured Term Loan Facility was 2.29% at October 30,2010.  The applicable margin is subjectto adjustment based on contractually defined debt coverage ratios.  At October 30, 2010, the applicablemargin with respect to base rate borrowings was 1.00% and the applicable marginwith respect to LIBOR borrowings was 2.00%. For a description of interest payable on the term loans aftergiving effect to the Amendment, see “Subsequent Event.”

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

***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 $1,505.7million was outstanding at October 30, 2010.  Effective December 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 from6.947% to 6.979% per quarter through December 2010 and result in anaverage fixed rate of 6.963%.  Theinterest rate swaps expire in December 2010.

 

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

 

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**Subsequent Event**

 

InNovember 2010, NMG and certain of its subsidiaries entered into theAmendment of the credit agreement governing NMG’s Senior Secured Term LoanFacility, thereby extending the maturity of approximately $1,064.0 millionprincipal amount of NMG’s existing term loans thereunder.

 

Theextended term loans will mature on April 6, 2016, unless $300.0 million ormore aggregate principal amount of NMG’s Senior Notes and Senior SubordinatedNotes remain outstanding on July 15, 2015, in which case the extended termloans will mature on that date instead. The approximately $441.7 million principal amount of existing term loansthat were not extended continue to have a maturity of April 6, 2013 (as all of the term loans did prior to theAmendment).

 

Inaddition to extending the maturity of a portion of the existing term loansunder the Senior Secured Term Loan Facility, the Amendment increases the “applicablemargin” used in calculating the interest rate payable to holders of theextended term loans (but does not change the applicable margin used incalculating the interest rate payable to holders of term loans that are notbeing extended).  Following theAmendment, term loans under the Senior Secured Term Loan Facility (including boththe extended and the non-extended term loans) bear interest at a rate per annumequal to, at NMG’s option, either (a) a base rate determined by referenceto the higher of (1) the prime rate of Credit Suisse AG (theadministrative agent), (2) the federal funds effective rate plus 1⁄2 of 1%and (3) the adjusted one-month LIBOR rate plus 1.00% or (b) a LIBORrate (for a period equal to the relevant interest period), subject to certainadjustments, in each case plus an applicable margin.

 

Theapplicable margin for the extended term loans will be 3.00% for alternate baserate loans and 4.00% for LIBOR rate loans (or if NMG’s consolidated leverageratio as of the relevant date of determination is less than 5.00 to 1.00, 2.75%for alternate base rate loans and 3.75% for LIBOR rate loans).  The applicable margin for the term loans thatwere not extended remains 1.00% for alternate base rate loans and 2.00% forLIBOR rate loans (or if NMG’s consolidated leverage ratio as of the relevantdate of determination is less than 4.50 to 1.00, 0.75% for alternate base rateloans and 1.75% for LIBOR rate loans).

 

TheAmendment also included provisions permitting NMG (a) to incur debt torefinance the term loans that are not currently being extended (withoutrequiring any further consent under the Senior Secured Term Loan Facility) and (b) toenter into future extensions of any portion of the term loans with the consentof only the lenders electing to extend at that time.

 

**OTHER MATTERS**

 

**Factors That May Affect FutureResults**

 

Matters discussed in this Quarterly Report onForm 10-Q include forward-looking statements.  Forward-looking statements generally can beidentified by the use of forward-looking terminology such as “may,” “plan,” “predict,”“expect,” “estimate,” “intend,” “would,” “could,” “should,” “anticipate,” “believe,”“project” or “continue.” We make these forward-looking statements based on ourexpectations and beliefs concerning future events, as well as currentlyavailable data.  While we believe thereis a reasonable basis for our forward-looking statements, they involve a numberof risks and uncertainties.  Therefore,these statements are not guarantees of future performance and you should notplace undue reliance on them.  A varietyof factors could cause our actual results to differ materially from theanticipated or expected results expressed in our forward-lookingstatements.  Factors that could affectfuture performance include, but are not limited, to:

 

*Political and General Economic Conditions*

 

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

 

·                  currentpolitical and general economic conditions or changes in such conditionsincluding relationships between the United States and the countries from whichwe source our merchandise;

 

·                  terroristactivities in the United States and elsewhere;

 

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

 

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*Customer Considerations*

 

·                  changes inconsumer confidence resulting in a reduction of discretionary spending ongoods;

 

·                  changes in thedemographic or retail environment;

 

·                  changes inconsumer preferences or fashion trends;

 

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

 

*Merchandise Procurement and Supply Chain Considerations*

 

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

 

·                  delays inreceipt of merchandise ordered due to work stoppages or other causes ofdelay in connection with either the manufacture or shipment of suchmerchandise;

 

·                  changes inforeign currency exchange or inflation rates;

 

·                  significantincreases in paper, printing and postage costs;

 

*Industry and Competitive Factors*

 

·                  competitiveresponses to our loyalty programs, marketing, merchandising and promotionalefforts or inventory liquidations by vendors or other retailers;

 

·                  adverse changesin the financial viability of our competitors;

 

·                  seasonality ofthe retail business;

 

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

 

·                  delays inanticipated store openings and renovations;

 

·                  our success inenforcing our intellectual property rights;

 

*Employee Considerations*

 

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

 

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

 

*Legal and Regulatory Issues*

 

·                  changes ingovernment or regulatory requirements increasing our costs of operations;

 

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

 

*Leverage Considerations*

 

·                  the effects ofincurring a substantial amount of indebtedness under our Senior Secured CreditFacilities and our Senior Notes and Senior Subordinated Notes;

 

·                  the ability torefinance our indebtedness under our Senior Secured Credit Facilities and theeffects of any refinancing;

 

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·                  the effectsupon us of complying with the covenants contained in our Senior Secured CreditFacilities and the indentures governing our Senior Notes and Senior SubordinatedNotes;

 

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

 

*Other Factors*

 

·                  the impact offunding requirements related to our Pension Plan;

 

·                  our ability toprovide credit to our customers pursuant to our proprietary credit card programarrangement with HSBC, including any future changes in the terms of the sucharrangement and/or legislation impacting the extension of credit to ourcustomers;

 

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

 

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

 

Theforegoing factors are not exhaustive, and new factors may emerge or changes tothe foregoing factors may occur that could impact our business.  Except to the extent required by law, weundertake no obligation to update or revise (publicly or otherwise) anyforward-looking statements to reflect subsequent events, new information orfuture circumstances.

 

**Critical Accounting Policies**

 

Thepreparation of condensed consolidated financial statements in conformity withgenerally accepted accounting principles requires us to make estimates andassumptions about future events.  Theseestimates and assumptions affect amounts of assets, liabilities, revenues andexpenses and the disclosure of gain and loss contingencies at the date of theaccompanying Condensed Consolidated Financial Statements.  Our current estimates are subject to changeif different assumptions as to the outcome of future events were made.  We evaluate our estimates and judgments on anongoing basis and predicate those estimates and judgments on historicalexperience and on various other factors that we believe are reasonable underthe circumstances.  We make adjustmentsto our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannotbe determined with absolute certainty, actual results may differ from theestimates we used in preparing the accompanying Condensed ConsolidatedFinancial Statements.

 

See Note 1 of the Notes to Condensed ConsolidatedFinancial Statements in Part I - Item 1 for a summary of our criticalaccounting policies.  A completedescription of our critical accounting policies is included in our AnnualReport to Shareholders on Form 10-K for the fiscal year ended July 31,2010.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The market riskinherent in the Company’s financial instruments represents the potential lossarising from adverse changes in interest rates. The Company does not enter into derivative financial instruments fortrading purposes.  The Company seeks tomanage exposure to adverse interest rate changes through its normal operatingand financing activities.  The Company isexposed to interest rate risk through its borrowing activities, which aredescribed in Note 3 of the Notes to Condensed Consolidated FinancialStatements.

 

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 $1,505.7million was outstanding under its Senior Secured Term Loan Facility at October 30,2010.  In addition, as of October 30,2010, NMG had no borrowings outstanding under its Asset-Based Revolving CreditFacility.  Future borrowings under NMG’sAsset-Based Revolving Facility, to the extent of outstanding borrowings, wouldbe affected by interest rate changes.

 

Effective December 2005, NMG entered into floatingto fixed interest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rateinterest commitments through the expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.947% to 6.979% per quarter through December 2010and result in an average fixed rate of 6.963%.  We believe that a 1% increase in interestrates relating to the portion of our floating rate debt that is not hedged 

 

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would increase annual interest expense by approximately$0.4 million (prior to the expiration of the interest rate swapagreements) during the second quarter of fiscal year 2011.

 

Effective January 2010,NMG entered into interest rate cap agreements for an aggregate notional amountof $500.0 million in order to hedge the variability of our cash flows relatedto a portion of our floating rate indebtedness once the interest rate swapexpires in December 2010.  Theinterest rate cap agreements commence in December 2010 and expire in December 2012.  Pursuant to the interest rate cap agreements,NMG has capped LIBOR at 2.50% through December 2012 with respect to the$500.0 million notional amount of such agreements.  In the event LIBOR is less than 2.50%, NMGwill pay interest at the lower LIBOR rate. In the event LIBOR is higher than 2.50%, NMG will pay interest at thecapped rate of 2.50%.  As of October 30,2010, LIBOR was 0.25375%.  We believethat a 1% increase in LIBOR would increase our annual interest expense byapproximately $10 million (subsequent to the expiration of the interest rateswap agreements) during fiscal year 2011.

 

The effects of changesin the 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 manageexposure to adverse equity and bond returns by maintaining diversifiedinvestment portfolios and utilizing professional investment managers.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**a. Disclosure Controls and Procedures.**

 

In accordance with Rules 13a-15 and 15d-15 underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), wecarried out an evaluation as of October 30, 2010, under the supervisionand with the participation of our Chief Executive Officer and Chief FinancialOfficer, as well as other key members of our management, of the design andoperating effectiveness of our disclosure controls and procedures (as definedin Rule 13a-15(e) and Rule 15d-15(e) under the ExchangeAct). Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective toprovide reasonable assurance that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, accumulated,processed, summarized, reported and communicated on a timely basis within thetime periods specified in the Securities and Exchange Commission’s rules andforms.

 

**b. Changes in Internal Control overFinancial Reporting.**

 

In the ordinary course of business, we routinely enhanceour information systems by either upgrading our current systems or implementingnew systems. No change occurred in our internal controls over financialreporting during the quarter ended

October 30, 2010 that has materially affected, oris reasonably likely to materially affect, our internal controls over financialreporting.

 

**NEIMAN MARCUS, INC.**

 

**PART II**

 

**ITEM 1.           LEGAL PROCEEDINGS**

 

On April 30, 2010, a Class Action Complaintfor Injunction and Equitable Relief was filed in the United States DistrictCourt for the Central District of California by Sheila Monjazeb, individuallyand on behalf of other members of the general public similarly situated, againstthe Company, Newton Holding, LLC, TPG Capital, L.P. and Warburg Pincus,LLC.  On July 12, 2010, alldefendants except for the Company were dismissed without prejudice, and on August 20,2010, this case was refiled in the Superior Court of California for SanFrancisco County.  This complaint, alongwith a similar class action lawsuit originally filed by Bernadette Tanguilig in2007, alleges that the Company has engaged in various violations of theCalifornia Labor Code and Business and Professions Code, including withoutlimitation (1) asking employees to work “off the clock,” (2) failingto provide meal and rest breaks to its employees, (3) improperlycalculating deductions on paychecks delivered to its employees, and (4) failingto provide a chair or allow employees to sit during shifts.  The plaintiffs in these matters seekcertification of their cases as class actions, reimbursement for past wages andtemporary, preliminary and permanent injunctive relief preventing defendantfrom allegedly continuing to violate the laws cited in their complaints.  We intend to vigorously defend our interestsin these matters.  Currently, we cannotreasonably estimate the amount of loss, if any, arising from thesematters.  However, we do not currentlybelieve the resolution of these matters will have a material adverse impact onour financial position.  We will continueto evaluate these matters based on subsequent events, new information andfuture circumstances.

 

We are currently involved in various other legalactions and proceedings that arose in the ordinary course of business.  We believe 

 

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that any liability arising as a result of theseactions and proceedings will not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

Note 10 of the Notes to Condensed ConsolidatedFinancial Statements in Part I, Item 1 is incorporated herein byreference as if fully restated herein. Note 10 contains forward-looking statements that are subject to therisks and uncertainties discussed in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Factors That May AffectFuture Results.”

 

**ITEM 1A.        RISK FACTORS**

 

**Risks Related to Recent EconomicConditions**

 

**Recent economic conditions haveadversely affected, and may continue to adversely affect, our business andresults 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 we sellconsists in large part of luxury retail goods. The purchase of these goods by customers is discretionary, and thereforehighly dependent upon the level of consumer spending, particularly amongaffluent customers.  Accordingly, salesof these products may continue to be adversely affected by a continuation orworsening of recent economic conditions, increases in consumer debt levels,uncertainties regarding future economic prospects or a decline in consumerconfidence.  During an actual orperceived economic downturn (as a result of increases in consumer debt levels,increases in interest rates, a tightening of consumer credit, uncertainties regardingfuture economic performance and tax rates and policies, or a decline inconsumer confidence, among other factors), fewer customers may shop our storesand websites and those who do shop may limit the amounts of their purchases.  As a result, we could be required to takesignificant additional markdowns and/or increase our marketing and promotionalexpenses in response to the lower than anticipated levels of demand for luxurygoods.  In addition, promotional and/orprolonged periods of deep discount pricing by our competitors could have amaterial adverse effect on our business.

 

We continue to experience a challenging economic andretail environment and expect these conditions will continue in the nearterm.  We will continue to align ourinventory levels and purchases with anticipated lower customer demand.  The prolonged continuation of uncertainmarket conditions could have a material adverse effect on our business.

 

**Uncertain economic conditions may constrain our ability to obtaincredit.**

 

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

 

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

 

**Because our ownership of NMGaccounts for substantially all of our assets and operations, we are subject toall 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.

 

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

 

We are highlyleveraged.  As of October 30, 2010,the principal amount of NMG’s total indebtedness was approximately $2,883.4million, the unused borrowing availability under the $600.0 million Asset-BasedRevolving Credit Facility was $523.0 million and the outstanding letters ofcredit were $17.0 million.  As of October 30,2010, NMG had no borrowings outstanding under this facility.  NMG’s substantial indebtedness, combined withits lease and other financial obligations and contractual commitments, couldhave other important consequences.  Forexample, it could:

 

·                  makeit more difficult for NMG to satisfy its obligations with respect to itsindebtedness and any failure to comply with the obligations of any of its debtinstruments, including restrictive covenants and borrowing conditions, couldresult in an event of default under the agreements governing NMG’sindebtedness;

 

·                  makeNMG more vulnerable to adverse changes in general economic, industry andcompetitive conditions and adverse changes in government regulation;

 

·                  requireNMG to dedicate a substantial portion of its cash flow from operations topayments on its indebtedness, thereby reducing the availability of cash flowsto fund working capital, capital expenditures, acquisitions and other generalcorporate purposes;

 

·                  limitNMG’s flexibility in planning for, or reacting to, changes in NMG’s businessand the industry in which it operates;

 

·                  placeNMG at a competitive disadvantage compared to its competitors that are lesshighly leveraged;

 

·                  limitNMG’s ability to obtain credit from our vendors and/or the vendors’ factors andother financing sources; and

 

·                  limitNMG’s ability to borrow additional amounts for working capital, capitalexpenditures, acquisitions, debt service requirements, execution of itsbusiness strategy or other purposes.

 

Any of the above listedfactors could materially and 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 30,2010, NMG had approximately $1,505.7 million principal amount of floatingrate debt, consisting of outstanding borrowings under the Senior Secured TermLoan Facility.

 

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

 

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

 

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

 

NMG’s ability to payinterest on and principal of the debt obligations will primarily depend uponNMG’s future operating performance.  As aresult, prevailing economic conditions and financial, business and otherfactors, many of which are beyond our control, will affect its ability to makethese payments.

 

If NMG does not generate sufficient cash flow fromoperations to satisfy the debt service obligations, NMG may have to undertakealternative financing plans, such as refinancing or restructuring itsindebtedness, selling assets, reducing or delaying capital investments orseeking to raise additional capital.  Ourability to restructure or refinance NMG’s debt will depend on the 

 

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condition of the capital markets and our financialcondition at such time.  Any refinancingof NMG’s debt could be at higher interest rates and may require it to complywith more onerous covenants, which could further restrict its businessoperations.  The terms of existing orfuture debt instruments may restrict NMG from adopting some of thesealternatives.  In addition, our borrowingcosts and ability to refinance may be affected by short-term and long-term debtratings assigned by independent rating agencies, which are based, in significantpart, on NMG’s performance as measured by indicators such as interest coverageand leverage ratios.  Furthermore, anyfailure to make payments of interest and principal on NMG’s outstandingindebtedness on a timely basis would likely result in a reduction of NMG’scredit rating, which could harm its ability to incur additional indebtedness onacceptable terms.

 

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

 

**The terms of NMG’s Asset-BasedRevolving Credit Facility and Senior Secured Term Loan Facility and theindentures governing the Senior Notes, the Senior Subordinated Notes and the2028 Debentures may restrict NMG’s current and future operations, particularlyits ability to respond to changes in its business or to take certain actions.**

 

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

 

·                  incuradditional indebtedness;

 

·                  paydividends on NMG’s capital stock or redeem, repurchase or retire its capitalstock or indebtedness;

 

·                  makeinvestments;

 

·                  createrestrictions on the payment of dividends or other amounts to NMG from NMG’srestricted subsidiaries;

 

·                  engagein transactions with its affiliates;

 

·                  sellassets, including capital stock of NMG’s subsidiaries;

 

·                  consolidateor merge;

 

·                  createliens; and

 

·                  enterinto sale and lease back transactions.

 

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

 

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

 

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

 

The operating and financial restrictions and covenantsin these debt agreements and any future financing agreements may adverselyaffect NMG’s ability to finance future operations or capital needs or to engagein other business activities.

 

**Risks Related to Our Business and Industry**

 

**The specialty retail industry ishighly competitive.**

 

The specialty retail industry is highly competitive andfragmented.  Competition is strong bothto attract and sell to customers and to establish relationships with, andobtain merchandise from, key vendors.

 

A number of different competitive factors could have amaterial adverse effect on our business, results of operations and financialcondition, including:

 

·                  increasedoperational efficiencies of competitors;

 

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

 

·                  expansionof product offerings by existing competitors;

 

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

 

·                  adoptionby existing competitors of innovative retail sales methods.

 

We compete for customers with specialty retailers,traditional and high-end department stores, national apparel chains,vendor-owned proprietary boutiques, individual specialty apparel stores anddirect marketing firms.  We compete forcustomers principally on the basis of quality and fashion, customer service,value, assortment and presentation of merchandise, marketing and customerloyalty programs and, in the case of Neiman Marcus and Bergdorf Goodman, storeambiance.  In our Specialty Retailbusiness, merchandise assortment is a critical competitive factor, and retailstores compete for exclusive, preferred and limited distribution arrangementswith key designers.  Many of ourcompetitors are larger than we are and have greater financial resources than wedo.  In addition, certain designers fromwhom we source merchandise have established competing free-standing retailstores in the same vicinity as our stores. If we fail to successfully compete for customers or merchandise, ourbusiness will suffer.

 

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

 

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

 

As a result of recent economic conditions, some of ourvendors have experienced serious cash flow issues, reductions in availablecredit from banks, factors or other financial institutions, or increases in thecost of capital.  To counteract theircash flow problems, our vendors may attempt to increase their prices, passthrough increased costs, alter historical credit and payment terms available tous or seek other relief.  Any of theseactions could have an adverse impact on our relationship with the vendor or

 

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constrain the amounts or timing of our purchases fromthe vendor and, ultimately, have an adverse impact on our revenues,profitability and liquidity.

 

Moreover, nearly all of the brands of our top designersare sold by competing retailers, and many of our top designers also have theirown dedicated retail stores.  If one ormore of our top designers were to cease providing us with adequate supplies ofmerchandise for purchase or, conversely, were to 1) increase sales ofmerchandise through their own stores, 2) increase the sales of merchandise toour competitors or 3) alter the form in which their goods were made availableto us for resale, our business could be adversely affected.  In addition, any decline in the popularity orquality of any of our designer brands could adversely affect our business.

 

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

 

We make decisions regarding the purchase of ourmerchandise well in advance of the season in which it will be sold.  For example, women’s apparel, men’s apparel,shoes and handbags are typically ordered six to nine months in advance of theproducts being offered for sale while jewelry and other categories aretypically ordered three to six months in advance.  If our sales during any season, particularlya peak season, are significantly lower than we expect for any reason, we maynot be able to adjust our expenditures for inventory and other expenses in atimely fashion and may be left with a substantial amount of unsoldinventory.  If that occurs, we may beforced to rely on markdowns or promotional sales to dispose of excessinventory.  This could have an adverseeffect on our margins and operating income. 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 salesor harm our customer relationships.

 

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

 

Our success depends in large part on our ability toidentify fashion trends as well as to anticipate, gauge and react to changingconsumer demands in a timely manner.  Ifwe fail to adequately match our product mix to prevailing customer tastes, wemay be required to sell our merchandise at higher average markdown levels andlower average margins.  Furthermore, theproducts we sell often require long lead times to order and must appeal toconsumers whose preferences cannot be predicted with certainty and often changerapidly.  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 to anticipate, identify and respond effectivelyto changing consumer demands and fashion trends could adversely affect ourbusiness.

 

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

 

The protection of our customer, employee and companydata is critically important to us.  Weutilize customer data captured through both our proprietary credit cardprograms and our direct marketing activities. Our customers have a high expectation that we will adequately safeguardand protect their personal information. The regulatory environment surrounding information security and privacyis evolving and increasingly demanding, with the frequent imposition of new andconstantly changing 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.

 

**Our business and performance maybe affected by our ability to implement our store expansion and remodelingstrategies.**

 

We expect that planned new full-line stores will addover 89,000 square feet of new store space over approximately the next threefiscal years, representing an increase of approximately 1.5% above the currentaggregate square footage of our full-line Neiman Marcus andBergdorf Goodman stores.  Inaddition, we anticipate opening approximately 3 to 5 new Neiman Marcus LastCall stores annually in each of the next three fiscal years.  New store openings involve certain risks,including constructing, furnishing and supplying a store in a timely and costeffective manner, accurately assessing the demographic or retail environment ata given location, negotiating favorable lease terms, hiring and trainingquality staff, obtaining necessary permits and zoning approvals, obtainingcommitments from a core group of vendors to supply the new store, integratingthe new store into our distribution network and building customer awareness andloyalty.

 

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

 

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

 

Some business processes that are dependent on technologyare outsourced to third parties.  Suchprocesses include credit card authorization and processing, insurance claimsprocessing, payroll processing, record keeping for retirement and other benefitplans and other accounting processes.  Inthe second quarter of fiscal year 2010, we entered into agreements to outsourcecertain information technology functions. In addition, we review outsourcing alternatives on a routine basis andmay decide to outsource additional business processes in the future.  We make a diligent effort to ensure that allproviders of outsourced services are observing proper internal controlpractices, such as redundant processing facilities; however, there are no guaranteesthat failures will not occur.  Failure ofthird parties to provide adequate services could have an adverse effect on ourresults of operations, financial condition or ability to accomplish ourfinancial and management reporting.

 

**Acts of terrorism could adverselyaffect our business.**

 

The economic downturn that followed the terroristattacks of September 11, 2001 had a material adverse effect on ourbusiness.  Any further acts of terrorismor other future conflicts may disrupt commerce and undermine consumerconfidence, cause a downturn in the economy generally, cause consumer spendingor shopping center traffic to decline or reduce the desire of our customers tomake discretionary purchases.  Any of theforegoing factors could negatively impact our sales revenue, particularly inthe case of any terrorist attack targeting retail space, such as a shoppingcenter.  Furthermore, an act of terrorismor war, or the threat thereof, could negatively impact our business byinterfering with our ability to obtain merchandise from foreignmanufacturers.  Any future inability toobtain merchandise from our foreign manufacturers or to substitute othermanufacturers, at similar costs and in a timely manner, could adversely affectour business.

 

**The loss of any of our seniormanagement team or attrition among our buyers or key sales associates couldadversely affect our business.**

 

Our success in the specialty retail industry willcontinue to depend to a significant extent on our senior management team,buyers and key sales associates.  We relyon the experience of our senior management, who have specific knowledgerelating to us and our industry that would be difficult to replace.  If we were to lose a portion of our buyers orkey sales associates, our ability to benefit from long-standing relationshipswith key vendors or to provide relationship-based customer service maysuffer.  We may not be able to retain ourcurrent senior management team, buyers or key sales associates and the loss ofany of these individuals could adversely affect our business.

 

**Inflation, including pricechanges resulting from foreign exchange rate exchanges, may adversely affectour business operations in the future.**

 

In recent years, we have experienced certaininflationary conditions in our cost base due primarily to changes inforeign currency exchange rates that have reduced the purchasing power of theU.S. dollar and, to a lesser extent, to increases in selling, general andadministrative expenses, particularly with regard to employee benefits, andincreases in fuel prices and costs impacted by increases in fuel prices, suchas freight and transportation costs. Inflation can harm our margins and profitability if we are unable toincrease prices or cut costs enough to offset the effects of inflation in ourcost base.  If inflation in these orother costs worsens, we may not be able to offset the effects of inflation andcost increases through control of expenses, passing cost increases on tocustomers or any other method.  Anyfuture inflation could adversely affect our profitability and our business.

 

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

 

We maintain loyalty programs that are designed tocultivate long-term relationships with our customers and enhance the quality ofservice 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 of the last two calendar years was generatedby our InCircle loyalty program members, our failure to continue to providequality service and competitive rewards to our customers through the InCircleloyalty program could adversely affect our business.

 

**Changes in our credit cardarrangements, applicable regulations and consumer credit patterns couldadversely impact our ability to facilitate the provision of consumer credit toour customers and adversely affect our business.**

 

We maintain a proprietary credit card program throughwhich credit is extended to customers under the “Neiman Marcus” and “BergdorfGoodman” names.  Because a majority ofour revenues is transacted through our proprietary credit cards, changes in ourproprietary credit card arrangement that adversely impact our ability tofacilitate the provision of consumer credit may adversely affect ourperformance.

 

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

 

Under the terms of the Program Agreement, HSBC offerscredit cards and non-card payment plans and bears substantially all credit riskwith respect to sales transacted on the cards bearing our brands.  We receive payments from HSBC based on salestransacted on our proprietary credit cards. Such payments are subject to annual adjustments, both increases anddecreases, based upon the overall annual profitability and performance of theproprietary credit card portfolio.  Basedupon current market conditions and the terms of the extended Program Agreement,we believe the future income earned by the Company will be lower than theincome earned pursuant to the original Program Agreement and that a higherportion of such future income will be based upon the future profitability andperformance of the credit card portfolio. In addition, we receive payments from HSBC for marketing and servicingactivities as we continue to handle key customer service functions, primarilycustomer inquiries and collections, for HSBC.

 

In connection with our Program Agreement, we havechanged and may continue to change the terms of credit offered to ourcustomers.  In addition, HSBC hasdiscretion over certain policies and arrangements with credit card customersand may change these policies and arrangements in ways that affect ourrelationships with these customers.  Anysuch changes in our credit card arrangements may adversely affect our creditcard program and ultimately, our business.

 

Credit card operations are subject to numerous federaland state laws that impose disclosure and other requirements upon theorigination, servicing and enforcement of credit accounts and limitations onthe maximum amount of finance charges that may be charged by a creditprovider.  Any regulation or change inthe regulation of credit arrangements that would materially limit theavailability of credit to our customer base could adversely affect ourbusiness.  Changes in credit card use,payment patterns, and default rates may result from a variety of economic,legal, social, and other factors that we cannot control or predict withcertainty.

 

**Our business can be affected byextreme or unseasonable weather conditions.**

 

Extreme weather conditions in the areas in which ourstores are located could adversely affect our business.  For example, heavy snowfall, rainfall orother extreme weather conditions over a prolonged period might make itdifficult for our customers to travel to our stores and thereby reduce oursales and profitability.  Our business isalso susceptible to unseasonable weather conditions.  For example, extended periods of unseasonablywarm temperatures during the winter season or cool weather during the summerseason could render a portion of our inventory incompatible with thoseunseasonable conditions.  Reduced salesfrom extreme or prolonged unseasonable weather conditions would adverselyaffect our business.

 

**We are subject to numerousregulations that could affect our operations.**

 

We are subject to customs, truth-in-advertising, laborand other laws, including consumer protection regulations and zoning andoccupancy ordinances that regulate retailers generally and/or 1) govern theimportation, promotion and sale of merchandise 2) regulate wage and hourmatters with respect to our employees and 3) govern the operation of our retailstores and warehouse facilities. Although we undertake to monitor changes in these laws, if these laws orthe interpretations of these laws change without our knowledge, or are violatedby importers, designers, manufacturers or distributors, we could experiencedelays in shipments and receipt of goods, suffer damage to our reputation or besubject to fines or other penalties under the controlling regulations, any ofwhich could adversely affect our business.

 

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

 

The specialty retail industry is seasonal in nature,with a higher level of sales typically generated in the fall and holidayselling 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 have significant additionalcash requirements in the period leading up to the months of November and December inanticipation of higher sales volume in those periods, including paymentsrelating to additional inventory, advertising and employees.

 

**Our business is affected byforeign currency fluctuations.**

 

We purchase a substantial portion of our inventory fromforeign suppliers whose costs are affected by the fluctuation of their localcurrency against the dollar or who price their merchandise in currencies otherthan the dollar.  Fluctuations in theEuro-U.S. dollar

 

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exchange rate affect us most significantly; however, wesource goods from numerous countries and thus are affected by changes in numerouscurrencies and, 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, and ultimatelyour earnings, could decrease.  Foreigncurrency fluctuations could have a material adverse effect on our business,financial condition and results of operations in the future.

 

**Conditions in, and the UnitedStates’ relationship with, the countries where we source our merchandise couldaffect our sales.**

 

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

 

**Significant increases in costsassociated with the production of catalogs and other promotional materials mayadversely affect our operating income.**

 

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

 

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

 

We are indirectly owned and controlled by the Sponsorsand certain other equity investors, and the Sponsors have the ability tocontrol our policies and operations.  Theinterests of the Sponsors may not in all cases be aligned with those of ourcreditors.  For example, if we encounterfinancial difficulties or are unable to pay our debts as they mature, theinterests of our equity holders might conflict with our creditors’ interests.  In addition, our equity holders may have aninterest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investments,even though such transactions might involve risks to holders of ourindebtedness.  Furthermore, the Sponsorsmay in the future own businesses that directly or indirectly compete withus.  One or more of the Sponsors also maypursue acquisition opportunities that may be complementary to our business, andas a result, those acquisition opportunities may not be available to us.

 

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

 

We and our subsidiaries currently own our tradenames andservice marks, including the “Neiman Marcus” and “Bergdorf Goodman” marks.  Our tradenames and service marks areregistered in the United States and in various foreign countries, primarily inEurope.  The laws of some foreigncountries do not protect proprietary rights to the same extent as do the lawsof the United States.  Moreover, we areunable to predict the effect that any future foreign or domestic intellectualproperty legislation or regulation may have on our existing or futurebusiness.  The loss or reduction of anyof our significant proprietary rights could have an adverse effect on ourbusiness.

 

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

 

**Failure to successfully maintainand update information technology systems and enhance existing systems mayadversely affect our business.**

 

To keep pace with changing technology, we mustcontinuously provide for the design and implementation of new informationtechnology systems as well as enhancements of our existing systems. Any failureto adequately maintain and update the information technology systems supportingour online operations, sales operations or inventory control could prevent ourcustomers from purchasing merchandise on our websites or prevent us fromprocessing and delivering merchandise, which could 

 

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adversely affect ourbusiness.

 

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

 

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

 

**ITEM 6.        EXHIBITS**

 
| 2.1    |   | Agreement and Plan of Merger, dated May 1, 2005,  among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and  Newton Merger Sub, Inc., incorporated herein by reference to the  Company’s Annual Report on Form 10-K for the fiscal year ended  July 31, 2010.                                                                                           |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.2    |   | Purchase, Sale and Servicing Transfer Agreement dated  as of June 8, 2005, among The Neiman Marcus Group, Inc., Bergdorf  Goodman, Inc., HSBC Bank Nevada, N.A. and HSBC Finance Corporation,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended July 31, 2010.                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1    |   | Amended and Restated Certificate of Incorporation of  Neiman Marcus, Inc., incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Registration Statement on Form S-1  (Registration No. 333-133184) dated April 10, 2006.                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2    |   | Amended and Restated Bylaws of Neiman  Marcus, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Registration Statement on Form S-1 (Registration  No. 333-133184) dated April 10, 2006.                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1    |   | Indenture, dated as of May 27, 1998, between The  Neiman Marcus Group, Inc. and The Bank of New York, as trustee,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009.                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2    |   | Form of 7.125% Senior Notes Due 2028, dated  May 27, 1998, incorporated herein by reference to the Company’s Annual  Report on Form 10-K for the fiscal year ended August 1, 2009.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3    |   | Senior Indenture dated as of October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger  Sub, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National  Association, trustee. (1)                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 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. (1)                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Form of 9%/9 3/4% Senior Notes due 2015. (1)                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Form of 10 3/8% Senior Subordinated Notes due  2015. (1)                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 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. (1)                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 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. |

 

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| 4.9    |   | Second Supplemental Indenture, dated as of  August 14, 2006, to the Indenture, dated as of May 27, 1998, among  The Neiman Marcus Group, Inc., Neiman Marcus, Inc., and The Bank of  New York Trust Company, N.A., as successor trustee, incorporated herein by  reference to the Company’s Current Report on Form 8-K dated  August 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1*  |   | Rollover Agreement dated as of October 4, 2005 by  and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc.,  and Burton M. Tansky, incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended August 1,  2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2*  |   | Amendment to Letter Agreement effective as of  January 1, 2009 by and between Neiman Marcus, Inc., a Delaware  corporation, and Burton M. Tansky, incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3*  |   | Second Amendment to Letter Agreement dated  April 26, 2010 by and between Neiman Marcus, Inc., a Delaware  corporation, and Burton M. Tansky incorporated herein by reference to the  Company’s Current Report on Form 8-K dated April 28, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4*  |   | Director Services Agreement dated April 26, 2010  by and among Neiman Marcus, Inc., The Neiman Marcus Group, Inc.,  and Burton M. Tansky, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated April 28, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5*  |   | Form of Rollover Agreement by and among The  Neiman Marcus Group, Inc., Newton Acquisition, Inc., and certain  members of management, incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended August 1,  2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6   |   | Amended and Restated Credit Agreement dated as of  July 15, 2009, among The Neiman Marcus Group, Inc., the Company,  the other borrowers and guarantors named therein, Bank of America, N.A., as  administrative agent and co-collateral agent, Wells Fargo Retail Finance, LLC  as co-collateral agent, Banc of America Securities LLC, Wells Fargo Retail  Finance, LLC, J.P. Morgan Securities Inc. and Regions Business Capital  Corporation as joint lead arrangers and joint bookrunners, Wells Fargo Retail  Finance, LLC as syndication agent, JPMorgan Chase Bank, N.A. and Regions Bank  as co-documentation agents and the lenders thereunder, incorporated herein by  reference to Neiman Marcus, Inc.’s Current Report on Form 8-K dated  July 16, 2009.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   |   | Credit Agreement dated as of October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger  Sub, Inc., The Neiman Marcus Group, Inc., the Subsidiary  Guarantors, Credit Suisse, as administrative agent and collateral agent,  Credit Suisse and Deutsche Bank Securities Inc. as joint lead arrangers, Banc  of America Securities LLC and Goldman Sachs Credit Partners L.P. as co-arrangers,  Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC  and Goldman Sachs Credit Partners L.P. as joint bookrunners, Deutsche Bank  Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as co-syndication agents and the lenders thereunder,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009. (2) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Credit Agreement dated as of October 6, 2005 as  amended and restated as of November 17, 2010, among the lenders  thereunder, Credit Suisse, as administrative agent and as collateral agent  for the lenders, Neiman Marcus, Inc., The Neiman Marcus Group, Inc.  and each subsidiary of The Neiman Marcus Group, Inc. from time to time  party thereto, incorporated herein by reference to the Company’s Current  Report on Form 8-K dated November 17, 2010. (3)                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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| 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. (1)                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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. (1)                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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. (1)                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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. (1)                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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. (1)                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17* |   | 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.                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18* |   | 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.                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19* |   | 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.                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20* |   | 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.                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21* |   | Amended and Restated Stock Option Grant Agreement  dated April 1, 2010 between Neiman Marcus, Inc. and Burton M.  Tansky incorporated herein by reference to the Company’s Current Report on  Form 8-K dated April 28, 2010.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.22* |   | 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* |   | Employment Agreement dated April 26, 2010 by and  between The Neiman Marcus Group, Inc. and Karen Katz incorporated herein  by reference to the Company’s Current Report on Form 8-K dated  April 28, 2010.                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.25  |   | 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.                                                        |

 

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| 10.26  |   | Registration Rights Agreement, dated as of  October 6, 2005, among Newton Acquisition Merger Sub, Inc., Newton  Acquisition, Inc., Newton Holding, LLC and the “Holders” identified  therein as parties thereto, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the quarter  ended January 28, 2006.                                                                                                                                                                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.27  |   | 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.                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.28  |   | Amended and Restated Credit Card Program Agreement,  dated as of September 23, 2010, by and among The Neiman Marcus  Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A. and HSB  Card Services, Inc., incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2010.  (2)                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.29  |   | Amended and Restated Servicing Agreement, dated as of  September 23, 2010, by and between The Neiman Marcus Group, Inc.  and HSBC Bank Nevada, N.A., incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2010.  (2)                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.30* |   | 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.                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.31  |   | Stockholder Agreement, dated as of May 1, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc.  and the other parties signatory thereto, incorporated herein by reference to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  May 1, 2010.                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.32* |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.33  |   | 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.                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.34  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.35* |   | 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.                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.36* |   | Amendment No. 1 effective as of January 1,  2009 to The Neiman Marcus Group, Inc. Key Employee Deferred Compensation  Plan incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.37  |   | 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.                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.38  |   | 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.                                                                                                                                                                                                                                                                                                                                          |

 

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| 10.39  |   | 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.               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.40  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.41* |   | Second Amendment to the Neiman Marcus, Inc.  Management Equity Incentive Plan effective as of November 16, 2009,  incorporated herein by reference to the Company’s Quarterly Report on  Form 10-Q for the quarter ended October 31, 2009.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.42* |   | Form of Amended and Restated Stock Option  Agreement between the Company and certain eligible key employees,  incorporated herein by reference to the Company’s Quarterly Report on  Form 10-Q for the quarter ended October 31, 2009.                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.43* |   | Form of Second Amended and Restated Stock Option  Grant Agreement between the Company and certain eligible key employees,  incorporated herein by reference to the Company’s Quarterly Report on  Form 10-Q for the quarter ended October 31, 2009.                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.44* |   | Employment Agreement dated July 22, 2010 by and  among the Company, The Neiman Marcus Group, Inc., and James E. Skinner,  incorporated herein by reference to the Company’s Current Report on  Form 8-K dated July 28, 2010.                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.45  |   | Employment Agreement dated July 22, 2010 by and  among the Company, The Neiman Marcus Group, Inc. and James J. Gold,  incorporated herein by reference to the Company’s Current Report on  Form 8-K dated July 28, 2010.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.46  |   | Amendment No. 2 to the Amended and Restated  Neiman Marcus Group, Inc. Defined Contribution Supplemental Executive  Retirement Plan dated July 17, 2010, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended  July 31, 2010.                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.47  |   | Amendment No. 1 to The Neiman Marcus  Group, Inc. Defined Contribution Supplemental Executive Retirement Plan  dated July 17, 2010, incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2010.                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 10.48* |   | Amendment to Employment Agreement effective  December 31, 2010 by and between the Company, The Neiman Marcus  Group, Inc. and Karen Katz, incorporated herein by reference to the  Company’s Current Report on Form 8-K dated December 2, 2010.                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                             |
| 32     |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. (1)                                                                                                                                                                                                      |

 

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

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934 the registrant has duly caused this report to be signed onits behalf by the undersigned hereunto duly authorized.

 

 

NEIMANMARCUS, INC.

(Registrant)

 

| **Signature**         | ** ** | **Title**                        | ** ** | **Date**              |
|-----------------------|------------|----------------------------------|------------|-----------------------|
|                  |       |                             |       |                  |
| /s/ T. Dale Stapleton |       | Senior Vice President            |       | December 7, 2010 |
| T. Dale Stapleton     |       | and Chief Accounting Officer     |       |                  |
|                  |       | (on behalf of the registrant and |       |                  |
|                  |       | as principal accounting officer) |       |                  |

 

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