Table of Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# **FORM 10-Q**

#  

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

 

### **Forthe Quarterly Period Ended May 1, 2010**

### ** **

**OR**

 

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

 

## **Commission file no. 333-133184-12**

##  

**Neiman Marcus, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

** **

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x  No  ̈

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

There were 1,013,082shares of the registrant’s common stock, par value $.01 per share, outstandingat May 1, 2010.

 

 

 

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**NEIMANMARCUS, INC.**

 

#### **INDEX**

####  

| ** **    | ** **                                                                                                              | **Page Number** |
|---------------|-------------------------------------------------------------------------------------------------------------------------|-----------------|
| Part I.  | Financial Information                                                                                                   |            |
|          |                                                                                                                    |            |
| Item 1.       | Condensed Consolidated  Balance Sheets as of May 1, 2010, August 1, 2009 and May 2,  2009                | 1               |
|          |                                                                                                                    |            |
|          | Condensed  Consolidated Statements of Operations for the Thirteen Weeks Ended  May 1, 2010 and May 2, 2009    | 2               |
|          |                                                                                                                    |            |
|          | Condensed  Consolidated Statements of Operations for the Thirty-Nine Weeks Ended  May 1, 2010 and May 2, 2009 | 3               |
|          |                                                                                                                    |            |
|          | Condensed  Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended  May 1, 2010 and May 2, 2009 | 4               |
|          |                                                                                                                    |            |
|          | Notes  to Condensed Consolidated Financial Statements                                                                   | 5               |
|          |                                                                                                                    |            |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                             | 27              |
|          |                                                                                                                    |            |
| Item 3.       | Quantitative  and Qualitative Disclosures about Market Risk                                                             | 45              |
|          |                                                                                                                    |            |
| Item 4.       | Controls and  Procedures                                                                                                | 46              |
|          |                                                                                                                    |            |
| Part II. | Other Information                                                                                                       |            |
|          |                                                                                                                    |            |
| Item 1.       | Legal Proceedings                                                                                                       | 46              |
|          |                                                                                                                    |            |
| Item 1A.      | Risk Factors                                                                                                            | 47              |
|          |                                                                                                                    |            |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                            | 55              |
|          |                                                                                                                    |            |
| Item 6.       | Exhibits                                                                                                                | 55              |
|          |                                                                                                                    |            |
| Signatures    |                                                                                                                    | 62              |

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

** **
| **(in  thousands, except shares)**                                                                                                                                                | ** ** | **May 1,********2010** | ** ** | **August 1,********2009** | ** ** | **May 2,******** 2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                        | ** ** |
| **ASSETS**                                                                                                                                                                        |       |                        |       |                           |       |                              |       |
| Current assets:                                                                                                                                                                   |       |                        |       |                           |       |                              |       |
| Cash and cash equivalents                                                                                                                                                         |       | $                           | 513,273    |                           | $          | 323,425                           |       | $ | 229,388 |   |
| Merchandise inventories                                                                                                                                                           |       | 779,376                     |       | 755,034                        |       | 865,980                           |       |
| Deferred income taxes                                                                                                                                                             |       | 19,136                      |       | 19,136                         |       | 32,659                            |       |
| Other current assets                                                                                                                                                              |       | 84,754                      |       | 123,932                        |       | 132,439                           |       |
| Total current assets                                                                                                                                                              |       | 1,396,539                   |       | 1,221,527                      |       | 1,260,466                         |       |
|                                                                                                                                                                              |       |                        |       |                           |       |                              |       |
| Property and equipment, net                                                                                                                                                       |       | 926,838                     |       | 992,715                        |       | 1,015,060                         |       |
| Goodwill and intangible assets, net                                                                                                                                               |       | 3,224,003                   |       | 3,278,947                      |       | 3,437,578                         |       |
| Other assets                                                                                                                                                                      |       | 70,635                      |       | 87,837                         |       | 69,462                            |       |
| Total assets                                                                                                                                                                      |       | $                           | 5,618,015  |                           | $          | 5,581,026                         |       | $ | 5,782,566 |   |
|                                                                                                                                                                              |       |                        |       |                           |       |                              |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                    |       |                        |       |                           |       |                              |       |
| Current liabilities:                                                                                                                                                              |       |                        |       |                           |       |                              |       |
| Accounts payable                                                                                                                                                                  |       | $                           | 203,506    |                           | $          | 233,990                           |       | $ | 158,975 |   |
| Accrued liabilities                                                                                                                                                               |       | 379,147                     |       | 302,886                        |       | 347,421                           |       |
| Other current liabilities                                                                                                                                                         |       | 34,088                      |       | 26,617                         |       | —                            |       |
| Total current liabilities                                                                                                                                                         |       | 616,741                     |       | 563,493                        |       | 506,396                           |       |
|                                                                                                                                                                              |       |                        |       |                           |       |                              |       |
| Long-term liabilities:                                                                                                                                                            |       |                        |       |                           |       |                              |       |
| Long-term debt                                                                                                                                                                    |       | 2,972,271                   |       | 2,954,221                      |       | 2,963,311                         |       |
| Deferred income taxes                                                                                                                                                             |       | 697,173                     |       | 697,810                        |       | 771,409                           |       |
| Deferred real estate credits                                                                                                                                                      |       | 96,920                      |       | 96,420                         |       | 95,140                            |       |
| Other long-term liabilities                                                                                                                                                       |       | 236,846                     |       | 350,247                        |       | 354,041                           |       |
| Total long-term liabilities                                                                                                                                                       |       | 4,003,210                   |       | 4,098,698                      |       | 4,183,901                         |       |
|                                                                                                                                                                              |       |                        |       |                           |       |                              |       |
| Common stock (par value $0.01 per share, 5,000,000  shares authorized and 1,013,082 shares issued and outstanding at May 1,  2010, August 1, 2009 and May 2, 2009) |       | 10                          |       | 10                             |       | 10                                |       |
| Additional paid-in capital                                                                                                                                                        |       | 1,433,234                   |       | 1,424,258                      |       | 1,422,600                         |       |
| Accumulated other comprehensive loss                                                                                                                                              |       | (65,274                     | )          | (104,587                       | )          | (98,028                           | )          |
| Accumulated deficit                                                                                                                                                               |       | (369,906                    | )          | (400,846                       | )          | (232,313                          | )          |
| Total shareholders’ equity                                                                                                                                                   |       | 998,064                     |       | 918,835                        |       | 1,092,269                         |       |
| Total liabilities and shareholders’ equity                                                                                                                                   |       | $                           | 5,618,015  |                           | $          | 5,581,026                         |       | $ | 5,782,566 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

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** **

**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                                                           | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009** | ** ** |
| ** **                                                                        | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                        | 895,169    |   | $ | 810,086 |   |
| Cost  of goods sold including buying and occupancy costs (excluding depreciation) |       | 553,227                  |       | 514,765 |   |
| Selling,  general and administrative expenses (excluding depreciation)            |       | 220,693                  |       | 200,515 |   |
| Income  from credit card program, net                                             |       | (17,060                  | )          | (10,494 | ) |
| Depreciation  expense                                                             |       | 34,719                   |       | 36,667 |   |
| Amortization  of intangible assets                                                |       | 13,845                   |       | 13,845 |   |
| Amortization  of favorable lease commitments                                      |       | 4,469                    |       | 4,469 |   |
|                                                                              |       |                     |       |   |   |
| Operating  earnings                                                               |       | 85,276                   |       | 50,319 |   |
|                                                                              |       |                     |       |   |   |
| Interest  expense, net                                                            |       | 59,390                   |       | 58,250 |   |
|                                                                              |       |                     |       |   |   |
| Earnings  (loss) before income taxes                                              |       | 25,886                   |       | (7,931 | ) |
|                                                                              |       |                     |       |   |   |
| Income  tax expense (benefit)                                                     |       | 7,431                    |       | (4,796 | ) |
|                                                                              |       |                     |       |   |   |
| Net  earnings (loss)                                                              |       | $                        | 18,455     |   | $ | (3,135 | ) |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                                               | ** ** | **May 1,  2010**       | ** ** | **May 2,  2009** | ** ** |
| ** **                                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                           | 2,866,430  |   | $ | 2,875,253 |   |
| Cost  of goods sold including buying and occupancy costs (excluding depreciation) |       | 1,848,936                   |       | 1,953,877 |   |
| Selling,  general and administrative expenses (excluding depreciation)            |       | 677,090                     |       | 686,959 |   |
| Income  from credit card program, net                                             |       | (46,719                     | )          | (33,682 | ) |
| Depreciation  expense                                                             |       | 104,923                     |       | 114,378 |   |
| Amortization  of intangible assets                                                |       | 41,536                      |       | 40,981 |   |
| Amortization  of favorable lease commitments                                      |       | 13,408                      |       | 13,408 |   |
| Impairment  charges                                                               |       | —                      |       | 560,159 |   |
|                                                                              |       |                        |       |   |   |
| Operating  earnings (loss)                                                        |       | 227,256                     |       | (460,827 | ) |
|                                                                              |       |                        |       |   |   |
| Interest  expense, net                                                            |       | 177,759                     |       | 174,676 |   |
|                                                                              |       |                        |       |   |   |
| Earnings  (loss) before income taxes                                              |       | 49,497                      |       | (635,503 | ) |
|                                                                              |       |                        |       |   |   |
| Income  tax expense (benefit)                                                     |       | 18,557                      |       | (135,990 | ) |
|                                                                              |       |                        |       |   |   |
| Net  earnings (loss)                                                              |       | $                           | 30,940     |   | $ | (499,513 | ) |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

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**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                                                          | ** ** | **May 1,********2010** | ** ** | **May 2,********2009** | ** ** |
| ** **                                                                                   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **CASH FLOWS - OPERATING  ACTIVITIES**                                                       |       |                        |       |   |   |
| Net earnings (loss)                                                                          |       | $                           | 30,940     |   | $ | (499,513 | ) |
| Adjustments to reconcile net earnings (loss) to net  cash provided by operating activities:  |       |                        |       |   |   |
| Depreciation and amortization expense                                                        |       | 173,890                     |       | 179,430 |   |
| Paid-in-kind interest                                                                        |       | 14,362                      |       | 20,520 |   |
| Impairment charges                                                                           |       | —                      |       | 560,159 |   |
| Deferred income taxes                                                                        |       | (26,153                     | )          | (98,357 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | 5,281                       |       | 8,021 |   |
|                                                                                         |       | 198,320                     |       | 170,260 |   |
| Changes in operating assets and liabilities:                                                 |       |                        |       |   |   |
| Merchandise inventories                                                                      |       | (24,342                     | )          | 112,064 |   |
| Other current assets                                                                         |       | 39,178                      |       | 18,693 |   |
| Other assets                                                                                 |       | 5,832                       |       | (5,485 | ) |
| Accounts payable and accrued liabilities                                                     |       | 50,521                      |       | (237,533 | ) |
| Deferred real estate credits                                                                 |       | 5,185                       |       | 14,879 |   |
| Funding of defined benefit pension plan                                                      |       | (15,000                     | )          | — |   |
| **Net cash provided by operating  activities**                                               |       | 259,694                     |       | 72,878 |   |
| ** **                                                                                   |       |                        |       |   |   |
| **CASH FLOWS — INVESTING  ACTIVITIES**                                                  |       |                        |       |   |   |
| Capital expenditures                                                                         |       | (43,083                     | )          | (81,287 | ) |
| **Net cash used for investing activities**                                                   |       | (43,083                     | )          | (81,287 | ) |
| ** **                                                                                   |       |                        |       |   |   |
| **CASH FLOWS — FINANCING  ACTIVITIES**                                                  |       |                        |       |   |   |
| Repayment of borrowings under senior term loan  facility                                     |       | (26,617                     | )          | — |   |
| Repayment of borrowings                                                                      |       | (146                        | )          | (1,383 | ) |
| **Net cash used for financing  activities**                                                  |       | (26,763                     | )          | (1,383 | ) |
| ** **                                                                                   |       |                        |       |   |   |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                        |       |   |   |
| Increase (decrease) during the period                                                        |       | 189,848                     |       | (9,792 | ) |
| Beginning balance                                                                            |       | 323,425                     |       | 239,180 |   |
| Ending balance                                                                               |       | $                           | 513,273    |   | $ | 229,388 |   |
|                                                                                         |       |                        |       |   |   |
| **Supplemental Schedule of Cash  Flow Information**                                          |       |                        |       |   |   |
|                                                                                         |       |                        |       |   |   |
| Cash paid during the period for:                                                             |       |                        |       |   |   |
| Interest                                                                                     |       | $                           | 155,909    |   | $ | 161,899 |   |
| Income taxes                                                                                 |       | $                           | 3,816      |   | $ | 2,644 |   |
| Noncash activities:                                                                          |       |                        |       |   |   |
| Adjustments to goodwill related to pre-acquisition  tax contingencies                        |       | —                      |       | $ | (17,312 | ) |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

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**NEIMANMARCUS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.**              Basis of Presentation

** **

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

 

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

 

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

 

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

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the third quarter of fiscal year 2010 relate to thethirteen weeks ended May 1, 2010. All references to the third quarter of fiscal year 2009 relate to thethirteen weeks ended May 2, 2009. All references to year-to-date fiscal 2010 relate to the thirty-nineweeks ended May 1, 2010.  Allreferences to year-to-date fiscal 2009 relate to the thirty-nine weeks ended May 2,2009.

 

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

 

***Use of Estimates.***  We are required tomake estimates and assumptions about future events in preparing financialstatements in conformity with generally accepted accounting principles.  These estimates and assumptions affect theamounts of assets, liabilities, revenues and expenses and the disclosure ofgain and loss contingencies at the date of the unaudited condensed consolidatedfinancial statements.  While we believethat our past estimates and assumptions have been materially accurate, ourcurrent estimates are subject to change if different assumptions as to the outcomeof 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 to be 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 used in preparing the accompanying unaudited condensed consolidatedfinancial statements.

** **

We believe the followingcritical accounting policies, among others, encompass the more significantjudgments and estimates used in the 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;

 

·                  Determination of impairment of long-livedassets;

 

·                  Recognitionof advertising and catalog costs;

 

·                  Measurementof liabilities related to our loyalty programs;

 

·                  Recognitionof income taxes; and

 

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·                  Measurement of accruals for generalliability, workers’ compensation and health insurance claims and pension andpostretirement health care benefits.

 

***FairValue Measurements.***  Under generally acceptedaccounting principles, we are required 1) to measure certain assets andliabilities at fair value or 2) to disclose the fair value of certain assetsand liabilities recorded at cost. Pursuant to these fair value measurement and disclosure requirements,fair value is defined as the price that would be received upon sale of an assetor paid upon transfer of a liability in an orderly transaction between marketparticipants at the measurement date and in the principal or most advantageousmarket for that asset or liability. The fair value is calculated based onassumptions that market participants would use in pricing the asset orliability, not on assumptions specific to the entity. In addition, the fairvalue of liabilities includes consideration of non-performance risk, includingour own credit risk.  Each fair valuemeasurement is reported in one of the following three levels:

 

·                  Level 1 — valuationinputs are based upon unadjusted quoted prices for identical instruments tradedin active markets.

 

·                  Level 2 — valuationinputs are based upon quoted prices for similar instruments in active markets,quoted prices for identical or similar instruments in markets that are notactive, and model-based valuation techniques for which all significantassumptions are observable in the market or can be corroborated by observablemarket data for substantially the full term of the assets or liabilities.

 

·                  Level 3 — valuationinputs are unobservable and typically reflect management’s estimates ofassumptions that market participants would use in pricing the asset orliability. The fair values are therefore determined using model-basedtechniques that include option pricing models, discounted cash flow models andsimilar techniques.

 

At May 1, 2010, August 1,2009 and May 2, 2009, the fair values of cash and cash equivalents,receivables and accounts payable approximated their carrying values due to theshort-term nature of these instruments. See Notes 3 and 4 to the condensed consolidated financial statements forthe estimated fair values of our debt and other financial instruments.

 

***RecentAccounting Pronouncements. ***In December 2007, the FASB issuedguidance that addresses the recognition and accounting for identifiable assetsacquired, liabilities assumed and non-controlling interests in businesscombinations.  In addition, this guidancechanges the accounting treatment for certain acquisition-related items,including requirements to expense acquisition-related costs as incurred,expense restructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a businesscombination as a component of tax expense. These rules are to be applied prospectively to businesscombinations for which the acquisition date is on or after December 15,2008.  Generally, the effect of thisguidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertaintiesremaining as of May 1, 2010 related to the Acquisition will be subject tothe provisions of this guidance. As to the future resolution of these taxuncertainties, we do not believe these requirements will have a material impacton our future financial statements.

 

In February 2008,the FASB issued guidance that delays the effective date of fair valuedisclosures required for all nonfinancial assets, such as intangible assets andgoodwill, and nonfinancial liabilities that are recognized or disclosed at fairvalue in the financial statements on a nonrecurring basis.  We implemented this guidance in thepreparation of our condensed consolidated financial statements for the first quarterof fiscal year 2010, however, no additional disclosures were required.

 

In December 2008,the FASB issued guidance related to an employer’s disclosures about plan assetsof a defined benefit pension or other postretirement plan.  This guidance is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have evaluated the impact ofadopting the disclosure requirements and have determined that the adoption ofthese disclosure requirements will expand the disclosures regarding plan assetsin our consolidated financial statements for the fiscal year ending July 31,2010.

 

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

 

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

 

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ended October 31,2009.  The adoption of this guidance didnot have an impact on our consolidated financial statements.

** **

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

 
| **(in  thousands)**                  | ** ** | **May 1,********2010** | ** ** | **August 1,********2009** | ** ** | **May 2,********2009** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|-----------------------------|------------|
|                                 |       |                        |       |                           |       |                        |       |
| Goodwill                             |       | $                           | 1,263,433  |                           | $          | 1,263,433                   |       | $ | 1,302,787 |   |
| Tradenames                           |       | 1,234,457                   |       | 1,235,290                      |       | 1,336,530                   |       |
| Customer  lists, net                 |       | 327,957                     |       | 368,660                        |       | 382,228                     |       |
| Favorable  lease commitments, net    |       | 398,156                     |       | 411,564                        |       | 416,033                     |       |
| Goodwill  and intangible assets, net |       | $                           | 3,224,003  |                           | $          | 3,278,947                   |       | $ | 3,437,578 |   |

 

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

 

***IntangibleAssets Subject to Amortization.***  Customer listsand amortizable tradenames are amortized using the straight-line method overtheir estimated useful lives, ranging from 5 to 24 years (weighted average lifeof 13 years).  Favorable leasecommitments are amortized straight-line over the remaining lives of the leases,ranging from 6 to 49 years (weighted average life of 33 years).  Total estimated amortization of allacquisition-related intangible assets for the next five fiscal years iscurrently estimated as follows (in thousands):

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

 

***Impairmentof Long-Lived Assets.**** *We assess the recoverability of indefinite-livedassets and goodwill in the fourth quarter of each year and upon the occurrenceof certain events.  In connection withthe preparation of our condensed consolidated financial statements for thesecond quarter of fiscal year 2009, we concluded that it was appropriate totest our long-lived assets for recoverability in light of the significantdeclines in the domestic and global financial markets during the first andsecond quarters of fiscal year 2009. Utilizing our then-current operatingforecasts to estimate the fair values of our Neiman Marcus stores, BergdorfGoodman stores and Direct Marketing operation, we determined certain of ourproperty and equipment, tradenames and goodwill to be impaired and recordedimpairment charges in the second quarter of fiscal year 2009 aggregating $560.1million.

 

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

 

Total impairment chargesrecorded in fiscal year 2009 were as follows:

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

 

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** **

**3.**              Long-term Debt

** **

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

 
| **(in  thousands)**                                         | ** ** | **Interest********Rate** | ** ** | **May 1,******** 2010** | ** ** | **August 1,********2009** | ** ** | **May 2,********2009** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
|                                                        |       |                     |       |                              |       |                           |       |                        |       |
| Senior  Secured Term Loan Facility                          |       | variable                 |       | $                                 | 1,598,383  |                           | $          | 1,625,000                   |       | $ | 1,625,000 |   |
| 2028  Debentures                                            |       | 7.125%                   |       | 121,443                           |       | 121,297                        |       | 121,248                     |       |
| Senior  Notes                                               |       | 9.0%/9.75%               |       | 752,445                           |       | 734,541                        |       | 717,063                     |       |
| Senior  Subordinated Notes                                  |       | 10.375%                  |       | 500,000                           |       | 500,000                        |       | 500,000                     |       |
| Total  debt                                                 |       |                     |       | 2,972,271                         |       | 2,980,838                      |       | 2,963,311                   |       |
| Less:  current portion of Senior Secured Term Loan Facility |       |                     |       | —                            |       | (26,617                        | )          | —                      |       |
| Long-term  debt                                             |       |                     |       | $                                 | 2,972,271  |                           | $          | 2,954,221                   |       | $ | 2,963,311 |   |

 

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

 

The Asset-Based RevolvingCredit Facility provides committed financing of up to $600.0 million, subjectto a borrowing base.  The Asset-BasedRevolving Credit Facility includes borrowing capacity available for letters ofcredit and for borrowings on same-day notice. The borrowing base for the Asset-Based Revolving Credit Facility isequal to at any time the sum of (a) the lesser of (i) 80% of eligibleinventory (valued at the lower of cost or market value) and (ii) 85% ofthe net orderly liquidation value of eligible inventory, and (b) 85% ofthe amounts owed by credit card processors in respect of eligible credit cardaccounts constituting proceeds arising from the sale or disposition ofinventory, less certain reserves. Through April 30, 2011, NMG is required to maintain excessavailability under the terms of the Asset-Based Revolving Credit Facility of atleast the greater of (a) 10% of the lesser of (i) the aggregaterevolving commitments and (ii) the borrowing base and (b) $50million.  After April 30, 2011, if at any time, excess availabilityis less than the greater of (a) 15% of the lesser of (i) theaggregate revolving commitments and (ii) the borrowing base and (b) $60million, NMG will be required to maintain a pro forma ratio of consolidatedEBITDA to consolidated Fixed Charges (as such terms are defined in the creditagreement) of at least 1.1 to 1.0.  On May 1, 2010, NMG had noborrowings outstanding under this facility, $31.1 million of outstandingletters of credit and $486.2 million of unused borrowing availability.

 

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

 

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

 

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

 

If at any time theaggregate amount of outstanding revolving loans, unreimbursed letter of credit drawingsand undrawn letters of credit under the Asset-Based Revolving Credit Facilityexceeds the lesser of (a) the commitment amount and (b) the borrowingbase (including as a result of reductions to the borrowing base that wouldresult from certain non-ordinary course sales of inventory with a value inexcess of $25 million, if applicable), NMG will be required to repayoutstanding loans or cash collateralize letters of credit in an aggregateamount equal to such excess, with no reduction of the commitment amount. In addition, if at any time the aggregate amount of outstanding revolving loansand incremental term loans, unreimbursed letter of credit drawings and undrawnletters of credit under the Asset-Based Revolving Credit Facility exceeds the reportedvalue of inventory owned by the borrowers and guarantors, NMG will be requiredto eliminate such excess within the earlier of 30 days from such occurrence or5 business days from the first date on or after such occurrence at which excessavailability is less than $75 million.  If (a) the amount availableunder the Asset-Based Revolving Credit Facility is less than the greaterof (i) 20% of the lesser of (A) the aggregate revolving commitmentsand (B) the borrowing base and (ii) $75 million or (b) an eventof default has occurred, NMG will be required to repay outstanding loans andcash collateralize letters of credit with the cash NMG would then be requiredto deposit daily in a collection account maintained with the agent under theAsset-Based Revolving Credit Facility.

 

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

 

All obligations under theAsset-Based Revolving Credit Facility are guaranteed by the Company and certainof NMG’s existing and future domestic subsidiaries.  All obligationsunder NMG’s Asset-Based Revolving Credit Facility, and the guarantees of thoseobligations, are secured, subject to certain significant exceptions, bysubstantially all of the assets of the Company, NMG and the subsidiaries thathave guaranteed the Asset-Based Revolving Credit Facility (subsidiaryguarantors). As of May 1, 2010, there were no assets or liabilities heldby non-guarantor subsidiaries.

 

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

 

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

 

***SeniorSecured Term Loan Facility.***  In October 2005,NMG entered into a credit agreement and related security and other agreementsfor a $1,975.0 million Senior Secured Term Loan Facility.  At May 1, 2010, the outstanding balanceunder the Senior Secured Term Loan Facility was $1,598.4 million.  The principal amount of the loans outstandingis due and payable in full on April 6, 2013.

 

At May 1, 2010, borrowings under the Senior Secured Term LoanFacility bore interest at a rate per annum equal to, at NMG’s option, either (a) abase rate determined by reference to the higher of (1) the prime rate ofCredit Suisse and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. The interest rateon the outstanding borrowings pursuant to the Senior Secured Term Loan Facilitywas 2.25% at May 1, 2010.  Theapplicable margin is subject to adjustment based on contractually defined debtcoverage ratios.  At May 1, 2010,the applicable margin with respect to base rate borrowings was 1.00% and theapplicable margin with respect to LIBOR borrowings was 2.00%.

 

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The credit agreementgoverning the Senior Secured Term Loan Facility requires NMG to prepayoutstanding term loans with 50% (which percentage will be reduced to 25% if NMG’stotal leverage ratio is less than a specified ratio and will be reduced to 0%if NMG’s total leverage ratio is less than a specified ratio) of its annualexcess cash flow (as defined in the credit agreement). For fiscal year 2009,NMG was required to prepay $26.6 million of outstanding term loans in the firstquarter of fiscal year 2010 pursuant to the annual excess cash flowrequirements.  If a change of control (asdefined in the credit agreement) occurs, NMG will be required to offer toprepay all outstanding term loans, at a prepayment price equal to 101% of theprincipal amount to be prepaid, plus accrued and unpaid interest to the date ofprepayment. NMG also must offer to prepay outstanding term loans at 100% of theprincipal amount to be prepaid, plus accrued and unpaid interest, with theproceeds of certain asset sales under certain circumstances.

 

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

 

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

 

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

 

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

 

The fair value of theSenior Secured Term Loan Facility was approximately $1,530.5 million at May 1,2010, $1,332.5 million at August 1, 2009 and $1,113.1 million at May 2,2009 based on prevailing market rates at this time.

 

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

 

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

 

The fair value of the2028 Debentures was approximately $115.6 million at May 1, 2010, $95.6million at August 1, 2009 and $68.8 million at May 2, 2009 based onquoted market prices.

 

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

 

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

 

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

 

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

 

The Senior Notes arefully and unconditionally guaranteed, on a joint and several unsecured, seniorbasis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’sobligations under its Senior Secured Credit Facilities and by the Company. TheSenior Notes and the guarantees thereof are NMG’s and the guarantors’unsecured, senior obligations and rank (i) equal in the right of paymentwith all of NMG’s and the guarantors’ existing and future senior indebtedness,including any borrowings under NMG’s Senior Secured Credit Facilities and theguarantees thereof and NMG’s 2028 Debentures; and (ii) senior to all ofNMG’s and its guarantors’ existing and future subordinated indebtedness,including the Senior Subordinated Notes due 2015 and the guarantees thereof.The Senior Notes also are effectively junior in priority to NMG’s and itsguarantors’ obligations under all secured indebtedness, including NMG’s SeniorSecured Credit Facilities, the 2028 Debentures, and any other securedobligations of NMG, in each case, to the extent of the value of the assetssecuring such obligations. In addition, the Senior 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 tomake any mandatory redemption or sinking fund payments with respect to theSenior Notes.  The indenture governingthe Senior Notes contains a number of customary negative covenants and events ofdefault, including a cross-default provision in respect of any otherindebtedness that has an aggregate principal amount exceeding $50 million,which, if any of them occurs, would permit or require the principal, premium,if any, interest and any other monetary obligations on all outstanding SeniorNotes to be due and payable immediately.

 

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

 

The fair value of NMG’sSenior Notes was approximately $771.3 million at May 1, 2010, $539.9million at August 1, 2009 and $394.4 million at May 2, 2009 based onquoted market prices.

 

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

 

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

 

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

 

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

 

The fair value of NMG’sSenior Subordinated Notes was approximately $526.9 million at May 1, 2010,$355.0 million at August 1, 2009 and $275.0 million at May 2, 2009based on quoted market prices.

 

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***Maturitiesof Long-Term Debt.***  At May 1, 2010, annualmaturities of long-term debt during the next five fiscal years and thereafterare as follows (in millions):

 
| 2011       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2012       |   | —  |   |
| 2013       |   | 1,598.4 |   |
| 2014       |   | —  |   |
| 2015       |   | —  |   |
| Thereafter |   | 1,373.9 |   |

 

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

 

***Interestexpense.***  The significant components of interestexpense are as follows:

 
| ** **                         | ** ** | **Thirteen weeks ended**    | ** ** | **Thirty-Nine weeks ended** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(in thousands)**                 | ** ** | **May 1,********2010** | ** ** | **May 2,********2009** | ** ** | **May 1,********2010** | ** ** | **May 2,********2009** | ** ** |
|                               |       |                        |       |                        |       |   |   |   |   |
| Senior  Secured Term Loan Facility |       | $                           | 20,816     |                        | $          | 21,903 |   | $ | 62,388 |   | $ | 69,774 |   |
| 2028  Debentures                   |       | 2,227                       |       | 2,227                       |       | 6,660 |   | 6,680 |   |
| Senior  Notes                      |       | 17,116                      |       | 17,332                      |       | 51,385 |   | 48,793 |   |
| Senior  Subordinated Notes         |       | 12,969                      |       | 12,969                      |       | 38,764 |   | 39,060 |   |
| Amortization  of debt issue costs  |       | 4,683                       |       | 3,554                       |       | 14,023 |   | 10,663 |   |
| Other                              |       | 1,795                       |       | 867                         |       | 5,277 |   | 2,558 |   |
| Total  interest expense            |       | 59,606                      |       | 58,852                      |       | 178,497 |   | 177,528 |   |
| Less:                              |       |                        |       |                        |       |   |   |   |   |
| Interest  income                   |       | 135                         |       | 385                         |       | 463 |   | 2,156 |   |
| Capitalized  interest              |       | 81                          |       | 217                         |       | 275 |   | 696 |   |
| Interest  expense, net             |       | $                           | 59,390     |                        | $          | 58,250 |   | $ | 177,759 |   | $ | 174,676 |   |

 

**4.**              Derivative Financial Instruments

** **

***InterestRate Swaps. ***In connection with the Acquisition, weobtained $2,575.0 million of floating rate debt agreements, of which $2,125.0million was outstanding at the Acquisition date and $1,598.4 million isoutstanding at May 1, 2010. Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rateinterest commitments through the expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.891% to 6.983% per quarter through2010 and result in an average fixed rate of 6.945%.

 

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

 

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

 

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

 

At each balance sheetdate, the interest rate caps are recorded at estimated fair value.  Changes in the fair value of the cap areexpected to be highly effective in offsetting the unpredictability in expectedfuture cash flows on floating rate indebtedness attributable to fluctuations inLIBOR interest rates above 2.50%. Unrealized gains and losses on the outstanding balances of the interestrate caps are recorded as a component of accumulated other comprehensiveloss.  Gains and losses realized at thetime of our quarterly interest payments due to the expiration of applicableportions of the interest rate caps are reclassified to interest expense.

 

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

 
| **(in  thousands)**                                            | ** ** | **May 1,  2010** | ** ** | **August 1,  2009** | ** ** | **May 2,  2009** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-----------------------|------------|
|                                                           |       |                  |       |                     |       |                  |       |
| Interest  rate caps (included in other long-term assets)       |       | $                     | 3,797      |                     | $          | —                |       | $ | — |   |
|                                                           |       |                  |       |                     |       |                  |       |
| Interest  rate swaps (included in other current liabilities)   |       | $                     | (34,088    | )                        | $          | —                |       | $ | — |   |
|                                                           |       |                  |       |                     |       |                  |       |
| Interest  rate swaps (included in other long-term liabilities) |       | $                     | —     |                     | $          | (57,750               | )          | $ | (61,075 | ) |
|                                                           |       |                  |       |                     |       |                  |       |
| Accumulated  other comprehensive loss, net of taxes            |       | $                     | 22,656     |                     | $          | 35,508                |       | $ | 37,647 |   |

 

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

 
| ** **                                                           | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                                  | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009**       | ** ** | **May 1,  2010** | ** ** | **May 2,  2009** | ** ** |
|                                                                 |       |                     |       |                        |       |   |   |   |   |
| Realized  hedging losses — included in interest expense, net    |       | $                        | 11,713     |                        | $          | 8,103 |   | $ | 34,234 |   | $ | 19,181 |   |
|                                                                 |       |                     |       |                        |       |   |   |   |   |
| Ineffective  hedging losses — included in interest expense, net |       | $                        | 224        |                        | $          | 177 |   | $ | 653 |   | $ | 469 |   |

 

The amount of lossesrecorded in other comprehensive loss at May 1, 2010 that is expected to bereclassified into interest expense in the next twelve months, if interest ratesremain unchanged, is approximately $34.1 million.

 

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**5.**              Employee Benefit Plans

** **

***Descriptionof Benefit Plans.***  We sponsor a defined benefitpension plan (Pension Plan) and an unfunded supplemental executive retirementplan (SERP Plan) which provides certain employees additional pension benefits.Benefits under both plans are based on the employees’ years of service andcompensation over defined periods of employment.  We froze benefits offered to a significantportion of participating employees under our Pension Plan and SERP Planeffective December 31, 2007.  In thethird quarter of fiscal year 2010, we froze benefits offered to all remainingemployees under our Pension Plan and SERP Plan. Retirees and active employees hired prior to March 1, 1989 areeligible for certain limited postretirement health care benefits (PostretirementPlan) if they meet certain service and minimum age requirements.

 

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

 

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

 
| **(in  thousands)**                       | ** ** | **May 1,********2010** | ** ** | **August 1,********2009** | ** ** | **May 2,********2009** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                  | ** ** |
| Pension  Plan                             |       | $                           | 107,571    |                           | $          | 156,001                     |       | $ | 155,171 |   |
| SERP  Plan                                |       | 87,685                      |       | 92,152                         |       | 88,813                      |       |
| Postretirement  Plan                      |       | 17,748                      |       | 17,920                         |       | 20,329                      |       |
|                                      |       | 213,004                     |       | 266,073                        |       | 264,313                     |       |
| Less:  current portion                    |       | (5,069                      | )          | (5,069                         | )          | (4,165                      | )          |
| Long-term  portion of benefit obligations |       | $                           | 207,935    |                           | $          | 261,004                     |       | $ | 260,148 |   |

 

In connection with theactions taken in the third quarter of fiscal year 2010 to freeze benefits toall remaining participants in the Pension Plan and SERP Plan, we remeasuredboth our plan assets and benefit obligations during the third quarter of fiscalyear 2010 and recorded the following adjustments:

 

·                  we decreased our recorded liability for projected benefit obligationspayable by the Pension Plan by $23.3 million and by the SERP Plan by $1.2million to equal their unfunded status as of March 31, 2010.  The $23.3 million decrease in our PensionPlan was driven by an increase in the fair value of our pension plan assets andan increase in our discount rate from 5.9% at August 1, 2009 to 6.0% at March 31,2010; and

 

·                  we further reduced our recorded liabilities for projected benefitobligations payable by the Pension Plan by $16.6 million and by the SERP Planby $8.4 million to reflect the impact of freezing benefits provided under theseplans as of July 31, 2010.  Of theaggregate gain of $25.0 million, $23.5 million was recorded as a reduction ofaccumulated other comprehensive loss and $1.5 million was recognized as acurtailment gain.

 

As of May 1, 2010,we have $42.6 million (net of taxes of $27.7 million) of adjustments to ourbenefit obligations recorded as increases to accumulated other comprehensiveloss.

 

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

 
| ** **                              | ** ** | **Thirteen weeks ended**    | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                     | ** ** | **May 1,********2010** | ** ** | **May 2,********2009** | ** ** | **May 1,********2010** | ** ** | **May 2,********2009** | ** ** |
| Pension Plan:                           |       |                        |       |                        |       |   |   |   |   |
| Service cost                            |       | $                           | 1,394      |                        | $          | 1,592 |   | $ | 4,251 |   | $ | 4,467 |   |
| Interest  cost                          |       | 6,182                       |       | 6,195                       |       | 18,840 |   | 18,165 |   |
| Expected  return on plan assets         |       | (6,522                      | )          | (6,584                      | )          | (19,447 | ) | (19,464 | ) |
| Net  amortization of losses             |       | 188                         |       | —                      |       | 753 |   | — |   |
| Pension  Plan expense                   |       | $                           | 1,242      |                        | $          | 1,203 |   | $ | 4,397 |   | $ | 3,168 |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| SERP  Plan:                             |       |                        |       |                        |       |   |   |   |   |
| Service  cost                           |       | $                           | 166        |                        | $          | 181 |   | $ | 508 |   | $ | 507 |   |
| Interest  cost                          |       | 1,324                       |       | 1,337                       |       | 4,079 |   | 3,975 |   |
| SERP  Plan expense                      |       | $                           | 1,490      |                        | $          | 1,518 |   | $ | 4,587 |   | $ | 4,482 |   |
| Curtailment  gain                       |       | $                           | 1,479      |                        | $          | — |   | $ | 1,479 |   | $ | — |   |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Postretirement  Plan:                   |       |                        |       |                        |       |   |   |   |   |
| Service  cost                           |       | $                           | 18         |                        | $          | 23 |   | $ | 54 |   | $ | 69 |   |
| Interest  cost                          |       | 254                         |       | 336                         |       | 763 |   | 1,008 |   |
| Net  amortization of prior service cost |       | (172                        | )          | —                      |       | (515 | ) | — |   |
| Net  amortization of losses             |       | 90                          |       | 70                          |       | 269 |   | 211 |   |
| Postretirement  Plan expense            |       | $                           | 190        |                        | $          | 429 |   | $ | 571 |   | $ | 1,288 |   |

 

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

 

**6.**              Income Taxes

** **

Our effective income taxrate for the third quarter of fiscal year 2010 was 28.7% compared to 60.5% forthe third quarter of fiscal year 2009. Our effective income tax rate for year-to-date fiscal 2010 was 37.5%compared to 21.4% for year-to-date fiscal 2009. No income tax benefit exists related to the $291.1 million of goodwillimpairment charges recorded in the second quarter of fiscal year 2009.  Excluding the impact of the goodwillimpairment charges, our effective income tax rate was 39.5% for year-to-datefiscal 2009.  Changes in our effectivetax rates for the third quarter and year-to-date fiscal 2010 periods comparedto the corresponding periods in fiscal year 2009 are primarily attributable tothe relative significance of non-taxable income and non-deductible expenses toour estimated taxable income in the current year.  In addition, our effective income tax ratefor the third quarter of fiscal year 2009 was favorably impacted by a taxbenefit of $1.3 million as a result of the completion of the IRS examination offiscal years 2005 and 2006.

 

At May 1, 2010, thegross amount of unrecognized tax benefits was $6.8 million, all of which wouldimpact our effective tax rate, if recognized. We classify interest and penalties as a component of income tax expense(benefit) and our liability for accrued interest and penalties was $6.2 millionas of May 1, 2010.

 

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

 

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The IRS is examining ourfederal tax return for fiscal year 2007. We believe our recorded tax liabilities as of May 1, 2010 aresufficient to cover any potential assessments to be made by the IRS upon thecompletion of their examination. We will continue to monitor the progress ofthe IRS examination and review our recorded tax liabilities for potential auditassessments.  With respect to state andlocal jurisdictions, with limited exceptions, the Company and its subsidiariesare no longer subject to income tax audits for fiscal years before 2005.  We believe it is reasonably possible thatadditional adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 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 consolidated financialstatements.

 

**7.**              Stock-Based Compensation

** **

The Company has approvedequity-based management arrangements which authorize equity awards to begranted to certain management employees for up to 87,992 shares of the commonstock of the Company.  Options generallyvest over four to five years and expire six to eight years from the date ofgrant.

 

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

 

***StockOption Modification.***  In the second quarter of fiscalyear 2010, the Compensation Committee approved 1) a tender offer for outstandingAccreting Options to purchase 26,614 shares (Eligible Options), 2) theextension 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 extension of the exercise term with respect to Fixed PriceOptions to purchase 7,269 shares to October 6, 2015 and 2) the repricingof Accreting Options to purchase 8,502 shares. 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 have resulted in the exercise prices for our prioroptions to be in excess of the estimated fair value of our common stock.

 

In connection with themodifications of the Accreting Options, option holders were allowed to tendertheir Eligible Options for new options at an exchange rate of 1.5 EligibleOptions to 1.0 new option.  The newoptions issued 1) have an initial exercise price of $1,000 per share whichexercise price will escalate at a 10% compound rate per year through the fourthanniversary of the grant date, 2) vest over four years and 3) generally expireeight years after the grant date.  Thetender offer was completed in December 2009 with the tender of allEligible Options and the issuance of 17,743 new options.  The modification completed in April 2010resulted in the tender of Eligible Options for the purchase of 8,502 shares andthe issuance of 5,668 new options.

 

In connection with theModification Transactions, we incurred additional compensation chargesaggregating $1.8 million in the second quarter of fiscal year 2010 and $3.4million in the third quarter of fiscal year 2010 to recognize the excess of thepost-modification fair value of vested options over the pre-modification fairvalue of such options.

 

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

 
| ** **                            | ** ** | **May 1, 2010** | ** ** | **August 1, 2009**                  | ** ** | **May 2, 2009** | ** ** |
|---------------------------------------|------------|----------------------|------------|------------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **Shares**           | ** ** | **Weighted   Average   Exercise  Price** | ** ** | **Shares**           | ** ** | **Weighted   Average   Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted   Average   Exercise  Price** | ** ** |
| Outstanding  at beginning of year     |       | 79,399               |       | $                                        | 1,585      |                 | 83,147     |   | $ | 1,507 |   | 83,147 |   | $ | 1,507 |   |
| Granted                               |       | 31,579               |       | 1,019                                    |       | —               |       | — |   | — |   | — |   |
| Exercised                             |       | —               |       | —                                   |       | (855                 | )          | 1,684 |   | (855 | ) | 1,684 |   |
| Cancelled                             |       | (36,494              | )          | 2,132                                    |       | —               |       | — |   | — |   | — |   |
| Forfeited                             |       | (3,688               | )          | 1,587                                    |       | (2,893               | )          | 1,617 |   | (2,893 | ) | 1,617 |   |
| Outstanding  at end of period         |       | 70,796               |       | $                                        | 1,147      |                 | 79,399     |   | $ | 1,585 |   | 79,399 |   | $ | 1,585 |   |
| Options  exercisable at end of period |       | 36,785               |       | $                                        | 1,230      |                 | 60,857     |   | $ | 1,542 |   | 58,195 |   | $ | 1,534 |   |

 

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At May 1, 2010,Accreting Options were outstanding for 26,309 shares and Fixed Price Optionswere outstanding for 44,487 shares.

 

***GrantDate Fair Value of Stock Options.***  All grants ofstock options have an exercise price equaling or exceeding the fair marketvalue of our common stock on the date of grant. Because we are privately held and there is no public market for ourcommon stock, the fair market value of our common stock is determined by ourCompensation Committee at the time option grants are awarded (Level 3determination of fair value).  Indetermining the fair value of our common stock, the Compensation Committee considerssuch factors as the Company’s actual and projected financial results, theprincipal amount of the Company’s indebtedness, valuations of the Companyperformed by third parties and other factors it believes are material to thevaluation process.

 

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

 
| ** **                          | ** ** | **Options Issued in Connection with  Modification Transactions** | ** ** | **Other Grants**       | ** ** |
|-------------------------------------|------------|------------------------------------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **Fixed Price  Options**                                         | ** ** | **Accreting  Options** | ** ** | **Fixed Price  Options** | ** ** | **Accreting  Options** | ** ** |
| Options  Granted                    |       | 1,378                                                            |       | 23,411                 |       | 3,395 |   | 3,395 |   |
| Exercise  Price at May 1, 2010 |       | $                                                                | 1,445      |                   | $          | 1,000 |   | $ | 1,000 |   | $ | 1,000 |   |
| Term  in Years                      |       | 8                                                                |       | 8                      |       | 8 |   | 8 |   |
| Volatility                          |       | 53.4                                                             | %          | 53.8                   | %          | 53.4 | % | 53.4 | % |
| Risk-Free  Rate                     |       | 3.3                                                              | %          | 3.1                    | %          | 3.3 | % | 3.3 | % |
| Dividend  Yield                     |       | —                                                           |       | —                 |       | — |   | — |   |
| Fair  Value                         |       | $                                                                | 465        |                   | $          | 439 |   | $ | 541 |   | $ | 462 |   |

 

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

 

We recognize compensationexpense for stock options on a straight-line basis over the vestingperiod.  Excluding the compensationcharges recorded in connection with the Modification Transactions, werecognized non-cash stock compensation expense of $3.8 million inyear-to-date fiscal 2010 and $4.3 million in year-to-date fiscal 2009, which isincluded in selling, general and administrative expenses.  At May 1, 2010, unearned non-cashstock-based compensation that we expect to recognize as expense through fiscalyear 2015 aggregates approximately $6.5 million.

 

**8.**              Transactions with Sponsors

** **

Pursuant to a managementservices agreement with affiliates of the Sponsors, and in exchange foron-going consulting and management advisory services that are provided to us bythe Sponsors and their affiliates, affiliates of the Sponsors receive anaggregate annual management fee equal to the lesser of (i) 0.25% of ourconsolidated annual revenues or (ii) $10 million. Affiliates of theSponsors also receive reimbursement for out-of-pocket expenses incurred by themor their affiliates in connection with services provided pursuant to theagreement. These management fees are payable quarterly in arrears.  We recorded management fees of $7.2 million duringyear-to-date fiscal 2010 and $7.2 million during year-to-date fiscal 2009,which are included in selling, general and administrative expenses in thecondensed consolidated statements of operations.

 

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

 

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

** **

In June 2005, weentered into a marketing and servicing alliance with HSBC.  Pursuant to the agreement with HSBC (ProgramAgreement), HSBC offers credit cards and non-card payment plans and bearssubstantially all credit risk with respect to sales transacted on the cardsbearing our brands. We receive ongoing payments from HSBC related to creditcard sales and 

 

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compensation formarketing and servicing activities (HSBC Program Income).  We recognize HSBC Program Income when earned.

 

The Program Agreement, asamended, provides for 1) the allocation between HSBC and NMG of additionalincome, if any, to be generated from the credit card program as a result ofcertain changes made to the terms of credit extended to our customers since theinception of the Program Agreement and 2) the allocation of certain credit cardlosses between HSBC and NMG.  Ourestimated net liability to HSBC aggregated $3.5 million as of August 1,2009 and $7.4 million as of May 2, 2009 while our estimated net receivablefrom HSBC at May 1, 2010 was $3.5 million.

 

The Program Agreementexpires in July 2010.  We arecurrently in negotiations with HSBC with respect to a replacement to theProgram Agreement.  Based upon currentmarket conditions, we believe the future income to the Company pursuant to anyreplacement arrangement will be lower than the current HSBC Program Incomeearned pursuant to the Program Agreement and that a higher portion of suchincome will be based upon the future performance of the credit card portfolio.

 

**10.**       Commitmentsand Contingencies

** **

***Long-termIncentive Plan.***  The Company has a long-term incentive plan(Long-term Incentive Plan) that provides for a cash incentive payable tocertain employees upon a change of control, as defined, subject to theattainment of certain performance objectives. Performance objectives and targets are based on cumulative EBITDApercentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performanceperiod will be credited to a book account and will earn interest at acontractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% ofour total outstanding common stock.  Asof May 1, 2010, the vested participant balance in the Long-Term IncentivePlan aggregated $5.1 million.

 

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

 

***Litigation.***  On April 30,2010, a Class Action Complaint for Injunction and Equitable Relief wasfiled in the United States District Court for the Central District ofCalifornia by Sheila Monjazeb, individually and on behalf of other members ofthe general public similarly situated, against the Company, Newton Holding,LLC, TPG Capital, L.P. and Warburg Pincus, LLC. Plaintiff alleges that the Company and other defendants have 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.  Plaintiff seeks certification of the case asa class action, reimbursement for past wages and temporary, preliminary andpermanent injunctive relief preventing defendants from allegedly continuing toviolate the laws cited in the Complaint. The Company intends to vigorously defend its interests in this matter.

 

We are currently involvedin various other legal actions and proceedings that arose in the ordinarycourse of business. We believe 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.

 

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**11.**       AccumulatedOther Comprehensive Loss

** **

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

 
| **(in  thousands)**                         | ** ** | **May 1,  2010** | ** ** | **August 1,********2009** | ** ** | **May 2,  2009** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|--------------------------------|------------|-----------------------|------------|
|                                        |       |                  |       |                           |       |                  |       |
| Unrealized  loss on financial instruments   |       | $                     | (22,656    | )                              | $          | (35,508               | )          | $ | (37,647 | ) |
| Change  in unfunded benefit obligations     |       | (42,618               | )          | (69,011                        | )          | (60,221               | )          |
| Other                                       |       | —                |       | (68                            | )          | (160                  | )          |
| Total  accumulated other comprehensive loss |       | $                     | (65,274    | )                              | $          | (104,587              | )          | $ | (98,028 | ) |

** **

**Thecomponents of other comprehensive income (loss) are:**

** **
| ** **                                                                | ** ** | **Thirty-Nine weeks ended** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                                       | ** ** | **May 1,  2010**       | ** ** | **May 2,  2009** | ** ** |
| Net  earnings (loss) from condensed consolidated statements of operations |       | $                           | 30,940     |   | $ | (499,513 | ) |
| Change  in unrealized loss on financial instruments                       |       | 12,852                      |       | (15,892 | ) |
| Change  in unfunded benefit obligations                                   |       | 26,393                      |       | (72,523 | ) |
| Other                                                                     |       | 68                          |       | (449 | ) |
| Total  comprehensive income (loss) for the period                         |       | $                           | 70,253     |   | $ | (588,377 | ) |

** **

**12.**       SegmentReporting

** **

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

 

Operating earnings (loss)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 respectivesegment.  Items not allocated to ouroperating segments include those items not considered by management inmeasuring the assets and profitability of our segments. These amounts include1) corporate expenses including, but not limited to, treasury, investorrelations, legal and finance support services, and general corporatemanagement, 2) charges related to the application of purchase accountingadjustments made in connection with the Acquisition including amortization ofintangible assets and favorable lease commitments and other non-cash items and3) interest expense.  These items, whileoften 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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Thefollowing tables set forth the information for our reportable segments:

 
| ** **                                                         | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  thousands)**                                                | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009**       | ** ** | **May 1,  2010** | ** ** | **May 2,  2009** | ** ** |
|                                                               | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                           |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                        | 740,717    |                        | $          | 665,559 |   | $ | 2,343,474 |   | $ | 2,363,222 |   |
| Direct Marketing                                                   |       | 154,452                  |       | 144,527                     |       | 522,956 |   | 512,031 |   |
| Total                                                              |       | $                        | 895,169    |                        | $          | 810,086 |   | $ | 2,866,430 |   | $ | 2,875,253 |   |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| OPERATING EARNINGS (LOSS)                                          |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                        | 98,038     |                        | $          | 69,266 |   | $ | 252,945 |   | $ | 154,065 |   |
| Direct Marketing                                                   |       | 28,905                   |       | 20,701                      |       | 91,339 |   | 57,399 |   |
| Corporate expenses                                                 |       | (13,799                  | )          | (12,433                     | )          | (42,808 | ) | (39,353 | ) |
| Other expenses (1)                                                 |       | (9,554                   | )          | (8,901                      | )          | (19,276 | ) | (18,390 | ) |
| Amortization of intangible assets and favorable  lease commitments |       | (18,314                  | )          | (18,314                     | )          | (54,944 | ) | (54,389 | ) |
| Impairment charges (2)                                             |       | —                   |       | —                      |       | — |   | (560,159 | ) |
| Total                                                              |       | $                        | 85,276     |                        | $          | 50,319 |   | $ | 227,256 |   | $ | (460,827 | ) |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| CAPITAL EXPENDITURES                                               |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                        | 11,859     |                        | $          | 14,962 |   | $ | 34,615 |   | $ | 72,608 |   |
| Direct Marketing                                                   |       | 2,842                    |       | 1,781                       |       | 8,468 |   | 8,679 |   |
| Total                                                              |       | $                        | 14,701     |                        | $          | 16,743 |   | $ | 43,083 |   | $ | 81,287 |   |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| DEPRECIATION EXPENSE                                               |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                            |       | $                        | 29,336     |                        | $          | 31,347 |   | $ | 88,450 |   | $ | 97,082 |   |
| Direct Marketing                                                   |       | 3,616                    |       | 3,739                       |       | 11,214 |   | 12,973 |   |
| Other                                                              |       | 1,767                    |       | 1,581                       |       | 5,259 |   | 4,323 |   |
| Total                                                              |       | $                        | 34,719     |                        | $          | 36,667 |   | $ | 104,923 |   | $ | 114,378 |   |
|                                                               |       |                     |       |                        |       |   |   |   |   |

 
| ** **                                            | ** ** | **May 1,  2010** | ** ** | **May 2,  2009** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|------------|------------|------------|------------|
| ASSETS                                                |       |                  |       |                  |       |       |       |       |       |
| Tangible assets of Specialty Retail stores            |       | $                     | 1,641,578  |                  | $          | 1,826,036  |       |       |       |   |   |
| Tangible assets of Direct Marketing                   |       | 161,095               |       | 157,876               |       |       |       |       |       |
| Corporate assets:                                     |       |                  |       |                  |       |       |       |       |       |
| Intangible assets related to Specialty Retail  stores |       | 2,761,406             |       | 2,958,821             |       |       |       |       |       |
| Intangible assets related to Direct Marketing         |       | 462,597               |       | 478,757               |       |       |       |       |       |
| Other                                                 |       | 591,339               |       | 361,076               |       |       |       |       |       |
| Total                                                 |       | $                     | 5,618,015  |                  | $          | 5,782,566  |       |       |       |   |   |

** **

----

(1)        Other expenses consists primarily ofcosts (primarily professional fees and severance) incurred in connection withcost reductions and corporate initiatives.

 

(2)         Impairment charges recorded in the secondquarter of fiscal year 2009 consist of pretax charges of 1) $291.1 million forthe writedown to fair value of goodwill, 2) $242.2 million for the writedown tofair value of the net carrying value of tradenames and 3) $26.8 million for thewritedown to fair value of the net carrying value of certain long-lived assets.

 

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**13.**       CondensedConsolidating Financial Information

** **

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

 

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

 
| ** **                                      | ** ** | **May 1, 2010** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| **(in thousands)**                              | ** ** | **Company**          | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                 |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                    | —     |   | $ | 512,378 |   | $ | 895 |   | $ | — |   | $ | 513,273 |   |
| Merchandise inventories                         |       | —               |       | 686,719 |   | 92,657 |   | — |   | 779,376 |   |
| Other current assets                            |       | —               |       | 94,951 |   | 8,939 |   | — |   | 103,890 |   |
| Total current assets                            |       | —               |       | 1,294,048 |   | 102,491 |   | — |   | 1,396,539 |   |
| Property and equipment, net                     |       | —               |       | 813,717 |   | 113,121 |   | — |   | 926,838 |   |
| Goodwill and intangible assets, net             |       | —               |       | 1,490,565 |   | 1,733,438 |   | — |   | 3,224,003 |   |
| Other assets                                    |       | —               |       | 68,843 |   | 1,792 |   | — |   | 70,635 |   |
| Investments in subsidiaries                     |       | 998,064              |       | 1,850,543 |   | — |   | (2,848,607 | ) | — |   |
| Total assets                                    |       | $                    | 998,064    |   | $ | 5,517,716 |   | $ | 1,950,842 |   | $ | (2,848,607 | ) | $ | 5,618,015 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |       |                 |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                 |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                    | —     |   | $ | 175,507 |   | $ | 27,999 |   | $ | — |   | $ | 203,506 |   |
| Accrued liabilities                             |       | —               |       | 308,342 |   | 70,805 |   | — |   | 379,147 |   |
| Other current liabilities                       |       | —               |       | 34,088 |   | — |   | — |   | 34,088 |   |
| Total current liabilities                       |       | —               |       | 517,937 |   | 98,804 |   | — |   | 616,741 |   |
| Long-term liabilities:                          |       |                 |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —               |       | 2,972,271 |   | — |   | — |   | 2,972,271 |   |
| Deferred income taxes                           |       | —               |       | 697,173 |   | — |   | — |   | 697,173 |   |
| Other long-term liabilities                     |       | —               |       | 332,271 |   | 1,495 |   | — |   | 333,766 |   |
| Total long-term liabilities                     |       | —               |       | 4,001,715 |   | 1,495 |   | — |   | 4,003,210 |   |
| Total shareholders’ equity                 |       | 998,064              |       | 998,064 |   | 1,850,543 |   | (2,848,607 | ) | 998,064 |   |
| Total liabilities and shareholders’ equity |       | $                    | 998,064    |   | $ | 5,517,716 |   | $ | 1,950,842 |   | $ | (2,848,607 | ) | $ | 5,618,015 |   |

 

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

 
| ** **                                      | ** ** | **May 2, 2009** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| **(in thousands)**                              | ** ** | **Company**          | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                 |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                 |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                    | —     |   | $ | 228,169 |   | $ | 1,219 |   | $ | — |   | $ | 229,388 |   |
| Merchandise inventories                         |       | —               |       | 756,253 |   | 109,727 |   | — |   | 865,980 |   |
| Other current assets                            |       | —               |       | 156,108 |   | 8,990 |   | — |   | 165,098 |   |
| Total current assets                            |       | —               |       | 1,140,530 |   | 119,936 |   | — |   | 1,260,466 |   |
| Property and equipment, net                     |       | —               |       | 888,880 |   | 126,180 |   | — |   | 1,015,060 |   |
| Goodwill and intangible assets, net             |       | —               |       | 1,580,252 |   | 1,857,326 |   | — |   | 3,437,578 |   |
| Other assets                                    |       | —               |       | 67,587 |   | 1,875 |   | — |   | 69,462 |   |
| Investments in subsidiaries                     |       | 1,092,269            |       | 2,008,298 |   | — |   | (3,100,567 | ) | — |   |
| Total assets                                    |       | $                    | 1,092,269  |   | $ | 5,685,547 |   | $ | 2,105,317 |   | $ | (3,100,567 | ) | $ | 5,782,566 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  |       |                 |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                 |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                    | —     |   | $ | 138,464 |   | $ | 20,511 |   | $ | — |   | $ | 158,975 |   |
| Accrued liabilities                             |       | —               |       | 273,318 |   | 74,103 |   | — |   | 347,421 |   |
| Total current liabilities                       |       | —               |       | 411,782 |   | 94,614 |   | — |   | 506,396 |   |
| Long-term liabilities:                          |       |                 |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —               |       | 2,963,311 |   | — |   | — |   | 2,963,311 |   |
| Deferred income taxes                           |       | —               |       | 771,409 |   | — |   | — |   | 771,409 |   |
| Other long-term liabilities                     |       | —               |       | 446,776 |   | 2,405 |   | — |   | 449,181 |   |
| Total long-term liabilities                     |       | —               |       | 4,181,496 |   | 2,405 |   | — |   | 4,183,901 |   |
| Total shareholders’ equity                 |       | 1,092,269            |       | 1,092,269 |   | 2,008,298 |   | (3,100,567 | ) | 1,092,269 |   |
| Total liabilities and shareholders’ equity |       | $                    | 1,092,269  |   | $ | 5,685,547 |   | $ | 2,105,317 |   | $ | (3,100,567 | ) | $ | 5,782,566 |   |

 

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| ** **                                                                        | ** ** | **Thirteen weeks ended May 1, 2010** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                               | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                         | —     |   | $ | 745,391 |   | $ | 149,778 |   | $ | — |   | $ | 895,169 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                    |       | 464,381 |   | 88,846 |   | — |   | 553,227 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                    |       | 193,599 |   | 27,094 |   | — |   | 220,693 |   |
| Income from credit card program, net                                              |       | —                                    |       | (15,915 | ) | (1,145 | ) | — |   | (17,060 | ) |
| Depreciation expense                                                              |       | —                                    |       | 30,665 |   | 4,054 |   | — |   | 34,719 |   |
| Amortization of intangible assets and favorable  lease commitments                |       | —                                    |       | 15,089 |   | 3,225 |   | — |   | 18,314 |   |
| Operating earnings                                                                |       | —                                    |       | 57,572 |   | 27,704 |   | — |   | 85,276 |   |
| Interest expense, net                                                             |       | —                                    |       | 59,389 |   | 1 |   | — |   | 59,390 |   |
| Intercompany royalty charges (income)                                             |       | —                                    |       | 50,423 |   | (50,423 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (18,455                                   | )          | (78,126 | ) | — |   | 96,581 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 18,455                                    |       | 25,886 |   | 78,126 |   | (96,581 | ) | 25,886 |   |
| Income tax expense                                                                |       | —                                    |       | 7,431 |   | — |   | — |   | 7,431 |   |
| Net earnings (loss)                                                               |       | $                                         | 18,455     |   | $ | 18,455 |   | $ | 78,126 |   | $ | (96,581 | ) | $ | 18,455 |   |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended May 2, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                               | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                         | —     |   | $ | 688,582 |   | $ | 121,504 |   | $ | — |   | $ | 810,086 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                    |       | 439,239 |   | 75,526 |   | — |   | 514,765 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                    |       | 174,683 |   | 25,832 |   | — |   | 200,515 |   |
| Income from credit card program, net                                              |       | —                                    |       | (9,440 | ) | (1,054 | ) | — |   | (10,494 | ) |
| Depreciation expense                                                              |       | —                                    |       | 32,642 |   | 4,025 |   | — |   | 36,667 |   |
| Amortization of intangible assets and favorable  lease commitments                |       | —                                    |       | 15,089 |   | 3,225 |   | — |   | 18,314 |   |
| Operating earnings                                                                |       | —                                    |       | 36,369 |   | 13,950 |   | — |   | 50,319 |   |
| Interest expense, net                                                             |       | —                                    |       | 58,248 |   | 2 |   | — |   | 58,250 |   |
| Intercompany royalty charges (income)                                             |       | —                                    |       | 40,528 |   | (40,528 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 3,135                                     |       | (54,476 | ) | — |   | 51,341 |   | — |   |
| (Loss) earnings before income taxes                                               |       | (3,135                                    | )          | (7,931 | ) | 54,476 |   | (51,341 | ) | (7,931 | ) |
| Income tax benefit                                                                |       | —                                    |       | (4,796 | ) | — |   | — |   | (4,796 | ) |
| Net (loss) earnings                                                               |       | $                                         | (3,135     | ) | $ | (3,135 | ) | $ | 54,476 |   | $ | (51,341 | ) | $ | (3,135 | ) |

 

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| ** **                                                                        | ** ** | **Thirty-Nine weeks ended May 1, 2010** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                            | —     |   | $ | 2,393,814 |   | $ | 472,616 |   | $ | — |   | $ | 2,866,430 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                       |       | 1,552,503 |   | 296,433 |   | — |   | 1,848,936 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                       |       | 595,610 |   | 81,480 |   | — |   | 677,090 |   |
| Income from credit card program, net                                              |       | —                                       |       | (43,045 | ) | (3,674 | ) | — |   | (46,719 | ) |
| Depreciation expense                                                              |       | —                                       |       | 93,192 |   | 11,731 |   | — |   | 104,923 |   |
| Amortization of intangible assets and favorable  lease commitments                |       | —                                       |       | 45,269 |   | 9,675 |   | — |   | 54,944 |   |
| Operating earnings                                                                |       | —                                       |       | 150,285 |   | 76,971 |   | — |   | 227,256 |   |
| Interest expense, net                                                             |       | —                                       |       | 177,757 |   | 2 |   | — |   | 177,759 |   |
| Intercompany royalty charges (income)                                             |       | —                                       |       | 148,480 |   | (148,480 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (30,940                                      | )          | (225,449 | ) | — |   | 256,389 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 30,940                                       |       | 49,497 |   | 225,449 |   | (256,389 | ) | 49,497 |   |
| Income tax expense                                                                |       | —                                       |       | 18,557 |   | — |   | — |   | 18,557 |   |
| Net earnings (loss)                                                               |       | $                                            | 30,940     |   | $ | 30,940 |   | $ | 225,449 |   | $ | (256,389 | ) | $ | 30,940 |   |

 
| ** **                                                                        | ** ** | **Thirty-Nine weeks ended May 2, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                            | —     |   | $ | 2,429,326 |   | $ | 445,927 |   | $ | — |   | $ | 2,875,253 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                       |       | 1,653,090 |   | 300,787 |   | — |   | 1,953,877 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                       |       | 602,464 |   | 84,495 |   | — |   | 686,959 |   |
| Income from credit card program, net                                              |       | —                                       |       | (29,996 | ) | (3,686 | ) | — |   | (33,682 | ) |
| Depreciation expense                                                              |       | —                                       |       | 101,268 |   | 13,110 |   | — |   | 114,378 |   |
| Amortization of intangible assets and favorable  lease commitments                |       | —                                       |       | 45,269 |   | 9,120 |   | — |   | 54,389 |   |
| Impairment charges                                                                |       | —                                       |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                       |       | (218,640 | ) | (242,187 | ) | — |   | (460,827 | ) |
| Interest expense, net                                                             |       | —                                       |       | 174,670 |   | 6 |   | — |   | 174,676 |   |
| Intercompany royalty charges (income)                                             |       | —                                       |       | 156,248 |   | (156,248 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 499,513                                      |       | 85,945 |   | — |   | (585,458 | ) | — |   |
| (Loss) earnings before income taxes                                               |       | (499,513                                     | )          | (635,503 | ) | (85,945 | ) | 585,458 |   | (635,503 | ) |
| Income tax benefit                                                                |       | —                                       |       | (135,990 | ) | — |   | — |   | (135,990 | ) |
| Net (loss) earnings                                                               |       | $                                            | (499,513   | ) | $ | (499,513 | ) | $ | (85,945 | ) | $ | 585,458 |   | $ | (499,513 | ) |

 

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| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended May 1, 2010** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                            | 30,940     |   | $ | 30,940 |   | $ | 225,449 |   | $ | (256,389 | ) | $ | 30,940 |   |
| Adjustments to reconcile net earnings (loss) to net  cash provided by operating activities:  |       |                                         |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                       |       | 152,484 |   | 21,406 |   | — |   | 173,890 |   |
| Paid-in-kind interest                                                                        |       | —                                       |       | 14,362 |   | — |   | — |   | 14,362 |   |
| Deferred income taxes                                                                        |       | —                                       |       | (26,153 | ) | — |   | — |   | (26,153 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | —                                       |       | 5,144 |   | 137 |   | — |   | 5,281 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                       |       | 148,480 |   | (148,480 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                                    |       | (30,940                                      | )          | (225,449 | ) | — |   | 256,389 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                       |       | 157,191 |   | (95,817 | ) | — |   | 61,374 |   |
| Net cash provided by operating activities                                                    |       | —                                       |       | 256,999 |   | 2,695 |   | — |   | 259,694 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                       |       | (40,624 | ) | (2,459 | ) | — |   | (43,083 | ) |
| Net cash used for investing activities                                                       |       | —                                       |       | (40,624 | ) | (2,459 | ) | — |   | (43,083 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                       |       | (26,763 | ) | — |   | — |   | (26,763 | ) |
| Net cash used for financing activities                                                       |       | —                                       |       | (26,763 | ) | — |   | — |   | (26,763 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                         |       |   |   |   |   |   |   |   |   |
| Increase during the period                                                                   |       | —                                       |       | 189,612 |   | 236 |   | — |   | 189,848 |   |
| Beginning balance                                                                            |       | —                                       |       | 322,766 |   | 659 |   | — |   | 323,425 |   |
| Ending balance                                                                               |       | $                                            | —     |   | $ | 512,378 |   | $ | 895 |   | $ | — |   | $ | 513,273 |   |

 
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended May 2, 2009** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-********Guarantor********Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Net (loss) earnings                                                                          |       | $                                            | (499,513   | ) | $ | (499,513 | ) | $ | (85,945 | ) | $ | 585,458 |   | $ | (499,513 | ) |
| Adjustments to reconcile net (loss) earnings to net  cash provided by operating activities:  |       |                                         |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                       |       | 157,200 |   | 22,230 |   | — |   | 179,430 |   |
| Deferred income taxes                                                                        |       | —                                       |       | (98,357 | ) | — |   | — |   | (98,357 | ) |
| Impairment charges                                                                           |       | —                                       |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Paid-in-kind interest                                                                        |       | —                                       |       | 20,520 |   | — |   | — |   | 20,520 |   |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | —                                       |       | 7,173 |   | 848 |   | — |   | 8,021 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                       |       | 156,247 |   | (156,247 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                                    |       | 499,513                                      |       | 85,945 |   | — |   | (585,458 | ) | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                       |       | (36,678 | ) | (60,704 | ) | — |   | (97,382 | ) |
| Net cash provided by operating activities                                                    |       | —                                       |       | 68,408 |   | 4,470 |   | — |   | 72,878 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                       |       | (77,060 | ) | (4,227 | ) | — |   | (81,287 | ) |
| Net cash used for investing activities                                                       |       | —                                       |       | (77,060 | ) | (4,227 | ) | — |   | (81,287 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                       |       | (1,383 | ) | — |   | — |   | (1,383 | ) |
| Net cash used for financing activities                                                       |       | —                                       |       | (1,383 | ) | — |   | — |   | (1,383 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                         |       |   |   |   |   |   |   |   |   |
| (Decrease) increase during the period                                                        |       | —                                       |       | (10,035 | ) | 243 |   | — |   | (9,792 | ) |
| Beginning balance                                                                            |       | —                                       |       | 238,204 |   | 976 |   | — |   | 239,180 |   |
| Ending balance                                                                               |       | $                                            | —     |   | $ | 228,169 |   | $ | 1,219 |   | $ | — |   | $ | 229,388 |   |

 

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

 

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

 
| **(in thousands)** | ** ** | **May 1,  2010** | ** **   | **August 1,********2009** | ** ** | **May 2,  2009** | ** ** |
|--------------------|------------|-----------------------|--------------|--------------------------------|------------|-----------------------|------------|
| Total  assets      |       | $                     |  — |                           | $          |  332             |       | $ |  708 |   |
| Net assets         |       | $                     | —       |                           | $          | 332                   |       | $ | (530 | ) |

 
| ** **                                            | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)**                                    | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009**       | ** ** | **May 1,  2010** | ** ** | **May 2,  2009** | ** ** |
| Revenues                                              |       | $                        | —     |                        | $          | — |   | $ | — |   | $ | — |   |
| Net earnings (loss)                                   |       | —                   |       | 32                          |       | — |   | (301 | ) |
| Net cash (used for) provided by operating  activities |       | —                   |       | (546                        | )          | (34 | ) | 80 |   |
|                                                       |            |                          |            |                             |            |  |  |  |  |  |  |  |  |

 

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

 

**EXECUTIVEOVERVIEW**

 

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

 

**Overview**

 

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

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the third quarter of fiscal year 2010 relate to thethirteen weeks ended May 1, 2010. All references to the third quarter of fiscal year 2009 relate to thethirteen weeks ended May 2, 2009. All references to year-to-date fiscal 2010 relate to the thirty-nineweeks ended May 1, 2010.  Allreferences to year-to-date fiscal 2009 relate to the thirty-nine weeks ended May 2,2009.

 

**FactorsAffecting Our Results**

 

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

 

·                  Sales of merchandise—Revenues fromour Specialty Retail stores are recognized at the later of the point of sale orthe delivery of goods to the customer. Revenues from our Direct Marketingoperation are recognized when the merchandise is delivered to the customer. Wemaintain reserves for anticipated sales returns primarily based on ourhistorical trends related to returns by both our retail and direct marketingcustomers. Revenues exclude sales taxes collected from our customers.

 

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

 

Our revenues can beaffected by the following factors:

 

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

 

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

 

·                  changes in the level of full-pricesales;

 

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

 

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

 

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

 

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

 

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

 

·                  Inventory costs—We utilize the retail method of accounting. Under theretail inventory method, the valuation of inventories at cost and the resultinggross margins are determined by applying a calculated cost-to-retail ratio, forvarious groupings of similar items, to the retail value of our inventories. Thecost of the inventory reflected on the consolidated balance sheet is decreasedby charges to cost of goods sold at the time the retail value of the inventoryis lowered through the use of markdowns. Hence, earnings are negativelyimpacted when merchandise is marked down. With the introduction of new fashionsin the first and third fiscal quarters and our emphasis on full-price sellingin these quarters, a lower level of markdowns and higher margins arecharacteristic of these quarters.

 

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

 

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

 

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

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold. Wereceived vendor allowances of $46.7 million, or 1.6% of revenues, inyear-to-date fiscal 2010 and $72.3 million, or 2.5% of revenues, inyear-to-date fiscal 2009.  The decreasein vendor allowances in year-to-date fiscal 2010 compared to year-to-datefiscal 2009 was consistent with the decrease in markdowns in the periods.

 

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

 

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

 

·                  customer acceptance of and demandfor the merchandise we offer in a given season and the related impact of suchfactors on the level of full-price sales;

 

·                  factors affecting revenuesgenerally, including pricing strategies, product offerings and other actionstaken by competitors;

 

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

 

·                  the amount of vendor reimbursementswe receive during the fiscal year.

 

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

 

Advertising costs consistprimarily of 1) print media costs for promotional materials mailed to ourcustomers incurred by our Specialty Retail segment, 2) advertising costsincurred by our Direct Marketing operation related to the production, printingand distribution of our print catalogs and the production of the photographiccontent for our websites and 3) online marketing costs incurred by our DirectMarketing operation. We receive advertising allowances from certain of ourmerchandise vendors. Substantially all the advertising allowances we receiverepresent reimbursements of direct, specific and incremental costs that weincur to promote the vendor’s merchandise in connection with our variousadvertising programs, primarily catalogs and other print media.  As a result, advertising allowances arerecorded as a reduction of our advertising costs when earned. Advertisingallowances aggregated approximately $42.3 million, or 1.5% of revenues, inyear-to-date fiscal 2010 and $62.4 million, or 2.2% 

 

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of revenues, inyear-to-date fiscal 2009.  The decreasein advertising allowances in year-to-date fiscal 2010 compared to year-to-datefiscal 2009 was consistent with the decrease in gross advertising expendituresin the periods.

 

We also receiveallowances from certain merchandise vendors in conjunction with compensationprograms for employees who sell the vendor’s merchandise. These allowances are nettedagainst the related compensation expense that we incur. Amounts received fromvendors related to compensation programs were $47.5 million, or 1.7% ofrevenues, in year-to-date fiscal 2010 and $51.4 million, or 1.8% ofrevenues, in year-to-date fiscal 2009.

 

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

 

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

 

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

 

·                  changes in expenses related toemployee benefits due to general economic conditions such as rising health carecosts.

 

***Incomefrom credit card program, net***.  Pursuant to along-term marketing and servicing alliance with HSBC, HSBC offers credit cardand non-card payment plans bearing our brands and we receive 1) ongoingpayments from HSBC based on net credit card sales, 2) compensation formarketing and servicing activities, 3) our allocable share of certain incomegenerated from the credit card program and 4) our allocable share of certaincredit card losses generated from the credit card portfolio (HSBC ProgramIncome). We recognize HSBC Program Income when earned.  In the future, the HSBC Program Income maybe:

 

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

 

·                  increased or decreased based uponfuture changes to our historical credit card program related to, among otherthings, the interest rates applied to unpaid balances, the assessment of latefees and the level of usage of promotional no-interest credit programs;

 

·                  decreased based upon the level offuture services we provide to HSBC;

 

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

 

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

 

TheProgram Agreement expires in July 2010. We are currently in negotiations with HSBC with respect to a replacementto the Program Agreement.  Based uponcurrent market conditions, we believe the future income to the Company pursuantto any replacement arrangement will be lower than the current HSBC ProgramIncome earned pursuant to the Program Agreement and that a higher portion ofsuch income will be based upon the future performance of the credit cardportfolio.

 

**Seasonality**

 

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

 

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

 

Similarly, the third fiscalquarter is generally characterized by a higher level of full-price sales with afocus on the initial introduction of Spring season fashions. Aggressivein-store marketing activities designed to stimulate customer buying, a lowerlevel of markdowns and higher margins are again characteristic of this quarter.Revenues are generally the lowest in the fourth

 

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fiscal quarter with afocus on promotional activities offering Spring season goods to the customer ona marked down basis, resulting in lower margins during the quarter. Our workingcapital requirements are typically lower in the third and fourth fiscal quartersthan in the other quarters.

 

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

 

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

 

**OPERATING RESULTS**

 

**Performance Summary**

 

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

 
| ** **                                                                        | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                        | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009**       | ** ** | **May 1,  2010** | ** ** | **May 2,  2009** | ** ** |
| ** **                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                    | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
|                                                                              |       |                     |       |                        |       |   |   |   |   |
| Cost  of goods sold including buying and occupancy costs (excluding depreciation) |       | 61.8                     |       | 63.5                        |       | 64.5 |   | 68.0 |   |
| Selling,  general and administrative expenses (excluding depreciation)            |       | 24.7                     |       | 24.8                        |       | 23.6 |   | 23.9 |   |
| Income  from credit card program, net                                             |       | (1.9                     | )          | (1.3                        | )          | (1.6 | ) | (1.2 | ) |
| Depreciation  expense                                                             |       | 3.9                      |       | 4.5                         |       | 3.7 |   | 4.0 |   |
| Amortization  of intangible assets                                                |       | 1.5                      |       | 1.7                         |       | 1.4 |   | 1.4 |   |
| Amortization  of favorable lease commitments                                      |       | 0.5                      |       | 0.6                         |       | 0.5 |   | 0.5 |   |
| Impairment  charges                                                               |       | —                   |       | —                      |       | — |   | 19.5 |   |
| Operating  earnings (loss)                                                        |       | 9.5                      |       | 6.2                         |       | 7.9 |   | (16.0 | ) |
| Interest  expense, net                                                            |       | 6.6                      |       | 7.2                         |       | 6.2 |   | 6.1 |   |
| Earnings  (loss) before income taxes                                              |       | 2.9                      |       | (1.0                        | )          | 1.7 |   | (22.1 | ) |
| Income  tax expense (benefit)                                                     |       | 0.8                      |       | (0.6                        | )          | 0.6 |   | (4.7 | ) |
| Net  earnings (loss)                                                              |       | 2.1                      | %          | (0.4                        | )%         | 1.1 | % | (17.4 | )% |

 

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

 
| ** **                                                         | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in  millions, except sales per square foot)**                   | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009**       | ** ** | **May 1,  2010** | ** ** | **May 2,  2009** | ** ** |
| REVENUES                                                           |       |                     |       |                        |       |   |   |   |   |
| Specialty  Retail stores                                           |       | $                        | 740.7      |                        | $          | 665.6 |   | $ | 2,343.5 |   | $ | 2,363.2 |   |
| Direct  Marketing                                                  |       | 154.5                    |       | 144.5                       |       | 522.9 |   | 512.0 |   |
| Total                                                              |       | $                        | 895.2      |                        | $          | 810.1 |   | $ | 2,866.4 |   | $ | 2,875.2 |   |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| OPERATING  EARNINGS (LOSS)                                         |       |                     |       |                        |       |   |   |   |   |
| Specialty  Retail stores                                           |       | $                        | 98.0       |                        | $          | 69.2 |   | $ | 252.9 |   | $ | 154.1 |   |
| Direct  Marketing                                                  |       | 28.9                     |       | 20.7                        |       | 91.3 |   | 57.4 |   |
| Corporate  expenses                                                |       | (13.8                    | )          | (12.4                       | )          | (42.8 | ) | (39.4 | ) |
| Other  expenses (1)                                                |       | (9.5                     | )          | (8.9                        | )          | (19.2 | ) | (18.4 | ) |
| Amortization  of intangible assets and favorable lease commitments |       | (18.3                    | )          | (18.3                       | )          | (54.9 | ) | (54.4 | ) |
| Impairment  charges (2)                                            |       | —                   |       | —                      |       | — |   | (560.1 | ) |
| Total                                                              |       | $                        | 85.3       |                        | $          | 50.3 |   | $ | 227.3 |   | $ | (460.8 | ) |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| OPERATING  PROFIT (LOSS) MARGIN                                    |       |                     |       |                        |       |   |   |   |   |
| Specialty  Retail stores                                           |       | 13.2                     | %          | 10.4                        | %          | 10.8 | % | 6.5 | % |
| Direct  Marketing                                                  |       | 18.7                     | %          | 14.3                        | %          | 17.5 | % | 11.2 | % |
| Total                                                              |       | 9.5                      | %          | 6.2                         | %          | 7.9 | % | (16.0 | )% |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| CHANGE  IN COMPARABLE REVENUES (3)                                 |       |                     |       |                        |       |   |   |   |   |
| Specialty  Retail stores                                           |       | 9.5                      | %          | (27.1                       | )%         | (2.8 | )% | (22.7 | )% |
| Direct  Marketing                                                  |       | 6.9                      | %          | (14.3                       | )%         | 2.1 | % | (11.2 | )% |
| Total                                                              |       | 9.1                      | %          | (25.1                       | )%         | (1.9 | )% | (20.8 | )% |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| SALES  PER SQUARE FOOT                                             |       |                     |       |                        |       |   |   |   |   |
| Specialty  Retail stores                                           |       | $                        | 114        |                        | $          | 105 |   | $ | 363 |   | $ | 376 |   |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| STORE  COUNT                                                       |       |                     |       |                        |       |   |   |   |   |
| Neiman  Marcus and Bergdorf Goodman stores:                        |       |                     |       |                        |       |   |   |   |   |
| Open  at beginning of period                                       |       | 43                       |       | 42                          |       | 42 |   | 41 |   |
| Opened  during the period                                          |       | —                   |       | —                      |       | 1 |   | 1 |   |
| Open  at end of period                                             |       | 43                       |       | 42                          |       | 43 |   | 42 |   |
| Clearance  centers:                                                |       |                     |       |                        |       |   |   |   |   |
| Open  at beginning of period                                       |       | 28                       |       | 25                          |       | 27 |   | 24 |   |
| Opened  during the period                                          |       | —                   |       | 2                           |       | 1 |   | 3 |   |
| Closed  during the period                                          |       | —                   |       | (1                          | )          | — |   | (1 | ) |
| Open  at end of period                                             |       | 28                       |       | 26                          |       | 28 |   | 26 |   |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| NON-GAAP FINANCIAL DATA                                            |       |                     |       |                        |       |   |   |   |   |
| EBITDA  (4)                                                        |       | $                        | 138.3      |                        | $          | 105.3 |   | $ | 387.1 |   | $ | (292.0 | ) |
| Adjusted  EBITDA (4)                                               |       | $                        | 138.3      |                        | $          | 105.3 |   | $ | 387.1 |   | $ | 268.1 |   |

 

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

 

(2)          Impairment charges recorded in the secondquarter of fiscal year 2009 consist of pretax charges of 1) $291.1 million forthe writedown to fair value of goodwill, 2) $242.2 million for the writedown tofair value of the net carrying value of tradenames and 3) $26.8 million for thewritedown to fair value of the net carrying value of certain long-lived assets.

 

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

 

(4)          For an explanation of EBITDA and AdjustedEBITDA as a measure of our operating performance, see “Management’s Discussionand Analysis of Financial Condition and Results of Operations — Non-GAAPFinancial Measure-EBITDA and Adjusted EBITDA.”

 

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**Fiscal Year 2010 Summary**

 

While economic conditionsand consumer spending improved in the third quarter of fiscal year 2010compared to the prior year, consumer spending remains below historical levelsachieved in fiscal years 2007 and 2008. We do not anticipate the return of consumer spending to these levels inthe near-term.

 

A summary of ouroperating results is as follows:

 

·                  **Revenues**—Our revenues in thethird quarter of fiscal year 2010 were positively impacted by a higher level ofcustomer demand.  As a result, ourrevenues for the third quarter of fiscal year 2010 were $895.2 million, anincrease of 10.5% compared to the third quarter of fiscal year 2009 reflectingan increase in comparable revenues of 9.1%.

 

Our revenues foryear-to-date fiscal 2010 were $2,866.4 million, a decrease of 0.3% compared tothe prior year reflecting a decline in comparable revenues of 1.9%.

 

For Specialty Retailstores, our sales per square foot for the last twelve trailing months were $462as of May 1, 2010, $453 as of January 30, 2010 and $511 as of May 2,2009.

 

·                  **Cost of goods sold including buying and occupancy costs (excludingdepreciation)**—COGSrepresented 61.8% of revenues in the third quarter of fiscal year 2010, animprovement of 1.7% of revenues compared to the third quarter of fiscal year2009.  COGS represented 64.5% of revenuesin year-to-date fiscal 2010, an improvement of 3.5% of revenues compared toyear-to-date fiscal 2009.  The decreasesin COGS as a percentage of revenues were due to 1) lower net markdowns as aresult of a closer alignment of on-hand inventories to customer demand infiscal year 2010 and 2) increases in customer demand, particularly since December 2009.

 

·                  **Inventories**—During fiscal year 2010, we havecontinued to maintain tight control over inventory and aligned our inventorypurchases with sales expectations for the Fall and Spring seasons.  At May 1, 2010, on-hand inventoriestotaled $779.4 million, a 10.0% decrease from the prior year fiscalperiod.  Excluding inventories held bynew stores, inventories decreased by 13.3%.

 

·                  **Selling,general and administrative expenses (excluding depreciation)**— SG&A represented24.7% of revenues in the third quarter of fiscal year 2010, a net improvementof 0.1% of revenues compared to the third quarter of fiscal year 2009.  SG&A represented 23.6% of revenues inyear-to-date fiscal 2010, a net improvement of 0.3% of revenues compared toyear-to-date fiscal 2009.  The lowerlevels of SG&A expenses primarily reflect 1) net savings realized as aresult of our on-going initiatives to control our expenses, and 2) loweradvertising and marketing costs incurred by our Direct Marketing operation,offset by 3) higher incentive compensation requirements.

 

·                  **Operatingearnings (loss)—**Total operating earnings in the third quarter of fiscalyear 2010 were $85.3 million, or 9.5% of revenues.  Total operating earnings in the third quarterof fiscal year 2009 were $50.3 million, or 6.2% of revenues.  Operating margins increased by3.3% of revenues in the third quarter of fiscal year 2010 primarily due to:

 

·                  a decrease in COGS by 1.1% ofrevenues primarily due to higher customer demand, higher levels of full-pricesales and lower net markdowns;

 

·                  decreases in buying and occupancycosts of 0.6% of revenues primarily due to the leveraging of expenses on higherrevenues;

 

·                  decreases in both SG&A expensesby 0.1% of revenues and depreciation and amortization expense by 0.9% ofrevenues; and

 

·                  an increase in income from ourcredit card operations by 0.6% of revenues primarily due to lower estimatedshared credit card losses.

 

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Total operating earningsin year-to-date fiscal 2010 were $227.3 million, or 7.9% of revenues.  Total operating losses in year-to-date fiscalyear 2009 were $460.8 million, or 16.0% of revenues, which included impairmentsof our long-lived assets of $560.1 million, or 19.5% of revenues.  Excluding the impairments in year-to-datefiscal 2009, operating margins increased by 4.4% of revenues in year-to-datefiscal 2010 primarily due to:

 

·                  a decrease in COGS by 3.5% ofrevenues primarily due to higher customer demand, higher levels of full-pricesales and lower net markdowns;

 

·                  a decrease in SG&A expenses by0.3% of revenues primarily due to 1) savings realized as a result of ouron-going initiatives to control our expenses, and 2) lower advertising and marketingcosts incurred by our Direct Marketing operation, offset by 3) higher incentivecompensation requirements;

 

·                  a decrease in depreciation andamortization expense by 0.3% of revenues reflecting the current lower level ofcapital expenditures; and

 

·                  an increase in income from ourcredit card operations by 0.4% of revenues primarily due to lower shared creditcard losses.

 

·                  **Liquidity—**Cash provided by ouroperating activities was $259.7 million in year-to-date fiscal 2010 compared to$72.9 million in year-to-date fiscal 2009. This increase was primarily due to lower working capital requirementsattributable to the closer alignment of on-hand inventories to customer demandin fiscal year 2010 and the improvement in operating earnings.  We held cash balances of $513.3 millionat May 1, 2010 compared to $229.4 million at May 2, 2009.  At May 1, 2010, we had no borrowingsoutstanding under our Asset-Based Revolving Credit Facility, $31.1 million ofoutstanding letters of credit and $486.2 million of unused borrowingavailability.

 

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

 

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

 

·                  **Outlook—**We do not anticipatethe return of consumer spending to historical levels in the near-term.  We plan to maintain an appropriate alignmentof our inventory levels and purchases with anticipated customer demand. Webelieve the 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 2010.

 

**RecentManagement Announcements**

 

BurtonM. Tansky, President and Chief Executive Officer of the Company and NMG, hasannounced that he will retire effective October 6, 2010.  Effective with his retirement, Mr. Tanskywill assume the role of non-executive Chairman of the Board and Karen W. Katz,President, Chief Executive Officer of our Neiman Marcus stores and ExecutiveVice President of NMG, will succeed Mr. Tansky as President and ChiefExecutive Officer of the Company and NMG. Simultaneously, James E. Skinner, Executive Vice President and ChiefFinancial Officer of NMG, will become Chief Operating Officer of NMG (inaddition to continuing in his current capacities) and James J. Gold, currentlyPresident and CEO of Bergdorf Goodman, will become our President of SpecialtyRetail.

 

**Thirteen Weeks****Ended May 1, 2010Compared to Thirteen Weeks Ended May 2, 2009**

 

***Revenues.**** *Ourrevenues for the third quarter of fiscal year 2010 of $895.2 million increased$85.1 million, or 10.5%, from $810.1 million in the third quarter of fiscalyear 2009.  The increase in revenues wasdue to increases in comparable revenues related to a higher level of customerdemand.

 

Comparable revenues forthe thirteen weeks ended May 1, 2010 were $883.4 million compared to$810.1 million in the third 

 

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quarter of fiscal year2009, representing an increase of 9.1%. Comparable revenues increased in the third quarter of fiscal year 2010by 9.5% for Specialty Retail stores and 6.9% for Direct Marketing.  New stores generated revenues of $11.8million in the third quarter of fiscal year 2010.

 

Internet revenuesgenerated by Direct Marketing were $130.9 million for the third quarter offiscal year 2010, an increase of 15.4% compared to the prior year fiscalperiod.  Catalog revenues decreased 24.3%compared to the prior year fiscal period as our customers continue to migratetoward on-line retailing in our Direct Marketing operation.

 

***Costof goods sold including buying and occupancy costs (excluding depreciation).*** COGS for the third quarter of fiscal year 2010 were 61.8% of revenuescompared to 63.5% of revenues for the third quarter of fiscal year 2009.  The decrease in COGS by 1.7% of revenues inthe third quarter of fiscal year 2010 was primarily due to:

 

·                  increased product margins generated byboth our Specialty Retail stores and Direct Marketing operation ofapproximately 1.1% of revenues.  Theimprovement in product margins was attributable to both higher customer demandand the closer alignment of on-hand inventories to demand which resulted inhigher levels of full-price sales and lower net markdowns; and

 

·                  lower buying and occupancy costs of 0.6%of revenues primarily due to the leveraging of these expenses on higherrevenues.

 

***Selling,general and administrative expenses (excluding depreciation)*****.**  SG&Aexpenses as a percentage of revenues decreased to 24.7% of revenues in thethird quarter of fiscal year 2010 compared to 24.8% of revenues in the prioryear fiscal period.  The net decrease inSG&A expenses by 0.1% of revenues in the third quarter of fiscal year 2010was primarily due to:

 

·                  lower payroll and related benefits costsof approximately 1.4% of revenues; primarily as a result of our reducedheadcount; and

 

·                  a lower level of advertising and marketingcosts for our Direct Marketing operation of 0.3% of revenues primarily due to alower level of catalog spending in connection with planned decreases in catalogcirculation; offset by

 

·                  an increase in of advertising and marketingcosts for our Specialty Retail stores of approximately 0.4% of revenues due toa higher level of in-store marketing events as well as a lower level ofadvertising allowances; and

 

·                  higher incentive compensationrequirements by approximately 0.9% of revenues.

 

***Incomefrom credit card program, net. ***We earned HSBC Program Income of $17.1million, or 1.9% of revenues, in the third quarter of fiscal year 2010 comparedto $10.5 million, or 1.3% of revenues, in the third quarter of fiscal year 2009primarily due to lower estimated shared credit losses.

 

***Depreciationexpense. ***Depreciation expense was $34.7 million, or3.9% of revenues, in the third quarter of fiscal year 2010 compared to $36.7million, or 4.5% of revenues, in the third quarter of fiscal year 2009.  The decrease in depreciation expense resultsprimarily from recent lower levels of capital spending and delays in certainreal estate projects in response to current economic conditions.

 

***Amortizationexpense. ***Amortization of intangible assets(primarily customer lists and favorable lease commitments) aggregated $18.3million, or 2.0% of revenues, in the third quarter of fiscal year 2010 comparedto $18.3 million, or 2.3% of revenues, in the third quarter of fiscal year2009.

 

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***Segmentoperating 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)**                                                 | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009** | ** ** |
| Specialty  Retail stores                                           |       | $                        | 98.0       |   | $ | 69.2 |   |
| Direct  Marketing                                                  |       | 28.9                     |       | 20.7 |   |
| Amortization  of intangible assets and favorable lease commitments |       | (18.3                    | )          | (18.3 | ) |
| Corporate  expenses                                                |       | (13.8                    | )          | (12.4 | ) |
| Other  expenses                                                    |       | (9.5                     | )          | (8.9 | ) |
| Total  operating earnings                                          |       | $                        | 85.3       |   | $ | 50.3 |   |

 

Operating earnings forour Specialty Retail stores segment were $98.0 million, or 13.2% of SpecialtyRetail stores revenues, for the third quarter of fiscal year 2010 compared tooperating earnings of $69.2 million, or 10.4% of Specialty Retail storesrevenues, for the prior year fiscal period. The increase in operating margin as a percentage of revenues wasprimarily due to:

 

·                  higher customer demand, higher levels offull-price sales and lower net markdowns;

 

·                  leveraging of buying and occupancyexpenses on higher revenues; and

 

·                  favorable payroll and related benefitsprimarily due to savings realized as a result of our initiatives to control ourexpenses; offset by

 

·                  higher incentive compensationrequirements; and

 

·                  higher advertising and marketing costsfor in-store marketing events and a lower level of advertising allowances.

 

Operating earnings forDirect Marketing were $28.9 million, or 18.7% of Direct Marketing revenues, inthe third quarter of fiscal year 2010 compared to $20.7 million, or 14.3% ofDirect Marketing revenues, for the prior year fiscal period.  The increase in operating margin as apercentage of revenues for Direct Marketing was primarily the result of:

 

·                  higher customer demand and lower netmarkdowns;

 

·                  a lower level of spending for advertisingand marketing costs incurred for print catalogs; and

 

·                  favorable payroll and related costs primarily due toour initiatives to control expenses; offset by

 

·                  higher incentive compensation requirements.

 

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***Interestexpense, net*****.**  Net interest expense was $59.4 million, or 6.6%of revenues, in the third quarter of fiscal year 2010 and $58.2 million, or7.2% of revenues, for the prior year fiscal period.  The significant components of interestexpense are as follows:

 
| ** **                         | ** ** | **Thirteen weeks ended** | ** ** |
|------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                 | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009** | ** ** |
|                               |       |                     |       |   |   |
| Senior  Secured Term Loan Facility |       | $                        | 20,816     |   | $ | 21,903 |   |
| 2028  Debentures                   |       | 2,227                    |       | 2,227 |   |
| Senior  Notes                      |       | 17,116                   |       | 17,332 |   |
| Senior  Subordinated Notes         |       | 12,969                   |       | 12,969 |   |
| Amortization  of debt issue costs  |       | 4,683                    |       | 3,554 |   |
| Other                              |       | 1,795                    |       | 867 |   |
| Total  interest expense            |       | 59,606                   |       | 58,852 |   |
| Less:                              |       |                     |       |   |   |
| Interest  income                   |       | 135                      |       | 385 |   |
| Capitalized  interest              |       | 81                       |       | 217 |   |
| Interest  expense, net             |       | $                        | 59,390     |   | $ | 58,250 |   |

 

***Incometax expense (benefit).***  Our effectiveincome tax rate for the third quarter of fiscal year 2010 was 28.7% compared to60.5% for the third quarter of fiscal year 2009.  The decrease in our effective tax rate forthe third quarter of fiscal year 2010 compared to the corresponding prior yearfiscal period is attributable to the relative significance of non-taxableincome and non-deductible expenses to our estimated taxable income in thecurrent year.  In addition, our effectiveincome tax rate for the third quarter of fiscal year 2009 was favorablyimpacted by a tax benefit of $1.3 million as a result of the completion of theIRS examination of fiscal years 2005 and 2006.

 

The IRS is examining ourfederal tax return for fiscal year 2007. We believe our recorded tax liabilities as of May 1, 2010 aresufficient to cover any potential assessments to be made by the IRS upon thecompletion of their examination. We will continue to monitor the progress ofthe IRS examination and review our recorded tax liabilities for potential auditassessments.  With respect to state and localjurisdictions, with limited exceptions, the Company and its subsidiaries are nolonger subject to income tax audits for fiscal years before 2005.  We believe it is reasonably possible thatadditional adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 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 consolidated financial statements.

 

**Thirty-Nine Weeks****Ended May 1, 2010Compared to Thirty-Nine Weeks Ended May 2, 2009**

 

***Revenues.**** *Ourrevenues for year-to-date fiscal 2010 of $2,866.4 million decreased $8.8million, or 0.3%, from $2,875.2 million in year-to-date fiscal 2009.  The decrease in revenues was due primarily todecreases in comparable revenues in the first quarter of fiscal year 2010.  New stores generated revenues of $48.4million in year-to-date fiscal 2010.

 

Comparable revenues forthe thirty-nine weeks ended May 1, 2010 were $2,818.0 million compared to$2,872.4 million in year-to-date fiscal 2009, representing a decrease of1.9%.  Changes in comparable revenues, byquarter and by reportable segment, were:

 
| ** **               | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Year-to-Date  Fiscal 2010** | ** ** |
|--------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|-------------------------------|------------|
| Specialty  Retail stores |       | (14.9              | )%         | (0.6                | )%         | 9.5                | %          | (2.8                          | )%         |
| Direct  Marketing        |       | (7.2               | )%         | 5.9                 | %          | 6.9                | %          | 2.1                           | %          |
| Total                    |       | (13.7              | )%         | 0.6                 | %          | 9.1                | %          | (1.9                          | )%         |

 

Internet revenuesgenerated by Direct Marketing were $439.1 million for year-to-date fiscal 2010,an increase of 8.0% compared to the prior year fiscal period.  Catalog revenues decreased 20.4% compared tothe prior year fiscal period as our customers continue to migrate towardon-line retailing in our Direct Marketing operation.

 

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***Costof goods sold including buying and occupancy costs (excluding depreciation).*** COGS for year-to-date fiscal 2010 were 64.5% of revenues compared to68.0% of revenues for year-to-date fiscal 2009. The decrease in COGS by 3.5% of revenues for year-to-date fiscal 2010was primarily due to:

 

·                  increased product margins generated byboth our Specialty Retail stores and Direct Marketing operation ofapproximately 3.2% of revenues due to 1) lower net markdowns as a result of thecloser alignment of on-hand inventories to customer demand in fiscal year 2010and 2) increases in customer demand and higher levels of full-price sales; and

 

·                  lower buying and occupancy costs of 0.3%of revenues primarily due to the leveraging of these expenses on higherrevenues.

 

***Selling,general and administrative expenses (excluding depreciation)*****.**  SG&Aexpenses as a percentage of revenues decreased to 23.6% of revenues inyear-to-date fiscal 2010 compared to 23.9% of revenues in the prior year fiscalperiod.  The net decrease in SG&Aexpenses by 0.3% of revenues in year-to-date fiscal 2010 was primarily due to:

 

·                  lower payroll and related benefits costs,of approximately 1.0% of revenues, primarily as a result of our reducedheadcount; and

 

·                  a lower level of advertising and marketingcosts incurred by our Direct Marketing operation in the year-to-date of fiscal year2010 of approximately 0.2% of revenues, primarily due to a lower level ofcatalog spending in connection with planned decreases in catalog circulation;offset by

 

·                  higher incentive compensationrequirements by approximately 0.8% of revenues.

 

***Incomefrom credit card program, net. ***We earned HSBC Program Income of $46.7million, or 1.6% of revenues, in year-to-date fiscal 2010 compared to $33.7million, or 1.2% of revenues, in year-to-date fiscal 2009 primarily due tolower estimated shared credit card losses.

 

***Depreciationexpense. ***Depreciation expense was $104.9 million,or 3.7% of revenues, in year-to-date fiscal 2010 compared to $114.4 million, or4.0% of revenues, in year-to-date fiscal 2009. The decrease in depreciation results primarily from recent lower levelsof capital spending and delays in certain real estate projects in response tocurrent economic conditions.

 

***Amortizationexpense. ***Amortization of intangible assets(primarily customer lists and favorable lease commitments) aggregated $54.9million, or 1.9% of revenues, in year-to-date fiscal 2010 compared to $54.4million, or 1.9% of revenues, in year-to-date fiscal 2009.

 

***Impairmentcharges.***** **In the second quarter of fiscal year 2009, we recordedimpairment charges, related primarily to our tradenames and goodwill,aggregating $560.1 million in connection with the review of our long-livedassets for recoverability, as more fully explained in Note 2 in our Notes toCondensed Consolidated Financial Statements.

 

***Segmentoperating earnings (loss).***  Segmentoperating earnings (loss) for our Specialty Retail stores and Direct Marketingsegments do not reflect either the impact of adjustments to revalue our assetsand liabilities to estimated fair value at the Acquisition date or impairmentcharges related to declines in fair value subsequent to the Acquisitiondate.  The reconciliation of segmentoperating earnings (loss) to total operating earnings (loss) is as follows:

 
| ** **                                                         | ** ** | **Thirty-Nine weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in  millions)**                                                 | ** ** | **May 1,  2010**       | ** ** | **May 2,  2009** | ** ** |
| Specialty  Retail stores                                           |       | $                           | 252.9      |   | $ | 154.1 |   |
| Direct  Marketing                                                  |       | 91.3                        |       | 57.4 |   |
| Amortization  of intangible assets and favorable lease commitments |       | (54.9                       | )          | (54.4 | ) |
| Corporate  expenses                                                |       | (42.8                       | )          | (39.4 | ) |
| Other  expenses                                                    |       | (19.2                       | )          | (18.4 | ) |
| Impairment  charges                                                |       | —                      |       | (560.1 | ) |
| Total  operating earnings (loss)                                   |       | $                           | 227.3      |   | $ | (460.8 | ) |

 

Operating earnings forour Specialty Retail stores segment were $252.9 million, or 10.8% of SpecialtyRetail stores revenues, for year-to-date fiscal 2010 compared to $154.1million, or 6.5% of Specialty Retail stores revenues, for the prior year fiscal

 

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period.  The increase in operating margin as apercentage of revenues was primarily due to:

 

·                  lower net markdowns, higher customerdemand and higher levels of full-price sales; and

 

·                  favorable payroll and related benefitsprimarily due to savings realized as a result of our initiatives to control ourexpenses; offset by

 

·                  higher incentive compensationrequirements.

 

Operating earnings forDirect Marketing were $91.3 million, or 17.5% of Direct Marketing revenues, inyear-to-date fiscal 2010 compared to $57.4 million, or 11.2% of DirectMarketing revenues, for the prior year fiscal period.  The increase in operating margin as apercentage of revenues for Direct Marketing was primarily the result of:

 

·                  lower net markdowns and higher customerdemand;

 

·                  a lower level of spending for advertisingand marketing costs incurred for print catalogs; and

 

·                  favorable payroll and related benefits primarily dueto our initiatives to control expenses; offset by

 

·                  higher incentive compensation requirements.

 

***Interestexpense, net*****.**  Net interest expense was $177.8 million, or6.2% of revenues, in year-to-date fiscal 2010 and $174.7 million, or 6.1% ofrevenues, for the prior year fiscal period. The significant components of interest expense are as follows:

 
| ** **                         | ** ** | **Thirty-Nine weeks ended** | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                 | ** ** | **May 1,  2010**       | ** ** | **May 2,  2009** | ** ** |
|                               |       |                        |       |   |   |
| Senior  Secured Term Loan Facility |       | $                           | 62,388     |   | $ | 69,774 |   |
| 2028  Debentures                   |       | 6,660                       |       | 6,680 |   |
| Senior  Notes                      |       | 51,385                      |       | 48,793 |   |
| Senior  Subordinated Notes         |       | 38,764                      |       | 39,060 |   |
| Amortization  of debt issue costs  |       | 14,023                      |       | 10,663 |   |
| Other                              |       | 5,277                       |       | 2,558 |   |
| Total  interest expense            |       | 178,497                     |       | 177,528 |   |
| Less:                              |       |                        |       |   |   |
| Interest  income                   |       | 463                         |       | 2,156 |   |
| Capitalized  interest              |       | 275                         |       | 696 |   |
| Interest  expense, net             |       | $                           | 177,759    |   | $ | 174,676 |   |

 

***Incometax expense (benefit).***  Our effectiveincome tax rate for year-to-date fiscal 2010 was 37.5% compared to 21.4% foryear-to-date fiscal 2009.  No income taxbenefit exists related to the $291.1 million of goodwill impairment chargesrecorded in the second quarter of fiscal year 2009.  Excluding the impact of the goodwillimpairment charges, our effective income tax rate was 39.5% for year-to-datefiscal 2009.  The decrease in oureffective tax rate for year-to-date fiscal 2010 compared to the correspondingperiod in fiscal year 2009 (excluding the impact of the goodwill impairmentcharges) is primarily attributable to the relative significance of non-taxableincome and non-deductible expenses to our estimated taxable income in thecurrent year.

 

**Non-GAAP Financial Measure —EBITDA and Adjusted EBITDA**

 

We present the non-GAAPfinancial performance measures of EBITDA and Adjusted EBITDA because we usethese measures to monitor and evaluate the performance of our business andbelieve the presentation of these measures 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.  In addition, we use performance targets basedon Adjusted EBITDA as a component of the measurement of incentive compensationas described in our Annual Report on Form 10-K for the fiscal year ended August 1,2009.

 

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EBITDA and AdjustedEBITDA are not presentations made in accordance with GAAP and our computationof EBITDA and Adjusted EBITDA may vary from others in our industry.  In addition, EBITDA and Adjusted EBITDAcontain some, but not all, adjustments that are taken into account in thecalculation of the components of various covenants in the agreements andindentures governing NMG’s senior secured Asset-Based Revolving CreditFacility, Senior Secured Term Loan Facility, Senior Notes and SeniorSubordinated Notes.  EBITDA and AdjustedEBITDA should not be considered as alternatives to operating earnings (loss) ornet earnings (loss) as measures of operating performance.  In addition, EBITDA and Adjusted EBITDA arenot presented as and should not be considered as alternatives to cash flows asmeasures of liquidity.  EBITDA andAdjusted EBITDA have important limitations as analytical tools and should notbe considered in isolation, or as a substitute for analysis of our results asreported under GAAP.  For example, EBITDAand Adjusted EBITDA:

 

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

 

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

 

·                  do not reflect our considerableinterest expense, or the cash requirements necessary to service interest orprincipal payments, on our debt;

 

·                  exclude tax payments that representa reduction in available cash; and

 

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

 

The following tablereconciles net earnings (loss) as reflected in our condensed consolidatedstatements of operations prepared in accordance with GAAP to EBITDA andAdjusted EBITDA:

 
| ** **                                                         | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(dollars in millions)**                                          | ** ** | **May 1,  2010**    | ** ** | **May 2,  2009**       | ** ** | **May 1,  2010** | ** ** | **May 2,  2009** | ** ** |
|                                                               |       |                     |       |                        |       |   |   |   |   |
| Net  earnings (loss)                                               |       | $                        | 18.5       |                        | $          | (3.1 | ) | $ | 30.9 |   | $ | (499.5 | )(1) |
| Income  tax expense (benefit)                                      |       | 7.4                      |       | (4.8                        | )          | 18.6 |   | (136.0 | ) |
| Interest  expense, net                                             |       | 59.4                     |       | 58.2                        |       | 177.8 |   | 174.7 |   |
| Depreciation  expense                                              |       | 34.7                     |       | 36.7                        |       | 104.9 |   | 114.4 |   |
| Amortization  of intangible assets and favorable lease commitments |       | 18.3                     |       | 18.3                        |       | 54.9 |   | 54.4 |   |
| EBITDA                                                             |       | $                        | 138.3      |                        | $          | 105.3 |   | $ | 387.1 |   | $ | (292.0 | )(1) |
| EBITDA  as a percentage of revenues                                |       | 15.5                     | %          | 13.0                        | %          | 13.5 | % | (10.2 | )% |
| Non-cash  impairment of long-lived assets                          |       | —                   |       | —                      |       | — |   | 560.1 |   |
| Adjusted  EBITDA                                                   |       | $                        | 138.3      |                        | $          | 105.3 |   | $ | 387.1 |   | $ | 268.1 |   |
| Adjusted  EBITDA as a percentage of revenues                       |       | 15.5                     | %          | 13.0                        | %          | 13.5 | % | 9.3 | % |

 

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

 

**Inflation and Deflationand Foreign Currency Exchange Rates**

** **

We believe changes inrevenues and net earnings that have resulted from inflation or deflation havenot been material during the periods presented. In recent years, we haveexperienced certain inflationary conditions related to 1) increases inproduct costs primarily due to changes in foreign currency exchange rates thathave reduced the purchasing power of the U.S. dollar and 2) increases inSG&A. We purchase a substantial portion of our inventory from foreignsuppliers whose costs are affected by the fluctuation of their local currencyagainst the dollar or who price their merchandise in currencies other than thedollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us mostsignificantly; however, we source goods from numerous countries and thus areaffected by changes in numerous currencies and, generally, by fluctuations inthe U.S. dollar relative to such currencies. Accordingly, changes in the value ofthe dollar relative to foreign currencies may increase the retail prices ofgoods offered for sale and/or increase our cost of goods sold. If our customersreduce their levels of spending in response to 

 

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increases in retailprices and/or we are unable to pass such cost increases to our customers, ourrevenues, gross margins, and ultimately our earnings, could decrease. Foreigncurrency fluctuations could have a material adverse effect on our business,financial condition and results of operations in the future. We attempt tooffset the effects of inflation through price increases and control ofexpenses, although our ability to increase prices may be limited by customerresistance and competitive factors. We attempt to offset the effects ofmerchandise deflation, which has occurred on a limited basis in recent years,through control of expenses. There is no assurance, however, that inflation ordeflation will not materially affect our operations in the future.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our cash requirementsconsist principally of:

 

·                  the funding of our merchandisepurchases;

 

·                  capital expenditures for new storeconstruction, store renovations and upgrades of our management informationsystems;

 

·                  debt service requirements;

 

·                  income tax payments; and

 

·                  obligations related to our PensionPlan.

 

Our primary sources ofshort-term liquidity are comprised of cash on hand, availability under ourAsset-Based Revolving Credit Facility and vendor financing. The amounts of cashon hand and borrowings under the Asset-Based Revolving Credit Facility areinfluenced by a number of factors, including revenues, working capital levels,vendor terms, the level of capital expenditures, cash requirements related tofinancing instruments and debt service obligations, Pension Plan fundingobligations and tax payment obligations, among others.  As to vendor financing, some of our vendorshave experienced serious cash flow issues, reductions in available credit frombanks, factors or other financial institutions, or increases in the cost ofcapital as a result of current economic conditions.  To counteract their cash flow problems, ourvendors may attempt to increase their prices, pass through increased costs,alter historical credit and payment terms available to us or seek otherrelief.  Any of these actions could havean adverse impact on our relationship with the vendor or constrain the amountsor timing of our purchases from the vendor and, ultimately, have an adverseimpact on our revenues, profitability and liquidity.

 

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

 

We believe that operatingcash flows, cash balances, available vendor financing and amounts availablepursuant to our senior secured Asset-Based Revolving Credit Facility, will besufficient to fund our operations, anticipated capital expenditurerequirements, debt service obligations, contractual obligations and commitmentsand Pension Plan funding requirements through the remainder of fiscal year2010.

 

At May 1, 2010, cashand cash equivalents were $513.3 million compared to $229.4 millionat May 2, 2009. Net cash provided by our operating activities was $259.7million in year-to-date fiscal 2010 compared to $72.9 million in year-to-datefiscal 2009.  This change was primarilydue to the improvement in operating earnings and lower working capitalrequirements attributable to the closer alignment of on-hand inventories tocustomer demand in fiscal year 2010.

 

Net cash used forinvesting activities, representing capital expenditures, was $43.1 millionin year-to-date fiscal 2010 and $81.3 million in year-to-date fiscal2009.  We incurred capital expendituresin year-to-date fiscal 2010 related to the construction of our new store inBellevue (suburban Seattle).  We incurredsignificant capital expenditures in year-to-date fiscal 2009 related to theconstruction of new stores in Topanga (the greater Los Angeles area) andBellevue. We opened our Topanga store in September 2008 and our Bellevuestore in September 2009.  Inresponse to current economic conditions and delays in certain real estateprojects, we have reduced our current and near-term construction commitmentsand currently project gross capital expenditures for fiscal year 2010 to beapproximately $65 to $75 million.  Net ofdeveloper contributions, capital expenditures for fiscal year 2010 areprojected to be approximately $50 to $60 million.

 

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Net cash used forfinancing activities was $26.8 million in year-to-date fiscal 2010compared to $1.4 million in year-to-date fiscal 2009.  In the first quarter of fiscal year 2010,pursuant to the terms of our Senior Secured Term Loan Facility, we prepaid$26.6 million of outstanding borrowings under that facility from excess cashflow that we generated in fiscal year 2009.

 

**FinancingStructure at May 1, 2010**

 

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

 

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

 

The Asset-Based RevolvingCredit Facility provides committed financing of up to $600.0 million, subjectto a borrowing base.  The Asset-BasedRevolving Credit Facility includes borrowing capacity available for letters ofcredit and for borrowings on same-day notice. The borrowing base for the Asset-Based Revolving Credit Facility isequal to at any time the sum of (a) the lesser of (i) 80% of eligibleinventory (valued at the lower of cost or market value) and (ii) 85% ofthe net orderly liquidation value of eligible inventory, and (b) 85% ofthe amounts owed by credit card processors in respect of eligible credit cardaccounts constituting proceeds arising from the sale or disposition ofinventory, less certain reserves.  Through April 30, 2011 NMG is required to maintain excessavailability under the terms of the Asset-Based Revolving Credit Facility of atleast the greater of (a) 10% of the lesser of (i) the aggregaterevolving commitments and (ii) the borrowing base and (b) $50million.  After April 30, 2011, if at any time, excess availabilityis less than the greater of (a) 15% of the lesser of (i) theaggregate revolving commitments and (ii) the borrowing base and (b) $60million, NMG will be required to maintain a pro forma ratio of consolidated EBITDAto consolidated Fixed Charges (as such terms are defined in the creditagreement) of at least 1.1 to 1.0.  On May 1,2010, NMG had no borrowings outstanding under this facility, $31.1 million ofoutstanding letters of credit and $486.2 million of unused borrowingavailability.

 

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

 

***SeniorSecured Term Loan Facility.***  In October 2005,NMG entered into a credit agreement and related security and other agreementsfor a $1,975.0 million Senior Secured Term Loan Facility.  At May 1, 2010, the outstanding balanceunder the Senior Secured Term Loan Facility was $1,598.4 million.  The principal amount of the loans outstandingis due and payable in full on April 6, 2013.

 

At May 1,2010, borrowings under the Senior Secured Term Loan Facility bore interest at arate per annum equal to, at NMG’s option, either (a) a base ratedetermined by reference to the higher of (1) the prime rate of CreditSuisse and (2) the federal funds effective rate plus 1¤2 of 1% or (b) aLIBOR rate, subject to certain adjustments, in each case plus an applicablemargin. The interest rate on the outstanding borrowings pursuant to the SeniorSecured Term Loan Facility was 2.25% at May 1, 2010.  The applicable margin is subject toadjustment based on contractually defined debt coverage ratios.  At May 1, 2010, the applicable marginwith respect to base rate borrowings was 1.00% and the applicable margin withrespect to LIBOR borrowings was 2.00%.

 

The credit agreementgoverning the Senior Secured Term Loan Facility requires NMG to prepayoutstanding term loans with 50% (which percentage will be reduced to 25% if NMG’stotal leverage ratio is less than a specified ratio and will be reduced to 0%if NMG’s total leverage ratio is less than a specified ratio) of its annualexcess cash flow (as defined in the credit agreement). For fiscal year 2009,NMG was required to prepay $26.6 million of outstanding term loans in the firstquarter of fiscal year 2010 pursuant to the annual excess cash flowrequirements.  For fiscal year 2010, weexpect to be required to prepay a portion of our outstanding term loanspursuant to the annual excess cash flow requirements.

 

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

 

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

 

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

 

***SeniorNotes.**** *NMG has $752.4 million aggregate principal amountof 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture).  NMG’s Senior Notes mature on October 15,2015.  We negotiated for the right toinclude the PIK feature in our Senior Notes because of our belief that thisfeature could be a useful tool to enhance liquidity under appropriatecircumstances. In the second quarter of fiscal year 2009, given the dislocationin the financial markets and the uncertainty as to when reasonable conditionswould return, we believed that it was appropriate to utilize this feature, eventhough we had unused borrowing capacity under our $600.0 million revolvingcredit facility. Accordingly, we elected to pay PIK Interest for the threequarterly interest periods ending on October 14, 2009 and to make suchinterest payments with the issuance of additional Senior Notes at the PIKInterest rate of 9.75% instead of paying interest in cash.  As a result, the original principal amount ofSenior Notes of $700.0 million increased by $17.1 million on April 14,2009, $17.4 million on July 14, 2009 and $17.9 million on October 14,2009.

 

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

 

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

 

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

 

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

 

***InterestRate Swaps.***  In connection with the Acquisition, weobtained $2,575.0 million of floating rate debt agreements, of which $2,125.0million was outstanding at the Acquisition date and $1,598.4 million isoutstanding at May 1, 2010. Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rateinterest commitments through the expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.891% to 6.983% per quarter through2010 and result in an average fixed rate of 6.945%.

 

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

 

**FactorsThat May Affect Future Results**

 

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

 

*Politicaland General Economic Conditions*

 

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

 

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

 

·                  terrorist activities in the UnitedStates and elsewhere;

 

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

 

*CustomerConsiderations*

 

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

 

·                  changes in the demographic orretail environment;

 

·                  changes in consumer preferences orfashion trends;

 

·                  changes in our relationships withcustomers due to, among other things, 1) our failure to provide quality serviceand competitive loyalty programs, 2) our inability to provide credit pursuantto our proprietary credit card arrangement or 3) our failure to protectcustomer data or comply with regulations surrounding information security andprivacy;

 

*MerchandiseProcurement and Supply Chain Considerations*

 

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

 

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

 

·                  changes in foreign currencyexchange or inflation rates;

 

·                  significant increases in paper,printing and postage costs;

 

*Industryand Competitive Factors*

 

·                  competitive responses to ourloyalty programs, marketing, merchandising and promotional efforts or inventoryliquidations by vendors or other retailers;

 

·                  adverse changes in the financialviability of our competitors;

 

·                  seasonality of the retail business;

 

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

 

·                  delays in anticipated storeopenings and renovations;

 

·                  our success in enforcing our intellectualproperty rights;

 

*EmployeeConsiderations*

 

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

 

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

 

*Legaland Regulatory Issues*

 

·                  changes in government or regulatoryrequirements increasing our costs of operations;

 

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

 

*LeverageConsiderations*

 

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

 

·                  the ability to refinance ourindebtedness under our senior secured credit facilities and the effects of anyrefinancing;

 

·                  the effects upon us of complyingwith the covenants contained in our senior secured credit facilities and theindentures governing our senior notes and senior subordinated notes;

 

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

 

*OtherFactors*

 

·                  impact of funding requirementsrelated to our noncontributory defined benefit pension plan;

 

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

 

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

 

·                  other risks, uncertainties andfactors set forth in this Quarterly Report on Form 10-Q, including thoseset forth in Item 1A, “Risk Factors.”

 

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

 

**Critical Accounting Policies**

** **

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

 

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

 

***RecentAccounting Pronouncements. ***In December 2007, the FASB issuedguidance that addresses the recognition and accounting for identifiable assetsacquired, liabilities assumed and non-controlling interests in businesscombinations.  In addition, this guidancechanges the accounting treatment for certain acquisition-related items,including requirements to expense acquisition-related costs as incurred,expense restructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a businesscombination as a component of tax expense. These rules are to be applied prospectively to businesscombinations for which the acquisition date is on or after December 15,2008.  Generally, the effect of thisguidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertaintiesremaining as of May 1, 2010 related to the Acquisition will be subject tothe provisions of this guidance.  As tothe future resolution of these tax uncertainties, we do not believe theserequirements will have a material impact on our future financial statements.

 

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

 

In December 2008,the FASB issued guidance related to an employer’s disclosures about plan assetsof a defined benefit pension or other postretirement plan.  This guidance is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have evaluated the impact ofadopting the disclosure requirements and have determined that the adoption ofthese disclosure requirements will expand the disclosures regarding plan assetsin our consolidated financial statements for the fiscal year ending July 31,2010.

 

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

 

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

 

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

 

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

 

In connection with theAcquisition, NMG obtained $2,575.0 million of floating rate debt agreements, ofwhich $2,125.0 million was outstanding at the Acquisition date and $1,598.4million is outstanding under its Senior Secured Term Loan Facility at May 1,2010.  In addition, as of May 1,2010, 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 6,2005, NMG entered into floating to fixed interest rate swap agreements for anaggregate notional amount of $1,000.0 million to limit our exposure tointerest rate increases related to a portion of our floating rateindebtedness.  These swap agreementshedge a portion of our contractual floating rate interest commitments throughthe expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.891% to 6.983% per quarter through2010 and result in an average fixed rate of 6.945%.  A 1% increase in the rates relating to theportion of our floating rate debt that is not hedged would increase annualinterest expense by approximately $6.0 million.

 

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In addition to interestrate swap agreements, we also use interest rate cap agreements to manage ourfloating rate debt.  Effective January 19,2010, NMG entered into interest rate cap agreements for an aggregate notionalamount of $500.0 million in order to hedge the variability of our cash flowsrelated to a portion of our floating rate indebtedness once the interest rateswap expires on December 6, 2010. The interest rate cap agreements commence on December 6, 2010 andexpire on December 6, 2012. Pursuant to the interest rate cap agreements, NMG has capped LIBOR at2.50% through December 6, 2012 with respect to the $500.0 million notionalamount of such agreements.  In the eventLIBOR is less than 2.50%, 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%.

 

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

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

**a.  Disclosure Controls and Procedures.**

 

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of May 1,2010, under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, as well as other key members of ourmanagement, of the design and operating effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act). Based on that evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,accumulated, processed, summarized, reported and communicated on a timely basiswithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**b.  Changes in Internal Control over FinancialReporting.**

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter ended May 1, 2010 thathas materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**NEIMANMARCUS, INC.**

 

**PART II**

 

**ITEM 1.           LEGAL PROCEEDINGS**

 

On April 30, 2010, a Class Action Complaint for Injunction andEquitable Relief was filed in the United States District Court for the Central Districtof California by Sheila Monjazeb, individually and on behalf of other membersof the general public similarly situated, against the Company, Newton Holding,LLC, TPG Capital, L.P. and Warburg Pincus, LLC. Plaintiff alleges that theCompany and other defendants have engaged in various violations of theCalifornia Labor Code and Business and Professions Code, including withoutlimitation (1) asking employees to work “off the clock,” (2) failing to providemeal and rest breaks to its employees, (3) improperly calculating deductions onpaychecks delivered to its employees, and (4) failing to provide a chair orallow employees to sit during shifts. Plaintiff seeks certification of the caseas a class action, reimbursement for past wages and temporary, preliminary andpermanent injunctive relief preventing defendants from allegedly continuing toviolate the laws cited in the Complaint. The Company intends to vigorouslydefend its interests in this matter.

 

We are currently involvedin various legal actions and proceedings that arose in the ordinary course ofour business. We believe 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.

 

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

 

**ITEM 1A.        RISK FACTORS**

 

**RisksRelated to Current Economic Conditions**

 

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

 

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

 

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

 

We continue to experiencea challenging economic and retail environment and expect these conditions willcontinue for an extended period of time. We will continue to align our inventory levels and purchases withanticipated lower customer demand.  Theprolonged continuation of current market conditions could have a materialadverse effect on our business.

 

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

 

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

 

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

 

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

 

Weare a holding company.  NMG and itssubsidiaries conduct substantially all of our consolidated operations and ownsubstantially all of our consolidated assets. As a result, 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 hasa substantial amount of indebtedness, which may adversely affect NMG’s cashflow and its ability to operate the business, to comply with debt covenants andmake payments on its indebtedness.**

 

We are highlyleveraged.  As of May 1, 2010, theprincipal amount of NMG’s total indebtedness was approximately $2,976.2million, the unused borrowing availability under the $600.0 million Asset-BasedRevolving Credit Facility was $486.2 million and the outstanding letters ofcredit were $31.1 million.  NMG’ssubstantial indebtedness, combined with its lease and other financialobligations and contractual commitments, could have other importantconsequences. For example, it could:

 

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

 

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

 

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

 

·                  limit NMG’s flexibility in planningfor, or reacting to, changes in NMG’s business and the industry in which itoperates;

 

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

 

·                  limit NMG’s ability to obtaincredit from our vendors and/or the vendors’ factors; and

 

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

 

Any of the above listedfactors could materially adversely affect NMG’s business, financial conditionand 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 May 1,2010, NMG had approximately $1,598.4 million principal amount of floatingrate debt, consisting of outstanding borrowings under the Senior Secured TermLoan Facility.  In addition, NMG has anAsset-Based Revolving Credit Facility that provides committed financing of upto $600.0 million, subject to a borrowing base. As of May 1, 2010, NMG had no borrowings outstanding under thisfacility, $31.1 million of outstanding letters of credit and $486.2 million ofunused borrowing availability.  EffectiveDecember 6, 2005, NMG entered into floating to fixed interest rate swapagreements for an aggregate notional amount of $1,000.0 million to limit ourexposure to interest rate increases related to a portion of our floating rateindebtedness.

 

In addition to interestrate swap agreements, we also use interest rate cap agreements to manage ourfloating rate debt.  Effective January 19,2010, NMG entered into interest rate cap agreements for an aggregate notionalamount of $500.0 million in order to hedge the variability of our cash flowsrelated to a portion of our floating rate indebtedness once the interest rateswap expires on December 6, 2010. The interest rate cap agreements commence on December 6, 2010 andexpire on December 6, 2012. Pursuant to the interest rate cap agreements, NMG has capped LIBOR at2.50% through December 6, 2012 with respect to the $500.0 million notionalamount of such agreements.  In the eventLIBOR is less than 2.50%, 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%.

 

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

 

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

 

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

 

Contractual 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) theaggregate revolving commitments and (B) the borrowing base and (ii) $75million or (b) an event of default has occurred, NMG will be required torepay outstanding loans and cash collateralize letters of credit.  In addition, under the terms of theAsset-Based Revolving Credit Facility, through April 30, 2011 NMG isrequired to maintain excess availability of at least the greater of (a) 10%of the lesser of (i) the aggregate revolving commitments and (ii) theborrowing base and (b) $50 million.  After April 30, 2011, if atany time, excess availability is less than the greater of (a) 15% of thelesser of (i) the aggregate revolving commitments and (ii) theborrowing base and (b) $60 million, NMG will be required to maintain a proforma ratio of consolidated EBITDA to consolidated Fixed Charges (as such termsare defined in the credit agreement) of at least 1.1 to 1.0.  Our ability to meet the conditions describedin this paragraph may be affected by events beyond our control.

 

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

 

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

 

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

 

·                  incur additional indebtedness;

 

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

 

·                  make investments;

 

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

 

·                  engage in transactions with itsaffiliates;

 

·                  sell assets, including capitalstock of NMG’s subsidiaries;

 

·                  consolidate or merge;

 

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·                  create liens; and

 

·                  enter into sale and lease backtransactions.

 

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

 

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

 

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

 

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

 

**RisksRelated to Our Business and Industry**

 

**Thespecialty retail industry is highly competitive.**

 

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

 

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

 

·                  increased operational efficiencies of competitors;

 

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

 

·                  expansion of product offerings by existingcompetitors;

 

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

 

·                  adoption by existing competitors of innovative retailsales methods.

 

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

 

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

 

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

 

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

 

Moreover, nearly all ofthe brands of our top designers are sold by competing retailers, and many ofour top designers also have their own dedicated retail stores. If one or moreof our top designers were to cease providing us with adequate supplies of merchandisefor purchase or, conversely, were to 1) increase sales of merchandise throughtheir own stores, 2) increase the sales of merchandise to our competitors or 3)alter the form in which their goods were made available to us for resale, ourbusiness could be adversely affected. In addition, any decline in thepopularity or quality of any of our designer brands could adversely affect ourbusiness.

 

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

 

We make decisionsregarding the purchase of our merchandise well in advance of the season inwhich it will be sold. For example, women’s apparel, men’s apparel, shoes andhandbags are typically ordered six to nine months in advance of the productsbeing offered for sale while jewelry and other categories are typically orderedthree to six months in advance.  If oursales during any season, particularly a peak season, are significantly lowerthan we expect for any reason, we may not be able to adjust our expendituresfor inventory and other expenses in a timely fashion and may be left with asubstantial amount of unsold inventory. If that occurs, we may be forced torely on markdowns or promotional sales to dispose of excess inventory. Thiscould have an adverse effect on our margins and operating income. At the sametime, if we fail to purchase a sufficient quantity of merchandise, we may nothave an adequate supply of products to meet consumer demand. This may cause usto lose sales or harm our customer relationships.

 

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

 

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

 

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

 

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

 

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

 

Based upon our expansionstrategy, we expect that planned new stores will add over 189,000 square feetof new store space over approximately the next four fiscal years, representingan increase of approximately 3% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores.  New store openings involve certain risks,including constructing, furnishing and supplying a store in a timely and costeffective manner, accurately assessing the demographic or retail environment ata given location, hiring and training quality staff, obtaining necessarypermits and zoning approvals, obtaining commitments from a core group ofvendors to supply the new store, integrating the new store into ourdistribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, 

 

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cost effective manner,minimize disruptions to our existing operations, and succeed in creating animproved shopping environment. If we fail to execute on these or other aspectsof our store expansion and remodeling strategy, we could suffer harm to oursales, an increase in costs and expenses and an adverse effect on our business.

 

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

 

Somebusiness processes that are dependent on technology are outsourced to thirdparties.  Such processes include creditcard authorization and processing, insurance claims processing, payrollprocessing, record keeping for retirement and other benefit plans and otheraccounting processes.  In the secondquarter of fiscal year 2010, we entered into agreements to outsource certaininformation technology functions.  Inaddition, we review outsourcing alternatives on a routine basis and may decideto 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 ofterrorism could adversely affect our business.**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Credit card operationsare subject to numerous federal and state laws that impose disclosure and otherrequirements upon the origination, servicing and enforcement of credit accountsand limitations on the maximum amount of finance charges that may be charged bya credit provider. Any regulation or change in the regulation of creditarrangements that would materially limit the availability of credit to ourcustomer base could adversely affect our business.  Changes in credit card use, payment patterns,and default rates may result from a variety of economic, legal, social, andother factors that we cannot control or predict with certainty.

 

The Program Agreementwith HSBC expires in July 2010.  Weare currently in negotiations with HSBC with respect to a replacement to theProgram Agreement.  Based upon currentmarket conditions, we believe the future income to the Company pursuant to anyreplacement arrangement will be lower than the current HSBC Program Incomeearned pursuant to the Program Agreement and that a higher portion of suchincome will be based upon the future performance of the credit cardportfolio.  Any changes in our creditcard arrangements may adversely affect our credit card program and ultimately,our business.

 

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

 

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

 

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

 

We are subject tocustoms, truth-in-advertising, labor and other laws, including consumerprotection regulations and zoning and occupancy ordinances that regulate retailersgenerally and/or 1) govern the importation, promotion and sale of merchandise2) regulate wage and hour matters with respect to our associates and 3) govern theoperation of our retail stores and warehouse facilities. Although we undertaketo monitor changes in these laws, if these laws or the interpretations of theselaws change without our knowledge, or are violated by importers, designers,manufacturers or distributors, we could experience delays in shipments andreceipt of goods or be subject to fines or other penalties under thecontrolling regulations, any of which could adversely affect our business.

 

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

 

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

 

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

 

We purchase a substantialportion of our inventory from foreign suppliers whose costs are affected by thefluctuation of their local currency against the dollar or who price theirmerchandise in currencies other than the dollar. Fluctuations in the Euro-U.S.dollar exchange rate affect us most significantly; however, we source goodsfrom numerous countries and thus are affected by changes in numerous currenciesand, generally, by fluctuations in the U.S. dollar relative to such currencies.Accordingly, changes in the value of the dollar relative to foreign currenciesmay increase the retail prices of goods offered for sale and/or increase ourcost of goods sold.  If our customersreduce their levels of spending in response to increases in retail pricesand/or we are unable to pass such cost increases to our customers, ourrevenues, gross margins, and ultimately our earnings, could decrease. Foreigncurrency fluctuations could have a material adverse effect on our business,financial condition and results of operations in the future.

 

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

 

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

 

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

 

We advertise and promotein-store events, new merchandise and fashion trends through print catalogs andother promotional materials mailed on a targeted basis to our customers.Significant increases in paper, printing and postage costs could affect the costof producing these materials and as a result, may adversely affect ouroperating 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 andcontrolled by the Sponsors and certain other equity investors, and the Sponsorshave the ability to control our policies and operations. The interests of theSponsors may not in all cases be aligned with those of our creditors. Forexample, if we encounter financial difficulties or are unable to pay our debtsas they mature, the interests of our equity holders might conflict with ourcreditors’ interests. In addition, our equity holders may have an interest inpursuing acquisitions, divestitures, financings or other transactions that, intheir judgment, could enhance their equity investments, even though suchtransactions might involve risks to holders of our indebtedness. Furthermore,the Sponsors may in the future own businesses that directly or indirectlycompete with us. One or more of the Sponsors also may pursue acquisitionopportunities that may be complementary to our business, and as a result, thoseacquisition opportunities may not be available to us.

 

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

 

We and our subsidiariescurrently own our tradenames and service marks, including the “Neiman Marcus”and “Bergdorf Goodman” marks. Our tradenames and service marks are registeredin the United States and in various foreign countries, primarily in Europe. Thelaws of some foreign countries do not protect proprietary rights to the sameextent as do the laws of the United States. Moreover, we 

 

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are unable to predict theeffect that any future foreign or domestic intellectual property legislation orregulation may have on our existing or future business. The loss or reductionof any of our significant proprietary rights could have an adverse effect onour business.

 

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

 

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

 

To keep pace withchanging technology, we must continuously provide for the design andimplementation of new information technology systems as well as enhancements ofour existing systems. Any failure to adequately maintain and update the informationtechnology systems supporting our online operations, sales operations orinventory control could prevent our customers from purchasing merchandise onour websites or prevent us from processing and delivering merchandise, whichcould adversely affect our business.

 

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

 

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

 

###### **ITEM 2.**          UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

**ITEM 6.                EXHIBITS**

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

 

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| 4.3    |   | Senior Indenture dated  as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo  Bank, National Association, trustee, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4    |   | Senior Subordinated  Indenture dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Form of 9%/9 3/4%  Senior Notes due 2015, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Form of 10 3/8%  Senior Subordinated Notes due 2015, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.7    |   | Registration Rights  Agreement dated October 6, 2005, among Newton Acquisition, Inc.,  Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, The  Neiman Marcus Group, Inc., and the Initial Purchasers, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.8    |   | First Supplemental  Indenture, dated as of July 11, 2006, to the Indenture, dated as of  May 27, 1998, among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor  trustee, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated July 11, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.9    |   | Second Supplemental  Indenture, dated as of August 14, 2006, to the Indenture, dated as of  May 27, 1998, among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor  trustee, incorporated herein by reference to the Company’s Current Report on  Form 8-K dated August 15, 2006.                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1*  |   | Employment Agreement  dated as of October 6, 2005 by and among The Neiman Marcus  Group, Inc., Newton Acquisition Merger Sub, Inc., Newton  Acquisition, Inc., and Burton M. Tansky, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2*  |   | First Amendment to  Employment Agreement by and between The Neiman Marcus Group, Inc., a  Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and  Burton M. Tansky effective December 21, 2007, incorporated herein by  reference to the Neiman Marcus, Inc.’s Current Report on Form 8-K  dated December 21, 2007.                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3*  |   | Second Amendment to  Employment Agreement by and between The Neiman Marcus Group, Inc., a  Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and  Burton M. Tansky effective January 1, 2009, incorporated herein by  reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4*  |   | Rollover Agreement  dated as of October 4, 2005 by and among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and Burton M. Tansky,  incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended August 1, 2009.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5*  |   | Amendment to Letter  Agreement effective as of January 1, 2009 by and between Neiman  Marcus, Inc., a Delaware corporation, and Burton M. Tansky, incorporated  herein by reference to Neiman Marcus, Inc.’s Quarterly Report on  Form 10-Q for the quarter ended January 31, 2009.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6*  |   | 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.                                                                                                                          |

 

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| 10.7*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.8*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.9   |   | 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.                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10  |   | 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) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12  |   | Substitution of Agent  and Joinder Agreement, dated as of July 15, 2009, among Deutsche Bank  Trust Company Americas, Credit Suisse and Bank of America, N.A., incorporated  herein by reference to Neiman Marcus, Inc.’s Current Report on Form 8-K  dated July 16, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14  |   | Lien Subordination and  Intercreditor Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as revolving  facility agent, and Credit Suisse, as term loan agent, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15  |   | Form of First  Priority Mortgage, Assignment of Leases and Rents, Security Agreement and  Financing Statement from The Neiman Marcus Group, Inc. to Credit Suisse,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16  |   | Form of First  Priority Leasehold Mortgage, Assignment of Leases and Rents, Security  Agreement and Financing Statement from The Neiman Marcus Group, Inc. to  Credit Suisse, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17  |   | Form of Second  Priority Mortgage, Assignment of Leases and Rents, Security Agreement and  Financing Statement from The Neiman Marcus Group, Inc. to Deutsche Bank  Trust Company Americas, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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| 10.18  |   | Form of Second  Priority Leasehold Mortgage, Assignment of Lease and Rents, Security  Agreement and Financing Statement from The Neiman Marcus Group, Inc. to  Deutsche Bank Trust Company Americas, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.19  |   | Amendment No. 1  dated as of October 6, 2005 to the Credit Agreement dated as of October 6,  2005 among The Neiman Marcus Group, Inc., Newton Acquisition, Inc.,  each subsidiary of The Neiman Marcus Group, Inc. from time to time party  thereto, the Lenders thereunder, and Credit Suisse, as administrative agent  and as collateral agent for the Lenders, incorporated herein by reference to  The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.20* |   | 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.                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.21* |   | 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.                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.22* |   | 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.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.23* |   | 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.                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.24* |   | 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.                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.25* |   | 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.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.26* |   | 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.                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.27  |   | Amendment No. 2  dated as of January 26, 2006 to the Credit Agreement dated as of October 6,  2005, as amended, among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc.  from time to time party thereto, the Lenders thereunder and Credit Suisse, as  administrative agent and collateral agent for the Lenders, incorporated by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K  dated January 30, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.28* |   | Employment Agreement  between The Neiman Marcus Group, Inc. and Karen Katz, dated February 1,  2006, effective as of October 6, 2005, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  February 1, 2006.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.29* |   | Amendment to Employment  Agreement effective as of January 1, 2009 by and between The Neiman  Marcus Group, Inc., a Delaware corporation, and Karen Katz incorporated  herein by reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.30* |   | 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.                                                                                                                                                                                                                                                                                                            |

 

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| 10.31  |   | Management Services  Agreement, dated as of October 6, 2005 among Newton Acquisition Merger  Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P., TPG  GenPar III, L.P. and Warburg Pincus LLC, incorporated herein by reference to  The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for  the quarter ended January 28, 2006.                                                                                                                                                                                                                                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.32  |   | Registration Rights  Agreement, dated as of October 6, 2005, among Newton Acquisition Merger  Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and the  “Holders” identified therein as parties thereto, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 28, 2006.                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.33  |   | Amendment No. 1,  dated as of March 28, 2006, to the Pledge and Security Intercreditor  Agreement dated as of October 6, 2005, among Neiman Marcus, Inc.,  The Neiman Marcus Group, Inc., the Subsidiaries party thereto and Credit  Suisse, as administrative agent and collateral agent, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K  dated March 29, 2006.                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.34  |   | Credit Card Program  Agreement, dated as of June 8, 2005, by and among The Neiman Marcus  Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A. and  Household Corporation, incorporated herein by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended August 1,  2009.  (2)                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.35  |   | Servicing Agreement by  and between The Neiman Marcus Group, Inc. and HSBC Bank Nevada,  N.A.,  incorporated herein by reference  to the Company’s Annual Report on Form 10-K for the fiscal year ended August 1,  2009.  (2)                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.36* |   | Confidentiality,  Non-Competition and Termination Benefits Agreement by and between Bergdorf  Goodman, Inc., a New York corporation and a wholly owned subsidiary of  The Neiman Marcus Group, Inc., and James J. Gold dated May 3, 2004  incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q  for the quarter ended January 30, 2010.                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.37* |   | Amendment to the  Confidentiality, Non-Competition and Termination Benefits Agreement effective  as of January 1, 2009 by and between Bergdorf Goodman, Inc., a New  York corporation and wholly owned subsidiary of The Neiman Marcus Group, Inc.  and James J. Gold incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.38* |   | 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.                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.39  |   | Stockholder Agreement,  dated as of May 1, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc. and the other parties signatory  thereto.  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.40* |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.41  |   | 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.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.42  |   | 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. |

 

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| 10.43* |   | 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.                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.44* |   | 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.                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.45  |   | Amendment No. 3  dated as of October 12, 2006 to the Credit Agreement dated as of October 6,  2005 among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., each  subsidiary of The Neiman Marcus Group, Inc. from time to time party  thereto, the Lenders thereunder and Credit Suisse, as administrative agent  and collateral agent for the Lenders, incorporated by reference to Neiman  Marcus, Inc.’s Current Report on Form 8-K dated October 17,  2006.                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.46  |   | Amendment No. 4  dated as of February 8, 2007 to the Credit Agreement dated as of October 6,  2005, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc.,  each subsidiary of The Neiman Marcus Group, Inc. from time to time party  thereto, the lenders thereunder, and Credit Suisse, as administrative agent  and collateral agent for the lenders incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated February 14,  2007. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.47  |   | 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.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.48  |   | The Neiman Marcus Group, Inc.  Defined Contribution Supplemental Executive Retirement Plan, as amended and  restated effective as of January 1, 2008, incorporated herein by  reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for  the fiscal year ended August 2, 2008.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.49  |   | 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.                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.50  |   | First Amendment to  Credit Card Program Agreement dated as of April 30, 2006 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and Household Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended August 1,  2009.  (2)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.51  |   | Second Amendment to  Credit Card Program Agreement dated as of June 28, 2006 by and among The  Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A. and Household Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended August 1,  2009.  (2)                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.52  |   | Third Amendment to  Credit Card Program Agreement dated as of August 1, 2006 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and Household Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended August 1,  2009.  (2)                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.53  |   | Fourth Amendment to  Credit Card Program Agreement dated as of April 3, 2007 by and among The  Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.  (2)                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.54  |   | Fifth Amendment to  Credit Card Program Agreement dated as of March 13, 2007 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.                                                                                                                                                                  |

 

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| 10.55  |   | Sixth Amendment to  Credit Card Program Agreement dated as of July 17, 2007 by and among The  Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada,  N.A., and HSBC Private Label Corporation, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended August 1,  2009.  (2)     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.56  |   | Seventh Amendment to  Credit Card Program Agreement dated April 21, 2008 by and among The  Neiman Marcus Group, Inc., Bergdorf Goodman, HSBC Private Label  Corporation, and HSBC Bank Nevada, N.A., incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended August 1,  2009.  (2)                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.57  |   | Eighth Amendment to  Credit Card Program Agreement dated as of October 17, 2008 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.  (2) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.58  |   | Ninth Amendment to  Credit Card Program Agreement dated as of December 3, 2008 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and HSBC Private Label Corporation, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended August 1, 2009.  (2)  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.59  |   | 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.                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.60* |   | 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.                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.61* |   | 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.                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.62* |   | 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.                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 10.63  |   | Tenth Amendment to  Credit Card Program Agreement dated as of December 17, 2009 by and among  The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A., and HSBC Private Label Corporation incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended January 30, 2010.  (2) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.  (1)                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.  (1)                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                               |
| 32     |   | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.  (1)                                                                                                                                                                                                                                  |

 

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

 

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SIGNATURES

 

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

 

 

NEIMAN MARCUS, INC.

(Registrant)

 

| **Signature**         | ** ** | **Title**                                               | ** ** | **Date**          |
|-----------------------|------------|---------------------------------------------------------|------------|-------------------|
|                  |       |                                                    |       |              |
| /s/ T. Dale Stapleton |       | Vice President and  Controller and                      |       | June 7, 2010 |
| T. Dale Stapleton     |       | Duly Authorized Officer  (principal accounting officer) |       |              |

 

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