Neiman Marcus 10K 2010 Annual report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended July 31, 2010

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

For the transition period from to

Commission file no. 333-133184-12

Neiman Marcus, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-3509435
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1618 Main Street
Dallas, Texas		75201
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (214) 743-7600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Large accelerated filer o		Accelerated filer o

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

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant is zero. The registrant is a privately held corporation.

As of September 21, 2010, the registrant had outstanding 1,014,915 shares of its common stock, par value $0.01 per share.

Table of Contents

NEIMAN MARCUS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JULY 31, 2010

TABLE OF CONTENTS

		Page No.
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	10
Item 2.	Properties	19
Item 3.	Legal Proceedings	20
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
PART II
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	48
Item 8.	Financial Statements and Supplementary Data	49
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	49
Item 9A.	Controls and Procedures	49
Item 9B.	Other Information	49
PART III
Item 10.	Directors and Executive Officers of the Registrant	50
Item 11.	Executive Compensation	54
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	77
Item 13.	Certain Relationships and Related Transactions, and Director Independence	81
Item 14.	Principal Accounting Fees and Services	83
PART IV
Item 15.	Exhibits and Financial Statement Schedules	84
Signatures	Signatures	90

Table of Contents

PART I

ITEM 1. BUSINESS

Business Overview

We are one of the nation’s leading luxury retailers, offering distinctive merchandise and excellent customer service that cater to the needs of the affluent consumer. Since our founding in the early 1900s, we have established ourselves as a leading fashion authority among luxury consumers and have become a premier U.S. retail channel for many of the world’s most exclusive designers. Currently, we operate 41 Neiman Marcus full-line stores at prime retail locations in major U.S. markets and two Bergdorf Goodman stores on Fifth Avenue in New York City. We also operate catalogs and e-commerce websites under the brands Neiman Marcus®, Bergdorf Goodman® and Horchow®. During fiscal years 2010, 2009 and 2008, we generated revenues of $3,692.8 million, $3,643.3 million and $4,600.5 million, respectively, and operating earnings (loss) of $231.8 million, $(652.9) million and $466.4 million, respectively.

We operate an integrated, multi-channel retailing model as described below:

Specialty Retail. Our specialty retail store operations (Specialty Retail) consist primarily of our 41 Neiman Marcus stores and two Bergdorf Goodman stores. Specialty Retail accounted for 81.5% of our total revenues in fiscal year 2010, 82.1% in fiscal year 2009 and 83.8% in fiscal year 2008.

· Neiman Marcus Stores. Neiman Marcus stores offer distinctive luxury merchandise, including women’s couture and designer apparel, contemporary sportswear, handbags, fashion accessories, shoes, cosmetics, men’s clothing and furnishings, precious and designer jewelry, decorative home accessories, fine china, crystal and silver, children’s apparel and gift items. We locate our Neiman Marcus stores at carefully selected venues in major metropolitan markets across the United States and design our stores to provide a feeling of residential luxury by blending art and architectural details from the communities in which our stores are located.

We also operate 28 off-price stores under the Neiman Marcus Last Call brand. These off-price stores offer end-of-season clearance goods from our Neiman Marcus stores, Bergdorf Goodman stores and direct-to-consumer operations, as well as off-price goods purchased directly for resale by our Neiman Marcus Last Call stores. Based upon our strategy to expand our off-price operations, we anticipate opening approximately three to five new Neiman Marcus Last Call stores annually in each of the next three fiscal years.

Our full-line Neiman Marcus stores and Neiman Marcus Last Call stores accounted for 68.2% of our total revenues in fiscal year 2010, 69.7% in fiscal year 2009 and 71.2% in fiscal year 2008 and 83.7% of Specialty Retail revenues in fiscal year 2010, 84.9% in fiscal year 2009 and 85.0% in fiscal year 2008.

· Bergdorf Goodman Stores. Bergdorf Goodman is a premier luxury retailer in New York City well known for its couture merchandise, opulent shopping environment and landmark Fifth Avenue locations. Bergdorf Goodman features high-end apparel, fashion accessories, shoes, decorative home accessories, precious and designer jewelry, cosmetics and gift items. Our Bergdorf Goodman stores accounted for 13.3% of our total revenues in fiscal year 2010, 12.4% in fiscal year 2009 and 12.6% in fiscal year 2008 and 16.3% of Specialty Retail revenues in fiscal year 2010, 15.1% in fiscal year 2009 and 15.0% in fiscal year 2008.

We currently operate 6 stores under the CUSP name. CUSP is a smaller store format (6,000 to 11,000 square feet) that targets a younger, fashion savvy customer with a contemporary point of view. To date, the operations of the CUSP stores are insignificant to the revenues and operating earnings of our Specialty Retail stores.

Direct Marketing. Our upscale direct-to-consumer operation (Direct Marketing) conducts online and catalog sales of fashion apparel, accessories and home furnishings through the Neiman Marcus brand, online and catalog sales of home furnishings and accessories through the Horchow brand, and online sales of fashion apparel and accessories through the Bergdorf Goodman brand. We anticipate the launch of a website under the Neiman Marcus Last Call brand in the first quarter of fiscal year 2011. The Neiman Marcus Last Call website will feature off-price fashion goods and will augment and complement the operations of our Neiman Marcus Last Call stores.

In addition, Direct Marketing currently operates five designer websites. In connection with the designer websites, Direct Marketing creates and/or maintains separate e-commerce sites bearing the designers’ brand names. Direct Marketing maintains inventory from each designer to be showcased on that designer’s website and bears all the responsibilities related

Table of Contents

to the fulfillment of goods purchased on the designer website.

Direct Marketing generated 18.5% of our total revenues in fiscal year 2010, 17.9% in fiscal year 2009 and 16.2% in fiscal year 2008. Over one million customers made a purchase through one of our websites or catalogs in fiscal year 2010. In recent years, internet revenues have increased as a percentage of Direct Marketing revenues. As a percentage of total revenues of Direct Marketing, internet revenues were 84.2% in fiscal year 2010, 79.5% in fiscal year 2009 and 75.5% in fiscal year 2008. Our catalog business circulated approximately 48 million catalogs in fiscal year 2010, a decrease of over 25% from the prior year. With the growth of internet revenues, we have reduced catalog circulation in recent years and would expect flat to declining catalog circulation in the foreseeable future. We regularly send e-mails to approximately 4.7 million e-mail addresses, alerting our customers to our newest merchandise and the latest fashion trends.

For more information about our reportable segments, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 16 in the Notes to Consolidated Financial Statements in Item 15.

Our fiscal year ends on the Saturday closest to July 31. Like many other retailers, we follow a 4-5-4 reporting calendar, which resulted in an extra week in fiscal year 2008 (the fifty-third week). All references to fiscal year 2010 relate to the fifty-two weeks ended July 31, 2010, all references to fiscal year 2009 relate to the fifty-two weeks ended August 1, 2009 and all references to fiscal year 2008 relate to the fifty-three weeks ended August 2, 2008. References to fiscal years 2011 and years thereafter relate to our fiscal years for such periods.

We make our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and related amendments, available free of charge through our website at www.neimanmarcusgroup.com as soon as reasonably practicable after we electronically file such material with (or furnish such material to) the Securities and Exchange Commission. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be part of this Annual Report on Form 10-K.

The Acquisition

On April 22, 2005, Neiman Marcus, Inc. (the Company), formerly Newton Acquisition, Inc., and its wholly-owned subsidiary, Newton Acquisition Merger Sub, Inc. (Merger Sub), were formed and incorporated in the state of Delaware. On April 29, 2005, the Company received subscriptions for 900 shares of its common stock from Newton Holding, LLC (Holding) in exchange for a capital contribution of $900 and Merger Sub issued 900 shares of its common stock to the Company in exchange for a capital contribution of $900. Holding, the Company and Merger Sub were formed by investment funds affiliated with TPG Capital (formerly Texas Pacific Group) and Warburg Pincus LLC (collectively, the Sponsors) for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG).

In connection with the acquisition of NMG, Holding made an aggregate cash equity contribution of $1,420.0 million and a non-cash equity contribution of $25.0 million to the Company in exchange for the Company issuing 999,100 shares of its common stock to Holding. In addition, certain members of executive management of the Company made cash equity contributions aggregating $7.7 million and non-cash equity contributions, consisting of shares of common stock and common stock options in NMG, aggregating $17.9 million in exchange for 12,264 shares of common stock in the Company.

The acquisition of NMG was completed on October 6, 2005 through the merger of Merger Sub with and into NMG, with NMG being the surviving entity (the Acquisition). Subsequent to the Acquisition, NMG is a subsidiary of the Company, which is controlled by Holding. In connection with the Acquisition, NMG incurred significant indebtedness and became highly leveraged. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” All references to “we” and “our” relate to the Company for periods subsequent to the Acquisition and to NMG for periods prior to the Acquisition.

Prior to the Acquisition, the Company had no independent assets or operations. After the Acquisition, the Company represents the successor to NMG since the Company’s sole asset is its investment in NMG and its operations consist solely of the operating activities of NMG as well as costs incurred by the Company related to its investment in NMG. For periods prior to the Acquisition, NMG is deemed to be the predecessor to the Company. As a result, for periods prior to the Acquisition, the financial statements of the Company consist of the financial statements of NMG for such periods.

Table of Contents

Recent Developments

On September 2, 2010, we announced preliminary total revenues and comparable revenues of approximately $250 million and $248 million, respectively, for the four-week period ended August 28, 2010. In the four-week August period of fiscal year 2011, total revenues increased 3.9% and comparable revenues increased 2.9% compared to the four-week August period of fiscal year 2010. Comparable revenues increased 2.7% in our Specialty Retail stores and increased 3.6% in our Direct Marketing operation for the four-week August period of fiscal year 2011.

All the financial data set forth above for the four-week period ending August 28, 2010 are preliminary and unaudited and subject to revision based upon our review and a review by our independent registered public accounting firm of our financial condition and results of operations for the quarter ending October 30, 2010. Once we and our independent registered public accounting firm have completed our respective reviews of our financial information for the quarter ending October 30, 2010, we may report financial results that are different from those set forth above.

Industry Overview

We operate in the luxury apparel and accessories segment of the U.S. retail industry and market and sell merchandise from luxury-branded fashion vendors, including, but not limited to, Chanel, Gucci, Prada, Giorgio Armani, St. John, David Yurman, Christian Louboutin, Ermenegildo Zegna, Manolo Blahnik and Loro Piana. Luxury-branded fashion vendors typically manage the distribution and marketing of their merchandise to maximize the perception of brand exclusivity and to facilitate the sale of their goods at premium prices, including limitations on the number of retail locations through which they distribute their merchandise. These retail locations typically consist of a limited number of specialty stores, high-end department stores and, in some instances, vendor-owned proprietary boutiques. Retailers that compete with us for the distribution of luxury fashion brands include Saks Fifth Avenue, Nordstrom, Barney’s New York and other national, regional and local retailers.

Customer Service and Marketing

We are committed to providing our customers with a premier shopping experience through our relationship-based customer service model, with superior merchandise selection and elegant store settings. Critical elements to our customer service approach are:

· knowledgeable, professional and well-trained sales associates;

· marketing programs designed to promote customer awareness of our offerings of the latest fashion trends;

· loyalty programs designed to cultivate long-term relationships with our customers; and

· facilitating the extension of credit to our customers through a proprietary credit card program.

We believe we offer our customers fair and liberal return policies consistent with the practices of other luxury and specialty retailers. We believe these policies help to cultivate long-term relationships with our customers.

Sales Associates. We seek to maintain a sales force of knowledgeable, professional and well-trained sales associates to deliver personal attention and service to our customers through our relationship-based customer service model. We compensate our sales associates primarily on a commission basis and provide them with training in the areas of customer service, selling skills and product knowledge. Our sales associates participate in active clienteling programs designed to maintain contact with our customers between store visits and to ensure that our customers are aware of the latest merchandise offerings and fashion trends that we present in our stores. We empower our sales associates to act as personal shoppers and, in many cases, as the personal style advisor to our customers.

Marketing Programs. We conduct a wide variety of marketing programs to support our sales associates in the communication of fashion trends to our customers in order to create fashion excitement and enhance our customer relationships. The programs include both in-store events and targeted, brand-consistent print media communications.

We maintain an active calendar of in-store events to promote our sales efforts. The activities include in-store promotions of the merchandise of selected designers or merchandise categories, often through events conducted in connection with our loyalty programs, in-store visits and trunk shows by leading designers featuring the newest fashions from the designer,

Table of Contents

and participation in charitable functions in each of our markets. Past trunk shows and in-store promotions at our Neiman Marcus and Bergdorf Goodman stores have featured vendors such as Chanel, Giorgio Armani, Oscar de la Renta and Manolo Blahnik.

Through our print media programs, we mail various publications to our customers communicating upcoming in-store events, new merchandise offerings and fashion trends. In connection with these programs, Neiman Marcus produces The Book® approximately seven to nine times each year. The Book is a high-quality publication featuring the latest fashion trends that is mailed on a targeted basis to our customers and has a yearly printing in excess of 2.0 million. Our other print publications include the Bergdorf Goodman Magazine and specific designer mailers. We also believe that the online and print catalog operations of Direct Marketing promote brand awareness, which benefits the operations of our retail stores.

Loyalty Programs. We maintain a loyalty program under the InCircle® brand name designed to cultivate long-term relationships with our customers. Our loyalty program focuses on our most active customers. This program includes marketing features, including private in-store events, special magazine issues, as well as the ability to accumulate points for qualifying purchases. Increased points are periodically offered in connection with in-store promotional and other events. Upon attaining specified point levels, customers may redeem their points for a wide variety of gifts ranging from gift cards to designer merchandise and trips to exotic locations. Beginning in calendar 2006, we transitioned customers in our previous Bergdorf Goodman loyalty program to our InCircle loyalty program. Approximately 40% of our total revenues during each of the last two calendar years was generated by our InCircle loyalty program members.

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

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

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

Historically, our customers holding a proprietary credit card have tended to shop more frequently and have a higher level of spending than customers paying with cash or third-party credit cards. In fiscal years 2010 and 2009, approximately 50% of our revenues were transacted through our proprietary credit cards.

We utilize data captured through our proprietary credit card program in connection with promotional events and customer relationship programs targeting specific customers based upon their past spending patterns for certain brands, merchandise categories and store locations.

Integrated Multi-Channel Model. We offer products through our complementary Direct Marketing and Specialty Retail businesses, which enable us to maximize our brand recognition and strengthen our customer relationships across all channels. Our well-established online and catalog operation expands our reach beyond the trading area of our retail stores, as approximately 40% of our Direct Marketing customers in fiscal years 2010 and 2009 were located outside of the trade areas of our existing retail locations. We also use our e-commerce websites and catalogs as selling and marketing tools to increase the visibility and exposure of our brand and generate customer traffic within our retail stores. We believe the combination of our retail stores and direct selling efforts is the main reason that our multi-channel customers spend more on average than our single-channel customers (approximately four times more in fiscal years 2010 and 2009).

Table of Contents

Merchandise

We carry luxury merchandise from well-recognized designers as well as emerging designers. We believe our merchandising experience and in-depth knowledge of our customers and the markets within which we operate, allow us to select an appropriate merchandise assortment for each of our stores that is tailored to our customers’ tastes and lifestyles.

Our percentages of revenues by major merchandise category are as follows:

	Years Ended
	July 31, 2010		August 1, 2009		August 2, 2008
Women’s Apparel	36	%	36	%	36	%
Women’s Shoes, Handbags and Accessories	22	%	21	%	20	%
Cosmetics and Fragrances	11	%	11	%	11	%
Men’s Apparel and Shoes	11	%	12	%	12	%
Designer and Precious Jewelry	11	%	11	%	12	%
Home Furnishings and Décor	7	%	7	%	8	%
Other	2	%	2	%	1	%
	100	%	100	%	100	%

Our major merchandise categories are as follows:

Women’s Apparel: Women’s apparel consists of dresses, eveningwear, suits, coats, and sportswear separates—skirts, pants, blouses, jackets, and sweaters. Women’s apparel occupies the largest amount of square footage within our stores. We work with women’s apparel vendors to present the merchandise and highlight the best of the vendor’s product. Our primary women’s apparel vendors include Chanel, Gucci, Prada, Giorgio Armani, St. John, Akris and Escada.

Women’s Shoes, Handbags and Accessories: Women’s accessories include belts, gloves, scarves, hats and sunglasses and complement our shoes and handbags assortments. Our primary vendors in this category include Christian Louboutin, Chanel, Manolo Blahnik, Prada, Gucci and Tory Burch in ladies shoes, and handbags from Chanel, Prada, Gucci, Nancy Gonzalez, Tory Burch and Balenciaga.

Cosmetics and Fragrances: Cosmetics and fragrances include facial and skin cosmetics, skin therapy and lotions, soaps, fragrances, candles and beauty accessories. Our primary vendors of cosmetics and beauty products include La Mer, Chanel, Sisley, Bobbi Brown, La Prairie, Estee Lauder and Laura Mercier.

Men’s Apparel and Shoes: Men’s apparel and shoes include suits, dress shirts and ties, sport coats, jackets, trousers, casual wear and eveningwear as well as business and casual footwear. Bergdorf Goodman has a fully dedicated men’s store in New York. Our primary vendors in this category include Ermenegildo Zegna, Brioni, Giorgio Armani, Tom Ford, Prada and Loro Piana in men’s clothing and sportswear and Ermenegildo Zegna, Brioni, Prada, Ferragamo, Gucci and Stefano Ricci in men’s furnishings and shoes.

Designer and Precious Jewelry: Our designer and precious jewelry offering includes women’s necklaces, bracelets, rings, earrings and watches that are selected to complement our apparel merchandise offering. Our primary vendors in this category include David Yurman, John Hardy, Ippolita and Konstantino in designer jewelry and Cartier and Roberto Coin in precious jewelry. We often sell precious jewelry, which has been consigned to us from the vendor.

Home Furnishings and Décor: Home furnishings and décor include linens, tabletop, kitchen accessories, furniture, rugs, decorative items (frames, candlesticks, vases and sculptures) as well as collectables. Merchandise for the home complements our apparel offering in terms of quality and design. Our primary vendors in this category include Jay Strongwater, MacKenzie-Childs and Lalique.

Table of Contents

Vendor Relationships

Our merchandise assortment consists of a wide selection of luxury goods purchased from both well-known luxury-branded fashion vendors as well as new and emerging designers. We communicate with our vendors frequently, providing feedback on current demand for their products, suggesting changes to specific product categories or items on occasion and gaining insight into their future fashion direction. Certain designers sell their merchandise, or certain of their design collections, exclusively to us and other designers sell to us pursuant to their limited distribution policies. We compete for quality merchandise and assortment principally based on relationships and purchasing power with designer resources. Our women’s and men’s apparel and fashion accessories businesses are especially dependent upon our relationships with these designer resources. We monitor and evaluate the sales and profitability performance of each vendor and adjust our future purchasing decisions from time to time based upon the results of this analysis. We have no guaranteed supply arrangements with our principal merchandising sources and, accordingly, there can be no assurance that such sources will continue to meet our needs for quality, style and volume. In addition, our vendor base is diverse, with only one vendor representing slightly more than 5% of the cost of our total purchases in fiscal year 2010. The breadth of our sourcing helps mitigate risks associated with a single brand or designer.

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

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. We receive certain allowances to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise. We also receive advertising allowances from certain of our merchandise vendors, substantially all of which represent reimbursements of direct, specified and incremental costs we incur to promote the vendors’ merchandise. These allowances are recorded as a reduction of our advertising costs when incurred. In addition, we receive allowances from certain merchandise vendors in conjunction with compensation allowances for employees who sell the vendors’ merchandise, which allowances are netted against the related compensation expenses that we incur. For more information related to allowances received from vendors, see Note 1 in the Notes to Consolidated Financial Statements.

In order to expand our product assortment, we offer certain merchandise, primarily precious jewelry, which has been consigned to us from the vendor. As of July 31, 2010 and August 1, 2009, we held consigned inventories with a cost basis of approximately $256.2 million and $283.0 million, respectively (consigned inventories are not reflected in our consolidated balance sheet as we do not take title to consigned merchandise). From time to time, we make advances to certain of our vendors. These advances are typically deducted from amounts paid to vendors at the time we receive the merchandise or, in the case of advances made for consigned goods, at the time we sell the goods. We had net outstanding advances to vendors of approximately $7.3 million at July 31, 2010 and $11.6 million at August 1, 2009.

Inventory Management

Our merchandising function is decentralized with separate merchandising functions for Neiman Marcus stores, Bergdorf Goodman and Direct Marketing. Each merchandising function is responsible for the determination of the merchandise assortment and quantities to be purchased and, in the case of Neiman Marcus stores, for the allocation of merchandise to each store. We currently have approximately 400 merchandise buyers and merchandise planners.

The majority of the merchandise we purchase is initially received at one of our centralized distribution facilities. To support our Specialty Retail stores, we utilize a primary distribution facility in Longview, Texas, a regional distribution facility in Dayton, New Jersey and four regional service centers. We also operate two distribution facilities in the Dallas-Fort Worth area to support our Direct Marketing operation.

Our distribution facilities are linked electronically to our various merchandising staffs to facilitate the distribution of goods to our stores. We utilize electronic data interchange (EDI) technology with certain of our vendors, which is designed to move merchandise onto the selling floor quickly and cost-effectively by allowing vendors to deliver floor-ready merchandise to the distribution facilities. In addition, we utilize high-speed automated conveyor systems capable of scanning the bar coded labels on incoming cartons of merchandise and directing the cartons to the proper processing areas. Many types of merchandise

Table of Contents

are processed in the receiving area and immediately “cross docked” to the shipping dock for delivery to the stores. Certain processing areas are staffed with personnel equipped with hand-held radio frequency terminals that can scan a vendor’s bar code and transmit the necessary information to a computer to record merchandise on hand. We utilize third-party carriers to distribute our merchandise to individual stores.

With respect to the Specialty Retail stores, the majority of the merchandise is held in our retail stores. We primarily operate on a pre-distribution model through which we allocate merchandise on our initial purchase orders to each store. This merchandise is shipped from our vendors to our distribution facilities for delivery to designated stores. We closely monitor the inventory levels and assortments in our retail stores to facilitate reorder and replenishment decisions, satisfy customer demand and maximize sales. Transfers of goods between stores are made primarily at the direction of merchandising personnel and, to a lesser extent, by store management primarily to fulfill customer requests.

We also maintain certain inventories at the Longview distribution facility. The goods held at the Longview distribution facility consist primarily of goods held in limited assortment or quantity by our stores and replenishment goods available to stores achieving high initial sales levels. With our “locker stock” inventory management program, we maintain a portion of our most in-demand and high fashion merchandise at our distribution facilities. For products stored in locker stock, we can ship replenishment merchandise to the stores that demonstrate the highest customer demand. In addition, our sales associates can use the program to ship items directly to our customers, thereby improving customer service and increasing productivity. This program also helps us to restock inventory at individual stores more efficiently, to maximize the opportunity for full-price selling and to minimize the potential risks related to excess inventories.

Capital Investments

We make capital investments annually to support our long-term business goals and objectives. We invest capital in new and existing stores, distribution and support facilities as well as information technology. We have gradually increased the number of our stores over the past ten years, growing our full-line Neiman Marcus and Bergdorf Goodman store base from 31 stores at the beginning of fiscal year 2000 to our current 43 stores.

We invest capital in the development and construction of new stores in both existing and new markets. We conduct extensive demographic, marketing and lifestyle research to identify attractive retail markets with a high concentration of our target customers prior to our decision to construct a new store. We compete with other retailers for real estate opportunities principally on the basis of our ability to attract customers. In addition to the construction of new stores, we also invest in the on-going maintenance of our stores to ensure an elegant shopping experience for our customers. Capital expenditures for existing stores range from minor renovations of certain areas within the store to major remodels and renovations and store expansions. We are focused on operating only in attractive markets that can profitably support our stores as well as maintaining the quality of our stores and, consequently, our brand. With respect to our major remodels, we only expand after extensive analysis of our projected returns on capital. We generally experience an increase in both total sales and sales per square foot at stores that undergo a remodel or expansion.

We also believe capital investments for information technology in our stores, distribution facilities and support functions are necessary to support our business strategies. As a result, we are continually upgrading our information systems to improve efficiency and productivity.

In the past three fiscal years, we have made capital expenditures aggregating $343.7 million related primarily to:

· the construction of new stores in Natick (suburban Boston), Topanga (greater Los Angeles area) and Bellevue (suburban Seattle);

· the renovation and expansion of our main Bergdorf Goodman store in New York City and Neiman Marcus stores in Atlanta and Westchester; and

· enhancements to merchandising and store systems.

In fiscal year 2011, we anticipate capital expenditures for our planned new store in Walnut Creek, California (scheduled to open in March 2012).

We receive allowances from developers related to the construction of our stores thereby reducing our cash investment in these stores. We record these allowances as deferred real estate credits, which are recognized as a reduction of rent expense

Table of Contents

on a straight-line basis over the lease term. We received construction allowances aggregating $14.4 million in fiscal year 2010 and $10.0 million in fiscal year 2009.

Competition

The specialty retail industry is highly competitive and fragmented. We compete for customers with specialty retailers, traditional and high-end department stores, national apparel chains, vendor-owned proprietary boutiques, individual specialty apparel stores and direct marketing firms. We compete for customers principally on the basis of quality and fashion, customer service, value, assortment and presentation of merchandise, marketing and customer loyalty programs and, in the case of Neiman Marcus and Bergdorf Goodman, store ambiance. Retailers that compete with us for distribution of luxury fashion brands include Saks Fifth Avenue, Nordstrom, Barney’s New York and other national, regional and local retailers. Many of these competitors have greater financial resources than we do. In addition, following consummation of the Acquisition many of those competitors are significantly less leveraged than we are, and therefore may have greater flexibility to respond to changes in our industry.

We believe we are differentiated from other national retailers by our distinctive merchandise assortment, which we believe is more upscale than other high-end department stores, excellent customer service, prime real estate locations and elegant shopping environment. We believe we differentiate ourselves from regional and local high-end luxury retailers through our diverse product selection, strong national brand, loyalty programs, customer service, prime shopping locations and strong vendor relationships that allow us to offer the top merchandise from each vendor. Vendor-owned proprietary boutiques and specialty stores carry a much smaller selection of brands and merchandise, lack the overall shopping experience we provide and have a limited number of retail locations.

Employees

As of September 15, 2010, we had approximately 14,400 employees. Neiman Marcus stores had approximately 11,600 employees, Bergdorf Goodman stores had approximately 1,000 employees, Direct Marketing had approximately 1,300 employees and Neiman Marcus Group had approximately 500 employees. Our staffing requirements fluctuate during the year as a result of the seasonality of the retail industry. We hire additional temporary associates and increase the hours of part-time employees during seasonal peak selling periods. Except for approximately 13% of the Bergdorf Goodman employees, none of our employees is subject to a collective bargaining agreement. We believe that our relations with our employees are good.

Seasonality

Our business, like that of most retailers, is affected by seasonal fluctuations in customer demand, product offerings and working capital expenditures. For additional information on seasonality, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Executive Overview—Seasonality.”

Regulation

The credit card operations that are conducted under our arrangements with HSBC are subject to numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. In addition to our proprietary credit cards, credit to our customers is also provided primarily through third parties. Any regulation or change in the regulation of credit arrangements that would materially limit the availability of credit to our customer base could adversely affect our results of operations or financial condition.

Our practices, as well as our competitors, are subject to review in the ordinary course of business by the Federal Trade Commission and are subject to numerous federal and state laws. Additionally, we are subject to certain customs, truth-in-advertising and other laws, including consumer protection regulations that regulate retailers generally and/or govern the importation, promotion and sale of merchandise. We undertake to monitor changes in these laws and believe that we are in material compliance with all applicable state and federal regulations with respect to such practices.

Table of Contents

ITEM 1A. RISK FACTORS

Risks Related to Recent Economic Conditions

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

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

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

We continue to experience a challenging economic and retail environment and expect these conditions will continue in the near term. We will continue to align our inventory levels and purchases with anticipated lower customer demand. The prolonged continuation of uncertain market conditions could have a material adverse effect on our business.

Uncertain economic conditions may constrain our ability to obtain credit.

Uncertain economic conditions may constrain our ability to obtain credit. Domestic and global credit and equity markets have recently undergone significant disruption, making it difficult for many businesses to obtain financing on acceptable terms or at all. As a result of this disruption, we have experienced an increase in the cost of borrowings necessary to operate our business. If these conditions continue or become worse, our cost of borrowing could continue to increase. It may also become more difficult to obtain financing for our operations or to refinance long-term obligations as they become payable. In addition, our borrowing costs can be affected by independent rating agencies’ short and long-term debt ratings, which are based largely on our performance as measured by credit metrics including interest coverage and leverage ratios. A decrease in these ratings would likely also increase our cost of borrowing and make it more difficult for us to obtain financing. Our long-term debt ratings were downgraded in fiscal year 2009 by all three independent rating agencies. A significant increase in the costs we incur in order to finance our operations may have a material adverse impact on our business results and financial condition.

Risks Related to Our Structure and NMG’s Indebtedness

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

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

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

We are highly leveraged. As of July 31, 2010, the principal amount of NMG’s total indebtedness was approximately $2,891.0 million, the unused borrowing availability under the $600.0 million Asset-Based Revolving Credit Facility was $508.9

Table of Contents

million and the outstanding letters of credit were $31.1 million. As of July 31, 2010, NMG had no borrowings outstanding under this facility. NMG’s substantial indebtedness, combined with its lease and other financial obligations and contractual commitments, could have other important consequences. For example, it could:

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

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

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

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

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

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

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

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

In addition, NMG’s interest expense could increase if interest rates increase because the entire amount of the indebtedness under the senior secured credit facilities bears interest at floating rates. As of July 31, 2010, NMG had approximately $1,513.4 million principal amount of floating rate debt, consisting of outstanding borrowings under the Senior Secured Term Loan Facility (including $7.6 million of borrowings classified as current liabilities).

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

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

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

If NMG does not generate sufficient cash flow from operations to satisfy the debt service obligations, NMG may have to undertake alternative financing plans, such as refinancing or restructuring its indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance NMG’s debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of NMG’s debt could be at higher interest rates and may require it to comply with more onerous covenants, which could further restrict its business operations.

Table of Contents

The terms of existing or future debt instruments may restrict NMG from adopting some of these alternatives. In addition, our borrowing costs and ability to refinance may be affected by short-term and long-term debt ratings assigned by independent rating agencies, which are based, in significant part, on NMG’s performance as measured by indicators such as interest coverage and leverage ratios. Furthermore, any failure to make payments of interest and principal on NMG’s outstanding indebtedness on a timely basis would likely result in a reduction of NMG’s credit rating, which could harm its ability to incur additional indebtedness on acceptable terms.

Contractual limitations on NMG’s ability to execute any necessary alternative financing plans could exacerbate the effects of any failure to generate sufficient cash flow to satisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits NMG to borrow up to $600.0 million; however, NMG’s ability to borrow and obtain letters of credit (including amendments, renewals and extensions of letters of credit) thereunder is limited by a borrowing base, which at any time will equal the sum of (a) the lesser of (i) 80% of eligible inventory (valued at the lower of cost or market value) and (ii) 85% of the net orderly liquidation value of eligible inventory, and (b) 85% of the amounts owed by credit card processors to the borrowers under the Asset-Based Revolving Credit Facility in respect of eligible credit card accounts constituting proceeds arising from the sale or disposition of inventory, less certain reserves. In addition, if at any time the aggregate amount of outstanding revolving loans and incremental term loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the reported value of inventory as calculated under that facility, NMG will be required to eliminate such excess. Further, if (a) the amount available under the Asset-Based Revolving Credit Facility is less than the greater of (i) 20% of the lesser of (A) the aggregate revolving commitments and (B) the borrowing base and (ii) $75 million or (b) an event of default has occurred, NMG will be required to repay outstanding loans and cash collateralize letters of credit. In addition, under the terms of the Asset-Based Revolving Credit Facility, through April 30, 2011 NMG is required to maintain excess availability of at least the greater of (a) 10% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $50 million. After April 30, 2011, if at any time, excess availability is less than the greater of (a) 15% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $60 million, NMG will be required to maintain a pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) of at least 1.1 to 1.0. Our ability to meet the conditions described in this paragraph may be affected by events beyond our control.

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

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

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

· incur additional indebtedness;

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

· make investments;

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

· engage in transactions with its affiliates;

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

· consolidate or merge;

· create liens; and

· enter into sale and lease back transactions.

Table of Contents

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

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

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

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

Risks Related to Our Business and Industry

The specialty retail industry is highly competitive.

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

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

· increased operational efficiencies of competitors;

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

· expansion of product offerings by existing competitors;

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

· adoption by existing competitors of innovative retail sales methods.

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

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

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

Table of Contents

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

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

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

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

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

A breach in information privacy could negatively impact our operations.

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

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

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

Table of Contents

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

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

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

Acts of terrorism could adversely affect our business.

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

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

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

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

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

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

We maintain loyalty programs that are designed to cultivate long-term relationships with our customers and enhance the quality of service we provide to our customers. We must constantly monitor and update the terms of our loyalty programs so that they continue to meet the demands and needs of our customers and remain competitive with loyalty programs offered by other high-end specialty retailers. Given that approximately 40% of our total revenues during each of the last two calendar years was generated by our InCircle loyalty program members, our failure to continue to provide quality service and competitive rewards to our customers through the InCircle loyalty program could adversely affect our business.

Table of Contents

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

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

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

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

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

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

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

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

Table of Contents

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

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

Our business is affected by foreign currency fluctuations.

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

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

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

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

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

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

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

Table of Contents

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

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

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

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

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

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

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

Table of Contents

ITEM 2. PROPERTIES

Our corporate headquarters are located at the Downtown Neiman Marcus store location in Dallas, Texas. The operating headquarters for Neiman Marcus, Bergdorf Goodman and Direct Marketing are located in Dallas, Texas; New York, New York; and Irving, Texas, respectively.

Properties that we use in our operations include Neiman Marcus stores, Bergdorf Goodman stores, Neiman Marcus Last Call stores and distribution, support and office facilities. As of September 15, 2010, the approximate aggregate square footage of the properties used in our operations was as follows:

	Owned	Owned Subject to Ground Lease	Leased	Total
Neiman Marcus Stores	752,000	2,513,000	2,302,000	5,567,000
Bergdorf Goodman Stores	—	—	316,000	316,000
Neiman Marcus Last Call stores and Other	—	—	857,000	857,000
Distribution, Support and Office Facilities	1,317,000	150,000	1,010,000	2,477,000

Neiman Marcus Stores. As of September 15, 2010, we operated 41 Neiman Marcus stores, with an aggregate total property size of approximately 5,567,000 square feet. The following table sets forth certain details regarding each Neiman Marcus store:

Neiman Marcus Stores

Locations	Fiscal Year Operations Began	Gross Store Sq. Feet	Locations	Fiscal Year Operations Began	Gross Store Sq. Feet
Dallas, Texas (Downtown)(1)	1908	129,000	Denver, Colorado(3)*	1991	90,000
Dallas, Texas (NorthPark)(2)*	1965	218,000	Minneapolis, Minnesota(2)	1992	119,000
Houston, Texas (Galleria)(3)*	1969	224,000	Scottsdale, Arizona(2)*	1992	118,000
Bal Harbour, Florida(2)	1971	97,000	Troy, Michigan(3)*	1993	157,000
Atlanta, Georgia(2)*	1973	206,000	Short Hills, New Jersey(3)*	1996	138,000
St. Louis, Missouri(2)	1975	145,000	King of Prussia, Pennsylvania(3)*	1996	142,000
Northbrook, Illinois(3)	1976	144,000	Paramus, New Jersey(3)*	1997	141,000
Fort Worth, Texas(2)	1977	119,000	Honolulu, Hawaii(3)	1999	181,000
Washington, D.C.(2)*	1978	130,000	Palm Beach, Florida(2)	2001	53,000
Newport Beach, California(3)*	1978	154,000	Plano, Texas (Willow Bend)(4)*	2002	156,000
Beverly Hills, California(1)*	1979	185,000	Tampa, Florida(3)*	2002	96,000
Westchester, New York(2)*	1981	138,000	Coral Gables, Florida(2)*	2003	136,000
Las Vegas, Nevada(2)	1981	174,000	Orlando, Florida(4)*	2003	95,000
Oak Brook, Illinois(2)	1982	119,000	San Antonio, Texas(4)*	2006	120,000
San Diego, California(2)	1982	106,000	Boca Raton, Florida(3)	2006	136,000
Fort Lauderdale, Florida(3)*	1983	94,000	Charlotte, North Carolina(3)	2007	80,000
San Francisco, California(4)*	1983	251,000	Austin, Texas(3)	2007	80,000
Chicago, Illinois (Michigan Ave.)(2)	1984	188,000	Natick, Massachusetts(1)	2008	102,000
Boston, Massachusetts(2)	1984	111,000	Topanga, California(3)	2009	120,000
Palo Alto, California(3)*	1986	120,000	Bellevue, Washington(2)	2010	125,000
McLean, Virginia(4)*	1990	130,000

(1) Owned subject to partial ground lease.

(2) Leased.

(3) Owned subject to ground lease.

(4) Owned.

* Mortgaged to secure our senior secured credit facilities and the 2028 Debentures.

We recently opened new stores in Natick (102,000 square feet) in September 2007, Topanga (120,000 square feet) in September 2008 and Bellevue, Washington (125,000 square feet) in September 2009 and currently plan to open a new store in Walnut Creek, California in 2012 (89,000 square feet planned).

Table of Contents

Bergdorf Goodman Stores. We operate two Bergdorf Goodman stores, both of which are located in Manhattan at 58th Street and Fifth Avenue. The following table sets forth certain details regarding these stores:

Bergdorf Goodman Stores

Locations	Fiscal Year Operations Began	Gross Store Sq. Feet
New York City (Main)(1)	1901	250,000
New York City (Men’s)(1)*	1991	66,000

(1) Leased.

* Mortgaged to secure our senior secured credit facilities and the 2028 Debentures.

Neiman Marcus Last Call stores. As of September 15, 2010, we operated 28 Neiman Marcus Last Call stores that average approximately 28,900 square feet each in size.

Distribution, support and office facilities. We own approximately 41 acres of land in Longview, Texas, where our primary distribution facility is located. The Longview facility is the principal merchandise processing and distribution facility for Neiman Marcus stores. We currently utilize a regional distribution facility in Dayton, New Jersey and four regional service centers in New York, Florida, Texas and California. We also own approximately 50 acres of land in Irving, Texas, where our Direct Marketing operating headquarters and distribution facility is located. In addition, we currently utilize another regional distribution facility in Dallas, Texas to support our Direct Marketing operation.

Lease Terms. The terms of the leases for substantially all of our stores, assuming all outstanding renewal options are exercised, range from 1 to 101 years. The lease on the Bergdorf Goodman Main Store expires in 2050, with no renewal options, and the lease on the Bergdorf Goodman Men’s Store expires in 2020, with a 10-year renewal option. Most leases provide for monthly fixed rentals or contingent rentals based upon sales in excess of stated amounts and normally require us to pay real estate taxes, insurance, common area maintenance costs and other occupancy costs.

For further information on our properties and lease obligations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14 in the Notes to Consolidated Financial Statements in Item 15.

ITEM 3. LEGAL PROCEEDINGS

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

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

Table of Contents

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public trading market for our common stock. At September 15, 2010, there were 31 holders of record of our common stock.

We have not declared or paid any dividends on our common stock in our three most recent fiscal years. For the foreseeable future we intend to retain all current and foreseeable future earnings to support operations and finance expansion.

There were no unregistered sales of our equity securities during the quarterly period ended July 31, 2010.

Table of Contents

PART II

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data is qualified in entirety by our consolidated financial statements (and the related Notes thereto) contained in Item 15 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

	(Successor)															(Predecessor)
(in millions)	Fiscal year ended July 31, 2010			Fiscal year ended August 1, 2009			Fiscal year ended August 2, 2008 (1)			Fiscal year ended July 28, 2007			Forty-three weeks ended July 29, 2006			Nine weeks ended October 1, 2005
OPERATING RESULTS
Revenues	$	3,692.8		$	3,643.3		$	4,600.5		$	4,390.1		$	3,397.7		$	632.4
Cost of goods sold including buying and occupancy costs (excluding depreciation)	2,419.5			2,536.8			2,935.0			2,753.8			2,219.4			371.5
Selling, general and administrative expenses (excluding depreciation)	885.4			882.7			1,045.4			1,015.1			802.4			155.6
Income from credit card program, net	(59.1		)	(50.0		)	(65.7		)	(65.7		)	(49.4		)	(7.8		)
Depreciation and amortization	215.1			223.5			220.6			208.7			166.6			19.2
Impairment charges	—			703.2		(2)	31.3		(3)	11.5		(4)	—			—
Operating earnings (loss)	231.8			(652.9		)(2)	466.4		(3)	476.8		(4)	258.7			70.3		(5)
(Loss) earnings from continuing operations before income taxes	(5.3		)	(888.5		)	226.6			217.0			41.0			71.2
Loss from discontinued operations, net of tax (6)	—			—			—			(22.8		)	(14.0		)	(0.8		)
Net (loss) earnings	$	(1.8	)	$	(668.0	)	$	142.8		$	111.9		$	12.5		$	44.2

(in millions)	July 31, 2010		August 1, 2009		August 2, 2008 (1)		July 28, 2007		July 29, 2006

FINANCIAL POSITION
Cash and cash equivalents	$	421.0	$	323.4	$	239.2	$	141.2	$	223.7
Merchandise inventories	790.5		766.8		991.6		933.4		807.3
Total current assets	1,360.1		1,234.5		1,378.6		1,231.9		1,150.9
Property and equipment, net	905.8		992.7		1,075.3		1,043.7		1,030.3
Total assets	5,532.3		5,594.0		6,571.7		6,517.9		6,623.0
Total current liabilities	662.5		576.4		721.7		784.8		714.1
Long-term debt, excluding current maturities	$	2,879.7	$	2,954.2	$	2,946.1	$	2,945.9	$	3,195.7

Table of Contents

	(Successor)															(Predecessor)
(in millions, except sales per square foot)	Fiscal year ended July 31, 2010			Fiscal year ended August 1, 2009			Fiscal year ended August 2, 2008 (1)			Fiscal year ended July 28, 2007			Forty-three weeks ended July 29, 2006			Nine Weeks ended October 1, 2005
OTHER OPERATING DATA
Capital expenditures	$	58.7		$	101.5		$	183.5		$	147.9		$	138.2		$	25.6
Depreciation expense	$	141.8		$	150.8		$	148.4		$	136.5		$	107.0		$	19.2
Rent expense and related occupancy costs	$	85.0		$	85.4		$	92.6		$	87.5		$	69.3		$	12.5
Change in comparable revenues (7)	(0.1		)%	(21.4		)%	1.7		%	6.7		%	6.8		%	9.8		%
Number of full-line stores open at period end	43			42			41			40			38			37
Sales per square foot	$	466		$	475		$	634	(8)	$	638		$	508		$	103

NON-GAAP FINANCIAL MEASURE
EBITDA (9)	$	446.9		$	(429.4	)(2)	$	687.0	(3)	$	685.6	(4)	$	425.3		$	89.5	(5)
Adjusted EBITDA (9)	$	446.9		$	273.8		$	685.8		$	686.9		$	425.3		$	113.0

(1) Fiscal year 2008 consists of the fifty-three weeks ended August 2, 2008. All other fiscal years consist of fifty-two weeks.

(2) For fiscal year 2009, operating loss and EBITDA include pretax impairment charges related to 1) $329.7 million for the writedown to fair value of goodwill, 2) $343.2 million for the writedown to fair value of the net carrying value of tradenames and 3) $30.3 million for the writedown to fair value of the net carrying value of certain long-lived assets.

(3) For fiscal year 2008, operating earnings and EBITDA include 1) $32.5 million of other income related to a pension curtailment gain as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007, offset by 2) $31.3 million pretax impairment charge related to the writedown to fair value of the Horchow tradename.

(4) For fiscal year 2007, operating earnings and EBITDA include 1) $11.5 million pretax impairment charge related to the writedown to fair value of the Horchow tradename, offset by 2) $4.2 million of other income we received in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot and 3) $6.0M of other income related to aged, non-escheatable gift cards.

(5) For the nine weeks ended October 1, 2005, operating earnings and EBITDA include $23.5 million of transaction and other costs incurred in connection with the Acquisition. These costs consist primarily of $4.5 million of accounting, investment banking, legal and other costs associated with the Acquisition and a $19.0 million non-cash charge for stock compensation resulting from the accelerated vesting of Predecessor stock options and restricted stock in connection with the Acquisition.

(6) Loss from discontinued operations, reflects the operations of Kate Spade LLC (prior to its sale in December 2006) and Gurwitch Products, L.L.C. (prior to its sale in July 2006).

(7) Comparable revenues include 1) revenues derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded and 2) revenues from our Direct Marketing operation. Comparable revenues exclude 1) revenues of closed stores and 2) revenues from our discontinued operations (Gurwitch Products, L.L.C. and Kate Spade LLC). The calculation of the change in comparable revenues for fiscal year 2008 is based on revenues for the fifty-two weeks ended July 26, 2008 compared to revenues for the fifty-two weeks ended July 28, 2007.

(8) Sales per square foot for fiscal year 2008 are based on revenues for the fifty-two weeks ended July 26, 2008.

(9) For an explanation and reconciliation of EBITDA and Adjusted EBITDA, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measure-EBITDA and Adjusted EBITDA.”

Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes. Unless otherwise specified, the meanings of all defined terms in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are consistent with the meanings of such terms as defined in the Notes to Consolidated Financial Statements. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions relating to these statements.

Overview

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

The Company acquired The Neiman Marcus Group, Inc. (NMG) on October 6, 2005 through a merger transaction with Newton Acquisition Merger Sub, Inc., a wholly-owned subsidiary of Neiman Marcus, Inc. The acquisition was accomplished through the merger of the Newton Acquisition Merger Sub, Inc. with and into NMG, with NMG being the surviving entity (the Acquisition). Subsequent to the Acquisition, NMG is a subsidiary of the Company, which is controlled by Newton Holding, LLC (Holding). Both the Company and Holding were formed by investment funds affiliated with TPG Capital (formerly Texas Pacific Group) and Warburg Pincus LLC (collectively, the Sponsors). In connection with the Acquisition, NMG incurred significant indebtedness and became highly leveraged.

Recent Developments

Table of Contents

Fiscal Year 2010 Summary

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

A summary of our operating results is as follows:

· Revenues—Our revenues for fiscal year 2010 were $3,692.8 million, an increase of 1.4% as compared to fiscal year 2009, reflecting a decrease in comparable revenues of 0.1%. Comparable revenues by quarter for fiscal year 2010 are as follows:

First fiscal quarter	(13.7	)%
Second fiscal quarter	0.6	%
Third fiscal quarter	9.1	%
Fourth fiscal quarter	6.5	%

For Specialty Retail stores, our sales per square foot decreased to $466 for the fifty-two weeks ended July 31, 2010 from $475 for the fifty-two weeks ended August 1, 2009.

· Cost of goods sold including buying and occupancy costs (excluding depreciation)—COGS represented 65.5% of revenues in fiscal year 2010 and 69.6% of revenues in fiscal year 2009. The decreases in COGS as a percentage of revenues were due to 1) lower net markdowns as a result of a closer alignment of on-hand inventories to customer demand in fiscal year 2010 and 2) increases in customer demand, particularly since December 2009.

· Inventories—During fiscal year 2010, we continued to maintain tight control over inventory and aligned our inventory purchases with sales expectations. At July 31, 2010, on-hand inventories totaled $790.5 million, a 3.1% increase from the prior year fiscal period. Excluding inventories held by new stores, inventories increased by approximately 2%.

· Selling, general and administrative expenses (excluding depreciation)—SG&A represented 24.0% of revenues in fiscal 2010, a net improvement of 0.2% of revenues compared to fiscal year 2009. The lower levels of SG&A expenses primarily reflect net savings realized as a result of our on-going initiatives to control our expenses, offset by higher incentive compensation requirements.

· Operating earnings (loss)—Total operating earnings in fiscal year 2010 were $231.8 million, or 6.3% of revenues. Total operating losses in fiscal year 2009 were $652.9 million, or 17.9% of revenues, which included impairments of our long-lived assets of $703.2 million, or 19.3% of revenues. Excluding these impairment charges, operating earnings were $50.3 million, or 1.4% of revenues, in fiscal year 2009. Excluding these impairment charges, operating earnings margin increased by 4.9% of revenues compared to the prior year primarily due to:

· a decrease in COGS by 4.1% of revenues primarily due to higher customer demand, higher levels of full-price sales and lower net markdowns;

· a decrease in SG&A expenses by 0.2% of revenues primarily due to savings realized as a result of our on-going initiatives to control our expenses, offset by higher incentive compensation requirements;

· a decrease in depreciation and amortization expense by 0.3% of revenues reflecting the current lower level of capital expenditures in fiscal years 2010 and 2009; and

· an increase in income from our credit card operations by 0.2% of revenues primarily due to lower estimated shared credit card losses.

· Liquidity—Cash provided by our operating activities was $268.0 million in fiscal year 2010, an increase of $57.2 million from the prior fiscal year. This increase was primarily due to lower working capital requirements attributable to the closer alignment of on-hand inventories to customer demand in fiscal year 2010 and the

Table of Contents

improvement in operating earnings. We held cash balances of $421.0 million at July 31, 2010 compared to $323.4 million at August 1, 2009. At July 31, 2010, we had no borrowings outstanding under our Asset-Based Revolving Credit Facility, $31.1 million of outstanding letters of credit and $508.9 million of unused borrowing availability.

Given the challenging economic and retail environment, we elected to pay non-cash interest for the three quarterly interest periods ending October 14, 2009 with the issuance of additional Senior Notes instead of paying interest in cash. As a result, the original principal amount of Senior Notes of $700.0 million increased by $17.1 million in April 2009, $17.4 million in July 2009 and $18.1 million in October 2009. We have elected to pay cash interest since the first quarter of fiscal year 2010. After October 15, 2010, we are required to make all interest payments on the Senior Notes entirely in cash.

· Outlook— We do not anticipate the return of consumer spending to historical levels in the near-term. We plan to maintain an appropriate alignment of our inventory levels and purchases with anticipated customer demand. We believe the cash generated from our operations along with our cash balances and available sources of financing will enable us to meet our cash obligations for fiscal year 2011.

OPERATING RESULTS

Performance Summary

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

	Fiscal year ended
	July 31,		August 1,		August 2,
	2010		2009		2008

Revenues	100.0	%	100.0	%	100.0	%
Cost of goods sold including buying and occupancy costs (excluding depreciation)	65.5		69.6		63.8
Selling, general and administrative expenses (excluding depreciation)	24.0		24.2		22.7
Income from credit card program, net	(1.6	)	(1.4	)	(1.4	)
Depreciation expense	3.8		4.1		3.2
Amortization of intangible assets	1.5		1.5		1.2
Amortization of favorable lease commitments	0.5		0.5		0.4
Impairment charges	—		19.3		0.7
Other income	—		—		(0.7	)
Operating earnings (loss)	6.3		(17.9	)	10.1
Interest expense, net	6.4		6.5		5.2
Operating (loss) earnings before income taxes	(0.1	)	(24.4	)	4.9
Income tax (benefit) expense	(0.1	)	(6.1	)	1.8
Net (loss) earnings	(0.0	)%	(18.3	)%	3.1	%

Table of Contents

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

	Fiscal year ended
(in millions, except sales per square foot)	July 31, 2010			August 1, 2009			August 2, 2008

REVENUES
Specialty Retail stores	$	3,010.8		$	2,991.3		$	3,853.0
Direct Marketing	682.0			652.0			747.5
Total	$	3,692.8		$	3,643.3		$	4,600.5

OPERATING EARNINGS (LOSS)
Specialty Retail stores	$	272.5		$	124.3		$	476.7
Direct Marketing	112.6			73.3			117.7
Corporate expenses	(58.1		)	(52.1		)	(57.0		)
Other expenses (1)	(21.9		)	(22.5		)	—
Amortization of intangible assets and favorable lease commitments	(73.3		)	(72.7		)	(72.2		)
Impairment charges (2)	—			(703.2		)	(31.3		)
Other income (3)	—			—			32.5
Total	$	231.8		$	(652.9	)	$	466.4

OPERATING PROFIT MARGIN (LOSS)
Specialty Retail stores	9.1		%	4.2		%	12.4		%
Direct Marketing	16.5		%	11.2		%	15.7		%
Total	6.3		%	(17.9		)%	10.1		%

CHANGE IN COMPARABLE REVENUES (4)
Specialty Retail stores	(1.2		)%	(23.2		)%	1.3		%
Direct Marketing	4.6		%	(12.2		)%	3.8		%
Total	(0.1		)%	(21.4		)%	1.7		%

SALES PER SQUARE FOOT
Specialty Retail stores	$	466		$	475		$	634	(5)

STORE COUNT
Neiman Marcus and Bergdorf Goodman full-line stores:
Open at beginning of period	42			41			40
Opened during the period	1			1			1
Open at end of period	43			42			41
Neiman Marcus Last Call stores:
Open at beginning of period	27			24			20
Opened during the period	1			4			4
Closed during the period	—			(1		)	—
Open at end of period	28			27			24

NON-GAAP FINANCIAL MEASURE
EBITDA (6)	$	446.9		$	(429.4	)	$	687.0
Adjusted EBITDA (6)	$	446.9		$	273.8		$	685.8

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

Table of Contents

(2) For fiscal year 2009, impairment charges consist of pretax charges of 1) $329.7 million for the writedown to fair value of goodwill, 2) $343.2 million for the writedown to fair value of the net carrying value of tradenames and 3) $30.3 million for the writedown to fair value of the net carrying value of certain long-lived assets.

For fiscal year 2008, impairment charge consists of a $31.3 million pretax impairment charge related to the writedown to fair value of the Horchow tradename.

(3) For fiscal year 2008, other income includes a pension curtailment gain of $32.5 million as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007.

(4) Comparable revenues include 1) revenues derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded and 2) revenues from our Direct Marketing operation. Comparable revenues exclude revenues of closed stores. The calculation of the change in comparable revenues for fiscal year 2009 is based on revenues for the fifty-two weeks ended August 1, 2009 compared to revenues for the fifty-two weeks ended July 26, 2008.

(5) Sales per square foot for fiscal year 2008 are based on revenues for the fifty-two weeks ended July 26, 2008.

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

Factors Affecting Our Results

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

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

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

Our revenues can be affected by the following factors:

· general economic conditions;

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

· changes in the level of full-price sales;

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

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

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

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

Cost of 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 the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of our inventories. The cost of the inventory reflected on the

Table of Contents

consolidated balance sheet is decreased by charges to cost of goods sold at the time the retail value of the inventory is lowered through the use of markdowns. Hence, earnings are negatively impacted when merchandise is marked down. With the introduction of new fashions in the first and third fiscal quarters and our emphasis on full-price selling in these quarters, a lower level of markdowns and higher margins are characteristic of these quarters.

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

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

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

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold. We received vendor allowances of $81.2 million, or 2.2% of revenues, in fiscal year 2010, $107.7 million, or 3.0% of revenues, in fiscal year 2009 and $109.6 million, or 2.4% of revenues, in fiscal year 2008. The amounts of vendor allowances we receive fluctuate based on the level of markdowns taken and did not have a significant impact on the year-over-year change in gross margin during fiscal years 2010, 2009 or 2008.

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

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

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

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

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

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

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

Advertising costs consist primarily of 1) print media costs for promotional materials mailed to our customers incurred by our Specialty Retail segment, 2) advertising costs incurred by our Direct Marketing operation related to the production, printing and distribution of our print catalogs and the production of the photographic content for our websites and 3) online marketing costs incurred by our Direct Marketing operation. We receive advertising allowances from certain of our merchandise vendors. Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor’s merchandise in connection with our various advertising programs, primarily catalogs and other print media. Advertising allowances fluctuate based on the level of advertising expenses incurred and are recorded as a reduction of our advertising costs when earned. Advertising allowances aggregated approximately $46.2 million, or 1.3% of revenues, in fiscal year 2010, $65.7 million, or 1.8% of revenues, in fiscal year 2009 and $75.7 million, or 1.6% of revenues, in fiscal year 2008. The decrease in advertising allowances in fiscal 2010 compared to fiscal 2009 was consistent with the decrease in gross advertising expenditures in the periods.

We also receive allowances from certain merchandise vendors in conjunction with compensation programs for employees who sell the vendor’s merchandise. These allowances are netted against the related compensation expense that we

Table of Contents

incur. Amounts received from vendors related to compensation programs were $61.1 million, or 1.7% of revenues, in fiscal year 2010, $65.8 million, or 1.8% of revenues, in fiscal year 2009 and $71.6 million, or 1.6% of revenues, in fiscal year 2008.

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

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

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

· changes in expenses related to insurance and long-term benefits due to general economic conditions such as rising health care costs.

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

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

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

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

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

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

Seasonality

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

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

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

A large percentage of our merchandise assortment, particularly in the apparel, fashion accessories and shoe categories, is ordered months in advance of the introduction of such goods. For example, women’s apparel, men’s apparel, shoes and handbags are typically ordered six to nine months in advance of the products being offered for sale while jewelry and other

Table of Contents

categories are typically ordered three to six months in advance. As a result, inherent in the successful execution of our business plans is our ability both to predict the fashion trends that will be of interest to our customers and to anticipate future spending patterns of our customer base.

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

Fiscal Year Ended July 31, 2010 Compared to Fiscal Year Ended August 1, 2009

Revenues. Our revenues for fiscal year 2010 of $3,692.8 million increased by $49.5 million, or 1.4%, from $3,643.3 million in fiscal year 2009. New stores generated revenues of $56.7 million in fiscal year 2010.

Comparable revenues for the fifty-two weeks ended July 31, 2010 were $3,636.1 million compared to $3,640.5 million in fiscal year 2009, representing a decrease of 0.1%. Changes in comparable revenues, by quarter and by reportable segment, were:

	Fiscal year 2010								Fiscal year 2009
	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Specialty Retail stores	4.9	%	9.5	%	(0.6	)%	(14.9	)%	(25.0	)%	(27.1	)%	(25.0	)%	(15.8	)%
Direct Marketing	13.6	%	6.9	%	5.9	%	(7.2	)%	(15.7	)%	(14.3	)%	(12.1	)%	(7.0	)%
Total	6.5	%	9.1	%	0.6	%	(13.7	)%	(23.4	)%	(25.1	)%	(22.8	)%	(14.5	)%

Internet revenues generated by Direct Marketing were $574.0 million for fiscal year 2010, an increase of 10.7% compared to the prior fiscal year. Catalog revenues decreased 19.2% compared to the prior fiscal year as our customers continued to migrate toward on-line retailing in our Direct Marketing operation.

Cost of goods sold including buying and occupancy costs (excluding depreciation). COGS for fiscal year 2010 were 65.5% of revenues compared to 69.6% of revenues for fiscal year 2009. The decrease in COGS by 4.1% of revenues for fiscal year 2010 was primarily due to:

· increased product margins generated by both our Specialty Retail stores and Direct Marketing operation of approximately 3.9% of revenues due to 1) lower net markdowns as a result of the closer alignment of on-hand inventories to customer demand in fiscal year 2010 and 2) increases in customer demand and higher levels of full-price sales; and

· lower buying and occupancy costs of 0.2% of revenues primarily due to the leveraging of these expenses on higher revenues.

Selling, general and administrative expenses (excluding depreciation). SG&A expenses as a percentage of revenues decreased to 24.0% of revenues in fiscal year 2010 compared to 24.2% of revenues in the prior fiscal year. The net decrease in SG&A expenses by 0.2% of revenues in fiscal year 2010 was primarily due to:

· lower payroll and related benefits costs, of approximately 0.9% of revenues, primarily as a result of our reduced headcount; and

· a lower level of advertising and marketing costs incurred in fiscal year 2010 by our Direct Marketing operation of approximately 0.2% of revenues, primarily due to a lower level of catalog spending in connection with planned decreases in catalog circulation; offset by

· an increase in advertising and marketing costs for our Specialty Retail stores of approximately 0.1% of revenues due to a higher level of in-store marketing events as well as a lower level of advertising allowances; and

Table of Contents

· higher incentive compensation requirements by approximately 0.7% of revenues.

Income from credit card program, net. We earned HSBC Program Income of $59.1 million, or 1.6% of revenues, in fiscal year 2010 compared to $50.0 million, or 1.4% of revenues, in fiscal year 2009 primarily due to improvements in the profitability and performance of the credit card portfolio, primarily as the result of lower shared credit card losses.

Depreciation expense. Depreciation expense was $141.8 million, or 3.8% of revenues, in fiscal year 2010 compared to $150.8 million, or 4.1% of revenues, in fiscal year 2009. The decrease in depreciation results primarily from recent lower levels of capital spending and delays in certain real estate projects in response to recent unfavorable economic conditions.

Amortization expense. Amortization of intangible assets (primarily customer lists and favorable lease commitments) aggregated $73.3 million, or 2.0% of revenues, in fiscal year 2010 compared to $72.7 million, or 2.0% of revenues, in fiscal year 2009.

Impairment charges. In fiscal year 2009, we recorded impairment charges, related primarily to our tradenames and goodwill, aggregating $703.2 million in connection with the review of our long-lived assets for recoverability, as more fully explained in Note 9 in the Notes to Consolidated Financial Statements.

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

	Fiscal year ended
(in millions)	July 31, 2010			August 1, 2009
Specialty Retail stores	$	272.5		$	124.3
Direct Marketing	112.6			73.3
Corporate expenses	(58.1		)	(52.1		)
Other expenses	(21.9		)	(22.5		)
Amortization of intangible assets and favorable lease commitments	(73.3		)	(72.7		)
Impairment charges	—			(703.2		)
Total operating earnings (loss)	$	231.8		$	(652.9	)

Operating earnings for our Specialty Retail stores segment were $272.5 million, or 9.1% of Specialty Retail stores revenues, for fiscal year 2010 compared to $124.3 million, or 4.2% of Specialty Retail stores revenues, for the prior fiscal year. The increase in operating margin as a percentage of revenues was primarily due to:

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

· favorable payroll and related benefits primarily due to savings realized as a result of our initiatives to control our expenses; offset by

· higher incentive compensation requirements; and

· a higher level of spending for advertising and marketing costs for our Specialty Retail stores.

Operating earnings for Direct Marketing were $112.6 million, or 16.5% of Direct Marketing revenues, in fiscal year 2010 compared to $73.3 million, or 11.2% of Direct Marketing revenues, for the prior fiscal year. The increase in operating margin as a percentage of revenues for Direct Marketing was primarily the result of:

· lower net markdowns and higher customer demand;

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

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

· higher incentive compensation requirements.

Table of Contents

Other expenses of $21.9 million in fiscal year 2010 and $22.5 million in fiscal year 2009 consist primarily of costs (professional fees and severance) incurred in connection with cost reductions and corporate initiatives.

Interest expense, net. Net interest expense was $237.1 million, or 6.4% of revenues, in fiscal year 2010 and $235.6 million, or 6.5% of revenues, for the prior fiscal year. The significant components of interest expense are as follows:

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009

Senior Secured Term Loan Facility	$	83,468		$	90,952
2028 Debentures	8,886			8,906
Senior Notes	68,315			66,356
Senior Subordinated Notes	51,732			52,028
Amortization of debt issue costs	18,697			17,185
Other, net	6,296			1,140
Capitalized interest	(286		)	(993		)
Interest expense, net	$	237,108		$	235,574

Income tax (benefit) expense. In fiscal year 2010, we generated a loss before income taxes of approximately $5.3 million, which resulted in a recorded income tax benefit of approximately $3.5 million and an effective tax rate of 65.4%. The effective tax rate exceeds the statutory rate primarily due to the relative significance of state taxes, non-taxable income and non-deductible expense to our pretax loss. For fiscal year 2009, we generated a loss before income taxes of approximately $888.5 million, which resulted in a recorded income tax benefit of approximately $220.5 million and an effective tax rate of 24.8%. For fiscal year 2009, no income tax benefit exists related to the $329.7 million of goodwill impairment charges recorded. Excluding the impact of the goodwill impairment charges, our effective income tax rate was 39.5% for fiscal year 2009.

During the fourth quarter of fiscal year 2010, the Internal Revenue Service (IRS) closed their examination of our fiscal year 2007 federal income tax return with no changes or assessments. We anticipate the IRS will begin an examination of fiscal years 2008 and 2009 sometime in fiscal year 2011. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2006. We believe our recorded tax liabilities as of July 31, 2010 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances. We believe it is reasonably possible that additional adjustments in the amounts of our unrecognized tax benefits could occur within the next twelve months as a result of settlements with tax authorities or expiration of statutes of limitation. At this time, we do not believe such adjustments will have a material impact on our consolidated financial statements.

Fiscal Year Ended August 1, 2009 Compared to Fiscal Year Ended August 2, 2008

Revenues. Our revenues for fiscal year 2009 of $3,643.3 million decreased $957.2 million, or 20.8%, from $4,600.5 million in fiscal year 2008. The decrease in revenues was due to decreases in comparable revenues for both our Specialty Retail stores and Direct Marketing operation as a result of the current challenging economic environment and lower customer demand. Customer demand, especially during the holiday selling season, was well below our initial expectations and the prior year and the lower level of customer demand continued throughout the Spring season of fiscal year 2009.

Comparable revenues for the fifty-two weeks ended August 1, 2009 were $3,575.4 million compared to $4,548.5 million in fiscal year 2008, representing a decrease of 21.4%. Comparable revenues decreased in fiscal year 2009 by 23.2% for Specialty Retail stores and 12.2% for Direct Marketing. New stores generated revenues of $67.9 million in fiscal year 2009.

Table of Contents

Comparable revenues by quarter for fiscal years 2009 and 2008 are as follows:

	Fiscal year 2009								Fiscal year 2008
	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
Specialty Retail stores	(25.0	)%	(27.1	)%	(25.0	)%	(15.8	)%	(1.8	)%	(3.4	)%	3.4	%	6.4	%
Direct Marketing	(15.7	)%	(14.3	)%	(12.1	)%	(7.0	)%	0.7	%	2.0	%	5.2	%	7.1	%
Total	(23.4	)%	(25.1	)%	(22.8	)%	(14.5	)%	(1.4	)%	(2.5	)%	3.7	%	6.5	%

Internet revenues generated by Direct Marketing were $518.5 million for fiscal year 2009, a decrease of 8.2% compared to the prior fiscal year. In addition, catalog revenues decreased 27.0% compared to the prior fiscal year.

Cost of goods sold including buying and occupancy costs (excluding depreciation). COGS for fiscal year 2009 were 69.6% of revenues compared to 63.8% of revenues for fiscal year 2008.

The increase in COGS as a percentage of revenues in fiscal year 2009 was primarily due to decreased product margins generated by both our Specialty Retail stores and Direct Marketing operation of approximately 4.6% of revenues. We experienced a lower than anticipated level of customer demand in fiscal year 2009. As a result, we generated a lower level of full-price sales and incurred significantly higher net markdowns and sales promotions costs to liquidate inventories held in excess of customer demand, resulting in lower product margins. Additionally, buying and occupancy costs increased by 1.2% of revenues primarily due to the deleveraging of payroll and rent expenses on the lower level of revenues generated, net of savings realized as a result of our initiatives to control our expenses (approximately $10 million).

Selling, general and administrative expenses (excluding depreciation). SG&A expenses decreased by $162.7 million in fiscal year 2009 compared to the prior fiscal year. The decrease in SG&A expenses reflects 1) savings in variable costs, primarily commissions, on lower revenues and 2) savings realized as a result of our initiatives to control our expenses (approximately $90 million).

Despite a decrease in SG&A expenses, SG&A expenses as a percentage of revenues increased to 24.2% of revenues in fiscal year 2009 compared to 22.7% of revenues in the prior fiscal year. The net increase in SG&A expenses as a percentage of revenues in fiscal year 2009 of approximately 1.5% of revenues was primarily due to:

· the deleveraging of a significant portion of our SG&A expenses, primarily payroll and related benefits net of lower incentive compensation requirements, by approximately 1.1% of revenues; and

· expenses, primarily consulting fees and severance, aggregating $21.3 million, or 0.6% of revenues, incurred in connection with our initiatives to control expenses and to reduce our cost structure, which initiatives included headcount and salary reductions and the centralization and redesign of various store and corporate job functions; offset by

· a lower level of advertising and promotions costs incurred in fiscal year 2009 of approximately 0.1% of revenues, primarily due to a lower level of spending by our Specialty Retail stores. During the first quarter of fiscal year 2008, we incurred incremental advertising and promotions costs in connection with the celebration of the 100th anniversary of Neiman Marcus in October 2007.

Income from credit card program, net. We earned HSBC Program Income of $50.0 million, or 1.4% of revenues, in fiscal year 2009 compared to $65.7 million, or 1.4% of revenues, in fiscal year 2008.

Depreciation expense. Depreciation expense was $150.8 million, or 4.1% of revenues, in fiscal year 2009 compared to $148.4 million, or 3.2% of revenues, in fiscal year 2008. The increase in depreciation expense as a percentage of revenues results primarily from the deleveraging of these costs on lower revenues.

Amortization expense. Amortization of intangible assets (primarily customer lists and favorable lease commitments) aggregated $72.7 million, or 2.0% of revenues, in fiscal year 2009 compared to $72.2 million, or 1.6% of revenues, in fiscal year 2008. The increase in amortization expense as a percentage of revenues results primarily from the deleveraging of these costs on lower revenues.

Table of Contents

In the fourth quarter of fiscal year 2008, we recorded a $31.3 million, or 0.7% of revenues, pretax impairment charge related to the writedown to fair value of the Horchow tradename.

Other income. In the first quarter of fiscal year 2008, we recorded a pension curtailment gain of $32.5 million, or 0.7% of revenues, as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007, as more fully explained in Notes 10 and 13 in the Notes to Consolidated Financial Statements.

	Fiscal year ended
	August 1,			August 2,
(in millions)	2009			2008
Specialty Retail stores	$	124.3		$	476.7
Direct Marketing	73.3			117.7
Corporate expenses	(52.1		)	(57.0		)
Other expenses	(22.5		)	—
Amortization of intangible assets and favorable lease commitments	(72.7		)	(72.2		)
Impairment charges	(703.2		)	(31.3		)
Other income	—			32.5
Total operating (loss) earnings	$	(652.9	)	$	466.4

Operating earnings for our Specialty Retail stores segment were $124.3 million, or 4.2% of Specialty Retail stores revenues, for fiscal year 2009 compared to $476.7 million, or 12.4% of Specialty Retail stores revenues, for the prior fiscal year. The decrease in operating margin as a percentage of revenues was primarily due to:

· lower level of full-price sales as a result of weak customer demand and higher net markdowns and promotional costs incurred to liquidate on-hand inventories held in excess of sales trends; and

· the deleveraging of a significant portion of our expenses on the lower level of revenues; partially offset by

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

Operating earnings for Direct Marketing were $73.3 million, or 11.2% of Direct Marketing revenues, in fiscal year 2009 compared to $117.7 million, or 15.7% of Direct Marketing revenues, for the prior fiscal year. The decrease in operating margin as a percentage of revenues for Direct Marketing was primarily the result of:

· a decrease in margins primarily due to higher net markdowns in response to weak customer demand; and

· the deleveraging of a significant portion of our expenses.

Other expenses of $22.5 million in fiscal year 2009 consist primarily of costs (professional fees and severance) incurred in connection with cost reductions and corporate initiatives.

Table of Contents

Interest expense, net. Net interest expense was $235.6 million, or 6.5% of revenues, in fiscal year 2009 and $239.8 million, or 5.2% of revenues, for the prior fiscal year. The net decrease in interest expense is primarily due to 1) the decrease in interest rates on our variable-rate indebtedness, partially offset by 2) incremental non-cash interest on the Senior Notes, 3) lower interest income and 4) lower capitalized interest as a result of lower capital expenditures. The significant components of interest expense are as follows:

	Fiscal year ended
(in thousands)	August 1, 2009			August 2, 2008

Senior Secured Term Loan Facility	$	90,952		$	106,504
2028 Debentures	8,906			8,903
Senior Notes	66,356			63,000
Senior Subordinated Notes	52,028			51,875
Amortization of debt issue costs	17,185			14,217
Other, net	1,140			(1,658		)
Capitalized interest	(993		)	(3,036		)
Interest expense, net	$	235,574		$	239,805

Income tax (benefit) expense. Our effective income tax rate for fiscal year 2009 was 24.8% compared to 37.0% for fiscal year 2008. No income tax benefit exists related to the $329.7 million of goodwill impairment charges recorded in fiscal year 2009. Excluding the impact of the goodwill impairment charges, our effective income tax rate was 39.5% for fiscal year 2009.

During the third quarter of fiscal year 2009, we closed the IRS examination of fiscal years 2005 and 2006 and received net refunds of approximately $2.8 million. In addition, as a result of the completion of the audit and IRS determination regarding certain deductions taken in connection with the Acquisition, we recorded a decrease in the gross amount of unrecognized tax benefits of $13.7 million and a decrease in accrued interest and penalties of $2.2 million. This $15.9 million reduction in our liability for unrecognized tax benefits resulted in 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 during fiscal year 2009. Finally, in the fourth quarter of fiscal year 2009, we recorded a decrease to our recorded liability for unrecognized tax benefits and a corresponding reduction to goodwill of $0.7 million as a result of the expiration of statutes of limitation in various taxing jurisdictions.

During the fourth quarter of fiscal year 2008, we entered into a negotiated settlement with a state tax authority regarding a state non-filing position which resulted in a decrease in our accruals for uncertain tax positions and a reduction to our gross unrecognized tax benefits of $7.2 million and a corresponding decrease to goodwill of $3.0 million related to the resolution of uncertainties that existed at the time of the Acquisition.

Non-GAAP Financial Measure — EBITDA and Adjusted EBITDA

We present the financial performance measures of earnings before interest, taxes, depreciation and amortization (EBITDA) and Adjusted EBITDA because we use these measures to monitor and evaluate the performance of our business and believe the presentation of these measures will enhance investors’ ability to analyze trends in our business, evaluate our performance relative to other companies in our industry and evaluate our ability to service our debt. EBITDA and Adjusted EBITDA are not presentations made in accordance with generally accepted accounting principals in the U.S. (GAAP). Our computations of EBITDA and Adjusted EBITDA may vary from others in our industry. In addition, we use performance targets based on Adjusted EBITDA as a component of the measurement of incentive compensation as described under “Executive Compensation — Compensation Discussion and Analysis — 2010 Executive Officer Compensation.”

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

Table of Contents

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

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

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

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

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

The following table reconciles (loss) earnings as reflected in our consolidated statements of operations prepared in accordance with GAAP to EBITDA and Adjusted EBITDA:

	Fiscal year ended
(dollars in millions)	July 31, 2010			August 1, 2009			August 2, 2008

(Loss) earnings	$	(1.8	)	$	(668.0	)(1)	$	142.8	(2)
Income tax (benefit) expense	(3.5		)	(220.5		)	83.8
Interest expense, net	237.1			235.6			239.8
Depreciation expense	141.8			150.8			148.4
Amortization of intangible assets and favorable lease commitments	73.3			72.7			72.2
EBITDA	446.9			(429.4		)(1)	687.0		(2)
EBITDA as a percentage of revenues	12.1		%	(11.8		)%	14.9		%
Non-cash impairment of long-lived assets	—			703.2			31.3
Other income	—			—			(32.5		)
Adjusted EBITDA	$	446.9		$	273.8		$	685.8
Adjusted EBITDA as a percentage of revenues	12.1		%	7.5		%	14.9		%

(1) For fiscal year 2009, operating loss and EBITDA include pretax impairment charges related to 1) $329.7 million for the writedown to fair value of goodwill, 2) $343.2 million for the writedown to fair value of the net carrying value of tradenames and 3) $30.3 million for the writedown to fair value of the net carrying value of certain long-lived assets.

(2) For fiscal year 2008, operating earnings and EBITDA include 1) $32.5 million of other income related to a pension curtailment gain as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007, offset by 2) $31.3 million pretax impairment charge related to the writedown to fair value of the Horchow tradename.

Inflation and Deflation

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

Table of Contents

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

LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements consist principally of:

· the funding of our merchandise purchases;

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

· debt service requirements;

· income tax payments; and

· obligations related to our Pension Plan.

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

Our working capital requirements fluctuate during the fiscal year, increasing substantially during the first and second quarters of each fiscal year as a result of higher seasonal levels of inventories. We have typically financed the increases in working capital needs during the first and second fiscal quarters with available cash balances, cash flows from operations and, if necessary, with cash provided from borrowings under our credit facilities. We have made no borrowings under our Asset-Based Revolving Credit Facility during fiscal years 2010, 2009 or 2008.

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

At July 31, 2010, cash and cash equivalents were $421.0 million compared to $323.4 million at August 1, 2009. Net cash provided by our operating activities was $268.0 million for fiscal year 2010 compared to $210.8 million for fiscal year 2009. This change was primarily due to the improvement in operating earnings and lower working capital requirements attributable to the closer alignment of on-hand inventories to customer demand in fiscal year 2010, offset by a higher level of funding of our defined benefit pension plan.

Net cash used for investing activities, representing capital expenditures, was $58.7 million in fiscal year 2010 and $101.5 million in fiscal year 2009. We incurred capital expenditures in fiscal year 2010 related to the construction of our new store in Bellevue (suburban Seattle). We incurred capital expenditures in fiscal year 2009 related to the construction of new stores in Topanga (the greater Los Angeles area) and Bellevue. We opened our Topanga store in September 2008 and our Bellevue store in September 2009. Currently, we project gross capital expenditures for fiscal year 2011 to be approximately $125 to $135 million. Net of developer contributions, capital expenditures for fiscal year 2011 are projected to be approximately $110 to $120 million.

Net cash used for financing activities was $111.8 million in fiscal year 2010 as compared to $25.0 million in fiscal year 2009. In fiscal year 2010, pursuant to the terms of our Senior Secured Term Loan Facility, we prepaid $111.6 million of

Table of Contents

outstanding borrowings under that facility from excess cash flow, as defined, that we generated in fiscal years 2009 and 2010. We expect to make an additional prepayment of $7.6 million in the first quarter of fiscal year 2011.

Financing Structure at July 31, 2010

Our major sources of funds are comprised of vendor financing, a $600.0 million Asset-Based Revolving Credit Facility, $1,513.4 million Senior Secured Term Loan Facility (including $7.6 million of borrowings classified as current liabilities), $752.4 million Senior Notes, $500.0 million Senior Subordinated Notes, $125.0 million 2028 Debentures and operating leases.

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

Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base. The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice. The borrowing base for the Asset-Based Revolving Credit Facility is equal to at any time the sum of (a) the lesser of (i) 80% of eligible inventory (valued at the lower of cost or market value) and (ii) 85% of the net orderly liquidation value of eligible inventory, and (b) 85% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds arising from the sale or disposition of inventory, less certain reserves. Through April 30, 2011 NMG is required to maintain excess availability under the terms of the Asset-Based Revolving Credit Facility of at least the greater of (a) 10% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $50 million. After April 30, 2011, if at any time, excess availability is less than the greater of (a) 15% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $60 million, NMG will be required to maintain a pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) of at least 1.1 to 1.0. On July 31, 2010, NMG had no borrowings outstanding under this facility, $31.1 million of outstanding letters of credit and $508.9 million of unused borrowing availability.

See Note 7 in the Notes to Consolidated Financial Statements in Item 15 for a further description of the terms of the Asset-Based Revolving Credit Facility.

Senior Secured Term Loan Facility. In October 2005, NMG entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility. At July 31, 2010, the outstanding balance under the Senior Secured Term Loan Facility was $1,513.4 million (including $7.6 million of borrowings classified as current liabilities). The principal amount of the loans outstanding is due and payable in full on April 6, 2013.

At July 31, 2010, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 2.47% at July 31, 2010. The applicable margin is subject to adjustment based on contractually defined debt coverage ratios. At July 31, 2010, the applicable margin with respect to base rate borrowings was 1.00% and the applicable margin with respect to LIBOR borrowings was 2.00%.

See Note 7 in the Notes to Consolidated Financial Statements in Item 15 for a further description of the terms of the Senior Secured Term Loan Facility.

Table of Contents

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

See Note 7 in the Notes to Consolidated Financial Statements in Item 15 for a further description of the terms of the 2028 Debentures.

Senior Notes. NMG has $752.4 million aggregate principal amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015. We negotiated for the right to include the PIK feature in our Senior Notes because of our belief that this feature could be a useful tool to enhance liquidity under appropriate circumstances. In the second quarter of fiscal year 2009, given the dislocation in the financial markets and the uncertainty as to when reasonable conditions would return, we believed that it was appropriate to utilize this feature, even though we had unused borrowing capacity under our $600.0 million revolving credit facility. Accordingly, we elected to pay non-cash interest for the three quarterly interest periods ending on October 14, 2009 and to make such interest payments with the issuance of additional Senior Notes at the non-cash interest rate of 9.75% instead of paying interest in cash. As a result, the original principal amount of Senior Notes of $700.0 million increased by $17.1 million in April 2009, $17.4 million in July 2009 and $17.9 million in October 2009. We have elected to pay cash interest since the first quarter of fiscal year 2010. After October 15, 2010, we are required to make all interest payments on the Senior Notes entirely in cash.

See Note 7 in the Notes to Consolidated Financial Statements in Item 15 for a further description of the terms of the Senior Notes.

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

See Note 7 in the Notes to Consolidated Financial Statements in Item 15 for a further description of the terms of the Senior Subordinated Notes.

Interest Rate Swaps. In connection with the Acquisition, we obtained $2,575.0 million of floating rate debt agreements, of which $2,125.0 million was outstanding at the Acquisition date and $1,513.4 million (including $7.6 million of borrowings classified as current liabilities) is outstanding at July 31, 2010. Effective December 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rate interest commitments through the expiration of the agreements in December 2010. As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.963% to 6.983% per quarter through December 2010 and result in an average fixed rate of 6.973%. The interest rate swaps expire in December 2010.

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

Table of Contents

Contractual Obligations and Commitments

The following table summarizes our estimated significant contractual cash obligations at July 31, 2010:

	Payments Due By Period
(in thousands)	Total		Fiscal Year 2011		Friscal Years 2012-2013		Fiscal Years 2014-2015		Fiscal Year 2016 and Beyond
Contractual obligations:
Senior Secured Term Loan Facility (1)	$	1,513,383	$	7,648	$	1,505,735	$	—	$	—
Senior Notes	752,445		—		—		—		752,445
Senior Subordinated Notes	500,000		—		—		—		500,000
2028 Debentures	125,000		—		—		—		125,000
Interest requirements (2)	897,400		181,200		320,000		257,000		139,200
Lease obligations	874,100		55,700		108,300		92,100		618,000
Minimum pension funding obligation (3)	109,100		—		68,700		34,700		5,700
Other long-term liabilities (4)	70,300		5,600		12,300		13,700		38,700
Construction and purchase commitments (5)	1,011,800		993,200		18,600		—		—
	$	5,853,528	$	1,243,348	$	2,033,635	$	397,500	$	2,179,045

(1) Pursuant to the terms of our Senior Secured Term Loan Facility, NMG was required to prepay $92.6 million of our outstanding term loans pursuant to the annual excess cash flow requirements. Of such amount, NMG paid $85.0 million in the fourth quarter of fiscal year 2010 and will make the remaining $7.6 million payment in the first quarter of fiscal year 2011. The above table does not reflect future excess cash flow prepayments, if any, that may be required under the term loan facility.

(2) The cash obligations for interest requirements reflect 1) interest requirements on our fixed-rate debt obligations at their contractual rates, 2) interest requirements on floating rate debt obligations not subject to interest rate swaps or interest rate caps at rates in effect at July 31, 2010 and 3) interest requirements on floating rate debt obligations subject to interest rate swaps at the fixed rates provided through the swap agreements prior to their expiration in December 2010. We estimate that a 1% increase in interest rates related to the portion of our floating rate debt outstanding at July 31, 2010 not subject to interest rate swaps would increase annual interest rate requirements by approximately $12 million during fiscal year 2011.

(3) At July 31, 2010 (the most recent measurement date), our actuarially calculated projected benefit obligation for our Pension Plan was $476.2 million and the fair value of the assets was $314.5 million. Our policy is to fund the Pension Plan at or above the minimum amount required by law. Our scheduled obligations with respect to our Pension Plan consist of expected benefit payments through 2016, as currently estimated using information provided by our actuaries. We made voluntary contributions to our Pension Plan of $30.0 million in fiscal year 2010 and $15.0 million in fiscal year 2009. As of July 31, 2010, we do not anticipate any requirement to make contributions to the Pension Plan for fiscal year 2011.

(4) Included in other long-term liabilities at July 31, 2010 are our liabilities for our Pension, SERP and Postretirement Plans aggregating $270.5 million. Our scheduled obligations with respect to our SERP and Postretirement Plan liabilities consist of expected benefit payments through 2020, as currently estimated using information provided by our actuaries. Also included in other long-term liabilities at July 31, 2010 are our liabilities related to 1) uncertain tax positions (including related accruals for interest and penalties) of $12.7 million and 2) other obligations aggregating $16.8 million, primarily for employee benefits. Future cash obligations related to these liabilities are not currently estimable.

(5) Construction commitments relate primarily to obligations pursuant to contracts for the construction of new stores and the renovation of existing stores expected as of July 31, 2010. These amounts represent the gross construction costs and exclude developer contributions of approximately $25 million, which we expect to receive pursuant to the terms of the construction contracts.

In the normal course of our business, we issue purchase orders to vendors/suppliers for merchandise. Our purchase orders are not unconditional commitments but, rather represent executory contracts requiring performance by the vendors/suppliers, including the delivery of the merchandise prior to a specified cancellation date and the compliance with product specifications, quality standards and other requirements. In the event of the vendor’s failure to meet the agreed upon terms and conditions, we may cancel the order.

Table of Contents

The following table summarizes the expiration of our significant commercial commitments outstanding at July 31, 2010:

	Amount of Commitment by Expiration Period
(in thousands)	Total		Fiscal Year 2011		Fiscal Years 2012-2013		Fiscal Years 2014-2015		Fiscal Year 2016 and Beyond
Other commercial commitments:
Senior secured asset-based revolving credit facility (1)	$	600,000	$	—	$	600,000	$	—	$	—
Surety bonds	3,200		3,200		—		—		—
	$	603,200	$	3,200	$	600,000	$	—	$	—

(1) As of July 31, 2010, we had no borrowings outstanding under our Senior Secured Asset-Based Revolving Credit Facility, $31.1 million of outstanding letters of credit and $508.9 million of unused borrowing availability. Our working capital requirements are greatest in the first and second fiscal quarters as a result of higher seasonal requirements. See “Description of Other Indebtedness—Senior Secured Asset-Based Revolving Credit Facility” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Seasonality.”

In addition to the items presented above, our other principal commercial commitments are comprised of common area maintenance costs, tax and insurance obligations and contingent rent payments.

OTHER MATTERS

Factors That May Affect Future Results

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

Political and General Economic Conditions

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

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

· terrorist activities in the United States and elsewhere;

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

Customer Considerations

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

· changes in the demographic or retail environment;

· changes in consumer preferences or fashion trends;

· changes in our relationships with customers due to, among other things, 1) our failure to provide quality service and competitive loyalty programs, 2) our inability to provide credit pursuant to our proprietary credit card

Table of Contents

arrangement or 3) our failure to protect customer data or comply with regulations surrounding information security and privacy;

Merchandise Procurement and Supply Chain Considerations

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

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

· changes in foreign currency exchange or inflation rates;

· significant increases in paper, printing and postage costs;

Industry and Competitive Factors

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

· adverse changes in the financial viability of our competitors;

· seasonality of the retail business;

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

· delays in anticipated store openings and renovations;

· our success in enforcing our intellectual property rights;

Employee Considerations

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

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

Legal and Regulatory Issues

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

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

Leverage Considerations

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

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

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

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

Other Factors

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

Table of Contents

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

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

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

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

Critical Accounting Policies

Our accounting policies are more fully described in Note 1 in the Notes to Consolidated Financial Statements appearing elsewhere in this Annual Report. As disclosed in Note 1 in the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions about future events. These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.

While we believe that our past estimates and assumptions have been materially accurate, the amounts currently estimated are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying audited consolidated financial statements.

We believe the following critical accounting policies encompass the more significant judgments and estimates used in the preparation of our audited consolidated financial statements.

Revenues. Revenues include sales of merchandise and services and delivery and processing revenues related to merchandise sold. Revenues from our Specialty Retail stores are recognized at the later of the point of sale or the delivery of goods to the customer. Revenues from our Direct Marketing operation are recognized when the merchandise is delivered to the customer. Revenues associated with gift cards are recognized at the time of redemption by the customer. Revenues exclude sales taxes collected from our customers.

Revenues are reduced when customers return goods previously purchased. We maintain reserves for anticipated sales returns primarily based on our historical trends related to returns by our retail and direct marketing customers. Our reserves for anticipated sales returns aggregated $25.2 million at July 31, 2010 and $22.9 million at August 1, 2009. As the vast majority of merchandise returns are made in less than 30 days after the sales transaction, we believe the risk that differences between our estimated and actual returns will have a material impact on our consolidated financial statements is minimal.

Merchandise Inventories and Cost of Goods Sold. We utilize the retail method of accounting. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of our inventories. The cost of the inventory reflected on the consolidated balance sheets is decreased by charges to cost of goods sold at the time the retail value of the inventory is lowered through the use of markdowns. Earnings are negatively impacted when merchandise is marked down. As we adjust the retail value of our inventories through the use of markdowns to reflect market conditions, our merchandise inventories are stated at the lower of cost or market.

The areas requiring significant management judgment related to the valuation of our inventories include 1) setting the original retail value for the merchandise held for sale, 2) recognizing merchandise for which the customer’s perception of value has declined and appropriately marking the retail value of the merchandise down to the perceived value and 3) estimating the shrinkage that has occurred between physical inventory counts. These judgments and estimates, coupled with the averaging

Table of Contents

processes within the retail method can, under certain circumstances, produce varying financial results. Factors that can lead to different financial results include 1) determination of original retail values for merchandise held for sale, 2) identification of declines in perceived value of inventories and processing the appropriate retail value markdowns and 3) overly optimistic or conservative estimation of shrinkage. In prior years, we have made no material changes to our estimates of shrinkage or markdown requirements on inventories held as of the end of our fiscal years. We do not believe that the assumptions used in these estimates at July 31, 2010 will change significantly based upon our prior experience or that changes in these estimates, if any, will have a material effect on our future operating performance.

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold. The amounts of vendor allowances we receive fluctuate based on the level of markdowns taken and did not have a significant impact on the year-over-year change in gross margin during fiscal years 2010, 2009 or 2008. We received vendor allowances of $81.2 million, or 2.2% of revenues, in fiscal year 2010, $107.7 million, or 3.0% of revenues, in fiscal year 2009, $109.6 million, or 2.4% of revenues, in fiscal year 2008.

Long-lived Assets. Property and equipment are stated at cost less accumulated depreciation. For financial reporting purposes, we compute depreciation principally using the straight-line method over the estimated useful lives of the assets. Buildings and improvements are depreciated over five to 30 years while fixtures and equipment are depreciated over three to 15 years. Leasehold improvements are amortized over the shorter of the asset life or the lease term (which may include renewal periods when exercise of the renewal option is at our discretion and considered reasonably assured at the inception of the lease). Costs incurred for the development of internal computer software are capitalized and amortized using the straight-line method over three to ten years.

To the extent we remodel or otherwise replace or dispose of property and equipment prior to the end of the assigned depreciable lives, we could realize a loss or gain on the disposition. To the extent assets continue to be used beyond their assigned depreciable lives, no depreciation expense is incurred. We reassess the depreciable lives of our long-lived assets in an effort to reduce the risk of significant losses or gains at disposition and the utilization of assets with no depreciation charges. The reassessment of depreciable lives involves utilizing historical remodel and disposition activity and forward-looking capital expenditure plans.

We assess the recoverability of the carrying values of our store assets, consisting of property and equipment, customer lists and favorable lease commitments, annually and upon the occurrence of certain events. The recoverability assessment requires judgment and estimates of future store generated cash flows. The underlying estimates of cash flows include estimates for future revenues, gross margin rates and store expenses. We base these estimates upon the stores’ past and expected future performance. New stores may require two to five years to develop a customer base necessary to generate the cash flows of our more mature stores. To the extent our estimates for revenue growth and gross margin improvement are not realized, future annual assessments could result in impairment charges.

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

The recoverability assessment with respect to each of the tradenames used in our operations requires us to estimate the fair value of the tradename as of the assessment date. Such determination is made using discounted cash flow techniques (Level 3). Inputs to the valuation model include:

· future revenue and profitability projections associated with the tradename;

· estimated market royalty rates that could be derived from the licensing of our tradenames to third parties in order to establish the cash flows accruing to the benefit of the Company as a result of our ownership of our tradenames; and

· rates, based on our estimated weighted average cost of capital, used to discount the estimated royalty cash flow projections to their present value (or estimated fair value).

Table of Contents

If the recorded carrying value of the tradename exceeds its estimated fair value, an impairment charge is recorded to write the tradename down to its estimated fair value. The tradename impairment testing process is subject to inherent uncertainties and subjectivity. The use of different assumptions, estimates or judgments could materially increase or decrease any related impairment charge. We believe our estimates are appropriate based upon current market conditions and the best information available at the assessment date. However, future impairment charges could be required if we do not achieve our current revenue and profitability projections, market royalty rates decrease or the weighted average cost of capital increases. We currently estimate that the fair value of our tradenames decreases by approximately $267 million for each 0.5% decrease in market royalty rates and by approximately $112 million for each 0.5% increase in the weighted average cost of capital.

The assessment of the recoverability of the goodwill associated with our Neiman Marcus stores, Bergdorf Goodman stores and Direct Marketing reporting units involves a two-step process. The first step requires the comparison of the estimated enterprise fair value of each of our reporting units to its recorded carrying value. We estimate the enterprise fair value based on discounted cash flow techniques (Level 3). Inputs to the valuation model include:

· estimated future cash flows;

· growth assumptions for future revenues as well as future gross margin rates, expense rates and other estimates; and

· rates, based on our estimated weighted average cost of capital, used to discount our estimated future cash flow projections to their present value (or estimated fair value).

The projected sales, gross margin and expense rate and capital expenditures assumptions are based on our annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows directly resulting from the use of those assets in our operations. The estimates of the enterprise fair values of our reporting units are based on the best information available as of the date of the assessment.

If the recorded carrying value of a reporting unit exceeds its estimated enterprise fair value in the first step, a second step is performed in which we allocate the enterprise fair value to the fair value of the reporting unit’s net assets. The second step of the impairment testing process requires, among other things, the estimation of the fair values of substantially all of our tangible and intangible assets. Any enterprise fair value in excess of amounts allocated to such net assets represents the implied fair value of goodwill for that reporting unit. If the recorded goodwill balance for a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded to write goodwill down to its fair value.

The goodwill impairment testing process is subject to inherent uncertainties and subjectivity. The use of different assumptions, estimates or judgments in either step of the process, including with estimation of the projected future cash flows of our reporting units, the discount rate used to reduce such projected future cash flows to their net present value, and the estimation of the fair value of the reporting units’ tangible and intangible assets and liabilities, could materially increase or decrease the fair value of the reporting unit’s net assets and, accordingly, could materially increase or decrease any related impairment charge. We believe our estimates are appropriate based upon current market conditions and the best information available at the assessment date. However, future impairment charges could be required if we do not achieve our current revenue and profitability projections or the weighted average cost of capital increases. We currently estimate that a 5% decrease in the estimated fair value of the net assets of each of our reporting units as compared to the values used in the preparation of these financial statements would decrease the excess of fair value over the carrying value by approximately $250 million. In addition, we currently estimate that the fair value of our goodwill decreases by approximately $350 million for each 0.5% increase in the discount rate used to estimate fair value.

Leases. We lease certain retail stores and office facilities. Stores we own are often subject to ground leases. The terms of our real estate leases, including renewal options, range from 1 to 101 years. Most leases provide for monthly fixed minimum rentals or contingent rentals based upon sales in excess of stated amounts and normally require us to pay real estate taxes, insurance, common area maintenance costs and other occupancy costs. For leases that contain predetermined, fixed calculations of minimum rentals, we recognize rent expense on a straight-line basis over the lease term. We recognize contingent rent expenses when it is probable that the sales thresholds will be reached during the year.

Benefit Plans. We sponsor a noncontributory defined benefit pension plan (Pension Plan), an unfunded supplemental executive retirement plan (SERP Plan) which provides certain employees additional pension benefits and a postretirement plan providing eligible employees limited postretirement health care benefits (Postretirement Plan). In calculating our obligations and related expense, we make various assumptions and estimates, after consulting with outside actuaries and advisors. The annual determination of expense involves calculating the estimated total benefits ultimately payable to plan participants. We use the projected unit credit method in recognizing pension liabilities. The Pension and SERP Plans are valued annually as of the

Table of Contents

end of each fiscal year. In the third quarter of fiscal year 2010, we froze benefits offered to all remaining employees under our Pension Plan and SERP Plan.

Significant assumptions related to the calculation of our obligations include the discount rate used to calculate the present value of benefit obligations to be paid in the future, the expected long-term rate of return on assets held by the Pension Plan and the health care cost trend rate for the Postretirement Plan. We review these assumptions annually based upon currently available information, including information provided by our actuaries.

Significant assumptions utilized in the calculation of our projected benefit obligations as of July 31, 2010 and future expense requirements for our Pension Plan, SERP Plan and Postretirement Plan, and sensitivity analysis related to changes in these assumptions, are as follows:

					Using Sensitivity Rate
	Actual Rate		Sensitivity Rate Increase/(Decrease)		Increase in Liability (in millions)		Increase/ (Decrease) in Expense (in millions)
Pension Plan:
Discount rate	5.20	%	(0.25	)%	$	18.4	$	0.3
Expected long-term rate of return on plan assets	8.00	%	(1.00	)%	N/A		$	3.3
SERP Plan:
Discount rate	5.20	%	(0.25	)%	$	2.9	$	(0.1	)
Postretirement Plan:
Discount rate	5.10	%	(0.25	)%	$	0.6	$	0.1
Ultimate health care cost trend rate	8.00	%	1.00	%	$	2.4	$	0.1

Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We are routinely under audit by federal, state or local authorities in the area of income taxes. We regularly evaluate the likelihood of realization of tax benefits derived from positions we have taken in various federal and state filings after consideration of all relevant facts, circumstances and available information. For those tax benefits we believe more likely than not will be sustained, we recognize the benefit we believe is cumulatively greater than 50% likely to be realized. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of recorded reserves, our effective tax rate in a given financial statement period could be materially impacted.

Recent Accounting Pronouncements

In December 2007, the FASB issued guidance that addresses the recognition and accounting for identifiable assets acquired, liabilities assumed and non-controlling interests in business combinations. In addition, this guidance changes 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 recognize post-acquisition changes in tax uncertainties associated with a business combination as a component of tax expense. These rules are to be applied prospectively to business combinations for which the acquisition date is on or after December 15, 2008. Generally, the effect of this guidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertainties remaining as of July 31, 2010 related to the Acquisition will be subject to the provisions of this guidance. As to the future resolution of these tax uncertainties, we do not believe these requirements will have a material impact on our future financial statements.

In February 2008, the FASB issued guidance that currently requires disclosure related to the fair values of nonfinancial assets, such as intangible assets and goodwill, and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. We adopted this guidance during the first quarter of fiscal year 2010. However, the adoption of this guidance does not currently result in additional required disclosures in our consolidated financial statements for fiscal year 2010.

Table of Contents

statements 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 did not have an impact on our consolidated financial statements.

In December 2008 and January 2010, the FASB issued guidance related to improving disclosures about fair value measurements. This guidance requires reporting entities to make new disclosures about recurring and nonrecurring fair value measurements with respect to assets held by pension plans, as well as other assets and liabilities. Such disclosure requirements include disclosures related to significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. We adopted this guidance in the preparation of our consolidated financial statements for the fiscal year ending July 31, 2010 and expanded our disclosures regarding plan assets, the basis of determination of the fair value of these assets and provided additional information regarding activity related to our Level 3 investments.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s financial instruments represents the potential loss arising from adverse changes in interest rates. The Company does not enter into derivative financial instruments for trading purposes. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities. The Company is exposed to interest rate risk through its borrowing activities, which are described in Note 7 to our Notes to Consolidated Financial Statements.

In connection with the Acquisition, NMG obtained $2,575.0 million of floating rate debt agreements, of which $2,125.0 million was outstanding at the Acquisition date and $1,513.4 million (including $7.6 million of borrowings classified as current liabilities) is outstanding under its Senior Secured Term Loan Facility at July 31, 2010. In addition, as of July 31, 2010, NMG had no borrowings outstanding under its Asset-Based Revolving Credit Facility. Future borrowings under NMG’s Asset-Based Revolving Facility, to the extent of outstanding borrowings, would be affected by interest rate changes.

Effective December 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rate interest commitments through the expiration of the agreements in December 2010. As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.963% to 6.983% per quarter through December 2010 and result in an average fixed rate of 6.973%. We believe that a 1% increase in interest rates relating to the portion of our floating rate debt that is not hedged would increase annual interest expense by approximately $2 million (prior to the expiration of the interest rate swap agreements) during fiscal year 2011.

Effective January 2010, NMG entered into interest rate cap agreements for an aggregate notional amount of $500.0 million in order to hedge the variability of our cash flows related to a portion of our floating rate indebtedness once the interest rate swap expires in December 2010. The interest rate cap agreements commence in December 2010 and expire in December 2012. Pursuant to the interest rate cap agreements, NMG has capped LIBOR at 2.50% through December 2012 with respect to the $500.0 million notional amount of such agreements. In the event LIBOR is less than 2.50%, NMG will pay interest at the lower LIBOR rate. In the event LIBOR is higher than 2.50%, NMG will pay interest at the capped rate of 2.50%. As of July 31, 2010, LIBOR was 0.5103%. We believe that a 1% increase in LIBOR would increase our annual interest expense by approximately $10 million (subsequent to the expiration of the interest rate swap agreements) during fiscal year 2011.

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

Table of Contents

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Company and supplementary data are included as pages F-1 through F-44 at the end of this Annual Report on Form 10-K:

Index		Page Number
Management’s Report on Internal Control over Financial Reporting		F-2
Reports of Independent Registered Public Accounting Firm		F-3
Consolidated Balance Sheets		F-5
Consolidated Statements of Operations		F-6
Consolidated Statements of Cash Flows		F-7
Consolidated Statements of Shareholders’ Equity		F-8
Notes to Consolidated Financial Statements		F-9

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

a. Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of July 31, 2010, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely basis within the time periods specified in the Securities and Exchange Commission’s rules and forms.

b. Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of July 31, 2010. During its assessment, management did not identify any material weaknesses in our internal control over financial reporting. Our independent registered public accounting firm, Ernst & Young LLP, has audited our consolidated financial statements and has issued an attestation report on the effectiveness of our internal controls over financial reporting as of July 31, 2010.

c. Changes in Internal Control over Financial Reporting

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. No change occurred in our internal controls over financial reporting during the quarter ended July 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

Table of Contents

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our current Board of Directors consists of eight members, who have been elected pursuant to a limited liability operating agreement of our parent, as described on page 81. All of the directors, except Mr. Tansky, who is an employee of the Company, are employees of our Sponsors and therefore are deemed to be affiliates. The names of our current directors, along with their present positions and qualifications, their principal occupations and directorships held with public corporations during the past five years, their ages and the year first elected as a director, are set forth below.

Name	Present positions and offices with the Company, principal occupations during the past five years and other directorships	Age	Year first elected director

David A. Barr	Managing director of Warburg Pincus LLC and a general partner of Warburg Pincus & Co, a leading global private equity investment firm, since January 2001. Mr. Barr currently serves on the board of directors of Builders FirstSource, Inc., Polypore International Inc., TransDigm Group Incorporated, and Scotsman Industries, Inc. Formerly a director of Eagle Family Foods, Inc. and Wellman, Inc., Mr. Barr is the Chairman of our Audit Committee and serves as our Audit Committee financial expert.	47	2005

	We believe Mr. Barr’s qualifications to serve on our Board of Directors include his financial expertise and years of experience providing strategic advisory services to complex organizations.

Jonathan J. Coslet	Partner of TPG Capital, L.P. since 1993. He is currently a senior partner and member of the firm’s Executive, Management and Investment Committees. Mr. Coslet also serves on the board of directors of Harrah’s Entertainment, Inc., Quintiles Transnational Corp., IASIS Healthcare Corp., Petco Animal Supplies, Inc., and Biomet, Inc. Formerly a director of J. Crew Group, Inc., Mr. Coslet is Chairman of our Compensation Committee and a member of the Executive Committee.	45	2005

	Mr. Coslet’s knowledge of capital markets, his executive leadership, and financial expertise are valuable assets to our Board of Directors.

James G. Coulter	Co-founder in 1992 of TPG Capital, L.P. Mr. Coulter also serves on the board of directors of IMS Health Incorporated, Lenovo Group Limited and J. Crew Group, Inc. Formerly a director of Seagate Technology, Zhone Technologies, Inc., and Alltel Corporation.	50	2005

	As co-founder of TPG Capital, L.P., Mr. Coulter has extensive knowledge of the capital markets and brings an entrepreneurial spirit and keen sense of business acumen to our Board.

Table of Contents

John G. Danhakl	Managing Partner of Leonard Green & Partners, L.P., a private equity firm specializing in leveraged buyout transactions, with whom he has been a partner since 1995. He serves on the board of directors of Air Lease Corp., Arden Group, Inc., Horseshows In the Sun, Inc., IMS Healthcare Incorporated, Leslie’s Poolmart, Inc., Petco Animal Supplies, Inc. and The Tire Rack, Inc. He previously served on the boards of AsianMedia Group LLC, Big 5 Sporting Goods Corporation, Communications and Power Industries, Inc., Diamond Triumph Auto Glass, Inc., Liberty Group Publishing, Inc., MEMC Electronic Materials, Inc., Phoenix Scientific, Inc., Rite Aid Corporation, Sagittarius Brands, and VCA Antech, Inc. Mr. Danhakl is a member of our Compensation Committee.	54	2005

	Mr. Danhakl brings substantial experience from both private equity and public company exposure. His extensive experience serving on the boards of directors of numerous public companies brings to our Board valuable experience in dealing with the complex issues facing boards of directors today.

Sidney Lapidus	Retired Managing Director and Senior Advisor of Warburg Pincus LLC. Mr. Lapidus had been employed at Warburg Pincus since 1967. He presently serves as a director of Lennar Corporation and Knoll, Inc. He serves on the boards of a number of non-profit organizations including New York University Langone Medical Center, the American Antiquarian Society, and the New York Historical Society, and is chairman of the American Jewish Historical Society. Mr. Lapidus is a member of our Audit Committee.	72	2005

	During his long tenure in the private equity field, Mr. Lapidus developed extensive business, financial, and management skills. We believe this extensive experience has given him a broad understanding of the operational, financial and strategic issues facing public and private companies today.

Kewsong Lee	Member and managing director of Warburg Pincus LLC and a general partner of Warburg Pincus & Co. since January 1997. Mr. Lee is currently a member of Warburg Pincus LLC’s Executive Management Group. He also serves on the board of directors of Arch Capital Group, Ltd., MBIA Inc., and several privately held companies. Formerly a director of Knoll, Inc. and TransDigm Group, Inc., Mr. Lee is a member of our Compensation and Executive Committees.	45	2005

	Mr. Lee’s qualifications to serve on our Board of Directors include his broad-based knowledge in the areas of management, corporate strategy development, and finance.

Carrie Wheeler	Partner of TPG Capital, L.P. Since 1996, she serves on the board of directors of Metro-Goldwyn-Mayer Inc. and Petco Animal Supplies, Inc. Ms. Wheeler is a member of our Audit Committee.	38	2005

	Ms. Wheeler’s experience as a director of another retail-oriented company plus her financial expertise makes her a valuable asset to our Board of Directors.

Table of Contents

Burton M. Tansky	Director and President and Chief Executive Officer since October 6, 2005. Mr. Tansky also has served as a director and President and Chief Executive Officer of The Neiman Marcus Group, Inc. since May 2001 and as President and Chief Operating Officer from December 1998 until May 2001. Mr. Tansky formerly served on the board of directors of International Flavors and Fragrances Inc.	72	2005

	Mr. Tansky’s decades of experience in the luxury retail industry plus a deep understanding of our people and our products provide him with intimate knowledge of our operations.

EXECUTIVE OFFICERS

The names and ages of our executive officers, along with their positions and qualifications, are set forth below.

Name	Positions and Offices	Age

Karen W. Katz	Elected Executive Vice President and appointed a member of the Office of the Chairman in October 2007. Since December 2002, Ms. Katz has also served as President and Chief Executive Officer of Neiman Marcus Stores. Ms. Katz served as President and Chief Executive Officer of Neiman Marcus Direct from May 2000 to December 2002. Ms. Katz formerly served on the board of directors of Pier 1 Imports, Inc.	53

James E. Skinner	Elected Executive Vice President and Chief Financial Officer and appointed a member of the Office of the Chairman in October 2007. From October 2005 to October 2007, Mr. Skinner served as Senior Vice President and Chief Financial Officer. From October 2001 to October 2005, he served as Senior Vice President and Chief Financial Officer of The Neiman Marcus Group, Inc. Mr. Skinner serves on the board of directors of Fossil, Inc.	57

James J. Gold	President and Chief Executive Officer of Bergdorf Goodman since May 2004. Mr. Gold served as Senior Vice President, General Merchandise Manager of Neiman Marcus Stores from December 2002 to May 2004, and as Division Merchandise Manager from June 2000 to December 2002.	46

Gerald A. Barnes	President and Chief Executive Officer of Neiman Marcus Direct since April 2009. He served as Executive Vice President, Merchandising, Neiman Marcus Direct from April 2008 to April 2009 and as Senior Vice President, General Merchandise Manager, Fashion, Neiman Marcus Direct from 2001 until 2007.	57

Nelson A. Bangs	Senior Vice President and General Counsel since October 6, 2005 and has served in that capacity for The Neiman Marcus Group, Inc. since April 2001.	57

Marita O’Dea	Senior Vice President and Chief Human Resource Officer since October 6, 2005 and has also served in that capacity for The Neiman Marcus Group, Inc. since September 2002. Ms. O’Dea served as Vice President - Human Resources of The Neiman Marcus Group, Inc. from June 2001 until September 2002.	61

Phillip L. Maxwell	Senior Vice President and Chief Information Officer since October 6, 2005 and has also served in that capacity for The Neiman Marcus Group, Inc. since May 2000.	62

Table of Contents

Wayne A. Hussey	Senior Vice President, Properties and Store Development since October 22, 2007. From May 1999 to October 2007 he served as Senior Vice President, Properties and Store Development of Neiman Marcus Stores.	60

Wanda Gierhart	Senior Vice President, Chief Marketing Officer since August 10, 2009. From 2007 to 2009 Ms. Gierhart served as President and Chief Executive Officer of TravelSmith Outfitters, Inc., a travel apparel and accessory retailer, and from 2004 to 2006 she served as Executive Vice President, Chief Marketing and Merchandising Officer of Design Within Reach, a multichannel furniture retailer. Prior to 2004, she served as Executive Vice President, Chief Marketing Officer of Limited Brands, Inc. where she was an executive since 1995.	46

See “Item 13. Certain Relationships and Related Transactions, and Director Independence — Related Person Transactions” below for a discussion of certain arrangements and understandings regarding the nomination and selection of certain of our directors.

CORPORATE GOVERNANCE

Code of Ethics

The Board has adopted The Neiman Marcus Group, Inc. Code of Ethics and Conduct, which is applicable to all our directors, officers and employees. A Code of Ethics for Financial Professionals has also been adopted that applies to all financial employees including the Chief Executive Officer, the Chief Financial Officer and the Principal Accounting Officer. Both the Code of Ethics and Conduct and the Code of Ethics for Financial Professionals may be accessed through our website at www.neimanmarcusgroup.com under the “Investor Information —Governance Documents” section. Requests for printed copies without charge may be made in writing to The Neiman Marcus Group, Inc., Attn. Investor Relations, One Marcus Square, 1618 Main Street, Dallas, Texas 75201.

We have established a means for employees, customers, suppliers, or other interested parties to submit confidential and anonymous reports of suspected or actual violations of the Company’s Code of Conduct relating, among other things, to:

—		accounting practices, internal accounting controls, or auditing matters and procedures;
—		theft or fraud of any amount;
—		performance and execution of contracts;
—		conflicts of interest;
—		violations of securities and antitrust laws; and
—		violations of the Foreign Corrupt Practices Act.

Any employee or other interested party may call 1-866-384-4277 toll-free to submit a report. This number is operational 24 hours a day, seven days a week.

Director Independence

Because all of our directors, except Mr. Tansky, who is an employee of the Company, are employees of our Sponsors, none of our directors can be considered independent under the independence standards of the New York Stock Exchange.

Board Committees

Our Board of Directors has established an Audit Committee, a Compensation Committee, and an Executive Committee. The members of our Audit Committee for fiscal year 2010 were David A. Barr, Carrie Wheeler, and Sidney Lapidus. The Audit Committee recommends the annual appointment of auditors with whom the Audit Committee reviews the scope of audit and non-audit assignments and related fees, accounting principles we use in financial reporting, internal auditing procedures and the adequacy of our internal control procedures. The members of our Executive Committee are Jonathan Coslet, Kewsong Lee, and Burton M. Tansky. The Executive Committee manages the affairs of the Company as necessary between meetings of our Board of Directors and acts on matters that must be dealt with prior to the next scheduled

Table of Contents

Board meeting. The members of our Compensation Committee are Jonathan Coslet, Kewsong Lee, and John Danhakl. The Compensation Committee reviews and approves the compensation and benefits of our employees and directors, administers our employee benefit plans, authorizes and ratifies stock option and/or restricted stock grants and other incentive arrangements, and authorizes employment and related agreements.

Each of the Sponsors has the right to have at least one of its directors sit on each committee of the Board of Directors, to the extent permitted by applicable laws and regulations. See “Item 13. Certain Relationships and Related Transactions, and Director Independence — Related Person Transactions” below for a discussion of certain arrangements and understandings regarding the nomination and selection of certain of our directors.

Compensation Committee Interlocks and Insider Participation

In fiscal year 2010, Jonathan Coslet, Kewsong Lee, and John Danhakl served as members of our Compensation Committee. See “Item 13. Certain Relationships and Related Transactions, and Director Independence — Related Person Transactions” below for further discussion regarding certain matters relating to such members. No officer or employee served on the Compensation Committee (or equivalent), or the board of directors, of another entity whose executive officer(s) served on our Compensation Committee or Board.

Audit Committee Financial Expert

The Board of Directors has determined that David A. Barr, Chairman of the Audit Committee, meets the criteria set forth in the rules and regulations of the SEC for an “audit committee financial expert.” Mr. Barr is an employee of one of our Sponsors so therefore would not be considered independent under the independence standards of the New York Stock Exchange.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis is designed to provide an understanding of our compensation philosophy, core principles and arrangements that are applicable to the executive officers identified in the Summary Compensation Table beginning on page 62 (referred to as the named executive officers).

Compensation Philosophy and Objectives. We are a premier luxury retailer that has been in business for over a century. Our continued success depends on the skills of talented leaders who are dedicated to achieving solid financial performance, providing outstanding service to customers, and managing the Company’s assets wisely. Our compensation program is designed to meet the following objectives:

— Recruit and retain executives who possess the exceptional ability, experience, and vision to sustain and promote our preeminence in the marketplace.

— Encourage and reward the achievement of our short- and long-term goals and operating plans.

— Increase customer satisfaction, improve customer service, provide our customers with the high-end luxury merchandise they have come to expect, and increase the amount of business our customers do with us.

— Align the interests of our executives with the financial and strategic objectives of our equity investors.

— Provide total compensation opportunities that meet the expectations of a highly skilled executive team, are aligned and consistent with our fundamental performance and are competitive with the compensation practices and levels offered by companies with whom we compete for talent.

Individual Compensation Components

Base Salary. Base salary is intended to provide a base level of compensation commensurate with an executive’s job title, role, tenure, and experience. We utilize base salary as a building block of our compensation program, establishing a salary range for particular positions based on survey data and job responsibilities. Being competitive in base salary is a minimum requirement to recruit and retain skilled executives. Specifically, base salary levels of the named executive officers are determined based on a combination of factors, including our compensation philosophy, market compensation data, competition for key executive talent, the named executive officer’s experience, leadership, achievement of specified business

Table of Contents

objectives, individual performance, our overall budget for merit increases, and attainment of our financial goals. Salaries are reviewed before the end of each fiscal year as part of our performance and compensation review process as well as at other times to recognize a promotion or change in job responsibilities. Merit increases are usually awarded to the named executive officers in the same percentage range as all employees and are based on overall performance and competitive market data except in those situations where individual performance and other factors justify awarding increases above or below this range. Merit increases typically range between two and eight percent.

In addition, Mr. Tansky and Ms. Katz have employment agreements, described in more detail below beginning on page 69, that set a minimum salary upon execution of the agreement.

Annual Bonus. Annual bonus incentives keyed to short-term objectives form the second building block of our compensation program and are designed to provide incentives to achieve certain financial goals of the Company and personal objectives. These financial goals, which are used to determine annual bonus incentives for all employees, emphasize profitability and asset management. The Compensation Committee believes that a significant portion of annual cash compensation for the named executive officers should be at risk and tied to our operational and financial results. “Pay for performance” for the named executive officers has been significantly enhanced in recent years by putting a larger percentage of their potential compensation at risk in the annual bonus incentive program.

All named executive officers are eligible to be considered for annual bonus incentives. Threshold, target, and maximum annual performance incentives, stated as a percentage of base salary, are established for each of the named executive officers at the beginning of each fiscal year. The objectives set for Mr. Tansky and other senior officers with broad corporate responsibilities are based on financial results of the overall company as well as individual performance objectives. When an employee has responsibility for a particular business unit or division, the performance goals are heavily weighted toward the operational performance of that unit. Actual awards earned by the named executive officers are determined based on an assessment of our overall performance, a review of each named executive officer’s contribution to our overall achievement, and an assessment of each named executive officer’s performance. Other components may also be considered from time to time at the discretion of the Compensation Committee.

The employment agreements of Mr. Tansky and Ms. Katz contain provisions regarding target levels and the payment of annual incentives and are described in more detail below.

Long-Term Incentive. Long-term incentives in the form of stock options are intended to promote sustained high performance and to align our executives’ interests with those of our equity investors. The Compensation Committee believes that stock options create value for the executives if the value of the Company increases. This creates a direct correlation to the interests of our equity investors.

Equity awards become effective on the date of approval by the Compensation Committee or the effective date for grants made in connection with a new hire or a promotion.

An initial stock option grant was made in fiscal year 2006 under the Neiman Marcus, Inc. Management Equity Incentive Plan (referred to as the Management Incentive Plan) to all eligible officers, including the named executive officers. The initial stock option grants were not tied to performance objectives and were made following the consummation of the Acquisition in order to retain the senior management team and enable them to share in the growth of the Company along with our equity investors. The initial stock option grants were awarded at an exercise price equal to the fair market value of our common stock at the time of the grant. The exercise prices of certain of our options escalate at a 10% compound rate per year (Accreting Options) until the earlier to occur of (i) exercise, (ii) a defined anniversary of the date of grant (four to five years) or (iii) the occurrence of a change in control. However, in the event the Sponsors cause the sale of shares of the Company to an unaffiliated entity, the exercise price will cease to accrete at the time of the sale with respect to a pro rata portion of the accreting options. The exercise price with respect to all other options (Fixed Price Options) is fixed at the grant date.

Stock options typically vest and become exercisable twenty-five percent on the first anniversary of the date of the grant and thereafter in thirty-six (36) equal monthly installments over the following thirty-six (36) months, beginning on the one-month anniversary of such date, until 100% of the option is fully vested and exercisable provided that the participant is still employed by the Company at such time.

Because of the decline in capital markets and general economic conditions, the exercise prices of these options were in excess of the estimated fair value of our common stock. In the second and third quarters of fiscal year 2010, we commenced an exchange offer (Exchange Offer) for all outstanding and unexercised Accreting Options held by all eligible officers including the named executive officers, extended the option term with respect to the Fixed Price Options and

Table of Contents

modified additional Fixed Price Options to purchase additional shares. See discussion on “Stock Options” on page 59 of this section.

In addition, following the consummation of the Acquisition, the Neiman Marcus, Inc. Cash Incentive Plan (referred to as the Cash Incentive Plan) was adopted in fiscal year 2006 to aid in the retention of certain key executives, including our named executive officers. Under the Cash Incentive Plan, a $14 million cash bonus pool was created to be shared by its participants, including the named executive officers. In the event of a change in control, as defined, or an initial public offering, as defined, and if, in each case, the internal rate of return to our investors is positive, each participant in the Cash Incentive Plan, subject generally to continued employment, will be entitled to a cash bonus based upon the number of options that were granted in October 2005 to the participant under the Management Incentive Plan relative to the other participants in the Cash Incentive Plan. Mr. Tansky will be entitled to receive (subject, with certain exceptions, to continued employment) a cash bonus under the Cash Incentive Plan in the amount of $3,080,911 pursuant to the terms of his employment agreement. If the internal rate of return to the Sponsors is not positive following a change in control or an initial public offering, no amounts will be paid to those participating in the Cash Incentive Plan. No amounts have been paid to date under the Cash Incentive Plan and none are anticipated until a change of control or initial public offering occurs.

Risk Assessment of Compensation Policies and Programs

We have reviewed our compensation policies and programs for all employees, including the named executive officers, and we do not believe that these policies and practices create risks that are reasonably likely to have a material adverse effect on the Company. The three major components of our overall compensation package were reviewed and the following conclusions were made:

— Base salaries are determined by an industry peer group analysis and the overall experience of each individual. Merit increases are based on financial as well as individual performance and are generally kept within a specified percentage range for all employees, including the named executive officers;

— Because of our non-public status, long-term incentive awards in the form of stock option grants can be exercised but must be held until such time as a public market exists thereby aligning the interests of employees with those of our Sponsors; and

— Annual incentive bonus awards are based on Adjusted EBITDA, ROIC, and inventory turn, which are all set at the beginning of each fiscal year based on the achievement of goals that the Compensation Committee believes will be challenging. Maximum target payouts are capped at a pre-established percentage of base salary.

The Compensation Committee has discretionary authority to adjust incentive plan payouts and the granting of stock options, which further reduces any business risk associated with such plan payouts and stock option grants.

Executive Officer Compensation

Process for Evaluating Executive Officer Performance

Role of the Compensation Committee. The Compensation Committee is responsible for determining the compensation of our named executive officers and for establishing, implementing and monitoring adherence to our executive compensation philosophy. The Compensation Committee charter authorizes the committee to retain and terminate compensation consultants to provide advice and evaluation relative to the named executive officers. The Compensation Committee is further authorized to approve the fees and retention terms of any consultant it retains.

The Compensation Committee considers input from our CEO, our Senior Vice President and Chief Human Resource Officer, and the compensation consultants in making determinations regarding our executive compensation program and the individual contribution of each of our named executive officers. The CEO does not play a role in his own compensation determinations other than discussing individual performance objectives. The CEO’s performance assessment and compensation are reviewed and determined solely by the Compensation Committee.

In developing and reviewing the executive incentive programs, the Compensation Committee considers the business risks inherent in program designs to ensure they do not induce executives to take unacceptable levels of business risk for the purpose of increasing their incentive plan awards. The Committee ensures that the plan designs are conservative in this respect and that together the compensation components work as a check and balance to ensure executive incentives are fully

Table of Contents

consistent with the interests of our equity investors. The Compensation Committee believes that the mix of compensation components used in the determination of our named executive officers’ compensation does not encourage our named executive officers to take unreasonable risks relating to the business. For further information, see “Risk Assessment of Compensation Policies and Programs” on page 56.

Role of Management. As part of our annual planning process, the CEO and the Senior Vice President and Chief Human Resource Officer, with the help of our consultants, develop and recommend a compensation program for all executive officers. Based on performance assessments, the CEO and the Senior Vice President and Chief Human Resource Officer attend a meeting of the Compensation Committee held for the purpose of considering the executives’ annual compensation and recommend the base salary and any incentive bonus awards or long-term incentive awards, if applicable, for each of the other executive officers, including the named executive officers. Neither the CEO nor the Senior Vice President and Chief Human Resource Officer participate in the portion of the Compensation Committee meeting during which their own compensation is discussed.

Role of the Compensation Consultants. The Compensation Committee does not generally retain the services of any compensation consultants. Management retains an independent compensation consultant, W. T. Haigh & Company, to provide comparative market data regarding executive compensation to assist in establishing reference points for the principal components of compensation. They also provide information regarding compensation trends in the general marketplace, compensation practices of other retail companies, and regulatory and compliance developments. The fees paid to W. T. Haigh & Company for their services in fiscal year 2010 did not exceed $120,000.

2010 Executive Officer Compensation

We target our direct compensation to be positioned between the 50th and 75th percentile levels of the compensation packages received by executives in our peer group of industry related companies. We believe that this practice is appropriate in light of the high level of commitment, job demands, and the expected performance contribution required from each of our executive officers in our highly competitive marketplace. Ultimately, our named executive officers’ total compensation is based on the level of achievement versus Company, business unit, and individual target performance levels. The Compensation Committee uses its discretion in making decisions on the overall compensation packages of our executive officers based on current market conditions, business trends, and overall Company performance.

Base Salary. Due to the uncertain market conditions and consistent with our cost-saving measures, there was no change to the base salaries for the executive officers in fiscal year 2010.

	2009 Base Salary ($)	2010 Base Salary ($)	Percent Increase (%)
Burton M. Tansky	1,497,600	1,497,600	0.0	%
Karen W. Katz	897,600	897,600	0.0	%
James E. Skinner	628,800	628,800	0.0	%
James J. Gold	499,200	499,200	0.0	%
Gerald A. Barnes	425,000	425,000	0.0	%

Information on amounts actually earned by the named executive officers in fiscal years 2008, 2009, and 2010 can be found in the Summary Compensation Table beginning on page 62 of this section.

Annual Incentive Bonus. In determining annual incentive bonus amounts for the named executive officers, the Compensation Committee considers the performance relative to the pre-established goals that are set at the beginning of the year. In order to focus the management team on financial recovery following the extraordinary economic conditions in fiscal year 2009, the Compensation Committee used only financial metrics to determine the annual incentive bonus amounts for fiscal year 2010. Individual performance goals of each of the named executive officers were evaluated by the Compensation Committee but used only in consideration of merit increases. For fiscal year 2010, the annual financial goals were based on Adjusted EBITDA, return on invested capital (ROIC), or inventory turnover performance as described more fully on page 58. The Committee set the threshold, target, and maximum performance targets at levels they believed were challenging based on historical company performance and industry and market conditions. Goals were established at the division and business unit levels where appropriate for each of the named executive officers. As it relates to our annual incentive compensation program in particular, this performance assessment is a key determinant in total compensation paid to our named executive officers. Fiscal year 2010 target annual incentives and relative performance weightings for the named executive officers were as follows:

Table of Contents

	Target Bonus As Percent of		Relative Performance Weighting
Name	Salary		Company		Division
Burton M. Tansky	100	%	100	%	—
Karen W. Katz	75	%	50	%	50	%
James E. Skinner	65	%	100	%	—
James J. Gold	60	%	50	%	50	%
Gerald A. Barnes	60	%	50	%	50	%

Mr. Tansky, the individual with the greatest overall responsibility for company performance, was granted a larger incentive opportunity in comparison to his base salary in order to weight his annual cash compensation mix more heavily towards performance-based compensation. For each of the named executive officers, the Compensation Committee deemed their potential impact on company results as equally significant.

Discretionary Bonus. In February 2010, the Compensation Committee approved a one-time discretionary bonus for certain key executive officers, including each of the named executive officers, in an amount equal to four percent of base salary. The bonuses were approved based on the executives’ contributions toward improving the profitability of the Company in light of the challenging economic and operating environment and the four percent salary reduction that occurred in March 2009. Actual amounts paid to each of the named executive officers are listed in the Summary Compensation Table beginning on page 62 of this section under the column titled Bonus.

Corporate Performance Targets. At the end of the fiscal year, the Compensation Committee evaluates Company performance against specific financial and strategic performance targets set at the beginning of the fiscal year. For fiscal year 2010, the bonus metrics and weightings for Messrs. Tansky and Skinner were based on overall Adjusted EBITDA and ROIC; for Ms. Katz , overall Adjusted EBITDA and ROIC and Adjusted EBITDA and Inventory Turnover at Neiman Marcus Stores; for Mr. Gold, Adjusted EBITDA and Inventory Turnover at Bergdorf Goodman, and for Mr. Barnes, Adjusted EBITDA and Inventory Turnover at Neiman Marcus Direct. The bonus metrics related to threshold, target and maximum annual incentive bonus payouts for fiscal year 2010, as well as actual amounts achieved and actual payout percentages for fiscal year 2010, are as follows:

	Threshold			Target			Maximum			Achieved			Payout As Percent of Target
Neiman Marcus Group
Adjusted EBITDA (in millions)	$	325		$	435		$	510		$	467		142	%
ROIC	9.72		%	16.72		%	19.72		%	21.47		%	200	%

Neiman Marcus Stores
Adjusted EBITDA (in millions)	$	241		$	312		$	356		$	299		62	%
Inventory Turnover	2.105		x	2.145		x	2.168		x	2.200		x	200	%

Neiman Marcus Direct
Adjusted EBITDA (in millions)	$	89		$	114		$	136		$	129		166	%
Inventory Turnover	3.784		x	3.852		x	3.910		x	4.049		x	200	%

Bergdorf Goodman
Adjusted EBITDA (in millions)	$	54		$	72		$	86		$	92		200	%
Inventory Turnover	3.155		x	3.215		x	3.260		x	3.466		x	200	%

In calculating Adjusted EBITDA for purposes of evaluating performance and annual incentive compensation, the Compensation Committee adjusts EBITDA upwards or downwards, as applicable, for events and circumstances that 1) were not anticipated at the time performance targets were set and 2) were not impacted by or under the control of the named executives. This adjustment is performed by the Compensation Committee at the end of each fiscal year, based upon any such events and circumstances during such year. The upwards adjustments that were made by the Compensation Committee to EBITDA in order to calculate Adjusted EBITDA for purposes of evaluating performance and annual incentive compensation for fiscal year 2010 aggregated $19.9 million, consisting of the costs incurred in connection with the outsourcing of certain information technology processes, corporate business initiatives and other corporate costs. All such

Table of Contents

costs added back for the determination of Adjusted EBITDA were not anticipated at the time performance targets for fiscal year 2010 were set by the Compensation Committee.

For purposes of evaluating performance and annual incentive compensation, the ROIC metric is calculated by dividing 1) adjusted earnings before interest and taxes (adjustments are consistent with those used to determine Adjusted EBITDA) by 2) average invested capital excluding cash, accrued interest, deferred taxes and amounts related to financial derivatives and is used to assess our efficiency at turning capital into profitable investments. The inventory turnover metric is calculated by dividing sales by average inventory and is used to assess our efficiency in managing inventories.

2010 Annual Incentive Bonus. As actual operating performance for fiscal year 2010 exceeded the performance targets set at the beginning of the year (as shown in the Corporate Performance Targets Table on page 58 of this section), annual incentive amounts were paid to each of the named executive officers. The incentive bonus amounts were paid to the named executive officers based upon the actual target percentages. The Compensation Committee did not exercise their discretion to adjust the actual payout amounts. Actual amounts paid are listed in the Summary Compensation Table under the heading “Non-Equity Incentive Plan Compensation” on page 62 of this section.

Stock Options. In the second quarter of fiscal year 2010, the Compensation Committee approved 1) a tender offer for outstanding Accreting Options, except Mr. Tansky’s (Eligible Options), 2) the extension of the option term with respect to Fixed Price Options to October 6, 2017 and 3) the modification of additional Fixed Price Options to purchase additional shares. In the third quarter of fiscal year 2010, the Compensation Committee approved 1) the modification of Mr. Tansky’s Accreting Options and 2) the extension of the option term with respect to Mr. Tansky’s Fixed Price Options to October 6, 2015. The stock option modifications effected in both the second and third quarters of fiscal year 2010 are collectively referred to as the Modification Transactions. The Modification Transactions were taken in response to declines in capital markets and general economic conditions that resulted in the exercise prices for the prior options being in excess of the estimated fair value of our common stock.

In connection with the modifications of the Accreting Options, option holders were allowed to tender their Eligible Options for new options at an exchange rate of 1.5 Eligible Options to 1.0 new option. The new options issued 1) have an initial exercise price of $1,000 per share, which exercise price will escalate at a 10% compound rate per year through the fourth anniversary of the grant date, 2) vest over four years and 3) generally expire eight years after the grant date. The tender offer was completed in December 2009 with the tender of all Eligible Options and the issuance of new options for 17,743 shares. The modification completed in April 2010 resulted in the tender of Mr. Tansky’s options subject to modification for the purchase of shares and the issuance of new options for 5,668 shares.

Further details about our tender offer are included in Note 11 in the Notes to Consolidated Financial Statements included in this Annual Report and in the Schedule TO-I we filed with the SEC on November 17, 2009, as amended.

Other Compensation Components

We maintain the following compensation components in order to provide a competitive total rewards package that supports retention of key executives.

Health and Welfare Benefits. Executive officers are eligible to participate under the same plans as all other eligible employees for medical, dental, vision, disability, and life insurance. These benefits are intended to be competitive with benefits offered in the retail industry.

Retirement Plan. Prior to 2008, most non-union employees over age 21 who had completed one year of service with 1,000 or more hours participated in The Neiman Marcus Group, Inc. Retirement Plan (referred to as the Retirement Plan), which paid benefits upon retirement or termination of employment. The Retirement Plan is a “career-accumulation” plan, under which a participant earns each year a retirement annuity equal to one percent of his or her compensation for the year up to the Social Security wage base and 1.5 percent of his or her compensation for the year in excess of such wage base. A participant becomes fully vested after five years of service with us. Effective as of December 31, 2007, eligibility and benefit accruals under the Retirement Plan were frozen for all participants except for those “Rule of 65” employees who elected to continue participation in the Retirement Plan. “Rule of 65” employees included only those active employees who had completed at least 10 years of service and whose combined years of service and age equaled at least 65 as of December 31, 2007. Mr. Tansky, Ms. Katz, and Mr. Barnes were “Rule of 65” employees as of December 31, 2007, and elected to continue participation in the Retirement Plan. For Messrs. Skinner and Gold, benefits and accruals under the Retirement Plan were frozen effective as of December 31, 2007. Effective August 1, 2010, all benefits and accruals under the Retirement Plan

Table of Contents

were frozen and all remaining participants, including Ms. Katz, Mr. Tansky, and Mr. Barnes, were moved into The Neiman Marcus Group, Inc. Retirement Savings Plan (referred to as the RSP).

Savings Plans. Effective January 1, 2008, a new enhanced 401(k) plan, The Neiman Marcus Group, Inc. Retirement Savings Plan (referred to as the RSP) was established and offered to all employees, including the named executive officers, as the primary retirement plan. Benefits and accruals under a previous 401(k) plan, The Neiman Marcus Group, Inc. Employee Savings Plan (referred to as the ESP), were frozen as well as benefits and accruals under the Retirement Plan. All future and current employees who were not already enrolled in the ESP were automatically enrolled in the RSP. “Rule of 65” employees, as described above, were given a choice to either continue participation in the Retirement Plan and the ESP or freeze what was earned under those plans through December 31, 2007 and participate in the RSP. The RSP is a tax-qualified defined contribution 401(k) plan that allows participants to contribute up to the limit prescribed by the Internal Revenue Service on a pre-tax basis. The Company matches 100% of the first 3% and 50% of the next 3% of pay that is contributed to the RSP after the first year of employment. All employee contributions to the RSP are fully vested upon contribution. Company matching contributions vest after two years of service. The Company will match 100% of the first 2% and 25% of the next 4% of pay that is contributed to the ESP. All employee contributions to the ESP are fully vested upon contribution. Company matching contributions vest after three years of service. Effective August 1, 2010, benefits and accruals under the ESP were frozen for the remaining “Rule of 65” active employees and such participants were moved into the RSP.

Supplemental Retirement Plan and Key Employee Deferred Compensation Plan. U.S. tax laws limit the amount of benefits that we can provide under our tax-qualified plans. We maintain The Neiman Marcus Group, Inc. Supplemental Executive Retirement Plan (referred to as the SERP) and the Neiman Marcus Group, Inc. Key Employee Deferred Compensation Plan (referred to as the KEDC Plan), which are unfunded, nonqualified arrangements intended to provide named executive officers and certain other key employees with additional benefits, including the benefits that they would have received under the Retirement Plan, the ESP and the RSP if the tax law limitations did not apply and if certain other items of compensation could be included in calculation of benefits under our tax-qualified plans. Prior to 2008, executive, administrative and professional employees (other than those employed as salespersons) with an annual base salary at least equal to a minimum established by the Company were eligible to participate in the SERP. Similar to the Retirement Plan, effective December 31, 2007, eligibility and benefit accruals under the SERP were frozen for all participants not meeting the “Rule of 65” and such participants were moved into The Neiman Marcus Group, Inc. Defined Contribution Supplemental Executive Retirement Plan (DC SERP). Effective August 1, 2010, all benefits and accruals under the SERP for “Rule of 65” employees were frozen and such participants will be moved into the DC SERP. SERP related benefits are more fully described under “Pension Benefits” beginning on page 66 of this section.

Participation in the KEDC Plan is limited to employees whose base salary is in excess of $300,000 and meet other stated criteria. Amounts in excess of those benefits provided under the 401(K) plans are credited to the account balances of each KEDC Plan participant. KEDC Plan benefits are more fully described under “Nonqualified Deferred Compensation” beginning on page 68 of this section.

Matching Gift Program. All employees, including the named executive officers, may participate in our matching gift program. Under the program, we will match charitable contributions by employees up to a maximum of $2,000 per qualifying organization on a two-for-one basis in each calendar year. For any contribution made to a qualifying organization in which the employee has an active involvement (as evidenced by service on the organization’s governing body or in one of its working committees), the basis of our matching contribution may, upon application by the employee, be increased to a level greater than two-for-one.

Perquisites. We provide perquisites and other personal benefits that we believe are reasonable and consistent with the nature of individual responsibilities in order to provide a competitive level of total compensation to our executives. We believe the level of perquisites is within an acceptable range of what is offered by a group of industry related companies. The Compensation Committee believes that these benefits are aligned with the Company’s desire to attract and retain superior management talent for the benefit of all stockholders. The value of these benefits to the named executive officers is set forth in the Summary Compensation Table under the column “All Other Compensation” and detail about each benefit is set forth in a table following the Summary Compensation Table.

Table of Contents

Compensation Following Employment Termination or Change in Control

· Employment Agreements

Employment agreements with Mr. Tansky and Karen W. Katz were entered into in conjunction with the consummation of the Acquisition and amended effective January 1, 2009 to comply with Section 409A of the Internal Revenue Code. In April 2010, Mr. Tansky submitted a letter of non-renewal of his employment agreement effective October 5, 2010. In connection therewith, the Company entered into new agreements with Karen W. Katz, James E. Skinner, and James J. Gold, all of which will become effective on October 6, 2010. The Company and the Compensation Committee believe that the employment agreements are an important component in retaining these key executives.

The Compensation Committee considered the importance of the continuity of senior leadership to be a compelling reason to enter into the employment agreements with Mr. Tansky, Ms. Katz, Mr. Skinner and Mr. Gold. The employment agreements provide, among other things, for payments to the executive following a termination of employment by the executive for “good reason” or a termination of the executive’s employment by the Company without “cause.” The triggering events constituting “good reason” and “cause” were negotiated to provide protection to the Company and to the executive for unwarranted termination of employment that could cause harm to the Company. The employment agreements also provide for certain payments to the executives upon death or disability. For a detailed description of the terms of the employment agreements with Mr. Tansky, Ms. Katz, Mr. Skinner and Mr. Gold, see “Employment and Other Compensation Agreements” beginning on page 69 of this section.

· Confidentiality, Non-Competition and Termination Benefits Agreements

Each of the named executive officers (and certain other officers except for Mr. Tansky) is a party to a confidentiality, non-competition and termination benefits agreement with the Company. The confidentiality, non-competition and termination benefits agreements provide for severance benefits if the employment of the affected individual is terminated other than for death, disability, or for cause. These agreements provide for a severance payment equal to one and one-half annual base salary of the named executive officer, payable over an eighteen month period, and reimbursement for COBRA premiums for the same period.

· Other

The Company has change in control provisions in its Management Incentive Plan and its retirement plans that may provide for accelerated vesting and/or distributions in certain circumstances and these provisions apply equally to all participants in the plans, including the named executive officers, except to the extent an executive is party to an individual agreement that provides otherwise.

Consideration of Tax and Accounting Treatment of Compensation

· Internal Revenue Code §409A

The American Jobs Creation Act of 2004 added a new Section 409A to the Internal Revenue Code, which applies to compensation deferred under a nonqualified deferred compensation plan after December 31, 2004. Compliance with the new Section 409A became fully effective on January 1, 2009. Section 409A imposes restrictions on funding, distributions, and election to participate in the affected plans. We believe our executive compensation plans and arrangements comply with Section 409A.

· Accounting for Stock-Based Compensation

We began accounting for stock-based payments in accordance with the provisions of ASC Topic 718, “Compensation — Stock Compensation” on July 31, 2005. When setting equity compensation, the Compensation Committee considers the estimated cost for financial reporting purposes of any equity compensation it is considering. However, the accounting impact does not have a material impact on the design of our equity compensation plan.

Table of Contents

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

	THE COMPENSATION COMMITTEE

	Jonathan J. Coslet, Chairman
	Kewsong Lee
	John G. Danhakl

Summary Compensation Table

The following table sets forth the annual compensation for the Principal Executive Officer, the Principal Financial Officer, and the three other most highly compensated executive officers (referred to as the named executive officers) serving at the end of fiscal year 2010.

Name and Principal Position	Fiscal Year	Salary ($)	Bonus ($)(1)	Option Awards ($)(2)	Non-Equity Incentive Plan Compensation ($)(3)	Change in Pension Value and Non- qualified Deferred Compensation Earnings ($)(4)	All Other Compensation ($)(5)	Total ($)
Burton M. Tansky President and Chief Executive Officer	2010	1,497,600	59,904	3,382,886	2,346,739	521,000	139,153	7,947,282
	2009	1,497,600	—	—	—	786,000	108,287	2,391,887
	2008	1,500,000	—	—	—	205,000	145,992	1,850,992

Karen W. Katz Executive Vice President and President and Chief Executive Officer Neiman Marcus Stores	2010	897,600	35,904	531,615	851,598	752,000	52,237	3,120,954
	2009	897,600	—	—	—	721,000	45,394	1,663,994
	2008	875,000	—	—	—	145,369	113,324	1,133,693


James E. Skinner Executive Vice President and Chief Financial Officer	2010	628,800	25,152	265,838	640,464	84,000	40,812	1,685,066
	2009	628,800	—	—	—	102,000	35,980	766,780
	2008	625,000	—	—	—	54,563	52,381	731,944

James J. Gold President and Chief Executive Officer Bergdorf Goodman	2010	499,200	19,968	265,838	534,194	106,000	195,094	1,620,294
	2009	499,200	—	—	—	116,000	202,189	817,389
	2008	490,000	—	—	253,546	—	196,001	939,547

Gerald A. Barnes President and Chief Executive Officer Neiman Marcus Direct	2010	425,000	17,000	1,457,351	422,153	298,000	26,832	2,646,336
	2009	425,000	—	—	—	282,000	25,041	732,041
	2008	371,500	—	—	19,937	350,000	30,345	771,782

Table of Contents

Footnotes:

(1)		For fiscal year 2010, the amount shown represents discretionary bonuses awarded by the Compensation Committee.

(2)		For new option awards in fiscal year 2010, these amounts reflect the aggregate grant date fair value for the awards computed in accordance with ASC Topic 718. For option awards in fiscal year 2010 made in connection with the Modification Transactions, these amounts reflect the incremental aggregate grant date fair value of the modified awards over the grant date fair value of the original awards. The assumptions used in calculating these amounts are described under the caption Stock-Based Compensation in Note 11 to the Notes to Consolidated Financial Statements beginning on page F-25 of this Annual Report on Form 10-K. No stock option awards were made in fiscal years 2009 and 2008 to the named executive officers. These amounts reflect the grant date fair value and do not represent the actual value that may be realized by the named executive officers.

(3)		The amounts reported in the Non-Equity Incentive Plan Compensation column reflect the actual amounts earned under the bonus plan described in the “Compensation Discussion and Analysis” section beginning on page 54.

(4)		The amounts in this column represent the change in the actuarial value of the named executive officers’ benefits under our retirement and supplemental executive retirement plans from August 1, 2009 to July 31, 2010. This “change in the actuarial value” is the difference between the fiscal year 2009 and fiscal year 2010 present value of the pension benefits accumulated as of year-end by the named executive officers, assuming that benefit is not paid until age 65. These amounts were computed using the same assumptions used for financial statement reporting purposes under ASC Subtopic 715-30, “Defined Benefit Plans — Pension” as described in Note 13 in the Notes to Consolidated Financial Statements beginning on page F-29 of this Annual Report on Form 10-K. For fiscal year 2010, no earnings of each of the named executive officers in the KEDC plan exceeded 120 percent of the applicable federal long-term rate.

(5)		Includes all items listed in the following table entitled “All Other Compensation.” In the interest of transparency, the value of perquisites and other personal benefits is provided in this column and in the footnotes below even if the amount is less than the reporting threshold established by the SEC.

The table below sets forth all other compensation for each of the named executive officers.

All Other Compensation	Burton M. Tansky ($)		Karen W. Katz ($)		James E. Skinner ($)		James J. Gold ($)		Gerald A. Barnes ($)
401(k) plans contributions paid by us	$	7,350	$	7,350	$	11,025	$	10,485	$	7,512
Deferred compensation plan match	—		20,655		12,363		—		—
Group term life insurance	20,041		2,830		3,836		1,430		3,969
Financial counseling/tax preparation	41,189		3,325		3,000		—		3,000
Long-term disability	3,180		3,180		3,180		3,180		3,180
Car allowance	12,000		—		—		—		—
Cost of living adjustment(1)	—		—		—		179,999		—
Gross ups:
New York non-resident taxes (2)	55,393		14,897		7,408		—		9,171
TOTALS	$	139,153	$	52,237	$	40,812	$	195,094	$	26,832

Footnotes:

(1)		The amount listed for Mr. Gold represents an annualized cost of living adjustment following his relocation from Texas to New York in May 2004.

(2)		The amounts shown represent gross up payments made in connection with New York non-resident taxes.

Table of Contents

FISCAL YEAR 2010 GRANTS OF PLAN BASED AWARDS

The following table sets forth the non-equity incentive award that could have been payable pursuant to our annual cash incentive plan and equity awards granted pursuant to our long-term equity plans to our named executive officers for fiscal year 2010.

					All Other
					Option
					Awards:			Grant Date
					Number of		Exercise or	Fair Value
		Estimated Possible Future Payouts Under			Securities		Base Price	of Stock
		Non-Equity Incentive Plan Awards (1)			Underlying		Of Option	and Option
	Grant	Threshold	Target	Maximum	Options		Awards	Awards
Name	Date	($)	($)	($)	(#)		($)(5)	($)(6)

Tansky, Burton M.	11-03-09	748,000	1,497,600	2,995,200	—		—	—
	04-01-10	—	—	—	5,668	(2)	1,000	1,606,612
	10-06-05	—	—	—	7,269	(3)	1,445	1,776,274

Katz, Karen W.	11-03-09	168,300	673,200	1,346,400	—		—	—
	12-15-09	—	—	—	3,561	(2)	1,000	78,431
	10-06-05	—	—	—	5,341	(3)	1,445	453,184

Skinner, James E.	11-03-09	102,180	408,720	817,440	—		—	—
	12-15-09	—	—	—	1,780	(2)	1,000	39,204
	10-06-05	—	—	—	2,671	(3)	1,445	226,634

Gold, James J.	11-03-09	74,880	299,520	599,040	—		—	—
	12-15-09	—	—	—	1,780	(2)	1,000	39,204
	10-06-05	—	—	—	2,671	(3)	1,445	226,634

Barnes, Gerald A.	11-03-09	63,750	255,000	510,000	—		—	—
	10-05-09	—	—	—	2,800	(4)	1,000	1,404,200
	12-15-09	—	—	—	356	(2)	1,000	7,841
	10-06-05	—	—	—	534	(3)	1,445	45,310

Footnotes:

(1)		Non-equity incentive plan awards represent the threshold, target and maximum opportunities under our performance-based incentive compensation plan for fiscal year 2010. The actual amounts earned under this plan are disclosed in the Summary Compensation Table on page 62 of this section. For a detailed discussion of the annual incentive awards for fiscal year 2010, see “Compensation Discussion and Analysis” beginning on page 54 of this section.

(2)		Represents Accreting Options received from the exchange of underwater options at the rate of 1.5 for 1. For a detailed discussion, see “Long Term Incentive” on page 55 of this section and “Stock Options” on page 59 of this section.

(3)		Represents Fixed Price Options for which the option terms were extended in the second and third quarters of fiscal year 2010. For a detailed discussion, see “Long Term Incentive” on page 55 of this section and “Stock Options” on page 59 of this section.

(4)		Options awarded Mr. Barnes under the Management Incentive Plan pursuant to his promotion in fiscal year 2009. Half of the award is Fixed Price Options and half is Accreting Options. The exercise price of the Accreting Options escalates at a 10% compound rate on the first through the fifth anniversary dates of the grant. The exercise price of the Fixed Price Options is fixed at the grant date. The options vest 20% on the first anniversary date of the grant with the remaining portion becoming exercisable in forty-eight monthly installments over the forty-eight months following October 5, 2010, beginning on November 5, 2010, until October 5, 2014 when the options become fully exercisable. Both the Fixed Price Options and the Accreting Options will expire on October 5, 2017. For a detailed discussion, see “Long Term Incentive” on page 55 of this section and “Stock Options” on page 59 of this section.

(5)		Because we are privately held and there is no public market for our common stock, the fair market value of our common stock is determined by our Compensation Committee at the time option grants are awarded. In determining the fair market value of our common stock, the Compensation Committee considers such factors as the Company’s actual and projected financial results, the principal amount of the Company’s indebtedness, valuations of the Company performed by third parties and other factors it believes are material to the valuation process.

(6)		For new option awards in fiscal year 2010, these amounts reflect the aggregate grant date fair value for the awards computed in accordance with ASC Topic 718. For option awards in fiscal year 2010 made in connection with the Modification Transactions, these amounts reflect the incremental aggregate grant date fair value of the modified awards over the grant date fair value of the original awards. The assumptions used in calculating these amounts are described under the caption Stock-Based Compensation in Note 11 to the Notes to Consolidated Financial Statements on page F-25 of this Annual Report on Form 10-K.

Table of Contents

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

The following table sets forth certain information regarding the total number and aggregate value of stock options held by each of our named executive officers at July 31, 2010.

	Option Awards
Name	Number of Securities Underlying Unexercised Options (#) Exercisable	Number of Securities Underlying Unexercised Options (#) Unexercisable		Option Exercise Price ($)		Option Expiration Date
Burton M. Tansky	3,742	—		361.25		10-06-2015
	1,465	—		361.25		10-06-2015
	2,076	—		354.03		10-06-2015
	7,269	—	(1)	1,445.00		10-06-2015
	—	5,668	(2)	1,000.00	(2)	10-06-2015
Karen W. Katz	5,074	267	(3)	1,445.00		12-15-2017
	—	3,561	(4)	1,000.00	(4)	12-15-2017
James E. Skinner	2,537	134	(3)	1,445.00		12-15-2017
	—	1,780	(4)	1,000.00	(4)	12-15-2017
James J. Gold	2,537	134	(3)	1,445.00		12-15-2017
	—	1,780	(4)	1,000.00	(4)	12-15-2017
Gerald A. Barnes	507	27	(3)	1,445.00		12-15-2017
	—	356	(4)	1,000.00	(4)	12-15-2017
	—	1,400	(5)	1,000.00		10-05-2017
	—	1,400	(5)	1,000.00	(5)	10-05-2017

Footnotes:

(1)		Nonqualified stock options granted November 29, 2005 vested with respect to 460 shares on the first anniversary date of October 6, 2005 and thereafter on the subsequent three anniversary dates of October 6, 2005 with respect to 2,270 shares.

(2)		Nonqualified stock options exchanged for underwater options at the ratio of 1.5 to 1 on April 1, 2010, which vests 25% on the first anniversary of December 15, 2010 and thereafter in thirty-six equal monthly installments over the thirty-six months following December 15, 2010 beginning on January 15, 2011 and becoming fully vested on December 15, 2013. The options were granted at the initial exercise price of $1,000 per share which will increase at a 10% compound rate on each anniversary of December 15, 2010 until the earlier to occur of (i) the exercise of the option, (ii) December 15, 2013, or (iii) the occurrence of a change of control, or in the event the equity investors sell a portion of their investment, with respect to a portion of the options bearing the same ratio as the portion of the equity investor’s equity sold. On December 15, 2010, the option price will increase to $1,100 per share.

(3)		Nonqualified stock options granted on November 29, 2005 at the exercise price of $1,445 per share which vests 20% on the first anniversary of October 6, 2005 and thereafter in forty-eight equal monthly installments over the forty-eight months following the first anniversary of October 6, 2005, beginning on the one-month anniversary of such first anniversary and becoming fully vested on October 6, 2010, subject to earlier vesting in certain circumstances following a change in control.

(4)		Nonqualified stock options exchanged in a tender offer for underwater options at the ratio of 1.5 to 1 on December 15, 2009 which vests 25% on the first anniversary of December 15, 2009 and thereafter in thirty-six equal monthly installments over the thirty-six months following the first anniversary of December 15, 2009, beginning on January 15, 2011 and becoming fully vested on December 15, 2013. The options were granted at the initial exercise price of $1,000 per share which will increase at a 10% compound rate on each anniversary of December 15, 2009 until the earlier to occur of (i) the exercise of the option, (ii) December 15, 2013, or (iii) the occurrence of a change of control, or in the event the equity investors sell a portion of their investment, with respect to a portion of the options bearing the same ratio as the portion of the equity investor’s equity sold. On December 15, 2010, the option price will increase to $1,100 per share.

(5)		Nonqualified stock options granted on October 5, 2009 at the exercise price of $1,000 per share which vests 20% on the first anniversary of October 5, 2009 and thereafter in forty-eight equal monthly installments over the forty-eight months following the first anniversary of October 5, 2009, beginning on the one-month anniversary of such first anniversary and becoming fully vested on October 5, 2014. The options were granted at the initial exercise price of $1,000 per share which will increase at a 10% compound rate on each anniversary of October 5, 2009 until the earlier to occur of (i) the exercise of the option, (ii) October 5, 2014, or (iii) the occurrence of a change of control, or in the event the equity investors sell a portion of their investment, with respect to a portion of the options bearing the same ratio as the portion of the equity investor’s equity sold. On October 5, 2010, the option price will increase to $1,100 per share.

Table of Contents

PENSION BENEFITS

The following table sets forth certain information with respect to retirement payments and benefits under the Retirement Plan and the SERP for each of our named executive officers.

Name		Plan Name	Number of Years Credited Service (#)(1)		Present Value of Accumulated Benefit ($)(2)	Payments During Last Fiscal Year ($)
Burton M. Tansky		Retirement Plan	20		461,000	—
		SERP	32	(3)	8,386,000	—
Karen W. Katz		Retirement Plan	25		334,000	—
		SERP	25	(4)	2,638,000	—
James E. Skinner		Retirement Plan	7	(5)	132,000	—
		SERP	7	(5)	414,000	—
James J. Gold		Retirement Plan	17	(5)	133,000	—
		SERP	17	(5)	366,000	—
Gerald A. Barnes		Retirement Plan	27	(6)	406,000	—
	��	SERP	25	(6)	911,000	—

Footnotes:

(1)		Computed as of July 31, 2010, which is the same pension measurement date used for financial statement reporting purposes with respect to our audited consolidated financial statements and notes thereto.

(2)		For purposes of calculating the amounts in this column, retirement age was assumed to be the normal retirement age of the later of age 65 or the fifth anniversary of the individual’s date of hire, as defined in the Retirement Plan. A description of the valuation method and all material assumptions applied in quantifying the present value of accumulated benefit is set forth in Note 13 to the Notes to Consolidated Financial Statements beginning on page F-29 of this Annual Report on Form 10-K.

(3)		The difference in years of service is a result of the provision in Mr. Tansky’s employment agreement relating to the calculation of his years of service under the SERP. Following his termination of employment with us, his years of service for purposes of calculating his benefit under the SERP will be determined by multiplying his actual service for purposes of the SERP by 2, subject to the 25-year maximum set forth in the SERP, and by then providing him with an additional credit for each year of service to the Company following his attainment of age sixty-five (65) (disregarding the 25-year maximum set forth in the SERP). The value of Mr. Tansky’s actual years of service under the SERP is $4,886,000, so the value of the additional years of service in excess of his actual service is $3,500,000. See the discussion of his employment agreement under “Employment and Other Compensation Agreements” beginning on page 69 of this section.

(4)		Pursuant to the terms of Karen W. Katz’s employment agreement, she will be entitled to an additional one year of credit for each full year of service after she has reached the 25-year maximum set forth in the SERP. In addition, if her employment is terminated by us for any reason other than death, disability, cause, or for non-renewal of her employment term, or if she terminates her employment with us for good reason, and she has not yet reached 65, her SERP benefit will not be reduced solely by reason of her failure to reach 65 as of the termination date. The value of Ms. Katz’s actual years of service under the SERP is $2,623,000, so the value of the additional years of service in excess of her actual service is $15,000.

(5)		Effective December 31, 2007, benefit accruals for Messrs. Skinner and Gold under the Retirement Plan and the SERP were frozen, as further described below.

(6)		Effective August 1, 2010, benefit accruals for Mr. Barnes under the Retirement Plan and the SERP were frozen, as further described below.

Table of Contents

The Retirement Plan is a funded, tax-qualified pension plan. Prior to 2008, most non-union employees over age 21 who had completed one year of service with 1,000 or more hours were eligible to participate in the Retirement Plan, which paid benefits upon retirement or termination of employment. Effective as of December 31, 2007, eligibility and benefit accruals under the Retirement Plan were frozen for all participants except for those “Rule of 65” employees who elected to continue participating in the Retirement Plan. “Rule of 65” employees included only those active employees who had completed at least 10 years of service and whose combined years of service and age equaled at least 65 as of December 2007. The Retirement Plan is a “career-accumulation” plan, under which a participant earns each year a retirement annuity equal to one percent of his or her compensation for the year up to the Social Security wage base and 1.5 percent of his or her compensation for the year in excess of such wage base. “Compensation” for this purpose generally includes salary, bonuses, commissions and overtime but not in excess of the limits imposed upon annual compensation under Internal Revenue Code Section 401(a)(17). Such limit for 2009 was $245,000 and remains unchanged for 2010 and is adjusted annually for cost-of-living increases. Benefits under the Retirement Plan become fully vested after five years of service with us. Effective August 1, 2010, benefit accruals were frozen for the remaining “Rule of 65” employees and such participants were given the opportunity to participate in the RSP.

The SERP is an unfunded, nonqualified plan under which benefits are paid from our general assets to supplement Retirement Plan benefits and Social Security. Prior to 2008, executive, administrative and professional employees (other than those employed as salespersons) with an annual base salary at least equal to a minimum established by the Company were eligible to participate. Similar to the Retirement Plan, effective December 31, 2007, eligibility and benefit accruals under the SERP were frozen for all participants except for those “Rule of 65” employees who elected to continue participating in the Retirement Plan. At normal retirement age (the later of age 65 and the fifth anniversary of the participant’s date of hire), an eligible participant with 25 or more years of service is entitled to full benefits in the form of monthly payments under the SERP computed as a straight life annuity, equal to 50 percent of the participant’s average monthly compensation for the highest consecutive 60 months preceding retirement less 60 percent of his or her estimated annual primary Social Security benefit, offset by the benefit accrued by the participant under the Retirement Plan. The amount is then adjusted actuarially to determine the actual monthly payments based on the time and form of payment. For this purpose, “compensation” includes salary but does not include bonuses. If the participant has fewer than 25 years of service, the combined benefit is proportionately reduced. Benefits under the SERP become fully vested after five years of service with us. The SERP is designed to comply with the requirements of Section 409A of the Internal Revenue Code. Along with the Retirement Plan and the ESP, benefit accruals under the SERP were frozen for the remaining “Rule of 65” employees effective August 1, 2010 and those remaining participants were given the opportunity to participate in the DC SERP.

Table of Contents

NONQUALIFIED DEFERRED COMPENSATION

The amounts reported in the table below represent deferrals and Company matching contributions credited pursuant to the KEDC Plan and Company contributions credited pursuant to the DC SERP.

Name		Executive Contributions in Last Fiscal Year ($)(1)	Registrant Contributions in Last Fiscal Year ($)	Aggregate Earnings in Last Fiscal Year ($)	Aggregate Withdrawals / Distributions ($)	Aggregate Balance at Last Fiscal Year- End ($)

Burton M. Tansky	KEDC	—	—	—	—	—
	DC SERP	—	—	—	—	—

Karen W. Katz	KEDC	92,890	20,655	32,397	—	1,058,536
	DC SERP	—	—	—	—	—

James E. Skinner	KEDC	39,237	12,363	10,034	—	340,809
	DC SERP	—	60,970	3,625	—	142,950

James J. Gold	KEDC	—	—	—	—	—
	DC SERP	—	68,471	5,484	—	205,781

Gerald A. Barnes	KEDC	—	—	1,186	—	37,128
	DC SERP	—	—	—	—	—

Footnotes:

(1)

The amounts reported as Executive Contributions in Last Fiscal Year are also included as Salary in the Summary Compensation Table beginning on page 62 of this Section.

The KEDC Plan allows eligible employees to elect to defer up to 15% of base pay and up to 15% of annual performance bonus each year. Eligible employees generally are those employees who have completed one year of service with the Company, have annual base pay of at least $300,000 and are otherwise designated as eligible by the Company’s employee benefits committee; provided, however, that effective January 1, 2008, only those persons who were eligible for the KEDC as of January 1, 2007 are permitted to continue participating in the KEDC. No new participants will be added. The Company also credits a matching contribution each pay period equal to (A) the sum of (i) 100% of the sum of the employee’s KEDC Plan deferrals and the maximum RSP deferral that the employee could have made under such plan for such pay period, to the extent that such sum does not exceed 2% of the employee’s compensation for such pay period, and (ii) 25% of the sum of the employee’s KEDC Plan deferrals and the maximum RSP, as applicable, deferral that the employee could have made under such plan for such pay period, to the extent that such sum does not exceed the next 4% of the employee’s compensation for such pay period, minus (B) the maximum possible match the employee could have received under the RSP, as applicable, for such pay period. Such amounts are credited to a bookkeeping account for the employee and are fully vested with respect to matching contributions made for calendar years prior to 2008. Amounts attributable to matching contributions, plus interest thereon, for calendar years on and after 2008 are subject to forfeiture in the event the employee is terminated for cause. Accounts are credited monthly with interest at an annual rate equal to the prime interest rate published in The Wall Street Journal on the last business day of the preceding calendar quarter. Amounts credited to an employee’s account become payable to the employee upon separation from service, death, unforeseeable emergency, or change of control of the Company. In the event of separation of service, payment is made in a lump sum in the calendar quarter following the calendar quarter in which the separation occurs although if the employee is eligible for retirement upon such separation, payment may be deferred until the following year or the nine subsequent years, and may be made in a lump sum or in installments over a period of up to ten years, depending upon the distribution form elected by the employee. There is no separate funding for the amounts payable under the KEDC Plan, rather the Company makes payment from its general assets. The KEDC Plan is designed to comply with the requirements of Section 409A of the Internal Revenue Code.

The DC SERP is an unfunded, nonqualified deferred compensation plan under which benefits are paid from our general assets to provide eligible employees with the opportunity to receive employer contributions on the portion of their eligible compensation that exceeds the compensation limit imposed by Internal Revenue Code Section 401(a)(17) (the “IRS Limit”). The IRS Limit for 2009 was $245,000 and remains unchanged for 2010. Eligible employees generally are those employees who have completed one year of service with the Company, who have annual base pay of at least 80% of the IRS Limit (or were eligible to participate in the SERP as of December 31, 2007 and ceased to be eligible to participate in

Table of Contents

the SERP as of January 1, 2008), and who are otherwise designated as eligible by the Company’s employee benefits committee. The Company will make transitional and non-transitional credits to the accounts of eligible participants each pay period. Transitional credits apply only to participants who were eligible to participate in the SERP as of December 31, 2007 but ceased participating in the SERP as of that date and became a participant in the DC SERP on January 1, 2008. The amount of a transitional credit is the product of a participant’s eligible compensation in excess of the IRS Limit and an applicable percentage ranging from 0% to 6% depending upon the age of the participant. Non-transitional credits apply to all eligible participants. The amount of a non-transitional credit is the product of a participant’s eligible compensation in excess of the IRS Limit and 10.5%. All transitional and non-transitional credits are credited to a bookkeeping account and vest upon the earlier of (i) an eligible employee’s attainment of five years of service, (ii) an eligible employee’s attainment of age 65, (iii) an eligible employee’s death, (iv) an eligible employee’s disability, or (v) a change of control (as defined in the DC SERP) while in the employ of the Company. Notwithstanding the preceding, amounts credited to an account are subject to forfeiture in the event the employee is terminated for cause. Accounts are credited monthly with interest at an annual rate equal to the prime interest rate published in The Wall Street Journal on the last business day of the preceding calendar quarter. Vested amounts credited to an employee’s account become payable in the form of five annual installments beginning upon the later of the employee’s separation from service and age 55, or such later age as the employee may elect. Upon the employee’s death or disability or upon a change of control of the Company, vested amounts credited to an employee’s account will be paid in a single lump sum. The DC SERP is designed to comply with the requirements of Section 409A of the Internal Revenue Code.

Employment and Other Compensation Agreements

As discussed in “Compensation Discussion & Analysis,” The Neiman Marcus Group, Inc. has entered into employment agreements with Burton M. Tansky and Karen W. Katz. Following the submission by Mr. Tansky in April 2010 of his letter of non-renewal of his employment agreement, new employment agreements were entered into between the Company, The Neiman Marcus Group, Inc. and each of Karen W. Katz, James E. Skinner, and James J. Gold. These new employment agreements will become effective on October 6, 2010. In addition, each of the named executive officers, except for Mr. Tansky and Ms. Katz, is a party to a confidentiality, non-competition and termination benefits agreement, discussed below.

Employment Agreement with Mr. Tansky

The employment agreement with Mr. Tansky, as amended, has an employment term of five years until October 2010, subject to automatic one-year renewals of the term if neither party submits a notice of termination at least six months prior to the end of the then-current term, and provides for a base salary of not less than $1,300,000 per year. In April 2010, Mr. Tansky submitted a letter of non-renewal of his employment agreement effective October 5, 2010 whereby he will retire as President and Chief Executive Officer. Pursuant to a Director’s Service Agreement dated April 26, 2010 by and among the Company, The Neiman Marcus Group, Inc. and Mr. Tansky, he will continue as a non-employee chairman. The Director’s Service Agreement will become effective October 6, 2010 and expire on December 31, 2011.

Provisions of Mr. Tansky’s agreement include participation in the Company’s annual bonus plan. If bonus levels for a fiscal year are met, the minimum bonus amount he will receive will be at least 50% of his base salary, if the target bonus goal for the fiscal year is met, he will receive at least 85% of his base salary, and if the maximum target goal is met, he will receive at least 170% of his base salary. The actual amounts will be determined according to the terms of the annual bonus program and will be payable at the discretion of the Compensation Committee.

In addition to the foregoing, the agreement provides that upon the occurrence of the earlier of a change of control or an initial public offering, Mr. Tansky will be entitled to a cash bonus equal to $3,080,911, which represents his portion of the cash incentive pool pursuant to the Cash Incentive Plan (more fully described beginning on page 73 of this section). The agreement also provides that at the time of Mr. Tansky’s termination of employment with the Company, his years of service for purposes of calculating his benefit under the SERP shall be determined by multiplying his actual service for purposes of the SERP by 2, subject to the 25-year maximum set forth in the SERP, and by then providing him with additional credit for each year of service by him to the Company following his attainment of age sixty-five (65) (disregarding the 25-year maximum set forth in the SERP).

If (1) we terminate Mr. Tansky’s employment without cause or if he resigns for good reason, or (2) Mr. Tansky resigns without good reason during the 30 day period following the six month anniversary of a future change of control (referred to herein as a change of control resignation), he will receive, subject to his execution of a mutual release and waiver of claims, a lump sum equal to (A) 85% of base salary multiplied by a fraction, the numerator of which is the number of days during the fiscal year up to the termination date and the denominator of which is 365, plus (B) 36 times the monthly COBRA

Table of Contents

premium applicable to Mr. Tansky plus (C) if such termination is not a change of control resignation, an amount equal to three times the sum of (i) base salary and (ii) 85% of base salary in effect on the termination date, or if such termination is a change of control resignation, an amount equal to two times the sum of (i) base salary and (ii) 85% of base salary in effect on the termination date; provided, however, that Mr. Tansky shall be required to repay this payment if he violates certain of the restrictive covenants or if he is found to have engaged in certain acts of wrongdoing, all as further described in the agreement. In certain circumstances, Mr. Tansky will also be entitled to some or all of the benefits under the Cash Incentive Plan.

If Mr. Tansky’s employment terminates before the end of the term due to death or inability to perform (as defined in the employment agreement), we will pay him or his estate, as applicable, 85% of base salary multiplied by a fraction, the numerator of which is the number of days during the fiscal year up to the termination date and the denominator of which is 365.

Pursuant to the agreement and depending on the circumstances of the termination of Mr. Tansky’s employment, he may also be entitled to receive an amount equal to the monthly COBRA premium applicable at his termination date based upon the coverage in effect under the group medical plan immediately prior to his termination date multiplied by thirty-six (36).

Also pursuant to the agreement, depending on the circumstances of the termination of Mr. Tansky’s employment, he may be entitled to up to three years of continuing coverage under our life insurance plan at the same benefit level as provided to him immediately prior to his termination date and at the same cost as is generally provided to similarly situated active employees of the Company.

Mr. Tansky’s agreement provides that he is entitled to participate in any extraordinary dividend on certain of his options, if then outstanding, that were granted prior to the acquisition and assumed by Parent.

Mr. Tansky’s agreement also contains a tax gross-up provision whereby if, in the event of a change in control following the existence of a public market for the Company’s stock, he incurs any excise tax by reason of his receipt of any payment that constitutes an excess parachute payment as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), he will receive a gross-up payment in an amount that would place him in the same after-tax position that he would have been in if no excise tax had applied. However, under certain conditions, rather than receive a gross-up payment, the payments payable to him will be reduced so that no excise tax is imposed.

Pursuant to the agreement, Mr. Tansky received a grant to purchase 7,269.3851 Fixed Price Options and 9,079.79470 Accreting Options. On April 1, 2010 the Accreting Options were exchanged for 5,668 new Accreting Options that vest 25% on December 15, 2010 with the remaining portion becoming exercisable in thirty-six equal monthly installments over the thirty-six months following December 15, 2010. The Fixed Price Options became fully vested on October 6, 2009. The agreement provides for the accelerated vesting of the Accreting Options upon (i) a change of control or (ii) the termination of Mr. Tansky’s employment before the end of the term due to death or inability to perform. In addition, in the event that we terminate Mr. Tansky’s employment without cause or if he resigns for good reason, the agreement provides that the options will vest as to (i) the number of shares that would have become vested on the next anniversary of the grant date, plus (ii) if the termination date occurs prior to the third anniversary of the grant date, the number of shares that would have vested on the next anniversary of the grant date, multiplied by a fraction, the numerator of which is the number of days from the preceding anniversary of the grant date and the denominator of which is 365.

Mr. Tansky’s agreement also contains obligations on his part regarding non-competition and non-solicitation of employees during employment following the termination of his employment for any reason, confidential information and non-disparagement of the Company and its business. The non-competition agreement generally prohibits Mr. Tansky during his employment and for a period of three years from termination from becoming a director, officer, employee or consultant for any competing business that owns or operates a luxury specialty retail store located in the geographic areas of the Company’s operations. The agreement also requires that he disclose and assign to the Company any trademarks or inventions developed by him which relate to his employment by the Company or to the Company’s business.

Director Services Agreement with Mr. Tansky

In connection with his new position as non-executive Chairman of the Board that will become effective on October 6, 2010, the Company has entered into a director services agreement with Mr. Tansky, which is for a term running from October 6, 2010 through December 31, 2011. In consideration of the time, effort, and attention Mr. Tansky has agreed to commit to the Company in this new role, the Company will compensate Mr. Tansky for his attendance at Board meetings at the rate of $37,500 per Board meeting for up to four Board meetings in any 12-month period. In addition, upon termination of his employment agreement upon his retirement and provided such termination does not give rise to an obligation for the Company to pay severance compensation under the employment agreement, the Company will

Table of Contents

make a one-time, lump-sum payment to Mr. Tansky in an amount equal to the monthly premium cost of certain continued medical benefits multiplied by 60. The Company also will provide Mr. Tansky with office space and appropriate staff assistance at Bergdorf Goodman in New York and reimburse him for travel and other expenses incurred in the fulfillment of his non-executive Chairman of the Board responsibilities. The agreement provides that Mr. Tansky shall be subject to removal pursuant to the standards and requirements of the Company’s bylaws and applicable law.

Current Employment Agreement with Ms. Katz

In connection with the non-renewal of Mr. Tansky’s employment agreement in April 2010, the Company entered into a new employment agreement with Karen W. Katz wherein she will succeed Mr. Tansky as President and Chief Executive Officer. The new employment agreement will become effective on October 6, 2010. Her current employment agreement provides that she will act as Chief Executive Officer and President of Neiman Marcus Stores, a division of The Neiman Marcus Group, Inc., until October 2010, subject to automatic one-year renewals of the term if neither party submits a notice of termination at least three months prior to the end of the then-current term. Pursuant to the agreement, her base salary shall not be less than $760,000. Ms. Katz’s agreement also provides that she will participate in the Company’s annual bonus plan. The actual amounts will be determined according to the terms of the annual bonus program and will be payable at the discretion of the Compensation Committee. However, Ms. Katz’s agreement provides that her target bonus may not be reduced below 65% of her base salary. In addition, the agreement provides that during the term, Ms. Katz shall continue to accrue benefits under the SERP, provided that (i) the SERP shall not be amended or terminated in any way that adversely affects her, and (ii) after she has reached the 25-year maximum set forth in the SERP, she shall be entitled to an additional one year of credit for each full year of service thereafter. In addition, if (i) during the term, her employment is terminated by the Company for any reason other than death, disability, or cause (as defined in the employment agreement), (ii) during the term, she terminates her employment for good reason (as defined in the employment agreement), or (iii) her employment terminates upon expiration of the term following the provision by the Company of a notice of non-renewal, and, in any such case, on the date of such termination she has not yet reached age 65, her SERP benefit shall not be reduced according to the terms of the SERP solely by reason of her failure to reach age 65 as of the termination date.

This agreement may be terminated by either party on three months’ notice, subject to severance obligations in the event of termination under certain circumstances (as described below).

If we terminate Ms. Katz’s employment without cause or if she resigns for good reason or following her receipt of a notice of non-renewal from the Company relating to the employment term, she will receive (i) an amount of annual incentive pay equal to a prorated portion of her target bonus amount for the year in which the employment termination date occurs, and (ii) a lump sum equal to (A) 6 times the monthly COBRA premium applicable to Ms. Katz plus (B) two times the sum of her base salary and target bonus, at the level in effect as of the employment termination date; provided, however, that Ms. Katz shall be required to repay this payment if she violates certain restrictive covenants in her agreement or if she is found to have engaged in certain acts of wrongdoing, all as further described in the agreement. Ms. Katz is also entitled to continuation of certain benefits for a two-year period following a termination of her employment for any reason as set forth more fully in her employment agreement.

If Ms. Katz’s employment terminates before the end of the term due to her death or disability, we will pay her or her estate, as applicable, (i) any unpaid salary through the date of termination and any bonus payable for the preceding fiscal year that has otherwise not already been paid, (ii) any accrued but unused vacation days, (iii) any reimbursement for business travel and other expenses to which she is entitled, and (iv) an amount of annual incentive pay equal to a prorated portion of her target bonus amount for the year in which the employment termination date occurs.

Ms. Katz’s agreement also contains a tax gross-up provision whereby if, in the event of a change in control following the existence of a public market for the Company’s stock, she incurs any excise tax by reason of her receipt of any payment that constitutes an excess parachute payment as defined in Section 280G of the Code, she will receive a gross-up payment in an amount that would place her in the same after-tax position that she would have been in if no excise tax had applied. However, under certain conditions, rather than receive a gross-up payment, the payments payable to her will be reduced so that no excise tax is imposed.

Ms. Katz’s agreement also contains obligations on her part regarding non-competition and non-solicitation of employees following the termination of her employment for any reason, confidential information and non-disparagement of the Company and its business. The non-competition agreement generally prohibits Ms. Katz during employment and for a period of one year from termination from becoming a director, officer, employee or consultant for any competing business that owns or operates a luxury specialty retail store located in the geographic areas of the Company’s operations. The

Table of Contents

agreement also requires that she disclose and assign to the Company any trademarks or inventions developed by her which relate to her employment by the Company or to the Company’s business.

New Employment Agreement with Ms. Katz

In connection with her new position as President and Chief Executive Officer, Ms. Katz has entered into a new employment agreement with the Company, the terms of which become effective on October 6, 2010. The employment agreement is for a term of four years with automatic extensions of one year unless either party provides three months’ written notice of non-renewal. The agreement provides for a beginning annual base salary of $1,050,000, an initial bonus of $50,000 upon Ms. Katz’s commencement of her new position, and participation in an annual incentive program with a target bonus opportunity of 100% of annual base salary and a maximum bonus of 200% of annual base salary. In addition, as part of the agreement, the Company will, effective September 30, 2010 and pursuant to the Company’s Management Equity Incentive Plan (“Plan”), grant Ms. Katz a non-qualified stock option with respect to 4,300 shares of Common Stock of the Company with an exercise price equal to the fair market value of the Common Stock at the time of grant. The stock option will expire no later than the seventh anniversary of the grant date. SERP benefits for Ms. Katz under her new agreement are substantially similar to those she enjoyed under previous agreement discussed above. The agreement also provides for reimbursement of several types of expenses incurred by Ms. Katz. The agreement provides that Ms. Katz will be based at the principal executive offices of The Neiman Marcus Group in Dallas, Texas.

The employment agreement may be terminated by either party. In certain termination circumstances, Ms. Katz will receive, subject to her execution of a waiver and release agreement, severance pay consisting of no more than a lump sum payment equal to a prorated portion of the target bonus for the year of termination, an amount representing the monthly premium cost of certain continued medical benefits for 24 months, 2 years of base salary, and 2 years of annual target bonuses. In addition, in certain circumstances, she would receive life insurance coverage for two years following termination of employment. The agreement contains a two-year noncompetition agreement along with related confidentiality, nondisparagement, and intellectual property provisions and conditions receipt of the severance pay just described on compliance with those provisions.

Employment Agreements with Mr. Skinner and Mr. Gold

On July 22, 2010, the Company entered into new employment agreements with James E. Skinner, Executive Vice President and Chief Financial Officer, and James J. Gold, President and Chief Executive Officer of Bergdorf Goodman, Inc., the terms of which become effective on October 6, 2010. Each of the employment agreements is for a four-year term with automatic extensions of one year unless either party provides three months’ written notice of non-renewal. The agreement with Mr. Skinner provides that he will act as Executive Vice President, Chief Operating Officer and Chief Financial Officer of The Neiman Marcus Group for a beginning annual base salary of $700,000 and participation in an annual incentive program with a target bonus opportunity of 75% of annual base salary and a maximum bonus of 150% of annual base salary. In addition, as part of the agreement, the Company will, effective September 30, 2010 and pursuant to the Plan, grant Mr. Skinner a non-qualified stock option with respect to 2,200 shares of Common Stock of the Company with an exercise price equal to the fair market value of the Common Stock at the time of grant. The stock option will expire no later than the seventh anniversary of the grant date.

The agreement with Mr. Gold provides that he will act as President, Specialty Retail of The Neiman Marcus Group for a beginning annual base salary of $750,000 and participation in an annual incentive program with a target bonus opportunity of 75% of annual base salary and a maximum bonus of 150% of annual base salary. In addition, as part of the agreement, the Company will, effective September 30, 2010 and pursuant to the Plan, grant Mr. Gold a non-qualified stock option with respect to 2,200 shares of Common Stock of the Company with an exercise price equal to the fair market value of the Common Stock on the date of grant. The stock option will expire no later than the seventh anniversary of the grant date.

The employment agreements may be terminated by either party. In certain termination circumstances, Mr. Skinner and Mr. Gold each will receive, subject to their execution of a waiver and release agreement, severance pay consisting of no more than a prorated portion of the target bonus for the year of termination, an amount representing the monthly premium cost of certain continued medical benefits for eighteen months, 1.5 times annual base salary, and 1.5 times annual target bonus. The agreements contain an eighteen-month noncompetition agreement along with related confidentiality, nondisparagement, and intellectual property provisions and conditions receipt of the severance pay just described on compliance with those provisions.

Table of Contents

Confidentiality, Non-Competition and Termination Benefits Agreements

Each of the named executive officers and certain other officers, except for Mr. Tansky and Ms. Katz, are party to a confidentiality, non-competition and termination benefits agreement that will provide for severance benefits if the employment of the affected individual is terminated by the Company other than in the event of death, disability or termination for cause. These agreements provide for a severance payment equal to one and one-half annual base salary payable over an eighteen-month period, and reimbursement for COBRA premiums for the same period. Each confidentiality, non-competition and termination benefits agreement contains restrictive covenants as a condition to receipt of any payments payable thereunder.

Cash Incentive Plan

Following the consummation of the Acquisition, the Neiman Marcus, Inc. Cash Incentive Plan (referred to as the Cash Incentive Plan) was adopted to aid in the retention of certain key executives, including the named executive officers. The Cash Incentive Plan provides for the creation of a $14 million cash bonus pool to be shared by the participants based on the number of stock options that were granted to each such participant pursuant to the Management Incentive Plan in October 2005. Each participant in the Cash Incentive Plan will be entitled to a cash bonus upon the earlier to occur of a change of control or an initial public offering, provided that, in each case, the internal rate of return to certain of our investors is positive. If the internal rate of return to certain of our investors is not positive, no amounts will be paid under the Cash Incentive Plan. The Cash Incentive Plan was adopted in connection with the acquisition of NMG by the Sponsors, and was intended to align the interests of certain key executives with those of the Sponsors. Furthermore, it has been our experience that it often takes a long period of time to consummate a change in control transaction with a large retail company. As a result, it was our view and the view of the Sponsors that a “single trigger” payment upon an “initial public offering” or “change in control” of the Company (as those terms are defined under the Cash Incentive Plan) correctly aligns the interests of management, on the one hand, and the Company and its shareholders, on the other hand, and also provides the Company with an effective and durable retention mechanism that incentivizes each named executive officer to remain with us prior to the consummation of such an event.

Based on the foregoing, each of the named executive officers would be entitled to receive the following percentages of the $14 million cash bonus pool on July 31, 2010, assuming there was a “change in control” or an “initial public offering” on that date, and the rate of return to the Sponsors was positive:

	Percentage of
Name	Cash Bonus Pool
Burton M. Tansky	22.00	%
Karen W. Katz	17.01	%
James E. Skinner	8.51	%
James J. Gold	8.51	%
Gerald A. Barnes	1.70	%

All required federal, state, or local government tax will be withheld from all payments made to participants under the Cash Incentive Plan. No payments have been made or are currently anticipated under the Cash Incentive Plan.

Potential Payments Upon Termination or Change-in-Control

The tables below show certain potential payments that would have been made to a named executive officer if the named executive officer’s employment had terminated on July 31, 2010 under various scenarios, including a change in control. Because the payments to be made to a named executive officer depend on several factors, the actual amounts to be paid out upon a named executive officer’s termination of employment can only be determined at the time of an executive’s separation from the Company.

Table of Contents

Burton M. Tansky

Executive Benefits and Payments Upon Separation	Retirement ($)(1)(7)		Termination due to death ($)(2)(7)		Termination due to disability ($)(3)(7)		Termination without cause or for good reason ($)(4)(7)		Change in Control ($)(5)(7)		Termination without good reason 6 months following a change in control ($)(6)(7)

Compensation:
Severance	$	—	$	—	$	—	$	5,765,760	$	—	$	4,268,160
Bonus	—		1,272,960		1,272,960		3,818,880		—		2,545,920
Stock Options	—		3,264,768		3,264,768		816,192		3,264,768		3,264,768

Benefits & Perquisites:
Retirement Plans	3,500,000		—		—		—		—		—
Cash Incentive Plan Payment	—		—		—		—		3,080,911		—
Long-Term Disability	—		—		240,000		—		—		—
Health and Welfare Benefits	—		—		—		61,430		61,430		61,430
Life Insurance Benefits	—		1,000,000		—		67,710		67,710		67,710
Total	$	3,500,000	$	5,537,728	$	4,777,728	$	10,529,972	$	6,474,819	$	10,207,988

Footnotes:

	(1)	Represents the SERP enhancement provided in Mr. Tansky’s employment agreement.

	(2)	Represents the estimated present value of amounts payable to Mr. Tansky’s beneficiaries upon his death: A lump sum payment of 85% of Mr. Tansky’s base salary provided pursuant to his employment contract (see “Employment and Other Compensation Agreements” beginning on page 69 of this section); the value of all unvested equity incentive awards (calculated by taking the difference between the exercise price and $1,576, the estimated fair value of our common stock as of the end of the fiscal year); a lump sum basic life insurance benefits payment of $1,000,000 payable by the Company’s life insurance provider, and a lump sum amount payable under the Cash Incentive Plan, more fully described on page 73 of this Section.

	(3)	Represents a lump sum payment of 85% of Mr. Tansky’s base salary provided pursuant to his employment contract (see “Employment and Other Compensation Agreements” beginning on page 69 of this section), the value of all unvested equity incentive awards (calculated as in Footnote (2) above), and $20,000 per month payable for 12 months pursuant to the terms and conditions of the Company’s long-term disability plan provider.

	(4)	Represents a lump sum payment of three times base salary in effect at the time of termination, 85% percent of base salary in effect at the time of termination, and three times 85% of base salary provided pursuant to his employment contract (see “Employment and Other Compensation Agreements” beginning on page 69 of this section). The value of all unvested equity incentive awards that would be come exercisable following the next anniversary of the Effective Date, as that date is defined in Mr. Tansky’s employment agreement, (calculated as in Footnote (2) above). The amount included for health and welfare benefits represents a continuation of COBRA benefits for a period of three years. Calculations were based on COBRA rates currently in effect. The amount included for life insurance represents coverage for a period of three years at the same benefit level in effect at the time of termination. See “Employment and Other Compensation Agreements” beginning on page 69 of this section.

	(5)	Represents a lump sum amount payable under the Cash Incentive Plan, more fully described on page 73 of this section, the value of all unvested equity incentive awards (calculated as in Footnote (2) above), and life insurance coverage for a period of three years at the same benefit level in effect at the time of termination.

Table of Contents

	(6)	Represents a lump sum payment of 85% of base salary in effect at the time of termination, two times base salary, and two times 85% of base salary provided pursuant to his employment contract (see “Employment and Other Compensation Agreements” beginning on page 69 of this section). The value of all unvested equity incentive awards (calculated as in Footnote (2) above). The amount included for life insurance represents coverage for a period of three years at the same benefit level in effect at the time of termination. The amount included for health and welfare benefits represents a continuation of COBRA benefits for a period of three years. Calculations were based on COBRA rates currently in effect.

	(7)	In addition, Mr. Tansky may become entitled to receive a portion (ranging from, as of July 31, 2010, 75% to 100%, depending on the reason for the separation from service) of the Cash Incentive Plan Payment indicated under the column entitled “Change in Control” if his employment is terminated for any reason other than Cause, and, subsequent to such termination, a “change in control” or an “initial public offering” meeting certain conditions occurs.

Karen W. Katz

Executive Benefits and Payments Upon Separation	Retirement ($)(1)		Termination due to death ($)(2)		Termination due to disability ($)(3)		Termination without cause or for good reason ($)(4)		Change in Control ($)(5)

Compensation:
Severance	$	—	$	—	$	—	$	2,468,400	$	—
Bonus	—		673,200		673,200		1,346,400		—

Benefits & Perquisites:
Retirement Plans	15,000		—		—		—		—
Deferred Compensation Plan	1,058,536		1,058,536		1,058,536		1,058,536		1,058,536
Cash Incentive Plan Payment	—		—		—		—		2,381,474
Long-Term Disability	—		—		240,000		—		—
Health and Welfare Benefits	—		—		—		54,219		54,219
Life Insurance Benefits	—		1,000,000		—		6,150		6,150
Total	$	1,073,536	$	2,731,736	$	1,971,736	$	4,933,705	$	3,500,379

Footnotes:

	(1)	Represents the SERP enhancement provided in Ms. Katz’s employment agreement and a lump sum payout under the deferred compensation plan.

	(2)	Represents Ms. Katz’s target bonus, a lump sum payout under the deferred compensation plan, and a lump sum basic life insurance benefit payment of $1,000,000 payable by the Company’s life insurance provider to Ms. Katz’s beneficiaries upon her death.

	(3)	Represents Ms. Katz’s target bonus, lump sum payout under the deferred compensation plan, and long-term disability payments of $20,000 per month for twelve months payable from the Company’s long-term disability insurance provider.

	(4)	Represents a lump sum payment of the target bonus and two times base salary, two times target bonus and a lump sum payout under the deferred compensation plan. The amount included for health and welfare benefits represents a continuation of COBRA benefits for a period of two years. Calculations were based on COBRA rates currently in effect. The amount included for life insurance represents coverage for a period of two years at the same benefit level in effect at the time of termination. See “Employment and Other Compensation Agreements” beginning on page 69 of this section.

	(5)	Represents a lump sum payout under the deferred compensation plan and a lump sum amount payable under the Cash Incentive Plan, more fully described on page 73 of this section. The amount included for life insurance represents coverage for a period of two years at the same benefit level in effect at the time of termination.

Table of Contents

Executive Benefits and Payments Upon Separation	Termination due to death ($)(1)(5)		Termination due to disability ($)(1)(2)		Termination without cause or for good reason ($)(3)		Change in Control ($)(1)(4)
JAMES E. SKINNER
Compensation:
Severance	$	—	$	—	$	943,200	$	—

Benefits & Perquisites:
Retirement Plans	142,950		142,950		142,950		142,950
Deferred Compensation Plan	340,809		340,809		340,809		340,809
Cash Incentive Plan Payment	—		—		—		1,190,737
Long-Term Disability	—		240,000		—		—
Health and Welfare Benefits	—		—		29,332		—
Life Insurance Benefits	—		—		—		—
Total James E. Skinner	$	483,759	$	723,759	$	1,456,291	$	1,674,496

JAMES J. GOLD
Compensation:
Severance	$	—	$	—	$	748,800	$	—

Benefits & Perquisites:
Retirement Plans	205,781		205,781		205,751		205,781
Cash Incentive Plan Payment	—		—		—		1,190,737
Long-Term Disability	—		240,000		—		—
Health and Welfare Benefits	—		—		38,463		—
Life Insurance Benefits	—		—		—		—
Total James J. Gold	$	205,781	$	445,781	$	993,014	$	1,396,518

GERALD A. BARNES
Compensation:
Severance	$	—	$	—	$	637,500	$	—

Benefits & Perquisites:
Retirement Plans	—		—		—		—
Deferred Compensation Plan	37,128		37,128		37,128		37,128
Cash Incentive Plan Payment	—		—		—		238,154
Long-Term Disability	—		240,000		—		—
Health and Welfare Benefits	—		—		38,463		—
Life Insurance Benefits	—		—		—		—
Total Gerald A. Barnes	$	37,128	$	277,128	$	713,091	$	275,282

Footnotes:

	(1)	Represents a lump sum payout under the deferred compensation plans. See “Nonqualified Deferred Compensation” beginning on page 68 of this section.

	(2)	Represents long-term disability payments of $20,000 per month for twelve months payable from the Company’s long-term disability insurance provider.

	(3)	Represents a lump sum payment of one and one-half times base salary for each of Messrs. Skinner, Gold, and Barnes. The amount included for health and welfare benefits represents a continuation of COBRA benefits for a period of eighteen months. Calculations were based on COBRA rates currently in effect. See “Employment and Other Compensation Agreements” beginning on page 69 of this section.

	(4)	Represents a lump sum payment payable under the Cash Incentive Plan more fully described on page 73 of this section.

Table of Contents

DIRECTOR COMPENSATION

None of our directors receive compensation for their service as a member of our Board. They are reimbursed for any expenses incurred as a result of their service. As an employee director, Mr. Tansky receives no compensation for his service as a board member. We offer to each of our directors a discount at our stores at the same rate that is available to our employees.

In connection with the Acquisition, affiliates of the Sponsors receive an annual management fee equal to the lesser of (i) 0.25% of consolidated annual revenue, and (ii) $10 million for consulting and management advisory services they provide to us. See discussion on “Management Services Agreement” on page 82 of this section.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information regarding equity compensation plans approved by shareholders and equity compensation plans not approved by shareholders as of July 31, 2010.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants, and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders	70,796	(1)	$	1,147	17,196

Equity compensation plans not approved by security holders	—		—		—
Total	70,796		$	1,147	17,196

(1)	This number represents options issuable under the Management Incentive Plan that was approved by a majority of the shares of common stock of Neiman Marcus, Inc. on November 29, 2005. The Plan became effective on November 29, 2005 and will expire on November 29, 2015.

Table of Contents

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of September 17, 2010, the beneficial ownership of each person known to us to own more than 5% of our common stock, each of our directors, each named executive officer listed in the Summary Compensation Table, and all our directors and executive officers as a group.

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (Common Stock)	Options Currently Exercisable or Exercisable within 60 days	Total Stock and Stock Based Holdings	Percent of Class (1)

Newton Holding, LLC	1,000,000	—	1,000,000	98.71	%
301 Commerce Street
Suite 3300
Fort Worth, Texas 76102

TPG Funds(2)	1,000,000	—	1,000,000	98.71	%
301 Commerce Street
Suite 3300
Fort Worth, Texas 76102

Affiliates of Warburg Pincus, LLC(3)	1,000,000	—	1,000,000	98.71	%
466 Lexington Avenue
New York, NY 10017

David A. Barr(4)	1,000,000	—	1,000,000	98.71	%
466 Lexington Avenue
New York, NY 10017

James Coulter(2)	1,000,000	—	1,000,000	98.71	%
345 California Street, Suite 3300
San Francisco, CA 94104

Sidney Lapidus(4)	1,000,000	—	1,000,000	98.71	%
466 Lexington Avenue
New York, NY 10017

Kewsong Lee(4)	1,000,000	—	1,000,000	98.71	%
466 Lexington Avenue
New York, NY 10017

Burton M. Tansky (5)	1,506	14,552	16,058	1.56	%
1618 Main Street
Dallas, TX 75201

Karen W. Katz (6)	4,027	5,341	9,368	*
1618 Main Street
Dallas, TX 75201

James E. Skinner	2,107	2,671	4,778	*
1618 Main Street
Dallas, TX 75201

Gerald A. Barnes	50	1,141	1,191	*
1618 Main Street
Dallas, TX 75201

Table of Contents

Name of Beneficial Owner	Amount and Nature of Beneficial Ownership (Common Stock)	Options Currently Exercisable or Exercisable within 60 days	Total Stock and Stock Based Holdings	Percent of Class (1)

James J. Gold	902	2,671	3,573	*
754 Fifth Avenue
New York, NY 10019

Jonathan Coslet(7)	—	—	—	*
345 California Street
Suite 3300
San Francisco, CA 94104

John G. Danhakl	—	—	—	*
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, CA 90025

Carrie Wheeler(7)	—	—	—	*
345 California Street
Suite 3300
San Francisco, CA 94104

All current executive officers and directors as a group (17 persons)	1,009,038	30,448	1,039,486	99.60	%

* Represents less than 1% of the class.

Footnotes:

(1)

Percentage of class beneficially owned is based on 1,013,082 common shares outstanding as of September 17, 2010, together with the applicable options to purchase common shares for each shareholder exercisable on September 17, 2010 or within 60 days thereafter. Shares issuable upon the exercise of options currently exercisable or exercisable 60 days after September 17, 2010 are deemed outstanding for computing the percentage ownership of the person holding the options, but are not deemed outstanding for computing the percentage of any other person. The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of such securities as to which such person has voting or investment power.

(2)

Includes the 1,000,000 common shares owned by Newton Holding, LLC, a Delaware limited liability company (“Newton”) that are attributed to the TPG Funds (as defined below), which hold an aggregate of 41.5225% of membership units of Newton (the “TPG Units”). The TPG Units that are attributed to TPG Partners IV, L.P., a Delaware limited partnership (“Partners”), TPG Newton III, LLC, a Delaware limited liability company (“Newton III”) and TPG Newton Co-Invest I LLC, a Delaware limited liability company (“Newton Co-Invest” and, together with Partners and Newton III, collectively, the “TPG Funds”) and their affiliates represent direct holdings of membership units of Newton by the following entities (i) 27.6817% by Partners, (ii) 6.9204% by Newton III and (iii) 6.9204% by Newton Co-Invest.

The general partner of Partners and managing member of Newton Co-Invest is TPG GenPar IV, L.P., a Delaware limited partnership, whose general partner is TPG GenPar IV Advisors, LLC, a Delaware limited liability company, whose sole member is TPG Holdings I, L.P., a Delaware limited partnership, whose general partner is TPG Holdings I-A, LLC, a Delaware limited liability company, whose sole member is TPG

Table of Contents

	Group Holdings (SBS), L.P., a Delaware limited partnership, whose general partner is TPG Group Holdings (SBS) Advisors, Inc., a Delaware corporation (“Group Advisors”). The managing member of Newton III is TPG GenPar III, L.P., a Delaware limited partnership, whose general partner is TPG Advisors III, Inc., a Delaware corporation (“Advisors III”). Pursuant to the Newton limited liability company operating agreement, the TPG Funds (collectively) and WP VIII and WP IX (collectively) each have the separate right to designate four directors to the Board of Directors of Newton, or assign the right to designate one of their four director designees, to another direct or indirect member of Newton. Messrs. James Coulter, Jonathan Coslet and Carrie Wheeler are the initial directors appointed by the TPG Funds, and John Donhakl is a director assignee of Leonard Green & Partners, L.P., as such designation right has been assigned by the TPG Funds. Because of these relationships, Group Advisors and Advisors III may be deemed to be the beneficial owners of the common shares directly held by the TPG Funds, WP VIII and WP IX. David Bonderman and James G. Coulter are directors, officers and sole shareholders of Group Advisors and Advisors III and may therefore also be deemed to be the beneficial owners of the common shares directly held by the TPG Funds, WP VIII and WP IX. The mailing address for each of Group Advisors, Advisors III and Messrs. Bonderman and Coulter is c/o TPG Capital, L.P., 301 Commerce Street, Suite 3300, Fort Worth, TX 76102.

(3)	Includes the 1,000,000 shares owned by Newton Holding, LLC over which Warburg Pincus Private Equity VIII, L.P., Warburg Pincus Netherlands Private Equity VIII, C.V. I, Warburg Pincus Germany Private Equity VIII K. G. (collectively, “WP VIII”) and Warburg Pincus Private Equity IX, L.P. (“WP IX”) may be deemed, as a result of their ownership of 43.25% of Newton Holding, LLC’s total outstanding shares and certain provisions under the Newton Holding, LLC operating agreement, to have shared voting or dispositive power. Warburg Pincus Partners, LLC, a direct subsidiary of Warburg Pincus & Co. (“WP”), is the general partner of WP VIII. Warburg Pincus IX, LLC, an indirect subsidiary of WP, is the general partner of WP IX. Warburg Pincus LLC (“WP LLC”) is the manager of each of WP VIII and WP IX. WP and WP LLC may be deemed to beneficially own all of the shares of common stock owned by WP VIII and WP IX. Messrs. Barr, Lapidus, and Lee disclaim beneficial ownership of all of the shares of common stock owned by the Warburg Pincus entities.

(4)	Messrs. Barr and Lee, as partners of WP and managing directors and members of WP LLC, may be deemed to beneficially own all of the shares of common stock beneficially owned by the Warburg Pincus entities. Messrs. Barr and Lee disclaim any beneficial ownership of these shares of common stock.

(5)	Includes 1,506 shares held for the benefit of a family trust of which Mr. Tansky disclaims beneficial ownership.

(6)	Includes 944 shares held for the benefit of a family trust of which Ms. Katz disclaims beneficial ownership.

(7)	Messrs. Jonathan Coslet and Carrie Wheeler are each directors of Newton and partners of TPG Capital, L.P., an affiliate of the TPG Funds. Messrs. Coslet and Wheeler each have no voting or investment power over and each disclaim beneficial ownership of any Newton common shares held directly or indirectly by the TPG Funds, WP VIII or WP IX.

Table of Contents

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Our Board of Directors has adopted a written related-person transactions policy that sets forth our policies and procedures regarding the identification, review, consideration and approval or ratification of “related-person transactions.” For purposes of our policy only, a “related-person transaction “ is any transaction, including any financial transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships), in which we and any “related person” are, were or will be participants involving an amount that exceeds $120,000. Certain transactions, including transactions involving compensation for services provided to us as an employee, director or consultant by a related person and transactions in which rates or charges are determined by competitive bid, are not covered by this policy. A related person is any executive officer, director or nominee for director, or more than 5% stockholder of our company, including any of their immediate family members, and any entity owned or controlled by such persons.

The Board has determined that the Company’s Audit Committee is best suited to review and approve any related-person transaction and any material amendments thereto, although the Board may instead determine that a particular transaction (or amendment thereto) should be reviewed and approved by a majority of directors disinterested from the transaction. In the event a member of the Audit Committee has an interest in the proposed transaction, the relevant member must recuse himself or herself from the deliberations and approval. The policy requires that, in determining whether to approve, ratify or reject a related-person transaction, the Audit Committee satisfy itself that it has been fully informed as to the related person’s relationship and interest in the transaction (or amendment thereto) and the material facts thereof, and must determine must look at, in light of known circumstances, whether the transaction is, or is not, consistent with the best interests of our company and our Sponsors, as the Audit Committee determines in the good faith exercise of its discretion.

Typically, in considering related-person transactions, the Audit Committee takes into account the relevant available facts and circumstances including, but not limited to (a) the risks, costs and benefits to us, (b) the terms of the transaction, (c) the availability of other sources for comparable services or products and (d) the terms available to or from, as the case may be, unrelated third parties or to or from employees generally.

Related Person Transactions

Newton Holding, LLC Limited Liability Company Operating Agreement

The investment funds associated with or designated by a Sponsor (Sponsor Funds) and certain investors who agreed to co-invest with the Sponsor Funds or through a vehicle jointly controlled by the Sponsors to provide equity financing for the Acquisition (Co-Investors), entered into a limited liability company operating agreement in respect of our parent company, Newton Holding, LLC (the “LLC Agreement”). The LLC Agreement contains agreements among the parties with respect to the election of our directors and the directors of our parent companies, restrictions on the issuance or transfer of interests in us, including tag-along rights and drag-along rights, and other corporate governance provisions (including the right to approve various corporate actions).

Pursuant to the LLC Agreement, each of the Sponsors has the right, which is freely assignable to other members or indirect members, to nominate four directors, and the Sponsors are entitled to jointly nominate additional directors. The rights of the Sponsors to nominate directors are subject to their ownership percentages in Newton Holding, LLC remaining above a specified percentage of their initial ownership percentage. Each of the Sponsors has the right to have at least one of its directors sit on each committee of the Board of Directors, to the extent permitted by applicable laws and regulations.

The Sponsors have assigned the right to appoint one of our directors to investment funds that are affiliates of Credit Suisse Securities (USA) LLC and the right to appoint one of our directors to investment funds associated with Leonard Green Partners.

For purposes of any Board action, each director nominated by a Sponsor has three votes and each of the other directors (including any jointly nominated directors and the directors nominated by investment funds that are affiliates of Credit Suisse Securities (USA) LLC and Leonard Green Partners) has one vote. Certain major decisions of the board of directors of Newton Holding, LLC require the approval of each of the Sponsors and certain other decisions of the board of directors of Newton Holding, LLC require the approval of a specified number of directors designated by each of the Sponsors, in each case subject to the requirement that their respective ownership percentage in Newton Holding, LLC remains above a specified percentage of their initial ownership percentage.

Table of Contents

Registration Rights Agreement

The Sponsor Funds and the Co-Investors entered into a registration rights agreement with us upon completion of the Acquisition. Pursuant to this agreement, the Sponsor Funds can cause us to register their interests in NMG under the Securities Act and to maintain a shelf registration statement effective with respect to such interests. The Sponsor Funds and the Co-Investors are also entitled to participate on a pro rata basis in any registration of our equity interests under the Securities Act that we may undertake.

Management Services Agreement

In connection with the Acquisition, we entered into a management services agreement with affiliates of the Sponsors pursuant to which affiliates of one of the Sponsors received on the closing date of the Acquisition a transaction fee of $25 million in cash in connection with the Acquisition. Affiliates of the other Sponsor waived any cash transaction fee in connection with the Acquisition. In addition, pursuant to such agreement, and in exchange for consulting and management advisory services that will be provided to us by the Sponsors and their affiliates, affiliates of the Sponsors will receive an aggregate annual management fee equal to the lesser of (i) 0.25% of consolidated annual revenue and (ii) $10 million. Also, affiliates of the Sponsors are entitled to receive reimbursement for out-of-pocket expenses incurred by them or their affiliates in connection with the provision of services pursuant to the agreement. The management services agreement also provides that affiliates of the Sponsors may receive fees in connection with certain subsequent financing and acquisition or disposition transactions. The management services agreement includes customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates.

Certain Charter and Bylaws Provisions

Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions limiting directors’ obligations in respect of corporate opportunities. In addition, our amended and restated certificate of incorporation provides that Section 203 of the Delaware General Corporation Law will not apply to the Company. Section 203 restricts “business combinations” between a corporation and “interested stockholders,” generally defined as stockholders owning 15% or more of the voting stock of a corporation.

Management Stockholders’ Agreement

Subject to the Management Stockholders’ Agreement, certain members of management, including Burton M. Tansky, Karen W. Katz, James E. Skinner, James J. Gold, and Gerald A. Barnes along with 22 other members of management, elected to invest in the Company by contributing cash or equity interests in NMG, or a combination of both, to the Company prior to the merger and receiving equity interests in the Company in exchange therefore immediately after completion of the merger pursuant to rollover agreements with NMG and the Company entered into prior to the effectiveness of the merger. The aggregate amount of this investment was approximately $25.6 million. The Management Stockholders’ Agreement creates certain rights and restrictions on these equity interests, including transfer restrictions and tag-along, drag-along, put, call, and registration rights in certain circumstances.

Table of Contents

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The Audit Committee has adopted policies and procedures for pre-approving all audit and permissible non-audit services performed by our independent registered public accounting firm. Under these policies, the Audit Committee pre-approves the use of audit and audit-related services following approval of the independent registered public accounting firm’s audit plan. All services detailed in the audit plan are considered pre-approved. If, during the course of the audit, the independent registered public accounting firm expects fees to exceed the approved fee estimate between 10 percent and 15 percent, those fees must be pre-approved in advance by the Audit Committee Chairman. If fees are expected to exceed the approved estimate by more than 15 percent, those fees must be approved in advance by the Audit Committee.

Other non-audit services of less than $50,000 that are not restricted services may be pre-approved by both the chief financial officer and the controller, provided those services will not impair the independence of the independent auditor. These services will be considered approved by the Audit Committee, provided those projects are discussed with the Audit Committee at its next scheduled meeting. Services between $50,000 and $100,000 in estimated fees must be pre-approved by the Chairman of the Audit Committee, acting on behalf of the entire Audit Committee. Services of greater than $100,000 in estimated fees must be pre-approved by the Audit Committee. All fee overruns will be discussed with the Audit Committee at the next scheduled meeting.

Principal Accounting Fees and Services

Audit Fees. The aggregate fees billed for the audits of the Company’s annual financial statements for the fiscal years ended July 31, 2010 and August 1, 2009 and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q were $1,455,000 and $1,748,000, respectively.

Audit-Related Fees. The aggregate fees billed for audit-related services for the fiscal years ended July 31, 2010 and August 1, 2009 were $134,000 and $100,000, respectively. These fees related to accounting research and consultation and attestation services for certain subsidiary companies for the fiscal years ended July 31, 2010 and August 1, 2009.

Tax Fees. The aggregate fees billed for tax services for the fiscal years ended July 31, 2010 and August 1, 2009 were $100,000 and $90,000, respectively. These fees are related to tax compliance and planning.

The Audit Committee has considered and concluded that the provision of permissible non-audit services is compatible with maintaining our independent registered public accounting firm’s independence.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report.

1. Financial Statements

The list of financial statements required by this item is set forth in Item 8.

2. Index to Financial Statement Schedules

		Page Number
Reports of Independent Registered Public Accounting Firm		F-3
Schedule II—Valuation and Qualifying Accounts and Reserves		91

All other financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable.

3. Exhibits

Exhibit No.		Exhibit

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 (1).

3.1		Amended and Restated Certificate of Incorporation of Neiman Marcus, Inc., incorporated herein by reference to The Neiman Marcus Group, Inc.’s Registration Statement on Form S-1 (Registration No. 333-133184) dated April 10, 2006.

3.2		Amended and Restated Bylaws of Neiman Marcus, Inc., incorporated herein by reference to The Neiman Marcus Group, Inc.’s Registration Statement on Form S-1 (Registration No. 333-133184) dated April 10, 2006.

4.1		Indenture, dated as of May 27, 1998, between The Neiman Marcus Group, Inc. and The Bank of New York, as trustee, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2009.

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

4.3		Senior Indenture dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

4.4		Senior Subordinated Indenture dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

4.5		Form of 9%/9 3/4% Senior Notes due 2015, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

Table of Contents

4.6		Form of 10 3/8% Senior Subordinated Notes due 2015, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

4.7		Registration Rights Agreement dated October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial Purchasers, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

4.8		First Supplemental Indenture, dated as of July 11, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated July 11, 2006.

4.9		Second Supplemental Indenture, dated as of August 14, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor trustee, incorporated herein by reference to the Company’s Current Report on Form 8-K dated August 15, 2006.

10.1*		Employment Agreement dated as of October 6, 2005 by and among The Neiman Marcus Group, Inc., Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2009.

10.2*		First Amendment to Employment Agreement by and between The Neiman Marcus Group, Inc., a Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and Burton M. Tansky effective December 21, 2007 incorporated herein by reference to the Neiman Marcus, Inc.’s Current Report on Form 8-K dated December 21, 2007.

10.3*		Second Amendment to Employment Agreement by and between The Neiman Marcus Group, Inc., a Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and Burton M. Tansky effective January 1, 2009 incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2009.

10.4*		Rollover Agreement dated as of October 4, 2005 by and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2009.

10.5*		Amendment to Letter Agreement effective as of January 1, 2009 by and between Neiman Marcus, Inc., a Delaware corporation, and Burton M. Tansky incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2009.

10.6*		Form of Rollover Agreement by and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and certain members of management, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2009.

10.7*		Second Amendment to Letter Agreement dated April 26, 2010 by and between Neiman Marcus, Inc., a Delaware corporation, and Burton M. Tansky incorporated herein by reference to the Company’s Current Report on Form 8-K dated April 28, 2010.

10.8*		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.

10.9		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

Table of Contents

		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.

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.

Table of Contents

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*		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.

10.25*		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.

10.26*		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.

10.27		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.

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.

Table of Contents

10.34		Amended and Restated Credit Card Program Agreement, dated as of September 23, 2010, by and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A. and HSBC Card Services, Inc. (1) (2)

10.35		Amended and Restated Servicing Agreement, dated as of September 23, 2010, by and between The Neiman Marcus Group, Inc. and HSBC Bank Nevada, N.A. (1) (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, incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 1, 2010.

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.

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		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.

10.46		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.

Table of Contents

10.47		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.

10.48		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.

10.49*		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.

10.50*		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.

10.51*		Employment Agreement dated July 22, 2010 by and among the Company, The Neiman Marcus Group, Inc., and James E. Skinner, incorporated herein by reference to the Company’s Current Report on Form 8-K dated July 28, 2010.

10.52*		Employment Agreement dated July 22, 2010 by and among the Company, The Neiman Marcus Group, Inc., and James J. Gold, incorporated herein by reference to the Company’s Current Report on Form 8-K dated July 28, 2010.

10.53		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.

10.54		Amendment No. 2 to the Amended and Restated Neiman Marcus Group, Inc. Defined Contribution Supplemental Executive Retirement Plan dated July 17, 2010. (1)

10.55		Amendment No. 1 to The Neiman Marcus Group, Inc. Supplemental Executive Retirement Plan dated July 17, 2010. (1)

12.1		Computation of Ratio of Earnings to Fixed Charges. (1)

14.1		The Neiman Marcus Group, Inc. Code of Ethics and Conduct. (1)

14.2		The Neiman Marcus Group, Inc. Code of Ethics for Financial Professionals. (1)

21.1		Subsidiaries of the Company. (1)

23.1		Consent of Ernst & Young LLP. (1)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

32		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(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.

Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Management’s Report on Internal Control over Financial Reporting	F-2
Reports of Independent Registered Public Accounting Firm	F-3
Consolidated Balance Sheets	F-5
Consolidated Statements of Operations	F-6
Consolidated Statements of Cash Flows	F-7
Consolidated Statements of Shareholders’ Equity	F-8
Notes to Consolidated Financial Statements	F-9

F-1

Table of Contents

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

We are responsible for the integrity and objectivity of the financial and operating information contained in this Annual Report, including the consolidated financial statements covered by the Report of Independent Registered Public Accounting Firm. These statements were prepared in conformity with generally accepted accounting principles and include amounts that are based on our best estimates and judgment.

We maintain a system of internal controls, which provides management with reasonable assurance that transactions are recorded and executed in accordance with its authorizations, assets are properly safeguarded and accounted for, and records are maintained so as to permit preparation of financial statements in accordance with generally accepted accounting principles. This system includes written policies and procedures, an organizational structure that segregates duties, financial reviews and a comprehensive program of periodic audits by the internal auditors. We have also instituted policies and guidelines, which require employees to maintain a high level of ethical standards.

In addition, the Audit Committee of the Board of Directors meets periodically with management, the internal auditors and the independent registered public accounting firm to review internal accounting controls, audit results and accounting principles and practices and annually recommends to the Board of Directors the selection of the independent registered public accounting firm.

We are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under our supervision and with the participation of other key members of our management, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of July 31, 2010. During its assessment, management did not identify any material weaknesses in our internal control over financial reporting.

Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has issued an unqualified attestation report on the effectiveness of our internal controls over financial reporting as of July 31, 2010.

BURTON M. TANSKY

President and Chief Executive Officer

JAMES E. SKINNER

Executive Vice President and Chief Financial Officer

T. DALE STAPLETON

Vice President and Controller

F-2

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Neiman Marcus, Inc.

We have audited the accompanying consolidated balance sheets of Neiman Marcus, Inc. as of July 31, 2010 and August 1, 2009, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the three years in the period ended July 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Neiman Marcus, Inc. at July 31, 2010 and August 1, 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Neiman Marcus, Inc.’s internal control over financial reporting as of July 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 1, 2010 expressed an unqualified opinion thereon.

/S/ ERNST & YOUNG LLP

Dallas, Texas

October 1, 2010

F-3

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Neiman Marcus, Inc.

We have audited Neiman Marcus, Inc.’s internal control over financial reporting as of July 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Neiman Marcus, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Neiman Marcus, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Neiman Marcus, Inc. as of July 31, 2010 and August 1, 2009, and the related consolidated statements of operations, cash flows, and shareholders’ equity for each of the three years in the period ended July 31, 2010 of Neiman Marcus, Inc. and our report dated October 1, 2010 expressed an unqualified opinion thereon.

/S/ ERNST & YOUNG LLP

Dallas, Texas

October 1, 2010

F-4

Table of Contents

NEIMAN MARCUS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except shares)	July 31, 2010			August 1, 2009

ASSETS
Current assets:
Cash and cash equivalents	$	421,007		$	323,425
Merchandise inventories	790,516			766,832
Deferred income taxes	30,755			19,136
Other current assets	117,844			125,060
Total current assets	1,360,122			1,234,453
Property and equipment, net	905,826			992,715
Customer lists, net	314,389			368,660
Favorable lease commitments, net	393,686			411,564
Tradenames	1,234,180			1,235,290
Goodwill	1,263,433			1,263,433
Other assets	60,646			87,837
Total assets	$	5,532,282		$	5,593,952
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	270,778		$	233,990
Accrued liabilities	361,456			315,812
Other current liabilities	30,309			26,617
Total current liabilities	662,543			576,419
Long-term liabilities:
Long-term debt	2,879,672			2,954,221
Deferred real estate credits	96,093			96,420
Deferred income taxes	668,647			697,810
Other long-term liabilities	299,954			350,247
Total long-term liabilities	3,944,366			4,098,698

Common stock (par value $0.01 per share, 5,000,000 shares authorized and 1,013,082 shares issued and outstanding at July 31, 2010 and August 1, 2009)	10			10
Additional paid-in capital	1,434,321			1,424,258
Accumulated other comprehensive loss	(106,274		)	(104,587		)
Accumulated deficit	(402,684		)	(400,846		)
Total shareholders’ equity	925,373			918,835
Total liabilities and shareholders’ equity	$	5,532,282		$	5,593,952

See Notes to Consolidated Financial Statements.

F-5

Table of Contents

NEIMAN MARCUS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

Revenues	$	3,692,768		$	3,643,346		$	4,600,536
Cost of goods sold including buying and occupancy costs (excluding depreciation)	2,419,545			2,536,764			2,934,968
Selling, general and administrative expenses (excluding depreciation)	885,406			882,737			1,045,447
Income from credit card program, net	(59,076		)	(49,966		)	(65,727		)
Depreciation expense	141,839			150,759			148,411
Amortization of intangible assets	55,381			54,826			54,314
Amortization of favorable lease commitments	17,878			17,877			17,878
Impairment charges	—			703,266			31,261
Other income	—			—			(32,450		)
Operating earnings (loss)	231,795			(652,917		)	466,434
Interest expense, net	237,108			235,574			239,805
(Loss) earnings before income taxes	(5,313		)	(888,491		)	226,629
Income tax (benefit) expense	(3,475		)	(220,445		)	83,816
Net (loss) earnings	$	(1,838	)	$	(668,046	)	$	142,813

See Notes to Consolidated Financial Statements.

F-6

Table of Contents

NEIMAN MARCUS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

CASH FLOWS—OPERATING ACTIVITIES
Net (loss) earnings	$	(1,838	)	$	(668,046	)	$	142,813
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization expense	233,795			240,645			234,820
Impairment charges	—			703,266			31,261
Paid-in-kind interest	14,362			38,082			—
Deferred income taxes	(39,643		)	(153,888		)	(44,627		)
Gain on curtailment of defined benefit retirement obligations	—			—			(32,450		)
Other—primarily costs related to defined benefit pension and other long-term benefit plans	7,160			10,185			21,997
	213,836			170,244			353,814
Changes in operating assets and liabilities:
Merchandise inventories	(23,684		)	224,779			(58,170		)
Other current assets	7,216			(9,924		)	(19,881		)
Other assets	8,518			(7,684		)	3,118
Accounts payable and accrued liabilities	86,221			(169,270		)	(12,250		)
Deferred real estate credits	5,931			17,668			33,694
Funding of defined benefit pension plan	(30,000		)	(15,000		)	(15,000		)
Net cash provided by operating activities	268,038			210,813			285,325
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	(58,693		)	(101,525		)	(183,452		)
Purchases of short-term investments	—			—			(10,000		)
Sales of short-term investments	—			—			10,000
Net cash used for investing activities	(58,693		)	(101,525		)	(183,452		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	(146		)	(1,611		)	(3,900		)
Debt issuance costs paid	—			(23,432		)	—
Repayment of borrowings under senior term loan facility	(111,617		)	—			—
Net cash used for financing activities	(111,763		)	(25,043		)	(3,900		)
CASH AND CASH EQUIVALENTS
Increase during the year	97,582			84,245			97,973
Beginning balance	323,425			239,180			141,207
Ending balance	$	421,007		$	323,425		$	239,180

Supplemental Schedule of Cash Flow Information:
Cash paid (received) during the year for:
Interest	$	200,676		$	188,587		$	233,055
Income taxes	$	15,930		$	(29,639	)	$	145,811
Non-cash activities:
Adjustments to goodwill related to pre-acquisition tax contingencies	$	—		$	(18,049	)	$	6,051

See Notes to Consolidated Financial Statements.

F-7

Table of Contents

NEIMAN MARCUS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)	Common stock		Additional paid-in capital		Accumulated other comprehensive income (loss)			Retained earnings (deficit)			Total shareholders’ equity
BALANCE AT JULY 28, 2007	$	10	$	1,412,386	$	21,229		$	124,387		$	1,558,012
Stock based compensation expense	—		6,087		—			—			6,087
Comprehensive income:
Net earnings	—		—		—			142,813			142,813
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($16,355)	—		—		(25,159		)	—			(25,159		)
Reclassification to earnings, net of tax of ($214)	—		—		(329		)	—			(329		)
Change in unfunded benefit obligations, net of tax of ($3,239)	—		—		(5,063		)	—			(5,063		)
Other	—		—		158			—			158
Total comprehensive income											112,420
BALANCE AT AUGUST 2, 2008	10		1,418,473		(9,164		)	267,200			1,676,519
Stock based compensation expense	—		5,785		—			—			5,785
Comprehensive loss:
Net loss	—		—		—			(668,046		)	(668,046		)
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($19,229)	—		—		(29,575		)	—			(29,575		)
Reclassification to earnings, net of tax of $10,287	—		—		15,822			—			15,822
Change in unfunded benefit obligations, net of tax of ($52,865)	—		—		(81,313		)	—			(81,313		)
Other	—		—		(357		)	—			(357		)
Total comprehensive loss											(763,469		)
BALANCE AT AUGUST 1, 2009	10		1,424,258		(104,587		)	(400,846		)	918,835
Stock based compensation expense	—		10,063		—			—			10,063
Comprehensive loss:
Net loss	—		—		—			(1,838		)	(1,838		)
Adjustments for fluctuations in fair market value of financial instruments, net of tax of ($6,074)	—		—		(9,343		)	—			(9,343		)
Reclassification to earnings, net of tax of $17,925	—		—		27,570			—			27,570
Change in unfunded benefit obligations, net of tax of ($12,992)	—		—		(19,982		)	—			(19,982		)
Other	—		—		68			—			68
Total comprehensive loss											(3,525		)
BALANCE AT JULY 31, 2010	$	10	$	1,434,321	$	(106,274	)	$	(402,684	)	$	925,373

See Notes to Consolidated Financial Statements.

F-8

Table of Contents

NEIMAN MARCUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

On April 22, 2005, Neiman Marcus, Inc. (the Company), formerly Newton Acquisition, Inc., and its wholly-owned subsidiary, Newton Acquisition Merger Sub, Inc. (Merger Sub), were formed and incorporated in the state of Delaware. The Company is a subsidiary of Newton Holding, LLC (Holding). Holding, the Company and Merger Sub were formed by investment funds affiliated with TPG Capital (formerly Texas Pacific Group) and Warburg Pincus LLC (collectively, the Sponsors) for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG).

The accompanying consolidated financial statements include the amounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Certain prior period balances have been reclassified to conform to the current period presentation.

ESTIMATES AND CRITICAL ACCOUNTING POLICIES

We make estimates and assumptions about future events in preparing our financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the consolidated financial statements.

While we believe that our past estimates and assumptions have been materially accurate, the amounts currently estimated are subject to change if we make different assumptions as to the outcome of future events. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying consolidated financial statements.

Cash and Cash Equivalents. Cash and cash equivalents primarily consist of cash on hand in our stores, deposits with banks and overnight investments with banks and financial institutions. Cash equivalents are stated at cost, which approximates fair value. Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Accounts payable includes outstanding checks not yet presented for payment of $35.8 million at July 31, 2010 and $30.0 million at August 1, 2009.

Merchandise Inventories and Cost Of Goods Sold. We utilize the retail method of accounting. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of our inventories. The cost of the inventory reflected on the consolidated balance sheets is decreased by charges to cost of goods sold at the time the retail value of the inventory is lowered through the use of markdowns. Earnings are negatively impacted when merchandise is marked down. As we adjust the retail value of our inventories through the use of markdowns to reflect market conditions, our merchandise inventories are stated at the lower of cost or market.

F-9

Table of Contents

shrinkage that has occurred between physical inventory counts. These judgments and estimates, coupled with the averaging processes within the retail method can, under certain circumstances, produce varying financial results. Factors that can lead to different financial results include 1) determination of original retail values for merchandise held for sale, 2) identification of declines in perceived value of inventories and processing the appropriate retail value markdowns and 3) overly optimistic or conservative estimation of shrinkage. In prior years, we have made no material changes to our estimates of shrinkage or markdown requirements on inventories held as of the end of our fiscal years. We do not believe that the assumptions used in these estimates at July 31, 2010 will change significantly based upon our prior experience or that changes in these estimates, if any, will have a material effect on our future operating performance.

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold. The amounts of vendor allowances we receive fluctuate based on the level of markdowns taken and did not have a significant impact on the year-over-year change in gross margin during fiscal years 2010, 2009 or 2008. We received vendor allowances of $81.2 million, or 2.2% of revenues, in fiscal year 2010, $107.7 million, or 3.0% of revenues, in fiscal year 2009 and $109.6 million, or 2.4% of revenues, in fiscal year 2008.

We obtain certain merchandise, primarily precious jewelry, on a consignment basis in order to expand our product assortment. Consignment merchandise held by us with a cost basis of $256.2 million at July 31, 2010 and $283.0 million at August 1, 2009 is not reflected in our consolidated balance sheets.

Cost of goods sold also includes delivery charges we pay to third-party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.

To the extent we remodel or otherwise replace or dispose of property and equipment prior to the end of the assigned depreciable lives, we could realize a loss or gain on the disposition. To the extent assets continue to be used beyond their assigned depreciable lives, no depreciation expense is incurred. We reassess the depreciable lives of our long-lived assets in an effort to reduce the risk of significant losses or gains at disposition and utilization of assets with no depreciation charges. The reassessment of depreciable lives involves utilizing historical remodel and disposition activity and forward-looking capital expenditure plans.

F-10

Table of Contents

Intangible Assets Subject to Amortization. Customer lists and amortizable tradenames are amortized using the straight-line method over their estimated useful lives, ranging from 4 to 24 years (weighted average life of 13 years). Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from 6 to 49 years (weighted average life of 33 years). Total estimated amortization of all acquisition-related intangible assets for the next five fiscal years is currently estimated as follows (in thousands):

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

· future revenue and profitability projections associated with the tradename;

· rates, based on our estimated weighted average cost of capital, used to discount the estimated royalty cash flow projections to their present value (or estimated fair value).

· estimated future cash flows;

· growth assumptions for future revenues as well as future gross margin rates, expense rates and other estimates; and

· rates, based on our estimated weighted average cost of capital, used to discount our estimated future cash flow projections to their present value (or estimated fair value).

F-11

Table of Contents

fair value of goodwill for that reporting unit. If the recorded goodwill balance for a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded to write goodwill down to its fair value.

As more fully described in Note 9, we recorded significant impairment charges in fiscal year 2009 to writedown our tradenames and goodwill to estimated fair value.

We receive allowances from developers related to the construction of our stores. We record these allowances as deferred real estate credits, which we recognize as a reduction of rent expense on a straight-line basis over the lease term beginning with the date the Company takes possession of the leased asset. We received construction allowances aggregating $14.4 million in fiscal year 2010, $10.0 million in fiscal year 2009 and $36.8 million in fiscal year 2008.

Benefit Plans. We sponsor a noncontributory defined benefit pension plan (Pension Plan), an unfunded supplemental executive retirement plan (SERP Plan) which provides certain employees additional pension benefits and a post retirement plan providing eligible employees limited postretirement health care benefits (Postretirement Plan). In calculating our obligations and related expense, we make various assumptions and estimates, after consulting with outside actuaries and advisors. The annual determination of expense involves calculating the estimated total benefits ultimately payable to plan participants. We use the projected unit credit method in recognizing pension liabilities. The Pension and SERP Plans are valued annually as of the end of each fiscal year. In the third quarter of fiscal year 2010, we froze benefits offered to all remaining employees under our Pension Plan and SERP Plan.

Significant assumptions related to the calculation of our obligations include the discount rate used to calculate the present value of benefit obligations to be paid in the future, the expected long-term rate of return on assets held by the Pension Plan and the health care cost trend rate for the Postretirement Plan, as more fully described in Note 13. We review these assumptions annually based upon currently available information, including information provided by our actuaries.

Self-insurance and Other Employee Benefit Reserves. We use estimates in the determination of the required accruals for general liability, workers’ compensation and health insurance. We base these estimates upon an examination of historical trends, industry claims experience and independent actuarial estimates. Although we do not expect that we will ultimately pay claims significantly different from our estimates, self-insurance reserves could be affected if future claims experience differ significantly from our historical trends and assumptions.

Other Long-term Liabilities. Other long-term liabilities consist primarily of certain employee benefit obligations, postretirement health care benefit obligations and the liability for scheduled rent increases.

F-12

Table of Contents

merchandise returns are made in less than 30 days after the sales transaction, we believe the risk that differences between our estimated and actual returns will have a material impact on our consolidated financial statements is minimal.

Buying and Occupancy Costs. Our buying costs consist primarily of salaries and expenses incurred by our merchandising and buying operations. Occupancy costs primarily include rent, property taxes and operating costs of our retail, distribution and support facilities and exclude depreciation expense.

Selling, General and Administrative Expenses (excluding depreciation). Selling, general and administrative expenses are comprised principally of the costs related to employee compensation and benefits in the selling and administrative support areas, preopening expenses, advertising and catalog costs and insurance expense.

We receive allowances from certain merchandise vendors in conjunction with compensation programs for employees who sell the vendors’ merchandise. These allowances are netted against the related compensation expense that we incur. Amounts received from vendors related to compensation programs were $61.1 million in fiscal year 2010, $65.8 million in fiscal year 2009 and $71.6 million in fiscal year 2008.

We incur costs to advertise and promote the merchandise assortment offered by both Specialty Retail stores and Direct Marketing. Advertising costs incurred by our Specialty Retail stores consist primarily of print media costs related to promotional materials mailed to our customers. These costs are expensed at the time of mailing to the customer. Advertising costs incurred by Direct Marketing relate to the production, printing and distribution of our print catalogs and the production of the photographic content on our websites. We amortize the costs of print catalogs during the periods we expect to generate revenues from such catalogs, generally three to six months. We expense the costs incurred to produce the photographic content on our websites, as well as website design and web marketing costs, as incurred.

Deferred catalog costs included in other current assets in the consolidated balance sheets were $4.1 million as of July 31, 2010 and $4.0 million as of August 1, 2009. Net advertising expenses were $77.4 million in fiscal year 2010, $81.1 million in fiscal year 2009 and $102.8 million in fiscal year 2008.

Consistent with industry practice, we receive advertising allowances from certain of our merchandise vendors. Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor’s merchandise in connection with our various advertising programs, primarily catalogs and other print media. Advertising allowances fluctuate based on the level of advertising expenses incurred and are recorded as a reduction of our advertising costs when earned. Advertising allowances aggregated approximately $46.2 million in fiscal year 2010, $65.7 million in fiscal year 2009 and $75.7 million in fiscal year 2008.

Preopening expenses primarily consist of payroll and related media costs incurred in connection with store openings and major renovations and are expensed when incurred. We incurred preopening expenses of $2.7 million in fiscal year 2010, $5.1 million in fiscal year 2009 and $7.7 million in fiscal year 2008.

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

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

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

F-13

Table of Contents

Gift Cards. We sell gift cards at our Specialty Retail stores and through our Direct Marketing operation. Unredeemed gift cards aggregated $32.0 million at July 31, 2010 and $30.4 million at August 1, 2009. The gift cards sold to our customers have no stated expiration dates and, in some cases, are subject to actual and/or potential escheatment rights in various of the jurisdictions in which we operate.

Gift card breakage recognized during fiscal years 2010 and 2009 was not significant. We do not believe gift card breakage will have a material impact on our future operations.

Loyalty Programs. We maintain customer loyalty programs in which customers accumulate points for qualifying purchases. Upon reaching certain levels, customers may redeem their points for gifts. Generally, points earned in a given year must be redeemed no later than 90 days subsequent to the end of the annual program period.

The estimates of the costs associated with the loyalty programs require us to make assumptions related to customer purchasing levels, redemption rates and costs of awards to be chosen by our customers. Our customers redeem a substantial portion of the points earned in connection with our loyalty programs for gift cards. At the time the qualifying sales giving rise to the loyalty program points are made, we defer the portion of the revenues on the qualifying sales transactions equal to the estimated retail value of the gift cards to be issued upon conversion of the points to gift cards. We record the deferral of revenues related to gift card awards under our loyalty programs as a reduction of revenues. In addition, we charge the cost of all other awards under our loyalty programs to cost of goods sold.

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

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

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

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

At July 31, 2010 and August 1, 2009, the fair values of cash and cash equivalents, receivables and accounts payable approximated their carrying values due to the short-term nature of these instruments. See Notes 7, 8 and 13 to the consolidated financial statements for the estimated fair values of our long-term debt, derivative financial instruments and Pension Plan investments.

F-14

Table of Contents

Recent Accounting Pronouncements. In December 2007, the FASB issued guidance that addresses the recognition and accounting for identifiable assets acquired, liabilities assumed and non-controlling interests in business combinations. In addition, this guidance changes 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 recognize post-acquisition changes in tax uncertainties associated with a business combination as a component of tax expense. These rules are to be applied prospectively to business combinations for which the acquisition date is on or after December 15, 2008. Generally, the effect of this guidance will depend on future acquisitions. However, the accounting for the resolution of any tax uncertainties remaining as of July 31, 2010 related to the Acquisition will be subject to the provisions of this guidance. As to the future resolution of these tax uncertainties, we do not believe these requirements will have a material impact on our future financial statements.

In June 2009, the FASB issued guidance that establishes the Accounting Standards Codification (ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. This guidance is effective for financial statements 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 did not have an impact on our consolidated financial statements.

NOTE 2. TRANSACTIONS WITH SPONSORS

Pursuant to a management services agreement with affiliates of the Sponsors, and in exchange for ongoing consulting and management advisory services that are provided to us by the Sponsors and their affiliates, affiliates of the Sponsors receive an aggregate annual management fee equal to the lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10 million. Affiliates of the Sponsors also receive reimbursement for out-of-pocket expenses incurred by them or their affiliates in connection with services provided pursuant to the agreement. These management fees are payable quarterly in arrears. We recorded management fees of $9.2 million during fiscal year 2010, $9.1 million during fiscal year 2009 and $10.0 million during fiscal year 2008, which are included in selling, general and administrative expenses in the consolidated statements of operations.

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

NOTE 3. INCOME FROM CREDIT CARD PROGRAM, NET

F-15

Table of Contents

based upon the overall profitability and performance of the proprietary credit card portfolio. In addition, we receive payments from HSBC for marketing and servicing activities as we continue to handle key customer service functions, primarily customer inquiries and collections, for HSBC. Our estimated net receivable from HSBC at July 31, 2010 was $5.8 million while our estimated net liability to HSBC aggregated $3.5 million as of August 1, 2009.

NOTE 4. PROPERTY AND EQUIPMENT, NET

The significant components of our property and equipment, net are as follows:

(in thousands)	July 31, 2010		August 1, 2009
Land, buildings and improvements	$	898,625	$	868,026
Fixtures and equipment	672,808		617,303
Construction in progress	19,451		48,632
	1,590,884		1,533,961
Less accumulated depreciation and amortization	685,058		541,246
Property and equipment, net	$	905,826	$	992,715

NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET

The significant components of our intangible assets and goodwill, by our reportable operating segments, are as follows:

(in thousands)	Customer lists			Favorable lease commitments			Tradenames			Goodwill

Specialty Retail
Balance at August 2, 2008	$	378,516		$	429,441		$	1,406,030		$	1,305,058
Amortization	(39,499		)	(17,877		)
Adjustments related to pre-acquisition tax contingencies										(15,687		)
Writedown of tradenames							(311,835		)
Writedown of goodwill										(329,709		)
Balance at August 1, 2009	$	339,017		$	411,564		$	1,094,195		$	959,662
Amortization	(39,499		)	(17,878		)
Balance at July 31, 2010	$	299,518		$	393,686		$	1,094,195		$	959,662

Direct Marketing
Balance at August 2, 2008	$	44,415		$	—		$	173,024		$	306,133
Amortization	(14,772		)	—			(555		)
Adjustments related to pre-acquisition tax contingencies										(2,362		)
Writedown of tradenames							(31,374		)
Balance at August 1, 2009	$	29,643		$	—		$	141,095		$	303,771
Amortization	(14,772		)	—			(1,110		)
Balance at July 31, 2010	$	14,871		$	—		$	139,985		$	303,771

Total at July 31, 2010	$	314,389		$	393,686		$	1,234,180		$	1,263,433

Total accumulated amortization at July 31, 2010	$	262,101		$	86,294		$	1,665

During the third quarter of fiscal year 2009, we closed the Internal Revenue Service (IRS) examination of fiscal years 2005 and 2006 and received net refunds of approximately $2.8 million. In addition, as a result of the completion of the audit and IRS determination regarding certain deductions taken in connection with the Acquisition, we recorded a decrease in the gross amount of unrecognized tax benefits of $13.7 million and a decrease in accrued interest and penalties of $2.2 million. This

F-16

Table of Contents

$15.9 million reduction in our liability for unrecognized tax benefits resulted in 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 during fiscal year 2009. Finally, in the fourth quarter of fiscal year 2009, we recorded a decrease to our recorded liability for unrecognized tax benefits and a corresponding reduction to goodwill of $0.7 million as a result of the expiration of statutes of limitation in various taxing jurisdictions.

As more fully described in Note 9, we recorded significant impairment charges in fiscal year 2009 to writedown our tradenames and goodwill to estimated fair value.

NOTE 6. ACCRUED LIABILITIES

The significant components of accrued liabilities are as follows:

(in thousands)	July 31, 2010		August 1, 2009

Accrued salaries and related liabilities	$	68,845	$	42,213
Amounts due customers	83,942		82,055
Self-insurance reserves	36,041		35,510
Interest payable	32,081		28,933
Sales returns reserves	25,167		22,874
Sales taxes	21,408		18,323
Loyalty program liability	16,913		16,927
Other	77,059		68,977
Total	$	361,456	$	315,812

NOTE 7. LONG-TERM DEBT

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

(in thousands)	Interest Rate	July 31, 2010			August 1, 2009

Senior Secured Term Loan Facility	variable	$	1,513,383		$	1,625,000
2028 Debentures	7.125%	121,492			121,297
Senior Notes	9.0%/9.75%	752,445			734,541
Senior Subordinated Notes	10.375%	500,000			500,000
Total debt		2,887,320			2,980,838
Less: current portion of Senior Secured Term Loan Facility		(7,648		)	(26,617		)
Long-term debt		$	2,879,672		$	2,954,221

Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base. The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice. The borrowing base for the Asset-Based Revolving Credit Facility is equal to at any time the sum of (a) the lesser of (i) 80% of eligible inventory (valued at the lower of cost or market value) and (ii) 85% of the net orderly liquidation value of eligible inventory, and (b) 85% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds arising from the sale or disposition of inventory, less certain reserves. Through April 30, 2011, NMG is required to maintain excess availability under the terms of the Asset-Based Revolving Credit Facility of at least the greater of (a) 10% of the lesser of (i) the aggregate revolving commitments and (ii) the borrowing base and (b) $50 million. After April 30, 2011, if at any time, excess availability is less than the greater of (a) 15% of the lesser of (i) the aggregate revolving commitments

F-17

Table of Contents

and (ii) the borrowing base and (b) $60 million, NMG will be required to maintain a pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) of at least 1.1 to 1.0. On July 31, 2010, NMG had no borrowings outstanding under this facility, $31.1 million of outstanding letters of credit and $508.9 million of unused borrowing availability.

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

Borrowings under the Asset-Based Revolving Credit Facility bear interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the highest of (i) a defined prime rate, (ii) the federal funds effective rate plus 1/2 of 1% or (iii) a one-month LIBOR rate plus 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The applicable margin is up to 3.50% with respect to base rate borrowings and up to 4.50% with respect to LIBOR borrowings, provided that until October 1, 2010, the applicable margin will be 3.25% with respect to base rate borrowings and 4.25% with respect to LIBOR borrowings. The applicable margin is subject to adjustment based on the historical availability under the Asset-Based Revolving Credit Facility. In addition, NMG is required to pay a commitment fee in respect of unused commitments of (a) 0.750% per annum during any applicable period in which the average revolving loan utilization is 50% or more or (b) 1% per annum during any applicable period in which the average revolving loan utilization is less than 50%. NMG must also pay customary letter of credit fees and agency fees.

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

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

All obligations under the Asset-Based Revolving Credit Facility are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries. As of July 31, 2010, there were no assets or liabilities held by non-guarantor subsidiaries. All obligations under NMG’s Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of the Company, NMG and the subsidiaries that have guaranteed the Asset-Based Revolving Credit Facility (subsidiary guarantors), including:

· a first-priority security interest in personal property consisting of inventory and related accounts, cash, deposit accounts, all payments received by NMG or the subsidiary guarantors from credit card clearinghouses and processors or otherwise in respect of all credit card charges for sales of inventory by NMG and the subsidiary guarantors, certain related assets and proceeds of the foregoing;

F-18

Table of Contents

· a second-priority pledge of 100% of NMG’s capital stock and certain of the capital stock held by NMG, the Company or any subsidiary guarantor (which pledge, in the case of any foreign subsidiary is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary); and

· a second-priority security interest in, and mortgages on, substantially all other tangible and intangible assets of NMG, the Company and each subsidiary guarantor, including a significant portion of NMG’s owned and leased real property (which currently consists of approximately half of NMG’s full-line retail stores) and equipment.

Capital stock and other securities of a subsidiary of NMG that are owned by NMG or any subsidiary guarantor will not constitute collateral under NMG’s Asset-Based Revolving Credit Facility to the extent that such securities cannot secure NMG’s 2028 Debentures or other secured public debt obligations without requiring the preparation and filing of separate financial statements of such subsidiary in accordance with applicable Securities and Exchange Commission’s rules. As a result, the collateral under NMG’s Asset-Based Revolving Credit Facility will include shares of capital stock or other securities of subsidiaries of NMG or any subsidiary guarantor only to the extent that the applicable value of such securities (on a subsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amount of the 2028 Debentures or other secured public debt obligations of NMG. The Asset-Based Revolving Credit Facility contains a number of covenants that, among other things and subject to certain significant exceptions, restrict its ability and the ability of its subsidiaries to:

· incur additional indebtedness;

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

· make investments, loans, advances and acquisitions;

· create restrictions on the payment of dividends or other amounts to NMG from its subsidiaries that are not guarantors;

· engage in transactions with NMG’s affiliates;

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

· consolidate or merge;

· create liens; and

· enter into sale and lease back transactions.

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

F-19

Table of Contents

At July 31, 2010, the applicable margin with respect to base rate borrowings was 1.00% and the applicable margin with respect to LIBOR borrowings was 2.00%.

The credit agreement governing the Senior Secured Term Loan Facility requires NMG to prepay outstanding term loans with 50% (which percentage will be reduced to 25% if NMG’s total leverage ratio is less than a specified ratio and will be reduced to 0% if NMG’s total leverage ratio is less than a specified ratio) of its annual excess cash flow (as defined in the credit agreement). For fiscal year 2010, NMG was required to prepay $92.6 million of outstanding term loans pursuant to the annual excess cash flow requirements. Of such amount, NMG paid $85.0 million in the fourth quarter of fiscal year 2010 and will make the remaining $7.6 million payment in the first quarter of fiscal year 2011. For fiscal year 2009, NMG was required to prepay $26.6 million of outstanding term loans in the first quarter of fiscal year 2010 pursuant to the annual excess cash flow requirements. If a change of control (as defined in the credit agreement) occurs, NMG will be required to offer to prepay all outstanding term loans, at a prepayment price equal to 101% of the principal amount to be prepaid, plus accrued and unpaid interest to the date of prepayment. NMG also must offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales under certain circumstances.

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

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

· a first-priority pledge of 100% of NMG’s capital stock and certain of the capital stock held by NMG, the Company or any subsidiary guarantor (which pledge, in the case of any foreign subsidiary is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary); and

· a first-priority security interest in, and mortgages on, substantially all other tangible and intangible assets of NMG, the Company and each subsidiary guarantor, including a significant portion of NMG’s owned and leased real property (which currently consists of approximately half of NMG’s full-line retail stores) and equipment, but excluding, among other things, the collateral described in the following bullet point; and

· a second-priority security interest in personal property consisting of inventory and related accounts, cash, deposit accounts, all payments received by NMG or the subsidiary guarantors from credit card clearinghouses and processors or otherwise in respect of all credit card charges for sales of inventory by NMG and the subsidiary guarantors, certain related assets and proceeds of the foregoing.

Capital stock and other securities of a subsidiary of NMG that are owned by NMG or any subsidiary guarantor will not constitute collateral under NMG’s Senior Secured Term Loan Facility to the extent that such securities cannot secure the 2028 Debentures or other secured public debt obligations without requiring the preparation and filing of separate financial statements of such subsidiary in accordance with applicable SEC rules. As a result, the collateral under NMG’s Senior Secured Term Loan Facility will include shares of capital stock or other securities of subsidiaries of NMG or any subsidiary guarantor only to the extent that the applicable value of such securities (on a subsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amount of the 2028 Debentures or other secured public debt obligations of NMG.

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

The fair value of the Senior Secured Term Loan Facility was approximately $1,426.4 million at July 31, 2010 and $1,332.5 million at August 1, 2009 based on prevailing market rates at this time.

F-20

Table of Contents

2028 Debentures. In May 1998, NMG issued $125.0 million aggregate principal amount of its 7.125% 2028 Debentures. NMG equally and ratably secures its 2028 Debentures by a first lien security interest on certain collateral subject to liens granted under NMG’s Senior Secured Credit Facilities constituting (a) (i) 100% of the capital stock of certain of NMG’s existing and future domestic subsidiaries, and (ii) 100% of the non-voting stock and 65% of the voting stock of certain of NMG’s existing and future foreign subsidiaries and (b) certain of NMG’s principal properties that include approximately half of NMG’s full-line stores, in each case, to the extent required by the terms of the indenture governing the 2028 Debentures. The 2028 Debentures contain covenants that restrict NMG’s ability to create liens and enter into sale and lease back transactions. The collateral securing the 2028 Debentures will be released upon the release of liens on such collateral under NMG’s Senior Secured Credit Facilities and any other debt (other than the 2028 Debentures) secured by such collateral. Capital stock and other securities of a subsidiary of NMG that are owned by NMG or any subsidiary will not constitute collateral under the 2028 Debentures to the extent such property does not constitute collateral under NMG’s Senior Secured Credit Facilities as described above. The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company. The 2028 Debentures are not guaranteed by certain subsidiaries of NMG. The 2028 Debentures include a cross-acceleration provision in respect of any other indebtedness that has an aggregate principal amount exceeding $15 million. NMG’s 2028 Debentures mature on June 1, 2028.

The fair value of the 2028 Debentures was approximately $114.1 million at July 31, 2010 and $95.6 million at August 1, 2009 based on quoted market prices.

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

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

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

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

Except as described below, the Senior Notes are not redeemable at NMG’s option prior to October 15, 2010. From and after October 15, 2010, NMG may redeem the Senior Notes, in whole or in part, at a redemption price equal to 104.5% of principal amount, declining annually to 100% of the principal amount on October 15, 2013, plus accrued and unpaid interest, and Additional Interest (as defined in the Senior Indenture), if any, thereon to the applicable redemption date.

F-21

Table of Contents

At any time prior to October 15, 2010, NMG may redeem all or a part of the Senior Notes at a redemption price equal to 100% of the principal amount of Senior Notes redeemed plus an applicable premium, as provided in the Senior Indenture, and accrued and unpaid interest and Additional Interest, if any, to the redemption date.

Upon the occurrence of a change of control (as defined in the Senior Indenture), each holder of the Senior Notes has the right to require NMG to repurchase some or all of such holder’s Senior Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, and Additional Interest, if any, to the date of purchase.

The indenture governing the Senior Notes contains covenants that limit NMG’s ability and certain of its subsidiaries’ ability to:

· incur additional indebtedness;

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

· make investments;

· create restrictions on the payment of dividends or other amounts to NMG from its restricted subsidiaries that are not guarantors of the notes;

· engage in transactions with NMG’s affiliates;

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

· consolidate or merge;

· create liens; and

· enter into sale and lease back transactions.

The fair value of NMG’s Senior Notes was approximately $767.5 million at July 31, 2010 and $539.9 million at August 1, 2009 based on quoted market prices.

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

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

Except as described below, the Senior Subordinated Notes are not redeemable at NMG’s option prior to October 15, 2010. From and after October 15, 2010, NMG may redeem the Senior Subordinated Notes, in whole or in part, at a redemption price equal to 105.188% of principal amount, declining annually to 100% of principal amount on October 15, 2013, plus accrued

F-22

Table of Contents

and unpaid interest, and Additional Interest (as defined in the Senior Subordinated Indenture), if any, thereon to the applicable redemption date.

At any time prior to October 15, 2010, NMG also may redeem all or a part of the Senior Subordinated Notes at a redemption price equal to 100% of the principal amount of Senior Subordinated Notes redeemed plus an applicable premium, as provided in the Senior Subordinated Indenture, and accrued and unpaid interest and Additional Interest, if any, to the redemption date.

Upon the occurrence of a change of control (as defined in the Senior Subordinated Indenture), NMG will make an offer to purchase all of the Senior Subordinated Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, and Additional Interest, if any, to the date of purchase.

The fair value of NMG’s Senior Subordinated Notes was approximately $517.5 million at July 31, 2010 and $355.0 million at August 1, 2009 based on quoted market prices.

Maturities of Long-Term Debt. At July 31, 2010, annual maturities of long-term debt during the next five fiscal years and thereafter are as follows (in millions):

2011	$	7.6
2012	—
2013	1,505.8
2014	—
2015	—
Thereafter	1,373.9

The above table does not reflect either future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility or additional principal amounts under the Senior Notes that could be outstanding as a result of any future PIK interest election that we may make through October 15, 2010.

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

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

Senior Secured Term Loan Facility	$	83,468		$	90,952		$	106,504
2028 Debentures	8,886			8,906			8,903
Senior Notes	68,315			66,356			63,000
Senior Subordinated Notes	51,732			52,028			51,875
Amortization of debt issue costs	18,697			17,185			14,217
Other, net	6,296			1,140			(1,658		)
Capitalized interest	(286		)	(993		)	(3,036		)
Interest expense, net	$	237,108		$	235,574		$	239,805

NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS

As of the effective date, NMG designated the interest rate swaps as cash flow hedges. As cash flow hedges, unrealized

F-23

Table of Contents

gains on our outstanding interest rate swaps are recognized as 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 are exposed. As a result, unrealized gains and losses on our interest rate swap agreements are designated as effective or ineffective. The effective portion of such gains or losses is recorded as a component of accumulated other comprehensive loss while the ineffective portion of such gains or losses is recorded as a component of interest expense.

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

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

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

(in thousands)	July 31, 2010			August 1, 2009

Interest rate caps (included in other long-term assets)	$	1,040		$	—

Interest rate swaps (included in other current liabilities)	$	(22,661	)	$	—

Interest rate swaps (included in other long-term liabilities)	$	—		$	(57,750	)

Accumulated other comprehensive loss, net of taxes	$	17,281		$	35,508

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

	Fiscal year ended
(in thousands)	July 31, 2010		August 1, 2009		August 2, 2008

Realized hedging losses – included in interest expense, net	$	45,663	$	29,212	$	3,841

Ineffective hedging losses – included in interest expense, net	$	854	$	669	$	479

The amount of losses recorded in other comprehensive loss at July 31, 2010 that is expected to be reclassified into interest expense in the next twelve months, if interest rates remain unchanged, is approximately $22.7 million.

F-24

Table of Contents

NOTE 9. IMPAIRMENT OF LONG-LIVED ASSETS

We assess the recoverability of indefinite-lived assets and goodwill in the fourth quarter of each year and upon the occurrence of certain events. In connection with the preparation of our consolidated financial statements for the second quarter of fiscal year 2009, we concluded that it was appropriate to test our long-lived assets for recoverability in light of the significant declines in the domestic and global financial markets during the first and second quarters of fiscal year 2009. Utilizing our then-current operating forecasts to estimate the fair values of our Neiman Marcus stores, Bergdorf Goodman stores and Direct Marketing operation, we determined certain of our property and equipment, tradenames and goodwill to be impaired and recorded impairment charges in the second quarter of fiscal year 2009 aggregating $560.1 million.

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

Total impairment charges recorded in fiscal year 2009 are 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

NOTE 10. OTHER INCOME

In the first quarter of fiscal year 2008, we recorded a pension curtailment gain of $32.5 million, or 0.7% of revenues, as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007.

NOTE 11. STOCK-BASED COMPENSATION

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

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

Stock Option Modification. In the second quarter of fiscal year 2010, the Compensation Committee approved 1) a tender offer for outstanding Accreting Options to purchase 26,614 shares (Eligible Options), 2) the extension of the option term with respect to Fixed Price Options for 25,236 shares to October 6, 2017 and 3) the modification of additional Fixed Price Options to purchase 1,378 shares. In the third quarter of fiscal year 2010, the Compensation Committee approved 1) the modification of Accreting Options to purchase 8,502 shares and 2) the extension of the option term with respect to Fixed Price Options for 7,269 shares to October 6, 2015. The stock option modifications effected in both the second and third quarters of fiscal year 2010 are collectively referred to as the Modification Transactions. The Modification Transactions were taken in response to declines in capital markets and general economic conditions that resulted in the exercise prices for the prior options being in excess of the estimated fair value of our common stock.

F-25

Table of Contents

was completed in December 2009 with the tender of all Eligible Options and the issuance of 17,743 new options. The modification completed in April 2010 resulted in the tender of Eligible Options for the purchase of 8,502 shares and the issuance of 5,668 new options.

In connection with the Modification Transactions, we incurred additional compensation charges aggregating $5.1 million during fiscal year 2010 to recognize the excess of the post-modification fair value of vested options over the pre-modification fair value of such options.

Outstanding Stock Options. A summary of the status of our stock option plan is as follows:

	Fiscal year ended
	July 31, 2010				August 1, 2009				August 2, 2008
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of fiscal year	79,399		$	1,585	83,147		$	1,507	83,634		$	1,430
Granted	31,579		1,019		—		—		260		2,684
Exercised	—		—		(855	)	1,684		—		—
Cancelled	(36,494	)	2,132		—		—		—		—
Forfeited	(3,688	)	1,587		(2,893	)	1,617		(747	)	1,597
Outstanding at end of fiscal year	70,796		$	1,147	79,399		$	1,585	83,147		$	1,507
Options exercisable at end of fiscal year	37,982		$	1,237	60,857		$	1,542	46,684		$	1,415

At July 31, 2010, Accreting Options were outstanding for 26,309 shares and Fixed Price Options were outstanding for 44,487 shares. The total grant date fair value of stock options that vested during the year was $2.6 million in fiscal year 2010, $5.3 million in fiscal year 2009 and $6.4 million in fiscal year 2008.

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

We use the Black-Scholes option-pricing model to determine the fair value of our options as of the date of grant. A summary of our fiscal year 2010 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 July 31, 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 is based on a combination of NMG’s historical volatility adjusted for our leverage and estimates of implied volatility of our peer group.

We recognize compensation expense for stock options on a straight-line basis over the vesting period. Excluding the compensation charges recorded in connection with the Modification Transactions, we recognized non-cash stock compensation expense of $5.0 million in fiscal year 2010 and $5.8 million in fiscal year 2009, which is included in selling, general and

F-26

Table of Contents

administrative expenses. At July 31, 2010, unearned non-cash stock-based compensation that we expect to recognize as expense through fiscal year 2015 aggregates approximately $5.5 million.

NOTE 12. INCOME TAXES

The significant components of income tax (benefit) expense are as follows:

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

Current:
Federal	$	31,596		$	(66,168	)	$	108,467
State	4,572			(389		)	19,976
	36,168			(66,557		)	128,443
Deferred:
Federal	(35,518		)	(132,442		)	(37,693		)
State	(4,125		)	(21,446		)	(6,934		)
	(39,643		)	(153,888		)	(44,627		)
Income tax (benefit) expense	$	(3,475	)	$	(220,445	)	$	83,816

A reconciliation of income tax (benefit) expense to the amount calculated based on the federal and state statutory rates is as follows:

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

Income tax (benefit) expense at statutory rate	$	(1,860	)	$	(310,972	)	$	79,319
State income taxes, net of federal income tax benefit	(1,666		)	(23,311		)	5,821
Impairment of nondeductible goodwill	—			115,398			—
Tax expense (benefit) related to tax settlements and other changes in tax liabilities	354			(378		)	159
Impact of non-taxable income	(245		)	(897		)	(1,709		)
Impact of non-deductible expenses	73			82			226
Other	(131		)	(367		)	—
Total	$	(3,475	)	$	(220,445	)	$	83,816
Effective tax rate	65.4		%	24.8		%	37.0		%

In fiscal year 2010, we generated a loss before income taxes of approximately $5.3 million, which resulted in a recorded income tax benefit of approximately $3.5 million and an effective tax rate of 65.4%. The effective tax rate exceeds the statutory rate primarily due to the relative significance of state taxes, non-taxable income and non-deductible expense to our pretax loss. For fiscal year 2009, we generated a loss before income taxes of approximately $888.5 million, which resulted in a recorded income tax benefit of approximately $220.5 million and an effective tax rate of 24.8%. For fiscal year 2009, no income tax benefit exists related to the $329.7 million of goodwill impairment charges recorded. Excluding the impact of the goodwill impairment charges, our effective income tax rate was 39.5% for fiscal year 2009.

F-27

Table of Contents

Significant components of our net deferred income tax asset (liability) are as follows:

(in thousands)	July 31, 2010			August 1, 2009

Deferred income tax assets:
Accruals and reserves	$	48,106		$	39,997
Employee benefits	141,902			124,987
Other	30,401			43,348
Total deferred tax assets	$	220,409		$	208,332

Deferred income tax liabilities:
Inventory	$	(12,094	)	$	(12,208	)
Depreciation and amortization	(76,933		)	(76,818		)
Intangible assets	(759,124		)	(787,987		)
Other	(10,150		)	(9,993		)
Total deferred tax liabilities	(858,301		)	(887,006		)
Net deferred income tax liability	$	(637,892	)	$	(678,674	)

Net deferred income tax asset (liability):
Current	$	30,755		$	19,136
Non-current	(668,647		)	(697,810		)
Total	$	(637,892	)	$	(678,674	)

The net deferred tax liability of $637.9 million at July 31, 2010 decreased from a $678.7 million net deferred liability at August 1, 2009. This decrease was comprised primarily of 1) a $28.9 million decrease in deferred tax liabilities related to the amortization of certain intangible assets and 2) a $12.0 million increase in deferred tax assets related to an increase in our pension liability. We believe it is more likely than not that we will realize the benefits of our recorded deferred tax assets.

At July 31, 2010, the gross amount of unrecognized tax benefits was $6.4 million, all of which would impact our effective tax rate, if recognized. We classify interest and penalties as a component of income tax (benefit) expense and our liability for accrued interest and penalties was $6.3 million as of July 31, 2010. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

(in thousands)	July 31, 2010			August 1, 2009
Balance at beginning of fiscal year	$	6,605		$	21,244
Gross amount of increases for current year tax positions	654			591
Gross amount of decreases for settlements with tax authorities	(406		)	(14,263		)
Gross amount of decreases for expiration of statutes of limitation	(452		)	(967		)
Balance at ending of fiscal year	$	6,401		$	6,605

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. During the fourth quarter of fiscal year 2010, the IRS closed their examination of fiscal year 2007 federal income tax return with no changes or assessments. We anticipate the IRS will begin an examination of fiscal years 2008 and 2009 sometime in our fiscal year 2011. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2006.

During the third quarter of fiscal year 2009, we closed the IRS examination of fiscal years 2005 and 2006 and received net refunds of approximately $2.8 million. In addition, as a result of the completion of the audit and IRS determination regarding certain deductions taken in connection with the Acquisition, we recorded a decrease in the gross amount of unrecognized tax benefits of $13.7 million and a decrease in accrued interest and 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 resulted in 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.

We believe our recorded tax liabilities as of July 31, 2010 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances. We believe it is reasonably possible that additional adjustments in the amounts of our unrecognized tax benefits could occur within the

F-28

Table of Contents

next twelve months as a result of settlements with tax authorities or expiration of statutes of limitation. At this time, we do not believe such adjustments will have a material impact on our consolidated financial statements.

NOTE 13. EMPLOYEE BENEFIT PLANS

Description of Benefit Plans. We sponsor a defined benefit pension plan (Pension Plan) and an unfunded supplemental executive retirement plan (SERP Plan) which provides certain employees additional pension benefits. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment. We froze benefits offered to a significant portion of participating employees under our Pension Plan and SERP Plan effective December 31, 2007. In the third quarter of fiscal year 2010, we froze benefits offered to all remaining employees under our Pension Plan and SERP Plan. Retirees and active employees hired prior to March 1, 1989 are eligible for certain limited postretirement health care benefits (Postretirement Plan) if they meet certain service and minimum age requirements.

We also maintain defined contribution plans consisting of a 401(k) Plan, a retirement savings plan (RSP) and defined contribution supplemental executive retirement plan (Defined Contribution SERP Plan). Employees make contributions to the 401(k) Plan and RSP and we match an employee’s contribution up to a maximum of 6% of the employee’s compensation subject to statutory limitations for a potential maximum match of 50% of employee contributions to the 401(k) Plan and 75% of employee contributions to the RSP. We also sponsor an unfunded key employee deferred compensation plan, which provides certain employees with additional benefits. Our aggregate expense related to these plans was approximately $19.9 million in fiscal years 2010, $20.0 million in fiscal year 2009 and $19.2 million in fiscal year 2008.

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

(in thousands)	July 31, 2010			August 1, 2009

Pension Plan	$	161,760		$	156,001
SERP Plan	96,406			92,152
Postretirement Plan	17,914			17,920
	276,080			266,073
Less: current portion	(5,574		)	(5,069		)
Long-term portion of benefit obligations	$	270,506		$	261,004

As of July 31, 2010, we have $89.0 million (net of taxes of $57.8 million) of adjustments to such obligations recorded as increases to accumulated other comprehensive loss.

F-29

Table of Contents

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

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

Pension Plan:
Service cost	$	5,687		$	6,057		$	10,815
Interest cost	25,230			24,361			22,866
Expected return on plan assets	(26,340		)	(26,048		)	(24,626		)
Net amortization of losses	752			—			—
Pension Plan expense	$	5,329		$	4,370		$	9,055

Curtailment gain	$	—		$	—		$	26,113

SERP Plan:
Service cost	$	680		$	689		$	1,254
Interest cost	5,399			5,312			4,960
SERP Plan expense	$	6,079		$	6,001		$	6,214

Curtailment gain	$	1,479		$	—		$	6,337

Postretirement Plan:
Service cost	$	72		$	92		$	124
Interest cost	1,017			1,343			1,356
Net amortization of prior service credit	(686		)	—			—
Net amortization of losses	358			282			547
Postretirement Plan expense	$	761		$	1,717		$	2,027

For purposes of determining pension expense, the expected return on plan assets is calculated using the market related value of plan assets. The market related value of plan assets does not immediately recognize realized gains and losses. Rather, these effects of realized gains and losses are deferred initially and amortized over three years in the determination of the market related value of plan assets. At July 31, 2010, the market related value of plan assets exceeded fair value by $20.7 million.

Benefit Obligations. Our obligations for the Pension Plan, SERP Plan and Postretirement Plan are valued annually as of the end of each fiscal year. With respect to the Pension Plan and the SERP Plan, our obligations consist of both a projected benefit obligation (PBO) and an accumulated benefit obligation (ABO). The PBO represents the present value of benefits ultimately payable to plan participants for both past and future services expected to be provided by the plan participants. The ABO represents the present value of benefits payable to plan participants for only services rendered at the valuation date.

F-30

Table of Contents

Changes in our obligations pursuant to our Pension Plan, SERP Plan and Postretirement Plan during fiscal years 2010 and 2009 are as follows:

	Pension Plan						SERP Plan						Postretirement Plan
	Fiscal years						Fiscal years						Fiscal years
(in thousands)	2010			2009			2010			2009			2010			2009
Projected benefit obligations:
Beginning of year	$	427,995		$	354,229		$	92,152		$	77,566		$	17,920		$	20,336
Service cost	5,687			6,057			680			689			72			92
Interest cost	25,230			24,361			5,399			5,312			1,017			1,343
Actuarial loss	48,041			55,554			9,206			11,001			23			665
Curtailment	(16,606		)	—			(8,426		)	—			—			—
Benefits paid, net	(14,121		)	(12,206		)	(2,605		)	(2,416		)	(1,118		)	(1,525		)
Plan amendments	—			—			—			—			—			(2,991		)
End of year	$	476,226		$	427,995		$	96,406		$	92,152		$	17,914		$	17,920

Accumulated benefit obligations:
Beginning of year	$	407,297		$	336,016		$	84,254		$	68,253
End of year	$	476,226		$	407,297		$	96,406		$	84,254

In connection with the actions in the third quarter of fiscal year 2010 to freeze benefits offered under our Pension Plan and SERP Plan, we recognized a gain of $25.0 million. Of the aggregate gain, $23.5 million was recorded as a reduction of accumulated other comprehensive loss and $1.5 million was recorded as a curtailment gain.

A summary of expected benefit payments related to our Pension Plan, SERP Plan and Postretirement Plan is as follows:

(in thousands)	Pension Plan		SERP Plan		Postretirement Plan

Fiscal year 2011	$	15,456	$	4,719	$	855
Fiscal year 2012	17,011		5,032		913
Fiscal year 2013	18,623		5,380		961
Fiscal year 2014	20,237		5,757		988
Fiscal year 2015	21,832		5,946		1,020
Fiscal years 2016-2020	$	130,404	$	33,167	$	5,514

Funding Policy and Status. Our policy is to fund the Pension Plan at or above the minimum required by law. In fiscal years 2010 and 2009, we were not required to make contributions to the Pension Plan; however, we made voluntary contributions to our Pension Plan of $30.0 million in fiscal year 2010 and $15.0 million in fiscal year 2009. As of July 31, 2010, we are not required to make contributions to the Pension Plan for fiscal year 2011. We will continue to evaluate voluntary contributions to our Pension Plan based upon the unfunded position of the Pension Plan, our available liquidity and other factors.

The funded status of our Pension Plan, SERP Plan and Postretirement Plan is as follows:

	Pension Plan						SERP Plan						Postretirement Plan
	Fiscal years						Fiscal years						Fiscal years
(in thousands)	2010			2009			2010			2009			2010			2009
Projected benefit obligation	$	476,226		$	427,995		$	96,406		$	92,152		$	17,914		$	17,920
Fair value of plan assets	314,466			271,994			—			—			—			—
Accrued obligation	$	(161,760	)	$	(156,001	)	$	(96,406	)	$	(92,152	)	$	(17,914	)	$	(17,920	)

F-31

Table of Contents

Pension Plan Assets and Investment Valuations. Assets held by our Pension Plan aggregated $314.5 million at July 31, 2010 and $272.0 million at August 1, 2009. The Pension Plan’s investments are stated at fair value or estimated fair value, as more fully described below. Purchases and sales of securities are recorded on the trade date. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.

Assets held by the Pension Plan are invested in accordance with the provisions of our approved investment policy. The Pension Plan’s strategic asset allocation was structured to reduce volatility through diversification and enhance return to approximate the amounts and timing of the expected benefit payments. The asset allocation for our Pension Plan at the end of fiscal years 2010 and 2009 and the target allocation for fiscal year 2011, by asset category, are as follows:

	Pension Plan
	Allocation at July 31, 2010		Allocation at July 31, 2009		2011 Target Allocation
Equity securities	74	%	68	%	75	%
Fixed income securities	26	%	32	%	25	%
Total	100	%	100	%	100	%

Changes in the assets held by the Pension Plan in fiscal years 2010 and 2009 are as follows:

	Fiscal years
(in thousands)	2010			2009
Fair value of assets at beginning of year	$	271,994		$	313,427
Actual return on assets	26,593			(44,227		)
Contribution	30,000			15,000
Benefits paid	(14,121		)	(12,206		)
Fair value of assets at end of year	$	314,466		$	271,994

Pension Plan investments in common corporate stock, preferred corporate stock, mutual funds, certain U.S. government securities and certain other investments are classified as Level 1 investments within the fair value hierarchy. Common and preferred corporate stocks and certain U.S. government securities are stated at fair value as determined by quoted market prices. Investments in mutual funds are valued at fair value based on quoted market prices, which represent the net asset value of the shares held by the Pension Plan at year-end.

Pension Plan investments in corporate debt securities, certain U.S. government securities, common/collective trusts, and certain other investments are classified as Level 2 investments within the fair value hierarchy. Common/collective trusts are valued at net asset value based on the underlying investments of such trust as determined by the sponsor of the trust. Other Level 2 investments are valued using updated quotes from market makers or broker-dealers recognized as market participants, information from market sources integrating relative credit information, observed market movements, and sector news, all of which is applied to pricing applications and models.

Pension Plan investments in hedge funds and other limited partnerships are classified as Level 3 investments within the fair value hierarchy. Hedge funds are valued at estimated fair value based on net asset value as determined by the respective fund manager based on the valuation of the underlying securities. Limited partnership interests in venture capital investments are valued at estimated fair value based on net asset value as determined by the respective fund investment manager. The hedge funds and limited partnerships allocate gains, losses, and expenses to the Pension Plan as described in the agreements.

Hedge funds and other limited partnerships are redeemable at net asset value to the extent provided in the documentation governing the investments. However, these redemption rights may be restricted in accordance with the governing documents. Redemption of these investments is subject to restrictions including lock-up periods where no redemptions are allowed, restrictions on redemption frequency and advance notice periods for redemptions. As of July 31, 2010, certain of these investments are generally subject to lock-up periods, ranging from two to seventeen months, certain of these investments are subject to restrictions on redemption frequency, ranging from quarterly to every three years, and certain of these investments are subject to advance notice requirements, ranging from thirty-day notification to ninety-day notification. At July 31, 2010, the Pension Plan had future unfunded commitments for additional contributions to the limited partnerships of approximately $6.3 million.

F-32

Table of Contents

Investment securities, in general, are exposed to various risks such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for benefits. The valuation methods previously described above may produce a fair value calculation that may not be indicative of net realized value or reflective of future fair values.

The following table sets forth by level, within the fair value hierarchy, the Pension Plan’s assets at fair value as of July 31, 2010.

(in thousands)	Level 1		Level 2		Level 3		Total

Corporate stock (1)	$	20,114	$	—	$	—	$	20,114
Corporate debt securities (2):
Financial services	—		9,436		—		9,436
Industrial	—		6,726		—		6,726
Other	—		14,768		—		14,768
Total corporate debt securities	—		30,930		—		30,930
Mutual funds:
Domestic income (1)	42,694		—		—		42,694
Fixed income (2)	40,245		—		—		40,245
Total mutual funds	82,939		—		—		82,939
Common/collective trusts (1)	—		41,802		—		41,802
U.S. government securities (2)	6,481		1,598		—		8,079
Hedge funds/limited partnership interests (1):
Equity-long/short	—		—		58,645		58,645
Absolute return	—		—		45,592		45,592
Equity-foreign/developed markets	—		—		15,846		15,846
Other	—		—		6,945		6,945
Total hedge funds/limited partnership interests	—		—		127,028		127,028
Other (2)	—		3,574		—		3,574
Total investments	$	109,534	$	77,904	$	127,028	$	314,466

(1) Equity securities.

(2) Fixed income securities.

The table below sets forth a summary of changes in the fair value of the Pension Plan’s Level 3 investment assets for the year ended July 31, 2010.

(in thousands)
Balance, beginning of year	$	108,278
Realized loss	(9,390		)
Unrealized gains relating to investments still held at July 31, 2010	12,024
Purchases	22,946
Sales	(6,830		)
Balance, end of year	$	127,028

F-33

Table of Contents

Assumptions. Significant assumptions related to the calculation of our obligations pursuant to our employee benefit plans include the discount rate used to calculate the present value of benefit obligations to be paid in the future, the expected long-term rate of return on assets held by the Pension Plan, the average rate of compensation increase by Pension Plan and SERP Plan participants and the health care cost trend rate for the Postretirement Plan. We review these assumptions annually based upon currently available information. The assumptions we utilized in calculating the projected benefit obligations and periodic expense of our Pension Plan, SERP Plan and Postretirement Plan are as follows:

	July 31, 2010		July 31, 2009		July 31, 2008
Pension Plan:
Discount rate	5.20	%	5.90	%	6.75	%
Expected long-term rate of return on plan assets	8.00	%	8.00	%	8.00	%
Rate of future compensation increase	N/A		4.50	%	4.50	%
SERP Plan:
Discount rate	5.20	%	5.90	%	6.75	%
Rate of future compensation increase	N/A		4.50	%	4.50	%
Postretirement Plan:
Discount rate	5.10	%	5.80	%	6.75	%
Initial health care cost trend rate	8.00	%	8.00	%	8.00	%
Ultimate health care cost trend rate	8.00	%	8.00	%	8.00	%

Discount rate. The assumed discount rate utilized is based on a broad sample of Moody’s high quality corporate bond yields as of the measurement date. The projected benefit payments are matched with the yields on these bonds to determine an appropriate discount rate for the plan. The discount rate is utilized principally in calculating the present values of our benefit obligations and related expenses.

Expected long-term rate of return on plan assets. The assumed expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to be invested by the Pension Plan to provide for the plan’s obligations. During fiscal year 2010, we utilized 8.0% as the expected long-term rate of return on plan assets. We periodically evaluate the allocation between investment categories of the assets held by the Pension Plan. We estimate the expected average long-term rate of return on assets based on historical returns, our future asset performance expectations using currently available market and other data and the counsel of our outside actuaries and advisors. This rate is utilized primarily in calculating the expected return on plan assets component of the annual pension expense. To the extent the actual rate of return on assets realized over the course of a year is greater than the assumed rate, that year’s annual pension expense is not affected. Rather this gain reduces future pension expense over a period of approximately 30 years. To the extent the actual rate of return on assets is less than the assumed rate, that year’s annual pension expense is likewise not affected. Rather this loss increases pension expense over approximately 30 years.

Rate of future compensation increase. The assumed average rate of compensation increase is the average annual compensation increase expected over the remaining employment periods for the participating employees. This rate is utilized principally in calculating the obligation and annual expense for the Pension and SERP Plans. As a result of the freeze of our benefits offered to all remaining employees under our Pension Plan and SERP Plan in the third quarter of fiscal year 2010, the rate of future compensation increase is no longer applicable to the valuation of our liabilities pursuant to these plans.

Health care cost trend rate. The assumed health care cost trend rate represents our estimate of the annual rates of change in the costs of the health care benefits currently provided by the Postretirement Plan. The health care cost trend rate implicitly considers estimates of health care inflation, changes in health care utilization and delivery patterns, technological advances and changes in the health status of the plan participants.

F-34

Table of Contents

					Using Sensitivity Rate
	Actual Rate		Sensitivity Rate Increase/(Decrease)		Increase in Liability (in millions)		Increase/ (Decrease) in Expense (in millions)
Pension Plan:
Discount rate	5.20	%	(0.25	)%	$	18.4	$	0.3
Expected long-term rate of return on plan assets	8.00	%	(1.00	)%	N/A		$	3.3
SERP Plan:
Discount rate	5.20	%	(0.25	)%	$	2.9	$	(0.1	)
Postretirement Plan:
Discount rate	5.10	%	(0.25	)%	$	0.6	$	0.1
Ultimate health care cost trend rate	8.00	%	1.00	%	$	2.4	$	0.1

NOTE 14. COMMITMENTS AND CONTINGENCIES

Leases. We lease certain property and equipment under various operating leases. The leases provide for monthly fixed rentals and/or contingent rentals based upon sales in excess of stated amounts and normally require us to pay real estate taxes, insurance, common area maintenance costs and other occupancy costs. Generally, the leases have primary terms ranging from one to 99 years and include renewal options ranging from two to 80 years.

Rent expense and related occupancy costs under operating leases is as follows:

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

Minimum rent	$	56,100		$	55,400		$	53,000
Contingent rent	20,100			19,600			29,700
Other occupancy costs	15,100			15,700			13,600
Amortization of deferred real estate credits	(6,300		)	(5,300		)	(3,700		)
Total rent expense	$	85,000		$	85,400		$	92,600

Future minimum rental commitments, excluding renewal options, under non-cancelable leases are as follows: fiscal year 2011—$55.7 million; fiscal year 2012—$55.1 million; fiscal year 2013—$53.2 million; fiscal year 2014—$48.5 million; fiscal year 2015—$43.6 million; all fiscal years thereafter—$618.0 million.

Long-term Incentive Plan. We have a long-term incentive plan (Long-term Incentive Plan) that provides for a cash incentive payable to certain employees upon a change of control, as defined, subject to the attainment of certain performance objectives. Performance objectives and targets are based on cumulative EBITDA percentages for rolling three year periods beginning in fiscal year 2006. Earned awards for each completed performance period will be credited to a book account and will earn interest at a contractually defined annual rate until the award is paid. Awards will be paid upon a change of control, as defined, or an initial public offering, as defined, subject to the requirement that, in each case, the internal rate of return to the Sponsors is positive. As of July 31, 2010, the vested participant balance in the Long-Term Incentive Plan aggregated $6.5 million.

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

Litigation. On April 30, 2010, a Class Action Complaint for Injunction and Equitable Relief was filed in the United States District Court for the Central District of California by Sheila Monjazeb, individually and on behalf of other members of the general public similarly situated, against the Company, Newton Holding, LLC, TPG Capital, L.P. and Warburg Pincus, LLC.

F-35

Table of Contents

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

Other. We had approximately $31.1 million of outstanding irrevocable letters of credit relating to purchase commitments and insurance and other liabilities at July 31, 2010. We had approximately $3.2 million in surety bonds at July 31, 2010 relating primarily to merchandise imports and state sales tax and utility requirements.

NOTE 15. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table shows the components of accumulated other comprehensive loss (amounts are recorded net of related income taxes):

(in thousands)	July 31, 2010			August 1, 2009

Unrealized loss on financial instruments	$	(17,281	)	$	(35,508	)
Change in unfunded benefit obligations	(88,993		)	(69,011		)
Other	—			(68		)
Total accumulated other comprehensive loss	$	(106,274	)	$	(104,587	)

NOTE 16. SEGMENT REPORTING

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

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

F-36

Table of Contents

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

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008

REVENUES
Specialty Retail stores	$	3,010,804		$	2,991,318		$	3,853,074
Direct Marketing	681,964			652,028			747,462
Total	$	3,692,768		$	3,643,346		$	4,600,536

OPERATING EARNINGS (LOSS)
Specialty Retail stores	$	272,569		$	124,252		$	476,724
Direct Marketing	112,576			73,322			117,657
Corporate expenses	(58,146		)	(52,067		)	(56,944		)
Other expenses (1)	(21,945		)	(22,455		)	—
Amortization of intangible assets and favorable lease commitments	(73,259		)	(72,703		)	(72,192		)
Impairment charges (2)	—			(703,266		)	(31,261		)
Other income (3)	—			—			32,450
Total	$	231,795		$	(652,917	)	$	466,434

CAPITAL EXPENDITURES
Specialty Retail stores	$	43,585		$	91,128		$	164,640
Direct Marketing	15,108			10,397			18,812
Total	$	58,693		$	101,525		$	183,452

DEPRECIATION EXPENSE
Specialty Retail stores	$	119,871		$	128,018		$	127,186
Direct Marketing	14,939			16,727			16,801
Other	7,029			6,014			4,424
Total	$	141,839		$	150,759		$	148,411

	July 31, 2010			August 1, 2009			August 2, 2008
ASSETS
Tangible assets of Specialty Retail stores	$	1,640,063		$	1,716,361		$	2,009,383
Tangible assets of Direct Marketing	158,547			142,123			173,265
Corporate assets:
Intangible assets related to Specialty Retail stores	2,747,061			2,804,438			3,519,045
Intangible assets related to Direct Marketing	458,627			474,509			523,572
Other	527,984			456,521			346,481
Total	$	5,532,282		$	5,593,952		$	6,571,746

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

(2) Impairment charges recorded in fiscal year 2009 consist of pretax charges of 1) $329.7 million for the writedown to fair value of goodwill, 2) $343.2 million for the writedown to fair value of the net carrying value of tradenames and 3) $30.3 million for the writedown to fair value of the net carrying value of certain long-lived assets.

For fiscal year 2008, we recorded $31.3 million pretax impairment charges related to the writedown to fair value of the Horchow tradename.

(3) For fiscal year 2008, other income represents a pension curtailment gain of $32.5 million as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007.

F-37

Table of Contents

The following table presents our revenues by merchandise category as a percentage of net sales:

	Years Ended
	July 31, 2010		August 1, 2009		August 2, 2008
Women’s Apparel	36	%	36	%	36	%
Women’s Shoes, Handbags and Accessories	22	%	21	%	20	%
Cosmetics and Fragrances	11	%	11	%	11	%
Men’s Apparel and Shoes	11	%	12	%	12	%
Designer and Precious Jewelry	11	%	11	%	12	%
Home Furnishings and Décor	7	%	7	%	8	%
Other	2	%	2	%	1	%
	100	%	100	%	100	%

NOTE 17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

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

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

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

F-38

Table of Contents

	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	—		688,771		78,061		—			766,832
Other current assets	—		134,566		9,630		—			144,196
Total current assets	—		1,146,103		88,350		—			1,234,453
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	$	5,506,625	$	1,955,732	$	(2,787,240	)	$	5,593,952
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	210,219	$	23,771	$	—		$	233,990
Accrued liabilities	—		253,676		62,136		—			315,812
Other current liabilities	—		26,617		—		—			26,617
Total current liabilities	—		490,512		85,907		—			576,419
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	$	5,506,625	$	1,955,732	$	(2,787,240	)	$	5,593,952

F-39

Table of Contents

	Fiscal year ended July 31, 2010
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	3,068,503		$	624,265		$	—		$	3,692,768
Cost of goods sold including buying and occupancy costs (excluding depreciation)	—			2,022,268			397,277			—			2,419,545
Selling, general and administrative expenses (excluding depreciation)	—			772,353			113,053			—			885,406
Income from credit card program, net	—			(54,400		)	(4,676		)	—			(59,076		)
Depreciation expense	—			125,955			15,884			—			141,839
Amortization of intangible assets and favorable lease commitments	—			60,359			12,900			—			73,259
Operating earnings	—			141,968			89,827			—			231,795
Interest expense, net	—			237,105			3			—			237,108
Intercompany royalty charges (income)	—			182,910			(182,910		)	—			—
Equity in loss (earnings) of subsidiaries	1,838			(272,734		)	—			270,896			—
(Loss) earnings before income taxes	(1,838		)	(5,313		)	272,734			(270,896		)	(5,313		)
Income tax benefit	—			(3,475		)	—			—			(3,475		)
Net (loss) earnings	$	(1,838	)	$	(1,838	)	$	272,734		$	(270,896	)	$	(1,838	)

	Fiscal year ended August 1, 2009
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	3,067,882		$	575,464		$	—		$	3,643,346
Cost of goods sold including buying and occupancy costs (excluding depreciation)	—			2,132,190			404,574			—			2,536,764
Selling, general and administrative expenses (excluding depreciation)	—			772,882			109,855			—			882,737
Income from credit card program, net	—			(45,272		)	(4,694		)	—			(49,966		)
Depreciation expense	—			133,604			17,155			—			150,759
Amortization of intangible assets and favorable lease commitments	—			60,359			12,344			—			72,703
Impairment charges	—			307,989			395,277			—			703,266
Operating loss	—			(293,870		)	(359,047		)	—			(652,917		)
Interest expense, net	—			235,567			7			—			235,574
Intercompany royalty charges (income)	—			195,079			(195,079		)	—			—
Equity in loss (earnings) of subsidiaries	668,046			163,975			—			(832,021		)	—
(Loss) earnings before income taxes	(668,046		)	(888,491		)	(163,975		)	832,021			(888,491		)
Income tax benefit	—			(220,445		)	—			—			(220,445		)
Net (loss) earnings	$	(668,046	)	$	(668,046	)	$	(163,975	)	$	832,021		$	(668,046	)

F-40

Table of Contents

	Fiscal year ended August 2, 2008
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	3,854,429		$	746,107		$	—		$	4,600,536
Cost of goods sold including buying and occupancy costs (excluding depreciation)	—			2,460,441			474,527			—			2,934,968
Selling, general and administrative expenses (excluding depreciation)	—			906,014			139,433			—			1,045,447
Income from credit card program, net	—			(59,131		)	(6,596		)	—			(65,727		)
Depreciation expense	—			129,812			18,599			—			148,411
Amortization of intangible assets and favorable lease commitments	—			60,360			11,832			—			72,192
Impairment charges	—			—			31,261			—			31,261
Other income	—			(32,450		)	—			—			(32,450		)
Operating earnings	—			389,383			77,051			—			466,434
Interest expense, net	—			239,795			10			—			239,805
Intercompany royalty charges (income)	—			273,584			(273,584		)	—			—
Equity in (earnings) loss of subsidiaries	(142,813		)	(350,625		)	—			493,438			—
Earnings (loss) before income taxes	142,813			226,629			350,625			(493,438		)	226,629
Income tax expense	—			83,816			—			—			83,816
Net earnings (loss)	$	142,813		$	142,813		$	350,625		$	(493,438	)	$	142,813

F-41

Table of Contents

	Fiscal year ended July 31, 2010
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net (loss) earnings	$	(1,838	)	$	(1,838	)	$	272,734		$	(270,896	)	$	(1,838	)
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization expense	—			205,011			28,784			—			233,795
Paid-in-kind interest	—			14,362			—			—			14,362
Deferred income taxes	—			(39,643		)	—			—			(39,643		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			6,973			187			—			7,160
Intercompany royalty income payable (receivable)	—			182,910			(182,910		)	—			—
Equity in loss (earnings) of subsidiaries	1,838			(272,734		)	—			270,896			—
Changes in operating assets and liabilities, net	—			169,410			(115,208		)	—			54,202
Net cash provided by operating activities	—			264,451			3,587			—			268,038
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(55,291		)	(3,402		)	—			(58,693		)
Net cash used for investing activities	—			(55,291		)	(3,402		)	—			(58,693		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(111,763		)	—			—			(111,763		)
Net cash used for financing activities	—			(111,763		)	—			—			(111,763		)
CASH AND CASH EQUIVALENTS
Increase during the period	—			97,397			185			—			97,582
Beginning balance	—			322,766			659			—			323,425
Ending balance	$	—		$	420,163		$	844		$	—		$	421,007

	Fiscal year ended August 1, 2009
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net (loss) earnings	$	(668,046	)	$	(668,046	)	$	(163,975	)	$	832,021		$	(668,046	)
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization expense	—			211,146			29,499			—			240,645
Deferred income taxes	—			(153,888		)	—			—			(153,888		)
Impairment charges	—			307,989			395,277			—			703,266
Paid-in-kind interest	—			38,082			—			—			38,082
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			10,208			(23		)	—			10,185
Intercompany royalty income payable (receivable)	—			195,079			(195,079		)	—			—
Equity in loss (earnings) of subsidiaries	668,046			163,975			—			(832,021		)	—
Changes in operating assets and liabilities, net	—			102,055			(61,486		)	—			40,569
Net cash provided by operating activities	—			206,600			4,213			—			210,813
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(96,995		)	(4,530		)	—			(101,525		)
Net cash used for investing activities	—			(96,995		)	(4,530		)	—			(101,525		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(1,611		)	—			—			(1,611		)
Debt issuance costs paid	—			(23,432		)	—			—			(23,432		)
Net cash used for financing activities	—			(25,043		)	—			—			(25,043		)
CASH AND CASH EQUIVALENTS
Increase (decrease) during the period	—			84,562			(317		)	—			84,245
Beginning balance	—			238,204			976			—			239,180
Ending balance	$	—		$	322,766		$	659		$	—		$	323,425

F-42

Table of Contents

	Fiscal year ended August 2, 2008
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net earnings (loss)	$	142,813		$	142,813		$	350,625		$	(493,438	)	$	142,813
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization expense	—			204,389			30,431			—			234,820
Deferred income taxes	—			(44,627		)	—			—			(44,627		)
Impairment of Horchow tradename	—			—			31,261			—			31,261
Gain on curtailment of defined benefit retirement obligations	—			(32,450		)	—			—			(32,450		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			21,677			320			—			21,997
Intercompany royalty income payable (receivable)	—			273,584			(273,584		)	—			—
Equity in (earnings) loss of subsidiaries	(142,813		)	(350,625		)	—			493,438			—
Changes in operating assets and liabilities, net	—			60,247			(128,736		)	—			(68,489		)
Net cash provided by operating activities	—			275,008			10,317			—			285,325
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(172,237		)	(11,215		)	—			(183,452		)
Purchases of short-term investments	—			(10,000		)	—			—			(10,000		)
Sales of short-term investments	—			10,000			—			—			10,000
Net cash used for investing activities	—			(172,237		)	(11,215		)	—			(183,452		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(3,900		)	—			—			(3,900		)
Net cash used for financing activities	—			(3,900		)	—			—			(3,900		)
CASH AND CASH EQUIVALENTS
Increase (decrease) during the period	—			98,871			(898		)	—			97,973
Beginning balance	—			139,333			1,874			—			141,207
Ending balance	$	—		$	238,204		$	976		$	—		$	239,180

Senior Notes and Senior Subordinated Notes. All of NMG’s obligations under the Senior Notes and the Senior Subordinated Notes, as well as its obligations under the Asset-Based Revolving Credit Facility and the Senior Secured Term Loan Facility, are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries (principally, Bergdorf Goodman, Inc. through which NMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust which holds legal title to certain real property and intangible assets used by the Company in conducting its operations). The guarantees by the Company and each subsidiary guarantor are full and unconditional and joint and several. Currently, NMG conducts no operations through subsidiaries that do not guarantee the Senior Notes or the Senior Subordinated Notes. Previously, the non-guarantor subsidiaries of NMG included an operating subsidiary domiciled in Canada providing support services to our Direct Marketing operation through January 2009.

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

(in thousands)	July 31, 2010		August 1, 2009
Total assets	$	—	$	332
Net assets	$	—	$	332

	Fiscal year ended
(in thousands)	July 31, 2010			August 1, 2009			August 2, 2008
Revenues	$	—		$	—		$	—
Net earnings (loss)	—			282			(1,066		)
Net cash used for operating activities	(32		)	(341		)	(875		)

F-43

Table of Contents

NOTE 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Fiscal year 2010

(in millions)	First Quarter		Second Quarter		Third Quarter		Fourth Quarter			Total
Revenues	$	868.9	$	1,102.4	$	895.2	$	826.3		$	3,692.8
Gross profit (1)	$	334.7	$	340.9	$	341.9	$	255.8		$	1,273.3
Net earnings (loss)	$	8.5	$	4.0	$	18.5	$	(32.8	)	$	(1.8	)

Fiscal year 2009

Revenues	$	985.8	$	1,079.4		$	810.1		$	768.0		$	3,643.3
Gross profit (1)	$	368.0	$	258.0		$	295.3		$	185.3		$	1,106.6
Net earnings (loss) (2)	$	12.9	$	(509.2	)	$	(3.1	)	$	(168.6	)	$	(668.0	)

(1) Gross profit includes revenues less cost of goods sold including buying and occupancy costs (excluding depreciation).

(2) For fiscal year 2009, net earnings (loss) include pretax impairment charges related to 1) $291.1 million for the writedown to fair value of goodwill, 2) $242.2 million for the writedown to fair value of the net carrying value of tradenames and 3) $26.8 million for the writedown to fair value of the net carrying value of certain long-lived assets recorded in the second quarter. In addition, pretax impairment charges of 1) $38.6 million for the writedown to fair value of goodwill, 2) $101.0 million for the writedown to fair value of the net carrying value of tradenames and 3) $3.5 million for the writedown to fair value of the net carrying value of certain long-lived assets were recorded in the fourth quarter.

F-44

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NEIMAN MARCUS, INC.


	By:	/S/ NELSON A. BANGS
		Nelson A. Bangs Senior Vice President and General Counsel

Dated: October 1, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ BURTON M. TANSKY	President and Chief Executive Officer, Director	October 1, 2010
Burton M. Tansky	President and Chief Executive Officer, Director

/s/ JAMES E. SKINNER	Executive Vice President and Chief Financial Officer (principal financial officer)
James E. Skinner		October 1, 2010


/s/ T. DALE STAPLETON	Vice President and Controller (principal accounting officer)	October 1, 2010
T. Dale Stapleton

/s/ DAVID A. BARR	Director	October 1, 2010
David A. Barr

/s/ JONATHAN COSLET	Director	October 1, 2010
Jonathan Coslet

/s/ JAMES G. COULTER	Director	October 1, 2010
James G. Coulter

/s/ JOHN G. DANHAKL	Director	October 1, 2010
John G. Danhakl

/s/ SIDNEY LAPIDUS	Director	October 1, 2010
Sidney Lapidus

/s/ KEWSONG LEE	Director	October 1, 2010
Kewsong Lee

/s/ CARRIE WHEELER	Director	October 1, 2010
Carrie Wheeler

Table of Contents

SCHEDULE II

Neiman Marcus, Inc.

Valuation and Qualifying Accounts and Reserves

(in thousands)

Three years ended July 31, 2010

Column A	Column B		Column C				Column D			Column E
			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts		Deductions			Balance at End of Period
Reserve for estimated sales returns
Year ended July 31, 2010	$	22,874	$	523,025	$	—	$	(520,732	)(A)	$	25,167

Year ended August 1, 2009	$	36,176	$	473,606	$	—	$	(486,908	)(A)	$	22,874

Year ended August 2, 2008	$	38,977	$	646,071	$	—	$	(648,872	)(A)	$	36,176

Reserves for self-insurance
Year ended July 31, 2010	$	35,510	$	63,391	$	—	$	(62,860	)(B)	$	36,041

Year ended August 1, 2009	$	44,132	$	61,597	$	—	$	(70,219	)(B)	$	35,510

Year ended August 2, 2008	$	44,544	$	57,655	$	—	$	(58,067	)(B)	$	44,132

(A) Gross margin on actual sales returns, net of commissions.

(B) Claims and expenses paid net of employee contributions.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Neiman Marcus Inactive 10-K2010 FY Annual report

Content analysis