Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

### **Forthe Quarterly Period Ended January 31, 2009**

### ** **

**OR**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

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

 

**Neiman Marcus, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**

(State or other jurisdiction of

incorporation or organization)     | ** ** | **20-3509435**

(I.R.S. Employer

Identification No.) |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------|
| ** **                                                                        | ** ** | ** **                                            |
| **1618 Main Street**

**Dallas, Texas**

(Address of principal executive offices) | ** ** | **75201**

(Zip code)                                 |

 

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

 

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

 

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

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

 

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

 

There were 1,013,082 shares of the registrant’s common stock, par value$.01 per share, outstanding at January 31, 2009.

 

 

 

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**NEIMAN MARCUS, INC.**

 

#### **INDEX**

 
|            |                                                                                                                             | **Page** |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------|----------|
| Part I.    | Financial Information                                                                                                            |     |
|            |                                                                                                                             |     |
|  Item  1.  | Condensed Consolidated Balance Sheets as of  January 31, 2009, August 2, 2008 and January 26, 2008                | 1        |
|            |                                                                                                                             |     |
|            | Condensed  Consolidated Statements of Operations for the Thirteen Weeks Ended  January 31, 2009 and January 26, 2008   | 2        |
|            |                                                                                                                             |     |
|            | Condensed Consolidated Statements of  Operations for the Twenty-Six Weeks Ended January 31, 2009 and  January 26, 2008 | 3        |
|            |                                                                                                                             |     |
|            | Condensed Consolidated Statements of Cash  Flows for the Twenty-Six Weeks Ended January 31, 2009 and  January 26, 2008 | 4        |
|            |                                                                                                                             |     |
|            | Notes to  Condensed Consolidated Financial Statements                                                                            | 5        |
|            |                                                                                                                             |     |
|  Item 2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      | 32       |
|            |                                                                                                                             |     |
|  Item  3.  | Quantitative and Qualitative Disclosures  About Market Risk                                                                      | 51       |
|            |                                                                                                                             |     |
|  Item  4.  | Controls and Procedures                                                                                                          | 52       |
|            |                                                                                                                             |     |
| Part II.   | Other  Information                                                                                                               |     |
|            |                                                                                                                             |     |
|  Item 1.   | Legal Proceedings                                                                                                                | 52       |
|            |                                                                                                                             |     |
|  Item 1A.  | Risk Factors                                                                                                                     | 52       |
|            |                                                                                                                             |     |
|  Item  1B. | Unresolved Staff Comments                                                                                                        | 60       |
|            |                                                                                                                             |     |
|  Item  2.  | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                     | 60       |
|            |                                                                                                                             |     |
|  Item  4.  | Submission of Matters to a Vote of Security  Holders                                                                             | 60       |
|            |                                                                                                                             |     |
|  Item 6.   | Exhibits                                                                                                                         | 60       |
|            |                                                                                                                             |     |
| Signatures      |                                                                                                                             | 65       |

 

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**NEIMANMARCUS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

** **
| **(in thousands, except shares)**                                                                                                                                                                            | ** ** | **January 31,  2009** | ** ** | **August 2,  2008** | ** ** | **January 26,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                                                  | ** ** | ** **                 | ** ** | ** **               | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                                                                  |       |                       |       |                     |       |                       |       |
| Current assets:                                                                                                                                                                                                             |       |                       |       |                     |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                                                  |       | $                          | 223,184    |                     | $          | 239,180                    |       | $ | 235,747 |   |
| Merchandise  inventories                                                                                                                                                                                                    |       | 840,331                    |       | 978,044                  |       | 885,210                    |       |
| Deferred income  taxes                                                                                                                                                                                                      |       | 32,659                     |       | 32,659                   |       | 39,728                     |       |
| Other current  assets                                                                                                                                                                                                       |       | 137,324                    |       | 113,776                  |       | 96,907                     |       |
| Total current  assets                                                                                                                                                                                                       |       | 1,233,498                  |       | 1,363,659                |       | 1,257,592                  |       |
|                                                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Property and  equipment, net                                                                                                                                                                                                |       | 1,031,285                  |       | 1,075,294                |       | 1,064,734                  |       |
| Goodwill and  intangible assets, net                                                                                                                                                                                        |       | 3,473,205                  |       | 4,042,617                |       | 4,113,202                  |       |
| Other assets                                                                                                                                                                                                                |       | 71,062                     |       | 75,249                   |       | 91,896                     |       |
| Total assets                                                                                                                                                                                                                |       | $                          | 5,809,050  |                     | $          | 6,556,819                  |       | $ | 6,527,424 |   |
|                                                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                              |       |                       |       |                     |       |                       |       |
| Current  liabilities:                                                                                                                                                                                                       |       |                       |       |                     |       |                       |       |
| Accounts payable                                                                                                                                                                                                            |       | $                          | 195,629    |                     | $          | 345,640                    |       | $ | 242,766 |   |
| Accrued  liabilities                                                                                                                                                                                                        |       | 365,409                    |       | 361,094                  |       | 412,339                    |       |
| Total current  liabilities                                                                                                                                                                                                  |       | 561,038                    |       | 706,734                  |       | 655,105                    |       |
|                                                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Long-term  liabilities:                                                                                                                                                                                                     |       |                       |       |                     |       |                       |       |
| Long-term debt                                                                                                                                                                                                              |       | 2,946,199                  |       | 2,946,102                |       | 2,946,004                  |       |
| Deferred income  taxes                                                                                                                                                                                                      |       | 750,027                    |       | 929,970                  |       | 962,712                    |       |
| Deferred real  estate credits, net                                                                                                                                                                                          |       | 90,188                     |       | 84,019                   |       | 75,381                     |       |
| Other long-term  liabilities                                                                                                                                                                                                |       | 368,019                    |       | 213,475                  |       | 240,388                    |       |
| Total long-term  liabilities                                                                                                                                                                                                |       | 4,154,433                  |       | 4,173,566                |       | 4,224,485                  |       |
|                                                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Common stock  (par value $0.01 per share, 5,000,000 shares authorized and 1,013,082 shares  issued and outstanding at January 31, 2009 and 1,012,919 shares issued and  outstanding at August 2, 2008 and January 26, 2008) |       | 10                         |       | 10                       |       | 10                         |       |
| Additional  paid-in capital                                                                                                                                                                                                 |       | 1,421,253                  |       | 1,418,473                |       | 1,415,397                  |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                       |       | (98,506                    | )          | (9,164                   | )          | (15,021                    | )          |
| Retained  (deficit) earnings                                                                                                                                                                                                |       | (229,178                   | )          | 267,200                  |       | 247,448                    |       |
| Total  shareholders’ equity                                                                                                                                                                                            |       | 1,093,579                  |       | 1,676,519                |       | 1,647,834                  |       |
| Total  liabilities and shareholders’ equity                                                                                                                                                                            |       | $                          | 5,809,050  |                     | $          | 6,556,819                  |       | $ | 6,527,424 |   |

* *

*  SeeNotes to Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **January 31,  2009**         | ** ** | **January 26,  2008** | ** ** |
| ** **                                                                        | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                  | 1,079,379  |   | $ | 1,373,855 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 821,403                            |       | 913,234 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 243,580                            |       | 292,572 |   |
| Income from  credit card program, net                                             |       | (10,187                            | )          | (19,269 | ) |
| Depreciation  expense                                                             |       | 39,112                             |       | 35,086 |   |
| Amortization of  customer lists                                                   |       | 13,568                             |       | 13,568 |   |
| Amortization of  favorable lease commitments                                      |       | 4,469                              |       | 4,385 |   |
| Impairment  charges                                                               |       | 560,159                            |       | — |   |
|                                                                              |       |                               |       |   |   |
| Operating (loss)  earnings                                                        |       | (592,725                           | )          | 134,279 |   |
|                                                                              |       |                               |       |   |   |
| Interest  expense, net                                                            |       | 58,581                             |       | 60,397 |   |
|                                                                              |       |                               |       |   |   |
| (Loss) earnings  before income taxes                                              |       | (651,306                           | )          | 73,882 |   |
|                                                                              |       |                               |       |   |   |
| Income tax  (benefit) expense                                                     |       | (142,050                           | )          | 29,579 |   |
|                                                                              |       |                               |       |   |   |
| Net (loss)  earnings                                                              |       | $                                  | (509,256   | ) | $ | 44,303 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **January 31,   2009**     | ** ** | **January 26,   2008** | ** ** |
|                                                                              |       |                                 |       |   |   |
| Revenues                                                                          |       | $                                    | 2,065,166  |   | $ | 2,506,098 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 1,439,146                            |       | 1,580,370 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 486,408                              |       | 564,548 |   |
| Income from  credit card program, net                                             |       | (23,187                              | )          | (36,563 | ) |
| Depreciation  expense                                                             |       | 77,711                               |       | 70,221 |   |
| Amortization of  customer lists                                                   |       | 27,135                               |       | 27,179 |   |
| Amortization of  favorable lease commitments                                      |       | 8,939                                |       | 8,770 |   |
| Impairment  charges                                                               |       | 560,159                              |       | — |   |
| Other income                                                                      |       | —                               |       | (32,450 | ) |
|                                                                              |       |                                 |       |   |   |
| Operating (loss)  earnings                                                        |       | (511,145                             | )          | 324,023 |   |
|                                                                              |       |                                 |       |   |   |
| Interest  expense, net                                                            |       | 116,426                              |       | 121,620 |   |
|                                                                              |       |                                 |       |   |   |
| (Loss) earnings  before income taxes                                              |       | (627,571                             | )          | 202,403 |   |
|                                                                              |       |                                 |       |   |   |
| Income tax  (benefit) expense                                                     |       | (131,193                             | )          | 79,342 |   |
|                                                                              |       |                                 |       |   |   |
| Net (loss)  earnings                                                              |       | $                                    | (496,378   | ) | $ | 123,061 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                   | ** ** | **Twenty-Six weeks ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **January 31,   2009**     | ** ** | **January 26,   2008** | ** ** |
| ** **                                                                                   | ** ** | ** **                           | ** ** | ** ** | ** ** |
| **CASH  FLOWS - OPERATING ACTIVITIES**                                                       |       |                                 |       |   |   |
| Net (loss)  earnings                                                                         |       | $                                    | (496,378   | ) | $ | 123,061 |   |
| Adjustments to  reconcile net (loss) earnings to net cash provided by operating activities:  |       |                                 |       |   |   |
| Depreciation and  amortization expense                                                       |       | 120,894                              |       | 113,279 |   |
| Impairment  charges                                                                          |       | 560,159                              |       | — |   |
| Deferred income  taxes                                                                       |       | (122,158                             | )          | (13,673 | ) |
| Gain on  curtailment of defined benefit retirement obligations                               |       | —                               |       | (32,450 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | 8,457                                |       | 14,568 |   |
|                                                                                         |       | 70,974                               |       | 204,785 |   |
| Changes in  operating assets and liabilities:                                                |       |                                 |       |   |   |
| Merchandise  inventories                                                                     |       | 137,713                              |       | 33,059 |   |
| Other current  assets                                                                        |       | (64                                  | )          | (3,370 | ) |
| Other assets                                                                                 |       | (3,415                               | )          | (5,616 | ) |
| Accounts payable  and accrued liabilities                                                    |       | (164,007                             | )          | (67,447 | ) |
| Deferred real  estate credits                                                                |       | 8,580                                |       | 23,375 |   |
| **Net  cash provided by operating activities**                                               |       | 49,781                               |       | 184,786 |   |
| **CASH  FLOWS – INVESTING ACTIVITIES**                                                  |       |                                 |       |   |   |
| Capital  expenditures                                                                        |       | (64,544                              | )          | (88,173 | ) |
| Purchases of  short-term investments                                                         |       | —                               |       | (10,000 | ) |
| Sales of  short-term investments                                                             |       | —                               |       | 10,000 |   |
| **Net  cash used for investing activities**                                                  |       | (64,544                              | )          | (88,173 | ) |
| **CASH  FLOWS – FINANCING ACTIVITIES**                                                  |       |                                 |       |   |   |
| Repayment of  borrowings                                                                     |       | (1,233                               | )          | (2,073 | ) |
| **Net  cash used for financing activities**                                                  |       | (1,233                               | )          | (2,073 | ) |
| **CASH  AND CASH EQUIVALENTS**                                                               |       |                                 |       |   |   |
| (Decrease)  increase during the period                                                       |       | (15,996                              | )          | 94,540 |   |
| Beginning  balance                                                                           |       | 239,180                              |       | 141,207 |   |
| Ending balance                                                                               |       | $                                    | 223,184    |   | $ | 235,747 |   |
|                                                                                         |       |                                 |       |   |   |
| **Supplemental  Schedule of Cash Flow Information**                                          |       |                                 |       |   |   |
|                                                                                         |       |                                 |       |   |   |
| Cash paid during  the period for:                                                            |       |                                 |       |   |   |
| Interest                                                                                     |       | $                                    | 111,129    |   | $ | 122,992 |   |
| Income taxes                                                                                 |       | $                                    | 3,206      |   | $ | 89,796 |   |
| Noncash  activities:                                                                         |       |                                 |       |   |   |
| Adjustments to  goodwill related to pre-acquisition tax contingencies                        |       | $                                    | —     |   | $ | 9,133 |   |

* *

*See Notesto Condensed Consolidated Financial Statements.*

 

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**NEIMANMARCUS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.**              Basis of Presentation

** **

We have prepared the accompanying unaudited condensed consolidatedfinancial statements in accordance with generally accepted accountingprinciples for interim financial information and the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Therefore, these financial statements shouldbe read in conjunction with our Annual Report on Form 10-K for the fiscal yearended August 2, 2008.

 

In our opinion, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments, consisting of normal recurringadjustments, necessary to present fairly our financial position, results ofoperations and cash flows for the applicable interim periods.  In addition, in the second quarter of fiscalyear 2009, we recorded significant impairment charges as more fully describedin Note 3.

 

The specialty retail industry is seasonal in nature, with a higher levelof sales typically generated in the fall and holiday selling seasons.  Due to seasonal and other factors, the resultsof operations for the second quarter of fiscal year 2009 are not necessarilycomparable to, or indicative of, results of any other interim period or for thefiscal year as a whole.

 

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

 

 Our fiscal year ends on theSaturday closest to July 31.  Allreferences to the second quarter of fiscal year 2009 relate to the thirteenweeks ended January 31, 2009.  All referencesto the second quarter of fiscal year 2008 relate to the thirteen weeks endedJanuary 26, 2008.  All references toyear-to-date fiscal 2009 relate to the twenty-six weeks ended January 31, 2009.  All references to year-to-date fiscal 2008relate to the twenty-six weeks ended January 26, 2008.

 

A detaileddescription of our critical accounting policies is included in our AnnualReport on Form 10-K for the fiscal year ended August 2, 2008.

 

Certain prior period balances have been reclassified to conform to thecurrent period presentation.

 

***Use of Estimates.* **We are required to make estimates and assumptionsabout future events in preparing financial statements in conformity withgenerally accepted accounting principles. These estimates and assumptions affect the amounts of assets,liabilities, revenues and expenses and the disclosure of gain and losscontingencies at the date of the unaudited condensed consolidated financialstatements.  While we believe that our pastestimates and assumptions have been materially accurate, our current estimatesare subject to change if different assumptions as to the outcome of futureevents were made. We evaluate our estimates and judgments on an ongoing basisand predicate those estimates and judgments on historical experience and onvarious other factors that we believe to be reasonable under thecircumstances.  We make adjustments toour assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannotbe determined with absolute certainty, actual results may differ from theestimates used in preparing the accompanying unaudited condensed consolidatedfinancial statements.

** **

 We believe the following critical accountingpolicies, among others, encompass the more significant judgments and estimatesused in the preparation of our financial statements:

 

·                  Recognition of revenues;

 

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

 

·                  Determination of impairment oflong-lived assets;

 

·                  Recognition ofadvertising and catalog costs;

 

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·                  Measurement ofliabilities related to our loyalty programs;

 

·                  Recognition ofincome taxes; and

 

·                  Measurement ofaccruals for general liability, workers' compensation and health insuranceclaims and pension and postretirement health care benefits.

 

***RecentAccounting Pronouncements. ***Asmore fully explained in Note 5, we adopted in the first quarter of fiscal year2009 Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS 157), which provides guidance for using fair value tomeasure certain assets and liabilities. SFAS 157 applies whenever another standard requires or permits assets orliabilities to be measured at fair value. The standard does not expand the use of fair value to any newcircumstances.

 

In February 2008, the FASB issued FASBStaff Position 157-2,*“*Effective Date of FASB StatementNo. 157” (FSP 157-2), which delays the effective date of SFAS 157for all nonfinancial assets and nonfinancial liabilities, except for items thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). FSP 157-2 is effective for fiscal yearsbeginning after November 15, 2008, or our fiscal year ending July 31, 2010.  We have not yet evaluated the impact ofadopting FSP 157-2 on our consolidated financial statements.

 

In the firstquarter of fiscal year 2009, we adopted Statement of Financial AccountingStandards No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (SFAS 159).  SFAS 159expands opportunities to use fair value measurement in financial reporting andpermits entities to choose to measure many financial instruments and certainother items at fair value.  We chose notto elect the fair value option.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(R),“Business Combinations” (SFAS 141(R)), which addresses the recognition andaccounting for identifiable assets acquired, liabilities assumed and non-controllinginterests in business combinations.  Inaddition, SFAS 141(R) changes the accounting treatment for certainacquisition-related items, including requirements to expenseacquisition-related costs as incurred, expense restructuring costs associatedwith an acquired business and recognize post-acquisition changes in taxuncertainties associated with a business combination as a component of taxexpense.  SFAS 141(R) is to be appliedprospectively to business combinations for which the acquisition date is on orafter December 15, 2008, or our fiscal year ending July 31, 2010.  Generally, the effect of SFAS 141(R) willdepend on future acquisitions.  However,the accounting for the resolution of any tax uncertainties remaining as ofAugust 1, 2009 related to the Acquisition will be subject to the provisions ofSFAS 141(R).  We have not yet evaluatedthe impact, if any, of adopting SFAS 141(R) on our consolidated financialstatements.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities” (SFAS 161).  SFAS 161 enhances current disclosures relatedto derivative instruments and hedging activities to provide adequateinformation about how derivative and hedging activities affect an entity’sfinancial position, financial performance and cash flows.  SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November15, 2008, or our third fiscal quarter ending May 2, 2009.  We have not yet evaluated the impact, if any,of adopting the disclosure requirements of SFAS 161.

 

In December 2008, the FASB issued FASBStaff Position 132(R)-1,*“*Employers’ Disclosures about PostretirementBenefit Plan Assets” (FSP 132(R)-1), which provides guidance on anemployer’s disclosures about plan assets of a defined benefit pension or otherpostretirement plan.  FSP 132(R)-1 iseffective for fiscal years ending after December 15, 2009, or our fiscal year endingJuly 31, 2010.  We have not yet evaluatedthe impact of adopting the disclosure requirements of FSP 132(R)-1.

 

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

 
| **(in thousands)**              | ** ** | **January 31,  2009** | ** ** | **August 2,  2008** | ** ** | **January 26,  2008** | ** ** |
|--------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                                 |       |                       |       |                     |       |                       |       |
| Goodwill                             |       | $                          | 1,320,099  |                     | $          | 1,611,191                  |       | $ | 1,614,273 |   |
| Tradenames                           |       | 1,336,808                  |       | 1,579,054                |       | 1,610,315                  |       |
| Customer lists,  net                 |       | 395,796                    |       | 422,931                  |       | 450,065                    |       |
| Favorable lease  commitments, net    |       | 420,502                    |       | 429,441                  |       | 438,549                    |       |
| Goodwill and  intangible assets, net |       | $                          | 3,473,205  |                     | $          | 4,042,617                  |       | $ | 4,113,202 |   |

 

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Goodwill and indefinite-lived intangible assets, such as tradenames,are not subject to amortization. Rather, recoverability of goodwill andindefinite-lived intangible assets is assessed annually and upon the occurrenceof certain events. The recoverability assessment requires us to make judgmentsand estimates regarding fair values. Fair values are determined using estimatedfuture cash flows, including growth assumptions for future revenues, grossmargin rates and other estimates. In addition, the fair values of ourtradenames are based, in part, on our estimates of royalties which could bederived from the licensing of such tradenames to third parties.  To the extent that our estimates are notrealized, future assessments could result in impairment charges.

 

Customer lists are amortized using the straight-line method over theirestimated useful lives, ranging from 5 to 24 years (weighted average life of 13years).  Favorable lease commitments areamortized straight-line over the remaining lives of the leases, ranging from 6to 49 years (weighted average life of 33 years).  Total estimated amortization of allacquisition-related intangible assets for the next five fiscal years iscurrently estimated as follows (in thousands):

 
| 2010 |   | $      | 73,259 |   |
|------|--------|--------|--------|--------|
| 2011 |   | 62,548 |   |
| 2012 |   | 50,123 |   |
| 2013 |   | 47,436 |   |
| 2014 |   | 46,881 |   |

 

During the fourth quarter of fiscal year 2008, we entered into anegotiated settlement with a state tax authority regarding a state non-filingposition which resulted in a reduction to goodwill of $3.0 million related tothe resolution of tax uncertainties that existed at the time of theAcquisition.

 

In the fourth quarter of fiscal year 2008, we recorded a $31.3 millionpretax impairment charge related to the writedown to fair value of the netcarrying value of the Horchow tradename based upon lower revenues and royaltyrate expectations with respect to the Horchow brand in light of currentoperating performance and future operating expectations.  Additionally, in the second quarter of fiscalyear 2009, we recorded a $12.1 million pretax impairment charge related to thewritedown to fair value of the net carrying value of the Horchowtradename.  At January 31, 2009, therecorded fair value of the Horchow tradename was $4.4 million.

 

As more fully described in Note 3, we recorded significant impairmentcharges in the second quarter of fiscal year 2009 to writedown our tradenamesand goodwill to estimate fair value.

 

**3.****              Impairmentof Long-Lived Assets**

 

In connection with the preparation of our consolidated financialstatements for the second quarter of fiscal year 2009, we concluded that it wasappropriate to test our long-lived assets for recoverability in light of thefollowing factors:

 

·                  Recentsignificant declines in the U.S. and international financial markets and theresulting impact of such events on current and anticipated future macroeconomicconditions and customer behavior;

 

·                  Thedetermination that these macroeconomic conditions are significantly impactingour current business operations as evidenced by the double digit decreases incomparable revenues we are currently experiencing; and

 

·                  Our expectationthat current business conditions and trends will continue for an extended period.

 

In connection with the review of our long-lived assets forrecoverability, we determined certain of our property and equipment, tradenamesand goodwill to be impaired and recorded the following impairment charges inthe second quarter of fiscal 2009, which are included in impairment charges inour condensed consolidated statements of operations:

 
| **(in thousands)** | ** ** | **Specialty  Retail stores** | ** ** | **Direct  Marketing** | ** ** | **Total** | ** ** |
|-------------------------|------------|-----------------------------------|------------|-----------------------|------------|-----------|------------|
|                    |       |                              |       |                  |       |      |       |
| Property and equipment  |       | $                                 | 26,821     |                  | $          | —    |       | $ | 26,821 |   |
| Tradenames              |       | 210,872                           |       | 31,374                |       | 242,246   |       |
| Goodwill                |       | 291,092                           |       | —                |       | 291,092   |       |
|                    |       | $                                 | 528,785    |                  | $          | 31,374    |       | $ | 560,159 |   |

 

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***Long-lived assets.***  The recoverability assessment with respect toour long-lived assets (consisting of property and equipment, customer lists andfavorable lease commitments) is performed at the store level.  This assessment is based upon the comparisonof the undiscounted cash flows anticipated to be generated from the store tothe net carrying value of the store assets. To the extent the store-level cash flows are not sufficient to recoverthe net carrying value of the store assets, the assets are impaired and writtendown to their estimated fair value based upon discounted future cashflows.  Based upon the review of ourstore-level assets conducted in the second quarter, we identified certainproperty and equipment to be impaired by $26.8 million.

 

The recoverability assessment related to store-level assets requiresjudgments and estimates of future revenues, gross margin rates and storeexpenses.  We base these estimates uponour past and expected future performance. We believe our estimates are appropriate in light of current marketconditions.  However, future impairmentcharges could be required if we do not achieve our current revenue or cash flowprojections.

 

***Tradenames.***  The recoverability assessment with respect toeach of the tradenames used in our operations requires us to estimate the fairvalue of the tradename as of the assessment date.  Such determination is made using discountedcash flow techniques.  Inputs to thevaluation model include:

 

·                  Future revenueand profitability projections associated with the tradename;

 

·                  Estimated marketroyalty rates that could be derived from the licensing of our tradenames tothird parties in order to establish the cash flows accruing to the benefit ofthe Company as a result of our ownership of our tradenames; and

 

·                  Rate used todiscount the estimated royalty cash flow projections to their present value (orestimated fair value).

 

Based upon the review of our tradenames in the second quarter of fiscalyear 2009, we determined certain of these tradenames were impaired and recordedimpairment charges aggregating $242.2 million. These impairment charges reflect 1) lower revenues and profitabilityprojections associated with our tradenames in the near term, 2) lower estimatedmarket royalty rate expectations in light of current general economicconditions as well as our lower near-term profitability projections and 3) ahigher rate (based upon the weighted average cost of capital) required todiscount our cash flow projections in light of current economic conditions andfinancial market considerations.  Webelieve our estimates are appropriate based upon current marketconditions.  However, future impairmentcharges could be required if we do not achieve our current revenue andprofitability projections, market royalty rates decrease or the weightedaverage cost of capital increases.  Wecurrently estimate that the fair value of our tradenames decreases byapproximately $238.7 million for each 0.5% decrease in market royalty rates andby $97.3 million for each 0.5% increase in the weighted average cost ofcapital.

 

***Goodwill.***  We assess the recoverability of the goodwillassociated with our Neiman Marcus stores, Bergdorf Goodman stores and DirectMarketing reporting units. Such determination is made using discounted cashflow techniques.  Inputs to the valuationmodel include:

 

·                  Estimated futurecash flows;

 

·                  Growthassumptions for future revenues as well as future gross margin rates, expenserates and other estimates; and

 

·                  Rate used todiscount our estimated future cash flow projections to their present value (orestimated fair value).

 

Based upon the review of our recorded goodwill balances in the secondquarter of fiscal year 2009, we determined the goodwill balances associatedwith our Specialty Retail stores were impaired and recorded impairment chargesaggregating $291.1 million.  Theseimpairment charges reflect 1) lower cash flow, revenue and profitabilityprojections associated with these operations and 2) a higher rate (based uponthe weighted average cost of capital) required to discount our cash flowprojections in light of current economic conditions and financial marketconsiderations.  We believe our estimatesare appropriate based upon current market conditions. However, futureimpairment charges could be required if we do not achieve our current cashflow, revenue and profitability projections or the weighted average cost ofcapital increases.  We currently estimatethat the fair value of our goodwill decreases by approximately $336.1 millionfor each 0.5% increase in the weighted average cost of capital.

 

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**4.****              Long-termDebt**

 

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

 
| **(in thousands)**           | ** ** | **Interest  Rate** | ** ** | **January 31,  2009** | ** ** | **August 2,  2008** | ** ** | **January 26,  2008** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                              |       |               |       |                       |       |                     |       |                       |       |
| Senior Secured Term Loan Facility |       | variable           |       | $                          | 1,625,000  |                     | $          | 1,625,000                  |       | $ | 1,625,000 |   |
| 2028 Debentures                   |       | 7.125%             |       | 121,199                    |       | 121,102                  |       | 121,004                    |       |
| Senior Notes (1)                  |       | 9.0%/9.75%         |       | 700,000                    |       | 700,000                  |       | 700,000                    |       |
| Senior Subordinated Notes         |       | 10.375%            |       | 500,000                    |       | 500,000                  |       | 500,000                    |       |
| Long-term debt                    |       |               |       | $                          | 2,946,199  |                     | $          | 2,946,102                  |       | $ | 2,946,004 |   |

 

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(1) As permitted for any interest period through October 15, 2010, we electedto pay interest by issuing additional Senior Notes at the interest rate of9.75% instead of paying interest in cash for the interest period commencing on January 15,2009 through April 14, 2009.  As aresult, we estimate that the principal amount of Senior Notes will increase by$20.5 million at April 14, 2009.

 

***Senior Secured Asset-Based Revolving CreditFacility.*** NMG’s senior secured Asset-Based Revolving Credit Facility providesfinancing of up to $600.0 million, subject to a borrowing base equal to atany time the lesser of 80% of eligible inventory (valued at the lower of costor market value) and 85% of net orderly liquidation value of the eligibleinventory, less certain reserves.  Inaddition, our ability to borrow and obtain letters of credit under thisfacility is limited by a minimum liquidity condition described below.

 

The Asset-Based Revolving Credit Facility provides that NMG has theright at any time to request up to $200.0 million of additionalcommitments, but the lenders are under no obligation to provide any suchadditional commitments; and any increase in commitments will be subject tocustomary conditions precedent. NMG’s ability to borrow under any increasedcommitments would still be limited by the amount of the borrowing base.

 

As of January 31, 2009, NMG had $576.2 million of unusedborrowing availability under the Asset-Based Revolving Credit Facility based ona borrowing base of over $600.0 million and after giving effect to$23.8 million used for letters of credit. The principal amount of the loans outstanding is due and payable in fullon October 6, 2010.

 

Borrowings under theAsset-Based Revolving Credit Facility bear interest at a rate per annum equalto, at NMG’s option, either (a) a base rate determined by reference to thehigher of (1) the prime rate of Deutsche Bank Trust Company Americas and (2) thefederal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. The applicablemargin is 0% with respect to base rate borrowings and up to 1.75% with respectto LIBOR borrowings. The applicable margin is subject to adjustment based onthe historical availability under the Asset-Based Revolving Credit Facility.  NMG is also required to pay a commitment feeof 0.375% per annum in respect of the unutilized commitments. If the averagerevolving loan utilization is 50% or more for any applicable period, thecommitment fee will be reduced to 0.250% for such period. NMG must also paycustomary letter of credit fees and agency fees.

 

All obligations under theAsset-Based Revolving Credit Facility are guaranteed by the Company and certainof NMG’s existing and future domestic subsidiaries (subsidiary guarantors). Asof January 31, 2009, the liabilities of NMG’s non-guarantor subsidiariestotaled approximately $1.7 million and the assets of NMG’s non-guarantorsubsidiaries aggregated approximately $1.2 million.  All obligations under NMG’s Asset-BasedRevolving Credit Facility, and the guarantees of those obligations, aresecured, subject to certain significant exceptions, by substantially all of theassets of the Company, NMG and the subsidiary guarantors.

 

TheAsset-Based Revolving Credit Facility contains a number of customaryaffirmative and negative covenants, restrictions and events of default, butdoes not require NMG to comply with any financial ratio maintenance covenants.

 

The covenantslimiting dividends and other restricted payments; investments, loans, advancesand acquisitions; and prepayments or redemptions of other indebtedness, eachpermit the restricted actions in an unlimited amount, subject to thesatisfaction of certain payment conditions, principally that NMG must have atleast $75.0 million of pro forma excess availability under the Asset-BasedRevolving Credit Facility and that NMG must be in pro forma compliance with thefixed charge coverage ratio described below. In addition, NMG is permitted to take such restricted actions regardlessof whether such conditions are satisfied, subject to a $30.0 millionshared basket that is available.

 

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Although theAsset-Based Revolving Credit Facility does not require NMG to comply with anyfinancial ratio maintenance covenants, if less than $60.0 million wereavailable to be borrowed under the Asset-Based Revolving Credit Facility at anytime, NMG would not be permitted to borrow additional amounts and obtainletters of credit (including amendments, renewals and extensions of letters ofcredit) unless its pro forma ratio of consolidated EBITDA to consolidated FixedCharges (as such terms are defined in the credit agreement) was at least 1.1 to1.0.  NMG’s Fixed Charge Coverage Ratiofor the four-quarter period ended January 31, 2009 was 1.1 to 1.0.  We anticipate that the Fixed Charge CoverageRatio may continue to decline through the remainder of fiscal year 2009, but wewould not expect any such decline to adversely affect our ability to borrow orobtain other extensions of credit under our Asset-Based Revolving CreditFacility because we do not expect our excess availability thereunder to fallbelow $60.0 million.

 

For a more detailed description of NMG’s Asset-Based Revolving CreditFacility, refer to our Annual Report on Form 10-K for the fiscal yearended August 2, 2008.

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG entered into acredit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility.  NMG voluntarily repaid $100.0 millionprincipal amount of the loans under its Senior Secured Term Loan Facility infiscal year 2006 and $250 million in fiscal year 2007.

 

At January 31,2009, borrowings under the Senior Secured Term Loan Facility bore interest at arate per annum equal to, at NMG’s option, either (a) a base ratedetermined by reference to the higher of (1) the prime rate of CreditSuisse and (2) the federal funds effective rate plus 1/2 of1% or (b) a LIBOR rate, subject to certain adjustments, in each case plusan applicable margin. The interest rate on the outstanding borrowings pursuantto the Senior Secured Term Loan Facility was 4.19% at January 31,2009.  The applicable margin is subjectto adjustment based on contractually defined debt coverage ratios.  At January 31, 2009, the applicablemargin with respect to base rate borrowings was 1.00% and the applicable marginwith respect to LIBOR borrowings was 2.00%.

 

The credit agreement governing the Senior Secured Term Loan Facilityrequires NMG to prepay outstanding term loans with 50% (which percentage willbe reduced to 25% if NMG’s total leverage ratio is less than a specified ratioand will be reduced to 0% if NMG’s total leverage ratio is less than aspecified ratio) of its annual excess cash flow (as defined in the creditagreement). For fiscal years 2008 and 2007, NMG was not required to prepay anyoutstanding term loans pursuant to the annual excess cash flow requirements.  If a change of control (as defined in thecredit agreement) occurs, NMG will be required to offer to prepay alloutstanding term loans, at a prepayment price equal to 101% of the principalamount to be prepaid, plus accrued and unpaid interest to the date ofprepayment. NMG also must offer to prepay outstanding term loans at 100% of theprincipal amount to be prepaid, plus accrued and unpaid interest, with theproceeds of certain asset sales under certain circumstances.

 

NMG may voluntarily prepay outstanding loans under the Senior SecuredTerm 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 theSenior Secured Term Loan Facility. The principal amount of the loansoutstanding is due and payable in full on April 6, 2013.

 

All obligations under the Senior Secured Term Loan Facility areunconditionally guaranteed by the Company and each direct and indirect domesticsubsidiary of NMG that guarantees the obligations of NMG under its Asset-BasedRevolving Credit Facility. All obligations under the Senior Secured Term LoanFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiary guarantors.

 

The credit agreement governing the Senior Secured Term Loan Facilitycontains a number of customary negative covenants that are substantiallysimilar to those governing the Senior Notes and additional covenants related tothe security arrangements for the Senior Secured Term Loan Facility. The creditagreement also contains customary affirmative covenants and events ofdefault.  For a more detailed descriptionof the Senior Secured Term Loan Facility, refer to our Annual Report on Form 10-Kfor the fiscal year ended August 2, 2008.

 

***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 securityinterest on certain collateral subject to liens granted under NMG’s SeniorSecured Credit Facilities. The 2028 Debentures are guaranteed on an unsecured,senior basis by the Company. NMG’s 2028 Debentures mature on June 1, 2028.For a more detailed description of the 2028 Debentures, refer to our AnnualReport on Form 10-K for the fiscal year ended August 2, 2008.

 

The fair value of the 2028 Debentures at January 31, 2009 wasapproximately $62.5 million.

 

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***Senior Notes.**** *NMG has$700.0 million aggregate principal amount of 9.0% / 9.75% Senior Notesunder a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015.

 

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 (CashInterest) or entirely by increasing the principal amount of the outstandingSenior Notes or by issuing additional Senior Notes (PIK Interest). CashInterest on the Senior Notes accrues at the rate of 9% per annum. PIK Intereston the Senior Notes accrues at the rate of 9.75% per annum. We negotiated forthe right to include the PIK feature in our Senior Notes relating to the PIKNotes because of our belief that this feature could be a useful tool to enhanceliquidity under appropriate circumstances. In the second quarter of fiscal year2009, given the dislocation in the financial markets and the uncertainty as towhen reasonable conditions will return, we believed that it was appropriate toutilize this feature, even though we had available borrowing capacity under our$600 million revolving credit facility. Accordingly, we elected to pay PIKInterest for the interest period commencing on January 15, 2009 andcontinuing through April 14, 2009 and will make such interest payment withthe issuance of additional Senior Notes at the PIK Interest rate of 9.75%instead of paying interest in cash.

 

Prior to the beginning of each eligible interest period in the future,we will evaluate whether to continue utilizing this PIK feature, taking intoaccount market conditions and other relevant factors at that time. After October 15,2010, we will make all interest payments on the Senior Notes entirely incash.  Interest on the Senior Notes ispayable quarterly in arrears on each January 15, April 15, July 15and October 15, commencing on January 15, 2006.

 

The Senior Notes are fully and unconditionally guaranteed, on a jointand several unsecured, senior basis, by each of NMG’s wholly-owned domesticsubsidiaries that guarantee NMG’s obligations under its Senior Secured CreditFacilities and by the Company. The Senior Notes and the guarantees thereof areNMG’s and the guarantors’ unsecured, senior obligations and rank (i) equalin the right of payment with all of NMG’s and the guarantors’ existing andfuture senior indebtedness, including any borrowings under NMG’s Senior SecuredCredit Facilities and the guarantees thereof and NMG’s 2028 Debentures; and (ii) seniorto all of NMG’s and its guarantors’ existing and future subordinatedindebtedness, including the Senior Subordinated Notes due 2015 and theguarantees thereof. The Senior Notes also are effectively junior in priority toNMG’s and its guarantors’ obligations under all secured indebtedness, includingNMG’s Senior Secured Credit Facilities, the 2028 Debentures, and any othersecured obligations of NMG, in each case, to the extent of the value of theassets securing such obligations. In addition, the Senior Notes arestructurally subordinated to all existing and future liabilities, includingtrade payables, of NMG’s subsidiaries that are not providing guarantees.

 

NMG is not required to make any mandatory redemption or sinking fundpayments with respect to the Senior Notes. The indenture governing the Senior Notes contains a number of customarynegative covenants and events of default. For a more detailed description of NMG’s Senior Notes, refer to ourAnnual Report on Form 10-K for the fiscal year ended August 2, 2008.

 

The fair value of NMG’s Senior Notes at January 31, 2009 wasapproximately $308.0 million.

 

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

 

The Senior Subordinated Notes are fully and unconditionally guaranteed,on a joint and several unsecured, senior subordinated basis, by each of NMG’swholly-owned domestic subsidiaries that guarantee NMG’s obligations under itsSenior Secured Credit Facilities and by the Company. The Senior SubordinatedNotes and the guarantees thereof are NMG’s and the guarantors’ unsecured,senior subordinated obligations and rank (i) junior to all of NMG’s andthe guarantors’ existing and future senior indebtedness, including the SeniorNotes and any borrowings under NMG’s Senior Secured Credit Facilities, and theguarantees thereof and NMG’s 2028 Debentures; (ii) equally with any of NMG’sand the guarantors’ future senior subordinated indebtedness; and (iii) seniorto any of NMG’s and the guarantors’ future subordinated indebtedness. Inaddition, the Senior Subordinated Notes are structurally subordinated to allexisting and future liabilities, including trade payables, of NMG’ssubsidiaries that are not providing guarantees.

 

NMG is not required to make any mandatory redemption or sinking fundpayments with respect to the Senior Subordinated Notes. The indenture governingthe Senior Subordinated Notes contains a number of customary negative covenantsand events of defaults.  For a moredetailed description of NMG’s Senior Subordinated Notes, refer to our AnnualReport on Form 10-K for the fiscal year ended August 2, 2008.

 

The fair value of NMG’s Senior Subordinated Notes at January 31,2009 was approximately $230.0 million.

 

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***Maturities of Long-Term Debt.***  At January 31, 2009, annual maturitiesof long-term debt during the next five fiscal years and thereafter are asfollows (in millions):

 
| 2010       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| 2013       |   | 1,625.0 |   |
| 2014       |   | —  |   |
| Thereafter |   | 1,321.2 |   |

 

The above table does not reflect either future excess cash flowprepayments, if any, that may be required under the Senior Secured Term LoanFacility or additional principal amounts under the Senior Notes that will beoutstanding as a result of our current PIK Interest election for the interestperiod commencing on January 15, 2009 and continuing through April 14,2009, or any future PIK Interest election that we may make through October 15,2010.

 

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

 
| ** **                        | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**           | ** ** | **January 31,  2009**         | ** ** | **January 26,  2008**           | ** ** | **January 31,  2009** | ** ** | **January 26,  2008** | ** ** |
|                              |       |                               |       |                                 |       |   |   |   |   |
| Senior Secured Term Loan Facility |       | $                                  | 23,941     |                                 | $          | 27,806 |   | $ | 47,871 |   | $ | 55,782 |   |
| 2028 Debentures                   |       | 2,227                              |       | 2,181                                |       | 4,453 |   | 4,365 |   |
| Senior Notes                      |       | 15,711                             |       | 15,453                               |       | 31,461 |   | 30,906 |   |
| Senior Subordinated Notes         |       | 13,122                             |       | 12,724                               |       | 26,091 |   | 25,448 |   |
| Amortization of debt issue costs  |       | 3,554                              |       | 3,554                                |       | 7,109 |   | 7,109 |   |
| Other                             |       | 865                                |       | 842                                  |       | 1,691 |   | 1,674 |   |
| Total interest expense            |       | 59,420                             |       | 62,560                               |       | 118,676 |   | 125,284 |   |
| Less:                             |       |                               |       |                                 |       |   |   |   |   |
| Interest income                   |       | 666                                |       | 1,433                                |       | 1,771 |   | 2,288 |   |
| Capitalized interest              |       | 173                                |       | 730                                  |       | 479 |   | 1,376 |   |
| Interest expense, net             |       | $                                  | 58,581     |                                 | $          | 60,397 |   | $ | 116,426 |   | $ | 121,620 |   |

 

**5.****              FairValue Measurements**

 

In the first quarter of fiscal year 2009, we adopted Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” (SFAS157), which provides guidance for using fair value to measure certain assetsand liabilities.  SFAS 157 applieswhenever another standard requires or permits assets or liabilities to bemeasured at fair value.  The standarddoes not expand the use of fair value to any new circumstances.

 

SFAS 157 defines fair value as the price that would be received uponsale of an asset or paid upon transfer of a liability in an orderly transactionbetween market participants at the measurement date and in the principal ormost advantageous market for that asset or liability. The fair value should becalculated based on assumptions that market participants would use in pricingthe 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.

 

In addition to defining fair value, SFAS 157 expands the disclosurerequirements around fair value and establishes a fair value hierarchy forvaluation inputs. The hierarchy prioritizes the inputs into three levels basedon the extent to which inputs used in measuring fair value are observable inthe market. Each fair value measurement is reported in one of thefollowing three levels:

 

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

 

·                  Level 2 — valuationinputs are based upon quoted prices for similar instruments in active markets,quoted prices for identical or similar instruments in markets that are not active,and model-based valuation techniques for which all

 

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significant assumptions are observable in themarket or can be corroborated by observable market data for substantially thefull term of the assets or liabilities.

 

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

 

We use derivative financial instruments to help manage our interestrate risk.  Effective December 6,2005, NMG entered into floating to fixed interest rate swap agreements for anaggregate notional amount of $1,000.0 million to limit our exposure tointerest rate increases related to a portion of our floating rate indebtedness.The interest rate swap agreements terminate after five years.  The fair values of the interest rate swapsare estimated using industry standard valuation models using market-basedobservable inputs including interest rate curves (Level 2).  At January 31, 2009, the net fair valueof NMG’s interest rate swap agreements was a loss of approximately$61.7 million, which amount is included in other long-term liabilities.

 

As of the effective date, NMG designated the interest rate swaps ascash flow hedges. As a result, changes in the fair value of NMG’s swaps arerecorded subsequent to the effective date as a component of accumulated othercomprehensive loss.  At January 31,2009, we have $38.1 million of unrecognized losses, net of tax, on our interestrate swap agreements included in accumulated other comprehensive loss.

 

As a result of the swap agreements, NMG’s effective fixed interestrates as to the $1,000.0 million in floating rate indebtedness willcurrently range from 6.809% to 6.983% per quarter through 2010 and result in anaverage fixed rate of 6.878%.

 

**6.****              EmployeeBenefit Plans**

 

***Description of Benefit Plans.***  We sponsor a defined benefit pension plan(Pension Plan) and an unfunded supplemental executive retirement plan (SERPPlan) which provides certain employees additional pension benefits. Benefitsunder both plans are based on the employees’ years of service and compensationover defined periods of employment. As more fully described below, we frozebenefits offered under our Pension and SERP Plans effective December 31,2007.

 

Retirees and active employees hired prior to March 1, 1989 areeligible for certain limited postretirement health care benefits(Postretirement Plan) if they meet certain service and minimum agerequirements. The cost of these benefits is accrued during the years in whichan employee provides services.

 

We also maintain defined contribution plans consisting of a 401(k) Planand, in connection with the redesign of our long-term benefits effective January 1,2008 as more fully described below, a retirement savings plan (RSP) and definedcontribution supplemental executive retirement plan (Defined Contribution SERPPlan).  Employees make contributions tothe 401(k) Plan and RSP and we match an employee’s contribution up to amaximum of 6% of the employee’s compensation subject to statutory limitationsfor a potential maximum match of 50% of employee contributions to the 401(k) Planand 75% of employee contributions to the RSP. We also sponsor an unfunded keyemployee deferred compensation plan, which provides certain employees withadditional benefits.

 

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

 
| **(in thousands)**                  | ** ** | **January 31,  2009** | ** ** | **August 2,  2008** | ** ** | **January 26,  2008** | ** ** |
|------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | ** **                 | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Pension Plan                             |       | $                          | 153,968    |                     | $          | 40,802                     |       | $ | 40,228 |   |
| SERP Plan                                |       | 87,863                     |       | 77,566                   |       | 81,177                     |       |
| Postretirement Plan                      |       | 20,150                     |       | 20,336                   |       | 22,855                     |       |
|                                     |       | 261,981                    |       | 138,704                  |       | 144,260                    |       |
| Less: current portion                    |       | (4,165                     | )          | (4,165                   | )          | (4,019                     | )          |
| Long-term portion of benefit obligations |       | $                          | 257,816    |                     | $          | 134,539                    |       | $ | 140,241 |   |

 

In light of current market conditions and the significant decline inour pension assets and in accordance with the provisions of Statement ofFinancial Accounting Standards No. 87, “Employers’ Accounting for Pensions”,we remeasured both our plan assets and benefit obligations during the secondquarter of fiscal year 2009.  Weincreased our recorded liability for projected benefit obligations payable bythe Pension Plan by $111.2 million and by the SERP Plan by $8.5 million toequal their unfunded

 

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status.  The $111.2 millionincrease in our Pension Plan obligation was driven by a decrease in the fairvalue of our pension plan assets of approximately $66 million and a decrease inour discount rate from 6.75% at August 2, 2008 to 6.10% at January 31,2009, which resulted in increases in the obligations related to our PensionPlan and SERP Plan aggregating approximately $42 million.  As of January 31, 2009, we have $60.2million (net of taxes of $39.1 million) of adjustments to such obligationsrecorded as increases to accumulated other comprehensive loss.

 

In the first quarter of fiscal year 2008, we reduced our recordedliability for projected benefit obligations payable by the Pension Plan by$26.1 million and by the SERP Plan by $6.3 million to reflect the impact offreezing benefits provided under these plans as of December 31, 2007, asmore fully described below.  The totalone-time pension curtailment gain of $32.5 million was recorded as other incomein our condensed consolidated statements of operations.

 

***Plan Redesign.***On September 7, 2007, our Board of Directors approved certain changes toour long-term benefits program. Effective January 1, 2008, we offered a new, enhanced retirementsavings plan (RSP) subject to participants’ elections to participate (as morefully described below).  For associatesparticipating in the RSP:

 

·                  Participants’ balancesin our 401(k) Plan were automatically transferred to the RSP.

 

·                  Our matchingcontributions to the RSP increased to a potential maximum 75% of the employeecontributions (up to a 6% deferral) from the potential maximum 50% to the 401(k) Plan(subject to IRS limit of $15,500 in 2008 for employee contributions).

 

·                  Our matchingcontributions vest to employees in two years as compared to the three yearvesting under the 401(k) Plan.

 

·                  All current employees,who did not participate in the former 401(k) Plan, and future employeesare automatically enrolled in the RSP at a salary deferral rate of 3% onceeligibility requirements have been met.

 

Concurrent with the implementation of the RSP and the DefinedContribution SERP Plan, we froze benefits offered under our Pension and SERPPlans for most employees.  Employees witha minimum of ten years of service and whose age plus years of service equaledat least 65 (Rule of 65) as of December 31, 2007 were allowed either1) to continue participation in our 401(k) Plan and Pension Plan (and SERPPlan, if eligible) or 2) to freeze the benefits earned under the Pension Plan(and SERP Plan, if eligible) and participate in the RSP. No employee who metvesting requirements forfeited benefits earned prior to December 31, 2007.

 

In connection with the redesign of our long-term benefits program, werecorded a one-time pension curtailment gain of $32.5 million (recorded asother income in our condensed consolidated statements of operations) in thefirst quarter of fiscal year 2008 to reflect the impact of freezing benefitsprovided under the Pension and SERP Plans as of December 31, 2007.

 

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

 
| ** **                     | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|--------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**        | ** ** | **January 31,  2009**         | ** ** | **January 26,  2008**           | ** ** | **January 31,  2009** | ** ** | **January 26,  2008** | ** ** |
| Pension Plan:                  |       |                               |       |                                 |       |   |   |   |   |
| Service cost                   |       | $                                  | 1,444      |                                 | $          | 3,409 |   | $ | 2,875 |   | $ | 7,803 |   |
| Interest cost                  |       | 5,932                              |       | 5,549                                |       | 11,970 |   | 11,390 |   |
| Expected return on plan assets |       | (6,373                             | )          | (6,019                               | )          | (12,880 | ) | (12,178 | ) |
| Net amortization of gains      |       | —                             |       | 188                                  |       | — |   | — |   |
| Pension Plan expense           |       | $                                  | 1,003      |                                 | $          | 3,127 |   | $ | 1,965 |   | $ | 7,015 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Curtailment gain               |       | $                                  | —     |                                 | $          | — |   | $ | — |   | $ | 26,113 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| SERP Plan:                     |       |                               |       |                                 |       |   |   |   |   |
| Service cost                   |       | $                                  | 164        |                                 | $          | 378 |   | $ | 326 |   | $ | 846 |   |
| Interest cost                  |       | 1,302                              |       | 1,203                                |       | 2,638 |   | 2,473 |   |
| SERP Plan expense              |       | $                                  | 1,466      |                                 | $          | 1,581 |   | $ | 2,964 |   | $ | 3,319 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Curtailment gain               |       | $                                  | —     |                                 | $          | — |   | $ | — |   | $ | 6,337 |   |
|                           |       |                               |       |                                 |       |   |   |   |   |
| Postretirement Plan:           |       |                               |       |                                 |       |   |   |   |   |
| Service cost                   |       | $                                  | 23         |                                 | $          | 31 |   | $ | 46 |   | $ | 62 |   |
| Interest cost                  |       | 336                                |       | 339                                  |       | 672 |   | 678 |   |
| Net amortization of losses     |       | 70                                 |       | 137                                  |       | 141 |   | 274 |   |
| Postretirement Plan expense    |       | $                                  | 429        |                                 | $          | 507 |   | $ | 859 |   | $ | 1,014 |   |

 

***Funding Policy andPlan Assets.*** Our policy is to fund the Pension Plan at or above the minimum requiredby law. We were not required to make contributions to the Pension Plan duringfiscal year 2008. However, in the third quarter of fiscal year 2008, we made avoluntary $15.0 million contribution to our Pension Plan. Based upon currentlyavailable information, we will not be required to make significantcontributions to the Pension Plan during fiscal year 2009.

 

**7.****              IncomeTaxes**

 

Our effective income tax rate for year-to-date fiscal 2009 was 20.9%compared to 39.2% for year-to-date fiscal 2008. No income tax benefit exists related to the $291.1 million of goodwillimpairment charges recorded in the second quarter of fiscal year 2009.  Excluding the impact of the goodwillimpairment charges, our effective income tax rate was 39.0% for year-to-datefiscal 2009.

 

We adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year2008.  FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.

 

The cumulative effect of adopting FIN 48 resulted in a net increase toour accruals for uncertain tax positions of $9.1 million for the derecognitionof certain tax benefits previously recorded. This increase to our accruals wasoffset by a corresponding increase to goodwill as these uncertainties existedat the time of the Acquisition.  At August 2,2008, the gross amount of unrecognized tax benefits was $21.3 million, of which$1.7 million would impact our effective tax rate, if recognized.  We classify interest and penalties as acomponent of income tax (benefit) expense and our liability for accruedinterest and penalties was $9.5 million as of August 2, 2008. There wereno material changes to our unrecognized tax benefits during either the first orsecond quarters of fiscal year 2009.

 

We file income tax returns in the U.S. federal jurisdiction and variousstate and local jurisdictions.  The IRSis now examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofJanuary 31, 2009 are sufficient to cover any potential assessments to bemade by the IRS upon the completion of their examinations. We will continue tomonitor the progress of the IRS examinations and review our recorded taxliabilities for potential audit assessments. With respect to state and local jurisdictions, with limited exceptions,the Company and its subsidiaries are no longer subject to income tax audits

 

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for fiscal years before 2004. During the fourth quarter of fiscal year 2008, we entered into anegotiated settlement with a state tax authority regarding a state non-filingposition which resulted in a reduction to our gross unrecognized tax benefitsof $7.2 million and a corresponding decrease to goodwill of $3.0 millionrelated to the resolution of uncertainties that existed at the time of theAcquisition. We believe it is reasonably possible that additional adjustmentsin the amounts of our unrecognized tax benefits could occur within the next 12months as a result of settlements with tax authorities.  At this time, we do not believe suchadjustments will have a material impact on our consolidated financialstatements.

 

**8.****              Stock-BasedCompensation**

 

The Company has approved equity-based management arrangements whichauthorize equity awards to be granted to certain management employees for up to87,992.0 shares of the common stock of the Company.  Options generally vest over four to fiveyears and expire 10 years from the date of grant.

 

A summary of the status of our stock option plan as of January 31,2009, August 2, 2008 and January 26, 2008 and changes during theperiods ended on these dates is as follows:

 
| ** **                           | ** ** | **January 31, 2009** | ** ** | **August 2, 2008**           | ** ** | **January 26, 2008** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **Shares**                     | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares**                     | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of period   |       | 83,146.6                       |       | $                                      | 1,553      |                           | 83,634.3   |   | $ | 1,430 |   | 83,634.3 |   | $ | 1,430 |   |
| Granted                              |       | —                         |       | —                                 |       | 260.0                          |       | 2,684 |   | 260.0 |   | 2,684 |   |
| Exercised                            |       | (854.5                         | )          | 1,684                                  |       | —                         |       | — |   | — |   | — |   |
| Forfeited                            |       | (2,481.4                       | )          | 1,606                                  |       | (747.7                         | )          | 1,597 |   | — |   | — |   |
| Outstanding at end of period         |       | 79,810.7                       |       | $                                      | 1,546      |                           | 83,146.6   |   | $ | 1,553 |   | 83,894.3 |   | $ | 1,434 |   |
| Options exercisable at end of period |       | 55,945.5                       |       | $                                      | 1,431      |                           | 46,684.4   |   | $ | 1,375 |   | 40,653.1 |   | $ | 1,385 |   |

 

The exercise price of approximately 50% of our options escalate at a10% compound rate per year until the earlier to occur of (i) exercise, (ii) thefifth anniversary of the date of grant or (iii) the occurrence of a changein control. However, in the event the Sponsors cause the sale of shares of theCompany to an unaffiliated entity, the exercise price will cease to accrete atthe time of the sale with respect to a pro rata portion of the accretingoptions.

 

All grantsof stock options have an exercise price equal to the fair market value of ourcommon stock on the date of grant. Because we are privately held and there is no public market for ourcommon stock, the fair market value of our common stock is determined by ourCompensation Committee at the time option grants are awarded.  In determining the fair value of our commonstock, the Compensation Committee considers such factors as the Company’sactual and projected financial results, the principal amount of the Company’sindebtedness, valuations of the Company performed by third parties and otherfactors it believes are material to the valuation process.

 

We use the Black-Scholes option-pricing model to determine the fairvalue of our options as of the date of grant in accordance with the provisionsof SFAS 123(R).  A summary of fiscal year2008 grants and fair value assumptions is as follows:

 
| ** **                              | ** ** | **Fiscal Year 2008 Grants** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **Fair  Value  Options**                   | ** ** | **Accreting  Exercise  Price  Options** | ** ** |
| Options Granted                         |       | 130.0                                      |       | 130.0 |   |
| Exercise Price at January 31, 2009 |       | $                                          | 2,684      |   | $ | 2,952 |   |
| Term                                    |       | 5                                          |       | 5 |   |
| Volatility                              |       | 30.0                                       | %          | 30.0 | % |
| Risk-Free Rate                          |       | 3.5                                        | %          | 3.5 | % |
| Dividend  Yield                         |       | —                                     |       | — |   |
| Fair Value                              |       | $                                          | 882        |   | $ | 433 |   |

 

Expected volatility is based on a combination of NMG’s historicalvolatility adjusted for our leverage and estimates of implied volatility of ourpeer group.

 

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We recognize compensation expense for stock options on a straight-linebasis over the vesting period.  Werecognized non-cash stock compensation expense of $3.0 million in bothyear-to-date fiscal 2009 and year-to-date fiscal 2008, which is included inselling, general and administrative expenses. At January 31, 2009,unearned non-cash stock-based compensation that we expect to recognize asexpense over the next five years aggregates approximately$8.9 million.

 

**9.****              Transactionswith Sponsors**

 

Pursuant to a management services agreement with affiliates of theSponsors, and in exchange for on-going consulting and management advisoryservices that are provided to us by the Sponsors and their affiliates,affiliates of the Sponsors receive an aggregate annual management fee equal tothe lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10 million.Affiliates of the Sponsors also receive reimbursement for out-of-pocketexpenses incurred by them or their affiliates in connection with servicesprovided pursuant to the agreement. These management fees are payable quarterlyin arrears.  We recorded management feesof $5.2 million during year-to-date fiscal 2009 and $6.3 million duringyear-to-date fiscal 2008, which are included in selling, general andadministrative expenses in the condensed consolidated statements of operations.

 

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

 

**10.****       Incomefrom Credit Card Program, Net**

 

Pursuant to a long-term marketing and servicing alliance with HSBC BankNevada, N.A. and HSBC Private Label Corporation (formerly known as HouseholdCorporation) (collectively referred to as HSBC), HSBC offers credit cards andnon-card payment plans and bears substantially all credit risk with respect tosales transacted on the cards bearing our brands. We receive ongoing paymentsfrom HSBC related to credit card sales and compensation for marketing andservicing activities (HSBC Program Income). We recognize HSBC Program Income when earned.

 

On April 21, 2008, we entered into an amendment to the ProgramAgreement, dated as of June 8, 2005, with HSBC. The amendment, among otherthings, provides for 1) the allocation between HSBC and NMG of additionalincome, if any, to be generated from the credit card program as a result ofcertain changes made to the Program Agreement and 2) the allocation of certaincredit card losses between HSBC and NMG. Credit losses allocable to NMG are based upon a percentage of lossesincurred as a percentage of credit sales and subject to a contractual limit,which limits our loss exposure to a maximum of 0.3% of credit sales from April 1,2008 to June 30, 2010.  As a resultof current higher delinquencies and losses on consumer indebtednesses in lightof current economic conditions, losses are currently allocable to NMG at themaximum contractual limit.  As a result,we recorded a charge of approximately $3.1 million during the second quarter offiscal year 2009 and $5.3 million during year-to-date fiscal 2009 for ourallocable portion of credit card losses, which is included as a reduction toHSBC Program Income. As of January 31, 2009, our reserve for credit cardlosses aggregated $6.0 million.

 

**11.****       Commitmentsand Contingencies**

 

***Long-term Incentive Plan.***  The Company has a long-term incentive plan(Long-term Incentive Plan) that provides for a cash incentive payable upon achange of control, as defined, subject to the attainment of certain performanceobjectives to certain employees.  Performanceobjectives and targets are based on cumulative EBITDA percentages for threeyear periods beginning in fiscal year 2006. Earned awards for each completed performance period will be credited toa book account and will earn interest at a contractually defined annual rateuntil the award is paid.  Awards will bepaid within 30 days of a change of control or the first day there is a publicmarket of at least 20% of total outstanding common stock.  As of January 31, 2009, the vestedparticipant balance in the Long-Term Incentive Plan aggregated $3.5 million.

 

***Cash Incentive Plan. ***The Company alsohas a cash incentive plan (Cash Incentive Plan) to aid in the retention ofcertain key executives.  The CashIncentive Plan provides for the creation of a $14 million cash bonus pool. Eachparticipant in the Cash Incentive Plan will be entitled to a cash bonus uponthe earlier to occur of a change of control or an initial public offering, asdefined in the Cash Incentive Plan, provided that the internal rate of returnto the Sponsors is positive.

 

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***Litigation.***  We are currently involved in various legalactions and proceedings that arose in the ordinary course of business. Webelieve that any liability arising as a result of these actions and proceedingswill not have a material adverse effect on our financial position, results ofoperations or cash flows.

 

**12.****Accumulated OtherComprehensive Loss**

 

The following table shows the components of accumulated othercomprehensive loss (amounts are recorded net of related income taxes):

 
| **(in thousands)**                    | ** ** | **January 31,  2009** | ** ** | **August 2,  2008** | ** ** | **January 26,  2008** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                                       |       |                       |       |                     |       |                       |       |
| Unrealized loss on financial instruments   |       | $                          | (38,114    | )                        | $          | (21,755                    | )          | $ | (31,052 | ) |
| Change in unfunded benefit obligations     |       | (60,221                    | )          | 12,302                   |       | 15,709                     |       |
| Other                                      |       | (171                       | )          | 289                      |       | 322                        |       |
| Total accumulated other comprehensive loss |       | $                          | (98,506    | )                        | $          | (9,164                     | )          | $ | (15,021 | ) |

 
| **(in thousands)**                                                   | ** ** | **Twenty-Six  weeks ended  January 31,  2009** | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Net (loss) earnings from condensed  consolidated statements of operations |       | $                                                        | (496,378   | )                                                        | $          | 123,061 |   |
| Change in unrealized (loss) gain on  financial instruments                |       | (16,359                                                  | )          | (34,785                                                  | )          |
| Change in unfunded benefit obligations                                    |       | (72,523                                                  | )          | —                                                   |       |
| Other                                                                     |       | (460                                                     | )          | (1,465                                                   | )          |
| Total comprehensive (loss) income for the  period                         |       | $                                                        | (585,720   | )                                                        | $          | 86,811 |   |

 

**13.****Segment Reporting**

 

We have identified two reportable segments: Specialty Retail stores andDirect Marketing. The Specialty Retail stores segment includes all NeimanMarcus and Bergdorf Goodman retail stores, including Neiman Marcus clearancestores. The Direct Marketing segment conducts both online and print catalogoperations under the Neiman Marcus, Bergdorf Goodman and Horchow brandnames.  Both the Specialty Retail storesand Direct Marketing segments derive their revenues from the sales of high-endfashion apparel, accessories, cosmetics and fragrances from leading designers,precious and fashion jewelry and decorative home accessories.

 

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

 

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The followingtables set forth the information for our reportable segments:

 
| ** **                                                      | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **January 31,  2009**         | ** ** | **January 26,  2008**           | ** ** | **January 31,  2009** | ** ** | **January 26,  2008** | ** ** |
| ** **                                                      | ** ** | ** **                         | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                        |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail stores                                         |       | $                                  | 870,537    |                                 | $          | 1,136,324 |   | $ | 1,697,663 |   | $ | 2,097,921 |   |
| Direct Marketing                                                |       | 208,842                            |       | 237,531                              |       | 367,503 |   | 408,177 |   |
| Total                                                           |       | $                                  | 1,079,379  |                                 | $          | 1,373,855 |   | $ | 2,065,166 |   | $ | 2,506,098 |   |
|                                                            |       |                               |       |                                 |       |   |   |   |   |
| OPERATING (LOSS) EARNINGS                                       |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail stores                                         |       | $                                  | (13,861    | )                                    | $          | 127,917 |   | $ | 80,575 |   | $ | 293,499 |   |
| Direct Marketing                                                |       | 14,677                             |       | 41,968                               |       | 34,038 |   | 65,230 |   |
| Corporate expenses                                              |       | (15,345                            | )          | (17,653                              | )          | (29,525 | ) | (31,207 | ) |
| Amortization of customer lists and  favorable lease commitments |       | (18,037                            | )          | (17,953                              | )          | (36,074 | ) | (35,949 | ) |
| Impairment charges (1)                                          |       | (560,159                           | )          | —                               |       | (560,159 | ) | — |   |
| Other income (2)                                                |       | —                             |       | —                               |       | — |   | 32,450 |   |
| Total                                                           |       | $                                  | (592,725   | )                                    | $          | 134,279 |   | $ | (511,145 | ) | $ | 324,023 |   |
|                                                            |       |                               |       |                                 |       |   |   |   |   |
| CAPITAL EXPENDITURES                                            |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail stores                                         |       | $                                  | 27,820     |                                 | $          | 36,421 |   | $ | 57,646 |   | $ | 76,610 |   |
| Direct Marketing                                                |       | 3,263                              |       | 5,714                                |       | 6,898 |   | 11,563 |   |
| Total                                                           |       | $                                  | 31,083     |                                 | $          | 42,135 |   | $ | 64,544 |   | $ | 88,173 |   |
|                                                            |       |                               |       |                                 |       |   |   |   |   |
| DEPRECIATION EXPENSE                                            |       |                               |       |                                 |       |   |   |   |   |
| Specialty Retail stores                                         |       | $                                  | 32,787     |                                 | $          | 30,331 |   | $ | 65,735 |   | $ | 60,262 |   |
| Direct Marketing                                                |       | 4,922                              |       | 3,776                                |       | 9,234 |   | 7,821 |   |
| Other                                                           |       | 1,403                              |       | 979                                  |       | 2,742 |   | 2,138 |   |
| Total                                                           |       | $                                  | 39,112     |                                 | $          | 35,086 |   | $ | 77,711 |   | $ | 70,221 |   |

 
| ** **                                            | ** ** | **January 31,  2009** | ** ** | **January 26,  2008** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ASSETS                                                |       |                       |       |                       |       |
| Tangible assets of Specialty Retail stores            |       | $                          | 1,849,025  |                       | $          | 1,895,607 |   |
| Tangible assets of Direct Marketing                   |       | 154,139                    |       | 175,161                    |       |
| Corporate assets:                                     |       |                       |       |                       |       |
| Intangible assets related to Specialty  Retail stores |       | 2,988,393                  |       | 3,550,983                  |       |
| Intangible assets related to Direct  Marketing        |       | 484,812                    |       | 562,219                    |       |
| Other                                                 |       | 332,681                    |       | 343,454                    |       |
| Total                                                 |       | $                          | 5,809,050  |                       | $          | 6,527,424 |   |

 

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| (1)    | Impairment charges recorded in the second quarter of fiscal year 2009  consist of pretax charges of 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. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | For year-to-date fiscal 2008, other income represents a one-time  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.                                                                                                                                                           |

 

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**14. Condensed Consolidating Financial Information (with respect to NMG’sobligations under the Senior Notes and theSenior Subordinated Notes)**

 

All of NMG’s obligations under the Senior Notes and the SeniorSubordinated Notes, as well as its obligations under the Asset-Based RevolvingCredit Facility and the Senior Secured Term Loan Facility, are guaranteed bythe Company and certain of NMG’s existing and future domestic subsidiaries(principally, Bergdorf Goodman, Inc. through which NMG conducts theoperations of its Bergdorf Goodman stores and NM Nevada Trust which holds legaltitle to certain real property and intangible assets used by the Company inconducting its operations). The guarantees by the Company and each subsidiaryguarantor are full and unconditional and joint and several.  Currently, the Company’s non-guarantorsubsidiaries consist principally of an operating subsidiary domiciled in Canadaproviding support services to our Direct Marketing operations.

 

The following condensed consolidating financial information representsthe financial information of Neiman Marcus, Inc. and its wholly-ownedsubsidiary guarantors, prepared on the equity basis of accounting. Theinformation is presented in accordance with the requirements of Rule 3-10under the Securities and Exchange Commission’s Regulation S-X. Thefinancial information may not necessarily be indicative of results ofoperations, cash flows or financial position had the subsidiary guarantorsoperated as independent entities.

 
| ** **                                      | ** ** | **January 31, 2009** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 221,527 |   | $ | 656 |   | $ | 1,001 |   | $ | — |   | $ | 223,184 |   |
| Merchandise inventories                         |       | —                         |       | 744,180 |   | 96,151 |   | — |   | — |   | 840,331 |   |
| Other current assets                            |       | —                         |       | 159,832 |   | 9,904 |   | 247 |   | — |   | 169,983 |   |
| Total current assets                            |       | —                         |       | 1,125,539 |   | 106,711 |   | 1,248 |   | — |   | 1,233,498 |   |
| Property and equipment, net                     |       | —                         |       | 901,460 |   | 129,825 |   | — |   | — |   | 1,031,285 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,610,216 |   | 1,862,989 |   | — |   | — |   | 3,473,205 |   |
| Other assets                                    |       | —                         |       | 69,166 |   | 1,896 |   | — |   | — |   | 71,062 |   |
| Investments in subsidiaries                     |       | 1,093,579                      |       | 2,004,967 |   | — |   | — |   | (3,098,546 | ) | — |   |
| Total assets                                    |       | $                              | 1,093,579  |   | $ | 5,711,348 |   | $ | 2,101,421 |   | $ | 1,248 |   | $ | (3,098,546 | ) | $ | 5,809,050 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 173,182 |   | $ | 22,446 |   | $ | 1 |   | $ | — |   | $ | 195,629 |   |
| Accrued liabilities                             |       | —                         |       | 292,503 |   | 72,131 |   | 775 |   | — |   | 365,409 |   |
| Total current liabilities                       |       | —                         |       | 465,685 |   | 94,577 |   | 776 |   | — |   | 561,038 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,946,199 |   | — |   | — |   | — |   | 2,946,199 |   |
| Deferred income taxes                           |       | —                         |       | 750,027 |   | — |   | — |   | — |   | 750,027 |   |
| Other long-term liabilities                     |       | —                         |       | 455,858 |   | 1,381 |   | 968 |   | — |   | 458,207 |   |
| Total long-term liabilities                     |       | —                         |       | 4,152,084 |   | 1,381 |   | 968 |   | — |   | 4,154,433 |   |
| Total shareholders’ equity                 |       | 1,093,579                      |       | 1,093,579 |   | 2,005,463 |   | (496 | ) | (3,098,546 | ) | 1,093,579 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,093,579  |   | $ | 5,711,348 |   | $ | 2,101,421 |   | $ | 1,248 |   | $ | (3,098,546 | ) | $ | 5,809,050 |   |

 

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| ** **                                      | ** ** | **August 2, 2008** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                            | —     |   | $ | 238,204 |   | $ | 601 |   | $ | 375 |   | $ | — |   | $ | 239,180 |   |
| Merchandise inventories                         |       | —                       |       | 884,808 |   | 93,236 |   | — |   | — |   | 978,044 |   |
| Other current assets                            |       | —                       |       | 137,738 |   | 8,697 |   | — |   | — |   | 146,435 |   |
| Total current assets                            |       | —                       |       | 1,260,750 |   | 102,534 |   | 375 |   | — |   | 1,363,659 |   |
| Property and equipment, net                     |       | —                       |       | 939,522 |   | 134,940 |   | 832 |   | — |   | 1,075,294 |   |
| Goodwill and intangible assets, net             |       | —                       |       | 1,889,445 |   | 2,153,172 |   | — |   | — |   | 4,042,617 |   |
| Other assets                                    |       | —                       |       | 75,249 |   | — |   | — |   | — |   | 75,249 |   |
| Investments in subsidiaries                     |       | 1,676,519                    |       | 2,288,802 |   | — |   | — |   | (3,965,321 | ) | — |   |
| Total assets                                    |       | $                            | 1,676,519  |   | $ | 6,453,768 |   | $ | 2,390,646 |   | $ | 1,207 |   | $ | (3,965,321 | ) | $ | 6,556,819 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                            | —     |   | $ | 311,994 |   | $ | 33,593 |   | $ | 53 |   | $ | — |   | $ | 345,640 |   |
| Accrued liabilities                             |       | —                       |       | 291,047 |   | 69,930 |   | 117 |   | — |   | 361,094 |   |
| Total current liabilities                       |       | —                       |       | 603,041 |   | 103,523 |   | 170 |   | — |   | 706,734 |   |
| Long-term liabilities:                          |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                       |       | 2,946,102 |   | — |   | — |   | — |   | 2,946,102 |   |
| Deferred income taxes                           |       | —                       |       | 929,970 |   | — |   | — |   | — |   | 929,970 |   |
| Other long-term liabilities                     |       | —                       |       | 298,136 |   | (642 | ) | — |   | — |   | 297,494 |   |
| Total long-term liabilities                     |       | —                       |       | 4,174,208 |   | (642 | ) | — |   | — |   | 4,173,566 |   |
| Total shareholders’ equity                 |       | 1,676,519                    |       | 1,676,519 |   | 2,287,765 |   | 1,037 |   | (3,965,321 | ) | 1,676,519 |   |
| Total liabilities and shareholders’ equity |       | $                            | 1,676,519  |   | $ | 6,453,768 |   | $ | 2,390,646 |   | $ | 1,207 |   | $ | (3,965,321 | ) | $ | 6,556,819 |   |

 

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| ** **                                      | ** ** | **January 26, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 234,321 |   | $ | 881 |   | $ | 545 |   | $ | — |   | $ | 235,747 |   |
| Merchandise inventories                         |       | —                         |       | 784,541 |   | 100,662 |   | 7 |   | — |   | 885,210 |   |
| Other current assets                            |       | —                         |       | 122,839 |   | 9,571 |   | 3,681 |   | 544 |   | 136,635 |   |
| Total current assets                            |       | —                         |       | 1,141,701 |   | 111,114 |   | 4,233 |   | 544 |   | 1,257,592 |   |
| Property and equipment, net                     |       | —                         |       | 925,987 |   | 136,681 |   | 2,066 |   | — |   | 1,064,734 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,922,766 |   | 2,190,436 |   | — |   | — |   | 4,113,202 |   |
| Other assets                                    |       | —                         |       | 91,808 |   | 88 |   | — |   | — |   | 91,896 |   |
| Investments in subsidiaries                     |       | 1,647,834                      |       | 2,320,138 |   | — |   | — |   | (3,967,972 | ) | — |   |
| Total assets                                    |       | $                              | 1,647,834  |   | $ | 6,402,400 |   | $ | 2,438,319 |   | $ | 6,299 |   | $ | (3,967,428 | ) | $ | 6,527,424 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 196,748 |   | $ | 41,145 |   | $ | 4,329 |   | $ | 544 |   | $ | 242,766 |   |
| Accrued liabilities                             |       | —                         |       | 332,656 |   | 79,626 |   | 57 |   | — |   | 412,339 |   |
| Total current liabilities                       |       | —                         |       | 529,404 |   | 120,771 |   | 4,386 |   | 544 |   | 655,105 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,946,004 |   | — |   | — |   | — |   | 2,946,004 |   |
| Deferred income taxes                           |       | —                         |       | 962,712 |   | — |   | — |   | — |   | 962,712 |   |
| Other long-term liabilities                     |       | —                         |       | 316,446 |   | (677 | ) | — |   | — |   | 315,769 |   |
| Total long-term liabilities                     |       | —                         |       | 4,225,162 |   | (677 | ) | — |   | — |   | 4,224,485 |   |
| Total shareholders’ equity                 |       | 1,647,834                      |       | 1,647,834 |   | 2,318,225 |   | 1,913 |   | (3,967,972 | ) | 1,647,834 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,647,834  |   | $ | 6,402,400 |   | $ | 2,438,319 |   | $ | 6,299 |   | $ | (3,967,428 | ) | $ | 6,527,424 |   |

 

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| ** **                                                                        | ** ** | **Thirteen weeks ended January 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 923,020 |   | $ | 156,359 |   | $ | — |   | $ | — |   | $ | 1,079,379 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                             |       | 694,798 |   | 125,374 |   | 1,231 |   | — |   | 821,403 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                             |       | 214,592 |   | 30,434 |   | (1,446 | ) | — |   | 243,580 |   |
| Income from credit card program, net                                              |       | —                                                             |       | (9,023 | ) | (1,164 | ) | — |   | — |   | (10,187 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 34,310 |   | 4,154 |   | 648 |   | — |   | 39,112 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                             |       | 15,090 |   | 2,947 |   | — |   | — |   | 18,037 |   |
| Impairment charges                                                                |       | —                                                             |       | 275,871 |   | 284,288 |   | — |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                                             |       | (302,618 | ) | (289,674 | ) | (433 | ) | — |   | (592,725 | ) |
| Interest expense, net                                                             |       | —                                                             |       | 58,579 |   | 2 |   | — |   | — |   | 58,581 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 58,889 |   | (58,889 | ) | — |   | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 509,256                                                            |       | 231,220 |   | — |   | — |   | (740,476 | ) | — |   |
| (Loss) earnings before income taxes                                               |       | (509,256                                                           | )          | (651,306 | ) | (230,787 | ) | (433 | ) | 740,476 |   | (651,306 | ) |
| Income tax benefit                                                                |       | —                                                             |       | (142,050 | ) | — |   | — |   | — |   | (142,050 | ) |
| Net (loss) earnings                                                               |       | $                                                                  | (509,256   | ) | $ | (509,256 | ) | $ | (230,787 | ) | $ | (433 | ) | $ | 740,476 |   | $ | (509,256 | ) |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 1,167,217 |   | $ | 206,638 |   | $ | — |   | $ | — |   | $ | 1,373,855 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                             |       | 772,879 |   | 140,169 |   | 186 |   | — |   | 913,234 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | —                                                             |       | 255,531 |   | 37,487 |   | (446 | ) | — |   | 292,572 |   |
| Income from credit card program, net                                              |       | —                                                             |       | (17,506 | ) | (1,763 | ) | — |   | — |   | (19,269 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 30,679 |   | 4,300 |   | 107 |   | — |   | 35,086 |   |
| Amortization of customer lists and favorable  lease commitments                   |       | —                                                             |       | 15,060 |   | 2,893 |   | — |   | — |   | 17,953 |   |
| Operating earnings                                                                |       | —                                                             |       | 110,574 |   | 23,552 |   | 153 |   | — |   | 134,279 |   |
| Interest expense, net                                                             |       | —                                                             |       | 60,394 |   | 3 |   | — |   | — |   | 60,397 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 83,143 |   | (83,143 | ) | — |   | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (44,303                                                            | )          | (106,845 | ) | — |   | — |   | 151,148 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 44,303                                                             |       | 73,882 |   | 106,692 |   | 153 |   | (151,148 | ) | 73,882 |   |
| Income tax expense                                                                |       | —                                                             |       | 29,579 |   | — |   | — |   | — |   | 29,579 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 44,303     |   | $ | 44,303 |   | $ | 106,692 |   | $ | 153 |   | $ | (151,148 | ) | $ | 44,303 |   |

 

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| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 1,740,743 |   | $ | 324,423 |   | $ | — |   | $ | — |   | $ | 2,065,166 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                               |       | 1,213,886 |   | 223,873 |   | 1,387 |   | — |   | 1,439,146 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                               |       | 427,744 |   | 60,424 |   | (1,760 | ) | — |   | 486,408 |   |
| Income from credit card program, net                                              |       | —                                                               |       | (20,556 | ) | (2,631 | ) | — |   | — |   | (23,187 | ) |
| Depreciation expense                                                              |       | —                                                               |       | 68,625 |   | 8,380 |   | 706 |   | — |   | 77,711 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                               |       | 30,179 |   | 5,895 |   | — |   | — |   | 36,074 |   |
| Impairment charges                                                                |       | —                                                               |       | 275,871 |   | 284,288 |   | — |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                                               |       | (255,006 | ) | (255,806 | ) | (333 | ) | — |   | (511,145 | ) |
| Interest expense, net                                                             |       | —                                                               |       | 116,422 |   | 4 |   | — |   | — |   | 116,426 |   |
| Intercompany royalty charges (income)                                             |       | —                                                               |       | 115,719 |   | (115,719 | ) | — |   | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 496,378                                                              |       | 140,424 |   | — |   | — |   | (636,802 | ) | — |   |
| (Loss) earnings before income taxes                                               |       | (496,378                                                             | )          | (627,571 | ) | (140,091 | ) | (333 | ) | 636,802 |   | (627,571 | ) |
| Income tax benefit                                                                |       | —                                                               |       | (131,193 | ) | — |   | — |   | — |   | (131,193 | ) |
| Net (loss) earnings                                                               |       | $                                                                    | (496,378   | ) | $ | (496,378 | ) | $ | (140,091 | ) | $ | (333 | ) | $ | 636,802 |   | $ | (496,378 | ) |

 
| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 2,108,676 |   | $ | 397,422 |   | $ | — |   | $ | — |   | $ | 2,506,098 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                               |       | 1,330,577 |   | 249,414 |   | 379 |   | — |   | 1,580,370 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                               |       | 492,555 |   | 72,951 |   | (958 | ) | — |   | 564,548 |   |
| Income from credit card program, net                                              |       | —                                                               |       | (32,941 | ) | (3,622 | ) | — |   | — |   | (36,563 | ) |
| Depreciation expense                                                              |       | —                                                               |       | 60,961 |   | 9,050 |   | 210 |   | — |   | 70,221 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                               |       | 30,119 |   | 5,830 |   | — |   | — |   | 35,949 |   |
| Other income                                                                      |       | —                                                               |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Operating earnings                                                                |       | —                                                               |       | 259,855 |   | 63,799 |   | 369 |   | — |   | 324,023 |   |
| Interest expense, net                                                             |       | —                                                               |       | 121,614 |   | 6 |   | — |   | — |   | 121,620 |   |
| Intercompany royalty charges (income)                                             |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (123,061                                                             | )          | (220,124 | ) | — |   | — |   | 343,185 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 123,061                                                              |       | 202,403 |   | 219,755 |   | 369 |   | (343,185 | ) | 202,403 |   |
| Income tax expense                                                                |       | —                                                               |       | 79,342 |   | — |   | — |   | — |   | 79,342 |   |
| Net earnings (loss)                                                               |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 219,755 |   | $ | 369 |   | $ | (343,185 | ) | $ | 123,061 |   |

 

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| ** **                                                                                   | ** ** | **Twenty-Six weeks ended January 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING  ACTIVITIES**                                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss)  earnings                                                                         |       | $                                                                    | (496,378   | ) | $ | (496,378 | ) | $ | (140,091 | ) | $ | (333 | ) | $ | 636,802 |   | $ | (496,378 | ) |
| Adjustments to  reconcile net (loss) earnings to net cash provided by operating activities:  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization expense                                                       |       | —                                                               |       | 105,913 |   | 14,275 |   | 706 |   | — |   | 120,894 |   |
| Deferred income  taxes                                                                       |       | —                                                               |       | (122,158 | ) | — |   | — |   | — |   | (122,158 | ) |
| Impairment  charges                                                                          |       | —                                                               |       | 275,871 |   | 284,288 |   | — |   | — |   | 560,159 |   |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | —                                                               |       | 7,698 |   | 127 |   | 632 |   | — |   | 8,457 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                               |       | 115,719 |   | (115,719 | ) | — |   | — |   | — |   |
| Equity in loss  (earnings) of subsidiaries                                                   |       | 496,378                                                              |       | 140,424 |   | — |   | — |   | (636,802 | ) | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                               |       | 18,139 |   | (38,953 | ) | (379 | ) | — |   | (21,193 | ) |
| Net cash provided  by operating activities                                                   |       | —                                                               |       | 45,228 |   | 3,927 |   | 626 |   | — |   | 49,781 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | —                                                               |       | (60,672 | ) | (3,872 | ) | — |   | — |   | (64,544 | ) |
| Net cash used for  investing activities                                                      |       | —                                                               |       | (60,672 | ) | (3,872 | ) | — |   | — |   | (64,544 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                               |       | (1,233 | ) | — |   | — |   | — |   | (1,233 | ) |
| Net cash used for  financing activities                                                      |       | —                                                               |       | (1,233 | ) | — |   | — |   | — |   | (1,233 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                               |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease)  increase during the period                                                       |       | —                                                               |       | (16,677 | ) | 55 |   | 626 |   | — |   | (15,996 | ) |
| Beginning balance                                                                            |       | —                                                               |       | 238,204 |   | 601 |   | 375 |   | — |   | 239,180 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 221,527 |   | $ | 656 |   | $ | 1,001 |   | $ | — |   | $ | 223,184 |   |

 
| ** **                                                                                   | ** ** | **Twenty-Six weeks ended January 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 219,755 |   | $ | 369 |   | $ | (343,185 | ) | $ | 123,061 |   |
| Adjustments to  reconcile net earnings (loss) to net cash provided by operating activities:  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization expense                                                       |       | —                                                               |       | 98,189 |   | 14,880 |   | 210 |   | — |   | 113,279 |   |
| Deferred income  taxes                                                                       |       | —                                                               |       | (13,673 | ) | — |   | — |   | — |   | (13,673 | ) |
| 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 |       | —                                                               |       | 14,605 |   | (37 | ) | — |   | — |   | 14,568 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   | — |   |
| Equity in  (earnings) loss of subsidiaries                                                   |       | (123,061                                                             | )          | (220,124 | ) | — |   | — |   | 343,185 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                               |       | 55,281 |   | (74,488 | ) | (792 | ) | — |   | (19,999 | ) |
| Net cash provided  by (used for) operating activities                                        |       | —                                                               |       | 180,851 |   | 4,148 |   | (213 | ) | — |   | 184,786 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | —                                                               |       | (83,790 | ) | (4,463 | ) | 80 |   | — |   | (88,173 | ) |
| Purchases of  short-term investments                                                         |       | —                                                               |       | (10,000 | ) | — |   | — |   | — |   | (10,000 | ) |
| Sales of  short-term investments                                                             |       | —                                                               |       | 10,000 |   | — |   | — |   | — |   | 10,000 |   |
| Net cash (used  for) provided by investing activities                                        |       | —                                                               |       | (83,790 | ) | (4,463 | ) | 80 |   | — |   | (88,173 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                               |       | (2,073 | ) | — |   | — |   | — |   | (2,073 | ) |
| Net cash used for  financing activities                                                      |       | —                                                               |       | (2,073 | ) | — |   | — |   | — |   | (2,073 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                               |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Increase (decrease)  during the period                                                       |       | —                                                               |       | 94,988 |   | (315 | ) | (133 | ) | — |   | 94,540 |   |
| Beginning balance                                                                            |       | —                                                               |       | 139,333 |   | 1,196 |   | 678 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 234,321 |   | $ | 881 |   | $ | 545 |   | $ | — |   | $ | 235,747 |   |

 

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**15. Condensed Consolidating Financial Information (with respect toNMG’s obligations under the 2028 Debentures)**

 

All of NMG’s obligations under the 2028 Debentures are guaranteed bythe Company. The guarantee by the Company is full and unconditional and jointand several. Currently, the Company’s non-guarantor subsidiaries consistprincipally of Bergdorf Goodman, Inc. through which NMG conducts theoperations of its Bergdorf Goodman stores and NM Nevada Trust which holds legaltitle to certain real property and intangible assets used by NMG in conductingits operations.

 

The following condensed consolidating financial information representsthe financial information of Neiman Marcus, Inc. and its non-guarantorsubsidiaries, prepared on the equity basis of accounting. The information ispresented in accordance with the requirements of Rule 3-10 under theSecurities and Exchange Commission’s Regulation S-X. The financial informationmay not necessarily be indicative of results of operations, cash flows orfinancial position had the non-guarantor subsidiaries operated as independententities.

 
| ** **                                      | ** ** | **January 31, 2009** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 221,527 |   | $ | 1,657 |   | $ | — |   | $ | 223,184 |   |
| Merchandise inventories                         |       | —                         |       | 744,180 |   | 96,151 |   | — |   | 840,331 |   |
| Other current assets                            |       | —                         |       | 159,832 |   | 10,151 |   | — |   | 169,983 |   |
| Total current assets                            |       | —                         |       | 1,125,539 |   | 107,959 |   | — |   | 1,233,498 |   |
| Property and equipment, net                     |       | —                         |       | 901,460 |   | 129,825 |   | — |   | 1,031,285 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,610,216 |   | 1,862,989 |   | — |   | 3,473,205 |   |
| Other assets                                    |       | —                         |       | 69,166 |   | 1,896 |   | — |   | 71,062 |   |
| Investments in subsidiaries                     |       | 1,093,579                      |       | 2,004,967 |   | — |   | (3,098,546 | ) | — |   |
| Total assets                                    |       | $                              | 1,093,579  |   | $ | 5,711,348 |   | $ | 2,102,669 |   | $ | (3,098,546 | ) | $ | 5,809,050 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 173,182 |   | $ | 22,447 |   | $ | — |   | $ | 195,629 |   |
| Accrued liabilities                             |       | —                         |       | 292,503 |   | 72,906 |   | — |   | 365,409 |   |
| Total current liabilities                       |       | —                         |       | 465,685 |   | 95,353 |   | — |   | 561,038 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,946,199 |   | — |   | — |   | 2,946,199 |   |
| Deferred income taxes                           |       | —                         |       | 750,027 |   | — |   | — |   | 750,027 |   |
| Other long-term liabilities                     |       | —                         |       | 455,858 |   | 2,349 |   | — |   | 458,207 |   |
| Total long-term liabilities                     |       | —                         |       | 4,152,084 |   | 2,349 |   | — |   | 4,154,433 |   |
| Total shareholders’ equity                 |       | 1,093,579                      |       | 1,093,579 |   | 2,004,967 |   | (3,098,546 | ) | 1,093,579 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,093,579  |   | $ | 5,711,348 |   | $ | 2,102,669 |   | $ | (3,098,546 | ) | $ | 5,809,050 |   |

 

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| ** **                                      | ** ** | **August 2, 2008** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                  | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                         |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                         |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                            | —     |   | $ | 238,204 |   | $ | 976 |   | $ | — |   | $ | 239,180 |   |
| Merchandise inventories                         |       | —                       |       | 884,808 |   | 93,236 |   | — |   | 978,044 |   |
| Other current assets                            |       | —                       |       | 137,738 |   | 8,697 |   | — |   | 146,435 |   |
| Total current assets                            |       | —                       |       | 1,260,750 |   | 102,909 |   | — |   | 1,363,659 |   |
| Property and equipment, net                     |       | —                       |       | 939,522 |   | 135,772 |   | — |   | 1,075,294 |   |
| Goodwill and intangible assets, net             |       | —                       |       | 1,889,445 |   | 2,153,172 |   | — |   | 4,042,617 |   |
| Other assets                                    |       | —                       |       | 75,249 |   | — |   | — |   | 75,249 |   |
| Investments in subsidiaries                     |       | 1,676,519                    |       | 2,288,802 |   | — |   | (3,965,321 | ) | — |   |
| Total assets                                    |       | $                            | 1,676,519  |   | $ | 6,453,768 |   | $ | 2,391,853 |   | $ | (3,965,321 | ) | $ | 6,556,819 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                         |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                            | —     |   | $ | 311,994 |   | $ | 33,646 |   | $ | — |   | $ | 345,640 |   |
| Accrued liabilities                             |       | —                       |       | 291,047 |   | 70,047 |   | — |   | 361,094 |   |
| Total current liabilities                       |       | —                       |       | 603,041 |   | 103,693 |   | — |   | 706,734 |   |
| Long-term liabilities:                          |       |                         |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                       |       | 2,946,102 |   | — |   | — |   | 2,946,102 |   |
| Deferred income taxes                           |       | —                       |       | 929,970 |   | — |   | — |   | 929,970 |   |
| Other long-term liabilities                     |       | —                       |       | 298,136 |   | (642 | ) | — |   | 297,494 |   |
| Total long-term liabilities                     |       | —                       |       | 4,174,208 |   | (642 | ) | — |   | 4,173,566 |   |
| Total shareholders’ equity                 |       | 1,676,519                    |       | 1,676,519 |   | 2,288,802 |   | (3,965,321 | ) | 1,676,519 |   |
| Total liabilities and shareholders’ equity |       | $                            | 1,676,519  |   | $ | 6,453,768 |   | $ | 2,391,853 |   | $ | (3,965,321 | ) | $ | 6,556,819 |   |

 

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| ** **                                      | ** ** | **January 26, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 234,321 |   | $ | 1,426 |   | $ | — |   | $ | 235,747 |   |
| Merchandise inventories                         |       | —                         |       | 784,541 |   | 100,669 |   | — |   | 885,210 |   |
| Other current assets                            |       | —                         |       | 122,839 |   | 13,252 |   | 544 |   | 136,635 |   |
| Total current assets                            |       | —                         |       | 1,141,701 |   | 115,347 |   | 544 |   | 1,257,592 |   |
| Property and equipment, net                     |       | —                         |       | 925,987 |   | 138,747 |   | — |   | 1,064,734 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,922,766 |   | 2,190,436 |   | — |   | 4,113,202 |   |
| Other assets                                    |       | —                         |       | 91,808 |   | 88 |   | — |   | 91,896 |   |
| Investments in subsidiaries                     |       | 1,647,834                      |       | 2,320,138 |   | — |   | (3,967,972 | ) | — |   |
| Total assets                                    |       | $                              | 1,647,834  |   | $ | 6,402,400 |   | $ | 2,444,618 |   | $ | (3,967,428 | ) | $ | 6,527,424 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 196,748 |   | $ | 45,474 |   | $ | 544 |   | $ | 242,766 |   |
| Accrued liabilities                             |       | —                         |       | 332,656 |   | 79,683 |   | — |   | 412,339 |   |
| Total current liabilities                       |       | —                         |       | 529,404 |   | 125,157 |   | 544 |   | 655,105 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,946,004 |   | — |   | — |   | 2,946,004 |   |
| Deferred income taxes                           |       | —                         |       | 962,712 |   | — |   | — |   | 962,712 |   |
| Other long-term liabilities                     |       | —                         |       | 316,446 |   | (677 | ) | — |   | 315,769 |   |
| Total long-term liabilities                     |       | —                         |       | 4,225,162 |   | (677 | ) | — |   | 4,224,485 |   |
| Total shareholders’ equity                 |       | 1,647,834                      |       | 1,647,834 |   | 2,320,138 |   | (3,967,972 | ) | 1,647,834 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,647,834  |   | $ | 6,402,400 |   | $ | 2,444,618 |   | $ | (3,967,428 | ) | $ | 6,527,424 |   |

 

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| ** **                                                                        | ** ** | **Thirteen weeks ended January 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 923,020 |   | $ | 156,359 |   | $ | — |   | $ | 1,079,379 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                             |       | 694,798 |   | 126,605 |   | — |   | 821,403 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                             |       | 214,592 |   | 28,988 |   | — |   | 243,580 |   |
| Income from credit card program, net                                              |       | —                                                             |       | (9,023 | ) | (1,164 | ) | — |   | (10,187 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 34,310 |   | 4,802 |   | — |   | 39,112 |   |
| Amortization of customer lists and favorable  lease commitments                   |       | —                                                             |       | 15,090 |   | 2,947 |   | — |   | 18,037 |   |
| Impairment charges                                                                |       | —                                                             |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                                             |       | (302,618 | ) | (290,107 | ) | — |   | (592,725 | ) |
| Interest expense, net                                                             |       | —                                                             |       | 58,579 |   | 2 |   | — |   | 58,581 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 58,889 |   | (58,889 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 509,256                                                            |       | 231,220 |   | — |   | (740,476 | ) | — |   |
| (Loss) earnings before income taxes                                               |       | (509,256                                                           | )          | (651,306 | ) | (231,220 | ) | 740,476 |   | (651,306 | ) |
| Income tax benefit                                                                |       | —                                                             |       | (142,050 | ) | — |   | — |   | (142,050 | ) |
| Net (loss) earnings                                                               |       | $                                                                  | (509,256   | ) | $ | (509,256 | ) | $ | (231,220 | ) | $ | 740,476 |   | $ | (509,256 | ) |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 1,167,217 |   | $ | 206,638 |   | $ | — |   | $ | 1,373,855 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                             |       | 772,879 |   | 140,355 |   | — |   | 913,234 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                             |       | 255,531 |   | 37,041 |   | — |   | 292,572 |   |
| Income from credit card program, net                                              |       | —                                                             |       | (17,506 | ) | (1,763 | ) | — |   | (19,269 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 30,679 |   | 4,407 |   | — |   | 35,086 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                             |       | 15,060 |   | 2,893 |   | — |   | 17,953 |   |
| Operating earnings                                                                |       | —                                                             |       | 110,574 |   | 23,705 |   | — |   | 134,279 |   |
| Interest expense, net                                                             |       | —                                                             |       | 60,394 |   | 3 |   | — |   | 60,397 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 83,143 |   | (83,143 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (44,303                                                            | )          | (106,845 | ) | — |   | 151,148 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 44,303                                                             |       | 73,882 |   | 106,845 |   | (151,148 | ) | 73,882 |   |
| Income tax expense                                                                |       | —                                                             |       | 29,579 |   | — |   | — |   | 29,579 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 44,303     |   | $ | 44,303 |   | $ | 106,845 |   | $ | (151,148 | ) | $ | 44,303 |   |

 

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| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 1,740,743 |   | $ | 324,423 |   | $ | — |   | $ | 2,065,166 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                               |       | 1,213,886 |   | 225,260 |   | — |   | 1,439,146 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                               |       | 427,744 |   | 58,664 |   | — |   | 486,408 |   |
| Income from credit card program, net                                              |       | —                                                               |       | (20,556 | ) | (2,631 | ) | — |   | (23,187 | ) |
| Depreciation expense                                                              |       | —                                                               |       | 68,625 |   | 9,086 |   | — |   | 77,711 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                               |       | 30,179 |   | 5,895 |   | — |   | 36,074 |   |
| Impairment charges                                                                |       | —                                                               |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                                               |       | (255,006 | ) | (256,139 | ) | — |   | (511,145 | ) |
| Interest expense, net                                                             |       | —                                                               |       | 116,422 |   | 4 |   | — |   | 116,426 |   |
| Intercompany royalty charges (income)                                             |       | —                                                               |       | 115,719 |   | (115,719 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 496,378                                                              |       | 140,424 |   | — |   | (636,802 | ) | — |   |
| (Loss) earnings before income taxes                                               |       | (496,378                                                             | )          | (627,571 | ) | (140,424 | ) | 636,802 |   | (627,571 | ) |
| Income tax benefit                                                                |       | —                                                               |       | (131,193 | ) | — |   | — |   | (131,193 | ) |
| Net (loss) earnings                                                               |       | $                                                                    | (496,378   | ) | $ | (496,378 | ) | $ | (140,424 | ) | $ | 636,802 |   | $ | (496,378 | ) |

 
| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 2,108,676 |   | $ | 397,422 |   | $ | — |   | $ | 2,506,098 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                               |       | 1,330,577 |   | 249,793 |   | — |   | 1,580,370 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                               |       | 492,555 |   | 71,993 |   | — |   | 564,548 |   |
| Income from credit card program, net                                              |       | —                                                               |       | (32,941 | ) | (3,622 | ) | — |   | (36,563 | ) |
| Depreciation expense                                                              |       | —                                                               |       | 60,961 |   | 9,260 |   | — |   | 70,221 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                               |       | 30,119 |   | 5,830 |   | — |   | 35,949 |   |
| Other income                                                                      |       | —                                                               |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Operating earnings                                                                |       | —                                                               |       | 259,855 |   | 64,168 |   | — |   | 324,023 |   |
| Interest expense, net                                                             |       | —                                                               |       | 121,614 |   | 6 |   | — |   | 121,620 |   |
| Intercompany royalty charges (income)                                             |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (123,061                                                             | )          | (220,124 | ) | — |   | 343,185 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 123,061                                                              |       | 202,403 |   | 220,124 |   | (343,185 | ) | 202,403 |   |
| Income tax expense                                                                |       | —                                                               |       | 79,342 |   | — |   | — |   | 79,342 |   |
| Net earnings (loss)                                                               |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 220,124 |   | $ | (343,185 | ) | $ | 123,061 |   |

 

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| ** **                                                                                   | ** ** | **Twenty-Six weeks ended January 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net (loss) earnings                                                                          |       | $                                                                    | (496,378   | ) | $ | (496,378 | ) | $ | (140,424 | ) | $ | 636,802 |   | $ | (496,378 | ) |
| Adjustments to reconcile net (loss)  earnings to net cash provided by operating activities:  |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                                               |       | 105,913 |   | 14,981 |   | — |   | 120,894 |   |
| Deferred income taxes                                                                        |       | —                                                               |       | (122,158 | ) | — |   | — |   | (122,158 | ) |
| Impairment charges                                                                           |       | —                                                               |       | 275,871 |   | 284,288 |   | — |   | 560,159 |   |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | —                                                               |       | 7,698 |   | 759 |   | — |   | 8,457 |   |
| Intercompany royalty income payable  (receivable)                                            |       | —                                                               |       | 115,719 |   | (115,719 | ) | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                                    |       | 496,378                                                              |       | 140,424 |   | — |   | (636,802 | ) | — |   |
| Changes in operating assets and liabilities,  net                                            |       | —                                                               |       | 18,139 |   | (39,332 | ) | — |   | (21,193 | ) |
| Net cash provided by operating activities                                                    |       | —                                                               |       | 45,228 |   | 4,553 |   | — |   | 49,781 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                               |       | (60,672 | ) | (3,872 | ) | — |   | (64,544 | ) |
| Net cash used for investing activities                                                       |       | —                                                               |       | (60,672 | ) | (3,872 | ) | — |   | (64,544 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                               |       | (1,233 | ) | — |   | — |   | (1,233 | ) |
| Net cash used for financing activities                                                       |       | —                                                               |       | (1,233 | ) | — |   | — |   | (1,233 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| (Decrease) increase during the period                                                        |       | —                                                               |       | (16,677 | ) | 681 |   | — |   | (15,996 | ) |
| Beginning balance                                                                            |       | —                                                               |       | 238,204 |   | 976 |   | — |   | 239,180 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 221,527 |   | $ | 1,657 |   | $ | — |   | $ | 223,184 |   |

 
| ** **                                                                                   | ** ** | **Twenty-Six weeks ended January 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 220,124 |   | $ | (343,185 | ) | $ | 123,061 |   |
| Adjustments to reconcile net earnings  (loss) to net cash provided by operating activities:  |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                                               |       | 98,189 |   | 15,090 |   | — |   | 113,279 |   |
| Deferred income taxes                                                                        |       | —                                                               |       | (13,673 | ) | — |   | — |   | (13,673 | ) |
| 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 |       | —                                                               |       | 14,605 |   | (37 | ) | — |   | 14,568 |   |
| Intercompany royalty income payable  (receivable)                                            |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                                    |       | (123,061                                                             | )          | (220,124 | ) | — |   | 343,185 |   | — |   |
| Changes in operating assets and  liabilities, net                                            |       | —                                                               |       | 55,281 |   | (75,280 | ) | — |   | (19,999 | ) |
| Net cash provided by operating activities                                                    |       | —                                                               |       | 180,851 |   | 3,935 |   | — |   | 184,786 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                               |       | (83,790 | ) | (4,383 | ) | — |   | (88,173 | ) |
| Purchases of short-term investments                                                          |       | —                                                               |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                                               |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used for investing activities                                                       |       | —                                                               |       | (83,790 | ) | (4,383 | ) | — |   | (88,173 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                               |       | (2,073 | ) | — |   | — |   | (2,073 | ) |
| Net cash used for financing activities                                                       |       | —                                                               |       | (2,073 | ) | — |   | — |   | (2,073 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                                               |       | 94,988 |   | (448 | ) | — |   | 94,540 |   |
| Beginning balance                                                                            |       | —                                                               |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 234,321 |   | $ | 1,426 |   | $ | — |   | $ | 235,747 |   |

 

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

** **

**EXECUTIVE OVERVIEW**

 

The following discussion andanalysis of our financial condition and results of operations should be read inconjunction with our Annual Report on Form 10-K for the fiscal year endedAugust 2, 2008. Unless otherwise specified, the meanings of all defined termsin Management’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) are consistent with the meanings of such terms as definedin the Notes to the Condensed Consolidated Financial Statements. Thisdiscussion contains forward-looking statements. Please see “Forward-LookingStatements” for a discussion of the risks, uncertainties and assumptionsrelating to our forward-looking statements.

 

**Overview**

 

Neiman Marcus, Inc. (theCompany), together with our operating segments and subsidiaries, is a high-endspecialty retailer. Our operations include the Specialty Retail stores segmentand the Direct Marketing segment. The Specialty Retail stores segment consistsprimarily of Neiman Marcus and Bergdorf Goodman stores. The Direct Marketingsegment conducts both online and print catalog operations under the brand namesof Neiman Marcus, Bergdorf Goodman and Horchow.

 

Our fiscal year ends on the Saturday closest to July 31. Allreferences to the second quarter of fiscal year 2009 relate to the thirteenweeks ended January 31, 2009. All references to the second quarter of fiscalyear 2008 relate to the thirteen weeks ended January 26, 2008. All referencesto year-to-date fiscal 2009 relate to the twenty-six weeks ended January 31,2009. All references to year-to-date fiscal 2008 relate to the twenty-six weeksended January 26, 2008.

 

**Factors Affecting Our Results**

 

***Revenues.***Wegenerate our revenues from the sale of high-end merchandise through ourSpecialty Retail stores and Direct Marketing operations. Components of ourrevenues include:

 

·                  Sales ofmerchandise—Revenues from our Specialty Retail stores are recognized at thelater of the point of sale or the delivery of goods to the customer. Revenuesfrom our Direct Marketing operations are recognized when the merchandise isdelivered to the customer. We maintain reserves for anticipated sales returnsprimarily based on our historical trends related to returns by both our retailand direct marketing customers. Revenues exclude sales taxes collected from ourcustomers.

 

·                  Delivery and processing—Wegenerate revenues from delivery and processing charges related to merchandisedelivered to our customers from both our retail and direct marketingoperations.

 

Our revenues can be affected bythe following factors:

 

·                  general economicconditions, including the continuing deterioration of the general economicconditions and the length of a recovery;

 

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

 

·                  changes in the level offull-price sales;

 

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

 

·                  our ability tosuccessfully implement our store expansion and remodeling strategies; and

 

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

 

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

 

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***Cost of goods sold including buying andoccupancy costs (excluding depreciation) (COGS).***COGSconsists of the following components:

 

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

 

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

 

·                  Occupancy costs—Occupancycosts consist primarily of rent, property taxes and operating costs of ourretail, distribution and support facilities. A significant portion of ourbuying and occupancy costs are fixed.

 

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

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold. Wereceived vendor allowances of $62.5 million, or 3.0% of revenues, inyear-to-date fiscal 2009 and $55.0 million, or 2.2% of revenues, inyear-to-date fiscal 2008.

 

Changes in our COGS as apercentage of revenues are affected primarily by the following factors:

 

·                  our ability to order anappropriate amount of merchandise to match customer demand and the relatedimpact on the level of net markdowns incurred;

 

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

 

·                  factors affecting revenuesgenerally;

 

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

 

·                  the amount of vendorreimbursements we receive during the fiscal year.

 

***Selling, general andadministrative expenses (excluding depreciation) (SG&A).***SG&Aprincipally consists of costs related to employee compensation and benefits inthe selling and administrative support areas, advertising and catalog costs andinsurance and long-term benefits expenses. A significant portion of ourselling, general and administrative expenses are variable in nature and aredependent on the sales we generate.

 

Advertising costs incurred byour Specialty Retail segment consist primarily of print media costs related topromotional materials mailed to our customers, while advertising costs incurredby our Direct Marketing operations relate to the production, printing anddistribution of our print catalogs and the production of the photographiccontent on our websites, as well as online marketing costs. We receiveadvertising allowances from certain of our merchandise vendors. Substantiallyall the advertising allowances we receive represent reimbursements of direct,specific and incremental costs that we incur to promote the vendor’smerchandise in connection with our various advertising programs, primarilycatalogs and other print media. As a result, these allowances are recorded as areduction of our advertising costs when earned. Vendor allowances earned andrecorded as a reduction to selling, general and administrative expenses aggregatedapproximately $40.9 million, or 2.0% of revenues, in year-to-date fiscal 2009and $43.9 million, or 1.7% of revenues, in year-to-date fiscal 2008.

 

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We also receive allowances from certain merchandise vendors inconjunction with compensation programs for employees who sell the vendor’smerchandise. These allowances are netted against the related compensationexpense that we incur. Amounts received from vendors related to compensationprograms were $35.4 million, or 1.7% of revenues, in year-to-date fiscal 2009and $36.1 million, or 1.4% of revenues, in year-to-date fiscal 2008.

 

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

 

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

 

·                  changes in expensesincurred in connection with our advertising and marketing programs; and

 

·                  changes in expensesrelated to insurance and long-term benefits due to general economic conditionssuch as rising health care costs.

 

***Income from credit card program, net***.Pursuant to a long-term marketing and servicing alliance with HSBC, HSBC offerscredit card and non-card payment plans bearing our brands and we receiveongoing payments from HSBC based on net credit card sales and compensation formarketing and servicing activities (HSBC Program Income). We recognize HSBCProgram Income when earned. In the future, the HSBC Program Income may be:

 

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

 

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

 

·                  decreased based upon thelevel of future services we provide to HSBC;

 

·                  increased for ourallocable share of certain income, if any, generated from the credit cardprogram as provided pursuant to our contractual agreement with HSBC; and

 

·                  decreased for ourallocable share of certain credit card losses generated from the credit cardportfolio (credit losses are based upona percentage of losses incurred as a percentage of credit sales and subject toa contractual limit, which limits our loss exposure to a maximum of 0.3% ofcredit sales from April 1, 2008 to June 30, 2010).

 

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**Seasonality**

 

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

 

Our first fiscal quarter isgenerally characterized by a higher level of full-price sales with a focus onthe initial introduction of Fall season fashions. Aggressive in-store marketingactivities designed to stimulate customer buying, a lower level of markdownsand higher margins are characteristic of this quarter. The second fiscalquarter is more focused on promotional activities related to the Decemberholiday season, the early introduction of resort season collections fromcertain designers and the sale of Fall season goods on a marked down basis. Asa result, margins are typically lower in the second fiscal quarter. However,due to the seasonal increase in sales that occurs during the holiday season,the second fiscal quarter is typically the quarter in which our revenues arethe 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 secondfiscal quarters as a result of higher seasonal requirements.

 

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

 

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

 

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

 

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**OPERATING RESULTS**

 

**Performance Summary**

 

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

 
| ** **                                                                        | ** ** | **Quarter-to-Date**                                    | ** ** | **Year-to-Date**                                       | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Thirteen  weeks ended  January 31,  2009** | ** ** | **Thirteen  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended  January 31,  2009** | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** |
| ** **                                                                        | ** ** | ** **                                             | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                                                  | %          | 100.0                                                  | %          | 100.0 | % | 100.0 | % |
|                                                                              |       |                                                   |       |                                                   |       |   |   |   |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 76.1                                                   |       | 66.5                                                   |       | 69.7 |   | 63.1 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | 22.6                                                   |       | 21.3                                                   |       | 23.6 |   | 22.5 |   |
| Income from credit card program, net                                              |       | (0.9                                                   | )          | (1.4                                                   | )          | (1.1 | ) | (1.5 | ) |
| Depreciation expense                                                              |       | 3.6                                                    |       | 2.6                                                    |       | 3.8 |   | 2.8 |   |
| Amortization of customer lists                                                    |       | 1.3                                                    |       | 1.0                                                    |       | 1.3 |   | 1.1 |   |
| Amortization of favorable lease commitments                                       |       | 0.4                                                    |       | 0.3                                                    |       | 0.4 |   | 0.3 |   |
| Impairment charges                                                                |       | 51.9                                                   |       | —                                                 |       | 27.1 |   | — |   |
| Other income                                                                      |       | —                                                 |       | —                                                 |       | — |   | (1.3 | ) |
| Operating (loss) earnings                                                         |       | (54.9                                                  | )          | 9.8                                                    |       | (24.8 | ) | 12.9 |   |
| Interest expense, net                                                             |       | 5.4                                                    |       | 4.4                                                    |       | 5.6 |   | 4.9 |   |
| (Loss) earnings before income taxes                                               |       | (60.3                                                  | )          | 5.4                                                    |       | (30.4 | ) | 8.1 |   |
| Income tax (benefit) expense                                                      |       | (13.2                                                  | )          | 2.2                                                    |       | (6.4 | ) | 3.2 |   |
| Net (loss) earnings                                                               |       | (47.2                                                  | )%         | 3.2                                                    | %          | (24.0 | )% | 4.9 | % |

 

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

** **
| ** **                                                                                 | ** ** | **Quarter-to-Date**                                    | ** ** | **Year-to-Date**                                       | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(dollars in millions, except sales per square foot)** | ** ** | **Thirteen  weeks ended  January 31,  2009** | ** ** | **Thirteen  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended  January 31,  2009** | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** |
| REVENUES                                                                                   |       |                                                   |       |                                                   |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                      | 870.6      |                                                   | $          | 1,136.3 |   | $ | 1,697.7 |   | $ | 2,097.9 |   |
| Direct Marketing                                                                           |       | 208.8                                                  |       | 237.5                                                  |       | 367.5 |   | 408.2 |   |
| Total                                                                                      |       | $                                                      | 1,079.4    |                                                   | $          | 1,373.8 |   | $ | 2,065.2 |   | $ | 2,506.1 |   |
|                                                                                       |       |                                                   |       |                                                   |       |   |   |   |   |
| OPERATING (LOSS) EARNINGS                                                                  |       |                                                   |       |                                                   |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                      | (13.9      | )                                                      | $          | 127.9 |   | $ | 80.6 |   | $ | 293.5 |   |
| Direct Marketing                                                                           |       | 14.7                                                   |       | 42.0                                                   |       | 34.0 |   | 65.2 |   |
| Corporate expenses                                                                         |       | (15.4                                                  | )          | (17.6                                                  | )          | (29.5 | ) | (31.2 | ) |
| Amortization of customer lists and  favorable lease commitments                            |       | (18.0                                                  | )          | (18.0                                                  | )          | (36.1 | ) | (36.0 | ) |
| Impairment charges (1)                                                                     |       | (560.1                                                 | )          |                                                   |       | (560.1 | ) | — |   |
| Other income (2)                                                                           |       | —                                                 |       | —                                                 |       | — |   | 32.5 |   |
| Total                                                                                      |       | $                                                      | (592.7     | )                                                      | $          | 134.3 |   | $ | (511.1 | ) | $ | 324.0 |   |
|                                                                                       |       |                                                   |       |                                                   |       |   |   |   |   |
| OPERATING (LOSS) PROFIT MARGIN                                                             |       |                                                   |       |                                                   |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | (1.6                                                   | )%         | 11.3                                                   | %          | 4.7 | % | 14.0 | % |
| Direct Marketing                                                                           |       | 7.0                                                    | %          | 17.7                                                   | %          | 9.3 | % | 16.0 | % |
| Total                                                                                      |       | (54.9                                                  | )%         | 9.8                                                    | %          | (24.8 | )% | 12.9 | % |
|                                                                                       |       |                                                   |       |                                                   |       |   |   |   |   |
| CHANGE IN COMPARABLE REVENUES (3)                                                          |       |                                                   |       |                                                   |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | (25.0                                                  | )%         | 3.4                                                    | %          | (20.8 | )% | 4.7 | % |
| Direct Marketing                                                                           |       | (12.1                                                  | )%         | 5.2                                                    | %          | (10.0 | )% | 6.0 | % |
| Total                                                                                      |       | (22.8                                                  | )%         | 3.7                                                    | %          | (19.0 | )% | 4.9 | % |
|                                                                                       |       |                                                   |       |                                                   |       |   |   |   |   |
| SALES PER SQUARE FOOT                                                                      |       |                                                   |       |                                                   |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                      | 139        |                                                   | $          | 190 |   | $ | 271 |   | $ | 353 |   |
|                                                                                       |       |                                                   |       |                                                   |       |   |   |   |   |
| STORE COUNT                                                                                |       |                                                   |       |                                                   |       |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores:                                                 |       |                                                   |       |                                                   |       |   |   |   |   |
| Open at beginning of period                                                                |       | 42                                                     |       | 41                                                     |       | 41 |   | 40 |   |
| Opened during the period                                                                   |       | —                                                 |       | —                                                 |       | 1 |   | 1 |   |
| Open at end of period                                                                      |       | 42                                                     |       | 41                                                     |       | 42 |   | 41 |   |
| Clearance centers:                                                                         |       |                                                   |       |                                                   |       |   |   |   |   |
| Open at beginning of period                                                                |       | 25                                                     |       | 21                                                     |       | 24 |   | 20 |   |
| Opened during the period                                                                   |       | —                                                 |       | 1                                                      |       | 1 |   | 2 |   |
| Open at end of period                                                                      |       | 25                                                     |       | 22                                                     |       | 25 |   | 22 |   |
|                                                                                       |       |                                                   |       |                                                   |       |   |   |   |   |
| NON-GAAP FINANCIAL DATA                                                                    |       |                                                   |       |                                                   |       |   |   |   |   |
| EBITDA (4)                                                                                 |       | $                                                      | (535.5     | )                                                      | $          | 187.3 |   | $ | (397.3 | ) | $ | 430.2 |   |
| Adjusted EBITDA (4)                                                                        |       | $                                                      | 24.6       |                                                   | $          | 187.3 |   | $ | 162.8 |   | $ | 397.7 |   |

 

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

 

(2)  For year-to-date fiscal 2008, other incomerepresents a one-time pension curtailment gain of $32.5 million as a result ofour decision to freeze certain Pension and SERP benefits as of December 31,2007.

 

(3)  Comparable revenues include 1) revenuesderived from our retail stores open for more than 52 weeks, includingstores that have been relocated or expanded and 2) revenues from ourDirect Marketing operations.

 

(4)  For an explanation of EBITDA and AdjustedEBITDA, see “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Non-GAAP Financial Measure-EBITDA and Adjusted EBITDA.”

 

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**Fiscal Year 2009 Summary**

 

We continue to experience a challenging economic and retail environmentand expect these conditions will continue for an extended period of time.Consistent with the significant declines in overall macroeconomic factors,capital markets and consumer confidence that have accelerated throughout fiscalyear 2009, customer demand was well below our initial expectations and theprior year, particularly during the holiday season in the second quarter. Thecurrent softness in customer demand exists across all geographic areas, alldistribution channels and all merchandise categories, particularly the appareland home décor categories. We believe affluent customers are continuing toreact to the economic conditions mentioned above. However, based on ourexperience in previous business cycles, we believe our customers’ buying levelswill increase once the economic environment improves.

 

In response to these challenging business conditions, we continue totake the following actions:

 

·                  stimulatesales through additional promotional and other events;

 

·                  reduceinventory levels and purchases;

 

·                  implementexpense control initiatives; and

 

·                  reviewfuture capital expenditures and eliminate or postpone certain projects.

 

A summary of our operating results is as follows:

 

·                  **Revenues**—Our revenues in thesecond quarter of fiscal year 2009 were significantly impacted by a lower thananticipated level of customer demand and the higher proportion of markdownsales required to liquidate Fall season merchandise. As a result, our revenuesfor the second quarter of fiscal year 2009 were $1,079.4 million, a decrease of21.4% as compared to the second quarter of fiscal year 2008. Comparablerevenues decreased by 22.8% in the second quarter of fiscal year 2009 whichrepresented an acceleration of the decrease in comparable revenues of 14.5% weexperienced in the first quarter of fiscal year 2009. Comparable revenuesdecreased in the second quarter of fiscal year 2009 for both our SpecialtyRetail stores and Direct Marketing operations.

 

Our revenues for year-to-date fiscal 2009 were $2,065.2 million, adecrease of 17.6% as compared to the prior year reflecting a decline incomparable revenues of 19.0%.

 

For Specialty Retail stores, our sales per square foot for the lasttwelve trailing months were $553 as of January 31, 2009, $605 as of November 1,2008 and $650 as of January 26, 2008.

 

·                  **Cost of goodssold including buying and occupancy costs (excluding depreciation)**—COGS represented 76.1% ofrevenues in the second quarter of fiscal year 2009 and 66.5% of revenues in thesecond quarter of fiscal year 2008. COGS represented 69.7% of revenues inyear-to-date fiscal 2009 and 63.1% of revenues in year-to-date fiscal 2008.These increases in COGS as a percentage of revenues were due primarily to 1)lower levels of full-price sales, 2) higher levels of markdowns and promotionalactivities for both our Specialty Retail stores and Direct Marketing operationsin response to weak demand, particularly during the holiday season in thesecond quarter and 3) the deleveraging of our fixed buying and occupancy costson lower sales.

 

With the majority of ourmerchandise being ordered six months or more prior to delivery, our ability toadjust our near-term inventory purchases during periods of significantdecreases in customer demand is somewhat limited. While we worked with ourvendors to return merchandise and cancel orders during both the first andsecond quarters of fiscal year 2009, inventory levels throughout the Fallseason exceeded customer demand. As a result, we were required to implementpromotional activities and to take higher levels of markdowns to liquidate Fallseason merchandise and to respond to promotional and markdown events of ourcompetitors. These actions contributed to the lower margins in the currentyear.

 

·                  **Selling,general and administrative expenses (excluding depreciation)**—SG&A represented22.6% of revenues in the second quarter of fiscal year 2009 and 21.3% ofrevenues in the second quarter of fiscal year 2008. SG&A represented 23.6%of revenues in year-to-date fiscal 2009 and 22.5% of revenues in year-to-datefiscal 2008. These increases in SG&A as a percentage of revenues wasprimarily due to the deleveraging of payroll costs and certain benefitsexpenses on the significant decreases in revenues. We have implemented bothshort-term expense control initiatives and longer-term adjustments to our coststructure, which initiatives include headcount and salary

 

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reductions and thecentralization and redesign of various store and corporate job functions. Wecontinue to review and evaluate additional initiatives to reduce our coststructure.

 

·                  **Impairment of long-lived assets**— In the second quarter offiscal year 2009, we tested our long-lived assets for recoverability in lightof the global financial crisis and uncertain economic conditions and theresulting negative impact to our business operations. In connection with thereview of our long-lived assets for recoverability, we determined certain ofour property and equipment, tradenames and goodwill to be impaired and recordednon-cash impairment charges aggregating $560.1 million in the second quarter offiscal 2009, as more fully described in Note 3 to the condensed consolidatedfinancial statements.

 

·                  **Operating (loss) earnings—**For the second quarter of fiscal year 2009, ouroperating losses were $592.7 million, or 54.9% of revenues, which includedimpairments of our long-lived assets of $560.1 million, or 51.9% of revenues.Operating earnings in the second quarter of fiscal year 2008 were $134.3million, or 9.8% of revenues. Excluding the impairments of our long-livedassets, operating margins decreased, as a percentage of revenues by 12.8% in the second quarter offiscal year 2009 primarily due to:

 

·            lower levels of full-pricesales and higher net markdowns that resulted in an increase in COGS by 9.6% ofrevenues;

 

·            increases in both SG&Aexpenses by 1.3% of revenues and depreciation and amortization expense by 1.4%of revenues, primarily due to the deleveraging of these expenses on lowersales; and

 

·            decrease in income fromour credit card operations of 0.5% of revenues resulting primarily from highershared credit card losses.

 

Total operating losses inyear-to-date fiscal 2009 were $511.1 million, or 24.8% of revenues, which included impairments of our long-lived assetsof $560.1 million, or 27.1% of revenues. Total operating earnings in year-to-date fiscal 2008were $324.0 million, or 12.9% of revenues, which included a curtailment gain of$32.5 million, or 1.3% of revenues. Excluding the impairments in year-to-datefiscal 2009 and curtailment gain in year-to-date fiscal 2008, operatingearnings margin decreased as a percentage of revenues, in year-to-date fiscal2009 by 9.2% primarily as a result of 1) lower levels of full-price sales andhigher net markdowns that resulted in an increase in COGS by 6.6% of revenuesand 2) increases in both SG&A expenses by 1.1% of revenues and depreciationand amortization expense by 1.3% of revenues, primarily due to the deleveragingof these expenses on lower sales.

 

·                  **Liquidity—**Cash provided by our operating activities was $49.8 million inyear-to-date fiscal 2009, a decrease of $135.0 million from the prior yearfiscal period, as a result of lower sales and earnings. However, we held cashbalances of $223.2 million at January 31, 2009, we have made no borrowingsunder our Asset-Based Revolving Credit Facility during fiscal year 2009 and wehave elected to pay PIK Interest rather than cash interest under our SeniorNotes for the interest period commencing on January 15, 2009 and continuingthrough April 14, 2009.

 

·                  **Outlook—**We expect retail demand and revenues will remain weak for an extendedperiod of time. We will continue to reduce our inventory levels and Springseason purchases to align them with anticipated lower customer demand. Inaddition, with softer revenue levels anticipated for fiscal year 2009, ourSG&A expenses as a percentage of revenues will continue to be under pressurethroughout the year. With respect to liquidity, our Adjusted EBITDA exceededour interest expense, net for year-to-date fiscal 2009 but not for the secondquarter of fiscal year 2009, and we anticipate that Adjusted EBITDA maycontinue to decline in the remainder of fiscal year 2009 as a result ofdeteriorating economic conditions. Despite the anticipated continuation ofcurrent economic conditions, we believe the cash generated from our operationsalong with our available sources of financing will enable us to meet our cashobligations for fiscal year 2009. Year-to-date fiscal year 2009, we have madeno borrowings under our revolving credit facility and, at present, we do notanticipate utilizing this revolver during the remainder of fiscal year 2009.

 

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**Thirteen Weeks EndedJanuary 31, 2009 Compared to Thirteen Weeks Ended January 26, 2008**

 

***Revenues.**** *Our revenues for thesecond quarter of fiscal year 2009 of $1,079.4 million decreased $294.5million, or 21.4%, from $1,373.8 million in the second quarter of fiscal year2008.  The decrease in revenues was dueto decreases in comparable revenues for both our Specialty Retail stores andDirect Marketing operations as a result of the challenging economicenvironment.  Customer demand, especiallyduring the holiday selling season, was well below our initial expectationsacross all geographic areas, all distribution channels and all merchandisecategories.

 

Comparable revenues for the second quarter offiscal year 2009 were $1,060.8 million compared to $1,373.8 million in theprior year fiscal period, representing a decrease of 22.8%.  Comparable revenues decreased in the secondquarter of fiscal year 2009 by 25.0% for Specialty Retail stores and 12.1% forDirect Marketing.  New stores generatedsales of $18.6 million for the second quarter of fiscal year 2009.

 

Internet revenues generated by DirectMarketing were $172.2 million for the second quarter of fiscal year 2009, adecrease of 4.6% compared to the prior year fiscal quarter. In addition,catalog revenues decreased 35.7% compared to the prior year fiscalquarter.  Decreases in revenues from thehome décor category, primarily offered by our Horchow brand, were incurred inboth our internet and catalog operations during the second quarter of fiscalyear 2009.

 

***Cost of goods sold including buying andoccupancy costs (excluding depreciation).***  COGS for the second quarter of fiscal year2009 were 76.1% of revenues compared to 66.5% of revenues for the secondquarter of fiscal year 2008.

 

The increase in COGS as a percentage ofrevenues in the second quarter of fiscal year 2009 was primarily due todecreased product margins generated by both our Specialty Retail stores and DirectMarketing operations of approximately 8.4% of revenues.  The increase in COGS as a percentage ofrevenues reflects the lower level of customer demand we experienced in thesecond quarter of fiscal year 2009.  As aresult, we generated a lower level of full-price sales and incurredsignificantly higher markdowns and sales promotions costs to liquidate on-handinventories held in excess of sales trends. Additionally, buying and occupancy costs increased 1.2% of revenuesprimarily due to the deleveraging of payroll and rent expenses on the lowerlevel of revenues generated.

 

***Selling, general and administrative expenses(excluding depreciation)*.**  SG&A expenses were 22.6% of revenues inthe second quarter of fiscal year 2009 compared to 21.3% of revenues in theprior year fiscal quarter.

 

The net increase in SG&A expenses as apercentage of revenues in the second quarter of fiscal year 2009 ofapproximately 1.3% of revenues was primarily due to:

 

·                  the deleveraging of a significantportion of our SG&A expenses, primarily payroll and related benefits net oflower incentive compensation requirements, of approximately 0.9% of revenues onthe lower level of revenues; and

 

·                  an increase in expenses, primarilyconsulting fees and severance, of approximately 0.6% of revenues incurred as aresult of on-going initiatives to control our expenses and to reduce our coststructure, which initiatives include headcount and salary reductions and thecentralization and redesign of various store and corporate job functions;offset by

 

·                  a lower level of advertising andpromotions costs incurred in the second quarter of fiscal year 2009 ofapproximately 0.2% of revenues.  Thisdecrease in advertising and promotions costs, as a percentage of revenues,reflects a lower level of spending by our Specialty Retail stores, partiallyoffset by the deleveraging of catalog production costs on lower catalogrevenues for our Direct Marketing operations.

 

***Income from credit card program, net. ***We earned HSBCProgram Income of $10.2 million, or 0.9% of revenues, in the second quarter offiscal year 2009 compared to $19.3 million, or 1.4% of revenues, in the secondquarter of fiscal year 2008.  As a resultof current higher delinquencies and losses on consumer indebtedness in light ofcurrent economic conditions, losses are currently allocable to NMG at themaximum contractual limit.  As a result,we recorded a charge of approximately $3.1 million, or 0.3% of revenues, in thesecond quarter of fiscal year 2009 for our allocable portion of credit cardlosses.  In addition, we offered certainfinancing promotions in the second quarter of fiscal year 2009 to stimulatecustomer demand, which reduced our HSBC Program Income by $1.6 million, or 0.1%of revenues.

 

***Depreciation expense. ***Depreciationexpense was $39.1 million, or 3.6% of revenues, in the second quarter of fiscalyear 2009 compared to $35.1 million, or 2.6% of revenues, in the second quarterof fiscal year 2008.  The increase indepreciation expense as a percentage of revenues results primarily from thedeleveraging of these costs on lower revenues.

 

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***Amortization expense. ***Amortization ofintangible assets (customer lists and favorable lease commitments) aggregated$18.0 million, or 1.7% of revenues, in the second quarter of fiscal year 2009compared to $18.0 million, or 1.3% of revenues, in the second quarter of fiscalyear 2008.  The increase in amortizationexpense as a percentage of revenues results primarily from the deleveraging ofthese costs on lower revenues.

 

***Impairment charges.* **In the second quarter of fiscal year2009, we recorded impairment charges, related primarily to our tradenames andgoodwill, aggregating $560.1 million in connection with the review of ourlong-lived assets for recoverability, as more fully explained in Note 3 in ournotes to condensed consolidated financial statements.

 

***Segment operating (loss) earnings*.**  Segment operating (loss) earnings for ourSpecialty Retail stores and Direct Marketing segments do not reflect either theimpact of adjustments to revalue our assets and liabilities to estimated fairvalue at the Acquisition date or impairment charges related to declines in fairvalue subsequent to the Acquisition date.

 

Operating losses for our Specialty Retailstores segment were $13.9 million, or 1.6% of Specialty Retail stores revenues,for the second quarter of fiscal year 2009 compared to operating earnings of$127.9 million, or 11.3% of Specialty Retail stores revenues, for the prioryear fiscal quarter.  The decrease inoperating margin as a percentage of revenues was primarily due to:

 

·                  lower demand resulting in a lowerlevel of full-price sales and higher markdowns and promotional costs; and

 

·                  the deleveraging of a significantportion of our expenses on the lower level of sales; partially offset by

 

·                  net decreases in advertising and promotioncosts; and

 

·                  lower estimated annual incentivecompensation costs.

 

Operating earnings for Direct Marketing were$14.7 million, or 7.0% of Direct Marketing revenues, in the second quarter offiscal year 2009 compared to $42.0 million, or 17.7% of Direct Marketingrevenues, for the prior year fiscal quarter. The decrease in operating margin as a percentage of revenues for DirectMarketing was primarily the result of 1) a decrease in margins primarily due tolower demand and higher markdowns and 2) the deleveraging of a significantportion of our expenses, primarily catalog production costs, on the lower levelof sales.

 

***Interest expense, net*.**  Net interest expense was $58.6 million, or5.4% of revenues, in the second quarter of fiscal year 2009 and $60.4 million,or 4.4% of revenues, for the prior year fiscal quarter.  The decrease in interest expense is primarilydue to the decrease in interest rates on our variable-rate indebtedness.  The significant components of interestexpense are as follows:

 
| ** **                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|
| **(in thousands)**           | ** ** | **January 31,  2009**         | ** ** | **January 26,  2008** | ** ** |
|                              |       |                               |       |   |   |
| Senior Secured Term Loan Facility |       | $                                  | 23,941     |   | $ | 27,806 |   |
| 2028 Debentures                   |       | 2,227                              |       | 2,181 |   |
| Senior Notes                      |       | 15,711                             |       | 15,453 |   |
| Senior Subordinated Notes         |       | 13,122                             |       | 12,724 |   |
| Amortization of debt issue costs  |       | 3,554                              |       | 3,554 |   |
| Other                             |       | 865                                |       | 842 |   |
| Total interest expense            |       | 59,420                             |       | 62,560 |   |
| Less:                             |       |                               |       |   |   |
| Interest income                   |       | 666                                |       | 1,433 |   |
| Capitalized interest              |       | 173                                |       | 730 |   |
| Interest expense, net             |       | $                                  | 58,581     |   | $ | 60,397 |   |

 

***Income tax (benefit) expense.***  Our effective income tax rate for the secondquarter of fiscal year 2009 was 21.8% compared to 40.0% for the second quarterof fiscal year 2008.  No income taxbenefit exists related to the $291.1 million of goodwill impairment charges recordedin the second quarter of fiscal year 2009. Excluding the impact of the goodwill impairment charges, our effectiveincome tax rate was 39.4% for the second quarter of fiscal year 2009.

 

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**Twenty-Six Weeks EndedJanuary 31, 2009 Compared to Twenty-Six Weeks Ended January 26, 2008**

 

***Revenues.**** *Our revenues foryear-to-date fiscal 2009 of $2,065.2 million decreased $440.9 million, or17.6%, from $2,506.1 million in year-to-date fiscal 2008.  The decrease in revenues was due to decreasesin comparable revenues for both our Specialty Retail stores and DirectMarketing operations as a result of the challenging economic environment.

 

Comparable revenues for year-to-date fiscal2009 were $2,028.8 million compared to $2,506.1 million in the prior yearfiscal period, representing a decrease of 19.0%.  Comparable revenues decreased in year-to-datefiscal 2009 by 20.8% for Specialty Retail stores and 10.0% for DirectMarketing.  New stores generated sales of$36.4 million for year-to-date fiscal 2009.

 

Internet revenues generated by DirectMarketing were $293.2 million for year-to-date fiscal 2009, a decrease of 3.8%compared to the prior year fiscal period. In addition, catalog revenuesdecreased 28.2% compared to the prior year fiscal period.  Decreases in revenues from the home décorcategory, primarily offered by our Horchow brand, were incurred in both ourinternet and catalog operations during year-to-date fiscal 2009.

 

***Cost of goods sold including buying andoccupancy costs (excluding depreciation).***  COGS for year-to-date fiscal 2009 were 69.7%of revenues compared to 63.1% of revenues for year-to-date fiscal 2008.

 

The increase in COGS as a percentage ofrevenues in year-to-date fiscal 2009 was primarily due to decreased productmargins generated by both our Specialty Retail stores and Direct Marketingoperations of approximately 5.5% of revenues. The decrease in COGS as a percentage of revenues reflects the lowerlevel of customer demand we experienced. As a result, we generated a lower level of full-price sales inyear-to-date fiscal 2009 and incurred significantly higher markdowns and salespromotions costs to liquidate on-hand inventories held in excess of salestrends.  Additionally, buying andoccupancy costs increased by 1.1% of revenues primarily due to the deleveragingof payroll and rent expenses on the lower level of revenues generated.

 

***Selling, general and administrative expenses(excluding depreciation)*.**  SG&A expenses were 23.6% of revenues inyear-to-date fiscal 2009 compared to 22.5% of revenues in the prior year fiscalperiod.

 

The net increase in SG&A expenses as apercentage of revenues in year-to-date fiscal 2009 of approximately 1.1% ofrevenues was primarily due to:

 

·                  the deleveraging of a significantportion of our SG&A expenses, primarily payroll and related benefits net oflower incentive compensation requirements, of approximately 1.0% of revenues onthe lower level of revenues; and

 

·                  an increase in expenses, primarilyconsulting fees and severance, of approximately 0.4% of revenues incurred as aresult of on-going initiatives to control expenses and to reduce our coststructure, which initiatives include headcount and salary reductions and thecentralization and redesign of various store and corporate job functions;offset by

 

·                  a lower level of advertising andpromotions costs incurred in year-to-date fiscal 2009 of approximately 0.2% ofrevenues.  This decrease in advertisingand promotions costs, as a percentage of revenues, reflects a lower level ofspending by our Specialty Retail stores, partially offset by the deleveragingof catalog production costs on lower catalog revenues for our Direct Marketingoperations.  During the first quarter ofthe prior year, we incurred incremental advertising and promotions costs inconnection with the celebration of the 100th anniversary ofNeiman Marcus in October 2007.

 

***Income from credit card program, net. ***We earned HSBCProgram Income of $23.2 million, or 1.1% of revenues, in year-to-date fiscal2009 compared to $36.6 million, or 1.5% of revenues, in year-to-date fiscal2008.  As a result of current higherdelinquencies and losses on consumer indebtednesses in light of currenteconomic conditions, losses are currently allocable to NMG at the maximumcontractual limit.  As a result, we recordeda charge of approximately $5.3 million, or 0.3% of revenues, in year-to-datefiscal year 2009 for our allocable portion of credit card losses.  In addition, we offered certain financingpromotions in the second quarter of fiscal year 2009 to stimulate customerdemand, which reduced our HSBC Program Income by $1.6 million, or 0.1% ofrevenues.

 

***Depreciation expense. ***Depreciationexpense was $77.7 million, or 3.8% of revenues, in year-to-date fiscal 2009compared to $70.2 million, or 2.8% of revenues, in year-to-date fiscal2008.  The increase in depreciationexpense as a percentage of revenues results primarily from the deleveraging ofthese costs on lower revenues.

 

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***Amortization expense. ***Amortization ofintangible assets (customer lists and favorable lease commitments) aggregated$36.1 million, or 1.7% of revenues, in year-to-date fiscal 2009 compared to $36.0million, or 1.4% of revenues, in year-to-date fiscal 2008.  The increase in amortization expense as apercentage of revenues results primarily from the deleveraging of these costson lower revenues.

 

***Impairment charges.* **In the second quarter of fiscal year2009, we recorded impairment charges, related primarily to our tradenames andgoodwill, aggregating $560.1 million in connection with the review of ourlong-lived assets for recoverability, as more fully explained in Note 3 in ournotes to condensed consolidated financial statements.

 

***Other income. ***In the first quarter of fiscal year 2008,we recorded a one-time pension curtailment gain of $32.5 million, or 1.3% ofrevenues, as a result of our decision to freeze certain Pension and SERPbenefits as of December 31, 2007.

 

***Segment operating earnings.***  Segment operating earnings for our SpecialtyRetail stores and Direct Marketing segments do not reflect either the impact ofadjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date or impairment charges related to declines in fair valuesubsequent to the Acquisition date.

 

Operating earnings for our Specialty Retailstores segment were $80.6 million, or 4.7% of Specialty Retail stores revenues,for year-to-date fiscal 2009 compared to $293.5 million, or 14.0% of SpecialtyRetail stores revenues, for the prior year fiscal period.  The decrease in operating margin as apercentage of revenues was primarily due to:

 

·                  lower demand resulting in a lowerlevel of full-price sales and higher markdowns and promotional costs; and

 

·                  the deleveraging of a significantportion of our expenses on the lower level of sales; partially offset by

 

·                  net decreases in advertising andpromotion costs; and

 

·                  lower estimated annual incentivecompensation costs.

 

Operating earnings for Direct Marketing were$34.0 million, or 9.3% of Direct Marketing revenues, in year-to-date fiscal2009 compared to $65.2 million, or 16.0% of Direct Marketing revenues, for theprior year fiscal period.  The decreasein operating margin as a percentage of revenues for Direct Marketing wasprimarily the result of 1) a decrease in margins primarily due to lower demandand higher markdowns and 2) the deleveraging of a significant portion of ourexpenses, primarily catalog production costs, on the lower level of sales.

 

***Interest expense, net*.**  Net interest expense was $116.4 million, or5.6% of revenues, in year-to-date fiscal 2009 and $121.6 million, or 4.9% ofrevenues, for the prior year fiscal period. The decrease in interest expense is primarily due to the decrease ininterest rates on our variable-rate indebtedness.  The significant components of interestexpense are as follows:

 
| ** **                        | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**           | ** ** | **January 31,  2009**           | ** ** | **January 26,  2008** | ** ** |
|                              |       |                                 |       |   |   |
| Senior Secured Term Loan Facility |       | $                                    | 47,871     |   | $ | 55,782 |   |
| 2028 Debentures                   |       | 4,453                                |       | 4,365 |   |
| Senior Notes                      |       | 31,461                               |       | 30,906 |   |
| Senior Subordinated Notes         |       | 26,091                               |       | 25,448 |   |
| Amortization of debt issue costs  |       | 7,109                                |       | 7,109 |   |
| Other                             |       | 1,691                                |       | 1,674 |   |
| Total interest expense            |       | 118,676                              |       | 125,284 |   |
| Less:                             |       |                                 |       |   |   |
| Interest income                   |       | 1,771                                |       | 2,288 |   |
| Capitalized interest              |       | 479                                  |       | 1,376 |   |
| Interest expense, net             |       | $                                    | 116,426    |   | $ | 121,620 |   |

 

***Income tax (benefit) expense.***  Our effective income tax rate foryear-to-date fiscal 2009 was 20.9% compared to 39.2% for year-to-date fiscal2008.  No income tax benefit existsrelated to the $291.1 million of goodwill impairment charges recorded in thesecond quarter of fiscal year 2009. Excluding the impact of the goodwill impairment charges, our effectiveincome tax rate was 39.0% for year-to-date fiscal 2009.

 

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We adopted the provisions of FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN48) in the first quarter of fiscal year 2008. The cumulative effect of adopting FIN 48 resulted in a net increase toour accruals for uncertain tax positions of $9.1 million for the derecognitionof certain tax benefits previously recorded. This increase to our accruals wasoffset by a corresponding increase to goodwill as these uncertainties existedat the time of the Acquisition.

 

We file income tax returns in the U.S. federal jurisdiction and variousstate and local jurisdictions.  The IRSis now examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofJanuary 31, 2009 are sufficient to cover any potential assessments to bemade by the IRS upon the completion of their examinations. We will continue tomonitor the progress of the IRS examinations and review our recorded taxliabilities for potential audit assessments. With respect to state and local jurisdictions, with limited exceptions,the Company and its subsidiaries are no longer subject to income tax audits forfiscal years before 2004.  During thefourth quarter of fiscal year 2008, we entered into a negotiated settlementwith a state tax authority regarding a state non-filing position which resultedin a reduction to our gross unrecognized tax benefits of $7.2 million and acorresponding decrease to goodwill of $3.0 million related to the resolution ofuncertainties that existed at the time of the Acquisition. We believe it isreasonably possible that additional adjustments in the amounts of ourunrecognized tax benefits could occur within the next 12 months as a result ofsettlements with tax authorities.  Atthis time, we do not believe such adjustments will have a material impact onour consolidated financial statements.

 

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

 

We present the non-GAAP financial measure EBITDA and adjusted EBITDAbecause we use these measures to monitor and evaluate the performance of ourbusiness and believe the presentation of these measures will enhance investors’ability to analyze trends in our business, evaluate our performance relative toother companies in our industry and evaluate our ability to service our debt.  In addition, we use EBITDA and AdjustedEBITDA as components of the measurement of incentive compensation.

 

EBITDA and Adjusted EBITDA are not presentations made in accordancewith GAAP and our computation of EBITDA and Adjusted EBITDA may vary fromothers in our industry.  In addition,EBITDA and Adjusted EBITDA contain some, but not all, adjustments that aretaken into account in the calculation of the components of various covenants inthe indentures governing NMG’s senior secured Asset-Based Revolving Credit Facility,Senior Secured Term Loan Facility, Senior Notes and Senior SubordinatedNotes.  EBITDA and Adjusted EBITDA shouldnot be considered as alternatives to operating earnings or net earnings asmeasures of operating performance or cash flows as measures of liquidity.  EBITDA and Adjusted EBITDA have importantlimitations as analytical tools and should not be considered in isolation, oras a substitute for analysis of our results as reported under GAAP.  For example, EBITDA and Adjusted EBITDA:

 

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

 

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

 

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

 

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

 

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

 

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The following table reconciles net (loss) earnings as reflected in ourconsolidated statements of operations prepared in accordance with GAAP toEBITDA and Adjusted EBITDA:

 
| ** **                                                                  | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-Six weeks ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------------------------|------------|
| **(dollars in millions)**                                         | ** ** | **January 31,  2009**         | ** ** | **January 26,  2008**           | ** ** | **January 31,  2009** | ** ** | **January 26,  2008** | ** ** |
|                                                                        |       |                               |       |                                 |       |   |   |   |   |
| Net (loss) earnings                                                         |       | $                                  | (509.2     | )                                    | $          | 44.3 |   | $ | (496.3 | ) | $ | 123.1 |   |
| Income tax (benefit) expense                                                |       | (142.0                             | )          | 29.5                                 |       | (131.2 | ) | 79.3 |   |
| Interest expense, net                                                       |       | 58.6                               |       | 60.4                                 |       | 116.4 |   | 121.6 |   |
| Depreciation expense                                                        |       | 39.1                               |       | 35.1                                 |       | 77.7 |   | 70.2 |   |
| Amortization of customer lists and favorable  lease commitments             |       | 18.0                               |       | 18.0                                 |       | 36.1 |   | 36.0 |   |
| EBITDA                                                                      |       | (535.5                             | )(1)       | 187.3                                |       | (397.3 | )(1) | 430.2 | (2) |
| EBITDA rate                                                                 |       | (49.6                              | )%         | 13.6                                 | %          | (19.2 | )% | 17.2 | % |
| Non-cash impairment of long-lived assets  (1)                               |       | 560.1                              |       | —                               |       | 560.1 |   | — |   |
| Non-cash gain on curtailment of defined  benefit retirement obligations (2) |       | —                             |       | —                               |       | — |   | (32.5 | ) |
| Adjusted EBITDA                                                             |       | $                                  | 24.6       |                                 | $          | 187.3 |   | $ | 162.8 |   | $ | 397.7 |   |
| Adjusted EBITDA rate                                                        |       | 2.3                                | %          | 13.6                                 | %          | 7.9 | % | 15.9 | % |

 

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

 

(2)   Foryear-to-date fiscal 2008, operating earnings and EBITDA include a one-timepension curtailment gain of $32.5 million as a result of our decision to freezecertain Pension and SERP benefits as of December 31, 2007.

 

**Inflation and Deflation**

 

We believe changes in revenues and net earnings that have resulted frominflation or deflation have not been material during the periods presented. Inrecent years, we have experienced certain inflationary conditions related to1) increases in product costs due primarily to changes in foreign currencyexchange rates that have reduced the purchasing power of the U.S. dollar and2) increases in SG&A. We purchase a substantial portion of ourinventory from foreign suppliers whose costs are affected by the fluctuation oftheir local currency against the dollar or who price their merchandise incurrencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchangerate affect us most significantly; however, we source goods from numerouscountries 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 currenciesmay increase our cost of goods sold and if we are unable to pass such costincreases to our customers, our gross margins, and ultimately our earnings,would decrease. Foreign currency fluctuations could have a material adverseeffect on our business, financial condition and results of operations in thefuture. We attempt to offset the effects of inflation through price increasesand control of expenses, although our ability to increase prices may be limitedby competitive factors. We attempt to offset the effects of merchandisedeflation, which has occurred on a limited basis in recent years, throughcontrol of expenses. There is no assurance, however, that inflation ordeflation will not materially affect our operations in the future.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirements consist principally of:

 

·                  the funding of ourmerchandise purchases;

 

·                  capital expenditures fornew store construction, store renovations and upgrades of our managementinformation systems;

 

·                  debt service requirements;

 

·                  income tax payments; and

 

·                  obligations related to ourPension Plan.

 

Our primary sources of short-term liquidity are comprised of cash onhand and availability under our Asset-Based Revolving Credit Facility. Theamounts of cash on hand and borrowings under the Asset-Based Revolving CreditFacility are influenced by a number of factors, including revenues, workingcapital levels, vendor terms, the level of capital expenditures, cashrequirements related to financing instruments and debt service obligations,Pension Plan funding obligations and tax payment obligations, among others.

 

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

 

We believe that operating cash flows, available vendor financing andamounts available pursuant to our senior secured Asset-Based Revolving CreditFacility as well as our option to elect PIK Interest under the Senior Notesthrough October 15, 2010, will be sufficient to fund our operations,anticipated capital expenditure requirements, debt service obligations,contractual obligations and commitments and Pension Plan funding requirementsthrough the end of fiscal year 2009.

 

At January 31, 2009, cash and cash equivalents were$223.2 million compared to $235.7 million at January 26, 2008.Net cash provided by operating activities was $49.8 million foryear-to-date fiscal 2009 compared to $184.8 million in year-to-date fiscal2008. Cash flows provided by operating activities were $135.0 million lower inyear-to-date fiscal 2009 than in the prior year fiscal period primarily due tothe lower levels of revenues and earnings generated in the current year.

 

Net cash used for investing activities, representing capitalexpenditures, was $64.5 million in year-to-date fiscal 2009 and$88.2 million in year-to-date fiscal 2008. We incurred significant capital expenditures in year-to-date fiscal 2009related to the construction of new stores in Topanga (the greater Los Angelesarea) and Bellevue (suburban Seattle). We incurred capital expenditures inyear-to-date fiscal 2008 related to the construction of new stores in Natickand Topanga and the remodel of our Atlanta store. We opened our Natick store inSeptember 2007, our Topanga store in September 2008 and anticipateour Bellevue store will open in Fall 2009. In light of current economicconditions and delays in certain real estate projects, we currently project grosscapital expenditures for fiscal year 2009 to be approximately $110 to $120million compared to capital expenditures of $183 million in fiscal year2008.  Net of developer contributions,capital expenditures for fiscal year 2009 are projected to be approximately $95to $105 million.

 

Net cash used for financing activities was $1.2 million inyear-to-date fiscal 2009 as compared to $2.1 million in year-to-datefiscal 2008.

 

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In response to current economic conditions, we have taken and willcontinue to take actions to maintain appropriate liquidity by:

 

·                  stimulating sales through additionalpromotional and other events;

 

·                  reducing inventory levels andpurchases;

 

·                  implementing expense controlinitiatives; and

 

·                  reviewing future capital expendituresand eliminating or postponing certain projects.

 

**Financing Structure at January 31, 2009**

 

Our major sources of funds are comprised of vendor financing, a$600.0 million Asset-Based Revolving Credit Facility,$1,625.0 million Senior Secured Term Loan Facility, $700.0 millionSenior Notes, $500.0 million Senior Subordinated Notes,$125.0 million 2028 Debentures and operating leases.

 

***Senior Secured Asset-Based Revolving CreditFacility.*** NMG’s senior secured Asset-Based Revolving Credit Facility providesfinancing of up to $600.0 million, subject to a borrowing base equal to atany time the lesser of 80% of eligible inventory (valued at the lower of costor market value) and 85% of net orderly liquidation value of the eligibleinventory, less certain reserves.

 

TheAsset-Based Revolving Credit Facility contains a number of customaryaffirmative and negative covenants, restrictions and events of default, butdoes not require NMG to comply with any financial ratio maintenance covenants.

 

The covenantslimiting dividends and other restricted payments; investments, loans, advancesand acquisitions; and prepayments or redemptions of other indebtedness, eachpermit the restricted actions in an unlimited amount, subject to thesatisfaction of certain payment conditions, principally that NMG must have atleast $75.0 million of pro forma excess availability under the Asset-BasedRevolving Credit Facility and that NMG must be in pro forma compliance with thefixed charge coverage ratio described below. In addition, NMG is permitted to take such restricted actions regardlessof whether such conditions are satisfied, subject to a $30.0 millionshared basket that is available.

 

Although the Asset-Based Revolving Credit Facility does not require NMGto comply with any financial ratio maintenance covenants, if less than$60.0 million were available to be borrowed under the Asset-BasedRevolving Credit Facility at any time, NMG would not be permitted to borrowadditional amounts and obtain letters of credit (including amendments, renewalsand extensions of letters of credit) unless its pro forma ratio of consolidatedEBITDA to consolidated Fixed Charges (as such terms are defined in the creditagreement) was at least 1.1 to 1.0. NMG’s Fixed Charge Coverage Ratio for the four-quarter period ended January 31,2009 was 1.1 to 1.0.  We anticipate thatthe Fixed Charge Coverage Ratio may continue to decline through the remainderof fiscal year 2009, but we would not expect any such decline to adverselyaffect our ability to borrow or obtain other extensions of credit under ourAsset-Based Revolving Credit Facility because we do not expect our excessavailability thereunder to fall below $60.0 million.

 

As of January 31, 2009, NMG had $576.2 million of unusedborrowing availability under the Asset-Based Revolving Credit Facility based ona borrowing base of over $600.0 million and after giving effect to$23.8 million used for letters of credit.

 

See Note 4 of our Notes to Condensed Consolidated Financial Statementsin Item 1 for a further description of the terms of the Asset-Based RevolvingCredit Facility.

 

***Senior Secured Term Loan Facility.***  In October 2005, NMG entered into acredit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility.  NMG voluntarily repaid $100.0 millionprincipal amount of its loans under the Senior Secured Term Loan Facility infiscal year 2006 and $250 million in fiscal year 2007.

 

At January 31,2009, borrowings under the Senior Secured Term Loan Facility bore interest at arate per annum equal to, at NMG’s option, either (a) a base ratedetermined by reference to the higher of (1) the prime rate of CreditSuisse and (2) the federal funds effective rate plus 1/2 of1% or (b) a LIBOR rate, subject to certain adjustments, in each case plusan applicable margin. The interest rate on the outstanding borrowings pursuantto the Senior Secured Term Loan Facility was 4.19% at January 31,2009.  The applicable margin is subjectto adjustment based on contractually defined debt coverage ratios.  At January 31, 2009, the applicablemargin with respect to base rate borrowings was 1.00% and the applicable marginwith respect to LIBOR borrowings was 2.00%.

 

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See Note 4 of our Notes to Condensed Consolidated Financial Statementsin Item 1 for a further description of the terms of the Senior Secured TermLoan Facility.

 

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

 

See Note 4 of our Notes to Condensed Consolidated Financial Statementsin Item 1 for a further description of the terms of the 2028 Debentures.

 

***Senior Notes.**** *NMG has$700.0 million aggregate original principal amount of 9.0% / 9.75% SeniorNotes under a senior indenture (Senior Indenture).  NMG’s Senior Notes mature on October 15,2015.  We negotiated for the right toinclude the PIK feature in our Senior Notes relating to the PIK Notes becauseof our belief that this feature could be a useful tool to enhance liquidityunder appropriate circumstances. In the second quarter of fiscal year 2009,given the dislocation in the financial markets and the uncertainty as to whenreasonable conditions will return, we believed that it was appropriate toutilize this feature, even though we had unused borrowing capacity under our$600 million revolving credit facility. Accordingly, we elected to pay PIKInterest for the interest period commencing on January 15, 2009 andcontinuing through April 14, 2009 and will make such interest payment withthe issuance of additional Senior Notes at the PIK Interest rate of 9.75%instead of paying interest in cash.

 

Prior to the beginning of each eligible interest period in the future,we will evaluate whether to continue utilizing this PIK feature, taking intoaccount market conditions and other relevant factors at that time. After October 15,2010, we will make all interest payments on the Senior Notes entirely in cash.

 

See Note 4 of our Notes to Condensed Consolidated Financial Statementsin Item 1 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 SubordinatedNotes under a senior subordinated indenture (Senior SubordinatedIndenture).  NMG’s Senior SubordinatedNotes mature on October 15, 2015.

 

See Note 4 of our Notes to Condensed Consolidated Financial Statementsin Item 1 for a further description of the terms of the Senior SubordinatedNotes.

 

***Interest Rate Swaps.***  NMG uses derivative financial instruments tohelp manage our interest rate risk. Effective December 6, 2005, NMGentered into floating to fixed interest rate swap agreements for an aggregatenotional amount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness. The interestrate swap agreements terminate after five years.  At January 31, 2009, the fair value ofNMG’s interest rate swap agreements was a loss of approximately$61.7 million, which amount is included in other long-term liabilities.

 

As of the effective date, NMG designated the interest rate swaps ascash flow hedges. As a result, changes in the fair value of NMG’s swaps arerecorded subsequent to the effective date as a component of accumulated othercomprehensive loss.

 

As a result of the swap agreements, NMG’s effective fixed interestrates as to the $1,000.0 million in floating rate indebtedness willcurrently range from 6.809% to 6.983% per quarter through 2010 and result in anaverage fixed rate of 6.878%.

 

**OTHER MATTERS**

 

**Factors That May Affect Future Results**

 

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

 

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*Political and General Economic Conditions*

 

·                  prolonged national andglobal economic crisis;

 

·                  current political andgeneral economic conditions or changes in such conditions includingrelationships between the United States and the countries from which we sourceour merchandise;

 

·                  terrorist activities inthe United States and elsewhere;

 

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

 

*Customer Considerations*

 

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

 

·                  changes in the demographicor retail environment;

 

·                  changes in consumerpreferences or fashion trends;

 

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

 

*Merchandise Procurement and Supply ChainConsiderations*

 

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

 

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

 

·                  changes in foreigncurrency exchange or inflation rates;

 

·                  significant increases inpaper, printing and postage costs;

 

*Industry and Competitive Factors*

 

·                  competitive responses toour loyalty programs, marketing, merchandising and promotional efforts orinventory liquidations by vendors or other retailers;

 

·                  adverse changes in thefinancial viability of our competitors;

 

·                  seasonality of the retailbusiness;

 

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

 

·                  delays in anticipatedstore openings and renovations;

 

·                  our success in enforcingour intellectual property rights;

 

*Employee Considerations*

 

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

 

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

 

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*Legal and Regulatory Issues*

 

·                  changes in government orregulatory requirements increasing our costs of operations;

 

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

 

*Leverage Considerations*

 

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

 

·                  the ability and theeffects of refinancing our indebtedness under our senior secured creditfacilities;

 

·                  the effects upon us ofcomplying with the covenants contained in our senior secured credit facilitiesand the indentures governing our senior notes and senior subordinated notes;

 

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

 

*Other Factors*

 

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

 

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

 

·                  other risks, uncertaintiesand factors set forth in this Quarterly Report on Form 10-Q, includingthose set forth in Item 1A, “Risk Factors.”

 

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

 

**CriticalAccounting Policies**

 

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

 

See Note 1 of the Notes to CondensedConsolidated Financial Statements in Item 1 for a summary of our criticalaccounting policies.  A completedescription of our critical accounting policies is included in our AnnualReport to Shareholders on Form 10-K for the fiscal year endedAugust 2, 2008.

 

***Recent Accounting Pronouncements. ***As more fullyexplained in Note 5, we adopted in the first quarter of fiscal year 2009Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS 157), which provides guidance for using fair value tomeasure certain assets and liabilities. SFAS 157 applies whenever another standard requires or permits assets orliabilities to be measured at fair value. The standard does not expand the use of fair value to any newcircumstances.

 

In February 2008, the FASB issued FASB Staff Position 157-2,*“*EffectiveDate of FASB Statement No. 157” (FSP 157-2), which delays the effective date of SFAS 157 for allnonfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). FSP 157-2 is effective for fiscal yearsbeginning after November 15, 2008, or our fiscal year ending July 31,2010.  We have not yet evaluated theimpact of adopting FSP 157-2 on our consolidated financial statements.

 

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In the first quarter of fiscal year 2009, we adopted Statement ofFinancial Accounting Standards No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities” (SFAS 159).  SFAS 159 expands opportunities to use fairvalue measurement in financial reporting and permits entities to choose tomeasure many financial instruments and certain other items at fair value.  We chose not to elect the fair value option.

 

In December 2007, the FASB issued Statement of FinancialAccounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)),which addresses the recognition and accounting for identifiable assetsacquired, liabilities assumed and non-controlling interests in businesscombinations.  In addition, SFAS 141(R) changesthe accounting treatment for certain acquisition-related items, includingrequirements to expense acquisition-related costs as incurred, expenserestructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a business combinationas a component of tax expense.  SFAS 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after December 15, 2008, or our fiscal year ending July 31,2010.  Generally, the effect of SFAS 141(R) willdepend on future acquisitions.  However,the accounting for the resolution of any tax uncertainties remaining as of August 1,2009 related to the Acquisition will be subject to the provisions of SFAS141(R).  We have not yet evaluated theimpact, if any, of adopting SFAS 141(R) on our consolidated financialstatements.

 

In March 2008, the FASB issued Statement of Financial AccountingStandards No. 161, “Disclosures about Derivative Instruments and HedgingActivities” (SFAS 161).  SFAS 161enhances current disclosures related to derivative instruments and hedgingactivities to provide adequate information about how derivative and hedgingactivities affect an entity’s financial position, financial performance andcash flows.  SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, or our third fiscal quarter ending May 2,2009.  We have not yet evaluated theimpact, if any, of adopting the disclosure requirements of SFAS 161.

 

In December 2008, the FASB issued FASB Staff Position 132(R)-1,*“*Employers’Disclosures about Postretirement Benefit Plan Assets” (FSP 132(R)-1), which provides guidance on anemployer’s disclosures about plan assets of a defined benefit pension or otherpostretirement plan.  FSP 132(R)-1 iseffective for fiscal years ending after December 15, 2009, or our fiscalyear ending July 31, 2010.  We havenot yet evaluated the impact of adopting the disclosure requirements of FSP132(R)-1.

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in the Company’s financial instrumentsrepresents 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 throughits normal operating and financing activities. The Company is exposed tointerest rate risk through its borrowing activities, which are described inNote 4 to our condensed consolidated financial statements.

 

As of January 31, 2009, NMG had no borrowings outstanding underits Asset-Based Revolving Credit Facility that bears interest at floatingrates. Future borrowings under NMG’s Asset-Based Revolving Facility, to the extentof outstanding borrowings, would be affected by interest rate changes.

 

At January 31, 2009, NMG had $1,625.0 million of debt underits Senior Secured Term Loan Facility issued in connection with the Acquisitionthat bears interest at floating rates.

 

NMG uses derivative financial instruments to help manage our interestrate risk.  Effective December 6,2005, NMG  entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. The interest rate swapagreements terminate after five years. As a result of the swap agreements, NMG’s effective fixed interest ratesas to the $1,000.0 million in floating rate indebtedness will currentlyrange from 6.809% to 6.983% per quarter through 2010 and result in an averagefixed rate of 6.878%. With respect to outstanding borrowings in excess of$1,000.0 million on the Senior Secured Term Loan Facility, such borrowings areat floating rates.  A 1% increase inthese floating rates would increase annual interest expense by approximately$6.3 million.

 

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

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

**a. Disclosure Controls and Procedures.**

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, wecarried out an evaluation as of January 31, 2009, under the supervisionand with the participation of our Chief Executive Officer and Chief FinancialOfficer, as well as other key members of our management, of the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e) andRule 15d-15(e) under the Exchange Act). Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, accumulated, processed,summarized, reported and communicated on a timely basis within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

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

 

In the ordinary course of business, we routinely enhance ourinformation systems by either upgrading our current systems or implementing newsystems. No change occurred in our internal controls over financial reportingduring the quarter ended January 31, 2009 that has materially affected, oris reasonably likely to materially affect, our internal controls over financialreporting.

 

**NEIMAN MARCUS, INC.**

 

**PART II**

 

**ITEM 1.           LEGALPROCEEDINGS**

 

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

 

Note 11 of the Notes to CondensedConsolidated Financial Statements in Part I, Item 1 is incorporated hereinby reference as if fully restated herein. Note 11 contains forward-looking statements that are subject to therisks and uncertainties discussed in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Factors That May AffectFuture Results.”

 

**ITEM 1A.        RISKFACTORS**

 

**Risks Related to Current Economic Conditions**

 

**The global economic crisis has affected, andmay continue to adversely affect, our business and results of operations.**

 

The global economic crisis has affected, and may continue to adverselyaffect, our business and results of operations. The significant economic downtown that we are experiencing has affectedthe United States generally as well as the geographic areas in which we havestores, particularly in Texas, California, Florida and the New York Citymetropolitan area, from which we derive a significant portion of 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 highlydependent upon the level of consumer spending, particularly among affluentcustomers. Accordingly, sales of these products may be adversely affected by aneconomic downturn, increases in consumer debt levels, uncertainties regardingfuture economic prospects or a decline in consumer confidence. During an actualor perceived economic downturn (as a result of increases in consumer debtlevels, 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 mayshop our stores and websites.  As aresult, we may be required to take significant additional markdowns and/orincrease our marketing and promotional expenses in response to the lower levelsof demand for luxury goods.  In addition,promotional and/or prolonged periods of deep discount pricing by ourcompetitors could have a material adverse effect on our business.

 

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We continue to experience a challenging economic and retail environmentand expect these conditions will continue for an extended period of time.  Consistent with the significant declines inoverall macroeconomic factors, capital markets and consumer confidence thathave accelerated throughout the fiscal year 2009, customer demand was wellbelow our initial expectations and the prior year, particularly during theholiday season in the second quarter. The current softness in customer demand exists across all geographicareas, all distribution channels and all merchandise categories, particularlythe apparel and home décor categories. We expect retail demand and revenues will remain weak for an extendedperiod of time.  We will continue toreduce our inventory levels and Spring season purchases to align them withanticipated lower customer demand.  Inaddition, with softer revenue levels anticipated for fiscal year 2009, ourSG&A expenses as a percentage of revenues will continue to be underpressure throughout the year.  Withrespect to liquidity, our Adjusted EBITDA exceeded our interest expense, netfor year-to-date fiscal 2009 but not for the second quarter of fiscal year2009, and we anticipate that Adjusted EBITDA may continue to decline in theremainder of fiscal year 2009 as a result of deteriorating economicconditions.  In addition to the impact ofthe economic downturn on our customers, some of our vendors and developers mayexperience a reduction in their availability of funds and cash flows, whichcould negatively impact their business as well as ours.  The prolonged continuation of current marketconditions could have a material adverse effect on our business.

 

**Risks Related to Our Structure and NMG’sIndebtedness**

 

**Because our ownership of NMG accounts forsubstantially all of our assets and operations, we are subject to all risksapplicable to NMG.**

 

We are a holding company.  NMG and its subsidiaries conductsubstantially all of our consolidated operations and own substantially all ofour consolidated assets.  As a result, weare subject to all risks applicable to NMG. In addition, NMG’s Asset-Based Revolving Credit Facility, NMG’s SeniorSecured Term Loan Facility and the indentures governing NMG’s senior notes andsenior subordinated notes contain provisions limiting NMG’s ability todistribute 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 thebusiness, to comply with debt covenants and make payments on its indebtedness.**

 

We are highly leveraged.  As of January 31,2009, the principal amount of NMG’s total indebtedness was approximately$2,953.9 million and the unused borrowing availability under the $600 millionAsset-Based Revolving Credit Facility was approximately $576.2 million aftergiving effect to $23.8 million of letters of credit outstandingthereunder.  NMG’s substantialindebtedness, combined with its lease and other financial obligations andcontractual commitments, could have other important consequences. For example,it could:

 

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

 

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

 

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

 

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

 

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

 

·                  limit NMG’s ability toobtain credit from our vendors and/or the vendors’ factors; and

 

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

 

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

 

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In addition, NMG’s interest expense could increase if interest ratesincrease because the entire amount of the indebtedness under the senior securedcredit facilities bears interest at floating rates.  As of January 31, 2009, NMG hadapproximately $1,625.0 million principal amount of floating rate debt,consisting of outstanding borrowings under the Senior Secured Term LoanFacility.  NMG also had at that dateapproximately $576.2 million of unused floating rate debt borrowing capacityavailable under the Asset-Based Revolving Credit Facility, based on a borrowingbase of over $600.0 million after giving effect to $23.8 million used forletters of credit.  Effective December 6,2005, NMG entered into floating to fixed interest rate swap agreements for anaggregate notional amount of $1,000.0 million to limit our exposure to interestrate increases related to a portion of our floating rate indebtedness.

 

**To service NMG’s indebtedness, it willrequire a significant amount of cash. NMG’s ability to generate cash depends onmany factors beyond its control, and any failure to meet the its debt serviceobligations could harm its business, financial condition and results ofoperations.**

 

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

 

If NMG doesnot generate sufficient cash flow from operations to satisfy the debt serviceobligations, NMG may have to undertake alternative financing plans, such asrefinancing or restructuring its indebtedness, selling assets, reducing ordelaying capital investments or seeking to raise additional capital.  For example, NMG’s Adjusted EBITDA exceededits interest expense, net for year-to-date fiscal 2009 but not for the secondquarter of fiscal year 2009, and we anticipate that Adjusted EBITDA maycontinue to decline in the remainder of fiscal year 2009 as a result ofdeteriorating economic conditions.  Ourability to restructure or refinance NMG’s debt will depend on the condition ofthe capital markets and our financial condition at such time.  Any refinancing of NMG’s debt could be athigher interest rates and may require it to comply with more onerous covenants,which could further restrict its business operations.  The terms of existing or future debtinstruments may restrict NMG from adopting some of these alternatives.  In addition, our borrowing costs and abilityto refinance may be affected by short-term and long-term debt ratings assignedby independent rating agencies, which are based, in significant part, on NMG’sperformance as measured by indicators such as interest coverage and leverageratios.  Furthermore, any failure to makepayments of interest and principal on NMG’s outstanding indebtedness on atimely basis would likely result in a reduction of NMG’s credit rating, whichcould harm its ability to incur additional indebtedness on acceptable terms.

 

Contractuallimitations on NMG’s ability to execute any necessary alternative financingplans could exacerbate the effects of any failure to generate sufficient cashflow to satisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits NMG to borrow up to$600.0 million; however, NMG’s ability to borrow and obtain letters ofcredit (including amendments, renewals and extensions of letters of credit)thereunder is limited by a borrowing base, which at any time will equal thelesser of 80% of eligible inventory valued at the lower of cost or market valueand 85% of the net orderly liquidation value of the eligible inventory, lesscertain reserves.  In addition, ourability to borrow and obtain letters of credit under this facility is limitedby a minimum liquidity condition, providing that, if less than$60.0 million is available at any time, NMG is not permitted to borrow anyadditional amounts and obtain letters of credit under the Asset-Based RevolvingCredit Facility unless NMG’s pro forma ratio of consolidated EBITDA toconsolidated Fixed Charges (as such terms are defined in the credit agreementfor the Asset-Based Revolving Credit Facility) is at least 1.1 to 1.0.  NMG’s Fixed Charge Coverage Ratio for thefour-quarter period ended January 31, 2009 was 1.1 to 1.0.  We anticipate that the fixed charge coverageratio may continue to decline through the remainder of fiscal year 2009, but wedo not expect our excess availability under the Asset-Based Revolving CreditFacility to fall below $60.0 million. Our ability to meet this minimum liquidity condition in the future maybe affected by events beyond our control.

 

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

 

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

 

The credit agreements governing NMG’s Asset-Based Revolving CreditFacility and Senior Secured Term Loan Facility and the indentures governing theSenior Notes, the Senior Subordinated Notes and the 2028 Debentures contain,and any future indebtedness of NMG would likely contain, a number ofrestrictive covenants that impose significant operating and financialrestrictions, including restrictions on NMG’s ability to engage in acts thatmay be in its best long-term interests. The indentures

 

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governing the Senior Notes, the Senior Subordinated Notes and the 2028Debentures and the credit agreements governing the senior secured creditfacilities include covenants that, among other things, restrict NMG’s abilityto:

 

·                  incur additionalindebtedness;

 

·                  pay dividends on NMG’scapital stock or redeem, repurchase or retire its capital stock orindebtedness;

 

·                  make investments;

 

·                  create restrictions on thepayment of dividends or other amounts to NMG from NMG’s restrictedsubsidiaries;

 

·                  engage in transactionswith its affiliates;

 

·                  sell assets, includingcapital stock of NMG’s subsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and leaseback transactions.

 

In addition, NMG’s ability to borrow under the Asset-Based RevolvingCredit Facility is limited by a borrowing base and a minimum liquiditycondition, as described above.

 

Moreover, NMG’s Asset-Based Revolving Credit Facility providesdiscretion to the agent bank acting on behalf of the lenders to imposeadditional availability restrictions and other reserves, which could materiallyimpair the amount of borrowings that would otherwise be available to us. Therecan be no assurance that the agent bank will not impose such reserves or, wereit to do so, that the resulting impact of this action would not materially andadversely impair NMG’s liquidity.

 

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

 

The operating and financial restrictions and covenants in these debtagreements and any future financing agreements may adversely affect NMG’sability to finance future operations or capital needs or to engage in otherbusiness activities.

 

**Risks Related to Our Business and Industry**

 

**The specialty retail industry is highlycompetitive.**

 

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

 

We compete for customers with specialty retailers, traditional andhigh-end department stores, national apparel chains, vendor-owned proprietaryboutiques, individual specialty apparel stores and direct marketing firms. Wecompete for customers principally on the basis of quality and fashion, customerservice, value, assortment and presentation of merchandise, marketing andcustomer loyalty programs and, in the case of Neiman Marcus and BergdorfGoodman, store ambiance. In our Specialty Retail business, merchandiseassortment is a critical competitive factor, and retail stores compete forexclusive, preferred and limited distribution arrangements with key designers.Many of our competitors are larger than we are and have greater financialresources than we do. In addition, certain designers from whom we sourcemerchandise have established competing free-standing retail stores in the samevicinity as our stores. If we fail to successfully compete for customers ormerchandise, our business will suffer.

 

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

 

Our relationships with established and emerging designers are a keyfactor in our position as a retailer of high-fashion merchandise, and asubstantial portion of our revenues is attributable to our sales of designermerchandise. Many of our key vendors limit the number of retail channels theyuse to sell their merchandise and competition among luxury retailers to obtainand sell these goods is intense. Our relationships with our designers have beena significant contributor to our past success. We have no guaranteed supplyarrangements with our principal merchandising sources. Accordingly, there canbe no assurance that

 

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such sources will continue to meet our quality, style and volumerequirements. Moreover, nearly all of the brands of our top designers are soldby competing retailers, and many of our top designers also have their owndedicated retail stores. If one or more of our top designers were to cease providingus with adequate supplies of merchandise or, conversely, were to increase salesof merchandise through their own stores or to the stores of our competitors,our business could be adversely affected. In addition, any decline in thepopularity or quality of any of our designer brands could adversely affect ourbusiness.

 

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

 

We make decisions regarding the purchase of our merchandise well inadvance of the season in which it will be sold. For example, women’s apparel,men’s apparel and shoes are typically ordered six to nine months in advance ofthe products being offered for sale while handbags, jewelry and othercategories are typically ordered three to six months in advance.  If our sales during any season, particularlya peak season, are significantly lower than we expect for any reason, we maynot be able to adjust our expenditures for inventory and other expenses in a timelyfashion and may be left with a substantial amount of unsold inventory. If thatoccurs, we may be forced to rely on markdowns or promotional sales to disposeof excess inventory. This could have an adverse effect on our margins andoperating income. At the same time, if we fail to purchase a sufficientquantity of merchandise, we may not have an adequate supply of products to meetconsumer demand. This may cause us to lose sales or harm our customerrelationships.

 

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

 

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

 

**A breach in information privacy couldnegatively impact our operations.**

 

The protection of our customer, employee and company data is criticallyimportant to us.  We utilize customerdata captured through both our proprietary credit card programs and our directmarketing activities. Our customers have a high expectation that we willadequately safeguard and protect their personal information.  The regulatory environment surroundinginformation security and privacy is evolving and increasingly demanding, withthe frequent imposition of new and constantly changing requirements across allour business units.  A significant breachof customer, employee or company data could damage our reputation andrelationships with our customers and result in lost sales, fines and lawsuits.

 

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

 

Based upon our expansion strategy, we expect that planned new storeswill add over 397,000 square feet of new store space over approximately thenext four fiscal years, representing an increase of approximately 7% above thecurrent aggregate square footage of our full-line Neiman Marcus andBergdorf Goodman stores.  New storeopenings involve certain risks, including constructing, furnishing andsupplying a store in a timely and cost effective manner, accurately assessing thedemographic or retail environment at a given location, hiring and trainingquality staff, obtaining necessary permits and zoning approvals, obtainingcommitments from a core group of vendors to supply the new store, integratingthe new store into our distribution network and building customer awareness andloyalty. In undertaking store remodels, we must complete the remodel in atimely, cost effective manner, minimize disruptions to our existing operations,and succeed in creating an improved shopping environment. If we fail to executeon these or other aspects of our store expansion and remodeling strategy, wecould suffer harm to our sales, an increase in costs and expenses and anadverse effect on our business.

 

**Acts of terrorism could adversely affect ourbusiness.**

 

The economic downturn that followed the terrorist attacks of September 11,2001 had a material adverse effect on our business. Any further acts ofterrorism or other future conflicts may disrupt commerce and undermine consumerconfidence, cause a downturn in the economy generally, cause consumer spendingor shopping center traffic to decline or reduce the desire of our customers tomake discretionary purchases. Any of the foregoing factors could negativelyimpact our sales revenue, particularly in the case of any terrorist attack targetingretail space, such as a shopping center. Furthermore, an act of terrorism orwar, or the

 

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threat thereof, could negatively impact our business by interferingwith our ability to obtain merchandise from foreign manufacturers. Any futureinability to obtain merchandise from our foreign manufacturers or to substituteother manufacturers, at similar costs and in a timely manner, could adverselyaffect our business.

 

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

 

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

 

**Inflation may adversely affect our businessoperations in the future.**

 

In recent years, we have experienced certain inflationary conditions inour cost base due primarily to (1) changes in foreign currency exchangerates that have reduced the purchasing power of the U.S. dollar, (2) increasesin selling, general and administrative expenses, particularly with regard toemployee benefits and (3) increases in fuel prices and costs impacted byincreases in fuel prices, such as freight and transportation costs. Inflationcan harm our margins and profitability if we are unable to increase prices orcut costs enough to offset the effects of inflation in our cost base. Ifinflation in these or other costs worsens, we may not be able to offset theeffects of inflation and cost increases through control of expenses, passingcost increases on to customers or any other method.  Any future inflation could adversely affectour profitability and our business.

 

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

 

We maintain loyalty programs that are designed to cultivate long-termrelationships with our customers and enhance the quality of service we provideto our customers. We must constantly monitor and update the terms of ourloyalty programs so that they continue to meet the demands and needs of ourcustomers and remain competitive with loyalty programs offered by otherhigh-end specialty retailers. Given that approximately 40% of our revenuesduring each of the last two calendar years was generated by our InCircleloyalty program members, our failure to continue to provide quality service andcompetitive rewards to our customers through the InCircle loyalty program couldadversely affect our business.

 

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

 

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

 

We entered into a five-year program agreement with HSBC in July 2005which provides for a long-term marketing and servicing alliance under whichHSBC offers proprietary credit card accounts to our customers under both the “NeimanMarcus” and “Bergdorf Goodman” brand names.

 

Under the terms of this alliance, HSBC offers credit cards and non-cardpayment plans and bears substantially all credit risk with respect to salestransacted on the cards bearing our brands. We receive ongoing payments fromHSBC related to credit card sales and compensation for marketing and servicingactivities. During fiscal year 2006, we outsourced various administrativeelements of the proprietary credit card program to HSBC, including theprocessing of data, although we continue to handle key customer servicefunctions, including customer inquiries and collections.

 

In April 2008, we entered into an amendment to the programagreement with HSBC. The amendment, among other things, provides for 1) theallocation between HSBC and NMG of additional income, if any, to be generatedfrom the credit card program as a result of certain changes made to the ProgramAgreement and 2) the allocation of certain credit card losses between HSBC andNMG (credit losses are based upon a percentage of losses incurred as apercentage of credit sales and subject to a contractual limit, which limits ourloss exposure to a maximum of 0.3% of credit sales from April 1, 2008 to June 30,2010).

 

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HSBC has discretion over certain policies and arrangements with ourcredit card customers and may change these policies and arrangements in waysthat affect our relationship with these customers. In addition, there can be noassurance that, upon expiration of our current alliance with HSBC, that we willbe able to enter into a replacement arrangement on terms comparable to thecurrent arrangement. Any changes in our credit card arrangements may adverselyaffect our credit card program and ultimately, our business.

 

Credit card operations are subject to numerous federal and state lawsthat impose disclosure and other requirements upon the origination, servicingand enforcement of credit accounts and limitations on the maximum amount offinance charges that may be charged by a credit provider. Any regulation orchange in the regulation of credit arrangements that would materially limit theavailability of credit to our customer base could adversely affect ourbusiness. In addition, changes in credit card use, payment patterns, anddefault rates may result from a variety of economic, legal, social, and otherfactors that we cannot control or predict with certainty.

 

**Our business can be affected by extreme orunseasonable weather conditions.**

 

Extreme weather conditions in the areas in which our stores are locatedcould adversely affect our business. For example, heavy snowfall, rainfall orother extreme weather conditions over a prolonged period might make itdifficult for our customers to travel to our stores and thereby reduce oursales and profitability. Our business is also susceptible to unseasonableweather conditions. For example, extended periods of unseasonably warmtemperatures during the winter season or cool weather during the summer seasoncould render a portion of our inventory incompatible with those unseasonableconditions. Reduced sales from extreme or prolonged unseasonable weatherconditions would adversely affect our business.

 

**We are subject to numerous regulations thatcould affect our operations.**

 

We are subject to customs, truth-in-advertising and other laws,including consumer protection regulations and zoning and occupancy ordinancesthat regulate retailers generally and/or govern the importation, promotion and saleof merchandise and the operation of retail stores and warehouse facilities.Although we undertake to monitor changes in these laws, if these laws changewithout our knowledge, or are violated by importers, designers, manufacturersor distributors, we could experience delays in shipments and receipt of goodsor be subject to fines or other penalties under the controlling regulations,any of which could adversely affect our business.

 

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

 

The specialty retail industry is seasonal in nature, with a higherlevel of sales typically generated in the fall and holiday selling seasons. Wehave in the past experienced significant fluctuation in our revenues fromquarter to quarter with a disproportionate amount of our revenues falling inour second fiscal quarter, which coincides with the holiday season. Inaddition, we have significant additional cash requirements in the periodleading up to the months of November and December in anticipation ofhigher sales volume in those periods, including payments relating to additionalinventory, advertising and employees.

 

**Our business is affected by foreign currencyfluctuations.**

 

We purchase a substantial portion of our inventory from foreignsuppliers whose cost to us is affected by the fluctuation of their localcurrency against the dollar or who price their merchandise in currencies otherthan the dollar. Fluctuations in the Euro-U.S. dollar exchange rate affect usmost significantly; however, we source goods from numerous countries and thusare affected by changes in numerous currencies and, generally, by fluctuationsin the U.S. dollar relative to such currencies. Accordingly, changes in the value of the dollar relative to foreign currenciesmay increase our cost of goods sold and if we are unable to pass such costincreases on to our customers, our gross margins, and ultimately our earnings,will decrease. Foreign currency fluctuations could have a material adverseeffect on our business, financial condition and results of operations in thefuture.

 

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

 

A substantial majority of our merchandise is manufactured overseas,mostly in Europe. As a result, political instability or other events resultingin the disruption of trade from other countries or the imposition of additionalregulations relating to or duties upon imports could cause significant delaysor interruptions in the supply of our merchandise or increase our costs, eitherof which could have a material adverse effect on our business. If we are forcedto source merchandise from other countries, those goods may be more expensiveor of a different or inferior quality from the ones we now sell. The importanceto us of our existing designer relationships could present additionaldifficulties, as it may not be possible to source merchandise from a givendesigner

 

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from alternative jurisdictions. If we were unable to adequately replacethe merchandise we currently source with merchandise produced elsewhere, ourbusiness could be adversely affected.

 

**Significant increases in costs associatedwith the production of catalogs and other promotional materials may adverselyaffect our operating income.**

 

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

 

**Weare indirectly owned and controlled by the Sponsors, and their interests asequity holders may conflict with those of our creditors.**

** **

We are indirectly owned and controlled by the Sponsors and certainother equity investors, and the Sponsors have the ability to control ourpolicies and operations. The interests of the Sponsors may not in all cases bealigned with those of our creditors. For example, if we encounter financialdifficulties or are unable to pay our debts as they mature, the interests ofour 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 theirequity investments, even though such transactions might involve risks toholders of our indebtedness. Furthermore, the Sponsors may in the future ownbusinesses that directly or indirectly compete with us. One or more of theSponsors also may pursue acquisition opportunities that may be complementary toour business, and as a result, those acquisition opportunities may not beavailable to us.

 

**If we are unable to enforce our intellectualproperty rights, or if we are accused of infringing on a third party’sintellectual 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 andservice marks are registered in the United States and in various foreigncountries, primarily in Europe. The laws of some foreign countries do notprotect proprietary rights to the same extent as do the laws of the UnitedStates. Moreover, we are unable to predict the effect that any future foreignor domestic intellectual property legislation or regulation may have on ourexisting or future business. The loss or reduction of any of our significantproprietary rights could have an adverse effect on our business.

 

Additionally, third parties may assert claims against us alleginginfringement, misappropriation or other violations of their tradename or otherproprietary rights, whether or not the claims have merit. Claims like these maybe time consuming and expensive to defend and could result in our beingrequired to cease using the tradename or other rights and selling the allegedlyinfringing products. This might have an adverse affect on our sales and causeus to incur significant litigation costs and expenses.

 

**Failure to successfully maintain and updateinformation technology systems and enhance existing systems may adverselyaffect our business.**

 

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

 

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

 

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

 

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**ITEM 1B.**                **UNRESOLVED STAFF COMMENTS**

 

None.

 

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

 

None.

 

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

 

None.

 

**ITEM 6.****                         EXHIBITS**

 
| 2.1    |   | Agreement and Plan of Merger, dated May 1, 2005, among The  Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Newton Merger  Sub, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                                |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 2.2    |   | Purchase, Sale and Servicing Transfer Agreement dated as of  June 8, 2005, among The Neiman Marcus Group, Inc., Bergdorf  Goodman, Inc., HSBC Bank Nevada, N.A. and HSBC Finance Corporation,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated June 8, 2005.                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1    |   | Amended and Restated Certificate of Incorporation of Neiman  Marcus, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Registration Statement on Form S-1 (Registration  No. 333-133184) dated April 10, 2006.                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 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 Neiman Marcus Group, Inc.’s Annual Report on Form 10-K  for the fiscal year ended July 31, 2004.                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2    |   | Form of 7.125% Senior Notes Due 2028, dated May 27, 1998,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Annual  Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3    |   | Senior Indenture dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4    |   | Senior Subordinated Indenture dated as of October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5    |   | Form of 9%/9 3/4% Senior Notes due 2015, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6    |   | Form of 10 3/8% Senior Subordinated Notes due 2015, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                |
| 4.7    |   | Registration Rights Agreement dated October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial  Purchasers, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005. |

 

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| 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 Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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.  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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 Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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 Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7   |   | Credit Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Deutsche Bank Trust  Company Americas, 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, and Credit  Suisse, Banc of America Securities LLC and Goldman Sachs Credit Partners  L.P., as co-syndication agents, General Electric Capital Corporation as  documentation agent and the lenders thereunder, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K  dated October 12, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8   |   | Credit Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Credit Suisse, as  administrative agent and collateral agent, Credit Suisse and Deutsche Bank  Securities Inc. as joint lead arrangers, Banc of America Securities LLC and  Goldman Sachs Credit Partners L.P. as co-arrangers, Credit Suisse, Deutsche  Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as joint bookrunners, Deutsche Bank Securities Inc., Banc of  America Securities LLC and Goldman Sachs Credit Partners L.P. as  co-syndication agents and the lenders thereunder, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9   |   | Pledge and Security 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 Deutsche Bank  Trust Company Americas, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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| 10.10  |   | 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 Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11  |   | 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.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.12  |   | 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.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.13  |   | 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.                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.14  |   | 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.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.15  |   | 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.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.16  |   | 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.    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.17* |   | Newton Acquisition, Inc. Management Equity Incentive Plan,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.18  |   | Amendment to the Newton Acquisition, Inc. Management Equity  Incentive Plan effective as of January 1, 2009. (1)                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.19* |   | Stock Option Grant Agreement made as of November 29, 2005  between Newton Acquisition, Inc. and Burton M. Tansky, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.20* |   | Amendment to the Stock Option Grant Agreement effective as of  January 1, 2009 by and between Neiman Marcus, Inc., a Delaware corporation,  and Burton M. Tansky. (1)                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.21* |   | 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.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.22* |   | 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. (1)                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.23  |   | 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. |

 

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| 10.24* |   | 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.                                                                                                                                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.25* |   | Amendment to Employment Agreement effective as of January 1,  2009 by and between The Neiman Marcus Group, Inc., a Delaware corporation,  and Karen Katz. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.26  |   | 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.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.27  |   | 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.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.28  |   | Amendment No. 1, dated as of March 28, 2006, to the Pledge  and Security Intercreditor Agreement dated as of October 6, 2005, among  Neiman Marcus, Inc., The Neiman Marcus Group, Inc., the  Subsidiaries party thereto and Credit Suisse, as administrative agent and  collateral agent, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated March 29, 2006.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.29  |   | Credit Card Program Agreement, dated as of June 8, 2005, by and  among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC  Bank Nevada, N.A. and Household Corporation, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.30  |   | Form of Servicing Agreement, by and between The Neiman Marcus  Group, Inc. and HSBC Bank Nevada, N.A., incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.31* |   | Confidentiality, Non-Competition and Termination Benefits Agreement  by and between Bergdorf Goodman, Inc., a New York corporation and a  wholly owned subsidiary of The Neiman Marcus Group, Inc., and James J.  Gold dated May 3, 2004, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal year  ended July 31, 2004.                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.32* |   | 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. (1)                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.33* |   | 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. (1)                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.34  |   | Stockholder Agreement, dated as of May 1, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc. and the  other parties signatory thereto, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated May 4,  2005.                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.35* |   | 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.                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.36  |   | 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. |

 

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| 10.37  |   | 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. (1)                              |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.38* |   | 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.                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.39* |   | Amendment No. 1 effective as of January 1, 2009 to The  Neiman Marcus Group, Inc. Key Employee Deferred Compensation Plan. (1)                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.40  |   | Amendment No. 3 dated as of October 12, 2006 to the Credit  Agreement dated as of October 6, 2005 among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman  Marcus Group, Inc. from time to time party thereto, the Lenders  thereunder and Credit Suisse, as administrative agent and collateral agent  for the Lenders, incorporated by reference to Neiman Marcus, Inc.’s  Current Report on Form 8-K dated October 17, 2006.                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.41  |   | Amendment No. 4 dated as of February 8, 2007 to the Credit  Agreement dated as of October 6, 2005, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman  Marcus Group, Inc. from time to time party thereto, the lenders  thereunder, and Credit Suisse, as administrative agent and collateral agent  for the lenders incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated February 14,  2007. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.42  |   | The Neiman Marcus Group, Inc. Supplemental Executive Retirement  Plan as amended and restated effective January 1, 2009. (1)                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.43  |   | The Neiman Marcus Group, Inc. Defined Contribution Supplemental  Executive Retirement Plan, as amended and restated effective as of  January 1, 2008, incorporated herein by reference to the Neiman  Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended  August 2, 2008.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.44  |   | Amendment No. 1 effective January 1, 2009 to the Amended  and Restated Neiman Marcus Group, Inc. Defined Contribution Supplemental  Executive Retirement Plan. (1)                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 32     |   | Certifications of Chief Executive Officer and Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                             |

 

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| (1)    | Filed herewith.                                                  |
|--------|------------------------------------------------------------------|
|   |                                                             |
| *      | Current management contract or compensatory plan or arrangement. |

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 

NEIMAN MARCUS, INC.

(Registrant)

 
| **Signature**         | ** ** | **Title**                      | ** ** | **Date**            |
|-----------------------|------------|--------------------------------|------------|---------------------|
|                  |       |                           |       |                |
| /s/ T. Dale Stapleton |       | Vice President and Controller  |       | March 11, 2009 |
| T. Dale Stapleton     |       | and Duly Authorized Officer    |       |                |
|                  |       | (principal accounting officer) |       |                |

 

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