Table of Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the Quarterly Period Ended November 1, 2008**

 

**OR**

 

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

 

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

 

**Neiman Marcus, Inc.**

(Exact name of registrant as specified in its charter)

 

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

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No  ̈

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large  accelerated filer  ̈ | Accelerated  filer  ̈ | Non-accelerated  filer  ̈ | Smaller  reporting filer x |
|---------------------------------|---------------------------|-------------------------------|----------------------------|

 

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

 

There were 1,012,919 shares ofthe registrant’s common stock, par value $.01 per share, outstanding at November 1,2008.

 

 

 

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**NEIMAN MARCUS, INC.**

 

**INDEX**

 
| ** **    | ** **                                                                                                                | **Page** |
|---------------|---------------------------------------------------------------------------------------------------------------------------|----------|
| Part I.  | Financial  Information                                                                                                    |     |
|          |                                                                                                                      |     |
| Item 1.       | Condensed Consolidated Balance Sheets as of  November 1, 2008, August 2, 2008 and October 27, 2007         | 1        |
|          |                                                                                                                      |     |
|          | Condensed  Consolidated Statements of Earnings for the Thirteen Weeks Ended  November 1, 2008 and October 27, 2007   | 2        |
|          |                                                                                                                      |     |
|          | Condensed  Consolidated Statements of Cash Flows for the Thirteen Weeks Ended  November 1, 2008 and October 27, 2007 | 3        |
|          |                                                                                                                      |     |
|          | Notes to  Condensed Consolidated Financial Statements                                                                     | 4        |
|          |                                                                                                                      |     |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                               | 27       |
|          |                                                                                                                      |     |
| Item 3.       | Quantitative and Qualitative Disclosures  About Market Risk                                                               | 42       |
|          |                                                                                                                      |     |
| Item 4.       | Controls and Procedures                                                                                                   | 43       |
|          |                                                                                                                      |     |
| Part II. | Other Information                                                                                                         |     |
|          |                                                                                                                      |     |
| Item 1.       | Legal Proceedings                                                                                                         | 44       |
|          |                                                                                                                      |     |
| Item 1A.      | Risk Factors                                                                                                              | 44       |
|          |                                                                                                                      |     |
| Item 1B.      | Unresolved Staff Comments                                                                                                 | 51       |
|          |                                                                                                                      |     |
| Item 2.       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                              | 51       |
|          |                                                                                                                      |     |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                                                                      | 51       |
|          |                                                                                                                      |     |
| Item 6.       | Exhibits                                                                                                                  | 51       |
|          |                                                                                                                      |     |
| Signatures    | 56                                                                                                                        |

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| **(in thousands, except shares)**                                                                                                                                            | ** ** | **November 1,  2008** | ** ** | **August 2,  2008** | ** ** | **October 27,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                                  | ** ** | ** **                 | ** ** | ** **               | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |                       |       |                     |       |                       |       |
| Current assets:                                                                                                                                                                             |       |                       |       |                     |       |                       |       |
| Cash and cash equivalents                                                                                                                                                                   |       | $                          | 115,350    |                     | $          | 239,180                    |       | $ | 80,556 |   |
| Merchandise inventories                                                                                                                                                                     |       | 1,084,308                  |       | 978,044                  |       | 1,085,511                  |       |
| Deferred income taxes                                                                                                                                                                       |       | 32,659                     |       | 32,659                   |       | 39,728                     |       |
| Other current assets                                                                                                                                                                        |       | 115,352                    |       | 113,776                  |       | 101,191                    |       |
| Total current assets                                                                                                                                                                        |       | 1,347,669                  |       | 1,363,659                |       | 1,306,986                  |       |
|                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Property and equipment, net                                                                                                                                                                 |       | 1,068,467                  |       | 1,075,294                |       | 1,057,994                  |       |
| Goodwill and intangible assets, net                                                                                                                                                         |       | 4,024,580                  |       | 4,042,617                |       | 4,131,294                  |       |
| Other assets                                                                                                                                                                                |       | 74,776                     |       | 75,249                   |       | 91,250                     |       |
| Total assets                                                                                                                                                                                |       | $                          | 6,515,492  |                     | $          | 6,556,819                  |       | $ | 6,587,524 |   |
|                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                               |       |                       |       |                     |       |                       |       |
| Current liabilities:                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Accounts payable                                                                                                                                                                            |       | $                          | 249,624    |                     | $          | 345,640                    |       | $ | 326,174 |   |
| Accrued liabilities                                                                                                                                                                         |       | 399,366                    |       | 359,399                  |       | 442,642                    |       |
| Other current liabilities                                                                                                                                                                   |       | 1,238                      |       | 1,695                    |       | 3,470                      |       |
| Total current liabilities                                                                                                                                                                   |       | 650,228                    |       | 706,734                  |       | 772,286                    |       |
|                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Long-term liabilities:                                                                                                                                                                      |       |                       |       |                     |       |                       |       |
| Long-term debt                                                                                                                                                                              |       | 2,946,150                  |       | 2,946,102                |       | 2,945,955                  |       |
| Deferred income taxes                                                                                                                                                                       |       | 916,072                    |       | 929,970                  |       | 982,492                    |       |
| Deferred real estate credits, net                                                                                                                                                           |       | 89,865                     |       | 84,019                   |       | 67,179                     |       |
| Other long-term liabilities                                                                                                                                                                 |       | 230,576                    |       | 213,475                  |       | 193,895                    |       |
| Total long-term liabilities                                                                                                                                                                 |       | 4,182,663                  |       | 4,173,566                |       | 4,189,521                  |       |
|                                                                                                                                                                                        |       |                       |       |                     |       |                       |       |
| Common stock (par value $0.01 per share,  5,000,000 shares authorized and 1,012,919 shares issued and outstanding at  November 1, 2008, August 2, 2008 and October 27, 2007) |       | 10                         |       | 10                       |       | 10                         |       |
| Additional paid-in capital                                                                                                                                                                  |       | 1,420,106                  |       | 1,418,473                |       | 1,413,889                  |       |
| Accumulated other comprehensive (loss)  income                                                                                                                                              |       | (17,593                    | )          | (9,164                   | )          | 8,673                      |       |
| Retained earnings                                                                                                                                                                           |       | 280,078                    |       | 267,200                  |       | 203,145                    |       |
| Total shareholders’ equity                                                                                                                                                             |       | 1,682,601                  |       | 1,676,519                |       | 1,625,717                  |       |
| Total liabilities and shareholders’ equity                                                                                                                                             |       | $                          | 6,515,492  |                     | $          | 6,556,819                  |       | $ | 6,587,524 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(UNAUDITED)**

 
| **(in thousands)**                                                           | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| Revenues                                                                          |       | $                                                      | 985,787    |                                                   | $          | 1,132,243 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 617,743                                                |       | 667,137                                                |       |
| Selling, general and administrative  expenses (excluding depreciation)            |       | 242,829                                                |       | 271,975                                                |       |
| Income from credit card program                                                   |       | (13,001                                                | )          | (17,294                                                | )          |
| Depreciation expense                                                              |       | 38,599                                                 |       | 35,135                                                 |       |
| Amortization of customer lists                                                    |       | 13,568                                                 |       | 13,611                                                 |       |
| Amortization of favorable lease commitments                                       |       | 4,469                                                  |       | 4,385                                                  |       |
| Other income                                                                      |       | —                                                 |       | (32,450                                                | )          |
|                                                                              |       |                                                   |       |                                                   |       |
| Operating earnings                                                                |       | 81,580                                                 |       | 189,744                                                |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Interest expense, net                                                             |       | 57,845                                                 |       | 61,223                                                 |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Earnings before income taxes                                                      |       | 23,735                                                 |       | 128,521                                                |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Income taxes                                                                      |       | 10,857                                                 |       | 49,763                                                 |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Net earnings                                                                      |       | $                                                      | 12,878     |                                                   | $          | 78,758 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

 
| **(in thousands)**                                                                      | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                        |       |                                                   |       |                                                   |       |
| Net earnings                                                                                 |       | $                                                      | 12,878     |                                                   | $          | 78,758 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities:         |       |                                                   |       |                                                   |       |
| Depreciation and amortization expense                                                        |       | 60,190                                                 |       | 56,685                                                 |       |
| Deferred income taxes                                                                        |       | (8,722                                                 | )          | (9,180                                                 | )          |
| Gain on curtailment of defined benefit  retirement obligations                               |       | —                                                 |       | (32,450                                                | )          |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | 4,143                                                  |       | 8,171                                                  |       |
|                                                                                         |       | 68,489                                                 |       | 101,984                                                |       |
| Changes in operating assets and  liabilities:                                                |       |                                                   |       |                                                   |       |
| Merchandise inventories                                                                      |       | (106,264                                               | )          | (167,242                                               | )          |
| Other current assets                                                                         |       | (1,576                                                 | )          | (7,654                                                 | )          |
| Other assets                                                                                 |       | (3,293                                                 | )          | (1,637                                                 | )          |
| Accounts payable and accrued liabilities                                                     |       | (54,209                                                | )          | 46,661                                                 |       |
| Deferred real estate credits                                                                 |       | 6,973                                                  |       | 14,064                                                 |       |
| **Net cash used for operating activities**                                                   |       | (89,880                                                | )          | (13,824                                                | )          |
| **CASH FLOWS – INVESTING ACTIVITIES**                                                   |       |                                                   |       |                                                   |       |
| Capital expenditures                                                                         |       | (33,461                                                | )          | (46,038                                                | )          |
| Purchases of short-term investments                                                          |       | —                                                 |       | (10,000                                                | )          |
| Sales of short-term investments                                                              |       | —                                                 |       | 10,000                                                 |       |
| **Net cash used for investing activities**                                                   |       | (33,461                                                | )          | (46,038                                                | )          |
| **CASH FLOWS – FINANCING ACTIVITIES**                                                   |       |                                                   |       |                                                   |       |
| Repayment of borrowings                                                                      |       | (489                                                   | )          | (789                                                   | )          |
| **Net cash used for financing activities**                                                   |       | (489                                                   | )          | (789                                                   | )          |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                   |       |                                                   |       |
| Decrease during the period                                                                   |       | (123,830                                               | )          | (60,651                                                | )          |
| Beginning balance                                                                            |       | 239,180                                                |       | 141,207                                                |       |
| Ending balance                                                                               |       | $                                                      | 115,350    |                                                   | $          | 80,556 |   |
|                                                                                         |       |                                                   |       |                                                   |       |
| **Supplemental Schedule of Cash Flow  Information**                                          |       |                                                   |       |                                                   |       |
|                                                                                         |       |                                                   |       |                                                   |       |
| Cash paid during the period for:                                                             |       |                                                   |       |                                                   |       |
| Interest                                                                                     |       | $                                                      | 66,643     |                                                   | $          | 70,185 |   |
| Income taxes                                                                                 |       | $                                                      | 1,849      |                                                   | $          | 7,994 |   |
| Noncash activities:                                                                          |       |                                                   |       |                                                   |       |
| Adjustments to goodwill related to  pre-acquisition tax contingencies                        |       | $                                                      | —     |                                                   | $          | 9,133 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

**1.**              Basis of Presentation

** **

We have prepared theaccompanying unaudited condensed consolidated financial statements inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, thesefinancial statements do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. Therefore, these financial statements should be read in conjunctionwith our Annual Report on Form 10-K for the fiscal year ended August 2,2008.

 

In our opinion, theaccompanying unaudited condensed consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, necessary to presentfairly our financial position, results of operations and cash flows for theapplicable interim periods. Additionally, the accompanying unaudited condensed consolidatedfinancial statements include the amounts of the Company and itssubsidiaries.  All significantintercompany accounts and transactions have been eliminated.

 

The specialty retail industryis seasonal in nature, with a higher level of sales typically generated in thefall and holiday selling seasons.  Due toseasonal and other factors, the results of operations for the first quarter offiscal year 2009 are not necessarily comparable to, or indicative of, resultsof any other interim period or for the fiscal year as a whole.

 

Neiman Marcus, Inc. (theCompany) is a wholly-owned subsidiary of and is controlled by Newton Holding,LLC (Holding).  Holding is controlled byinvestment funds affiliated with TPG Capital and Warburg Pincus (collectively,the Sponsors).  The Company was formed byHolding for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG),which acquisition was completed on October 6, 2005 (the Acquisition).

 

Our fiscal year ends on theSaturday closest to July 31.  Allreferences to the first quarter of fiscal year 2009 relate to the thirteenweeks ended November 1, 2008.  Allreferences to the first quarter of fiscal year 2008 relate to the thirteenweeks ended October 27, 2007.

 

A detailed description of ourcritical accounting policies is included in our Annual Report on Form 10-Kfor the fiscal year ended August 2, 2008.

 

Certain prior period balanceshave been reclassified to conform to the current period presentation.

 

***Use ofEstimates.* **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 loss contingencies at thedate of the unaudited condensed consolidated financial statements.  While we believe that our past estimates andassumptions have been materially accurate, our current estimates are subject tochange if different assumptions as to the outcome of future events were made.We evaluate our estimates and judgments on an ongoing basis and predicate thoseestimates and judgments on historical experience and on various other factorsthat we believe to be reasonable under the circumstances.  We make adjustments to our assumptions andjudgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolutecertainty, actual results may differ from the estimates used in preparing theaccompanying unaudited condensed consolidated financial statements.

** **

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

 

·                  Recognitionof revenues;

 

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

 

·                  Determination of impairment oflong-lived assets;

 

·                  Recognition ofadvertising and catalog costs;

 

·                  Measurement ofliabilities related to our loyalty programs;

 

·                  Recognition ofincome taxes; and

 

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

 

***Recent Accounting Pronouncements. ***As more fullyexplained in Note 4, 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 FASBissued FASB Staff Position 157-2, “EffectiveDate of FASB Statement No. 157” (FSP 157-2), which delays theeffective date of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually). FSP 157-2 iseffective for fiscal years beginning after November 15, 2008, or ourfiscal year ending July 31, 2010. We have not yet evaluated the impact of adopting FSP 157-2 on ourconsolidated financial statements.

 

In the first quarter of fiscalyear 2009, we adopted Statement of Financial Accounting Standards No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS159).  SFAS 159 expands opportunities touse fair value measurement in financial reporting and permits entities tochoose to measure many financial instruments and certain other items at fairvalue.  We chose not to elect the fairvalue option.

 

In December 2007, the FASBissued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (SFAS 141(R)), which addresses the recognition and accounting foridentifiable assets acquired, liabilities assumed and non-controlling interestsin business combinations.  In addition,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 tax uncertaintiesassociated with a business combination as a component of tax expense.  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 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 FASBissued 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 November 15,2008, or our second fiscal quarter ending January 31, 2009.  We have not yet evaluated the impact, if any,of adopting the disclosure requirements of SFAS 161.

 

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

 
| **(in thousands)**             | ** ** | **November 1,  2008** | ** ** | **August 2,  2008** | ** ** | **October 27,  2007** | ** ** |
|-------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                                |       |                       |       |                     |       |                       |       |
| Goodwill                            |       | $                          | 1,611,191  |                     | $          | 1,611,191                  |       | $ | 1,614,273 |   |
| Tradenames                          |       | 1,579,054                  |       | 1,579,054                |       | 1,610,315                  |       |
| Customer lists, net                 |       | 409,363                    |       | 422,931                  |       | 463,772                    |       |
| Favorable lease commitments, net    |       | 424,972                    |       | 429,441                  |       | 442,934                    |       |
| Goodwill and intangible assets, net |       | $                          | 4,024,580  |                     | $          | 4,042,617                  |       | $ | 4,131,294 |   |

 

During the fourth quarter offiscal year 2008, we entered into a negotiated settlement with a state taxauthority regarding a state non-filing position which resulted in a reductionto goodwill of $3.0 million related to the resolution of tax uncertainties thatexisted at the time of the Acquisition.

 

Goodwill and indefinite-livedintangible assets, such as tradenames, are not subject to amortization. Rather,recoverability of goodwill and indefinite-lived intangible assets is assessedannually and upon the occurrence of certain events. The recoverabilityassessment requires us to make judgments and estimates regarding fair values.Fair values are determined using estimated future cash flows, including growthassumptions for future revenues, gross margin rates and other estimates. Inaddition, the fair values 

 

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of our tradenames are based, inpart, on our estimates of royalties which could be derived from the licensingof such tradenames to third parties.  Tothe extent that our estimates are not realized, future assessments could resultin impairment charges.

 

In the fourth quarter of fiscalyear 2008, we recorded a $31.3 million pretax impairment charge related to thewritedown to fair value of the net carrying value of the Horchow tradenamebased upon lower revenues and royalty rate expectations with respect to theHorchow brand in light of current operating performance and future operatingexpectations.  At November 1, 2008,the recorded fair value of the Horchow tradename was $16.6 million.

 

Customer lists are amortizedusing the straight-line method over their estimated useful lives, ranging from5 to 24 years (weighted average life of 13 years).  Favorable lease commitments are amortizedstraight-line over the remaining lives of the leases, ranging from 6 to 49years (weighted average life of 33 years). Total estimated amortization of all acquisition-related intangibleassets for the next five fiscal years is currently estimated as follows (inthousands):

 
| 2009 |   | $      | 72,149 |   |
|------|--------|--------|--------|--------|
| 2010 |   | 72,149 |   |
| 2011 |   | 61,438 |   |
| 2012 |   | 49,013 |   |
| 2013 |   | 46,881 |   |
| 2014 |   | 46,881 |   |

 

**3.**              Long-term Debt

** **

The significant components ofour long-term debt are as follows:

 
| **(in thousands)**           | ** ** | **Interest  Rate** | ** ** | **November 1,  2008** | ** ** | **August 2,  2008** | ** ** | **October 27,  2007** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                              |       |               |       |                       |       |                     |       |                       |       |
| Senior Secured Term Loan Facility |       | variable           |       | $                          | 1,625,000  |                     | $          | 1,625,000                  |       | $ | 1,625,000 |   |
| 2028 Debentures                   |       | 7.125%             |       | 121,150                    |       | 121,102                  |       | 120,955                    |       |
| Senior Notes                      |       | 9.0%/9.75%         |       | 700,000                    |       | 700,000                  |       | 700,000                    |       |
| Senior Subordinated Notes         |       | 10.375%            |       | 500,000                    |       | 500,000                  |       | 500,000                    |       |
| Long-term debt                    |       |               |       | $                          | 2,946,150  |                     | $          | 2,946,102                  |       | $ | 2,945,955 |   |

 

***Senior Secured Asset-BasedRevolving Credit Facility.***  NMG’s senior secured Asset-Based RevolvingCredit Facility provides financing of up to $600.0 million, subject to aborrowing base equal to at any time the lesser of 80% of eligible inventory(valued at the lower of cost or market value) and 85% of net orderlyliquidation value of the eligible inventory, less certain reserves.  The Asset-Based Revolving Credit Facilityprovides that NMG has the right at any time to request up to$200.0 million of additional commitments, but the lenders are under noobligation to provide any such additional commitments, and any increase incommitments will be subject to customary conditions precedent. NMG’s ability toborrow under any increased commitments would still be limited by the amount ofthe borrowing base.

 

As of November 1, 2008,NMG had $576.3 million of unused borrowing availability under theAsset-Based Revolving Credit Facility based on a borrowing base of over$600.0 million and after giving effect to $23.7 million used forletters of credit.  The principal amountof the loans outstanding is due and payable in full on 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. Inaddition, NMG is required to pay a commitment fee of 0.375% per annum inrespect of the unutilized commitments. If the average revolving loanutilization is 50% or more for any applicable period, the commitment fee willbe reduced to 0.250% for such period. NMG must also pay customary letter ofcredit 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 November 1, 2008, NMG’s non-guarantor subsidiaries had immaterialliabilities and the assets of NMG’s non-guarantor subsidiaries aggregatedapproximately $1.1 million. All obligations 

 

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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.  The Asset-Based Revolving Credit Facilitycontains a number of customary negative covenants and restrictions, but doesnot require NMG to comply with any financial ratio maintenance covenants.  For a more detailed description of NMG’sAsset-Based Revolving Credit Facility, refer to our Annual Report on Form 10-Kfor the fiscal year ended August 2, 2008.

 

***Senior Secured Term LoanFacility.*** In October 2005, NMG entered into a credit agreement and relatedsecurity and other agreements for a $1,975.0 million Senior Secured TermLoan 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 November 1,2008, 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 4.57% at November 1, 2008,which margin is subject to adjustment based on contractually defined debtcoverage ratios.  At November 1,2008, the applicable margin with respect to base rate borrowings was 0.75% andthe applicable margin with respect to LIBOR borrowings was 1.75%.  Based upon current operating performanceexpectations, we anticipate the applicable margin with respect to LIBORborrowings will increase by 0.25% beginning in December 2008.

 

The credit agreement governingthe Senior Secured Term Loan Facility requires NMG to prepay outstanding termloans with 50% (which percentage will be reduced to 25% if NMG’s total leverageratio is less than a specified ratio and will be reduced to 0% if NMG’s totalleverage ratio is less than a specified ratio) of its annual excess cash flow(as defined in the credit agreement). For fiscal years 2008 and 2007, NMG wasnot required to prepay any outstanding term loans pursuant to the annual excesscash flow requirements.  If a change ofcontrol (as defined in the credit agreement) occurs, NMG will be required tooffer to prepay all outstanding term loans, at a prepayment price equal to 101%of the principal amount to be prepaid, plus accrued and unpaid interest to thedate of prepayment. NMG also must offer to prepay outstanding term loans at100% of the principal amount to be prepaid, plus accrued and unpaid interest,with the proceeds of certain asset sales under certain circumstances.

 

NMG may voluntarily prepayoutstanding loans under the Senior Secured Term Loan Facility at any timewithout premium or penalty other than customary “breakage” costs with respectto LIBOR loans. There is no scheduled amortization under the Senior SecuredTerm Loan Facility. The principal amount of the loans outstanding is due andpayable in full on April 6, 2013.

 

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

 

The credit agreement governingthe Senior Secured Term Loan Facility contains a number of customary negativecovenants that are substantially similar to those governing the Senior Notesand additional covenants related to the security arrangements for the Senior SecuredTerm Loan Facility. The credit agreement also contains customary affirmativecovenants and events of default.  For amore detailed description of the Senior Secured Term Loan Facility, refer toour Annual Report on Form 10-K for 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 2028Debentures at November 1, 2008 was approximately $106.3 million.

 

***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.

 

For any interest payment periodthrough October 15, 2010, NMG may, at its option, elect to pay interest onthe Senior Notes entirely in cash (Cash Interest) or entirely by increasing theprincipal amount of the outstanding Senior Notes or by issuing additional SeniorNotes (PIK Interest). Cash Interest on the Senior Notes accrues at the rate of9% per annum. PIK Interest on the Senior Notes accrues at the rate of 9.75% perannum. To date, NMG has paid all interest obligations in cash. After October 15,2010,

 

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NMG will make all interestpayments on the Senior Notes entirely in cash. All Senior Notes mature on October 15,2015. Interest on the Senior Notes is payable quarterly in arrears on each January 15,April 15, July 15 and October 15, commencing on January 15,2006.

 

The Senior Notes are fully andunconditionally guaranteed, on a joint and several unsecured, senior basis, byeach of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’sobligations under its Senior Secured Credit Facilities and by the Company. TheSenior Notes and the guarantees thereof are NMG’s and the guarantors’unsecured, senior obligations and rank (i) equal in the right of paymentwith all of NMG’s and the guarantors’ existing and future senior indebtedness,including any borrowings under NMG’s Senior Secured Credit Facilities and theguarantees thereof and NMG’s 2028 Debentures; and (ii) senior to all ofNMG’s and its guarantors’ existing and future subordinated indebtedness,including the Senior Subordinated Notes due 2015 and the guarantees thereof.The Senior Notes also are effectively junior in priority to NMG’s and itsguarantors’ obligations under all secured indebtedness, including NMG’s SeniorSecured Credit Facilities, the 2028 Debentures, and any other securedobligations of NMG, in each case, to the extent of the value of the assetssecuring such obligations. In addition, the Senior Notes are structurallysubordinated to all existing and future liabilities, including trade payables,of NMG’s subsidiaries that are not providing guarantees.

 

NMG is not required to make anymandatory redemption or sinking fund payments with respect to the SeniorNotes.  The indenture governing theSenior Notes contains a number of customary negative covenants and events ofdefault.  For a more detailed descriptionof NMG’s Senior Notes, refer to our Annual Report on Form 10-K for thefiscal year ended August 2, 2008.

 

The fair value of NMG’s SeniorNotes at November 1, 2008 was approximately $476.0 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 Notesare fully and unconditionally guaranteed, on a joint and several unsecured,senior subordinated basis, by each of NMG’s wholly-owned domestic subsidiariesthat guarantee NMG’s obligations under its Senior Secured Credit Facilities andby the Company. The Senior Subordinated Notes and the guarantees thereof areNMG’s and the guarantors’ unsecured, senior subordinated obligations and rank (i) juniorto all of NMG’s and the guarantors’ existing and future senior indebtedness,including the Senior Notes and any borrowings under NMG’s Senior Secured CreditFacilities, and the guarantees thereof and NMG’s 2028 Debentures; (ii) equallywith any of NMG’s and the guarantors’ future senior subordinated indebtedness;and (iii) senior to any of NMG’s and the guarantors’ future subordinatedindebtedness. In addition, the Senior Subordinated Notes are structurallysubordinated to all existing and future liabilities, including trade payables,of NMG’s subsidiaries that are not providing guarantees.

 

NMG is not required to make anymandatory redemption or sinking fund payments with respect to the SeniorSubordinated Notes. The indenture governing the Senior Subordinated Notescontains a number of customary negative covenants and events of defaults.  For a more detailed description of NMG’sSenior Subordinated Notes, refer to our Annual Report on Form 10-K for thefiscal year ended August 2, 2008.

 

The fair value of NMG’s SeniorSubordinated Notes at November 1, 2008 was approximately $342.5 million.

 

***Maturities of Long-Term Debt.***  At November 1, 2008, 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 notreflect future excess cash flow prepayments, if any, that may be required underthe Senior Secured Term Loan Facility.

 

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

 
| **(in thousands)**           | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                              |       |                                                   |       |                                                   |       |
| Senior Secured Term Loan Facility |       | $                                                      | 23,930     |                                                   | $          | 27,976 |   |
| 2028 Debentures                   |       | 2,227                                                  |       | 2,185                                                  |       |
| Senior Notes                      |       | 15,750                                                 |       | 15,453                                                 |       |
| Senior Subordinated Notes         |       | 12,969                                                 |       | 12,724                                                 |       |
| Amortization of debt issue costs  |       | 3,554                                                  |       | 3,554                                                  |       |
| Other                             |       | 825                                                    |       | 832                                                    |       |
| Total interest expense            |       | 59,255                                                 |       | 62,724                                                 |       |
| Less:                             |       |                                                   |       |                                                   |       |
| Interest income                   |       | 1,104                                                  |       | 855                                                    |       |
| Capitalized interest              |       | 306                                                    |       | 646                                                    |       |
| Interest expense, net             |       | $                                                      | 57,845     |                                                   | $          | 61,223 |   |

 

**4.**              Fair Value Measurements

** **

In the first quarter of fiscalyear 2009, we adopted Statement of Financial Accounting Standards No. 157,“Fair Value Measurements” (SFAS 157), which provides guidance for using fairvalue to measure certain assets and liabilities.  SFAS 157 applies whenever another standardrequires or permits assets or liabilities to be measured at fair value.  The standard does not expand the use of fairvalue to any new circumstances.

 

SFAS 157 defines fair value asthe price that would be received upon sale of an asset or paid upon transfer ofa liability in an orderly transaction between market participants at themeasurement date and in the principal or most advantageous market for thatasset or liability. The fair value should be calculated based on assumptionsthat market participants would use in pricing the asset or liability, not onassumptions specific to the entity. In addition, the fair value of liabilitiesincludes consideration of non-performance risk, including our own credit risk.

 

In addition to defining fair value,SFAS 157 expands the disclosure requirements around fair value and establishesa fair value hierarchy for valuation inputs. The hierarchy prioritizes theinputs into three levels based on the extent to which inputs used in measuringfair value are observable in the market. Each fair value measurement isreported in one of the following three levels:

 
| · | Level 1 –  valuation inputs are based upon unadjusted quoted prices for identical  instruments traded in active markets.                                                                                                                                                                                                                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · | Level 2 –  valuation inputs are based upon quoted prices for similar instruments in  active markets, quoted prices for identical or similar instruments in markets  that are not active, and model-based valuation techniques for which all  significant assumptions are observable in the market or can be corroborated  by observable market data for substantially the full term of the assets or liabilities. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                   |
| · | Level 3 –  valuation inputs are unobservable and typically reflect management’s  estimates of assumptions that market participants would use in pricing the  asset or liability. The fair values are therefore determined using  model-based techniques that include option pricing models, discounted cash  flow models and similar techniques.                                                             |

 

We use derivative financialinstruments to help manage our interest rate risk.  Effective December 6, 2005, NMG enteredinto floating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness. The interestrate 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 November 1, 2008, the fair value ofNMG’s interest rate swap agreements was a loss of approximately$47.7 million, which amount is included in other long-term liabilities.

 

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As of the effective date, NMGdesignated the interest rate swaps as cash flow hedges. As a result, changes inthe fair value of NMG’s swaps are recorded subsequent to the effective date asa component of accumulated other comprehensive (loss) income.  At November 1, 2008, we have $29.7million of unrecognized losses, net of tax, on our interest rate swapagreements included in accumulated other comprehensive (loss) income.

 

As a result of the swapagreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.535% to 6.733% per quarter through 2010 and result in an average fixed rateof 6.618%.

 

**5.**              Employee Benefit 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 employeeshired prior to March 1, 1989 are eligible for certain limitedpostretirement health care benefits (Postretirement Plan) if they meet certainservice and minimum age requirements. The cost of these benefits is accruedduring the years in which an employee provides services.

 

We also maintain definedcontribution plans consisting of a 401(k) Plan and, in connection with theredesign of our long-term benefits effective January 1, 2008 as more fullydescribed below, a retirement savings plan (RSP) and defined contributionsupplemental executive retirement plan (Defined Contribution SERP Plan).  Employees make contributions to the 401(k) Planand RSP and we match an employee’s contribution up to a maximum of 6% of theemployee’s compensation subject to statutory limitations for a potentialmaximum match of 50% of employee contributions to the 401(k) Plan and 75%of employee contributions to the RSP. We also sponsor an unfunded key employeedeferred compensation plan, which provides certain employees with additionalbenefits.

 

***Plan Redesign.***On September 7, 2007, our Board of Directors approved certain changes toour long-term benefits program.  EffectiveJanuary 1, 2008, we offered a new, enhanced retirement savings plan (RSP)subject to participants’ elections to participate (as more fully describedbelow).  For associates participating inthe RSP:

 

·                  Participants’ balances in our 401(k) Planwere automatically transferred to the RSP.

 

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

 

·                  Our matching contributions vest toemployees in two years as compared to the three year vesting under the 401(k) Plan.

 

·                  All current employees, who did notparticipate in the former 401(k) Plan, and future employees areautomatically enrolled in the RSP at a salary deferral rate of 3% onceeligibility requirements have been met.

 

Concurrent with theimplementation of the RSP and the Defined Contribution SERP Plan, we froze benefitsoffered under our Pension and SERP Plans for most employees.  Employees with a minimum of ten years ofservice and whose age plus years of service equaled at least 65 (Rule of65) as of December 31, 2007 were allowed either 1) to continue participationin our 401(k) Plan and Pension Plan (and SERP Plan, if eligible) or 2) tofreeze the benefits earned under the Pension Plan (and SERP Plan, if eligible)and participate in the RSP. No employee who met vesting requirements forfeitedbenefits earned prior to December 31, 2007.

 

In connection with the redesignof our long-term benefits program, we recorded a one-time pension curtailmentgain of $32.5 million (recorded as other income in our condensed consolidatedstatements of earnings) in the first quarter of fiscal year 2008 to reflect theimpact of freezing benefits provided 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:

 
| **(in thousands)**            | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Pension Plan:                      |       |                                                   |       |                                                   |       |
| Service cost                       |       | $                                                      | 1,431      |                                                   | $          | 4,394 |   |
| Interest cost                      |       | 6,038                                                  |       | 5,842                                                  |       |
| Expected return on plan assets     |       | (6,507                                                 | )          | (6,160                                                 | )          |
| Net amortization of gains          |       | —                                                 |       | (188                                                   | )          |
| Pension Plan expense               |       | $                                                      | 962        |                                                   | $          | 3,888 |   |
|                               |       |                                                   |       |                                                   |       |   |   |
| Curtailment gain                   |       | $                                                      | —     |                                                   | $          | 26,113 |   |
|                               |       |                                                   |       |                                                   |       |
| SERP Plan:                         |       |                                                   |       |                                                   |       |
| Service cost                       |       | $                                                      | 162        |                                                   | $          | 468 |   |
| Interest cost                      |       | 1,336                                                  |       | 1,270                                                  |       |
| SERP Plan expense                  |       | $                                                      | 1,498      |                                                   | $          | 1,738 |   |
|                               |       |                                                   |       |                                                   |       |   |   |
| Curtailment gain                   |       | $                                                      | —     |                                                   | $          | 6,337 |   |
|                               |       |                                                   |       |                                                   |       |
| Postretirement Plan:               |       |                                                   |       |                                                   |       |
| Service cost                       |       | $                                                      | 23         |                                                   | $          | 31 |   |
| Interest cost                      |       | 336                                                    |       | 339                                                    |       |
| Net amortization of losses (gains) |       | 70                                                     |       | 137                                                    |       |
| Postretirement Plan expense        |       | $                                                      | 429        |                                                   | $          | 507 |   |

 

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

 
| **(in thousands)**                  | ** ** | **November 1,  2008** | ** ** | **August 2,  2008** | ** ** | **October 27,  2007** | ** ** |
|------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                               | ** ** | ** **                 | ** ** | ** **               | ** ** | ** **                 | ** ** |
| Pension Plan                             |       | $                          | 41,765     |                     | $          | 40,802                     |       | $ | 37,100 |   |
| SERP Plan                                |       | 78,524                     |       | 77,566                   |       | 79,965                     |       |
| Postretirement Plan                      |       | 20,425                     |       | 20,336                   |       | 22,435                     |       |
|                                     |       | 140,714                    |       | 138,704                  |       | 139,500                    |       |
| Less: current portion                    |       | (4,165                     | )          | (4,165                   | )          | (4,019                     | )          |
| Long-term portion of benefit obligations |       | $                          | 136,549    |                     | $          | 134,539                    |       | $ | 135,481 |   |

 

We adopted the provisions ofStatement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans”(SFAS 158), in the fourth quarter of fiscal year 2007 which requires us torecord our obligations to equal their unfunded status.  As of November 1, 2008, we have $12.3million (net of taxes of $8.0 million) of adjustments to such obligations asincreases to accumulated other comprehensive (loss) income.

 

In the first quarter of fiscalyear 2008, we reduced our recorded liability for projected benefit obligationspayable by the Pension Plan by $26.1 million and by the SERP Plan by $6.3million to reflect the impact of freezing benefits provided under these plansas of December 31, 2007.  The totalone-time pension curtailment gain of $32.5 million, or 2.9% of revenues, wasrecorded as other income in our condensed consolidated statements of earnings.

 

***Funding Policy and Plan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law. We were not required to make contributionsto the Pension Plan during fiscal year 2008. However, in the third quarter offiscal year 2008, we made a voluntary $15.0 million contribution to our PensionPlan. Based upon currently available information, we will not be required tomake significant contributions to the Pension Plan during fiscal year 2009.

 

At November 1, 2008, the fairvalue of the assets held by the Pension Plan was approximately $250.7 millionreflecting a decline of approximately $62.7 million from August 2, 2008due primarily to the significant decline in the stock markets

 

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during the first quarter offiscal year 2009.  Assuming nosignificant recovery in stock prices prior to the end of fiscal year 2009, wewill be required to increase our recorded liability for the net underfundedstatus of our Pension Plan and we would expect pension expense in fiscal year2010 to increase from fiscal year 2009. Further, a decline in value of our pension assets could necessitateaccelerated and higher cash contributions in the near-term to our PensionPlan.  As the determinations of ourliability at the end of fiscal year 2009, our expense for fiscal year 2010, andfuture required contributions to the Pension Plan are contingent upon thevaluation of our Pension Plan assets as of July 31, 2009, such amounts arenot currently quantifiable.

 

**6.**              Income Taxes

** **

We adopted the provisions ofFASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(FIN 48) in the first quarter of fiscal year 2008.  FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.

 

The cumulative effect ofadopting FIN 48 resulted in a net increase to our accruals for uncertain taxpositions of $9.1 million for the derecognition of certain tax benefitspreviously recorded. This increase to our accruals was offset by acorresponding increase to goodwill as these uncertainties existed at the timeof 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 expense and our liability for accrued interest andpenalties was $9.5 million as of August 2, 2008. There were no materialchanges to our unrecognized tax benefits during the first quarter of fiscalyear 2009.

 

We file income tax returns inthe U.S. federal jurisdiction and various state and local jurisdictions.  The IRS is now examining our federal taxreturns for fiscal years 2005 and 2006. We believe our recorded tax liabilities as of November 1, 2008 aresufficient to cover any potential assessments to be made by the IRS upon thecompletion of their examinations. We will continue to monitor the progress ofthe IRS examinations and review our recorded tax liabilities for potentialaudit assessments.  With respect to stateand local jurisdictions, with limited exceptions, the Company and itssubsidiaries are no longer subject to income tax audits for fiscal years before2004.  During the fourth quarter offiscal year 2008, we entered into a negotiated settlement with a state taxauthority regarding a state non-filing position which resulted in a reductionto our gross unrecognized tax benefits of $7.2 million and a correspondingdecrease to goodwill of $3.0 million related to the resolution of uncertaintiesthat existed at the time of the Acquisition. We believe it is reasonablypossible that additional adjustments in the amounts of our unrecognized taxbenefits could occur within the next 12 months as a result of settlements withtax authorities.  At this time, we do notbelieve such adjustments will have a material impact on our consolidatedfinancial statements.

 

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**7.**              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 November 1,2008, August 2, 2008 and October 27, 2007 and changes during theperiods ended on these dates is as follows:

 
| ** **                           | ** ** | **November 1, 2008** | ** ** | **August 2, 2008**           | ** ** | **October 27, 2007** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **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 |   | — |   | — |   |
| Exercised                            |       | —                         |       | —                                 |       | —                         |       | — |   | — |   | — |   |
| Forfeited                            |       | —                         |       | —                                 |       | (747.7                         | )          | 1,597 |   | — |   | — |   |
| Outstanding at end of period         |       | 83,146.6                       |       | $                                      | 1,553      |                           | 83,146.6   |   | $ | 1,553 |   | 83,634.3 |   | $ | 1,430 |   |
| Options exercisable at end of period |       | 54,084.1                       |       | $                                      | 1,418      |                           | 46,684.4   |   | $ | 1,375 |   | 37,208.1 |   | $ | 1,290 |   |

 

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 November 1, 2008 |       | $                                      | 2,684      |   | $ | 2,684 |   |
| 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.

 

We recognize compensation expense for stock options on a straight-linebasis over the vesting period.  Werecognized non-cash stock compensation expense of $1.6 million in thefirst quarter of fiscal year 2009 and $1.5 million in the first quarter of fiscalyear 2008, which is included in selling, general and administrative expenses.At November 1, 2008, unearned non-cash stock-based compensation that weexpect to recognize as expense over the next 5 years aggregatesapproximately $10.3 million.

 

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**8.**              Transactions withSponsors

 

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 $2.5 million during the first quarter of fiscal year 2009 and $2.8 millionduring the first quarter of fiscal year 2008, which are included in selling,general and administrative expenses in the condensed consolidated statements ofearnings.

 

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.

 

**9.**              Income fromCredit Card Program

** **

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 (subject to a contractual limit on thelosses allocable to NMG).  As a result ofcurrent higher delinquencies and losses on consumer indebtednesses in light ofcurrent economic conditions, we recorded a charge of approximately $2.1 millionin the first quarter of fiscal year 2009 for our allocable portion of creditcard losses, which is included as a reduction to HSBC Program Income.  As of November 1, 2008, our reserve forcredit card losses aggregated $2.9 million.

 

**10.**       Commitments andContingencies

** **

***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. Performance objectives and targets are based on cumulative EBITDApercentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performanceperiod will be credited to a book account and will earn interest at acontractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% oftotal outstanding common stock.  As of November 1,2008, the vested participant balance in the Long-Term Incentive Plan aggregated$3.7 million.

 

***Cash Incentive Plan. ***The Company alsohas a cash incentive plan (Cash Incentive Plan) to aid in the retention ofcertain key executives.  The Cash IncentivePlan 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.

 

***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.

 

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**11.**       Accumulated OtherComprehensive (Loss) Income

** **

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

 
| **(in thousands)**                              | ** ** | **November 1,  2008** | ** ** | **August 2,  2008** | ** ** | **October 27,  2007** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|
|                                                 |       |                       |       |                     |       |                       |       |
| Unrealized loss on financial instruments             |       | $                          | (29,717    | )                        | $          | (21,755                    | )          | $ | (7,542 | ) |
| Change in unfunded benefit obligations               |       | 12,302                     |       | 12,302                   |       | 15,709                     |       |
| Other                                                |       | (178                       | )          | 289                      |       | 506                        |       |
| Total accumulated other comprehensive  (loss) income |       | $                          | (17,593    | )                        | $          | (9,164                     | )          | $ | 8,673 |   |

 
| ** **                                                              | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  August 2,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Net earnings (loss) from condensed  consolidated statements of earnings |       | $                                                      | 12,878     |                                                 | $          | (35,643                                                | )          | $ | 78,758 |   |
| Change in unrealized (loss) gain on  financial instruments              |       | (7,962                                                 | )          | 3,104                                                |       | (11,275                                                | )          |
| Other                                                                   |       | (467                                                   | )          | (3,425                                               | )          | (1,281                                                 | )          |
| Total comprehensive income (loss) for the  period                       |       | $                                                      | 4,449      |                                                 | $          | (35,964                                                | )          | $ | 66,202 |   |

 

**12.**       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 earnings for the segmentsinclude 1) revenues, 2) cost of sales, 3) direct selling, general, andadministrative expenses, 4) other direct operating expenses, 5) income fromcredit card program and 6) depreciation expense for the respectivesegment.  Items not allocated to ouroperating segments include those items not considered by management inmeasuring the assets and profitability of our segments. These amounts include1) corporate expenses including, but not limited to, treasury, investorrelations, legal and finance support services, and general corporatemanagement, 2) charges related to the application of purchase accounting adjustmentsmade in connection with the Acquisition including amortization of customerlists and favorable lease commitments and other non-cash items and 3) interestexpense.  These items, while often timesrelated to the operations of a segment, are not considered by segment operatingmanagement, corporate operating management and the chief operating decisionmaker in assessing segment operating performance.  The accounting policies of the operatingsegments are the same as those described in the summary of significantaccounting policies (except with respect to purchase accounting adjustments notallocated to the operating segments).

 

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The following tables set forth theinformation for our reportable segments:

 
| **(in thousands)**                                         | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                      | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| REVENUES                                                        |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                         |       | $                                                      | 827,126    |                                                   | $          | 961,598 |   |
| Direct Marketing                                                |       | 158,661                                                |       | 170,645                                                |       |
| Total                                                           |       | $                                                      | 985,787    |                                                   | $          | 1,132,243 |   |
|                                                            |       |                                                   |       |                                                   |       |
| OPERATING EARNINGS                                              |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                         |       | $                                                      | 94,436     |                                                   | $          | 165,582 |   |
| Direct Marketing                                                |       | 19,361                                                 |       | 23,262                                                 |       |
| Corporate expenses                                              |       | (14,180                                                | )          | (13,554                                                | )          |
| Amortization of customer lists and  favorable lease commitments |       | (18,037                                                | )          | (17,996                                                | )          |
| Other income (1)                                                |       | —                                                 |       | 32,450                                                 |       |
| Total                                                           |       | $                                                      | 81,580     |                                                   | $          | 189,744 |   |
|                                                            |       |                                                   |       |                                                   |       |
| CAPITAL EXPENDITURES                                            |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                         |       | $                                                      | 29,826     |                                                   | $          | 40,189 |   |
| Direct Marketing                                                |       | 3,635                                                  |       | 5,849                                                  |       |
| Total                                                           |       | $                                                      | 33,461     |                                                   | $          | 46,038 |   |
|                                                            |       |                                                   |       |                                                   |       |
| DEPRECIATION EXPENSE                                            |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                         |       | $                                                      | 32,948     |                                                   | $          | 29,931 |   |
| Direct Marketing                                                |       | 4,312                                                  |       | 4,045                                                  |       |
| Other                                                           |       | 1,339                                                  |       | 1,159                                                  |       |
| Total                                                           |       | $                                                      | 38,599     |                                                   | $          | 35,135 |   |

 
| ** **                                            | ** ** | **November 1,  2008** | ** ** | **October 27,  2007** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ASSETS                                                |       |                       |       |                       |       |
| Tangible assets of Specialty Retail stores            |       | $                          | 2,083,389  |                       | $          | 2,066,019 |   |
| Tangible assets of Direct Marketing                   |       | 203,516                    |       | 195,953                    |       |
| Corporate assets:                                     |       |                       |       |                       |       |
| Intangible assets related to Specialty  Retail stores |       | 3,504,700                  |       | 3,565,382                  |       |
| Intangible assets related to Direct  Marketing        |       | 519,880                    |       | 565,912                    |       |
| Other                                                 |       | 204,007                    |       | 194,258                    |       |
| Total                                                 |       | $                          | 6,515,492  |                       | $          | 6,587,524 |   |

 

----

(1) Forthe first quarter of fiscal year 2008, other income represents 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.

 

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**13.**       Condensed ConsolidatingFinancial Information (with respect to NMG’s obligations under the Senior Notesand 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.

 
| ** **                                      | ** ** | **November 1, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 114,309 |   | $ | 807 |   | $ | 234 |   | $ | — |   | $ | 115,350 |   |
| Merchandise inventories                         |       | —                         |       | 958,320 |   | 125,988 |   | — |   | — |   | 1,084,308 |   |
| Other current assets                            |       | —                         |       | 136,494 |   | 11,268 |   | 249 |   | — |   | 148,011 |   |
| Total current assets                            |       | —                         |       | 1,209,123 |   | 138,063 |   | 483 |   | — |   | 1,347,669 |   |
| Property and equipment, net                     |       | —                         |       | 935,188 |   | 132,629 |   | 650 |   | — |   | 1,068,467 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,874,355 |   | 2,150,225 |   | — |   | — |   | 4,024,580 |   |
| Other assets                                    |       | —                         |       | 74,776 |   | — |   | — |   | — |   | 74,776 |   |
| Investments in subsidiaries                     |       | 1,682,601                      |       | 2,323,610 |   | — |   | — |   | (4,006,211 | ) | — |   |
| Total assets                                    |       | $                              | 1,682,601  |   | $ | 6,417,052 |   | $ | 2,420,917 |   | $ | 1,133 |   | $ | (4,006,211 | ) | $ | 6,515,492 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 220,070 |   | $ | 29,549 |   | $ | 5 |   | $ | — |   | $ | 249,624 |   |
| Accrued liabilities                             |       | —                         |       | 329,918 |   | 69,437 |   | 11 |   | — |   | 399,366 |   |
| Other current liabilities                       |       | —                         |       | 1,238 |   | — |   | — |   | — |   | 1,238 |   |
| Total current liabilities                       |       | —                         |       | 551,226 |   | 98,986 |   | 16 |   | — |   | 650,228 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,946,150 |   | — |   | — |   | — |   | 2,946,150 |   |
| Deferred income taxes                           |       | —                         |       | 916,072 |   | — |   | — |   | — |   | 916,072 |   |
| Other long-term liabilities                     |       | —                         |       | 321,003 |   | (562 | ) | — |   | — |   | 320,441 |   |
| Total long-term liabilities                     |       | —                         |       | 4,183,225 |   | (562 | ) | — |   | — |   | 4,182,663 |   |
| Total shareholders’ equity                 |       | 1,682,601                      |       | 1,682,601 |   | 2,322,493 |   | 1,117 |   | (4,006,211 | ) | 1,682,601 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,682,601  |   | $ | 6,417,052 |   | $ | 2,420,917 |   | $ | 1,133 |   | $ | (4,006,211 | ) | $ | 6,515,492 |   |

 

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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                             |       | —                       |       | 289,352 |   | 69,930 |   | 117 |   | — |   | 359,399 |   |
| Other current liabilities                       |       | —                       |       | 1,695 |   | — |   | — |   | — |   | 1,695 |   |
| 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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| ** **                                      | ** ** | **October 27, 2007** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 79,514 |   | $ | 397 |   | $ | 645 |   | $ | — |   | $ | 80,556 |   |
| Merchandise inventories                         |       | —                         |       | 966,974 |   | 118,530 |   | 7 |   | — |   | 1,085,511 |   |
| Other current assets                            |       | —                         |       | 125,439 |   | 11,255 |   | 3,681 |   | 544 |   | 140,919 |   |
| Total current assets                            |       | —                         |       | 1,171,927 |   | 130,182 |   | 4,333 |   | 544 |   | 1,306,986 |   |
| Property and equipment, net                     |       | —                         |       | 917,353 |   | 138,377 |   | 2,264 |   | — |   | 1,057,994 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,937,964 |   | 2,193,330 |   | — |   | — |   | 4,131,294 |   |
| Other assets                                    |       | —                         |       | 91,119 |   | 131 |   | — |   | — |   | 91,250 |   |
| Investments in subsidiaries                     |       | 1,625,717                      |       | 2,352,217 |   | — |   | — |   | (3,977,934 | ) | — |   |
| Total assets                                    |       | $                              | 1,625,717  |   | $ | 6,470,580 |   | $ | 2,462,020 |   | $ | 6,597 |   | $ | (3,977,390 | ) | $ | 6,587,524 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 282,333 |   | $ | 38,988 |   | $ | 4,309 |   | $ | 544 |   | $ | 326,174 |   |
| Accrued liabilities                             |       | —                         |       | 368,817 |   | 73,709 |   | 116 |   | — |   | 442,642 |   |
| Other current liabilities                       |       | —                         |       | 3,470 |   | — |   | — |   | — |   | 3,470 |   |
| Total current liabilities                       |       | —                         |       | 654,620 |   | 112,697 |   | 4,425 |   | 544 |   | 772,286 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,945,955 |   | — |   | — |   | — |   | 2,945,955 |   |
| Deferred income taxes                           |       | —                         |       | 982,492 |   | — |   | — |   | — |   | 982,492 |   |
| Other long-term liabilities                     |       | —                         |       | 261,796 |   | (722 | ) | — |   | — |   | 261,074 |   |
| Total long-term liabilities                     |       | —                         |       | 4,190,243 |   | (722 | ) | — |   | — |   | 4,189,521 |   |
| Total shareholders’ equity                 |       | 1,625,717                      |       | 1,625,717 |   | 2,350,045 |   | 2,172 |   | (3,977,934 | ) | 1,625,717 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,625,717  |   | $ | 6,470,580 |   | $ | 2,462,020 |   | $ | 6,597 |   | $ | (3,977,390 | ) | $ | 6,587,524 |   |

 

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| ** **                                                                        | ** ** | **Thirteen weeks ended November 1, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 817,724 |   | $ | 168,063 |   | $ | — |   | $ | — |   | $ | 985,787 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                             |       | 519,088 |   | 98,499 |   | 156 |   | — |   | 617,743 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                             |       | 213,152 |   | 29,991 |   | (314 | ) | — |   | 242,829 |   |
| Income from credit card program                                                   |       | —                                                             |       | (11,534 | ) | (1,467 | ) | — |   | — |   | (13,001 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 34,316 |   | 4,225 |   | 58 |   | — |   | 38,599 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                             |       | 15,090 |   | 2,947 |   | — |   | — |   | 18,037 |   |
| Operating earnings                                                                |       | —                                                             |       | 47,612 |   | 33,868 |   | 100 |   | — |   | 81,580 |   |
| Interest expense, net                                                             |       | —                                                             |       | 57,843 |   | 2 |   | — |   | — |   | 57,845 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 56,830 |   | (56,830 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (12,878                                                            | )          | (90,796 | ) | — |   | — |   | 103,674 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 12,878                                                             |       | 23,735 |   | 90,696 |   | 100 |   | (103,674 | ) | 23,735 |   |
| Income taxes                                                                      |       | —                                                             |       | 10,857 |   | — |   | — |   | — |   | 10,857 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 12,878     |   | $ | 12,878 |   | $ | 90,696 |   | $ | 100 |   | $ | (103,674 | ) | $ | 12,878 |   |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 941,458 |   | $ | 190,785 |   | $ | — |   | $ | — |   | $ | 1,132,243 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                             |       | 557,697 |   | 109,247 |   | 193 |   | — |   | 667,137 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                             |       | 237,023 |   | 35,465 |   | (513 | ) | — |   | 271,975 |   |
| Income from credit card program                                                   |       | —                                                             |       | (15,435 | ) | (1,859 | ) | — |   | — |   | (17,294 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 30,282 |   | 4,750 |   | 103 |   | — |   | 35,135 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                             |       | 15,059 |   | 2,937 |   | — |   | — |   | 17,996 |   |
| Other income                                                                      |       | —                                                             |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Operating earnings                                                                |       | —                                                             |       | 149,282 |   | 40,245 |   | 217 |   | — |   | 189,744 |   |
| Interest expense, net                                                             |       | —                                                             |       | 61,220 |   | 3 |   | — |   | — |   | 61,223 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (78,758                                                            | )          | (97,454 | ) | — |   | — |   | 176,212 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 78,758                                                             |       | 128,521 |   | 97,237 |   | 217 |   | (176,212 | ) | 128,521 |   |
| Income taxes                                                                      |       | —                                                             |       | 49,763 |   | — |   | — |   | — |   | 49,763 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,237 |   | $ | 217 |   | $ | (176,212 | ) | $ | 78,758 |   |

 

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| ** **                                                                                    | ** ** | **Thirteen weeks ended November 1, 2008** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING  ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                          |       | $                                                                  | 12,878     |   | $ | 12,878 |   | $ | 90,696 |   | $ | 100 |   | $ | (103,674 | ) | $ | 12,878 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities:          |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation  and amortization expense                                                        |       | —                                                             |       | 52,960 |   | 7,172 |   | 58 |   | — |   | 60,190 |   |
| Deferred  income taxes                                                                        |       | —                                                             |       | (8,722 | ) | — |   | — |   | — |   | (8,722 | ) |
| Other,  primarily costs related to defined benefit pension and other long-term  benefit plans |       | —                                                             |       | 4,063 |   | 80 |   | — |   | — |   | 4,143 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                             |       | 56,830 |   | (56,830 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (12,878                                                            | )          | (90,796 | ) | — |   | — |   | 103,674 |   | — |   |
| Changes in  operating assets and liabilities, net                                             |       | —                                                             |       | (119,546 | ) | (38,867 | ) | 44 |   | — |   | (158,369 | ) |
| Net cash  (used for) provided by operating activities                                         |       | —                                                             |       | (92,333 | ) | 2,251 |   | 202 |   | — |   | (89,880 | ) |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                         |       | —                                                             |       | (31,073 | ) | (2,045 | ) | (343 | ) | — |   | (33,461 | ) |
| Net cash  used for investing activities                                                       |       | —                                                             |       | (31,073 | ) | (2,045 | ) | (343 | ) | — |   | (33,461 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                      |       | —                                                             |       | (489 | ) | — |   | — |   | — |   | (489 | ) |
| Net cash  used for financing activities                                                       |       | —                                                             |       | (489 | ) | — |   | — |   | — |   | (489 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease)  increase during the period                                                        |       | —                                                             |       | (123,895 | ) | 206 |   | (141 | ) | — |   | (123,830 | ) |
| Beginning  balance                                                                            |       | —                                                             |       | 238,204 |   | 601 |   | 375 |   | — |   | 239,180 |   |
| Ending  balance                                                                               |       | $                                                                  | —     |   | $ | 114,309 |   | $ | 807 |   | $ | 234 |   | $ | — |   | $ | 115,350 |   |

 
| ** **                                                                                    | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                          |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,237 |   | $ | 217 |   | $ | (176,212 | ) | $ | 78,758 |   |
| Adjustments  to reconcile net earnings to net cash provided by operating activities:          |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation  and amortization expense                                                        |       | —                                                             |       | 48,895 |   | 7,687 |   | 103 |   | — |   | 56,685 |   |
| Deferred  income taxes                                                                        |       | —                                                             |       | (9,180 | ) | — |   | — |   | — |   | (9,180 | ) |
| 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 |       | —                                                             |       | 7,612 |   | 559 |   | — |   | — |   | 8,171 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (78,758                                                            | )          | (97,454 | ) | — |   | — |   | 176,212 |   | — |   |
| Changes in  operating assets and liabilities, net                                             |       | —                                                             |       | (68,554 | ) | (46,729 | ) | (525 | ) | — |   | (115,808 | ) |
| Net cash  (used for) provided by operating activities                                         |       | —                                                             |       | (15,378 | ) | 1,759 |   | (205 | ) | — |   | (13,824 | ) |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                         |       | —                                                             |       | (43,652 | ) | (2,558 | ) | 172 |   | — |   | (46,038 | ) |
| 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                                         |       | —                                                             |       | (43,652 | ) | (2,558 | ) | 172 |   | — |   | (46,038 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                      |       | —                                                             |       | (789 | ) | — |   | — |   | — |   | (789 | ) |
| Net cash  used for financing activities                                                       |       | —                                                             |       | (789 | ) | — |   | — |   | — |   | (789 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Decrease  during the period                                                                   |       | —                                                             |       | (59,819 | ) | (799 | ) | (33 | ) | — |   | (60,651 | ) |
| Beginning  balance                                                                            |       | —                                                             |       | 139,333 |   | 1,196 |   | 678 |   | — |   | 141,207 |   |
| Ending  balance                                                                               |       | $                                                                  | —     |   | $ | 79,514 |   | $ | 397 |   | $ | 645 |   | $ | — |   | $ | 80,556 |   |

 

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**14.**       Condensed ConsolidatingFinancial Information (with respect to NMG’s obligations under the 2028Debentures)

 

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 is presentedin accordance with the requirements of Rule 3-10 under the Securities andExchange Commission’s Regulation S-X. The financial information may notnecessarily be indicative of results of operations, cash flows or financialposition had the non-guarantor subsidiaries operated as independent entities.

 
| ** **                                      | ** ** | **November 1, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 114,309 |   | $ | 1,041 |   | $ | — |   | $ | 115,350 |   |
| Merchandise inventories                         |       | —                         |       | 958,320 |   | 125,988 |   | — |   | 1,084,308 |   |
| Other current assets                            |       | —                         |       | 136,494 |   | 11,517 |   | — |   | 148,011 |   |
| Total current assets                            |       | —                         |       | 1,209,123 |   | 138,546 |   | — |   | 1,347,669 |   |
| Property and equipment, net                     |       | —                         |       | 935,188 |   | 133,279 |   | — |   | 1,068,467 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,874,355 |   | 2,150,225 |   | — |   | 4,024,580 |   |
| Other assets                                    |       | —                         |       | 74,776 |   | — |   | — |   | 74,776 |   |
| Investments in subsidiaries                     |       | 1,682,601                      |       | 2,323,610 |   | — |   | (4,006,211 | ) | — |   |
| Total assets                                    |       | $                              | 1,682,601  |   | $ | 6,417,052 |   | $ | 2,422,050 |   | $ | (4,006,211 | ) | $ | 6,515,492 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 220,070 |   | $ | 29,554 |   | $ | — |   | $ | 249,624 |   |
| Accrued liabilities                             |       | —                         |       | 329,918 |   | 69,448 |   | — |   | 399,366 |   |
| Other current liabilities                       |       | —                         |       | 1,238 |   | — |   | — |   | 1,238 |   |
| Total current liabilities                       |       | —                         |       | 551,226 |   | 99,002 |   | — |   | 650,228 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,946,150 |   | — |   | — |   | 2,946,150 |   |
| Deferred income taxes                           |       | —                         |       | 916,072 |   | — |   | — |   | 916,072 |   |
| Other long-term liabilities                     |       | —                         |       | 321,003 |   | (562 | ) | — |   | 320,441 |   |
| Total long-term liabilities                     |       | —                         |       | 4,183,225 |   | (562 | ) | — |   | 4,182,663 |   |
| Total shareholders’ equity                 |       | 1,682,601                      |       | 1,682,601 |   | 2,323,610 |   | (4,006,211 | ) | 1,682,601 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,682,601  |   | $ | 6,417,052 |   | $ | 2,422,050 |   | $ | (4,006,211 | ) | $ | 6,515,492 |   |

 

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| ** **                                      | ** ** | **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                             |       | —                       |       | 289,352 |   | 70,047 |   | — |   | 359,399 |   |
| Other current liabilities                       |       | —                       |       | 1,695 |   | — |   | — |   | 1,695 |   |
| 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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| ** **                                      | ** ** | **October 27, 2007** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 79,514 |   | $ | 1,042 |   | $ | — |   | $ | 80,556 |   |
| Merchandise inventories                         |       | —                         |       | 966,974 |   | 118,537 |   | — |   | 1,085,511 |   |
| Other current assets                            |       | —                         |       | 125,439 |   | 14,936 |   | 544 |   | 140,919 |   |
| Total current assets                            |       | —                         |       | 1,171,927 |   | 134,515 |   | 544 |   | 1,306,986 |   |
| Property and equipment, net                     |       | —                         |       | 917,353 |   | 140,641 |   | — |   | 1,057,994 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,937,964 |   | 2,193,330 |   | — |   | 4,131,294 |   |
| Other assets                                    |       | —                         |       | 91,119 |   | 131 |   | — |   | 91,250 |   |
| Investments in subsidiaries                     |       | 1,625,717                      |       | 2,352,217 |   | — |   | (3,977,934 | ) | — |   |
| Total assets                                    |       | $                              | 1,625,717  |   | $ | 6,470,580 |   | $ | 2,468,617 |   | $ | (3,977,390 | ) | $ | 6,587,524 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 282,333 |   | $ | 43,297 |   | $ | 544 |   | $ | 326,174 |   |
| Accrued liabilities                             |       | —                         |       | 368,817 |   | 73,825 |   | — |   | 442,642 |   |
| Other current liabilities                       |       | —                         |       | 3,470 |   | — |   | — |   | 3,470 |   |
| Total current liabilities                       |       | —                         |       | 654,620 |   | 117,122 |   | 544 |   | 772,286 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,945,955 |   | — |   | — |   | 2,945,955 |   |
| Deferred income taxes                           |       | —                         |       | 982,492 |   | — |   | — |   | 982,492 |   |
| Other long-term liabilities                     |       | —                         |       | 261,796 |   | (722 | ) | — |   | 261,074 |   |
| Total long-term liabilities                     |       | —                         |       | 4,190,243 |   | (722 | ) | — |   | 4,189,521 |   |
| Total shareholders’ equity                 |       | 1,625,717                      |       | 1,625,717 |   | 2,352,217 |   | (3,977,934 | ) | 1,625,717 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,625,717  |   | $ | 6,470,580 |   | $ | 2,468,617 |   | $ | (3,977,390 | ) | $ | 6,587,524 |   |

 

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

** **
| ** **                                                                        | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 941,458 |   | $ | 190,785 |   | $ | — |   | $ | 1,132,243 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                             |       | 557,697 |   | 109,440 |   | — |   | 667,137 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                             |       | 237,023 |   | 34,952 |   | — |   | 271,975 |   |
| Income from credit card program                                                   |       | —                                                             |       | (15,435 | ) | (1,859 | ) | — |   | (17,294 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 30,282 |   | 4,853 |   | — |   | 35,135 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                             |       | 15,059 |   | 2,937 |   | — |   | 17,996 |   |
| Other income                                                                      |       | —                                                             |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Operating earnings                                                                |       | —                                                             |       | 149,282 |   | 40,462 |   | — |   | 189,744 |   |
| Interest expense, net                                                             |       | —                                                             |       | 61,220 |   | 3 |   | — |   | 61,223 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (78,758                                                            | )          | (97,454 | ) | — |   | 176,212 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 78,758                                                             |       | 128,521 |   | 97,454 |   | (176,212 | ) | 128,521 |   |
| Income taxes                                                                      |       | —                                                             |       | 49,763 |   | — |   | — |   | 49,763 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,454 |   | $ | (176,212 | ) | $ | 78,758 |   |

 

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

 
| ** **                                                                                   | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,454 |   | $ | (176,212 | ) | $ | 78,758 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities:         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                                             |       | 48,895 |   | 7,790 |   | — |   | 56,685 |   |
| Deferred income taxes                                                                        |       | —                                                             |       | (9,180 | ) | — |   | — |   | (9,180 | ) |
| 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 |       | —                                                             |       | 7,612 |   | 559 |   | — |   | 8,171 |   |
| Intercompany royalty income payable  (receivable)                                            |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (78,758                                                            | )          | (97,454 | ) | — |   | 176,212 |   | — |   |
| Changes in operating assets and  liabilities, net                                            |       | —                                                             |       | (68,554 | ) | (47,254 | ) | — |   | (115,808 | ) |
| Net cash (used for) provided by operating  activities                                        |       | —                                                             |       | (15,378 | ) | 1,554 |   | — |   | (13,824 | ) |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                             |       | (43,652 | ) | (2,386 | ) | — |   | (46,038 | ) |
| Purchases of short-term investments                                                          |       | —                                                             |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                                             |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used for investing activities                                                       |       | —                                                             |       | (43,652 | ) | (2,386 | ) | — |   | (46,038 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                               |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                             |       | (789 | ) | — |   | — |   | (789 | ) |
| Net cash used for financing activities                                                       |       | —                                                             |       | (789 | ) | — |   | — |   | (789 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                               |       |   |   |   |   |   |   |   |   |
| Decrease during the period                                                                   |       | —                                                             |       | (59,819 | ) | (832 | ) | — |   | (60,651 | ) |
| Beginning balance                                                                            |       | —                                                             |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                  | —     |   | $ | 79,514 |   | $ | 1,042 |   | $ | — |   | $ | 80,556 |   |

 

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

** **

**EXECUTIVE OVERVIEW**

 

The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with our Annual Report on Form 10-Kfor the fiscal year ended August 2, 2008. Unless otherwise specified, the meanings of all defined terms inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) are consistent with the meanings of such terms as definedin the Notes to the Condensed Consolidated Financial Statements. Thisdiscussion contains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the risks,uncertainties and assumptions relating to our forward-looking statements.

 

**Overview**

 

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

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the first quarter of fiscalyear 2009 relate to the thirteen weeks ended November 1, 2008.  All references to the first quarter of fiscalyear 2008 relate to the thirteen weeks ended October 27, 2007.

 

**Factors Affecting Our Results**

 

***Revenues.***  We generate our revenues from the sale ofhigh-end merchandise through our Specialty Retail stores and Direct Marketingoperations. Components of our revenues 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 by the following factors:

 

·                  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;

 

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

 

·                  general economicconditions.

 

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

 

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***Cost of goods sold including buying andoccupancy costs (excluding depreciation) (COGS).***  COGS consists 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 industry business practice, we receive allowances fromcertain of our vendors in support of the merchandise we purchase for resale.Certain allowances are received to reimburse us for markdowns taken or tosupport the gross margins that we earn in connection with the sales of thevendor’s merchandise. These allowances result in an increase to gross marginwhen we earn the allowances and they are approved by the vendor. Otherallowances we receive represent reductions to the amounts we pay to acquire themerchandise. These allowances reduce the cost of the acquired merchandise andare recognized at the time the goods are sold. We received vendor allowances of $12.1 million, or 1.2% ofrevenues, for the first quarter of fiscal year 2009 and $12.5 million, or1.1% of revenues, for the first quarter of fiscal year 2008.

 

Changes in our COGS as a percentage of revenues are affected primarilyby 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.

 

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

 

Advertising costs incurred by our Specialty Retail segment consistprimarily of print media costs related to promotional materials mailed to ourcustomers, while advertising costs incurred by our Direct Marketing operationsrelate to the production, printing and distribution of our print catalogs andthe production of the photographic content on our websites, as well as onlinemarketing costs. We receive advertising allowances from certain of ourmerchandise vendors. Substantially all the advertising allowances we receiverepresent reimbursements of direct, specific and incremental costs that weincur to promote the vendor’s merchandise in connection with our variousadvertising programs, primarily catalogs and other print media. As a result,these allowances are recorded as a reduction of our advertising costs whenearned. Vendor allowances earned and recorded as a reduction to selling,general and administrative expenses aggregated approximately $23.9 million, or2.4% of revenues, for the first quarter of fiscal year 2009 and $28.2 million, or2.5% of revenues, for the first quarter of fiscal year 2008.

 

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 $17.9 million, or 1.8% of revenues, for the first quarter offiscal year 2009 and $17.9 million, or 1.6% of revenues, for the firstquarter of fiscal year 2008.

 

Changes in our selling, general and administrative expenses areaffected 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***.  Pursuant to a long-term marketing andservicing alliance with HSBC, HSBC offers credit card and non-card paymentplans bearing our brands and we receive ongoing payments from HSBC based on netcredit card sales and compensation for marketing and servicing activities (HSBCProgram Income). We recognize HSBC Program Income when earned.  In the future, the HSBC Program Income maybe:

 

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

 

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

 

·                  decreased based 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 (subject to a contractual limit).

 

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**Seasonality**

 

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

 

Our first fiscal quarter is generally characterized by a higher levelof full-price sales with a focus on the initial introduction of Fall seasonfashions. Aggressive in-store marketing activities designed to stimulatecustomer buying, a lower level of markdowns and higher margins arecharacteristic of this quarter. The second fiscal quarter is more focused onpromotional activities related to the December holiday season, the earlyintroduction of resort season collections from certain designers and the saleof Fall season goods on a marked down basis. As a result, margins are typicallylower in the second fiscal quarter. However, due to the seasonal increase insales that occurs during the holiday season, the second fiscal quarter istypically the quarter in which our revenues are the highest and in whichexpenses as a percentage of revenues are the lowest. Our working capitalrequirements are also the greatest in the first and second fiscal quarters as aresult of higher seasonal requirements.

 

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

 

A large percentage of our merchandise assortment, particularly in theapparel, fashion accessories and shoe categories, is ordered months in advanceof the introduction of such goods. For example, women’s apparel, men’s appareland shoes are typically ordered six to nine months in advance of the productsbeing offered for sale while handbags, jewelry and other categories aretypically ordered three to six months in advance. As a result, inherent in thesuccessful execution of our business plans is our ability both to predict thefashion trends that will be of interest to our customers and to anticipatefuture spending patterns of our customer base.

 

We monitor the sales performance of our inventories throughout eachseason. We seek to order additional goods to supplement our original purchasingdecisions when the level of customer demand is higher than originallyanticipated. However, in certain merchandise categories, particularly fashionapparel, our ability to purchase additional goods can be limited. This canresult in lost sales in the event of higher than anticipated demand of thefashion goods we offer or a higher than anticipated level of consumer spending.Conversely, in the event we buy fashion goods that are not accepted by thecustomer or the level of consumer spending is less than we anticipated, wetypically incur a higher than anticipated level of markdowns, net of vendorallowances, to sell the goods that remain at the end of the season, resultingin lower operating profits. We believe that the experience of our merchandisingand selling organizations helps to minimize the inherent risk in predictingfashion trends.

 

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**OPERATING RESULTS**

 

**Performance Summary**

 

Thefollowing table sets forth certain items expressed as percentages of netrevenues for the periods indicated.

 
| ** **                                                                        | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| Revenues                                                                          |       | 100.0                                                  | %          | 100.0                                                  | %          |
|                                                                              |       |                                                   |       |                                                   |       |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 62.7                                                   |       | 58.9                                                   |       |
| Selling, general and administrative  expenses (excluding depreciation)            |       | 24.6                                                   |       | 24.0                                                   |       |
| Income from credit card program                                                   |       | (1.3                                                   | )          | (1.5                                                   | )          |
| Depreciation expense                                                              |       | 3.9                                                    |       | 3.1                                                    |       |
| Amortization of customer lists                                                    |       | 1.4                                                    |       | 1.2                                                    |       |
| Amortization of favorable lease commitments                                       |       | 0.5                                                    |       | 0.4                                                    |       |
| Other income                                                                      |       | —                                                 |       | (2.9                                                   | )          |
| Operating earnings                                                                |       | 8.3                                                    |       | 16.8                                                   |       |
| Interest expense, net                                                             |       | 5.9                                                    |       | 5.4                                                    |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Earnings before income taxes                                                      |       | 2.4                                                    |       | 11.4                                                   |       |
| Income taxes                                                                      |       | 1.1                                                    |       | 4.4                                                    |       |
| Net earnings                                                                      |       | 1.3                                                    | %          | 7.0                                                    | %          |

 

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

** **
| **(dollars in millions, except sales per square foot)** | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| REVENUES                                                                                   |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                                                    |       | $                                                      | 827.1      |                                                   | $          | 961.6 |   |
| Direct Marketing                                                                           |       | 158.7                                                  |       | 170.6                                                  |       |
| Total                                                                                      |       | $                                                      | 985.8      |                                                   | $          | 1,132.2 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| OPERATING EARNINGS                                                                         |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                                                    |       | $                                                      | 94.4       |                                                   | $          | 165.6 |   |
| Direct Marketing                                                                           |       | 19.4                                                   |       | 23.2                                                   |       |
| Corporate expenses                                                                         |       | (14.2                                                  | )          | (13.6                                                  | )          |
| Amortization of customer lists and  favorable lease commitments                            |       | (18.0                                                  | )          | (18.0                                                  | )          |
| Other income (1)                                                                           |       | —                                                 |       | 32.5                                                   |       |
| Total                                                                                      |       | $                                                      | 81.6       |                                                   | $          | 189.7 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| OPERATING PROFIT MARGIN                                                                    |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                                                    |       | 11.4                                                   | %          | 17.2                                                   | %          |
| Direct Marketing                                                                           |       | 12.2                                                   | %          | 13.6                                                   | %          |
| Total                                                                                      |       | 8.3                                                    | %          | 16.8                                                   | %          |
|                                                                                       |       |                                                   |       |                                                   |       |
| CHANGE IN COMPARABLE REVENUES (2)                                                          |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                                                    |       | (15.8                                                  | )%         | 6.4                                                    | %          |
| Direct Marketing                                                                           |       | (7.0                                                   | )%         | 7.1                                                    | %          |
| Total                                                                                      |       | (14.5                                                  | )%         | 6.5                                                    | %          |
|                                                                                       |       |                                                   |       |                                                   |       |
| SALES PER SQUARE FOOT                                                                      |       |                                                   |       |                                                   |       |
| Specialty Retail stores                                                                    |       | $                                                      | 133        |                                                   | $          | 163 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| STORE COUNT                                                                                |       |                                                   |       |                                                   |       |
| Neiman Marcus and Bergdorf Goodman stores:                                                 |       |                                                   |       |                                                   |       |
| Open at beginning of period                                                                |       | 41                                                     |       | 40                                                     |       |
| Opened during the period                                                                   |       | 1                                                      |       | 1                                                      |       |
| Open at end of period                                                                      |       | 42                                                     |       | 41                                                     |       |
| Clearance centers:                                                                         |       |                                                   |       |                                                   |       |
| Open at beginning of period                                                                |       | 24                                                     |       | 20                                                     |       |
| Opened during the period                                                                   |       | 1                                                      |       | 1                                                      |       |
| Open at end of period                                                                      |       | 25                                                     |       | 21                                                     |       |
|                                                                                       |       |                                                   |       |                                                   |       |
| NON-GAAP FINANCIAL DATA                                                                    |       |                                                   |       |                                                   |       |
| EBITDA (3)                                                                                 |       | $                                                      | 138.2      |                                                   | $          | 242.9 |   |
| Adjusted EBITDA (3)                                                                        |       | $                                                      | 138.2      |                                                   | $          | 210.4 |   |

** **

----

(1)  For the first quarter of fiscal year 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.

 

(2)  Comparable revenues include 1) revenues derived from ourretail stores open for more than 52 weeks, including stores that have beenrelocated or expanded and 2) revenues from our Direct Marketingoperations.

 

(3) For an explanation of EBITDA and Adjusted EBITDA, see “Management’s Discussionand Analysis of Financial Condition and Results of Operations — Non-GAAPFinancial Measure-EBITDA and Adjusted EBITDA.”

 

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**First Quarter FiscalYear 2009 Summary**

 

We continue to experience a challenging economic and retailenvironment, and expect these conditions will continue for an extended periodof time.  Consistent with the significantdeclines in overall macroeconomic factors, capital markets and consumerconfidence that accelerated throughout the first quarter of fiscal year 2009,most notably in October, customer demand was well below our initialexpectations and the prior year.  Thecurrent softness in customer demand exists across all geographic areas, alldistribution channels and all merchandise categories, particularly the appareland home categories.  We believe affluentcustomers are continuing to react to the conditions mentioned above.  However, based on our experience in previousbusiness cycles, we believe our customers’ buying levels will increase once theeconomic environment improves.

 

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

 

·                  stimulate salesthrough additional promotional and other events;

 

·                  reduce inventorylevels and purchases;

 

·                  implementexpense control initiatives; and

 

·                  review futurecapital expenditures and eliminate certain projects.

 

A summary of our operating results for the first quarter of fiscal year2009 is as follows:

 

·                  **Revenues**—Our revenues for thefirst quarter of fiscal year 2009 were $985.8 million, a decrease of 12.9% ascompared to the first quarter of fiscal year 2008. This decrease wasattributable to a decrease in comparable revenues of 14.5%.  Comparable revenues decreased in the firstquarter of fiscal year 2009 for both our Specialty Retail stores and DirectMarketing operations.

 

For Specialty Retail stores, our sales persquare foot for the last twelve trailing months were $605 as of November 1,2008 and $647 as of October 27, 2007.

 

·                  **Cost of goodssold including buying and occupancy costs (excluding depreciation)**—COGS represented 62.7% ofrevenues in the first quarter of fiscal year 2009 and 58.9% of revenues in thefirst quarter of fiscal year 2008.  Theincrease in COGS was due primarily to 1) a lower level of full-price sales, 2)higher levels of markdowns and promotional activities for both our SpecialtyRetail stores and Direct Marketing operations in response to weak demand and 3)the deleveraging of our fixed buying and occupancy costs as a result of lowersales.

 

With the majority of our merchandise being orderedsix months or more prior to delivery, our ability to adjust our near-term inventorypurchases during periods of significant decreases in customer demand issomewhat limited.  While we have and willcontinue to work with our vendors to return merchandise and cancel orders,current inventory levels compared to customer demand are requiring us toimplement promotional activities and to take higher levels of markdowns.  These actions resulted in lower margins inthe first quarter of fiscal year 2009 compared to the prior year.

 

·                  **Selling,general and administrative expenses (excluding depreciation)**—SG&A represented24.6% of revenues in the first quarter of fiscal year 2009 and 24.0% ofrevenues in the first quarter of fiscal year 2008. The increase in SG&A asa percentage of revenues was primarily due to the deleveraging of payroll costsand certain benefits expenses on the significant decrease in revenues for thequarter.  We are implementing bothshort-term expense control initiatives and longer-term adjustments to our coststructure.  We continue to review andevaluate additional initiatives to reduce our cost structure.

 

·                  **Operating earnings—**For the first quarter of fiscal year 2009, ouroperating earnings were $81.6 million, or 8.3% of revenues, compared tooperating earnings in the first quarter of fiscal year 2008 of $189.7 million,or 16.8% of revenues.  Excluding thecurtailment gain in the first quarter of fiscal year 2008, operating earningsmargin decreased in the first quarter of fiscal year 2009 by 5.6% of revenuesprimarily as a result of 1) lower levels of full-price sales and higher netmarkdowns that resulted in an increase in COGS by 3.8% of revenues and 2)increases in SG&A expenses by 0.6% of revenues and depreciation andamortization expense by 1.1% of revenues, primarily due to the deleveraging ofthese expenses on lower sales.

 

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**·****                ****Liquidity—**Our working capital requirements are the highest in our first and secondquarters in advance of the holiday selling season.  Cash used in our operating activities was$89.9 million in the first quarter of fiscal year 2009, an increase of $76.1million from the prior year, as a result of lower sales and earnings and theresulting higher net investment in inventories. However, at November 1, 2008, we held cash balances of $115.4million and we made no borrowings under our Asset-Based Revolving CreditFacility in the first quarter of fiscal year 2009.

 

·                  **Short-term outlook—**We expect retail demand and revenues will remainweak for an extended period of time. Based on our inventory levels, we expect higher markdowns compared tothe prior year will be required to reduce Fall season merchandise resulting inlower gross margins in the second quarter of fiscal year 2009.  In addition, with softer revenue levelsanticipated for fiscal year 2009, our SG&A expenses as a percentage ofrevenues will continue to be under pressure throughout the year. Despite the anticipatedcontinuation of current economic conditions, we believe the cash generated fromour operations along with our available sources of financing will enable us tomeet our cash obligations for fiscal year 2009. To date, we have made no borrowings under our revolving credit facilityand, at present, we do not anticipate utilizing this revolver during the secondquarter of fiscal year 2009.

 

**Thirteen Weeks EndedNovember 1, 2008 Compared to Thirteen Weeks Ended October 27, 2007**

 

***Revenues.**** *Our revenues for thefirst quarter of fiscal year 2009 of $985.8 million decreased $146.4 million,or 12.9%, from $1,132.2 million in the first quarter of fiscal year 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.  New stores generated sales of $17.8 millionfor the first quarter of fiscal year 2009.

 

Comparable revenues for the first quarter offiscal year 2009 were $968.0 million compared to $1,132.2 million in the prioryear fiscal period, representing a decrease of 14.5%.  Comparable revenues decreased in the firstquarter of fiscal year 2009 by 15.8% for Specialty Retail stores and 7.0% forDirect Marketing compared to the first quarter of fiscal year 2008.

 

Internet revenues generated by DirectMarketing were $121.0 million for the first quarter of fiscal year 2009, adecrease of 2.5% compared to the prior year fiscal quarter. The decrease ininternet revenues was compounded by a 19.1% decrease in catalog revenues.  Decreases in revenues from the home décorcategory, primarily offered by our Horchow brand, were incurred in both ourinternet and catalog operations during the first quarter of fiscal year 2009.

 

***Cost of goods sold including buying andoccupancy costs (excluding depreciation).***  COGS for the first quarter of fiscal year2009 were 62.7% of revenues compared to 58.9% of revenues for the first quarterof fiscal year 2008.

 

The increase in COGS as a percentage ofrevenues in the first quarter of fiscal year 2009 was primarily due todecreased product margins generated by both our Specialty Retail stores andDirect Marketing operations of approximately 2.8% of revenues.  The decrease in COGS as a percentage ofrevenues reflects the lower level of customer demand we continue toexperience.  As a result, we generated alower level of full-price sales in the first quarter of fiscal year 2009 andincurred higher markdowns and sales promotions costs to liquidate on-hand inventoriesheld in excess of sales trends. Additionally, buying and occupancy costs increased 1.0% 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 24.6% of revenues inthe first quarter of fiscal year 2009 compared to 24.0% of revenues in theprior year fiscal quarter.

 

The net increase in SG&A expenses as apercentage of revenues in the first quarter of fiscal year 2009 ofapproximately 0.6% of revenues was primarily due to:

 

·                  the deleveragingof a significant portion of our SG&A expenses, primarily payroll andrelated benefits, by approximately 0.9% of revenues on the lower level ofrevenues, net of lower incentive compensation requirements; offset by

 

·                  a lower level ofadvertising and promotions costs incurred in the first quarter of fiscal year2009 of approximately 0.2% of revenues. During the first quarter of the prior year, we incurred incrementaladvertising and promotions costs in connection with the celebration of the 100thanniversary of Neiman Marcus in October 2007.  This increase was partially offset in thefirst quarter of fiscal year 2009 by an increase in advertising costs as apercentage of revenues for our Direct Marketing operations, primarily relatedto the deleveraging of catalog production costs on lower catalog revenues.

 

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***Income from credit card program. ***We earned HSBCProgram Income of $13.0 million, or 1.3% of revenues, in the first quarter offiscal year 2009 compared to $17.3 million, or 1.5% of revenues, in the firstquarter of fiscal year 2008.  As a resultof current higher delinquencies and losses on consumer indebtednesses in lightof current economic conditions, we recorded a charge of approximately $2.1million in the first quarter of fiscal year 2009 for our allocable portion ofcredit card losses.

 

***Depreciation expense. ***Depreciationexpense was $38.6 million, or 3.9% of revenues, in the first quarter of fiscalyear 2009 compared to $35.1 million, or 3.1% of revenues, in the first quarterof fiscal year 2008.  The increase indepreciation expense as a percentage of revenues results primarily from thedeleveraging of these costs on lower revenues.

 

***Amortization expense. ***Amortization ofintangible assets (customer lists and favorable lease commitments) aggregated$18.0 million, or 1.9% of revenues, in the first quarter of fiscal year 2009compared to $18.0 million, or 1.6% of revenues, in the first quarter of fiscalyear 2008.

 

***Other income.* **In the first quarter of fiscal year 2008,we recorded a one-time pension curtailment gain of $32.5 million, or 2.9% 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 the impact ofadjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date.

 

Operating earnings for our Specialty Retailstores segment were $94.4 million, or 11.4% of Specialty Retail storesrevenues, for the first quarter of fiscal year 2009 compared to $165.6 million,or 17.2% of Specialty Retail stores revenues, for the prior year fiscalquarter.  The decrease in operatingmargin as a percentage of revenues was primarily due to:

 

·                  lower demandresulting in a lower level of full-price sales and higher markdowns andpromotional costs; and

 

·                  the deleveragingof a significant portion of our expenses on the lower level of sales; partiallyoffset by

 

·                  net decreases inadvertising and promotion costs; and

 

·                  lower estimatedannual incentive compensation costs.

 

Operating earnings for Direct Marketing were$19.4 million, or 12.2% of Direct Marketing revenues, in the first quarter offiscal year 2009 compared to $23.2 million, or 13.6% 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 tohigher markdowns and 2) the deleveraging of a significant portion of ourexpenses on the lower level of sales, including catalog production costs.

 

Total operating earnings in the first quarterof fiscal year 2009 were $81.6 million, or 8.3% of revenues.  Total operating earnings in the first quarterof fiscal year 2008 were $189.7 million, or 16.8% of revenues.  Excluding the curtailment gain in the firstquarter of fiscal year 2008, operating earnings margin decreased in the firstquarter of fiscal year 2009 by 5.6% of revenues as a result of 1) an increasein COGS by 2.8% of revenues due primarily to lower product margins at SpecialtyRetail stores, 2) the deleveraging of both buying and occupancy and SG&Aexpenses by 1.6% of revenues and 3) the deleveraging of depreciation andamortization expenses by 1.1% of revenues.

 

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***Interest expense, net*.**  Net interest expense was $57.8 million, or5.9% of revenues, in the first quarter of fiscal year 2009 and $61.2 million,or 5.4% 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:

 
| **(in thousands)**           | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                              |       |                                                   |       |                                                   |       |
| Senior Secured Term Loan Facility |       | $                                                      | 23,930     |                                                   | $          | 27,976 |   |
| 2028 Debentures                   |       | 2,227                                                  |       | 2,185                                                  |       |
| Senior Notes                      |       | 15,750                                                 |       | 15,453                                                 |       |
| Senior Subordinated Notes         |       | 12,969                                                 |       | 12,724                                                 |       |
| Amortization of debt issue costs  |       | 3,554                                                  |       | 3,554                                                  |       |
| Other                             |       | 825                                                    |       | 832                                                    |       |
| Total interest expense            |       | 59,255                                                 |       | 62,724                                                 |       |
| Less:                             |       |                                                   |       |                                                   |       |
| Interest income                   |       | 1,104                                                  |       | 855                                                    |       |
| Capitalized interest              |       | 306                                                    |       | 646                                                    |       |
| Interest expense, net             |       | $                                                      | 57,845     |                                                   | $          | 61,223 |   |

 

***Income taxes.***  Our effective income tax rate for the firstquarter of fiscal year 2009 was 45.7% compared to 38.7% for the fist quarter offiscal year 2008.  Our effective tax ratefor the first quarter of fiscal year 2009 was unfavorably impacted by asignificantly lower level of projected earnings for fiscal year 2009.

 

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 IRS isnow examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofNovember 1, 2008 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 ourdebt.  In addition, we use EBITDA andAdjusted EBITDA as components of the measurement of incentive compensation.

 

EBITDA and Adjusted EBITDA are notpresentations made in accordance with GAAP and our computation of EBITDA andAdjusted EBITDA may vary from others in our industry.  In addition, EBITDA and Adjusted EBITDAcontain some, but not all, adjustments that are taken into account in thecalculation of the components of various covenants in the indentures governingNMG’s senior secured Asset-Based Revolving Credit Facility, Senior Secured TermLoan Facility, Senior Notes and Senior Subordinated Notes.  EBITDA and Adjusted EBITDA should not beconsidered as alternatives to operating earnings or net earnings as measures ofoperating 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:

 

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·                  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 cash requirementsfor assets being depreciated and amortized that may have to be replaced in thefuture.

 

The following table reconciles net earnings as reflected in ourconsolidated statements of earnings prepared in accordance with GAAP to EBITDAand Adjusted EBITDA:

 
| **(dollars in millions)**                                         | ** ** | **Thirteen  weeks ended  November 1,  2008** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                                        |       |                                                   |       |                                                   |       |
| Net earnings                                                                |       | $                                                      | 12.9       |                                                   | $          | 78.8 |   |
| Income taxes                                                                |       | 10.9                                                   |       | 49.8                                                   |       |
| Interest expense, net                                                       |       | 57.8                                                   |       | 61.2                                                   |       |
| Depreciation expense                                                        |       | 38.6                                                   |       | 35.1                                                   |       |
| Amortization of customer lists and  favorable lease commitments             |       | 18.0                                                   |       | 18.0                                                   |       |
| EBITDA (1)                                                                  |       | 138.2                                                  |       | 242.9                                                  |       |
| EBITDA rate                                                                 |       | 14.0                                                   | %          | 21.5                                                   | %          |
| Non-cash gain on curtailment of defined  benefit retirement obligations (1) |       | —                                                 |       | (32.5                                                  | )          |
| Adjusted EBITDA                                                             |       | $                                                      | 138.2      |                                                   | $          | 210.4 |   |
| Adjusted EBITDA rate                                                        |       | 14.0                                                   | %          | 18.6                                                   | %          |

 

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(1)          For the first quarter of fiscal year 2008,operating earnings and EBITDA include a one-time pension curtailment gain of$32.5 million as a result of our decision to freeze certain Pension and SERPbenefits 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 our inventoryfrom foreign suppliers whose costs are affected by the fluctuation of theirlocal currency against the dollar or who price their merchandise in currenciesother than the dollar. Fluctuations in the Euro-U.S. dollar exchange rateaffect us most significantly; however, we source goods from numerous countriesand thus are affected by changes in numerous currencies and, generally, byfluctuations in the U.S. dollar relative to such currencies. Accordingly,changes in the value of the dollar relative to foreign currencies may increaseour cost of goods sold and if we are unable to pass such cost increases to ourcustomers, our gross margins, and ultimately our earnings, would decrease.Foreign currency fluctuations could have a material adverse effect on ourbusiness, financial condition and results of operations in the future. Weattempt to offset the effects of inflation through price increases and controlof expenses, although our ability to increase prices may be limited bycompetitive factors. We attempt to offset the effects of merchandise deflation,which has occurred on a limited basis in recent years, through control ofexpenses. There is no assurance, however, that inflation or deflation will notmaterially 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. In the firstquarters of fiscal year 2009 and 2008, we have made no borrowings under ourAsset-Based Revolving Credit Facility.

 

We believe that operating cash flows, available vendor financing andamounts available pursuant to our senior secured Asset-Based Revolving CreditFacility will be sufficient to fund our operations, anticipated capitalexpenditure requirements, debt service obligations, contractual obligations andcommitments and Pension Plan funding requirements through the end of fiscalyear 2009.

 

At November 1, 2008, cash and cash equivalents were$115.4 million compared to $80.6 million at October 27, 2007.Net cash used for operating activities was $89.9 million for the firstquarter of fiscal year 2009 compared to $13.8 million in the first quarterof fiscal year 2008. Cash flows used for operating activities were $76.1 millionhigher in the first quarter of fiscal year 2009 than in the prior year fiscalperiod reflecting the lower levels of revenues and earnings generated in thecurrent year and the resulting higher net investment in inventories.

 

Net cash used for investing activities, representing capitalexpenditures, was $33.5 million in the first quarter of fiscal year 2009and $46.0 million in the first quarter of fiscal year 2008.  We incurred significant capital expendituresin the first quarter of fiscal year 2009 related to the construction of newstores in Topanga (the greater Los Angeles area) and Bellevue (suburbanSeattle). We incurred capital expenditures in the first quarter of fiscal year2008 related to the construction of new stores in Natick and Topanga and theremodel of our Atlanta store. We opened our Natick store in September 2007and our Topanga store in September 2008. In light of current economicconditions and delays in certain real estate projects, we currently projectgross capital expenditures for fiscal year 2009 to be approximately $115 to$125 million 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$100 to $110 million.

 

Net cash used for financing activities was $0.5 million in thefirst quarter of fiscal year 2009 as compared to $0.8 million in the firstquarter of fiscal year 2008.

 

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**Financing Structure at November 1, 2008**

 

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.

 

As of November 1, 2008, NMG had $576.3 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$23.7 million used for letters of credit.

 

See Note 3 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 November 1,2008, 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 Credit Suisseand (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. The interest rateon the outstanding borrowings pursuant to the Senior Secured Term Loan Facilitywas 4.57% at November 1, 2008, which margin is subject to adjustment basedon contractually defined debt coverage ratios. At November 1, 2008, the applicable margin with respect to baserate borrowings was 0.75% and the applicable margin with respect to LIBORborrowings was 1.75%.  Based upon currentoperating performance expectations, we anticipate the applicable margin withrespect to LIBOR borrowings will increase by 0.25% beginning in December 2008.

 

See Note 3 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 3 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% Senior Notesunder a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015.

 

See Note 3 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 3 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 November 1, 2008, the fair value ofNMG’s interest rate swap agreements was a loss of approximately$47.7 million, which amount is included in other long-term liabilities.

 

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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) income.

 

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 6.535% to 6.733% per quarter through 2010 and result in anaverage fixed rate of 6.618%.

 

**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 our expectations and beliefsconcerning future events, as well as currently available data.  While we believe there is a reasonable basisfor our forward-looking statements, they involve a number of risks anduncertainties. Therefore, these statements are not guarantees of futureperformance and you should not place undue reliance on them. A variety offactors 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:

 

*Political and General Economic Conditions*

 

·                  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 the demographicor retail environment;

 

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

 

·                  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;

 

·                  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;

 

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·                  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 our relationshipswith certain of our key sales associates and our ability to retain our keysales associates;

 

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

 

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

 

*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 the estimateswe used in preparing the accompanying Condensed Consolidated FinancialStatements.

 

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**SeeNote 1 of the Notes to Condensed Consolidated Financial Statements in Item 1for a summary of our critical accounting policies.  A complete description of our criticalaccounting policies is included in our Annual Report to Shareholders on Form 10-Kfor the fiscal year ended August 2, 2008.**

** **

***Recent Accounting Pronouncements. ***As more fullyexplained in Note 4, 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 new circumstances.

 

In February 2008, the FASB issued FASB Staff Position 157-2,*“*EffectiveDate of FASB Statement No. 157” (FSP 157-2), which delays theeffective date of SFAS 157 for all nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually). FSP 157-2 iseffective for fiscal years beginning after November 15, 2008, or ourfiscal year ending July 31, 2010. We have not yet evaluated the impact of adopting FSP 157-2 on ourconsolidated financial statements.

 

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 business combinations.  In addition, SFAS 141(R) changes theaccounting 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 businesscombination as a component of tax expense. SFAS 141(R) is to be applied prospectively to business combinationsfor which the acquisition date is on or after December 15, 2008, or ourfiscal year ending July 31, 2010. Generally, the effect of SFAS 141(R) will depend on futureacquisitions.  However, the accountingfor the resolution of any tax uncertainties remaining as of August 1, 2009related 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 second fiscal quarter ending January 31,2009.  We have not yet evaluated theimpact, if any, of adopting the disclosure requirements of SFAS 161.

 

**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 tradingpurposes. The Company seeks to manage exposure to adverse interest rate changesthrough its normal operating and financing activities. The Company is exposedto interest rate risk through its borrowing activities, which are described inNote 3 to our condensed consolidated financial statements.

 

As of November 1, 2008, 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 theextent of outstanding borrowings, would be affected by interest rate changes.

 

At November 1, 2008, 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 6.535% to 6.733% per quarter through 2010 and result in an averagefixed rate of 6.618%.

 

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With respect to outstanding borrowings in excess of $1,000.0 million onthe Senior Secured Term Loan Facility, such borrowings are at floatingrates.  A 1% increase in these floatingrates 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.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**a.  DisclosureControls and Procedures.**

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, wecarried out an evaluation as of November 1, 2008, 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 Controlover Financial Reporting.**

 

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 November 1, 2008 that has materially affected, oris reasonably likely to materially affect, our internal controls over financialreporting.

 

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**NEIMANMARCUS, INC.**

** **

**PART II**

 

**ITEM 1.           LEGAL PROCEEDINGS**

** **

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

 

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

 

**ITEM 1A.        RISK FACTORS**

** **

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

** **

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

 

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

 

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

** **

 We are highly leveraged.  As of November 1, 2008, the principal amountof NMG’s total indebtedness was approximately $2,951.4 million and the unusedborrowing availability under the $600 million Asset-Based Revolving CreditFacility was approximately $576.3 million after giving effect to $23.7 millionof letters of credit outstanding thereunder. NMG’s substantial indebtedness, combined with its lease and otherfinancial obligations and contractual commitments, could have other importantconsequences. For example, it could:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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 In addition, NMG’s interest expense couldincrease if interest rates increase because the entire amount of theindebtedness under the senior secured credit facilities bears interest atfloating rates.  As of November 1, 2008,NMG had approximately $1,625.0 million principal amount of floating ratedebt, consisting of outstanding borrowings under the Senior Secured Term LoanFacility.  NMG also had at that dateapproximately $576.3 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 $23.7 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 will require a significantamount of cash. NMG’s ability to generate cash depends on many factors beyondits control, and any failure to meet the its debt service obligations couldharm its business, financial condition and results of operations.**

** **

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

 

 If NMG does not generate sufficient cash flowfrom operations to satisfy the debt service obligations, NMG may have toundertake alternative financing plans, such as refinancing or restructuring itsindebtedness, selling assets, reducing or delaying capital investments orseeking to raise additional capital.  Ourability to restructure or refinance NMG’s debt will depend on the 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, any failure to make payments ofinterest and principal on NMG’s outstanding indebtedness on a timely basiswould likely result in a reduction of NMG’s credit rating, which could harm itsability to incur additional indebtedness on acceptable terms.

 

 Contractual limitations on NMG’s ability toexecute any necessary alternative financing plans could exacerbate the effectsof any failure to generate sufficient cash flow to satisfy its debt serviceobligations.  The Asset-Based RevolvingCredit Facility permits NMG to borrow up to $600.0 million; however, NMG’sability to borrow thereunder is limited by a borrowing base, which at any timewill equal the lesser of 80% of eligible inventory valued at the lower of costor market value and 85% of the net orderly liquidation value of the eligibleinventory, less certain reserves.  Inaddition, our ability to borrow under this facility is limited by a minimumliquidity condition, providing that, if less than $60.0 million isavailable at any time, NMG is not permitted to borrow any additional amountsunder the Asset-Based Revolving Credit Facility unless NMG’s pro forma ratio ofconsolidated EBITDA to consolidated Fixed Charges (as such terms are defined inthe credit agreement for the Asset-Based Revolving Credit Facility) is at least1.1 to 1.0.  Our ability to meet thisfinancial ratio may be affected by events beyond our control which may preventus from meeting this ratio.

 

 NMG’s inability to generate sufficient cashflow to satisfy its debt service obligations, or to refinance its obligationsat all or on commercially reasonable terms, would have an adverse effect, whichcould be material, on NMG’s business, financial condition and results ofoperations.

 

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

** **

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

 

·                  incur additional indebtedness;

 

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

 

·                  make investments;

 

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

 

·                  engage in transactions with its affiliates;

 

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·                  sell assets, including capital stock of NMG’ssubsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and lease back transactions.

 

 In addition, NMG’s ability to borrow under theAsset-Based Revolving Credit Facility is limited by a borrowing base and aminimum liquidity condition, as described above.

 

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

 

 A breach of any of the restrictive covenantswould result in a default under the Asset-Based Revolving Credit Facility andSenior Secured Term Loan Facility.  Ifany such default occurs, the lenders under the Asset-Based Revolving CreditFacility and Senior Secured Term Loan Facility may elect to declare alloutstanding borrowings under such facilities, together with accrued interestand other fees, to be immediately due and payable, or enforce their securityinterest, any of which would result in an event of default under NMG’s SeniorNotes and Senior Subordinated Notes and 2028 Debentures. The lenders would alsohave the right in these circumstances to terminate any commitments they have toprovide further borrowings.

 

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

 

**Risks Related to Our Business and Industry**

** **

**The specialty retail industry is highly competitive.**

** **

 The specialty retail industry is highlycompetitive and fragmented. Competition is strong both to attract and sell tocustomers and to establish relationships with, and obtain merchandise from, keyvendors.

 

 We compete for customers with specialtyretailers, traditional and high-end department stores, national apparel chains,vendor-owned proprietary boutiques, individual specialty apparel stores anddirect marketing firms. We compete for customers principally on the basis ofquality and fashion, customer service, value, assortment and presentation ofmerchandise, marketing and customer loyalty programs and, in the case of NeimanMarcus and Bergdorf Goodman, 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.

 

**Deterioration in economic conditions could adversely affectour business.**

** **

 The merchandise we sell consists in large partof luxury retail goods. The purchase of these goods by customers isdiscretionary, and therefore highly dependent upon the level of consumerspending, particularly among affluent customers. Accordingly, sales of theseproducts may be adversely affected by an economic downturn, increases inconsumer debt levels, uncertainties regarding future economic prospects or adecline in consumer confidence. During an actual or perceived economicdownturn (as a result of increases in consumer debt levels, increases ininterest rates, a tightening of consumer credit, uncertainties regarding futureeconomic performance and tax rates and policies, or a decline in consumerconfidence, among other factors), fewer customers may shop our stores andwebsites.  As a result, we may berequired to take significant additional markdowns and/or increase our marketingand promotional expenses in response to the lower levels of demand for luxurygoods.

 

 An economic downturn in the United Statesgenerally or in any of the geographic areas in which we have stores,particularly in Texas, California, Florida and the New York City metropolitanarea, from which we derive a significant portion of our revenues, could have amaterial adverse effect on our business and results of operations. Inaddition, promotional and/or prolonged periods of deep discount pricing by ourcompetitors could have a material adverse effect on our business.

 

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Weare currently experiencing a challenging economic and retail environment, andexpect these conditions will continue for an extended period of time.  Consistent with the significant declines inoverall macroeconomic factors, capital markets and consumer confidence thataccelerated throughout the first quarter of fiscal year 2009, most notably inOctober, customer demand was well below our initial expectations and the prioryear.  The current softness in customerdemand exists across all geographic areas, all distribution channels and allmerchandise categories, particularly the apparel and home categories.  We expect retail demand and revenueswill remain weak for an extended period of time.  Based on our inventory levels, we expecthigher markdowns compared to the prior year will be required to reduce Fallseason merchandise resulting in lower gross margins in the second quarter offiscal year 2009.  In addition, withsofter revenue levels anticipated for fiscal year 2009, our SG&A expensesas a percentage of revenues will continue to be under pressure throughout theyear.  The prolonged continuation of currentmarket conditions could adversely affect our business.

** **

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

** **

 Our relationships with established and emergingdesigners are a key factor in our position as a retailer of high-fashionmerchandise, and a substantial portion of our revenues is attributable to oursales of designer merchandise. Many of our key vendors limit the number ofretail channels they use to sell their merchandise and competition among luxuryretailers to obtain and sell these goods is intense. Our relationships with ourdesigners have been a significant contributor to our past success. We have noguaranteed supply arrangements with our principal merchandising sources.Accordingly, there can be no assurance that such sources will continue to meetour quality, style and volume requirements. Moreover, nearly all of the brandsof our top designers are sold by competing retailers, and many of our topdesigners also have their own dedicated retail stores. If one or more of ourtop designers were to cease providing us with adequate supplies of merchandiseor, conversely, were to increase sales of merchandise through their own storesor to the stores of our competitors, our business could be adversely affected.In addition, any decline in the popularity or quality of any of our designerbrands could adversely affect our business.

 

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

** **

 We make decisions regarding the purchase of ourmerchandise well in advance of the season in which it will be sold. Forexample, women’s apparel, men’s apparel and shoes are typically ordered six tonine months in advance of the products being offered for sale while handbags,jewelry and other categories are typically ordered three to six months inadvance.  If our sales during any season,particularly a peak season, are significantly lower than we expect for anyreason, we may not be able to adjust our expenditures for inventory and otherexpenses in a timely fashion and may be left with a substantial amount ofunsold inventory. If that occurs, we may be forced to rely on markdowns orpromotional sales to dispose of excess inventory. This could have an adverseeffect on our margins and operating income. At the same time, if we fail topurchase a sufficient quantity of merchandise, we may not have an adequatesupply of products to meet consumer demand. This may cause us to lose sales orharm our customer relationships.

 

**Our failure to identify changes in consumer preferences orfashion trends may adversely affect our performance.**

** **

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

 

**A breachin information privacy could negatively impact our operations.**

** **

 The protection of our customer, employee and company data iscritically important to us.  We utilizecustomer data captured through both our proprietary credit card programs andour direct marketing activities. Our customers have a high expectation that wewill adequately 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.

 

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**Our business and performance may be affected by our abilityto implement our store expansion and remodeling strategies.**

** **

 Based upon our expansion strategy, we expectthat planned new stores will add over 432,000 square feet of new store spaceover approximately the next four fiscal years, representing an increase ofapproximately 8% above the current aggregate square footage of our full-lineNeiman Marcus and Bergdorf Goodman stores. New store openings involve certain risks, including constructing,furnishing and supplying a store in a timely and cost effective manner,accurately assessing the demographic or retail environment at a given location,hiring and training quality staff, obtaining necessary permits and zoningapprovals, obtaining commitments from a core group of vendors to supply the newstore, integrating the new store into our distribution network and buildingcustomer awareness and loyalty. In undertaking store remodels, we must completethe remodel in a timely, cost effective manner, minimize disruptions to ourexisting operations, and succeed in creating an improved shopping environment.If we fail to execute on these or other aspects of our store expansion andremodeling strategy, we could suffer harm to our sales, an increase in costsand expenses and an adverse effect on our business.

 

**Acts of terrorism could adversely affect our business.**

** **

 The economic downturn that followed theterrorist attacks of September 11, 2001 had a material adverse effect onour business. Any further acts of terrorism or other future conflicts maydisrupt commerce and undermine consumer confidence, cause a downturn in theeconomy generally, cause consumer spending or shopping center traffic todecline or reduce the desire of our customers to make discretionary purchases.Any of the foregoing factors could negatively impact our sales revenue,particularly in the case of any terrorist attack targeting retail space, suchas a shopping center. Furthermore, an act of terrorism or war, or the threatthereof, could negatively impact our business by interfering with our abilityto obtain merchandise from foreign manufacturers. Any future inability toobtain merchandise from our foreign manufacturers or to substitute othermanufacturers, at similar costs and in a timely manner, could adversely affectour business.

 

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

** **

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

 

**Inflation may adversely affect our business operations in thefuture.**

** **

 In recent years, we have experienced certaininflationary conditions in our cost base due primarily to (1) changes inforeign currency exchange rates that have reduced the purchasing power of theU.S. dollar, (2) increases in selling, general and administrativeexpenses, particularly with regard to employee benefits and (3)increases in fuel prices and costs impacted by increases in fuel prices, suchas freight and transportation costs.Inflation can harm our margins and profitability if we are unable to increaseprices or cut costs enough to offset the effects of inflation in our cost base.If inflation in these or other costs worsens, we may not be able to offset 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 under our loyaltyprograms could adversely affect our business.**

** **

 We maintain loyalty programs that are designedto cultivate long-term relationships with our customers and enhance the qualityof service we provide to our customers. We must constantly monitor and updatethe terms of our loyalty programs so that they continue to meet the demands andneeds of our customers and remain competitive with loyalty programs offered byother high-end specialty retailers. Given that approximately 40% of ourrevenues during each of the last two calendar years was generated by ourInCircle loyalty program members, our failure to continue to provide qualityservice and competitive rewards to our customers through the InCircle loyaltyprogram could adversely affect our business.

 

**Changes in our credit card arrangements, applicableregulations and consumer credit patterns could adversely impact our ability tofacilitate the provision of consumer credit to our customers and adverselyaffect our business.**

 

 We maintain a proprietary credit card programthrough which credit is extended to customers under the “Neiman Marcus” and 

 

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“BergdorfGoodman” names. Because a majority of our revenues are transacted through ourproprietary credit cards, changes in our proprietary credit card arrangementthat adversely impact our ability to facilitate the provision of consumercredit may adversely affect 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“Neiman Marcus” and “Bergdorf Goodman” brand names.

 

 Under the terms of this alliance, HSBC offerscredit cards and non-card payment plans and bears substantially all credit riskwith respect to sales transacted on the cards bearing our brands. We receiveongoing payments from HSBC related to credit card sales and compensation formarketing and servicing activities. During fiscal year 2006, we outsourcedvarious administrative elements of the proprietary credit card program to HSBC,including the processing of data, although we continue to handle key customerservice functions, including customer inquiries and collections.

 

InApril 2008, we entered into an amendment to the program agreement 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 (subject to a contractual limit on the losses allocable to NMG).

 

HSBChas discretion over certain policies and arrangements with our credit cardcustomers and may change these policies and arrangements in ways that affectour relationship with these customers. In addition, there can be no assurancethat, upon expiration of our current alliance with HSBC, that we will be able toenter into a replacement arrangement on terms comparable to the currentarrangement. Any changes in our credit card arrangements may adversely affectour credit card program and ultimately, our business.

 

 Credit card operations are subject to numerousfederal and state laws that impose disclosure and other requirements upon theorigination, servicing and enforcement of credit accounts and limitations onthe maximum amount of finance charges that may be charged by a credit provider.Any regulation or change in the regulation of credit arrangements that wouldmaterially limit the availability of credit to our customer base couldadversely affect our business. In addition, changes in credit card use, paymentpatterns, and default rates may result from a variety of economic, legal,social, and other factors that we cannot control or predict with certainty.

 

**Our business can be affected by extreme or unseasonableweather conditions.**

** **

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

 

**We are subject to numerous regulations that could affect ouroperations.**

** **

 We are subject to customs, truth-in-advertisingand other laws, including consumer protection regulations and zoning andoccupancy ordinances that regulate retailers generally and/or govern theimportation, promotion and sale of merchandise and the operation of retailstores and warehouse facilities. Although we undertake to monitor changes inthese laws, if these laws change without our knowledge, or are violated byimporters, designers, manufacturers or distributors, we could experience delaysin shipments and receipt of goods or be subject to fines or other penaltiesunder the controlling regulations, any of which could adversely affect ourbusiness.

 

**Our revenues and cash requirements are affected by theseasonal nature of our business.**

** **

 The specialty retail industry is seasonal innature, with a higher level of sales typically generated in the fall andholiday selling seasons. We have in the past experienced significantfluctuation in our revenues from quarter to quarter with a disproportionateamount of our revenues falling in our second fiscal quarter, which coincideswith the holiday season. In addition, we have significant additional cashrequirements in the period leading up to the months of November and December inanticipation of higher sales volume in those periods, including paymentsrelating to additional inventory, advertising and employees.

 

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**Our business is affected by foreign currency fluctuations.**

 

 We purchase a substantial portion of ourinventory from foreign suppliers whose cost to us is affected by thefluctuation of their local currency against the dollar or who price theirmerchandise in currencies other than the dollar. Fluctuations in the Euro-U.S.dollar exchange rate affect us most significantly; however, we source goodsfrom numerous countries and thus are affected by changes in numerous currenciesand, generally, by fluctuations in the U.S. dollar relative to such currencies.  Accordingly, changes in the value of thedollar relative to foreign currencies may increase our cost of goods sold andif we are unable to pass such cost increases on to our customers, our grossmargins, and ultimately our earnings, will decrease. Foreign currency fluctuationscould have a material adverse effect on our business, financial condition andresults of operations in the future.

 

**Conditions in, and the United States' relationship with, thecountries where we source our merchandise could affect our sales.**

** **

 A substantial majority of our merchandise ismanufactured overseas, mostly in Europe. As a result, political instability orother events resulting in the disruption of trade from other countries or theimposition of additional regulations relating to or duties upon imports couldcause significant delays or interruptions in the supply of our merchandise orincrease our costs, either of which could have a material adverse effect on ourbusiness. If we are forced to source merchandise from other countries, thosegoods may be more expensive or of a different or inferior quality from the oneswe now sell. The importance to us of our existing designer relationships couldpresent additional difficulties, as it may not be possible to sourcemerchandise from a given designer from alternative jurisdictions. If we wereunable to adequately replace the merchandise we currently source withmerchandise produced elsewhere, our business could be adversely affected.

 

**Significant increases in costs associated with the productionof catalogs and other promotional materials may adversely affect our operatingincome.**

** **

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

 

**We are indirectly owned and controlled by theSponsors, and their interests as equity holders may conflict with those of ourcreditors.**

** **

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

 

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

** **

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

 

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

 

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**Failure to successfully maintain and update informationtechnology systems and enhance existing systems may adversely affect ourbusiness.**

** **

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

 

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

** **

Substantially all of our merchandise is deliveredto us by our vendors as finished goods and is manufactured in numerouslocations, including Europe and the United States and, to a lesser extent,China, Mexico and South America. Our vendors rely on third party carriers todeliver merchandise to our distribution facilities. In addition, our successdepends on our ability to source and distribute merchandise efficiently to ourSpecialty Retail stores and Direct Marketing customers. Events such as U.S. orforeign labor strikes, natural disasters, work stoppages or boycotts affectingthe manufacturing or transportation sectors could increase the cost or reducethe supply of merchandise available to us and could adversely affect ourresults of operations.

 

**ITEM 1B.         UNRESOLVED STAFF COMMENTS**

 

 None.

 

**ITEM 2.            UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 4.            SUBMISSION OF MATTERS TO A VOTE OFSECURITY 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.                                                                                                                |

 

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| 4.3    |   | Senior Indenture dated as of October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary  Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form  8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.4    |   | Senior Subordinated Indenture dated as of October 6,  2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc.,  the Subsidiary Guarantors, and Wells Fargo Bank, National Association,  trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.5    |   | Form of 9%/9 3/4% Senior Notes due 2015,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.6    |   | Form of 10 3/8% Senior Subordinated Notes due 2015,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.7    |   | Registration Rights Agreement dated October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial  Purchasers, incorporated herein by reference to The Neiman Marcus Group,  Inc.’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.8    |   | First Supplemental Indenture, dated as of July 11,  2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company,  N.A., as successor trustee, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated July 11, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.9    |   | Second Supplemental Indenture, dated as of August  14, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company,  N.A., as successor trustee, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated August 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1*  |   | Employment Agreement dated as of October 6, 2005 by  and among The Neiman Marcus Group, Inc., Newton Acquisition Merger Sub, Inc.,  Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by  reference to The 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*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | 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. |

 

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| 10.6   |   | 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. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7   |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8   |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9   |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.12  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.14  |   | 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.                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.15* |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.16* |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.17* |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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| 10.18  |   | Amendment No. 2 dated as of January 26, 2006 to the  Credit Agreement dated as of October 6, 2005, as amended, among The Neiman  Marcus Group, Inc., Newton Acquisition, Inc., each subsidiary of The Neiman  Marcus Group, Inc. from time to time party thereto, the Lenders thereunder  and Credit Suisse, as administrative agent and collateral agent for the  Lenders, incorporated by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated January 30, 2006.                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.19* |   | 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.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.20  |   | 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.                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.21  |   | 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.                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.22  |   | 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.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.23  |   | 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.                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.24  |   | 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.                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.25* |   | Confidentiality, Non-Competition and Termination  Benefits Agreement between Bergdorf Goodman, 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.                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.26  |   | 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.                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.27* |   | 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.                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.28  |   | Management Stockholders’ Agreement dated as of  October 6, 2005 between Newton Acquisition, Inc., Newton Holding, LLC, TPG  Newton III, LLC, TPG Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg  Pincus Private Equity VIII, L.P., Warburg Pincus Netherlands Private Equity  VIII C.V. I, Warburg Pincus Germany Private Equity VIII K.G , Warburg Pincus  Private Equity IX, L.P., and the other parties signatory thereto,  incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on  Form 10-K for the fiscal year ended July 29, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.29* |   | 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.                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.30  |   | 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                                                                                                                                                                                                                              |

 

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|   |   | agent for the Lenders, incorporated by reference to  Neiman Marcus, Inc.’s Current Report on Form 8-K dated October 17, 2006.                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.31  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.32  |   | The Neiman Marcus Group, Inc. Supplemental Executive  Retirement Plan as amended through December 31, 2007, incorporated herein by  reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the  fiscal year ended August 2, 2008.                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.33  |   | 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.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32     |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (1)                                                                                                                                                                                                                                                                                                                                                   |

 

----

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

 

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SIGNATURES

 

 

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

 

 
| NEIMAN MARCUS, INC. |
|---------------------|
| (Registrant)        |

 
| **Signature**         | ** ** | **Title**                       | ** ** | **Date**          | ** ** |
|-----------------------|------------|---------------------------------|------------|-------------------|------------|
|                  |       |                            |       |              |       |
| /s/ T. Dale Stapleton |       | Vice President and  Controller  |       | December 10, 2008 |       |
| T. Dale Stapleton     |       | and Duly Authorized  Officer    |       |              |       |
|                  |       | (principal accounting  officer) |       |              |       |

 

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