Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

# **FORM 10-Q**

#  

| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|----------------------------------------------------------------------------------------------------|

 

### **Forthe Quarterly Period Ended May 2, 2009**

### ** **

**OR**

 

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

 

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

##  

**NeimanMarcus, Inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

 

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

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every

Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the

preceding 12 months (orfor such shorter period that the registrant was required to submit and post suchfiles). Yes o No o

 

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

 

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

 

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

 

There were 1,013,082shares of the registrant’s common stock, par value $.01 per share, outstandingat May 2, 2009.

 

 

 

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**NEIMANMARCUS, INC.**

 

#### **INDEX**

####  

| ** **           | ** **                                                                                                                | **Page** |
|----------------------|---------------------------------------------------------------------------------------------------------------------------|----------|
| Part I.         | Financial Information                                                                                                     |     |
|                 |                                                                                                                      |     |
|   Item  1. | Condensed  Consolidated Balance Sheets as of May 2, 2009, August 2, 2008 and  April 26, 2008               | 1        |
|                 |                                                                                                                      |     |
|                 | Condensed Consolidated Statements of Operations for  the Thirteen Weeks Ended May 2, 2009 and April 26, 2008    | 2        |
|                 |                                                                                                                      |     |
|                 | Condensed Consolidated Statements of Operations for  the Thirty-Nine Weeks Ended May 2, 2009 and April 26, 2008 | 3        |
|                 |                                                                                                                      |     |
|                 | Condensed Consolidated Statements of Cash Flows for  the Thirty-Nine Weeks Ended May 2, 2009 and April 26, 2008 | 4        |
|                 |                                                                                                                      |     |
|                 | Notes to Condensed Consolidated Financial Statements                                                                      | 5        |
|                 |                                                                                                                      |     |
|   Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               | 34       |
|                 |                                                                                                                      |     |
|   Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                                               | 54       |
|                 |                                                                                                                      |     |
|   Item  4. | Controls and  Procedures                                                                                                  | 55       |
|                 |                                                                                                                      |     |
| Part II.        | Other Information                                                                                                         |     |
|                 |                                                                                                                      |     |
|   Item 1.  | Legal Proceedings                                                                                                         | 55       |
|                 |                                                                                                                      |     |
|   Item 1A. | Risk Factors                                                                                                              | 55       |
|                 |                                                                                                                      |     |
|   Item 1B. | Unresolved Staff Comments                                                                                                 | 63       |
|                 |                                                                                                                      |     |
|   Item 2.  | Unregistered Sales of Equity  Securities and Use of Proceeds                                                              | 63       |
|                 |                                                                                                                      |     |
|   Item 4.  | Submission of Matters to a Vote of  Security Holders                                                                      | 63       |
|                 |                                                                                                                      |     |
|   Item 6.  | Exhibits                                                                                                                  | 63       |
|                 |                                                                                                                      |     |
| Signatures           | 69                                                                                                                        |

 

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**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

** **
| **(in thousands, except shares)**                                                                                                                                                                                                  | ** ** | **May 2,  2009** | ** ** | **August 2,  2008** | ** ** | **April 26,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                                                                         | ** ** | ** **            | ** ** | ** **               | ** ** | ** **                    | ** ** |
| **ASSETS**                                                                                                                                                                                                                         |       |                  |       |                     |       |                          |       |
| Current assets:                                                                                                                                                                                                                    |       |                  |       |                     |       |                          |       |
| Cash and cash equivalents                                                                                                                                                                                                          |       | $                     | 229,388    |                     | $          | 239,180                       |       | $ | 206,104 |   |
| Merchandise inventories                                                                                                                                                                                                            |       | 865,980               |       | 978,044                  |       | 958,895                       |       |
| Deferred income taxes                                                                                                                                                                                                              |       | 32,659                |       | 32,659                   |       | 39,728                        |       |
| Other current assets                                                                                                                                                                                                               |       | 132,439               |       | 113,776                  |       | 105,015                       |       |
| Total current assets                                                                                                                                                                                                               |       | 1,260,466             |       | 1,363,659                |       | 1,309,742                     |       |
|                                                                                                                                                                                                                               |       |                  |       |                     |       |                          |       |
| Property and equipment, net                                                                                                                                                                                                        |       | 1,015,060             |       | 1,075,294                |       | 1,071,875                     |       |
| Goodwill and intangible assets, net                                                                                                                                                                                                |       | 3,437,578             |       | 4,042,617                |       | 4,095,249                     |       |
| Other assets                                                                                                                                                                                                                       |       | 69,462                |       | 75,249                   |       | 83,717                        |       |
| Total assets                                                                                                                                                                                                                       |       | $                     | 5,782,566  |                     | $          | 6,556,819                     |       | $ | 6,560,583 |   |
|                                                                                                                                                                                                                               |       |                  |       |                     |       |                          |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                      |       |                  |       |                     |       |                          |       |
| Current liabilities:                                                                                                                                                                                                               |       |                  |       |                     |       |                          |       |
| Accounts payable                                                                                                                                                                                                                   |       | $                     | 158,975    |                     | $          | 345,640                       |       | $ | 234,457 |   |
| Accrued liabilities                                                                                                                                                                                                                |       | 347,421               |       | 361,094                  |       | 402,187                       |       |
| Total current liabilities                                                                                                                                                                                                          |       | 506,396               |       | 706,734                  |       | 636,644                       |       |
|                                                                                                                                                                                                                               |       |                  |       |                     |       |                          |       |
| Long-term liabilities:                                                                                                                                                                                                             |       |                  |       |                     |       |                          |       |
| Long-term debt                                                                                                                                                                                                                     |       | 2,963,311             |       | 2,946,102                |       | 2,946,053                     |       |
| Deferred income taxes                                                                                                                                                                                                              |       | 771,409               |       | 929,970                  |       | 966,844                       |       |
| Deferred real estate credits, net                                                                                                                                                                                                  |       | 95,140                |       | 84,019                   |       | 80,662                        |       |
| Other long-term liabilities                                                                                                                                                                                                        |       | 354,041               |       | 213,475                  |       | 219,399                       |       |
| Total long-term liabilities                                                                                                                                                                                                        |       | 4,183,901             |       | 4,173,566                |       | 4,212,958                     |       |
|                                                                                                                                                                                                                               |       |                  |       |                     |       |                          |       |
| Common stock (par value $0.01 per share, 5,000,000 shares authorized and  1,013,082 shares issued and outstanding at May 2, 2009 and 1,012,919  shares issued and outstanding at August 2, 2008 and April 26, 2008) |       | 10                    |       | 10                       |       | 10                            |       |
| Additional paid-in capital                                                                                                                                                                                                         |       | 1,422,600             |       | 1,418,473                |       | 1,416,971                     |       |
| Accumulated other comprehensive loss                                                                                                                                                                                               |       | (98,028               | )          | (9,164                   | )          | (8,843                        | )          |
| Retained (deficit) earnings                                                                                                                                                                                                        |       | (232,313              | )          | 267,200                  |       | 302,843                       |       |
| Total shareholders’ equity                                                                                                                                                                                                    |       | 1,092,269             |       | 1,676,519                |       | 1,710,981                     |       |
| Total liabilities and shareholders’ equity                                                                                                                                                                                    |       | $                     | 5,782,566  |                     | $          | 6,556,819                     |       | $ | 6,560,583 |   |

* *

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

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** **

**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                                                                | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008** | ** ** |
| ** **                                                                        | ** ** | ** **               | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                        | 810,086    |   | $ | 1,062,161 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | 514,765                  |       | 636,987 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | 200,515                  |       | 238,855 |   |
| Income from credit card program, net                                              |       | (10,494                  | )          | (15,704 | ) |
| Depreciation expense                                                              |       | 36,667                   |       | 35,474 |   |
| Amortization of intangible assets                                                 |       | 13,845                   |       | 13,568 |   |
| Amortization of favorable lease commitments                                       |       | 4,469                    |       | 4,385 |   |
|                                                                              |       |                     |       |   |   |
| Operating earnings                                                                |       | 50,319                   |       | 148,596 |   |
|                                                                              |       |                     |       |   |   |
| Interest expense, net                                                             |       | 58,250                   |       | 57,303 |   |
|                                                                              |       |                     |       |   |   |
| (Loss) earnings before income taxes                                               |       | (7,931                   | )          | 91,293 |   |
|                                                                              |       |                     |       |   |   |
| Income tax (benefit) expense                                                      |       | (4,796                   | )          | 35,898 |   |
|                                                                              |       |                     |       |   |   |
| Net (loss) earnings                                                               |       | $                        | (3,135     | ) | $ | 55,395 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

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** **

**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                                        | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                                                                | ** ** | **May 2,  2009**       | ** ** | **April 26,  2008** | ** ** |
| ** **                                                                        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                           | 2,875,253  |   | $ | 3,568,259 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | 1,953,877                   |       | 2,217,357 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | 686,959                     |       | 803,404 |   |
| Income from credit card program, net                                              |       | (33,682                     | )          | (52,267 | ) |
| Depreciation expense                                                              |       | 114,378                     |       | 105,695 |   |
| Amortization of intangible assets                                                 |       | 40,981                      |       | 40,747 |   |
| Amortization of favorable lease commitments                                       |       | 13,408                      |       | 13,155 |   |
| Impairment charges                                                                |       | 560,159                     |       | — |   |
| Other income                                                                      |       | —                      |       | (32,450 | ) |
|                                                                              |       |                        |       |   |   |
| Operating (loss) earnings                                                         |       | (460,827                    | )          | 472,618 |   |
|                                                                              |       |                        |       |   |   |
| Interest expense, net                                                             |       | 174,676                     |       | 178,923 |   |
|                                                                              |       |                        |       |   |   |
| (Loss) earnings before income taxes                                               |       | (635,503                    | )          | 293,695 |   |
|                                                                              |       |                        |       |   |   |
| Income tax (benefit) expense                                                      |       | (135,990                    | )          | 115,239 |   |
|                                                                              |       |                        |       |   |   |
| Net (loss) earnings                                                               |       | $                           | (499,513   | ) | $ | 178,456 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

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**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **May 2,  2009**       | ** ** | **April 26,  2008** | ** ** |
| ** **                                                                                   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                        |       |                        |       |   |   |
| Net (loss) earnings                                                                          |       | $                           | (499,513   | ) | $ | 178,456 |   |
| Adjustments to reconcile net (loss) earnings to net cash provided by  operating activities:  |       |                        |       |   |   |
| Depreciation and amortization expense                                                        |       | 179,430                     |       | 170,260 |   |
| Impairment charges                                                                           |       | 560,159                     |       | — |   |
| Paid-in-kind interest                                                                        |       | 20,520                      |       | — |   |
| Deferred income taxes                                                                        |       | (98,357                     | )          | (13,569 | ) |
| Gain on curtailment of defined benefit retirement obligations                                |       | —                      |       | (32,450 | ) |
| Other, primarily costs related to defined benefit pension and other  long-term benefit plans |       | 8,021                       |       | 18,631 |   |
|                                                                                         |       | 170,260                     |       | 321,328 |   |
| Changes in operating assets and liabilities:                                                 |       |                        |       |   |   |
| Merchandise inventories                                                                      |       | 112,064                     |       | (40,626 | ) |
| Other current assets                                                                         |       | 18,693                      |       | (11,478 | ) |
| Other assets                                                                                 |       | (5,485                      | )          | (1,325 | ) |
| Accounts payable and accrued liabilities                                                     |       | (237,533                    | )          | (81,194 | ) |
| Deferred real estate credits                                                                 |       | 14,879                      |       | 29,768 |   |
| Funding of defined benefit pension plan                                                      |       | —                      |       | (15,000 | ) |
| **Net cash provided by operating activities**                                                |       | 72,878                      |       | 201,473 |   |
| **CASH FLOWS – INVESTING ACTIVITIES**                                                   |       |                        |       |   |   |
| Capital expenditures                                                                         |       | (81,287                     | )          | (133,130 | ) |
| Purchases of short-term investments                                                          |       | —                      |       | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                      |       | 10,000 |   |
| **Net cash used for investing activities**                                                   |       | (81,287                     | )          | (133,130 | ) |
| **CASH FLOWS – FINANCING ACTIVITIES**                                                   |       |                        |       |   |   |
| Repayment of borrowings                                                                      |       | (1,383                      | )          | (3,446 | ) |
| **Net cash used for financing activities**                                                   |       | (1,383                      | )          | (3,446 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                        |       |   |   |
| (Decrease) increase during the period                                                        |       | (9,792                      | )          | 64,897 |   |
| Beginning balance                                                                            |       | 239,180                     |       | 141,207 |   |
| Ending balance                                                                               |       | $                           | 229,388    |   | $ | 206,104 |   |
|                                                                                         |       |                        |       |   |   |
| **Supplemental Schedule of Cash Flow Information**                                           |       |                        |       |   |   |
|                                                                                         |       |                        |       |   |   |
| Cash paid during the period for:                                                             |       |                        |       |   |   |
| Interest                                                                                     |       | $                           | 161,899    |   | $ | 188,065 |   |
| Income taxes                                                                                 |       | $                           | 2,644      |   | $ | 109,893 |   |
| Noncash activities:                                                                          |       |                        |       |   |   |
| Adjustments to goodwill related to pre-acquisition tax contingencies                         |       | $                           | (17,312    | ) | $ | 9,133 |   |

* *

*See Notesto Condensed Consolidated Financial Statements.*

 

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**NEIMANMARCUS, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

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

** **

We have prepared theaccompanying unaudited condensed consolidated financial statements inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, thesefinancial statements do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. Therefore, these financial statements should be read in conjunctionwith our Annual Report on Form 10-K for the fiscal year ended August 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.  In addition,in the second quarter of fiscal year 2009, we recorded significant impairmentcharges as more fully described in Note 3.

 

The specialty retailindustry is seasonal in nature, with a higher level of sales typicallygenerated in the fall and holiday selling seasons.  Due to seasonal and other factors, theresults of operations for the third quarter of fiscal year 2009 are notnecessarily comparable to, or indicative of, results of any other interimperiod or for the fiscal year as a whole.

 

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

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the third quarter of fiscal year 2009 relate to thethirteen weeks ended May 2, 2009. All references to the third quarter of fiscal year 2008 relate to thethirteen weeks ended April 26, 2008. All references to year-to-date fiscal 2009 relate to the thirty-nineweeks ended May 2, 2009.  All referencesto year-to-date fiscal 2008 relate to the thirty-nine weeks ended April 26,2008.

 

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

 

Certain prior periodbalances have been reclassified to conform to the current period presentation.

* *

***Use of Estimates.***** **Weare required to make estimates and assumptions about future events in preparingfinancial statements in conformity with generally accepted accountingprinciples.  These estimates andassumptions affect the amounts of assets, liabilities, revenues and expensesand the disclosure of gain and loss contingencies at the date of the unauditedcondensed consolidated financial statements. While we believe that our past estimates and assumptions have beenmaterially accurate, our current estimates are subject to change if differentassumptions as to the outcome of future events were made. We evaluate ourestimates and judgments on an ongoing basis and predicate those estimates andjudgments on historical experience and on various other factors that we believeto be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstancesdictate.  Since future events and theireffects cannot be determined with absolute certainty, actual results may differfrom the estimates used in preparing the accompanying unaudited condensedconsolidated financial statements.

 

Webelieve the following critical accounting policies, among others, encompass themore significant judgments and estimates used in the preparation of ourfinancial statements:

 

·                  Recognition of revenues;

 

·                  Valuation of merchandise inventories, including determination oforiginal retail values, recognition of markdowns and vendor allowances,estimation of inventory shrinkage, and determination of cost of goods sold;

 

·                  Determination of impairment of long-lived assets;

 

·                  Recognition of advertising and catalog costs;

 

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·                  Measurement of liabilities related to our loyaltyprograms;

 

·                  Recognition of income taxes; and

 

·                  Measurement of accruals for general liability, workers’compensation and health insurance claims and pension and postretirement healthcare benefits.

 

***Recent Accounting Pronouncements. ***As more fully explained in Note 5, we adoptedStatement of Financial Accounting Standards No. 157, “Fair Value Measurements”(SFAS 157) in the first quarter of fiscal year 2009.  SFAS 157 provides guidance for using fairvalue to measure certain assets and liabilities and applies whenever anotherstandard requires or permits assets or liabilities to be measured at fair value.  The standard does not expand the use of fairvalue to any new circumstances.

 

In the first quarter offiscal year 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.

 

As more fully explainedin Note 5, we adopted Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161) inthe third quarter of fiscal year 2009. SFAS 161 enhances current disclosures related to derivative instrumentsand hedging activities to provide adequate information about how derivative andhedging activities affect an entity’s financial position, financial performanceand cash flows.

 

In December 2007,the FASB issued 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, SFAS141(R) changes the accounting treatment for certain acquisition-relateditems, including requirements to expense acquisition-related costs as incurred,expense restructuring costs associated with an acquired business and recognizepost-acquisition changes in tax uncertainties associated with a businesscombination as a component of tax expense. 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 February 2008,the FASB issued FASB Staff Position 157-2,*“*EffectiveDate of FASB Statement No. 157” (FSP 157-2), which delays the effectivedate of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,except for items such as intangible assets and goodwill, that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually). FSP 157-2 is effective for fiscal years beginning after November 15,2008, or our fiscal year ending July 31, 2010.  We have not yet evaluated the impact ofadopting FSP 157-2 on our consolidated financial statements.

 

In December 2008,the FASB issued FASB Staff Position 132(R)-1,*“*Employers’ Disclosures about Postretirement Benefit Plan Assets”(FSP 132(R)-1), which provides guidance on an employer’s disclosures about planassets of a defined benefit pension or other postretirement plan.  FSP 132(R)-1 is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have not yet evaluated theimpact of adopting the disclosure requirements of FSP 132(R)-1.

 

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**2.****             ****Goodwill and IntangibleAssets, Net**

 
| **(in thousands)**                  | ** ** | **May 2,  2009** | ** ** | **August 2,  2008** | ** ** | **April 26,  2008** | ** ** |
|-------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------|------------|
|                                |       |                  |       |                     |       |                     |       |
| Goodwill                            |       | $                     | 1,302,787  |                     | $          | 1,611,191                |       | $ | 1,614,273 |   |
| Tradenames, net                     |       | 1,336,530             |       | 1,579,054                |       | 1,610,315                |       |
| Customer lists, net                 |       | 382,228               |       | 422,931                  |       | 436,497                  |       |
| Favorable lease commitments, net    |       | 416,033               |       | 429,441                  |       | 434,164                  |       |
| Goodwill and intangible assets, net |       | $                     | 3,437,578  |                     | $          | 4,042,617                |       | $ | 4,095,249 |   |

 

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 discounted estimated future cash flows,including growth assumptions for future revenues, gross margin rates and otherestimates. In addition, the fair values of our tradenames are based, in part,on our estimates of royalties which could be derived from the licensing of suchtradenames to third parties.  To theextent that our estimates are not realized, future assessments could result inadditional impairment charges.

 

Customer lists areamortized using the straight-line method over their estimated useful lives,ranging from 5 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):

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

 

During the third quarterof fiscal year 2009, we closed the Internal Revenue Service (IRS) examinationof fiscal years 2005 and 2006 and received net refunds of approximately $2.8million.  In addition, as a result of thecompletion of the audit and IRS determination regarding certain deductionstaken in connection with the Acquisition, the Company recorded a decrease inthe gross amount of unrecognized tax benefits of $13.7 million and a decreasein accrued interest and penalties of $2.2 million. This reduction in FIN 48liability resulted in a decrease to goodwill of $17.3 million, a decrease todeferred tax liabilities of $2.7 million and a tax benefit of $1.3 millionduring the quarter.

 

During the fourth quarterof fiscal 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.

 

In the fourth quarter offiscal year 2008, we recorded a $31.3 million pretax impairment charge relatedto the writedown to fair value of the net carrying value of the Horchowtradename based upon lower revenues and royalty rate expectations with respectto the Horchow brand in light of current operating performance and futureoperating expectations.  Additionally, inthe second quarter of fiscal year 2009, we recorded a $12.1 million pretaximpairment charge related to the writedown to fair value of the net carryingvalue of the Horchow tradename.  At May 2,2009, the recorded amount of the Horchow tradename was $4.2 million.

 

As more fully describedin Note 3, we recorded significant impairment charges in the second quarter offiscal year 2009 to writedown our tradenames and goodwill to estimated fairvalue.

 

**3.****             ****Impairment of Long-LivedAssets**

** **

In connection with thepreparation of our consolidated financial statements for the second quarter offiscal year 2009, we concluded that it was appropriate to test our long-livedassets for recoverability in light of the following factors:

 

·                  Recent significant declines in the U.S.and international financial markets and the resulting impact of such events oncurrent and anticipated future macroeconomic conditions and customer behavior;

 

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·                  The determination that thesemacroeconomic conditions are significantly impacting our current businessoperations as evidenced by the double digit decreases in comparable revenues weare currently experiencing; and

 

·                  Our expectation that current businessconditions and trends will continue for an extended period.

 

In connection with thereview of our long-lived assets for recoverability, we determined certain ofour property and equipment, tradenames and goodwill to be impaired and recordedthe following impairment charges in the second quarter of fiscal 2009, whichare included in impairment charges in our condensed consolidated statements ofoperations:

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

 

***Long-lived assets.***  Therecoverability assessment with respect to our long-lived assets (consisting ofproperty and equipment, customer lists and favorable lease commitments) isperformed at the store level.  Thisassessment is based upon the comparison of the undiscounted cash flowsanticipated to be generated from the store to the net carrying value of thestore assets.  To the extent thestore-level cash flows are not sufficient to recover the net carrying value ofthe store assets, the assets are impaired and written down to their estimatedfair value based upon discounted future cash flows.  Based upon the review of our store-levelassets conducted in the second quarter of fiscal year 2009, we identifiedcertain property and equipment to be impaired by $26.8 million.

 

The recoverabilityassessment related to store-level assets requires judgments and estimates offuture revenues, gross margin rates and store expenses.  We base these estimates upon our past andexpected future performance.  We believeour estimates are appropriate in light of current market conditions.  However, future impairment charges could berequired if we do not achieve our current revenue or cash flow projections.

 

***Tradenames.***  Therecoverability assessment with respect to each of the tradenames used in ouroperations requires us to estimate the fair value of the tradename as of theassessment date.  Such determination ismade using discounted cash flow techniques.  Inputs to the valuation model include:

 

·                  Future revenue and profitabilityprojections associated with the tradename;

 

·                  Estimated market royalty rates that couldbe derived from the licensing of our tradenames to third parties in order toestablish the cash flows accruing to the benefit of the Company as a result ofour ownership of our tradenames; and

 

·                  Rate used to discount the estimatedroyalty cash flow projections to their present value (or estimated fair value).

 

Based upon the review ofour tradenames in the second quarter of fiscal year 2009, we determined certainof these tradenames were impaired and recorded impairment charges aggregating$242.2 million.  These impairment chargesreflect 1) lower revenues and profitability projections associated with ourtradenames in the near term, 2) lower estimated market royalty rateexpectations in light of current general economic conditions as well as ourlower near-term profitability projections and 3) a higher rate (based upon theweighted average cost of capital) required to discount our cash flowprojections in light of current economic conditions and financial marketconsiderations.  We believe our estimatesare appropriate based upon current market conditions.  However, future impairment charges could berequired if we do not achieve our current revenue and profitabilityprojections, market royalty rates decrease or the weighted average cost ofcapital increases.  We currently estimatethat the fair value of our tradenames decreases by approximately $238.7 millionfor each 0.5% decrease in market royalty rates and by $97.3 million for each0.5% increase in the weighted average cost of capital.

 

***Goodwill.***  We assess therecoverability of the goodwill associated with our Neiman Marcus stores,Bergdorf Goodman stores and Direct Marketing reporting units. Suchdetermination is made using discounted cash flow techniques.  Inputs to the valuation model include:

 

·                  Estimated future cash flows;

 

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·                  Growth assumptions for future revenues aswell as future gross margin rates, expense rates and other estimates; and

 

·                  Rate used to discount our estimatedfuture cash flow projections to their present value (or estimated fair value).

 

Based upon the review ofour recorded goodwill balances in the second quarter of fiscal year 2009, wedetermined the goodwill balances associated with our Specialty Retail storeswere impaired and recorded impairment charges aggregating $291.1 million.  These impairment charges reflect 1) lowercash flow, revenue and profitability projections associated with theseoperations and 2) a higher rate (based upon the weighted average cost ofcapital) required to discount our cash flow projections in light of currenteconomic conditions and financial market considerations.  We believe our estimates are appropriatebased upon current market conditions. However, future impairment charges couldbe required if we do not achieve our current cash flow, revenue andprofitability projections or the weighted average cost of capital increases.  We currently estimate that the fair value ofour goodwill decreases by approximately $336.1 million for each 0.5% increasein the weighted average cost of capital.

 

**4.****             ****Long-term Debt**

** **

Thesignificant components of our long-term debt are as follows:

 
| **(in thousands)**                | ** ** | **Interest  Rate** | ** ** | **May 2,  2009** | ** ** | **August 2,  2008** | ** ** | **April 26,  2008** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------|------------|--------------------------|------------|
|                              |       |               |       |                       |       |                     |       |                     |       |
| Senior Secured Term Loan Facility |       | variable           |       | $                          | 1,625,000  |                     | $          | 1,625,000                |       | $ | 1,625,000 |   |
| 2028 Debentures                   |       | 7.125%             |       | 121,248                    |       | 121,102                  |       | 121,053                  |       |
| Senior Notes (1)                  |       | 9.0%/9.75%         |       | 717,063                    |       | 700,000                  |       | 700,000                  |       |
| Senior Subordinated Notes         |       | 10.375%            |       | 500,000                    |       | 500,000                  |       | 500,000                  |       |
| Long-term debt                    |       |               |       | $                          | 2,963,311  |                     | $          | 2,946,102                |       | $ | 2,946,053 |   |

 

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(1) As permitted for any interest period through October 15, 2010, we haveelected to pay interest by issuing additional Senior Notes at the interest rateof 9.75% instead of paying interest in cash for the two quarterly interestperiods ending July 14, 2009.  As aresult, the original principal amount of Senior Notes of $700.0 millionincreased by $17.1 million on April 14, 2009 and will increase by $17.5million on July 14, 2009.

** **

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

 

As of May 2, 2009,we had no borrowings outstanding under our Asset-Based Revolving CreditFacility and have over $500 million of unused borrowing availability, aftergiving effect to $30.0 million used for letters of credit.  The principal amount of the loans outstandingis due and payable in full on October 6, 2010.

 

The Asset-Based RevolvingCredit Facility provides 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.

 

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 of1% or (b) a LIBOR rate, subject to certain adjustments, in each case plusan applicable margin. The applicable margin is 0% with respect to base rateborrowings and up to 1.75% with respect to LIBOR borrowings. The applicablemargin is subject to adjustment based on the historical availability under theAsset-Based Revolving Credit Facility. NMG is also 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.

 

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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 May 2, 2009, the liabilities of NMG’s non-guarantor subsidiariestotaled approximately $1.2 million and the assets of NMG’s non-guarantorsubsidiaries aggregated approximately $0.7 million.  All obligations under NMG’s Asset-BasedRevolving Credit Facility, and the guarantees of those obligations, aresecured, subject to certain significant exceptions, by substantially all of theassets of the Company, NMG and the subsidiary guarantors.

 

The Asset-Based RevolvingCredit Facility contains a number of customary affirmative and negativecovenants, restrictions and events of default, but does not require NMG tocomply with any financial ratio maintenance covenants.

 

The covenants limitingdividends and other restricted payments; investments, loans, advances andacquisitions; and prepayments or redemptions of other indebtedness, each permitthe restricted actions in an unlimited amount, subject to the satisfaction ofcertain payment conditions, principally that NMG must have at least$75.0 million of pro forma excess availability under the Asset-BasedRevolving Credit Facility and that NMG must be in pro forma compliance with thefixed charge coverage ratio described below. In addition, NMG is permitted to take such restricted actions regardlessof whether such conditions are satisfied, subject to a $30.0 millionshared basket that is available.

 

Although the Asset-BasedRevolving Credit Facility does not require NMG to comply with any financialratio maintenance covenants, if less than $60.0 million were available tobe borrowed under the Asset-Based Revolving Credit Facility at any time, NMGwould not be permitted to borrow additional amounts and obtain letters ofcredit (including amendments, renewals and extensions of letters of credit)unless its pro forma ratio of consolidated EBITDA to consolidated Fixed Charges(as such terms are defined in the credit agreement) was at least 1.1 to1.0.  At May 2, 2009, our fixedcharge coverage ratio for the four-quarter period then ended was less than 1.1to 1.0.  We currently do not expect theneed to borrow against our Asset-Based Revolving Credit Facility through theremainder of calendar year 2009. However, should future borrowings be necessary due to unforeseen eventsand, at the time of such borrowings, our fixed charge coverage ratio be lessthan 1.1 to 1.0, we would be limited to $510 million of borrowing capacity dueto the limitations of the Fixed Charge Coverage Ratio requirements of ourAsset-Based Revolving Credit Facility.

 

For a more detaileddescription of NMG’s Asset-Based Revolving Credit Facility, refer to our AnnualReport on Form 10-K for the fiscal year ended August 2, 2008.

 

***Senior Secured Term Loan Facility.*** 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 million principal amount of the loans under its Senior Secured TermLoan Facility in fiscal year 2006 and $250 million in fiscal year 2007.  At May 2, 2009, the outstanding balanceunder the Senior Secured Term Loan Facility was $1,625.0 million.

 

At May 2, 2009,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and (2) thefederal 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 2.97% at May 2, 2009.  The applicable margin is subject toadjustment based on contractually defined debt coverage ratios.  At May 2, 2009, the applicable marginwith respect to base rate borrowings was 1.00% and the applicable margin withrespect to LIBOR borrowings was 2.00%.

 

The credit agreementgoverning the Senior Secured Term Loan Facility requires NMG to prepayoutstanding term loans with 50% (which percentage will be reduced to 25% if NMG’stotal leverage ratio is less than a specified ratio and will be reduced to 0%if NMG’s total leverage ratio is less than a specified ratio) of its annualexcess cash flow (as defined in the credit agreement). For fiscal years 2008and 2007, NMG was not required to prepay any outstanding term loans pursuant tothe annual excess cash flow requirements. If a change of control (as defined in the credit agreement) occurs, NMGwill be required to offer to prepay all outstanding term loans, at a prepaymentprice equal to 101% of the principal amount to be prepaid, plus accrued andunpaid interest to the date of prepayment. NMG also must offer to prepayoutstanding term loans at 100% of the principal amount to be prepaid, plusaccrued and unpaid interest, with the proceeds of certain asset sales undercertain circumstances.

 

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

 

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All obligations under theSenior Secured Term Loan 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 credit agreementgoverning the Senior Secured Term Loan Facility contains a number of customarynegative covenants that are substantially similar to those governing the SeniorNotes and additional covenants related to the security arrangements for theSenior Secured Term Loan Facility. The credit agreement also contains customaryaffirmative covenants and events of default. For a more detailed description of the Senior Secured Term LoanFacility, refer to our Annual Report on Form 10-K for the fiscal yearended August 2, 2008.

* *

***2028 Debentures.***  In May 1998,NMG issued $125.0 million aggregate principal amount of its 7.125% 2028Debentures. NMG equally and ratably secures its 2028 Debentures by a first liensecurity interest on certain collateral subject to liens granted under NMG’sSenior Secured Credit Facilities. The 2028 Debentures are guaranteed on anunsecured, 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 ourAnnual Report on Form 10-K for the fiscal year ended August 2, 2008.

 

The fair value of the2028 Debentures at May 2, 2009 was approximately $68.8 million.

 

***Senior Notes.**** *NMG has$717.1 million aggregate principal amount of 9.0% / 9.75% Senior Notesunder a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015.

 

Interest on the SeniorNotes is payable quarterly in arrears on each January 15, April 15, July 15and October 15.  For any interestpayment period through October 15, 2010, NMG may, at its option, elect topay interest on the Senior Notes entirely in cash (Cash Interest) or entirelyby increasing the principal amount of the outstanding Senior Notes or byissuing additional Senior Notes (PIK Interest). Cash Interest on the SeniorNotes accrues at the rate of 9% per annum. PIK Interest on the Senior Notesaccrues at the rate of 9.75% per annum. We negotiated for the right to includethe PIK feature in our Senior Notes because of our belief that this featurecould be a useful tool to enhance liquidity under appropriate circumstances. Inthe second quarter of fiscal year 2009, given the dislocation in the financialmarkets and the uncertainty as to when reasonable conditions will return, webelieved that it was appropriate to utilize this feature, even though we hadavailable borrowing capacity under our $600 million revolving credit facility.Accordingly, we have elected to pay PIK Interest for the two quarterly interestperiods ending July 14, 2009 and to make such interest payments with theissuance of additional Senior Notes at the PIK Interest rate of 9.75% insteadof paying interest in cash.  As a result,the original principal amount of Senior Notes of $700.0 million increased by$17.1 million on April 14, 2009 and will increase by $17.5 million on July 14,2009.

 

Prior to the beginning ofeach eligible interest period in the future, we will evaluate whether to continueutilizing this PIK feature, taking into account market conditions and otherrelevant factors at that time. After October 15, 2010, we are required tomake all interest payments on the Senior Notes entirely in cash.

 

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

 

NMG is not required to makeany mandatory 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 description of NMG’s Senior Notes, refer to ourAnnual Report on Form 10-K for the fiscal year ended August 2, 2008.

 

The fair value of NMG’sSenior Notes at May 2, 2009 was approximately $394.4 million.

 

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

 

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

 

NMG is not required tomake any mandatory redemption or sinking fund payments with respect to theSenior Subordinated Notes. The indenture governing the Senior SubordinatedNotes contains a number of customary negative covenants and events ofdefaults.  For a more detaileddescription of NMG’s Senior Subordinated Notes, refer to our Annual Report on Form 10-Kfor the fiscal year ended August 2, 2008.

 

The fair value of NMG’sSenior Subordinated Notes at May 2, 2009 was approximately $275.0 million.

 

***Maturities of Long-Term Debt.*** At May 2, 2009, annual maturities of long-term debt during the nextfive fiscal years and thereafter are as follows (in millions):

 
| 2010       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| 2013       |   | 1,625.0 |   |
| 2014       |   | —  |   |
| Thereafter |   | 1,338.3 |   |

 

The above table does notreflect either future excess cash flow prepayments, if any, that may berequired under the Senior Secured Term Loan Facility or additional principalamounts under the Senior Notes that will be outstanding as a result of ourcurrent PIK Interest election for the quarterly interest period ending July 14,2009, or any future PIK Interest election that we may make through October 15,2010.

 

***Interest expense.***  Thesignificant components of interest expense are as follows:

 
| ** **                        | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)**                | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008**    | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
|                              |       |                     |       |                        |       |   |   |   |   |
| Senior Secured Term Loan Facility |       | $                        | 21,903     |                        | $          | 24,289 |   | $ | 69,774 |   | $ | 80,071 |   |
| 2028 Debentures                   |       | 2,227                    |       | 2,185                       |       | 6,680 |   | 6,550 |   |
| Senior Notes                      |       | 17,332                   |       | 15,786                      |       | 48,793 |   | 46,691 |   |
| Senior Subordinated Notes         |       | 12,969                   |       | 12,998                      |       | 39,060 |   | 38,446 |   |
| Amortization of debt issue costs  |       | 3,554                    |       | 3,554                       |       | 10,663 |   | 10,663 |   |
| Other                             |       | 867                      |       | 763                         |       | 2,558 |   | 2,439 |   |
| Total interest expense            |       | 58,852                   |       | 59,575                      |       | 177,528 |   | 184,860 |   |
| Less:                             |       |                     |       |                        |       |   |   |   |   |
| Interest income                   |       | 385                      |       | 1,304                       |       | 2,156 |   | 3,592 |   |
| Capitalized interest              |       | 217                      |       | 968                         |       | 696 |   | 2,345 |   |
| Interest expense, net             |       | $                        | 58,250     |                        | $          | 57,303 |   | $ | 174,676 |   | $ | 178,923 |   |

 

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**5.****             ****Fair Value Measurements**

** **

In the first quarter offiscal year 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 fairvalue as the price that would be received upon sale of an asset or paid upontransfer of a liability in an orderly transaction between market participantsat the measurement date and in the principal or most advantageous market forthat asset or liability. The fair value is calculated based on assumptions thatmarket 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 definingfair value, SFAS 157 expands the disclosure requirements around fair value andestablishes a fair value hierarchy for valuation inputs. The hierarchyprioritizes the inputs into three levels based on the extent to which inputsused in measuring fair value are observable in the market. Each fair valuemeasurement is reported in one of the following three levels:

 

·                  Level 1 – valuation inputs are based upon unadjusted quoted prices foridentical instruments traded in active markets.

 

·                  Level 2 – valuation inputs are based upon quoted prices for similarinstruments in active markets, quoted prices for identical or similarinstruments in markets that are not active, and model-based valuationtechniques for which all significant assumptions are observable in the marketor can be corroborated by observable market data for substantially the fullterm of the assets or liabilities.

 

·                  Level 3 – valuation inputs are unobservable and typically reflectmanagement’s estimates of assumptions that market participants would use inpricing the asset or liability. The fair values are therefore determined usingmodel-based techniques that include option pricing models, discounted cash flowmodels and similar techniques.

 

In the third quarter offiscal year 2009, we adopted the disclosure requirements of Statement ofFinancial Accounting Standards No. 161, “Disclosures about DerivativeInstruments and Hedging Activities” (SFAS 161). SFAS 161 enhances current disclosures related to derivative instrumentsand hedging activities to provide adequate information about how derivative andhedging activities affect an entity’s financial position, financial performanceand cash flows.

 

In connection with theAcquisition, we obtained $2,575.0 million of floating rate debt agreements, ofwhich $2,125.0 million was outstanding at the Acquisition date and $1,625.0million is outstanding at May 2, 2009. Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rateinterest commitments through the expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.818% to 6.983% per quarter through2010 and result in an average fixed rate of 6.888%.

 

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

 

In addition, we realize again or loss on our interest rate swap agreements in connection with eachrequired interest payment on our floating rate indebtedness.  These realized gains or losses arereclassified from accumulated other comprehensive loss to interestexpense.  The realized gains and losseseffectively adjust the contractual interest requirements pursuant to the termsof our floating rate indebtedness to the interest requirements at the fixedrates established in the interest rate swaps agreements.  The cash flows from our interest rate swapsare recorded in operating activities in the condensed consolidated statementsof cash flows.

 

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Thefair values of the interest rate swaps are estimated using industry standardvaluation models using market-based observable inputs including interest ratecurves (Level 2).  A summary of therecorded balances with respect to our interest rate swaps included in ourcondensed consolidated balance sheets is as follows:

 
| **(in thousands)**                                                 | ** ** | **May 2,  2009** | ** ** | **August 2,  2008** | ** ** | **April 26,  2008** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------|------------|
|                                                               |       |                  |       |                     |       |                     |       |
| Unrecognized losses – included in other long-term liabilities |       | $                     | 61,075     |                     | $          | 34,386                   |       | $ | 39,370 |   |
|                                                               |       |                  |       |                     |       |                     |       |
| Accumulated other comprehensive loss, net of taxes                 |       | $                     | 37,647     |                     | $          | 21,755                   |       | $ | 24,859 |   |

 

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

 
| ** **                                                               | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)**                                                       | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008**    | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
|                                                                     |       |                     |       |                        |       |   |   |   |   |
| Realized hedging losses (gains) – included in interest expense, net |       | $                        | 8,103      |                        | $          | 2,107 |   | $ | 19,181 |   | $ | (1,566 | ) |
|                                                                     |       |                     |       |                        |       |   |   |   |   |
| Ineffective hedging losses – included in interest expense, net      |       | $                        | 177        |                        | $          | 80 |   | $ | 469 |   | $ | 341 |   |

 

The amount of lossesrecorded in other comprehensive loss at May 2, 2009 that is expected to bereclassified into interest expense in the next twelve months, if interest ratesremain unchanged, is approximately $37.1 million.

 

**6.****             ****Employee Benefit Plans**

** **

***Description of Benefit Plans.*** We sponsor a defined benefit pension plan (Pension Plan) and an unfundedsupplemental executive retirement plan (SERP Plan) which provides certainemployees additional pension benefits. Benefits under both plans are based onthe employees’ years of service and compensation over defined periods ofemployment. As more fully described below, we froze benefits offered under ourPension and SERP Plans effective December 31, 2007.

 

Retirees and activeemployees hired 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.

 

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***Benefit Obligations.***  Obligationsfor our employee benefit plans, included in other long-term liabilities, are asfollows:

 
| **(in thousands)**                       | ** ** | **May 2,  2009** | ** ** | **August 2,  2008** | ** ** | **April 26,  2008** | ** ** |
|------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | ** **            | ** ** | ** **               | ** ** | ** **               | ** ** |
| Pension Plan                             |       | $                     | 155,171    |                     | $          | 40,802                   |       | $ | 26,248 |   |
| SERP Plan                                |       | 88,813                |       | 77,566                   |       | 81,875                   |       |
| Postretirement Plan                      |       | 20,329                |       | 20,336                   |       | 22,924                   |       |
|                                     |       | 264,313               |       | 138,704                  |       | 131,047                  |       |
| Less: current portion                    |       | (4,165                | )          | (4,165                   | )          | (4,019                   | )          |
| Long-term portion of benefit obligations |       | $                     | 260,148    |                     | $          | 134,539                  |       | $ | 127,028 |   |

 

Inlight of current market conditions and the significant decline in our pensionassets and in accordance with the provisions of Statement of FinancialAccounting Standards No. 87, “Employers’ Accounting for Pensions”, weremeasured both our plan assets and benefit obligations during the secondquarter of fiscal year 2009.  Weincreased our recorded liability for projected benefit obligations payable bythe Pension Plan by $111.2 million and by the SERP Plan by $8.5 million toequal their unfunded status.  The $111.2million increase in our Pension Plan obligation was primarily driven by 1) adecrease in the fair value of our pension plan assets of approximately $66million and 2) a decrease in our discount rate from 6.75% at August 2,2008 to 6.10% at January 31, 2009, which resulted in increases in theobligations related to our Pension Plan and SERP Plan aggregating approximately$42 million.  As of May 2, 2009, wehave $60.2 million (net of taxes of $39.1 million) of adjustments to suchobligations recorded as increases to accumulated other comprehensive loss.

 

In thefirst quarter of fiscal year 2008, we reduced our recorded liability forprojected benefit obligations payable by the Pension Plan by $26.1 million andby the SERP Plan by $6.3 million to reflect the impact of freezing benefitsprovided under these plans as of December 31, 2007, as more fullydescribed below.  The total one-timepension curtailment gain of $32.5 million was recorded as other income in ourcondensed consolidated statements of operations.

 

***Plan Redesign.***On September 7, 2007, our Board of Directorsapproved certain changes to our long-term benefits program.  Effective January 1, 2008, we offered anew, enhanced retirement savings plan subject to participants’ elections toparticipate (as more fully described below). For associates participating in the RSP:

 

·                  Participants’ balances in our 401(k) Plan were automaticallytransferred to the RSP.

 

·                  Our matching contributions to the RSP increased to a potential maximum75% of the employee contributions (up to a 6% deferral) from the potentialmaximum 50% to the 401(k) Plan (subject to IRS limit of $15,500 in 2008for employee contributions).

 

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

 

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

 

Concurrent with theimplementation of the RSP and the Defined Contribution SERP Plan, we frozebenefits offered 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 continueparticipation in our 401(k) Plan and Pension Plan (and SERP Plan, ifeligible) or 2) to freeze the benefits earned under the Pension Plan (and SERPPlan, if eligible) and participate in the RSP. No employee who met vestingrequirements forfeited benefits earned prior to December 31, 2007.

 

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***Costs ofBenefits. ***The components of the expenses incurredunder our Pension Plan, SERP Plan and Postretirement Plan are as follows:

 
| ** **                     | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|--------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)**             | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008**    | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
| Pension Plan:                  |       |                     |       |                        |       |   |   |   |   |
| Service cost                   |       | $                        | 1,592      |                        | $          | 1,506 |   | $ | 4,467 |   | $ | 9,309 |   |
| Interest cost                  |       | 6,195                    |       | 5,738                       |       | 18,165 |   | 17,128 |   |
| Expected return on plan assets |       | (6,584                   | )          | (6,224                      | )          | (19,464 | ) | (18,402 | ) |
| Pension Plan expense           |       | $                        | 1,203      |                        | $          | 1,020 |   | $ | 3,168 |   | $ | 8,035 |   |
|                           |       |                     |       |                        |       |   |   |   |   |
| Curtailment gain               |       | $                        | —     |                        | $          | — |   | $ | — |   | $ |  26,113 |   |
|                           |       |                     |       |                        |       |   |   |   |   |
| SERP Plan:                     |       |                     |       |                        |       |   |   |   |   |
| Service cost                   |       | $                        | 181        |                        | $          | 204 |   | $ | 507 |   | $ | 1,050 |   |
| Interest cost                  |       | 1,337                    |       | 1,244                       |       | 3,975 |   | 3,716 |   |
| SERP Plan expense              |       | $                        | 1,518      |                        | $          | 1,448 |   | $ | 4,482 |   | $ | 4,766 |   |
|                           |       |                     |       |                        |       |   |   |   |   |
| Curtailment gain               |       | $                        | —     |                        | $          | — |   | $ | — |   | $ |  6,337 |   |
|                           |       |                     |       |                        |       |   |   |   |   |
| Postretirement Plan:           |       |                     |       |                        |       |   |   |   |   |
| Service cost                   |       | $                        | 23         |                        | $          | 31 |   | $ | 69 |   | $ | 93 |   |
| Interest cost                  |       | 336                      |       | 339                         |       | 1,008 |   | 1,017 |   |
| Net amortization of losses     |       | 70                       |       | 137                         |       | 211 |   | 411 |   |
| Postretirement Plan expense    |       | $                        | 429        |                        | $          | 507 |   | $ | 1,288 |   | $ | 1,521 |   |

*** ***

***Funding Policy and Plan Assets.*** Our policy is to fund the Pension Plan at or above the minimum requiredby law. We were not required to make contributions to the Pension Plan duringfiscal year 2008. However, in the third quarter of fiscal year 2008, we made avoluntary $15.0 million contribution to our Pension Plan. Based upon currentlyavailable information, we will not be required to make contributions to thePension Plan during fiscal year 2009. However, we will continue to evaluate voluntary contributions to ourPension Plan based upon the unfunded position of the Pension Plan, ouravailable liquidity and other factors.

 

**7.****             ****Income Taxes**

** **

Our effective income taxrate for year-to-date fiscal 2009 was 21.4% compared to 39.2% for year-to-datefiscal 2008.  No income tax benefitexists related to the $291.1 million of goodwill impairment charges recorded inthe second quarter of fiscal year 2009. Excluding the impact of the goodwill impairment charges, our effectiveincome tax rate was 39.5% for year-to-date fiscal 2009.

 

We adopted the provisionsof FASB 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 (benefit) expense and our liability for accruedinterest and penalties was $9.5 million as of August 2, 2008.

 

We file income taxreturns in the U.S. federal jurisdiction and various state and localjurisdictions.  During the third quarterof fiscal year 2009, we closed the IRS examination of fiscal years 2005 and2006 and received net refunds of approximately $2.8 million.  In addition, as a result of the completion ofthe audit and IRS determination regarding certain deductions taken inconnection with the Acquisition, the Company recorded a decrease in the grossamount of unrecognized tax benefits of $13.7 million and a decrease in accruedinterest and penalties of $2.2 million. This reduction in FIN 48 liabilityresulted in a decrease to

 

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goodwill of $17.3million, a decrease to deferred tax liabilities of $2.7 million and a taxbenefit of $1.3 million during the quarter. During the fourth quarter of fiscal year 2008, we entered into anegotiated settlement with a state tax authority regarding a state non-filingposition which resulted in a reduction to our gross unrecognized tax benefitsof $7.2 million and a corresponding decrease to goodwill of $3.0 millionrelated to the resolution of uncertainties that existed at the time of theAcquisition.

 

The IRS is now examiningour federal tax returns for fiscal year 2007. We believe our recorded tax liabilities as of May 2, 2009 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.  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 or expiration of statutes of limitation.  At this time, we do not believe suchadjustments will have a material impact on our consolidated financial statements.

 

**8.****             ****Stock-Based Compensation**

** **

The Company has approvedequity-based management arrangements which authorize equity awards to begranted to certain management employees for up to 87,992.0 shares of the commonstock of the Company.  Options generallyvest over four to five years and expire 10 years from the date of grant.

 

A summary of the statusof our stock option plan is as follows:

 
| ** **                           | ** ** | **May 2, 2009** | ** ** | **August 2, 2008**                | ** ** | **April 26, 2008** | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **Shares**           | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares**              | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of period   |       | 83,146.6             |       | $                                      | 1,507      |                    | 83,634.3   |   | $ | 1,430 |   | 83,634.3 |   | $ | 1,430 |   |
| Granted                              |       | —               |       | —                                 |       | 260.0                   |       | 2,684 |   | 260.0 |   | 2,684 |   |
| Exercised                            |       | (854.5               | )          | 1,684                                  |       | —                  |       | — |   | — |   | — |   |
| Forfeited                            |       | (2,893.1             | )          | 1,617                                  |       | (747.7                  | )          | 1,597 |   | — |   | — |   |
| Outstanding at end of period         |       | 79,399.0             |       | $                                      | 1,585      |                    | 83,146.6   |   | $ | 1,507 |   | 83,894.3 |   | $ | 1,508 |   |
| Options exercisable at end of period |       | 58,195.2             |       | $                                      | 1,534      |                    | 46,684.4   |   | $ | 1,415 |   | 43,682.1 |   | $ | 1,401 |   |

 

The exercise price ofapproximately 50% of our options escalate at a 10% compound rate per year untilthe earlier to occur of (i) exercise, (ii) the fifth anniversary ofthe date of grant or (iii) the occurrence of a change in control. However,in the event the Sponsors cause the sale of shares of the Company to anunaffiliated entity, the exercise price will cease to accrete at the time ofthe sale with respect to a pro rata portion of the accreting options.

 

All grants of stockoptions have an exercise price equal to the fair market value of our commonstock on the date of grant.  Because weare privately held and there is no public market for our common stock, the fairmarket value of our common stock is determined by our Compensation Committee atthe time option grants are awarded.  Indetermining the fair value of our common stock, the Compensation Committeeconsiders such factors as the Company’s actual and projected financial results,the principal amount of the Company’s indebtedness, valuations of the Companyperformed by third parties and other factors it believes are material to thevaluation process.

 

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We use the Black-Scholesoption-pricing model to determine the fair value of our options as of the dateof grant in accordance with the provisions of SFAS 123(R).  A summary of fiscal year 2008 grants and fairvalue assumptions is as follows:

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

 

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

 

We recognize compensationexpense for stock options on a straight-line basis over the vestingperiod.  We recognized non-cash stockcompensation expense of $4.3 million in year-to-date fiscal 2009 and $4.5million in year-to-date fiscal 2008, which is included in selling, general andadministrative expenses. At May 2, 2009, unearned non-cash stock-basedcompensation that we expect to recognize as expense over the nextfive years aggregates approximately $7.5 million.

 

**9.****             ****Transactions withSponsors**

** **

Pursuant to a managementservices agreement with affiliates of the Sponsors, and in exchange foron-going consulting and management advisory services that are provided to us bythe Sponsors and their affiliates, affiliates of the Sponsors receive anaggregate annual management fee equal to the lesser of (i) 0.25% of ourconsolidated annual revenues or (ii) $10 million. Affiliates of theSponsors also receive reimbursement for out-of-pocket expenses incurred by themor their affiliates in connection with services provided pursuant to theagreement. These management fees are payable quarterly in arrears.  We recorded management fees of $7.2 millionduring year-to-date fiscal 2009 and $8.9 million during year-to-date fiscal2008, which are included in selling, general and administrative expenses in thecondensed consolidated statements of operations.

 

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

 

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

** **

In June 2005, weentered into a marketing and servicing alliance with HSBC Bank Nevada, N.A. andHSBC Private Label Corporation (formerly known as Household Corporation)(collectively referred to as HSBC).  Pursuant to the agreement with HSBC (ProgramAgreement), HSBC offers credit cards and non-card payment plans and bears substantiallyall credit risk with respect to sales transacted on the cards bearing ourbrands. We receive ongoing payments from HSBC related to credit card sales andcompensation for marketing and servicing activities (HSBC Program Income).  The Program Agreement expires in June 2010.  We recognize HSBC Program Income when earned.

 

The Program Agreement, asamended, provides for 1) the allocation between HSBC and NMG of additionalincome, if any, to be generated from the credit card program as a result ofcertain changes made to the terms of credit extended to our customers since theinception of the Program Agreement and 2) the allocation of certain credit cardlosses between HSBC and NMG.  In light ofcurrent economic conditions that have led to higher delinquencies and losses onconsumer indebtednesses, losses are currently allocable to NMG.  As a result, we recorded a charge ofapproximately $1.4 million during the third quarter of fiscal year 2009 and$6.7 million during year-to-date fiscal 2009 for our estimated portion ofallocable credit card losses, which is included as a reduction to HSBC ProgramIncome.  As of May 2, 2009, ourreserve for credit card losses aggregated $7.4 million.

 

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**11.****      ****Commitments and Contingencies**

 

***Long-term Incentive Plan.***  The Companyhas a long-term incentive plan (Long-term Incentive Plan) that provides for acash incentive payable upon a change of control, as defined, subject to theattainment of certain performance objectives to certain employees.  Performance objectives and targets are basedon cumulative EBITDA percentages for three year periods beginning in fiscal year2006.  Earned awards for each completedperformance period will be credited to a book account and will earn interest ata contractually 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 May 2,2009, the vested participant balance in the Long-Term Incentive Plan aggregated$3.4 million.

 

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

 

***Litigation.***  We arecurrently involved in various legal actions and proceedings that arose in theordinary course of business. We believe that any liability arising as a resultof these actions and proceedings will not have a material adverse effect on ourfinancial position, results of operations or cash flows.

 

**12.****      ****Accumulated Other Comprehensive Loss**

 

The following table showsthe components of accumulated other comprehensive loss (amounts are recordednet of related income taxes):

 
| **(in thousands)**                         | ** ** | **May 2,  2009** | ** ** | **August 2,  2008** | ** ** | **April 26,  2008** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|--------------------------|------------|--------------------------|------------|
|                                       |       |                  |       |                     |       |                     |       |
| Unrealized loss on financial instruments   |       | $                     | (37,647    | )                        | $          | (21,755                  | )          | $ | (24,859 | ) |
| Change in unfunded benefit obligations     |       | (60,221               | )          | 12,302                   |       | 15,709                   |       |
| Other                                      |       | (160                  | )          | 289                      |       | 307                      |       |
| Total accumulated other comprehensive loss |       | $                     | (98,028    | )                        | $          | (9,164                   | )          | $ | (8,843 | ) |

 
| **(in thousands)**                                                        | ** ** | **Thirty-Nine  weeks ended  May 2,  2009** | ** ** | ** ** | ** ** | **Thirty-Nine  weeks ended  April 26,  2008** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|----------------------------------------------------|------------|
| Net (loss) earnings from condensed consolidated statements of  operations |       | $                                               | (499,513   | )          |       |                                               | $          | 178,456 |   |
| Change in unrealized loss on financial instruments                        |       | (15,892                                         | )          |       |       | (28,592                                            | )          |
| Change in unfunded benefit obligations                                    |       | (72,523                                         | )          |       |       | —                                             |       |
| Other                                                                     |       | (449                                            | )          |       |       | (1,480                                             | )          |
| Total comprehensive (loss) income for the period                          |       | $                                               | (588,377   | )          |       |                                               | $          | 148,384 |   |

 

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

 

We have identified tworeportable segments: Specialty Retail stores and Direct Marketing. TheSpecialty Retail stores segment includes all Neiman Marcus and Bergdorf Goodmanretail stores, including Neiman Marcus clearance stores. The Direct Marketingsegment conducts both online and print catalog operations under the NeimanMarcus, Bergdorf Goodman and Horchow brand names.  Both the Specialty Retail stores and Direct Marketingsegments derive their revenues from the sales of high-end fashion apparel,accessories, cosmetics and fragrances from leading designers, precious andfashion jewelry and decorative home accessories.

 

Operating (loss) earningsfor the segments include 1) revenues, 2) cost of sales, 3) direct selling,general, and administrative expenses, 4) other direct operating expenses, 5)income from credit card program and 6) depreciation expense for the respectivesegment.  Items not allocated to ouroperating segments include those items not considered by management inmeasuring the assets and profitability of our segments. These amounts include1) corporate expenses including, but not limited to, treasury, investorrelations, legal and finance support services, and general corporatemanagement, 2) charges related to the application of purchase accountingadjustments made in connection with the Acquisition including amortization ofintangible assets and favorable lease commitments, impairment charges and othernon-cash items and 3) interest expense. These items, while often times related to the operations of a segment,are not considered by segment operating management, corporate operatingmanagement and the chief operating decision maker in assessing segment operatingperformance.  The accounting policies ofthe operating segments are the same as those described in the summary ofsignificant accounting policies (except with respect to purchase accountingadjustments not allocated to the operating segments).  

 

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The following tables setforth the information for our reportable segments:

 
| ** **                                                        | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)**                                                | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008**    | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
| ** **                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                          |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | $                        | 665,559    |                        | $          | 893,556 |   | $ | 2,363,222 |   | $ | 2,991,477 |   |
| Direct Marketing                                                  |       | 144,527                  |       | 168,605                     |       | 512,031 |   | 576,782 |   |
| Total                                                             |       | $                        | 810,086    |                        | $          | 1,062,161 |   | $ | 2,875,253 |   | $ | 3,568,259 |   |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| OPERATING EARNINGS (LOSS)                                         |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | $                        | 62,617     |                        | $          | 151,291 |   | $ | 143,193 |   | $ | 444,788 |   |
| Direct Marketing                                                  |       | 20,390                   |       | 28,025                      |       | 54,428 |   | 93,256 |   |
| Corporate expenses                                                |       | (14,374                  | )          | (12,767                     | )          | (43,900 | ) | (43,974 | ) |
| Amortization of intangible assets and favorable lease commitments |       | (18,314                  | )          | (17,953                     | )          | (54,389 | ) | (53,902 | ) |
| Impairment charges (1)                                            |       | —                   |       | —                      |       | (560,159 | ) | — |   |
| Other income (2)                                                  |       | —                   |       | —                      |       | — |   | 32,450 |   |
| Total                                                             |       | $                        | 50,319     |                        | $          | 148,596 |   | $ |  (460,827 | ) | $ | 472,618 |   |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| CAPITAL EXPENDITURES                                              |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | $                        | 14,962     |                        | $          | 40,326 |   | $ | 72,608 |   | $ | 116,936 |   |
| Direct Marketing                                                  |       | 1,781                    |       | 4,631                       |       | 8,679 |   | 16,194 |   |
| Total                                                             |       | $                        | 16,743     |                        | $          | 44,957 |   | $ | 81,287 |   | $ | 133,130 |   |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| DEPRECIATION EXPENSE                                              |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | $                        | 31,347     |                        | $          | 30,502 |   | $ | 97,082 |   | $ | 90,765 |   |
| Direct Marketing                                                  |       | 3,739                    |       | 4,128                       |       | 12,973 |   | 11,948 |   |
| Other                                                             |       | 1,581                    |       | 844                         |       | 4,323 |   | 2,982 |   |
| Total                                                             |       | $                        | 36,667     |                        | $          | 35,474 |   | $ | 114,378 |   | $ | 105,695 |   |

 
| ** **                                           | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| ASSETS                                               |       |                  |       |                     |       |
| Tangible assets of Specialty Retail stores           |       | $                     | 1,826,036  |                     | $          | 1,969,333 |   |
| Tangible assets of Direct Marketing                  |       | 157,876               |       | 182,624                  |       |
| Corporate assets:                                    |       |                  |       |                     |       |
| Intangible assets related to Specialty Retail stores |       | 2,958,821             |       | 3,536,723                |       |
| Intangible assets related to Direct Marketing        |       | 478,757               |       | 558,526                  |       |
| Other                                                |       | 361,076               |       | 313,377                  |       |
| Total                                                |       | $                     | 5,782,566  |                     | $          | 6,560,583 |   |

 

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

 

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

 

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14.         **Condensed Consolidating FinancialInformation (with respect to NMG’s obligations under the Senior Notes and the****Senior SubordinatedNotes)**

 

All of NMG’s obligationsunder the Senior Notes and the Senior Subordinated Notes, as well as itsobligations under the Asset-Based Revolving Credit Facility and the SeniorSecured Term Loan Facility, are guaranteed by the Company and certain of NMG’sexisting and future domestic subsidiaries (principally, Bergdorf Goodman, Inc.through which NMG conducts the operations of its Bergdorf Goodman stores and NMNevada Trust which holds legal title to certain real property and intangibleassets used by the Company in conducting its operations). The guarantees by theCompany and each subsidiary guarantor are full and unconditional and joint andseveral.  Currently, the Company’snon-guarantor subsidiaries consist principally of an operating subsidiarydomiciled in Canada providing support services to our Direct Marketingoperations.

 

The following condensedconsolidating financial information represents the financial information ofNeiman Marcus, Inc. and its wholly-owned subsidiary guarantors, preparedon the equity basis of accounting. The information is presented in accordancewith the requirements of Rule 3-10 under the Securities and ExchangeCommission’s Regulation S-X. The financial information may not necessarilybe indicative of results of operations, cash flows or financial position hadthe subsidiary guarantors operated as independent entities.

 
| ** **                                      | ** ** | **May 2, 2009** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| **(in thousands)**                              | ** ** | **Company**          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                    | —     |   | $ | 228,169 |   | $ | 764 |   | $ | 455 |   | $ | — |   | $ | 229,388 |   |
| Merchandise inventories                         |       | —               |       | 756,253 |   | 109,727 |   | — |   | — |   | 865,980 |   |
| Other current assets                            |       | —               |       | 156,108 |   | 8,737 |   | 253 |   | — |   | 165,098 |   |
| Total current assets                            |       | —               |       | 1,140,530 |   | 119,228 |   | 708 |   | — |   | 1,260,466 |   |
| Property and equipment, net                     |       | —               |       | 888,880 |   | 126,180 |   | — |   | — |   | 1,015,060 |   |
| Goodwill and intangible assets, net             |       | —               |       | 1,580,252 |   | 1,857,326 |   | — |   | — |   | 3,437,578 |   |
| Other assets                                    |       | —               |       | 67,587 |   | 1,875 |   | — |   | — |   | 69,462 |   |
| Investments in subsidiaries                     |       | 1,092,269            |       | 2,008,298 |   | — |   | — |   | (3,100,567 | ) | — |   |
| Total assets                                    |       | $                    | 1,092,269  |   | $ | 5,685,547 |   | $ | 2,104,609 |   | $ | 708 |   | $ | (3,100,567 | ) | $ | 5,782,566 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                    | —     |   | $ | 138,464 |   | $ | 20,510 |   | $ | 1 |   | $ | — |   | $ | 158,975 |   |
| Accrued liabilities                             |       | —               |       | 273,318 |   | 73,867 |   | 236 |   | — |   | 347,421 |   |
| Total current liabilities                       |       | —               |       | 411,782 |   | 94,377 |   | 237 |   | — |   | 506,396 |   |
| Long-term liabilities:                          |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —               |       | 2,963,311 |   | — |   | — |   | — |   | 2,963,311 |   |
| Deferred income taxes                           |       | —               |       | 771,409 |   | — |   | — |   | — |   | 771,409 |   |
| Other long-term liabilities                     |       | —               |       | 446,776 |   | 1,404 |   | 1,001 |   | — |   | 449,181 |   |
| Total long-term liabilities                     |       | —               |       | 4,181,496 |   | 1,404 |   | 1,001 |   | — |   | 4,183,901 |   |
| Total shareholders’ equity                 |       | 1,092,269            |       | 1,092,269 |   | 2,008,828 |   | (530 | ) | (3,100,567 | ) | 1,092,269 |   |
| Total liabilities and shareholders’ equity |       | $                    | 1,092,269  |   | $ | 5,685,547 |   | $ | 2,104,609 |   | $ | 708 |   | $ | (3,100,567 | ) | $ | 5,782,566 |   |

 

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

 

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| ** **                                      | ** ** | **April 26, 2008** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| **(in thousands)**                              | ** ** | **Company**             | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                       | —     |   | $ | 204,508 |   | $ | 631 |   | $ | 965 |   | $ | — |   | $ | 206,104 |   |
| Merchandise inventories                         |       | —                  |       | 849,409 |   | 109,479 |   | 7 |   | — |   | 958,895 |   |
| Other current assets                            |       | —                  |       | 130,033 |   | 10,485 |   | 3,681 |   | 544 |   | 144,743 |   |
| Total current assets                            |       | —                  |       | 1,183,950 |   | 120,595 |   | 4,653 |   | 544 |   | 1,309,742 |   |
| Property and equipment, net                     |       | —                  |       | 936,047 |   | 134,088 |   | 1,740 |   | — |   | 1,071,875 |   |
| Goodwill and intangible assets, net             |       | —                  |       | 1,907,706 |   | 2,187,543 |   | — |   | — |   | 4,095,249 |   |
| Other assets                                    |       | —                  |       | 83,673 |   | 44 |   | — |   | — |   | 83,717 |   |
| Investments in subsidiaries                     |       | 1,710,981               |       | 2,325,361 |   | — |   | — |   | (4,036,342 | ) | — |   |
| Total assets                                    |       | $                       | 1,710,981  |   | $ | 6,436,737 |   | $ | 2,442,270 |   | $ | 6,393 |   | $ | (4,035,798 | ) | $ | 6,560,583 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                       | —     |   | $ | 195,564 |   | $ | 34,042 |   | $ | 4,307 |   | $ | 544 |   | $ | 234,457 |   |
| Accrued liabilities                             |       | —                  |       | 316,605 |   | 85,470 |   | 112 |   | — |   | 402,187 |   |
| Total current liabilities                       |       | —                  |       | 512,169 |   | 119,512 |   | 4,419 |   | 544 |   | 636,644 |   |
| Long-term liabilities:                          |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                  |       | 2,946,053 |   | — |   | — |   | — |   | 2,946,053 |   |
| Deferred income taxes                           |       | —                  |       | 966,844 |   | — |   | — |   | — |   | 966,844 |   |
| Other long-term liabilities                     |       | —                  |       | 300,690 |   | (629 | ) | — |   | — |   | 300,061 |   |
| Total long-term liabilities                     |       | —                  |       | 4,213,587 |   | (629 | ) | — |   | — |   | 4,212,958 |   |
| Total shareholders’ equity                 |       | 1,710,981               |       | 1,710,981 |   | 2,323,387 |   | 1,974 |   | (4,036,342 | ) | 1,710,981 |   |
| Total liabilities and shareholders’ equity |       | $                       | 1,710,981  |   | $ | 6,436,737 |   | $ | 2,442,270 |   | $ | 6,393 |   | $ | (4,035,798 | ) | $ | 6,560,583 |   |

 

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| ** **                                                                        | ** ** | **Thirteen weeks ended May 2, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                               | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                         | —     |   | $ | 688,582 |   | $ | 121,504 |   | $ | — |   | $ | — |   | $ | 810,086 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                    |       | 439,239 |   | 75,379 |   | 147 |   | — |   | 514,765 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                    |       | 174,683 |   | 26,011 |   | (179 | ) | — |   | 200,515 |   |
| Income from credit card program, net                                              |       | —                                    |       | (9,440 | ) | (1,054 | ) | — |   | — |   | (10,494 | ) |
| Depreciation expense                                                              |       | —                                    |       | 32,642 |   | 4,025 |   | — |   | — |   | 36,667 |   |
| Amortization of intangible assets and favorable lease commitments                 |       | —                                    |       | 15,089 |   | 3,225 |   | — |   | — |   | 18,314 |   |
| Operating earnings                                                                |       | —                                    |       | 36,369 |   | 13,918 |   | 32 |   | — |   | 50,319 |   |
| Interest expense, net                                                             |       | —                                    |       | 58,248 |   | 2 |   | — |   | — |   | 58,250 |   |
| Intercompany royalty charges (income)                                             |       | —                                    |       | 40,528 |   | (40,528 | ) | — |   | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 3,135                                     |       | (54,476 | ) | — |   | — |   | 51,341 |   | — |   |
| (Loss) earnings before income taxes                                               |       | (3,135                                    | )          | (7,931 | ) | 54,444 |   | 32 |   | (51,341 | ) | (7,931 | ) |
| Income tax benefit                                                                |       | —                                    |       | (4,796 | ) | — |   | — |   | — |   | (4,796 | ) |
| Net (loss) earnings                                                               |       | $                                         | (3,135     | ) | $ | (3,135 | ) | $ | 54,444 |   | $ | 32 |   | $ | (51,341 | ) | $ | (3,135 | ) |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended April 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                            | —     |   | $ | 891,774 |   | $ | 170,387 |   | $ | — |   | $ | — |   | $ | 1,062,161 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                       |       | 535,962 |   | 100,785 |   | 240 |   | — |   | 636,987 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                       |       | 206,682 |   | 32,039 |   | 134 |   | — |   | 238,855 |   |
| Income from credit card program, net                                              |       | —                                       |       | (14,183 | ) | (1,521 | ) | — |   | — |   | (15,704 | ) |
| Depreciation expense                                                              |       | —                                       |       | 31,050 |   | 4,120 |   | 304 |   | — |   | 35,474 |   |
| Amortization of intangible assets and favorable lease commitments                 |       | —                                       |       | 15,060 |   | 2,893 |   | — |   | — |   | 17,953 |   |
| Operating earnings (loss)                                                         |       | —                                       |       | 117,203 |   | 32,071 |   | (678 | ) | — |   | 148,596 |   |
| Interest expense, net                                                             |       | —                                       |       | 57,301 |   | 2 |   | — |   | — |   | 57,303 |   |
| Intercompany royalty charges (income)                                             |       | —                                       |       | 62,489 |   | (62,489 | ) | — |   | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (55,395                                      | )          | (93,880 | ) | — |   | — |   | 149,275 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 55,395                                       |       | 91,293 |   | 94,558 |   | (678 | ) | (149,275 | ) | 91,293 |   |
| Income tax expense                                                                |       | —                                       |       | 35,898 |   | — |   | — |   | — |   | 35,898 |   |
| Net earnings (loss)                                                               |       | $                                            | 55,395     |   | $ | 55,395 |   | $ | 94,558 |   | $ | (678 | ) | $ | (149,275 | ) | $ | 55,395 |   |

 

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| ** **                                                                        | ** ** | **Thirty-Nine weeks ended May 2, 2009** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                            | —     |   | $ | 2,429,326 |   | $ | 445,927 |   | $ | — |   | $ | — |   | $ | 2,875,253 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                       |       | 1,653,090 |   | 299,253 |   | 1,534 |   | — |   | 1,953,877 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                       |       | 602,464 |   | 86,434 |   | (1,939 | ) | — |   | 686,959 |   |
| Income from credit card program, net                                              |       | —                                       |       | (29,996 | ) | (3,686 | ) | — |   | — |   | (33,682 | ) |
| Depreciation expense                                                              |       | —                                       |       | 101,268 |   | 12,404 |   | 706 |   | — |   | 114,378 |   |
| Amortization of intangible assets and favorable lease commitments                 |       | —                                       |       | 45,269 |   | 9,120 |   | — |   | — |   | 54,389 |   |
| Impairment charges                                                                |       | —                                       |       | 275,871 |   | 284,288 |   | — |   | — |   | 560,159 |   |
| Operating loss                                                                    |       | —                                       |       | (218,640 | ) | (241,886 | ) | (301 | ) | — |   | (460,827 | ) |
| Interest expense, net                                                             |       | —                                       |       | 174,670 |   | 6 |   | — |   | — |   | 174,676 |   |
| Intercompany royalty charges (income)                                             |       | —                                       |       | 156,248 |   | (156,248 | ) | — |   | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                         |       | 499,513                                      |       | 85,945 |   | — |   | — |   | (585,458 | ) | — |   |
| (Loss) earnings before income taxes                                               |       | (499,513                                     | )          | (635,503 | ) | (85,644 | ) | (301 | ) | 585,458 |   | (635,503 | ) |
| Income tax benefit                                                                |       | —                                       |       | (135,990 | ) | — |   | — |   | — |   | (135,990 | ) |
| Net (loss) earnings                                                               |       | $                                            | (499,513   | ) | $ | (499,513 | ) | $ | (85,644 | ) | $ | (301 | ) | $ | 585,458 |   | $ | (499,513 | ) |

 
| ** **                                                                        | ** ** | **Thirty-Nine weeks ended April 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                               | —     |   | $ | 3,000,449 |   | $ | 567,810 |   | $ | — |   | $ | — |   | $ | 3,568,259 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                          |       | 1,866,532 |   | 350,206 |   | 619 |   | — |   | 2,217,357 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                          |       | 699,244 |   | 104,984 |   | (824 | ) | — |   | 803,404 |   |
| Income from credit card program, net                                              |       | —                                          |       | (47,124 | ) | (5,143 | ) | — |   | — |   | (52,267 | ) |
| Depreciation expense                                                              |       | —                                          |       | 92,011 |   | 13,170 |   | 514 |   | — |   | 105,695 |   |
| Amortization of intangible assets and favorable lease commitments                 |       | —                                          |       | 45,179 |   | 8,723 |   | — |   | — |   | 53,902 |   |
| Other income                                                                      |       | —                                          |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Operating earnings (loss)                                                         |       | —                                          |       | 377,057 |   | 95,870 |   | (309 | ) | — |   | 472,618 |   |
| Interest expense, net                                                             |       | —                                          |       | 178,915 |   | 8 |   | — |   | — |   | 178,923 |   |
| Intercompany royalty charges (income)                                             |       | —                                          |       | 218,451 |   | (218,451 | ) | — |   | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (178,456                                        | )          | (314,004 | ) | — |   | — |   | 492,460 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 178,456                                         |       | 293,695 |   | 314,313 |   | (309 | ) | (492,460 | ) | 293,695 |   |
| Income tax expense                                                                |       | —                                          |       | 115,239 |   | — |   | — |   | — |   | 115,239 |   |
| Net earnings (loss)                                                               |       | $                                               | 178,456    |   | $ | 178,456 |   | $ | 314,313 |   | $ | (309 | ) | $ | (492,460 | ) | $ | 178,456 |   |

 

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| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended May 2, 2009** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS–OPERATING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Net (loss) earnings                                                                          |       | $                                            | (499,513   | ) | $ | (499,513 | ) | $ | (85,644 | ) | $ | (301 | ) | $ | 585,458 |   | $ | (499,513 | ) |
| Adjustments to reconcile net (loss) earnings to net cash provided by  operating activities:  |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                       |       | 157,200 |   | 21,524 |   | 706 |   | — |   | 179,430 |   |
| Deferred income taxes                                                                        |       | —                                       |       | (98,357 | ) | — |   | — |   | — |   | (98,357 | ) |
| Impairment charges                                                                           |       | —                                       |       | 275,871 |   | 284,288 |   | — |   | — |   | 560,159 |   |
| Paid-in-kind interest                                                                        |       | —                                       |       | 20,520 |   | — |   | — |   | — |   | 20,520 |   |
| Other, primarily costs related to defined benefit pension and other  long-term benefit plans |       | —                                       |       | 7,173 |   | 171 |   | 677 |   | — |   | 8,021 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                       |       | 156,247 |   | (156,247 | ) | — |   | — |   | — |   |
| Equity in loss (earnings) of subsidiaries                                                    |       | 499,513                                      |       | 85,945 |   | — |   | — |   | (585,458 | ) | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                       |       | (36,678 | ) | (59,702 | ) | (1,002 | ) | — |   | (97,382 | ) |
| Net cash provided by operating activities                                                    |       | —                                       |       | 68,408 |   | 4,390 |   | 80 |   | — |   | 72,878 |   |
| **CASH FLOWS–INVESTING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                       |       | (77,060 | ) | (4,227 | ) | — |   | — |   | (81,287 | ) |
| Net cash used for investing activities                                                       |       | —                                       |       | (77,060 | ) | (4,227 | ) | — |   | — |   | (81,287 | ) |
| **CASH FLOWS–FINANCING ACTIVITIES**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                       |       | (1,383 | ) | — |   | — |   | — |   | (1,383 | ) |
| Net cash used for financing activities                                                       |       | —                                       |       | (1,383 | ) | — |   | — |   | — |   | (1,383 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease) increase during the period                                                        |       | —                                       |       | (10,035 | ) | 163 |   | 80 |   | — |   | (9,792 | ) |
| Beginning balance                                                                            |       | —                                       |       | 238,204 |   | 601 |   | 375 |   | — |   | 239,180 |   |
| Ending balance                                                                               |       | $                                            | —     |   | $ | 228,169 |   | $ | 764 |   | $ | 455 |   | $ | — |   | $ | 229,388 |   |

 
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended April 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS–OPERATING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                               | 178,456    |   | $ | 178,456 |   | $ | 314,313 |   | $ | (309 | ) | $ | (492,460 | ) | $ | 178,456 |   |
| Adjustments to reconcile net earnings (loss) to net cash provided by  operating activities:  |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                          |       | 147,853 |   | 21,893 |   | 514 |   | — |   | 170,260 |   |
| Deferred income taxes                                                                        |       | —                                          |       | (13,569 | ) | — |   | — |   | — |   | (13,569 | ) |
| 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 |       | —                                          |       | 18,690 |   | (59 | ) | — |   | — |   | 18,631 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                          |       | 218,452 |   | (218,452 | ) | — |   | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                                    |       | (178,456                                        | )          | (314,004 | ) | — |   | — |   | 492,460 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                          |       | (8,179 | ) | (111,669 | ) | (7 | ) | — |   | (119,855 | ) |
| Net cash provided by operating activities                                                    |       | —                                          |       | 195,249 |   | 6,026 |   | 198 |   | — |   | 201,473 |   |
| **CASH FLOWS–INVESTING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                          |       | (126,628 | ) | (6,591 | ) | 89 |   | — |   | (133,130 | ) |
| 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                                         |       | —                                          |       | (126,628 | ) | (6,591 | ) | 89 |   | — |   | (133,130 | ) |
| **CASH FLOWS–FINANCING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                          |       | (3,446 | ) | — |   | — |   | — |   | (3,446 | ) |
| Net cash used for financing activities                                                       |       | —                                          |       | (3,446 | ) | — |   | — |   | — |   | (3,446 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                          |       | 65,175 |   | (565 | ) | 287 |   | — |   | 64,897 |   |
| Beginning balance                                                                            |       | —                                          |       | 139,333 |   | 1,196 |   | 678 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                               | —     |   | $ | 204,508 |   | $ | 631 |   | $ | 965 |   | $ | — |   | $ | 206,104 |   |

 

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**15.****      ****Condensed Consolidating FinancialInformation (with respect to NMG’s obligations under the 2028 Debentures)**

 

All of NMG’s obligationsunder the 2028 Debentures are guaranteed by the Company. The guarantee by theCompany is full and unconditional and joint and several. Currently, the Company’snon-guarantor subsidiaries consist principally of Bergdorf Goodman, Inc.through which NMG conducts the operations of its Bergdorf Goodman stores and NMNevada Trust which holds legal title to certain real property and intangibleassets used by NMG in conducting its operations.

 

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

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

 

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

 

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| ** **                                      | ** ** | **April 26, 2008** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| **(in thousands)**                              | ** ** | **Company**             | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                       | —     |   | $ | 204,508 |   | $ | 1,596 |   | $ | — |   | $ | 206,104 |   |
| Merchandise inventories                         |       | —                  |       | 849,409 |   | 109,486 |   | — |   | 958,895 |   |
| Other current assets                            |       | —                  |       | 130,033 |   | 14,166 |   | 544 |   | 144,743 |   |
| Total current assets                            |       | —                  |       | 1,183,950 |   | 125,248 |   | 544 |   | 1,309,742 |   |
| Property and equipment, net                     |       | —                  |       | 936,047 |   | 135,828 |   | — |   | 1,071,875 |   |
| Goodwill and intangible assets, net             |       | —                  |       | 1,907,706 |   | 2,187,543 |   | — |   | 4,095,249 |   |
| Other assets                                    |       | —                  |       | 83,673 |   | 44 |   | — |   | 83,717 |   |
| Investments in subsidiaries                     |       | 1,710,981               |       | 2,325,361 |   | — |   | (4,036,342 | ) | — |   |
| Total assets                                    |       | $                       | 1,710,981  |   | $ | 6,436,737 |   | $ | 2,448,663 |   | $ | (4,035,798 | ) | $ | 6,560,583 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                    |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                    |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                       | —     |   | $ | 195,564 |   | $ | 38,349 |   | $ | 544 |   | $ | 234,457 |   |
| Accrued liabilities                             |       | —                  |       | 316,605 |   | 85,582 |   | — |   | 402,187 |   |
| Total current liabilities                       |       | —                  |       | 512,169 |   | 123,931 |   | 544 |   | 636,644 |   |
| Long-term liabilities:                          |       |                    |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                  |       | 2,946,053 |   | — |   | — |   | 2,946,053 |   |
| Deferred income taxes                           |       | —                  |       | 966,844 |   | — |   | — |   | 966,844 |   |
| Other long-term liabilities                     |       | —                  |       | 300,690 |   | (629 | ) | — |   | 300,061 |   |
| Total long-term liabilities                     |       | —                  |       | 4,213,587 |   | (629 | ) | — |   | 4,212,958 |   |
| Total shareholders’ equity                 |       | 1,710,981               |       | 1,710,981 |   | 2,325,361 |   | (4,036,342 | ) | 1,710,981 |   |
| Total liabilities and shareholders’ equity |       | $                       | 1,710,981  |   | $ | 6,436,737 |   | $ | 2,448,663 |   | $ | (4,035,798 | ) | $ | 6,560,583 |   |

 

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

** **
| ** **                                                                        | ** ** | **Thirteen weeks ended April 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                            | —     |   | $ | 891,774 |   | $ | 170,387 |   | $ | — |   | $ | 1,062,161 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                       |       | 535,962 |   | 101,025 |   | — |   | 636,987 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                       |       | 206,682 |   | 32,173 |   | — |   | 238,855 |   |
| Income from credit card program, net                                              |       | —                                       |       | (14,183 | ) | (1,521 | ) | — |   | (15,704 | ) |
| Depreciation expense                                                              |       | —                                       |       | 31,050 |   | 4,424 |   | — |   | 35,474 |   |
| Amortization of intangible assets and  favorable lease commitments                |       | —                                       |       | 15,060 |   | 2,893 |   | — |   | 17,953 |   |
| Operating earnings                                                                |       | —                                       |       | 117,203 |   | 31,393 |   | — |   | 148,596 |   |
| Interest expense, net                                                             |       | —                                       |       | 57,301 |   | 2 |   | — |   | 57,303 |   |
| Intercompany royalty charges (income)                                             |       | —                                       |       | 62,489 |   | (62,489 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (55,395                                      | )          | (93,880 | ) | — |   | 149,275 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 55,395                                       |       | 91,293 |   | 93,880 |   | (149,275 | ) | 91,293 |   |
| Income tax expense                                                                |       | —                                       |       | 35,898 |   | — |   | — |   | 35,898 |   |
| Net earnings (loss)                                                               |       | $                                            | 55,395     |   | $ | 55,395 |   | $ | 93,880 |   | $ | (149,275 | ) | $ | 55,395 |   |

 

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

 
| ** **                                                                        | ** ** | **Thirty-Nine weeks ended April 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                               | —     |   | $ | 3,000,449 |   | $ | 567,810 |   | $ | — |   | $ | 3,568,259 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                          |       | 1,866,532 |   | 350,825 |   | — |   | 2,217,357 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                          |       | 699,244 |   | 104,160 |   | — |   | 803,404 |   |
| Income from credit card program, net                                              |       | —                                          |       | (47,124 | ) | (5,143 | ) | — |   | (52,267 | ) |
| Depreciation expense                                                              |       | —                                          |       | 92,011 |   | 13,684 |   | — |   | 105,695 |   |
| Amortization of intangible assets and  favorable lease commitments                |       | —                                          |       | 45,179 |   | 8,723 |   | — |   | 53,902 |   |
| Other income                                                                      |       | —                                          |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Operating earnings                                                                |       | —                                          |       | 377,057 |   | 95,561 |   | — |   | 472,618 |   |
| Interest expense, net                                                             |       | —                                          |       | 178,915 |   | 8 |   | — |   | 178,923 |   |
| Intercompany royalty charges (income)                                             |       | —                                          |       | 218,451 |   | (218,451 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                         |       | (178,456                                        | )          | (314,004 | ) | — |   | 492,460 |   | — |   |
| Earnings (loss) before income taxes                                               |       | 178,456                                         |       | 293,695 |   | 314,004 |   | (492,460 | ) | 293,695 |   |
| Income tax expense                                                                |       | —                                          |       | 115,239 |   | — |   | — |   | 115,239 |   |
| Net earnings (loss)                                                               |       | $                                               | 178,456    |   | $ | 178,456 |   | $ | 314,004 |   | $ | (492,460 | ) | $ | 178,456 |   |

 

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

** **
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended April 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                               | 178,456    |   | $ | 178,456 |   | $ | 314,004 |   | $ | (492,460 | ) | $ | 178,456 |   |
| Adjustments to reconcile net earnings  (loss) to net cash provided by operating activities:  |       |                                            |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                          |       | 147,853 |   | 22,407 |   | — |   | 170,260 |   |
| Deferred income taxes                                                                        |       | —                                          |       | (13,569 | ) | — |   | — |   | (13,569 | ) |
| 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 |       | —                                          |       | 18,690 |   | (59 | ) | — |   | 18,631 |   |
| Intercompany royalty income payable  (receivable)                                            |       | —                                          |       | 218,452 |   | (218,452 | ) | — |   | — |   |
| Equity in (earnings) loss of subsidiaries                                                    |       | (178,456                                        | )          | (314,004 | ) | — |   | 492,460 |   | — |   |
| Changes in operating assets and  liabilities, net                                            |       | —                                          |       | (8,179 | ) | (111,676 | ) | — |   | (119,855 | ) |
| Net cash provided by operating activities                                                    |       | —                                          |       | 195,249 |   | 6,224 |   | — |   | 201,473 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                          |       | (126,628 | ) | (6,502 | ) | — |   | (133,130 | ) |
| Purchases of short-term investments                                                          |       | —                                          |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                          |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used for investing activities                                                       |       | —                                          |       | (126,628 | ) | (6,502 | ) | — |   | (133,130 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                          |       | (3,446 | ) | — |   | — |   | (3,446 | ) |
| Net cash used for financing activities                                                       |       | —                                          |       | (3,446 | ) | — |   | — |   | (3,446 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                          |       | 65,175 |   | (278 | ) | — |   | 64,897 |   |
| Beginning balance                                                                            |       | —                                          |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                               | —     |   | $ | 204,508 |   | $ | 1,596 |   | $ | — |   | $ | 206,104 |   |

 

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**ITEM2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**EXECUTIVE OVERVIEW**

 

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with our Annual Report on Form 10-K for the fiscalyear ended August 2, 2008.  Unlessotherwise specified, the meanings of all defined terms in Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) are consistent with the meanings of such terms as defined in theNotes to the Condensed Consolidated Financial Statements. This discussioncontains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the risks,uncertainties and assumptions relating to our forward-looking statements.

 

**Overview**

 

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

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the third quarter of fiscal year 2009 relate to thethirteen weeks ended May 2, 2009. All references to the third quarter of fiscal year 2008 relate to thethirteen weeks endedApril 26, 2008.  Allreferences to year-to-date fiscal 2009 relate to the thirty-nine weeks ended May 2,2009.  All references to year-to-datefiscal 2008 relate to the thirty-nine weeks ended April 26, 2008.

 

**FactorsAffecting Our Results**

 

***Revenues.***  We generateour revenues from the sale of high-end merchandise through our Specialty Retailstores and Direct Marketing operations. Components of our revenues include:

 

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

 

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

 

Our revenues can beaffected by the following factors:

 

·                  general economic conditions, includingthe continuing deterioration of the general economic conditions and the lengthof a recovery;

 

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

 

·                  changes in the level of full-price sales;

 

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

 

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

 

·                  the rate of growth in internet revenuesby our Direct Marketing operations.

 

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

 

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

 

·                  Inventory costs—We utilize the retailmethod of accounting. Under the retail inventory method, the valuation ofinventories at cost and the resulting gross margins are determined by applyinga calculated cost-to-retail ratio, for various groupings of similar items, tothe retail value 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 costs consistprimarily of salaries and expenses incurred by our merchandising and buyingoperations.

 

·                  Occupancy costs—Occupancy costs consistprimarily of rent, property taxes and operating costs of our retail,distribution and support facilities. A significant portion of our buying andoccupancy costs are fixed.

 

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

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold.  We received vendor allowances of$72.3 million, or 2.5% of revenues, in year-to-date fiscal 2009 and$66.0 million, or 1.9% of revenues, in year-to-date fiscal 2008.

 

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

 

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

 

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

 

·                  factors affecting revenues generally;

 

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

 

·                  the amount of vendor reimbursements wereceive during the fiscal year.

 

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

 

Advertising costsincurred by our Specialty Retail segment consist primarily of print media costsrelated to promotional materials mailed to our customers, while advertisingcosts incurred by our Direct Marketing operations relate to the production,printing and distribution of our print catalogs and the production of thephotographic content on our websites, as well as online marketing costs. Wereceive advertising allowances from certain of our merchandise vendors.Substantially all the advertising allowances we receive representreimbursements of direct, specific and incremental costs that we incur topromote the vendor’s merchandise in connection with our various advertisingprograms, primarily catalogs and other print media. As a result, theseallowances are recorded as a reduction of our advertising costs when earned.Vendor allowances earned and recorded as a reduction to selling, general andadministrative expenses aggregated approximately $62.4 million, or 2.2% ofrevenues, in year-to-date fiscal 2009 and $68.8 million, or 1.9% of revenues,in year-to-date fiscal 2008.

 

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We also receiveallowances from certain merchandise vendors in conjunction with compensationprograms for employees who sell the vendor’s merchandise. These allowances arenetted against the related compensation expense that we incur. Amounts receivedfrom vendors related to compensation programs were $51.4 million, or 1.8% ofrevenues, in year-to-date fiscal 2009 and $54.3 million, or 1.5% ofrevenues, in year-to-date fiscal 2008.

 

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

 

·                  changes in the number of sales associatesprimarily due to new store openings and expansion of existing stores, includingincreased health care and related benefits expenses;

 

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

 

·                  changes in expenses related to insuranceand long-term benefits due to general economic conditions such as rising healthcare costs.

 

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

 

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

 

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

 

·                  decreased based upon the level of futureservices we provide to HSBC;

 

·                  increased for our allocable share ofcertain income, if any, generated from the credit card program as providedpursuant to our contractual agreement with HSBC; and

 

·                  decreased for our allocable share ofcertain credit card losses generated from the credit card portfolio.

 

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**Seasonality**

 

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

 

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

 

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

 

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

 

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

 

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**OPERATINGRESULTS**

 

**PerformanceSummary**

 

The followingtable sets forth certain items expressed as percentages of net revenues for theperiods indicated.

 
| ** **                                                                        | ** ** | **Thirteen weeks ended**   | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                        | ** ** | **May 2,  2009** | ** ** | **April 26,  2008**    | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
| ** **                                                                        | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                      | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | 63.5                       |       | 60.0                        |       | 68.0 |   | 62.1 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | 24.8                       |       | 22.5                        |       | 23.9 |   | 22.5 |   |
| Income from credit card program, net                                              |       | (1.3                       | )          | (1.5                        | )          | (1.2 | ) | (1.5 | ) |
| Depreciation expense                                                              |       | 4.5                        |       | 3.3                         |       | 4.0 |   | 3.0 |   |
| Amortization of intangible assets                                                 |       | 1.7                        |       | 1.3                         |       | 1.4 |   | 1.1 |   |
| Amortization of favorable lease commitments                                       |       | 0.6                        |       | 0.4                         |       | 0.5 |   | 0.4 |   |
| Impairment charges                                                                |       | —                     |       | —                      |       | 19.5 |   | — |   |
| Other income                                                                      |       | —                     |       | —                      |       | — |   | (0.9 | ) |
| Operating earnings (loss)                                                         |       | 6.2                        |       | 14.0                        |       | (16.0 | ) | 13.2 |   |
| Interest expense, net                                                             |       | 7.2                        |       | 5.4                         |       | 6.1 |   | 5.0 |   |
| (Loss) earnings before income taxes                                               |       | (1.0                       | )          | 8.6                         |       | (22.1 | ) | 8.2 |   |
| Income tax (benefit) expense                                                      |       | (0.6                       | )          | 3.4                         |       | (4.7 | ) | 3.2 |   |
| Net (loss) earnings                                                               |       | (0.4                       | )%         | 5.2                         | %          | (17.4 | )% | 5.0 | % |

 

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

** **
| ** **                                                        | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(dollars in millions, except sales per square foot)**           | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008**    | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
| REVENUES                                                          |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | $                        | 665.6      |                        | $          | 893.6 |   | $ | 2,363.2 |   | $ | 2,991.5 |   |
| Direct Marketing                                                  |       | 144.5                    |       | 168.6                       |       | 512.0 |   | 576.8 |   |
| Total                                                             |       | $                        | 810.1      |                        | $          | 1,062.2 |   | $ | 2,875.2 |   | $ | 3,568.3 |   |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| OPERATING EARNINGS (LOSS)                                         |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | $                        | 62.6       |                        | $          | 151.3 |   | $ | 143.2 |   | $ | 444.8 |   |
| Direct Marketing                                                  |       | 20.4                     |       | 28.0                        |       | 54.4 |   | 93.2 |   |
| Corporate expenses                                                |       | (14.4                    | )          | (12.8                       | )          | (43.9 | ) | (44.0 | ) |
| Amortization of intangible assets and favorable lease commitments |       | (18.3                    | )          | (17.9                       | )          | (54.4 | ) | (53.9 | ) |
| Impairment charges (1)                                            |       | —                   |       | —                      |       | (560.1 | ) | — |   |
| Other income (2)                                                  |       | —                   |       | —                      |       | — |   | 32.5 |   |
| Total                                                             |       | $                        | 50.3       |                        | $          | 148.6 |   | $ | (460.8 | ) | $ | 472.6 |   |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| OPERATING PROFIT MARGIN (LOSS)                                    |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | 9.4                      | %          | 16.9                        | %          | 6.1 | % | 14.9 | % |
| Direct Marketing                                                  |       | 14.1                     | %          | 16.6                        | %          | 10.6 | % | 16.2 | % |
| Total                                                             |       | 6.2                      | %          | 14.0                        | %          | (16.0 | )% | 13.2 | % |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| CHANGE IN COMPARABLE REVENUES (3)                                 |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | (27.1                    | )%         | (3.4                        | )%         | (22.7 | )% | 2.2 | % |
| Direct Marketing                                                  |       | (14.3                    | )%         | 2.0                         | %          | (11.2 | )% | 4.8 | % |
| Total                                                             |       | (25.1                    | )%         | (2.5                        | )%         | (20.8 | )% | 2.6 | % |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| SALES PER SQUARE FOOT                                             |       |                     |       |                        |       |   |   |   |   |
| Specialty Retail stores                                           |       | $                        | 105        |                        | $          | 148 |   | $ | 376 |   | $ | 499 |   |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| STORE COUNT                                                       |       |                     |       |                        |       |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores:                        |       |                     |       |                        |       |   |   |   |   |
| Open at beginning of period                                       |       | 42                       |       | 41                          |       | 41 |   | 40 |   |
| Opened during the period                                          |       | —                   |       | —                      |       | 1 |   | 1 |   |
| Open at end of period                                             |       | 42                       |       | 41                          |       | 42 |   | 41 |   |
| Clearance centers:                                                |       |                     |       |                        |       |   |   |   |   |
| Open at beginning of period                                       |       | 25                       |       | 22                          |       | 24 |   | 20 |   |
| Opened during the period                                          |       | 2                        |       | 1                           |       | 3 |   | 3 |   |
| Closed during the period                                          |       | (1                       | )          | —                      |       | (1 | ) | — |   |
| Open at end of period                                             |       | 26                       |       | 23                          |       | 26 |   | 23 |   |
|                                                              |       |                     |       |                        |       |   |   |   |   |
| NON-GAAP FINANCIAL DATAEBITDA (4)                                 |       | $                        | 105.3      |                        | $          | 202.0 |   | $ | (292.0 | ) | $ | 632.2 |   |
| Adjusted EBITDA (4)                                               |       | $                        | 105.3      |                        | $          | 202.0 |   | $ | 268.1 |   | $ | 599.7 |   |

 

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

 

(2) For year-to-datefiscal 2008, other income represents a one-time pension curtailment gain of$32.5 million as a result of our decision to freeze certain Pension and SERPbenefits as of December 31, 2007.

 

(3)  Comparable revenuesinclude 1) revenues derived from our retail stores open for more than52 weeks, including stores that have been relocated or expanded and2) revenues from our Direct Marketing operations.

 

(4) 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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**FiscalYear 2009 Summary**

 

We continue to experiencea challenging economic and retail environment and expect these conditions willcontinue for an extended period of time. Consistent with the significant declines in overall macroeconomicfactors, capital markets and consumer confidence that have existed duringfiscal year 2009, customer demand has been well below our initial expectationsand the prior year.  The current softnessin customer demand exists across all geographic areas, all distributionchannels and all merchandise categories, particularly the apparel and homedécor categories.  We believe affluentcustomers are continuing to react to the economic conditions mentionedabove.  However, based on our experiencein previous business cycles, we believe our customers’ buying levels willincrease once the economic environment improves.

 

In response to thesechallenging business conditions, we continue to take the following actions:

 

·                  stimulate sales through additionalpromotional and other events;

 

·                  reduce inventory levels and purchases;

 

·                  implement expense control initiatives;and

 

·                  review future capital expenditures andeliminate or postpone certain projects.

 

A summary of ouroperating results is as follows:

 

·                  **Revenues**—Our revenues in the third quarter offiscal year 2009 were significantly impacted by a lower level of customerdemand.  As a result, our revenues forthe third quarter of fiscal year 2009 were $810.1 million, a decrease of 23.7%as compared to the third quarter of fiscal year 2008.  Comparable revenues decreased by 25.1% in thethird quarter of fiscal year 2009. Comparable revenues decreased in the third quarter of fiscal year 2009for both our Specialty Retail stores and Direct Marketing operations.

 

Our revenues foryear-to-date fiscal 2009 were $2,875.2 million, a decrease of 19.4% as comparedto the prior year reflecting a decline in comparable revenues of 20.8%.

 

For Specialty Retailstores, our sales per square foot for the last twelve trailing months were $511as of May 2, 2009 and $639 as of April 26, 2008.

 

·                  **Cost of goods soldincluding buying and occupancy costs (excluding depreciation)**—COGS represented 63.5% of revenues in thethird quarter of fiscal year 2009 and 60.0% of revenues in the third quarter offiscal year 2008.  This increase in COGSwas primarily due to 1) higher net markdowns and promotional costs incurred inresponse to weak customer demand and 2) the deleveraging of our fixed buyingand occupancy costs on lower revenues.

 

COGS represented68.0% of revenues in year-to-date fiscal 2009 and 62.1% of revenues inyear-to-date fiscal 2008. This increase in COGS as a percentage of revenues wasprimarily due to 1) lower levels of full-price sales and higher levels of netmarkdowns and promotional activities for both our Specialty Retail stores andDirect Marketing operations in response to weak demand, particularly during theholiday season in the second quarter of fiscal year 2009 and 2) thedeleveraging of our fixed buying and occupancy costs on lower revenues.

 

·                  **Inventories**—As a result of the significant decreasein customer demand we experienced in the Fall season, our inventory purchasesand on-hand inventories were significantly in excess of actual demand.  As a result, we generated a lower level offull-price sales in the Fall season and incurred significantly higher netmarkdowns and sales promotions costs to liquidate Fall season inventories heldin excess of sales trends.  In responseto the lower levels of customer demand in the Fall season, we reduced ourreceipts in the third quarter of fiscal year 2009 by approximately 25% comparedto the prior year and we expect this trend to continue for the next severalquarters as we continue to align inventories with sales trends.

 

At May 2,2009, total inventories totaled $866.0 million, a 9.7% decrease from the prioryear.  Inventories decreased by 12.3% ona comparable basis.  While inventoriesare more closely aligned with customer demand in the Spring season than in theFall season, on-hand inventories continue to be higher than current salestrends.  While markdown requirements forSpring season goods are anticipated to be lower than those for Fall seasongoods, we currently expect net markdown requirements in the fourth quarter offiscal year 2009 to be higher than the prior year.

 

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·                  **Selling, general andadministrative expenses (excluding depreciation)**—Compared to the corresponding periods in fiscal year2008, we reduced SG&A by $38.3 million in the third quarter of fiscal year2009 and by $116.4 million in year-to-date fiscal 2009.  The lower levels of SG&A expenses primarilyreflect 1) savings in variable costs, primarily commissions, on lower revenuesand 2) savings realized as a result of our on-going initiatives to control ourexpenses.

 

Despite the lower levels of SG&A incurred, SG&A deleveraged inboth the third quarter and year-to-date fiscal 2009 periods.  SG&A represented 24.8% of revenues in thethird quarter of fiscal year 2009 and 22.5% of revenues in the third quarter offiscal year 2008.  SG&A represented23.9% of revenues in year-to-date fiscal 2009 and 22.5% in year-to-date fiscal2008.  The increases in SG&A aspercentages of revenues are primarily due to the deleveraging of payroll andcertain benefits costs on the significant decreases in revenues.

 

·                  **Expense controlinitiatives**— Inaddition to savings in variable costs, primarily commissions, on lowerrevenues, we have implemented both short-term expense control initiatives andlonger-term adjustments to our cost structure, which initiatives include headcountand salary reductions and the centralization of various store and corporate jobfunctions.  We believe we realizedsavings in buying and occupancy costs and SG&A expenses aggregatingapproximately $30 million in the third quarter of fiscal year 2009 and $70million in year-to-date fiscal 2009.  Wecontinue to review and evaluate additional initiatives to reduce our coststructure.

 

·                  **Impairment of long-livedassets**— In thesecond quarter of fiscal year 2009, we tested our long-lived assets forrecoverability in light of the global financial crisis and uncertain economicconditions and the resulting negative impact to our business operations.  In connection with the review of ourlong-lived assets for recoverability, we determined certain of our property andequipment, tradenames and goodwill to be impaired and recorded non-cashimpairment charges aggregating $560.1 million in the second quarter of fiscal2009, as more fully described in Note 3 to the condensed consolidated financialstatements.

 

·                  **Operating earnings(loss)—**For thethird quarter of fiscal year 2009, our operating earnings were $50.3 million,or 6.2% of revenues.  Operating earningsin the third quarter of fiscal year 2008 were $148.6 million, or 14.0% ofrevenues.  Operating margins decreased,as a percentage of revenues, by 7.8% in the third quarter of fiscal year 2009primarily due to:

 

  ·            anincrease in COGS by 3.5% of revenues as a result of higher net markdowns andpromotional costs incurred in response to weak customer demand as well as thedeleveraging of our buying and occupancy expenses on lower revenues;

 

  ·            increasesin both SG&A expenses by 2.3% of revenues and depreciation and amortizationexpense by 1.8% of revenues, primarily due to the deleveraging of theseexpenses on lower sales; and

 

  ·            decreasein income from our credit card operations of 0.2% of revenues resultingprimarily from higher shared credit card losses.

 

Total operating losses in year-to-date fiscal 2009 were $460.8 million,or 16.0% of revenues, which included impairments of our long-lived assets of$560.1 million, or 19.5% of revenues. Total operating earnings in year-to-date fiscal 2008 were $472.6million, or 13.2% of revenues, which included a curtailment gain of $32.5million, or 0.9% of revenues.  Excludingthe impairments in year-to-date fiscal 2009 and curtailment gain inyear-to-date fiscal 2008, operating earnings margin decreased as a percentageof revenues, in year-to-date fiscal 2009 by 8.8% primarily due to:

 

  ·            anincrease in COGS by 5.9% of revenues as a result of lower levels of full-pricesales, higher net markdowns and higher promotional costs incurred in responseto weak customer demand as well as the deleveraging of our buying and occupancyexpenses on lower revenues;

 

  ·            increasesin both SG&A expenses by 1.4% of revenues and depreciation and amortizationexpense by 1.4% of revenues, primarily due to the deleveraging of theseexpenses on lower sales; and

 

  ·            decreasein income from our credit card operations of 0.3% of revenues resultingprimarily from higher shared credit card losses.

 

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·                  **Liquidity—**Cash provided by our operating activitieswas $72.9 million in year-to-date fiscal 2009, a decrease of $128.6 millionfrom the prior year fiscal period as a result of lower sales and earnings.  Despite the decrease in cash provided byoperating activities, we held cash balances of $229.4 million at May 2,2009 compared to $206.1 million at April 26, 2008.  At May 2, 2009, we have made noborrowings outstanding under our Asset-Based Revolving Credit Facility and haveover $500 million of unused borrowing availability, after giving effect to$30.0 million used for letters of credit.

 

Given the dislocation in the financial markets and the uncertainty asto when reasonable conditions will return, we have elected to pay PIK Interestfor the two quarterly interest periods ending July 14, 2009 and to makesuch interest payments with the issuance of additional Senior Notes at the PIKInterest rate of 9.75% instead of paying interest in cash.  As a result, the original principal amount ofSenior Notes of $700.0 million increased by $17.1 million on April 14,2009 and will increase by $17.5 million on July 14, 2009.

 

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

 

Our Adjusted EBITDA exceeded our interest expense, net for both thequarter-to-date and year-to-date fiscal 2009 periods.  However, we anticipate that Adjusted EBITDAmay decline in the remainder of fiscal year 2009.

 

·                  **Outlook—**We expect retail demand and revenues willremain weak for an extended period of time. We will continue to reduce our inventory levels and purchases to alignthem with anticipated lower customer demand. In addition, with softer revenue levels anticipated for the remainder offiscal year 2009, our SG&A expenses as a percentage of revenues willcontinue to be under pressure.  Despitethe anticipated continuation of current economic conditions, we believe thecash generated from our operations along with our available sources offinancing will enable us to meet our cash obligations for fiscal year 2009.  For year-to-date fiscal year 2009, we havemade no borrowings under our revolving credit facility and, at present, we donot anticipate utilizing this revolver during the remainder of fiscal year2009.

 

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**ThirteenWeeks Ended May 2, 2009 Compared to Thirteen Weeks Ended April 26,2008**

 

***Revenues.**** *Ourrevenues for the third quarter of fiscal year 2009 of $810.1 million decreased$252.1 million, or 23.7%, from $1,062.2 million in the third quarter of fiscalyear 2008.  The decrease in revenues wasdue to decreases in comparable revenues for both our Specialty Retail storesand Direct Marketing operations as a result of the current challenging economicenvironment and lower customer demand.

 

Comparable revenues forthe third quarter of fiscal year 2009 were $794.8 million compared to $1,061.0million in the prior year fiscal period, representing a decrease of 25.1%.  Comparable revenues decreased in the thirdquarter of fiscal year 2009 by 27.1% for Specialty Retail stores and 14.3% forDirect Marketing.  New stores generatedsales of $15.3 million for the third quarter of fiscal year 2009.

 

Internet revenuesgenerated by Direct Marketing were $113.4 million for the third quarter offiscal year 2009, a decrease of 12.4% compared to the prior year fiscalquarter. In addition, catalog revenues decreased 20.4% compared to the prioryear fiscal quarter.  Decreases inrevenues from the home décor category, primarily offered by our Horchow brand,were incurred in both our internet and catalog operations during the thirdquarter of fiscal year 2009.

 

***Cost of goods sold including buying and occupancy costs(excluding depreciation).***  COGS for thethird quarter of fiscal year 2009 were 63.5% of revenues compared to 60.0% ofrevenues for the third quarter of fiscal year 2008.

 

The increase inCOGS as a percentage of revenues in the third quarter of fiscal year 2009 wasprimarily due to decreased product margins generated by both our SpecialtyRetail stores and Direct Marketing operations of approximately 2.2% ofrevenues.  The increase in COGS as apercentage of revenues was primarily due to higher net markdowns and sales promotionscosts incurred in response to weak customer demand.  Additionally, buying and occupancy costsincreased 1.3% of revenues primarily due to the deleveraging of payroll andrent expenses on the lower level of revenues generated.

 

***Selling, general and administrative expenses (excludingdepreciation)*****.**  SG&A expenses decreased by $38.3 millionin the third quarter of fiscal year 2009 compared to the prior year.  The decrease in SG&A expenses reflects 1)savings in variable costs, primarily commissions, on lower revenues and 2)savings realized as a result of our on-going initiatives to control ourexpenses (approximately $25 million).

 

Despite a decrease inSG&A expenses, SG&A expenses as a percentage of revenues increased to24.8% of revenues in the third quarter of fiscal year 2008 compared to 22.5% ofrevenues in the prior year fiscal quarter. The net increase in SG&A expenses as a percentage of revenues in thethird quarter of fiscal year 2009 of approximately 2.3% of revenues wasprimarily due to:

 

·                  the deleveraging of a significant portion of ourSG&A expenses, primarily payroll and related benefits, by approximately1.7% of revenues on the lower level of revenues; and

 

·                  expenses, primarily consulting fees and severance,aggregating $8.9 million, or 1.1% of revenues, incurred in connection with ouron-going initiatives to control our expenses and to reduce our cost structure,which initiatives include headcount and salary reductions and thecentralization and redesign of various store and corporate job functions;offset by

 

·                  a lower level of advertising and promotions costsincurred in the third quarter of fiscal year 2009 of approximately 0.4% ofrevenues, primarily due to a lower level of spending by our Specialty Retailstores.

 

***Income from credit card program, net. ***We earned HSBC Program Income of $10.5 million, or1.3% of revenues, in the third quarter of fiscal year 2009 compared to $15.7million, or 1.5% of revenues, in the third quarter of fiscal year 2008.  In light of current economic conditions thathave led to higher delinquencies and losses on consumer indebtedness, lossesare currently allocable to NMG.  As aresult, we recorded a charge of approximately $1.4 million, or 0.2% ofrevenues, in the third quarter of fiscal year 2009 for our estimated portion ofallocable credit card losses.

 

***Depreciation expense. ***Depreciationexpense was $36.7 million, or 4.5% of revenues, in the third quarter of fiscalyear 2009 compared to $35.5 million, or 3.3% of revenues, in the third quarterof fiscal year 2008.  The increase indepreciation expense as a percentage of revenues results primarily from thedeleveraging of these costs on lower revenues.

 

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***Amortization expense. ***Amortizationof intangible assets (primarily customer lists and favorable lease commitments)aggregated $18.3 million, or 2.3% of revenues, in the third quarter of fiscalyear 2009 compared to $17.9 million, or 1.7% of revenues, in the third quarterof fiscal year 2008.  The increase inamortization expense as a percentage of revenues results primarily from thedeleveraging of these costs on lower revenues.

 

***Segment operating earnings*****.** Segment operating earnings for our Specialty Retail stores and DirectMarketing segments do not reflect either the impact of adjustments to revalueour assets and liabilities to estimated fair value at the Acquisition date orimpairment charges related to declines in fair value subsequent to the Acquisitiondate.

 

Operating earnings forour Specialty Retail stores segment were $62.6 million, or 9.4% of SpecialtyRetail stores revenues, for the third quarter of fiscal year 2009 compared tooperating earnings of $151.3 million, or 16.9% of Specialty Retail storesrevenues, for the prior year fiscal quarter. The decrease in operating margin as a percentage of revenues wasprimarily due to:

 

·                  higher net markdowns and promotional costs incurred inresponse to weak customer demand; and

 

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

 

·                  a lower level of spending for advertising andpromotion costs.

 

Operating earnings forDirect Marketing were $20.4 million, or 14.1% of Direct Marketing revenues, inthe third quarter of fiscal year 2009 compared to $28.0 million, or 16.6% ofDirect Marketing revenues, for the prior year fiscal quarter.  The decrease in operating margin as apercentage of revenues for Direct Marketing was primarily the result of 1) adecrease in margins primarily due to higher net markdowns and 2) thedeleveraging of a significant portion of our expenses.

 

***Interest expense, net*****.**  Net interestexpense was $58.2 million, or 7.2% of revenues, in the third quarter of fiscalyear 2009 and $57.3 million, or 5.4% of revenues, for the prior year fiscalquarter.  The net increase in interestexpense is primarily due to 1) incremental PIK Interest on the Senior Notes, 2)lower interest income and 3) lower capitalized interest as a result of lowercapital expenditures, partially offset by 4) a decrease in interest rates onour variable-rate indebtedness.  Thesignificant components of interest expense are as follows:

 
| ** **                        | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------|------------|--------------------------|------------|
| **(in thousands)**                | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008** | ** ** |
|                              |       |                     |       |   |   |
| Senior Secured Term Loan Facility |       | $                        | 21,903     |   | $ | 24,289 |   |
| 2028 Debentures                   |       | 2,227                    |       | 2,185 |   |
| Senior Notes                      |       | 17,332                   |       | 15,786 |   |
| Senior Subordinated Notes         |       | 12,969                   |       | 12,998 |   |
| Amortization of debt issue costs  |       | 3,554                    |       | 3,554 |   |
| Other                             |       | 867                      |       | 763 |   |
| Total interest expense            |       | 58,852                   |       | 59,575 |   |
| Less:                             |       |                     |       |   |   |
| Interest income                   |       | 385                      |       | 1,304 |   |
| Capitalized interest              |       | 217                      |       | 968 |   |
| Interest expense, net             |       | $                        | 58,250     |   | $ | 57,303 |   |

 

***Income tax (benefit) expense.*** Our effective income tax rate for the third quarter of fiscal year 2009was 60.5% compared to 39.3% for the third quarter of fiscal year 2008.  Our effective income tax rate for the thirdquarter of fiscal year 2009 was favorably impacted by a tax benefit of $1.3million primarily as a result of the completion of the IRS examination offiscal years 2005 and 2006.

 

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**Thirty-NineWeeks Ended May 2, 2009 Compared to Thirty-Nine Weeks Ended April 26,2008**

 

***Revenues.**** *Ourrevenues for year-to-date fiscal 2009 of $2,875.2 million decreased $693.1million, or 19.4%, from $3,568.3 million in year-to-date fiscal 2008.  The decrease in revenues was due to decreasesin comparable revenues for both our Specialty Retail stores and DirectMarketing operations as a result of the current challenging economic environmentand lower customer demand.  Customer demand,especially during the holiday selling season, was well below our initialexpectations and the prior year and this trend continued in the third quarterof fiscal year 2009.

 

Comparable revenues foryear-to-date fiscal 2009 were $2,823.6 million compared to $3,567.1 million inthe prior year fiscal period, representing a decrease of 20.8%.  Comparable revenues decreased in year-to-datefiscal 2009 by 22.7% for Specialty Retail stores and 11.2% for Direct Marketing.  New stores generated sales of $51.6 millionfor year-to-date fiscal 2009.  Comparablerevenues by quarter for fiscal year 2009 are as follows:

 
| First fiscal quarter  |   | (14.5 | )% |
|-----------------------|--------|-------|----|
| Second fiscal quarter |   | (22.8 | )% |
| Third fiscal quarter  |   | (25.1 | )% |

 

Internet revenuesgenerated by Direct Marketing were $406.7 million for year-to-date fiscal 2009,a decrease of 6.3% compared to the prior year fiscal period. In addition,catalog revenues decreased 26.1% compared to the prior year fiscal period.  Decreases in revenues from the home décorcategory, primarily offered by our Horchow brand, were incurred in both ourinternet and catalog operations during year-to-date fiscal 2009.

 

***Cost of goods sold including buying and occupancy costs(excluding depreciation).***  COGS foryear-to-date fiscal 2009 were 68.0% of revenues compared to 62.1% of revenuesfor year-to-date fiscal 2008.

 

The increase inCOGS as a percentage of revenues in year-to-date fiscal 2009 was primarily dueto decreased product margins generated by both our Specialty Retail stores andDirect Marketing operations of approximately 4.6% of revenues.  The decrease in COGS as a percentage ofrevenues reflects the lower level of customer demand we experienced.  As a result, we generated a lower level offull-price sales in year-to-date fiscal 2009, primarily in the first and secondquarters, and incurred significantly higher net markdowns and sales promotionscosts to liquidate inventories held in excess of sales trends.  Additionally, buying and occupancy costs increasedby 1.3% of revenues primarily due to the deleveraging of payroll and rentexpenses on the lower level of revenues generated.

 

***Selling, general and administrative expenses (excludingdepreciation)*****.**  SG&A expenses decreased by $116.4 millionin year-to-date fiscal 2009 compared to the prior year fiscal period.  The decrease in SG&A expenses reflects 1)savings in variable costs, primarily commissions, on lower revenues and 2)savings realized as a result of our on-going initiatives to control our expenses(approximately $60 million).

 

Despite a decrease inSG&A expenses, SG&A expenses as a percentage of revenues increased to23.9% of revenues in year-to-date fiscal 2009 compared to 22.5% of revenues inthe prior year fiscal period.  The netincrease in SG&A expenses as a percentage of revenues in year-to-datefiscal 2009 of approximately 1.4% of revenues was primarily due to:

 

·                  the deleveraging of a significant portion of ourSG&A expenses, primarily payroll and related benefits net of lowerincentive compensation requirements, by approximately 1.2% of revenues on thelower level of revenues; and

 

·                  expenses, primarily consulting fees and severance,aggregating $16.7 million, or 0.6% of revenues, incurred in connection with ouron-going initiatives to control expenses and to reduce our cost structure,which initiatives include headcount and salary reductions and the centralizationand redesign of various store and corporate job functions; offset by

 

·                  a lower level of advertising and promotions costsincurred in year-to-date fiscal 2009 of approximately 0.2% of revenues,primarily due to a lower level of spending by our Specialty Retail stores.  During the first quarter of the prior year,we incurred incremental advertising and promotions costs in connection with thecelebration of the 100th anniversary of Neiman Marcus in October 2007.

 

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***Income from credit card program, net. ***We earned HSBC Program Income of $33.7 million, or1.2% of revenues, in year-to-date fiscal 2009 compared to $52.3 million, or1.5% of revenues, in year-to-date fiscal 2008. In light of current economic conditions that have led to higherdelinquencies and losses on consumer indebtednesses, losses are currentlyallocable to NMG.  As a result, werecorded a charge of approximately $6.7 million, or 0.2% of revenues, inyear-to-date fiscal year 2009 for our estimated portion of allocable creditcard losses.  In addition, we offeredcertain financing promotions in the second quarter of fiscal year 2009 tostimulate customer demand, which reduced our HSBC Program Income by $1.6million, or 0.1% of revenues.

 

***Depreciation expense. ***Depreciationexpense was $114.4 million, or 4.0% of revenues, in year-to-date fiscal 2009compared to $105.7 million, or 3.0% of revenues, in year-to-date fiscal2008.  The increase in depreciationexpense as a percentage of revenues results primarily from the deleveraging ofthese costs on lower revenues.

 

***Amortization expense. ***Amortizationof intangible assets (primarily customer lists and favorable lease commitments)aggregated $54.4 million, or 1.9% of revenues, in year-to-date fiscal 2009compared to $53.9 million, or 1.5% of revenues, in year-to-date fiscal2008.  The increase in amortizationexpense as a percentage of revenues results primarily from the deleveraging ofthese costs on lower revenues.

 

***Impairment charges.***** **In thesecond quarter of fiscal year 2009, we recorded impairment charges, relatedprimarily to our tradenames and goodwill, aggregating $560.1 million inconnection with the review of our long-lived assets for recoverability, as morefully explained in Note 3 in our notes to condensed consolidated financialstatements.

 

***Other income. ***In the first quarter of fiscal year 2008,we recorded a one-time pension curtailment gain of $32.5 million, or 0.9% ofrevenues, as a result of our decision to freeze certain Pension and SERPbenefits as of December 31, 2007, as more fully explained in Note 6 in ournotes to condensed consolidated financial statements.

 

***Segment operating earnings.*** Segment operating earnings for our Specialty Retail stores and Direct Marketingsegments do not reflect either the impact of adjustments to revalue our assetsand liabilities to estimated fair value at the Acquisition date or impairmentcharges related to declines in fair value subsequent to the Acquisition date.

 

Operating earnings forour Specialty Retail stores segment were $143.2 million, or 6.1% of SpecialtyRetail stores revenues, for year-to-date fiscal 2009 compared to $444.8million, or 14.9% of Specialty Retail stores revenues, for the prior yearfiscal period.  The decrease in operatingmargin as a percentage of revenues was primarily due to:

 

·                  lower level of full-price sales and higher netmarkdowns and promotional costs incurred in response to weak customer demand;and

 

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

 

·                  a lower level of spending for advertising andpromotion costs.

 

Operating earnings forDirect Marketing were $54.4 million, or 10.6% of Direct Marketing revenues, inyear-to-date fiscal 2009 compared to $93.2 million, or 16.2% of DirectMarketing revenues, for the prior year fiscal period.  The decrease in operating margin as apercentage of revenues for Direct Marketing was primarily the result of 1) adecrease in margins primarily due to higher net markdowns and 2) thedeleveraging of a significant portion of our expenses.

 

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***Interest expense, net*****.**  Net interestexpense was $174.7 million, or 6.1% of revenues, in year-to-date fiscal 2009and $178.9 million, or 5.0% of revenues, for the prior year fiscal period.  The net decrease in interest expense isprimarily due to 1) the decrease in interest rates on our variable-rateindebtedness, partially offset by 2) incremental PIK interest on the Senior Notes,3) lower interest income and 4) lower capitalized interest as a result of lowercapital expenditures.  The significantcomponents of interest expense are as follows:

 
| ** **                        | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| **(in  thousands)**               | ** ** | **May 2,  2009**       | ** ** | **April 26,  2008** | ** ** |
|                              |       |                        |       |   |   |
| Senior Secured Term Loan Facility |       | $                           | 69,774     |   | $ | 80,071 |   |
| 2028 Debentures                   |       | 6,680                       |       | 6,550 |   |
| Senior Notes                      |       | 48,793                      |       | 46,691 |   |
| Senior Subordinated Notes         |       | 39,060                      |       | 38,446 |   |
| Amortization of debt issue costs  |       | 10,663                      |       | 10,663 |   |
| Other                             |       | 2,558                       |       | 2,439 |   |
| Total interest expense            |       | 177,528                     |       | 184,860 |   |
| Less:                             |       |                        |       |   |   |
| Interest income                   |       | 2,156                       |       | 3,592 |   |
| Capitalized interest              |       | 696                         |       | 2,345 |   |
| Interest expense, net             |       | $                           | 174,676    |   | $ | 178,923 |   |

 

***Income tax (benefit) expense.*** Our effective income tax rate for year-to-date fiscal 2009 was 21.4%compared to 39.2% for year-to-date fiscal 2008.  No income tax benefit exists related to the$291.1 million of goodwill impairment charges recorded in the second quarter offiscal year 2009.  Excluding the impactof the goodwill impairment charges, our effective income tax rate was 39.5% foryear-to-date fiscal 2009.

 

We file income taxreturns in the U.S. federal jurisdiction and various state and localjurisdictions.  During the third quarterof fiscal year 2009, we closed the IRS examination of fiscal years 2005 and2006 and received net refunds of approximately $2.8 million.  In addition, as a result of the completion ofthe audit and IRS determination regarding certain deductions taken inconnection with the Acquisition, the Company recorded a decrease in the grossamount of unrecognized tax benefits of $13.7 million and a decrease in accruedinterest and penalties of $2.2 million. This reduction in FIN 48 liabilityresulted in a decrease to goodwill of $17.3 million, a decrease to deferred taxliabilities of $2.7 million and a tax benefit of $1.3 million during thequarter.

 

The IRS is now examiningour federal tax returns for fiscal year 2007. We believe our recorded tax liabilities as of May 2, 2009 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.  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 or expiration of statutes of limitation.  At this time, we do not believe suchadjustments will have a material impact on our consolidated financialstatements.

 

**Non-GAAPFinancial Measure – EBITDA and Adjusted EBITDA**

 

We present the non-GAAPfinancial measure EBITDA and adjusted EBITDA because we use these measures tomonitor and evaluate the performance of our business and believe thepresentation of these measures will enhance investors’ ability to analyzetrends in our business, evaluate our performance relative to other companies inour industry and evaluate our ability to service our debt.  In addition, we use EBITDA and AdjustedEBITDA as components of the measurement of incentive compensation.

 

EBITDA and AdjustedEBITDA are not presentations made in accordance with GAAP and our computationof EBITDA and Adjusted EBITDA may vary from others in our industry.  In addition, EBITDA and Adjusted EBITDAcontain some, but not all, adjustments that are taken into account in thecalculation of the components of various covenants in the 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

 

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important limitations asanalytical tools and should not be considered in isolation, or as a substitutefor analysis of our results as reported under GAAP.  For example, EBITDA and Adjusted EBITDA:

 

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

 

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

 

·                  do not reflect our considerable interestexpense, or the cash requirements necessary to service interest or principalpayments, on our debt;

 

·                  exclude tax payments that represent areduction in available cash; and

 

·                  do not reflect any cash requirements forassets being depreciated and amortized that may have to be replaced in thefuture.

 

The following tablereconciles net (loss) earnings as reflected in our consolidated statements ofoperations prepared in accordance with GAAP to EBITDA and Adjusted EBITDA:

 
| ** **                                                                  | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-Nine weeks ended** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(dollars in millions)**                                                   | ** ** | **May 2,  2009**    | ** ** | **April 26,  2008**    | ** ** | **May 2,  2009** | ** ** | **April 26,  2008** | ** ** |
|                                                                        |       |                     |       |                        |       |   |   |   |   |
| Net (loss) earnings                                                         |       | $                        | (3.1       | )                           | $          | 55.4 |   | $ | (499.5 | ) | $ | 178.5 |   |
| Income tax (benefit) expense                                                |       | (4.8                     | )          | 35.9                        |       | (136.0 | ) | 115.2 |   |
| Interest expense, net                                                       |       | 58.2                     |       | 57.3                        |       | 174.7 |   | 178.9 |   |
| Depreciation expense                                                        |       | 36.7                     |       | 35.5                        |       | 114.4 |   | 105.7 |   |
| Amortization of intangible assets and favorable lease commitments           |       | 18.3                     |       | 17.9                        |       | 54.4 |   | 53.9 |   |
| EBITDA                                                                      |       | 105.3                    |       | 202.0                       |       | (292.0 | )(1) | 632.2 | (2) |
| EBITDA rate                                                                 |       | 13.0                     | %          | 19.0                        | %          | (10.2 | )% | 17.7 | % |
| Non-cash impairment of long-lived assets (1)                                |       | —                   |       | —                      |       | 560.1 |   | — |   |
| Non-cash gain on curtailment of defined benefit retirement  obligations (2) |       | —                   |       | —                      |       | — |   | (32.5 | ) |
| Adjusted EBITDA                                                             |       | $                        | 105.3      |                        | $          | 202.0 |   | $ | 268.1 |   | $ | 599.7 |   |
| Adjusted EBITDA rate                                                        |       | 13.0                     | %          | 19.0                        | %          | 9.3 | % | 16.8 | % |

 

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

 

(2)          For year-to-date fiscal 2008, operatingearnings and EBITDA include a one-time pension curtailment gain of $32.5million as a result of our decision to freeze certain Pension and SERP benefitsas of December 31, 2007.

 

**Inflation and Deflation**

 

We believe changes inrevenues and net earnings that have resulted from inflation or deflation havenot been material during the periods presented. In recent years, we haveexperienced certain inflationary conditions related to 1) increases inproduct costs due primarily to changes in foreign currency exchange rates thathave reduced the purchasing power of the U.S. dollar and 2) increases inSG&A. We purchase a substantial portion of our inventory from foreignsuppliers whose costs are affected by the fluctuation of their local currencyagainst the dollar or who price their merchandise in currencies other than thedollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us mostsignificantly; however, we source goods from numerous countries and thus areaffected by changes in numerous currencies and, generally, by fluctuations inthe U.S. dollar relative to such currencies. Accordingly, changes in the valueof the dollar relative to foreign currencies may increase our cost of goodssold and if we are unable to pass such cost increases to our customers, ourgross margins, and ultimately our earnings, would decrease. Foreign currencyfluctuations could have a material adverse effect on our business, financialcondition and results of operations in

 

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the future. We attempt tooffset the effects of inflation through price increases and control ofexpenses, although our ability to increase prices may be limited by competitivefactors. We attempt to offset the effects of merchandise deflation, which hasoccurred on a limited basis in recent years, through control of expenses. Thereis no assurance, however, that inflation or deflation will not materiallyaffect our operations in the future.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirementsconsist principally of:

 

·                  the funding of our merchandise purchases;

 

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

 

·                  debt service requirements;

 

·                  income tax payments; and

 

·                  obligations related to our Pension Plan.

 

Our primary sources ofshort-term liquidity are comprised of cash on hand and availability under ourAsset-Based Revolving Credit Facility. The amounts of cash on hand andborrowings under the Asset-Based Revolving Credit Facility are influenced by anumber of factors, including revenues, working capital levels, vendor terms,the level of capital expenditures, cash requirements related to financinginstruments and debt service obligations, Pension Plan funding obligations andtax payment obligations, among others.

 

Our working capitalrequirements fluctuate during the fiscal year, increasing substantially duringthe first and second quarters of each fiscal year as a result of higherseasonal levels of inventories.  We havetypically financed the increases in working capital needs during the first andsecond fiscal quarters with available cash balances, cash flows from operationsand, if necessary, with cash provided from borrowings under our creditfacilities.  We have made no borrowingsunder our Asset-Based Revolving Credit Facility during fiscal year 2008 orfiscal year 2009.

 

We believe that operatingcash flows, available vendor financing and amounts available pursuant to oursenior secured Asset-Based Revolving Credit Facility as well as our option toelect PIK Interest under the Senior Notes through October 15, 2010, willbe sufficient to fund our operations, anticipated capital expenditurerequirements, debt service obligations, contractual obligations and commitmentsand Pension Plan funding requirements through the end of fiscal year 2009.

 

At May 2, 2009, cashand cash equivalents were $229.4 million compared to $206.1 millionat April 26, 2008. Net cash provided by operating activities was$72.9 million for year-to-date fiscal 2009 compared to $201.5 millionin year-to-date fiscal 2008. Cash flows provided by operating activities were$128.6 million lower in year-to-date fiscal 2009 than in the prior year fiscalperiod primarily due to the lower levels of revenues and earnings generated inthe current year.

 

Net cash used forinvesting activities, representing capital expenditures, was $81.3 millionin year-to-date fiscal 2009 and $133.1 million in year-to-date fiscal2008.  We incurred significant capitalexpenditures in year-to-date fiscal 2009 related to the construction of newstores in Topanga (the greater Los Angeles area) and Bellevue (suburbanSeattle). We incurred capital expenditures in year-to-date fiscal 2008 relatedto the construction of new stores in Natick and Topanga and the remodel of ourAtlanta and Westchester stores. We opened our Natick store in September 2007,our Topanga store in September 2008 and anticipate our Bellevue store willopen in Fall 2009. In light of current economic conditions and delays incertain real estate projects, we currently project gross capital expendituresfor fiscal year 2009 to be approximately $105 to $115 million compared tocapital expenditures of $183 million in fiscal year 2008.  Net of developer contributions, capitalexpenditures for fiscal year 2009 are projected to be approximately $90 to $100million.

 

Net cash used forfinancing activities was $1.4 million in year-to-date fiscal 2009 ascompared to $3.4 million in year-to-date fiscal 2008.

 

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In response to currenteconomic conditions, we have taken and will continue to take actions tomaintain appropriate liquidity by:

 

·                  stimulating sales through additionalpromotional and other events;

 

·                  reducing inventory levels and purchases;

 

·                  implementing expense control initiatives;and

 

·                  reviewing future capital expenditures andeliminating or postponing certain projects.

 

**FinancingStructure at May 2, 2009**

 

Our major sources offunds are comprised of vendor financing, a $600.0 million Asset-BasedRevolving Credit Facility, $1,625.0 million Senior Secured Term LoanFacility, $717.1 million Senior Notes, $500.0 million Senior SubordinatedNotes, $125.0 million 2028 Debentures and operating leases.

 

***Senior Secured Asset-Based Revolving Credit Facility.*** 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.

 

At May 2, 2009, wehave made no borrowings outstanding under our Asset-Based Revolving CreditFacility and have over $500 million of unused borrowing availability, aftergiving effect to $30.0 million used for letters of credit.

 

The Asset-Based RevolvingCredit Facility contains a number of customary affirmative and negativecovenants, restrictions and events of default, but does not require NMG tocomply with any financial ratio maintenance covenants.

 

The covenants limitingdividends and other restricted payments; investments, loans, advances andacquisitions; and prepayments or redemptions of other indebtedness, each permitthe restricted actions in an unlimited amount, subject to the satisfaction ofcertain payment conditions, principally that NMG must have at least$75.0 million of pro forma excess availability under the Asset-BasedRevolving Credit Facility and that NMG must be in pro forma compliance with thefixed charge coverage ratio described below. In addition, NMG is permitted to take such restricted actions regardlessof whether such conditions are satisfied, subject to a $30.0 millionshared basket that is available.

 

Although the Asset-BasedRevolving Credit Facility does not require NMG to comply with any financialratio maintenance covenants, if less than $60.0 million were available tobe borrowed under the Asset-Based Revolving Credit Facility at any time, NMGwould not be permitted to borrow additional amounts and obtain letters ofcredit (including amendments, renewals and extensions of letters of credit)unless its pro forma ratio of consolidated EBITDA to consolidated Fixed Charges(as such terms are defined in the credit agreement) was at least 1.1 to1.0.  At May 2, 2009, our fixedcharge coverage ratio for the four-quarter period then ended was less than 1.1to 1.0.  We currently do not expect theneed to borrow against our Asset-Based Revolving Credit Facility through theremainder of calendar year 2009. However, should future borrowings be necessary due to unforeseen eventsand, at the time of such borrowings, our fixed charge coverage ratio be lessthan 1.1 to 1.0, we would be limited to $510 million of borrowing capacity dueto the limitations of the Fixed Charge Coverage Ratio requirements of ourAsset-Based Revolving Credit Facility.

 

We are currently innegotiations with various banks to obtain a replacement facility for ourcurrent Asset-Based Revolving Credit Facility prior to its expiration in October 2010.  While we expect to obtain a replacementfacility in the fourth quarter of fiscal year 2009, there can be no assurancesthat such financing will be obtained or, if obtained, on what terms.

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Asset-Based Revolving Credit Facility.

 

***Senior Secured Term Loan Facility.*** In October 2005, NMG entered into a credit agreement and relatedsecurity and other agreements for a $1,975.0 million Senior Secured TermLoan Facility.  NMG voluntarily repaid$100.0 million principal amount of its loans under the Senior Secured TermLoan Facility in fiscal year 2006 and $250 million in fiscal year 2007.  At May 2, 2009, the outstanding balanceunder the Senior Secured Term Loan Facility was $1,625.0 million.

 

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At May 2, 2009,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and (2) thefederal 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 2.97% at May 2, 2009.  The applicable margin is subject toadjustment based on contractually defined debt coverage ratios.  At May 2, 2009, the applicable marginwith respect to base rate borrowings was 1.00% and the applicable margin withrespect to LIBOR borrowings was 2.00%.

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Senior Secured Term Loan Facility.

 

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

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the 2028 Debentures.

 

***Senior Notes.**** *NMG has$717.1 million aggregate principal amount of 9.0% / 9.75% Senior Notesunder a senior indenture (Senior Indenture). NMG’s Senior Notes mature on October 15, 2015.  We negotiated for the right to include thePIK feature in our Senior Notes because of our belief that this feature couldbe a useful tool to enhance liquidity under appropriate circumstances. In thesecond quarter of fiscal year 2009, given the dislocation in the financialmarkets and the uncertainty as to when reasonable conditions will return, webelieved that it was appropriate to utilize this feature, even though we hadunused borrowing capacity under our $600 million revolving credit facility.Accordingly, we elected to pay PIK Interest for the two quarterly interestperiods ending on July 14, 2009 and to make such interest payments withthe issuance of additional Senior Notes at the PIK Interest rate of 9.75%instead of paying interest in cash.  As aresult, the original principal amount of Senior Notes of $700.0 millionincreased by $17.1 million on April 14, 2009 and will increase by $17.5million on July 14, 2009.

 

Prior to the beginning ofeach eligible interest period in the future, we will evaluate whether tocontinue utilizing this PIK feature, taking into account market conditions andother relevant factors at that time. After October 15, 2010, we arerequired to make all interest payments on the Senior Notes entirely in cash.

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Senior Notes.

 

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

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Senior Subordinated Notes.

 

***Interest Rate Swaps.***  In connectionwith the Acquisition, we obtained $2,575.0 million of floating rate debtagreements, of which $2,125.0 million was outstanding at the Acquisition dateand $1,625.0 million is outstanding at May 2, 2009.  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.  These swap agreements hedge a portion of ourcontractual floating rate interest commitments through the expiration of theagreements in December 2010.  As aresult of the swap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.818% to 6.983% per quarter through 2010 and result in an average fixed rateof 6.888%.

 

**OTHERMATTERS**

 

**FactorsThat May Affect Future Results**

 

Matters discussed inMD&A include forward-looking statements. Forward-looking statementsgenerally can be identified by the use of forward-looking terminology such as “may,”“plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,” “should,”

 

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“anticipate,” “believe,” “project”or “continue.” We make these forward-looking statements based on ourexpectations and beliefs concerning future events, as well as currentlyavailable data.  While we believe thereis a reasonable basis for our forward-looking statements, they involve a numberof risks and uncertainties. Therefore, these statements are not guarantees offuture performance and you should not place undue reliance on them. A varietyof factors could cause our actual results to differ materially from theanticipated or expected results expressed in our forward-looking statements.Factors that could affect future performance include, but are not limited, to:

 

*Politicaland General Economic Conditions*

 

·                  prolonged national and global economiccrisis;

 

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

 

·                  terrorist activities in the United Statesand elsewhere;

 

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

 

*CustomerConsiderations*

 

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

 

·                  changes in the demographic or retailenvironment;

 

·                  changes in consumer preferences orfashion trends;

 

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

 

*MerchandiseProcurement and Supply Chain Considerations*

 

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

 

·                  delays in receipt of merchandise ordereddue to work stoppages or other causes of delay in connection with eitherthe manufacture or shipment of such merchandise;

 

·                  changes in foreign currency exchange orinflation rates;

 

·                  significant increases in paper, printingand postage costs;

 

*Industryand Competitive Factors*

 

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

 

·                  adverse changes in the financialviability of our competitors;

 

·                  seasonality of the retail business;

 

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

 

·                  delays in anticipated store openings andrenovations;

 

·                  our success in enforcing our intellectualproperty rights;

 

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*EmployeeConsiderations*

 

·                  changes in key management personnel andour ability to retain key management personnel;

 

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

 

*Legaland Regulatory Issues*

 

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

 

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

 

*LeverageConsiderations*

 

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

 

·                  the ability and the effects ofrefinancing our indebtedness under our senior secured credit facilities;

 

·                  the effects upon us of complying with thecovenants contained in our senior secured credit facilities and the indenturesgoverning our senior notes and senior subordinated notes;

 

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

 

*OtherFactors*

 

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

 

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

 

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

 

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

 

**CriticalAccounting Policies**

 

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

 

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.

 

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***Recent Accounting Pronouncements. ***As more fully explained in Note 5, we adoptedStatement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS 157) in the first quarter of fiscal year 2009.  SFAS 157 provides guidance for using fairvalue to measure certain assets and liabilities and applies whenever anotherstandard requires or permits assets or liabilities to be measured at fairvalue.  The standard does not expand theuse of fair value to any new circumstances.

 

In the first quarter offiscal year 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.

 

As more fully explainedin Note 5, we adopted Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161) inthe third quarter of fiscal year 2009. SFAS 161 enhances current disclosures related to derivative instrumentsand hedging activities to provide adequate information about how derivative andhedging activities affect an entity’s financial position, financial performanceand cash flows.

 

In December 2007,the FASB issued 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 taxuncertainties associated with a business combination as a component of taxexpense.  SFAS 141(R) is to beapplied prospectively to business combinations for which the acquisition dateis on or after December 15, 2008, or our fiscal year ending July 31,2010.  Generally, the effect of SFAS 141(R) willdepend on future acquisitions.  However,the accounting for the resolution of any tax uncertainties remaining as of August 1,2009 related to the Acquisition will be subject to the provisions of SFAS141(R).  We have not yet evaluated theimpact, if any, of adopting SFAS 141(R) on our consolidated financialstatements.

 

In February 2008,the FASB issued FASB Staff Position 157-2,*“*EffectiveDate of FASB Statement No. 157” (FSP 157-2), which delays the effectivedate of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,except for items such as intangible assets and goodwill, that are recognized ordisclosed at fair value in the financial statements on a recurring basis (at leastannually). FSP 157-2 is effective for fiscal years beginning after November 15,2008, or our fiscal year ending July 31, 2010.  We have not yet evaluated the impact ofadopting FSP 157-2 on our consolidated financial statements.

 

In December 2008,the FASB issued FASB Staff Position 132(R)-1,*“*Employers’ Disclosures about Postretirement Benefit Plan Assets”(FSP 132(R)-1), which provides guidance on an employer’s disclosures about planassets of a defined benefit pension or other postretirement plan.  FSP 132(R)-1 is effective for fiscal yearsending after December 15, 2009, or our fiscal year ending July 31,2010.  We have not yet evaluated theimpact of adopting the disclosure requirements of FSP 132(R)-1.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

The market risk inherentin the Company’s financial instruments represents the potential loss arisingfrom adverse changes in interest rates. The Company does not enter intoderivative financial instruments for trading purposes. The Company seeks tomanage exposure to adverse interest rate changes through its normal operatingand financing activities. The Company is exposed to interest rate risk throughits borrowing activities, which are described in Note 4 to our condensed consolidatedfinancial statements.

 

As of May 2, 2009,NMG had no borrowings outstanding under its Asset-Based Revolving CreditFacility.  Future borrowings under NMG’sAsset-Based Revolving Facility, to the extent of outstanding borrowings, wouldbe affected by interest rate changes.

 

At May 2, 2009, NMGhad $1,625.0 million of debt under its Senior Secured Term Loan Facilityissued in connection with the Acquisition that bears interest at floatingrates.

 

In connection with theAcquisition, we obtained $2,575.0 million of floating rate debt agreements, ofwhich $2,125.0 million was outstanding at the Acquisition date and $1,625.0million is outstanding at May 2, 2009. Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit our exposure to interest rate increases relatedto a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rateinterest commitments through the expiration of the agreements in December 2010.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will

 

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currently range from6.818% to 6.983% per quarter through 2010 and result in an average fixed rateof 6.888%.  A 1% increase in therates relating to the portion of our floating rate date that is not hedgedwould increase annual interest expense by approximately $6.3 million.

 

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

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**a.  Disclosure Controls and Procedures.**

 

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of May 2,2009, under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, as well as other key members of ourmanagement, of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and Rule 15d-15(e) under theExchange Act). Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,accumulated, processed, summarized, reported and communicated on a timely basiswithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

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

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter ended May 2, 2009that has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**NEIMANMARCUS, INC.**

 

**PART II**

 

**ITEM1.           LEGAL PROCEEDINGS**

 

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

 

Note 11 of theNotes to Condensed Consolidated Financial Statements in Part I, Item 1 isincorporated herein by reference as if fully restated herein.  Note 11 contains forward-looking statementsthat are subject to the risks and uncertainties discussed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Factors That May Affect Future Results.”

 

**ITEM1A.        RISK FACTORS**

 

**RisksRelated to Current Economic Conditions**

 

**Theglobal economic crisis has affected, and may continue to adversely affect, ourbusiness and results of operations.**

 

The globaleconomic crisis has affected, and may continue to adversely affect, ourbusiness and results of operations.  Thesignificant economic downtown that we are experiencing has affected the UnitedStates generally as well as 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.

 

The merchandise wesell consists in large part of luxury retail goods. The purchase of these goodsby customers is discretionary, and therefore highly dependent upon the level ofconsumer spending, particularly among affluent customers. Accordingly, sales ofthese products may be adversely affected by an economic downturn, increases inconsumer debt levels, uncertainties regarding

 

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future economicprospects or a decline in consumer confidence. During an actual or perceivedeconomic downturn (as a result of increases in consumer debt levels, increasesin interest rates, a tightening of consumer credit, uncertainties regardingfuture economic performance and tax rates and policies, or a decline inconsumer confidence, among other factors), fewer customers may shop our storesand websites.  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.  In addition, promotional and/orprolonged periods of deep discount pricing by our competitors could have amaterial adverse effect on our business.

 

We continue toexperience a challenging economic and retail environment and expect theseconditions will continue for an extended period of time.  Consistent with the significant declines inoverall macroeconomic factors, capital markets and consumer confidence thathave existed during fiscal year 2009, customer demand has been well below ourinitial expectations and the prior year. The current softness in customer demand exists across all geographicareas, all distribution channels and all merchandise categories, particularlythe apparel and home décor categories. We expect retail demand and revenues will remain weak for an extendedperiod of time.  We will continue toreduce our inventory levels and purchases to align them with anticipated lowercustomer demand.  In addition, withsofter revenue levels anticipated for fiscal year 2009, our SG&A expensesas a percentage of revenues will continue to be under pressure.  With respect to liquidity, our AdjustedEBITDA exceeded our interest expense, net for both the quarter-to-date andyear-to-date fiscal 2009 periods. However, we anticipate that Adjusted EBITDA may decline in the remainderof fiscal year 2009.  In addition to theimpact of the economic downturn on our customers, some of our vendors anddevelopers may experience a reduction in their availability of funds and cashflows, which could negatively impact their business as well as ours.  The prolonged continuation of current marketconditions could have a material adverse effect on our business.

 

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

 

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

 

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

 

**NMGhas a substantial amount of indebtedness, which may adversely affect NMG’s cashflow and its ability to operate the business, to comply with debt covenants andmake payments on its indebtedness.**

 

We are highlyleveraged.  As of May 2, 2009, theprincipal amount of NMG’s total indebtedness was approximately $2,967.6 millionand the unused borrowing availability under the $600 million Asset-BasedRevolving Credit Facility was in excess of $500.0 million, after giving effectto $30.0 million of letters of credit outstanding thereunder.  NMG’s substantial indebtedness, combined withits lease and other financial obligations and contractual commitments, couldhave other important consequences. For example, it could:

 

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

 

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

 

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

 

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

 

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

 

·                  limit NMG’s ability to obtain credit fromour vendors and/or the vendors’ factors; and

 

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

 

Any of the abovelisted factors could materially adversely affect NMG’s business, financialcondition and results of operations.

 

In addition, NMG’s interestexpense could increase if interest rates increase because the entire amount ofthe indebtedness under the senior secured credit facilities bears interest atfloating rates.  As of May 2, 2009,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 date inexcess of $500.0 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 $30.0 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.

 

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

 

NMG’s ability topay interest on and principal of the debt obligations will primarily dependupon NMG’s future operating performance. As a result, prevailing economicconditions and financial, business and other factors, many of which are beyondour control, will affect its ability to make these payments.

 

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

 

Contractuallimitations on NMG’s ability to execute any necessary alternative financingplans could exacerbate the effects of any failure to generate sufficient cashflow to satisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits NMG to borrow up to$600.0 million; however, NMG’s ability to borrow and obtain letters ofcredit (including amendments, renewals and extensions of letters of credit)thereunder is limited by a borrowing base, which at any time will equal the lesserof 80% of eligible inventory valued at the lower of cost or market value and85% of the net orderly liquidation value of the eligible inventory, lesscertain reserves.  In addition, ourability to borrow and obtain letters of credit under this facility is limitedby a minimum liquidity condition, providing that, if less than$60.0 million is available at any time, NMG is not permitted to borrow anyadditional amounts and obtain letters of credit under the Asset-Based RevolvingCredit Facility unless NMG’s pro forma ratio of consolidated EBITDA toconsolidated Fixed Charges (as such terms are defined in the credit agreementfor the Asset-Based Revolving Credit Facility) is at least 1.1 to 1.0.  At May 2, 2009, our fixed chargecoverage ratio for the four-quarter period then ended was less than 1.1 to1.0.  We currently do not expect the needto borrow against our Asset-Based Revolving Credit Facility through theremainder of calendar year 2009. However, should future borrowings be necessary due to unforeseen eventsand, at the time of such borrowings, our fixed charge coverage ratio be lessthan 1.1 to 1.0, we would be limited to $510 million of borrowing capacity dueto the limitations of the Fixed Charge Coverage Ratio requirements of ourAsset-Based Revolving Credit Facility. Our ability to meet this minimum liquidity condition in the future maybe affected by events beyond our control.

 

NMG’s inability togenerate sufficient cash flow to satisfy its debt service obligations, or torefinance its obligations at all or on commercially reasonable terms, wouldhave an adverse effect, which could be material, on NMG’s business, financialcondition and results of operations.

 

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

 

The creditagreements governing NMG’s Asset-Based Revolving Credit Facility and SeniorSecured Term Loan Facility and the indentures governing the Senior Notes, theSenior Subordinated Notes and the 2028 Debentures contain, and any futureindebtedness of NMG would likely contain, a number of restrictive covenantsthat impose significant operating and financial restrictions, includingrestrictions on NMG’s ability to engage in acts that may be in its bestlong-term interests. The indentures governing the Senior Notes, the SeniorSubordinated Notes and the 2028 Debentures and the credit agreements governingthe senior secured credit facilities include covenants that, among otherthings, 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 itsaffiliates;

 

·                  sell assets, including capital stock ofNMG’s subsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and lease backtransactions.

 

In addition, NMG’sability to borrow under the Asset-Based Revolving Credit Facility is limited bya borrowing base and a minimum liquidity condition, as described above.

 

Moreover, NMG’s Asset-BasedRevolving Credit Facility provides discretion to the agent bank acting onbehalf of the lenders to impose additional availability restrictions and otherreserves, which could materially impair the amount of borrowings that wouldotherwise be available to us. There can be no assurance that the agent bankwill not impose such reserves or, were it to do so, that the resulting impactof this action would not materially and adversely impair NMG’s liquidity.

 

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

 

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

 

**Risks Related to Our Business andIndustry**

 

**The specialty retail industry ishighly competitive.**

 

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

 

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

 

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**Weare dependent on our relationships with certain designers, vendors and othersources of merchandise.**

 

Our relationships withestablished and emerging designers are a key factor in our position as aretailer of high-fashion merchandise, and a substantial portion of our revenuesis attributable to our sales of designer merchandise. Many of our key vendorslimit the number of retail channels they use to sell their merchandise andcompetition among luxury retailers to obtain and sell these goods is intense.Our relationships with our designers have been a significant contributor to ourpast success. We have no guaranteed supply arrangements with our principalmerchandising sources. Accordingly, there can be no assurance that such sourceswill continue to meet our quality, style and volume requirements. Moreover,nearly all of the brands of our top designers are sold by competing retailers,and many of our top designers also have their own dedicated retail stores. Ifone or more of our top designers were to cease providing us with adequatesupplies of merchandise or, conversely, were to increase sales of merchandisethrough their own stores or to the stores of our competitors, our businesscould be adversely affected. In addition, any decline in the popularity orquality of any of our designer brands could adversely affect our business.

 

**Ifwe significantly overestimate our future sales, our profitability may beadversely affected.**

 

We make decisionsregarding the purchase of our merchandise well in advance of the season inwhich it will be sold. For example, women’s apparel, men’s apparel and shoesare typically ordered six to nine months in advance of the products beingoffered for sale while handbags, jewelry and other categories are typicallyordered three to six months in advance. If our sales during any season, particularly a peak season, aresignificantly lower than we expect for any reason, we may not be able to adjustour expenditures for inventory and other expenses in a timely fashion and maybe left with a substantial amount of unsold inventory. If that occurs, we maybe forced to rely on markdowns or promotional sales to dispose of excessinventory. This could have an adverse effect on our margins and operatingincome. At the same time, if we fail to purchase a sufficient quantity ofmerchandise, we may not have an adequate supply of products to meet consumerdemand. This may cause us to lose sales or harm our customer relationships.

 

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

 

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

 

**Abreach in information privacy could negatively impact our operations.**

 

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

 

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

 

Based upon our expansionstrategy, we expect that planned new stores will add over 310,000 square feetof new store space over approximately the next four fiscal years, representingan increase of approximately 5% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores.  New store openings involve certain risks,including constructing, furnishing and supplying a store in a timely and costeffective manner, accurately assessing the demographic or retail environment ata given location, hiring and training quality staff, obtaining necessarypermits and zoning approvals, obtaining commitments from a core group ofvendors to supply the new store, integrating the new store into ourdistribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, costeffective manner, minimize disruptions to our existing operations, and succeedin creating an improved shopping environment. If we fail to execute on these orother aspects of our store expansion and remodeling strategy, we could sufferharm to our sales, an increase in costs and expenses and an adverse effect onour business.

 

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**Actsof terrorism could adversely affect our business.**

 

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

 

**Theloss of any of our senior management team or attrition among our buyers or keysales associates could adversely affect our business.**

 

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

 

**Inflation may adversely affect ourbusiness operations in the future.**

 

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

 

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

 

We maintain loyaltyprograms that are designed to cultivate long-term relationships with ourcustomers and enhance the quality of service we provide to our customers. Wemust constantly monitor and update the terms of our loyalty programs so thatthey continue to meet the demands and needs of our customers and remaincompetitive with loyalty programs offered by other high-end specialtyretailers. Given that approximately 40% of our revenues during each of the lasttwo calendar years was generated by our InCircle loyalty program members, ourfailure to continue to provide quality service and competitive rewards to ourcustomers through the InCircle loyalty program could adversely affect ourbusiness.

 

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

 

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

 

We entered into afive-year program agreement with HSBC in June 2005 which provides for along-term marketing and servicing alliance under which HSBC offers proprietarycredit card accounts to our customers under both the “Neiman Marcus” and “BergdorfGoodman” brand names.  Under the terms ofthis alliance, HSBC offers credit cards and non-card payment plans and bearssubstantially all credit risk with respect to sales transacted on the cardsbearing our brands. HSBC has discretion over certain policies and arrangementswith our credit card customers and may change these policies and arrangementsin ways that affect our relationship with these customers.

 

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

 

We have entered intovarious amendments to the Program Agreement with HSBC since its inception.These amendments, among other things, provide for 1) the allocation betweenHSBC and NMG of additional income, if any, to be generated from the credit cardprogram as a result of certain changes made to the terms of credit extended toour customers and 2) the allocation of certain credit card losses between HSBCand NMG.

 

Credit card operationsare subject to numerous federal and state laws that impose disclosure and otherrequirements upon the origination, servicing and enforcement of credit accountsand limitations on the maximum amount of finance charges that may be charged bya credit provider. Any regulation or change in the regulation of creditarrangements that would materially limit the availability of credit to ourcustomer base could adversely affect our business.  Changes in credit card use, payment patterns,and default rates may result from a variety of economic, legal, social, andother factors that we cannot control or predict with certainty.  In addition, there can be no assurance that,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.

 

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

 

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

 

**Weare subject to numerous regulations that could affect our operations.**

 

We are subject tocustoms, truth-in-advertising and other laws, including consumer protectionregulations and zoning and occupancy ordinances that regulate retailersgenerally and/or govern the importation, promotion and sale of merchandise andthe operation of retail stores and warehouse facilities. Although we undertaketo monitor changes in these laws, if these laws change without our knowledge,or are violated by importers, designers, manufacturers or distributors, wecould experience delays in shipments and receipt of goods or be subject tofines or other penalties under the controlling regulations, any of which couldadversely affect our business.

 

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

 

The specialty retailindustry is seasonal in nature, with a higher level of sales typicallygenerated in the fall and holiday selling seasons. We have in the pastexperienced significant fluctuation in our revenues from quarter to quarterwith a disproportionate amount of our revenues falling in our second fiscalquarter, which coincides with the holiday season. In addition, we havesignificant additional cash requirements in the period leading up to the monthsof November and December in anticipation of higher sales volume inthose periods, including payments relating to additional inventory, advertisingand employees.

 

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

 

We purchase a substantialportion of our inventory from foreign suppliers whose cost to us is affected bythe fluctuation 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 suchcurrencies.  Accordingly, changes in thevalue of the dollar relative to foreign currencies may increase our cost ofgoods sold and if we are unable to pass such cost increases on to our customers,our gross margins, and ultimately our earnings, will decrease. Foreign currencyfluctuations could have a material adverse effect on our business, financialcondition and results of operations in the future.

 

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

 

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

 

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

 

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

 

**We areindirectly owned and controlled by the Sponsors, and their interests as equityholders may conflict with those of our creditors.**

 

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

 

**Ifwe are unable to enforce our intellectual property rights, or if we are accusedof infringing on a third party’s intellectual property rights, our net incomemay decline.**

 

We and our subsidiariescurrently own our tradenames and service marks, including the “Neiman Marcus”and “Bergdorf Goodman” marks. Our tradenames and service marks are registeredin the United States and in various foreign countries, primarily in Europe. Thelaws of some foreign countries do not protect proprietary rights to the sameextent as do the laws of the United States. Moreover, we are unable to predictthe effect that any future foreign or domestic intellectual propertylegislation or regulation may have on our existing or future business. The lossor reduction of any of our significant proprietary rights could have an adverseeffect on our business.

 

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

 

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

 

To keep pace withchanging technology, we must continuously provide for the design andimplementation of new information technology systems as well as enhancements ofour existing systems. Any failure to adequately maintain and update theinformation technology systems supporting our online operations, salesoperations or inventory control could prevent our customers from purchasingmerchandise on our websites or prevent us from processing and deliveringmerchandise, which could adversely affect our business.

 

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

 

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

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

 

None.

 
| **ITEM 2.** | ** ** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS** |
|-------------|------------|-----------------------------------------------------------------|

######  

None.

 
| **ITEM 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------|------------|---------------------------------------------------------|

 

None.

 
| **ITEM 6.** | ** ** | **EXHIBITS** |
|-------------|------------|--------------|

** **
| 2.1    |   | Agreement and  Plan of Merger, dated May 1, 2005, among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and Newton Merger  Sub, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2    |   | Purchase, Sale  and Servicing Transfer Agreement dated as of June 8, 2005, among The  Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank  Nevada, N.A. and HSBC Finance Corporation, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1    |   | Amended and  Restated Certificate of Incorporation of Neiman Marcus, Inc.,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Registration Statement on Form S-1 (Registration No. 333-133184)  dated April 10, 2006.                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2    |   | Amended and  Restated Bylaws of Neiman Marcus, Inc., incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Registration Statement on  Form S-1 (Registration No. 333-133184) dated April 10, 2006.                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1    |   | Indenture, dated  as of May 27, 1998, between The Neiman Marcus Group, Inc. and The  Bank of New York, as trustee, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal year  ended July 31, 2004.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2    |   | Form of  7.125% Senior Notes Due 2028, dated May 27, 1998, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Annual Report on  Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3    |   | Senior Indenture  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo  Bank, National Association, trustee, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4    |   | Senior  Subordinated Indenture dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005. |

 

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| 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*  |   | Second Amendment  to Employment Agreement by and between The Neiman Marcus Group, Inc., a  Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and  Burton M. Tansky effective January 1, 2009 incorporated herein by  reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4*  |   | Rollover  Agreement dated as of October 4, 2005 by and among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and Burton M. Tansky,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5*  |   | Amendment to  Letter Agreement effective as of January 1, 2009 by and between Neiman  Marcus, Inc., a Delaware corporation, and Burton M. Tansky incorporated  herein by reference to Neiman Marcus, Inc.’s Quarterly Report on  Form 10-Q for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6*  |   | Form of  Rollover Agreement by and among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., and certain members of management, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | Credit Agreement  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., the  Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as administrative  agent and collateral agent, Credit Suisse and Deutsche Bank Securities Inc.,  as joint lead arrangers, Banc of America Securities LLC and Goldman Sachs  Credit Partners L.P., as co-arrangers, Credit Suisse, Deutsche Bank  Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P., as joint bookrunners, and Credit Suisse, Banc of America  Securities LLC and Goldman Sachs Credit Partners L.P., as co-syndication  agents, General Electric Capital Corporation as documentation agent and the  lenders thereunder, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005. |

 

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| 10.8   |   | Credit Agreement  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., the  Subsidiary Guarantors, Credit Suisse, as administrative agent and collateral  agent, Credit Suisse and Deutsche Bank Securities Inc. as joint lead  arrangers, Banc of America Securities LLC and Goldman Sachs Credit Partners  L.P. as co-arrangers, Credit Suisse, Deutsche Bank Securities Inc., Banc of  America Securities LLC and Goldman Sachs Credit Partners L.P. as joint  bookrunners, Deutsche Bank Securities Inc., Banc of America Securities LLC  and Goldman Sachs Credit Partners L.P. as co-syndication agents and the  lenders thereunder, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.9   |   | Pledge and  Security Agreement dated as of October 6, 2005 among Newton Acquisition  Merger Sub, Inc., The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., the Subsidiary Guarantors and Deutsche Bank Trust  Company Americas, as administrative agent and collateral agent, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.10  |   | Pledge and Security  and Intercreditor Agreement dated as of October 6, 2005, among Newton  Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., the Subsidiary Guarantors and Credit Suisse, as  administrative agent and collateral agent, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11  |   | Lien  Subordination and Intercreditor Agreement dated as of October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger  Sub, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company  Americas, as revolving facility agent, and Credit Suisse, as term loan agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12  |   | Form of  First Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from The Neiman Marcus Group, Inc. to Credit  Suisse, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.13  |   | Form of  First Priority Leasehold Mortgage, Assignment of Leases and Rents, Security  Agreement and Financing Statement from The Neiman Marcus Group, Inc. to  Credit Suisse, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14  |   | Form of  Second Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from The Neiman Marcus Group, Inc. to Deutsche  Bank Trust Company Americas, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.15  |   | Form of  Second Priority Leasehold Mortgage, Assignment of Lease and Rents, Security Agreement  and Financing Statement from The Neiman Marcus Group, Inc. to Deutsche  Bank Trust Company Americas, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.16  |   | Amendment  No. 1 dated as of October 6, 2005 to the Credit Agreement dated as  of October 6, 2005 among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc.  from time to time party thereto, the Lenders thereunder, and Credit Suisse,  as administrative agent and as collateral agent for the Lenders, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.17* |   | Newton  Acquisition, Inc. Management Equity Incentive Plan, incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.18  |   | Amendment to the  Newton Acquisition, Inc. Management Equity Incentive Plan effective as  of January 1, 2009 incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.19* |   | Stock Option  Grant Agreement made as of November 29, 2005 between Newton  Acquisition, Inc. and Burton M. Tansky, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  December 5, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

 

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| 10.20* |   | Amendment to the  Stock Option Grant Agreement effective as of January 1, 2009 by and  between Neiman Marcus, Inc., a Delaware corporation, and Burton M.  Tansky incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21* |   | Form of  Stock Option Grant Agreement made as of November 29, 2005 between Newton  Acquisition, Inc. and certain eligible key employees, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.22* |   | Amendment to the  Form of Stock Option Grant Agreement effective as of January 1,  2009 by and between Neiman Marcus, Inc., a Delaware corporation, and  certain eligible key employees incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.23  |   | Amendment  No. 2 dated as of January 26, 2006 to the Credit Agreement dated as  of October 6, 2005, as amended, among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., each subsidiary of The  Neiman Marcus Group, Inc. from time to time party thereto, the Lenders  thereunder and Credit Suisse, as administrative agent and collateral agent  for the Lenders, incorporated by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated January 30,  2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.24* |   | Employment  Agreement between The Neiman Marcus Group, Inc. and Karen Katz, dated  February 1, 2006, effective as of October 6, 2005, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated February 1, 2006.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.25* |   | Amendment to  Employment Agreement effective as of January 1, 2009 by and between The  Neiman Marcus Group, Inc., a Delaware corporation, and Karen Katz  incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009.                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.26  |   | Management  Services Agreement, dated as of October 6, 2005 among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P.,  TPG GenPar III, L.P. and Warburg Pincus LLC incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 28, 2006.                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.27  |   | Registration  Rights Agreement, dated as of October 6, 2005, among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and  the “Holders” identified therein as parties thereto incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Quarterly Report on  Form 10-Q for the quarter ended January 28, 2006.                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.28  |   | Amendment  No. 1, dated as of March 28, 2006, to the Pledge and Security  Intercreditor Agreement dated as of October 6, 2005, among Neiman  Marcus, Inc., The Neiman Marcus Group, Inc., the Subsidiaries party  thereto and Credit Suisse, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated March 29, 2006.                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.29  |   | Credit Card  Program Agreement, dated as of June 8, 2005, by and among The Neiman  Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A.  and Household Corporation, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated June 8,  2005.                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.30  |   | Form of  Servicing Agreement, by and between The Neiman Marcus Group, Inc. and  HSBC Bank Nevada, N.A., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated June 8, 2005.                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.31* |   | Confidentiality,  Non-Competition and Termination Benefits Agreement by and between Bergdorf  Goodman, Inc., a New York corporation and a wholly owned subsidiary of  The Neiman Marcus Group, Inc., and James J. Gold dated May 3, 2004,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.32* |   | Amendment to the  Confidentiality, Non-Competition and Termination Benefits Agreement effective  as of January 1, 2009 by and between Bergdorf Goodman, Inc., a New  York corporation and wholly owned subsidiary of The Neiman Marcus  Group, Inc. and James J. Gold incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                       |

 

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| 10.33* |   | Form of  Amendment to the Confidentiality, Non-Competition and Termination Benefits  Agreement effective as of January 1, 2009 by and between The Neiman  Marcus Group, Inc., a Delaware corporation, and certain eligible key  employees incorporated herein by reference to Neiman Marcus, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended January 31,  2009.                                                                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.34  |   | Stockholder  Agreement, dated as of May 1, 2005, among Newton Acquisition, Inc.,  Newton Acquisition Merger Sub, Inc. and the other parties signatory  thereto, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.35* |   | Neiman  Marcus, Inc. Cash Incentive Plan amended as of January 21, 2008,  incorporated herein by reference to the Neiman Marcus, Inc. Quarterly  Report on Form 10-Q for the quarter ended April 26, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.36  |   | Management Stockholders’  Agreement dated as of October 6, 2005 between Newton  Acquisition, Inc., Newton Holding, LLC, TPG Newton III, LLC, TPG  Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg Pincus Private Equity  VIII, L.P., Warburg Pincus Netherlands Private Equity VIII C.V. I, Warburg  Pincus Germany Private Equity VIII K.G , Warburg Pincus Private Equity IX,  L.P., and the other parties signatory thereto, incorporated herein by  reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for  the fiscal year ended July 29, 2006.                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.37  |   | Amendment to the  Management Stockholders’ Agreement effective as of January 1, 2009 by  and between Neiman Marcus, Inc., a Delaware corporation, Newton Holding,  LLC, TPG Newton III, LLC, TPG Partners IV, L.P., TPG Newton Co-Invest I, LLC,  Warburg Pincus Private Equity VIII, L.P., Warburg Pincus Netherlands Private  Equity VIII C.V. I, Warburg Pincus Germany Private Equity VIII K.G., Warburg  Pincus Private Equity IX, L.P., and the other parties signatory thereto  incorporated herein by reference to Neiman Marcus, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended January 31, 2009. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.38* |   | The Neiman  Marcus Group, Inc. Key Employee Deferred Compensation Plan amended and  restated effective January 1, 2008, incorporated herein by reference to  the Neiman Marcus, Inc. Quarterly Report on Form 10-Q for the  quarter ended April 26, 2008.                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.39* |   | Amendment  No. 1 effective as of January 1, 2009 to The Neiman Marcus  Group, Inc. Key Employee Deferred Compensation Plan incorporated herein  by reference to Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.40  |   | Amendment  No. 3 dated as of October 12, 2006 to the Credit Agreement dated as  of October 6, 2005 among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from  time to time party thereto, the Lenders thereunder and Credit Suisse, as  administrative agent and collateral agent for the Lenders, incorporated by  reference to Neiman Marcus, Inc.’s Current Report on Form 8-K dated  October 17, 2006.                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.41  |   | Amendment  No. 4 dated as of February 8, 2007 to the Credit Agreement dated as  of October 6, 2005, among The Neiman Marcus Group, Inc., Neiman  Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from  time to time party thereto, the lenders thereunder, and Credit Suisse, as  administrative agent and collateral agent for the lenders incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated February 14, 2007.                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.42  |   | The Neiman  Marcus Group, Inc. Supplemental Executive Retirement Plan as amended and  restated effective January 1, 2009 incorporated herein by reference to  Neiman Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter  ended January 31, 2009.                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.43  |   | The Neiman  Marcus Group, Inc. Defined Contribution Supplemental Executive  Retirement Plan, as amended and restated effective as of January 1,  2008, incorporated herein by reference to the Neiman Marcus, Inc. Annual  Report on Form 10-K for the fiscal year ended August 2, 2008.                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.44  |   | Amendment  No. 1 effective January 1, 2009 to the Amended and Restated Neiman  Marcus Group, Inc. Defined Contribution Supplemental Executive  Retirement Plan incorporated herein by reference to Neiman  Marcus, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 31, 2009.                                                                                                                                                                                                                                                                                                                        |

 

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| 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 and Duly Authorized  Officer

(principal accounting officer) |       | June 10, 2009 |
| T. Dale Stapleton     |       |                                                                                       |       |
|                  |       |                                                                                       |       |

 

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