10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended November 1, 2008

OR

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

Commission file no. 333-133184-12

Neiman Marcus, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

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

NEIMAN MARCUS, INC.

INDEX

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

NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

See Notes to Condensed Consolidated Financial Statements.

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NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

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

See Notes to Condensed Consolidated Financial Statements.

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NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

See Notes to Condensed Consolidated Financial Statements.

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NEIMAN MARCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.Basis of Presentation

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 2, 2008.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods.  Additionally, the accompanying unaudited condensed consolidated financial statements include the amounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated.

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

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

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

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

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

Use of Estimates.  We are required to make estimates and assumptions about future events in preparing financial statements in conformity with generally accepted accounting principles.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the unaudited condensed consolidated financial statements.  While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited condensed consolidated financial statements.

We believe the following critical accounting policies, among others, encompass the more significant judgments and estimates used in the preparation of our financial statements:

·Recognition of revenues;

·Valuation of merchandise inventories, including determination of original 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;

·Measurement of liabilities related to our loyalty programs;

·Recognition of income taxes; and

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

Recent Accounting Pronouncements.  As more fully explained in Note 4, we adopted in the first quarter of fiscal year 2009 Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure certain assets and liabilities.  SFAS 157 applies whenever another standard requires or permits assets or liabilities to be measured at fair value.  The standard does not expand the use of fair value to any new circumstances.

In February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least 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 of adopting FSP 157-2 on our consolidated financial statements.

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

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed and non-controlling interests in business combinations.  In addition, SFAS 141(R) changes the accounting treatment for certain acquisition-related items, including requirements to expense acquisition-related costs as incurred, expense restructuring costs associated with an acquired business and recognize post-acquisition changes in tax uncertainties associated with a business combination as a component of tax expense.  SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after December 15, 2008, or our fiscal year ending July 31, 2010.  Generally, the effect of SFAS 141(R) will depend 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 SFAS 141(R).  We have not yet evaluated the impact, if any, of adopting SFAS 141(R) on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161).  SFAS 161 enhances current disclosures related to derivative instruments and hedging activities to provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, or our second fiscal quarter ending January 31, 2009.  We have not yet evaluated the impact, if any, of adopting the disclosure requirements of SFAS 161.

2.Goodwill and Intangible Assets, Net

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

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

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

5

of our tradenames are based, in part, on our estimates of royalties which could be derived from the licensing of such tradenames to third parties.  To the extent that our estimates are not realized, future assessments could result in impairment charges.

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

Customer lists are amortized 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 amortized straight-line over the remaining lives of the leases, ranging from 6 to 49 years (weighted average life of 33 years).  Total estimated amortization of all acquisition-related intangible assets for the next five fiscal years is currently estimated as follows (in thousands):

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

3.Long-term Debt

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

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

Senior Secured Asset-Based Revolving Credit Facility.  NMG’s senior secured Asset-Based Revolving Credit Facility provides financing of up to $600.0 million, subject to a borrowing base equal to at any time the lesser of 80% of eligible inventory (valued at the lower of cost or market value) and 85% of net orderly liquidation value of the eligible inventory, less certain reserves.  The Asset-Based Revolving Credit 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 no obligation to provide any such additional commitments, and any increase in commitments will be subject to customary conditions precedent. NMG’s ability to borrow under any increased commitments would still be limited by the amount of the borrowing base.

As of November 1, 2008, NMG had $576.3 million of unused borrowing availability under the Asset-Based Revolving Credit Facility based on a borrowing base of over $600.0 million and after giving effect to $23.7 million used for letters of credit.  The principal amount of the loans outstanding is due and payable in full on October 6, 2010.

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

All obligations under the Asset-Based Revolving Credit Facility are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries (subsidiary guarantors). As of November 1, 2008, NMG’s non-guarantor subsidiaries had immaterial liabilities and the assets of NMG’s non-guarantor subsidiaries aggregated approximately $1.1 million. All obligations

6

under NMG’s Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of the Company, NMG and the subsidiary guarantors.  The Asset-Based Revolving Credit Facility contains a number of customary negative covenants and restrictions, but does not require NMG to comply with any financial ratio maintenance covenants.  For a more detailed description of NMG’s Asset-Based Revolving Credit Facility, refer to our Annual Report 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 related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility.  NMG voluntarily repaid $100.0 million principal amount of the loans under its Senior Secured Term Loan Facility in fiscal year 2006 and $250 million in fiscal year 2007.

At November 1, 2008, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 4.57% at November 1, 2008, which margin is subject to adjustment based on contractually defined debt coverage ratios.  At November 1, 2008, the applicable margin with respect to base rate borrowings was 0.75% and the applicable margin with respect to LIBOR borrowings was 1.75%.  Based upon current operating performance expectations, we anticipate the applicable margin with respect to LIBOR borrowings will increase by 0.25% beginning in December 2008.

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

NMG may voluntarily prepay outstanding loans under the Senior Secured Term Loan Facility at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the Senior Secured Term Loan Facility. The principal amount of the loans outstanding is due and payable in full on April 6, 2013.

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

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

2028 Debentures.  In May 1998, NMG issued $125.0 million aggregate principal amount of its 7.125% 2028 Debentures. NMG equally and ratably secures its 2028 Debentures by a first lien security interest on certain collateral subject to liens granted under NMG’s Senior Secured Credit Facilities. The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company. NMG’s 2028 Debentures mature on June 1, 2028. For a more detailed description of the 2028 Debentures, refer to our Annual Report on Form 10-K for the fiscal year ended August 2, 2008.

The fair value of the 2028 Debentures at November 1, 2008 was approximately $106.3 million.

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

For any interest payment period through October 15, 2010, NMG may, at its option, elect to pay interest on the Senior Notes entirely in cash (Cash Interest) or entirely by increasing the principal amount of the outstanding Senior Notes or by issuing additional Senior Notes (PIK Interest). Cash Interest on the Senior Notes accrues at the rate of 9% per annum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum. To date, NMG has paid all interest obligations in cash. After October 15, 2010,

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

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

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

The fair value of NMG’s Senior Notes at November 1, 2008 was approximately $476.0 million.

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

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

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

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

Maturities of Long-Term Debt.  At November 1, 2008, annual maturities of long-term debt during the next five fiscal years and thereafter are as follows (in millions):

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

The above table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.

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Interest expense.  The significant components of interest expense are as follows:

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

4.Fair Value Measurements

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

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

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

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

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

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

We use derivative financial instruments to help manage our interest rate risk.  Effective December 6, 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. The interest rate swap agreements terminate after five years.  The fair values of the interest rate swaps are estimated using industry standard valuation models using market-based observable inputs including interest rate curves (Level 2).  At November 1, 2008, the fair value of NMG’s interest rate swap agreements was a loss of approximately $47.7 million, which amount is included in other long-term liabilities.

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

As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.535% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.618%.

5.Employee Benefit Plans

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

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

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

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

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

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

·Our matching contributions vest to employees in two years as compared to 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 deferral rate of 3% once eligibility requirements have been met.

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

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

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Costs of Benefits.  The components of the expenses incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:

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

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

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

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

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

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

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

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during the first quarter of fiscal year 2009.  Assuming no significant recovery in stock prices prior to the end of fiscal year 2009, we will be required to increase our recorded liability for the net underfunded status of our Pension Plan and we would expect pension expense in fiscal year 2010 to increase from fiscal year 2009.  Further, a decline in value of our pension assets could necessitate accelerated and higher cash contributions in the near-term to our Pension Plan.  As the determinations of our liability at the end of fiscal year 2009, our expense for fiscal year 2010, and future required contributions to the Pension Plan are contingent upon the valuation of our Pension Plan assets as of July 31, 2009, such amounts are not currently quantifiable.

6.Income Taxes

We adopted the provisions of 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 and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The cumulative effect of adopting FIN 48 resulted in a net increase to our accruals for uncertain tax positions of $9.1 million for the derecognition of certain tax benefits previously recorded. This increase to our accruals was offset by a corresponding increase to goodwill as these uncertainties existed at the time of the Acquisition.  At August 2, 2008, the gross amount of unrecognized tax benefits was $21.3 million, of which $1.7 million would impact our effective tax rate, if recognized.  We classify interest and penalties as a component of income tax expense and our liability for accrued interest and penalties was $9.5 million as of August 2, 2008. There were no material changes to our unrecognized tax benefits during the first quarter of fiscal year 2009.

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions.  The IRS is now examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as of November 1, 2008 are sufficient to cover any potential assessments to be made by the IRS upon the completion of their examinations. We will continue to monitor the progress of the IRS examinations and review our recorded tax liabilities for potential audit assessments.  With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2004.  During the fourth quarter of fiscal year 2008, we entered into a negotiated settlement with a state tax authority regarding a state non-filing position which resulted in a reduction to our gross unrecognized tax benefits of $7.2 million and a corresponding decrease to goodwill of $3.0 million related to the resolution of uncertainties that existed at the time of the Acquisition. We believe it is reasonably possible that additional adjustments in the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities.  At this time, we do not believe such adjustments will have a material impact on our consolidated financial statements.

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7.Stock-Based Compensation

The Company has approved equity-based management arrangements which authorize equity awards to be granted to certain management employees for up to 87,992.0 shares of the common stock of the Company.  Options generally vest over four to five years and expire 10 years from the date of grant.

A summary of the status of our stock option plan as of November 1, 2008, August 2, 2008 and October 27, 2007 and changes during the periods ended on these dates is as follows:

	November 1, 2008			August 2, 2008				October 27, 2007
	Shares	Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding at beginning of period	83,146.6	$	1,553	83,634.3		$	1,430	83,634.3	$	1,430
Granted	—	—		260.0		2,684		—	—
Exercised	—	—		—		—		—	—
Forfeited	—	—		(747.7	)	1,597		—	—
Outstanding at end of period	83,146.6	$	1,553	83,146.6		$	1,553	83,634.3	$	1,430
Options exercisable at end of period	54,084.1	$	1,418	46,684.4		$	1,375	37,208.1	$	1,290

The exercise price of approximately 50% of our options escalate at a 10% compound rate per year until the earlier to occur of (i) exercise, (ii) the fifth anniversary of the 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 an unaffiliated entity, the exercise price will cease to accrete at the time of the sale with respect to a pro rata portion of the accreting options.

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

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

	Fiscal Year 2008 Grants
	Fair Value Options			Accreting Exercise Price Options
Options Granted	130.0			130.0
Exercise Price at November 1, 2008	$	2,684		$	2,684
Term	5			5
Volatility	30.0		%	30.0		%
Risk-Free Rate	3.5		%	3.5		%
Dividend Yield	—			—
Fair Value	$	882		$	433

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

We recognize compensation expense for stock options on a straight-line basis over the vesting period.  We recognized non-cash stock compensation expense of $1.6 million in the first quarter of fiscal year 2009 and $1.5 million in the first quarter of fiscal year 2008, which is included in selling, general and administrative expenses. At November 1, 2008, unearned non-cash stock-based compensation that we expect to recognize as expense over the next 5 years aggregates approximately $10.3 million.

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8.Transactions with Sponsors

Pursuant to a management services agreement with affiliates of the Sponsors, and in exchange for on-going consulting and management advisory services that are provided to us by the Sponsors and their affiliates, affiliates of the Sponsors receive an aggregate annual management fee equal to the lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10 million. Affiliates of the Sponsors also receive reimbursement for out-of-pocket expenses incurred by them or their affiliates in connection with services provided pursuant to the agreement. These management fees are payable quarterly in arrears.  We recorded management fees of $2.5 million during the first quarter of fiscal year 2009 and $2.8 million during the first quarter of fiscal year 2008, which are included in selling, general and administrative expenses in the condensed consolidated statements of earnings.

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

9.Income from Credit Card Program

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

On April 21, 2008, we entered into an amendment to the Program Agreement, dated as of June 8, 2005, with HSBC. The amendment, among other things, provides for 1) the allocation between HSBC and NMG of additional income, if any, to be generated from the credit card program as a result of certain changes made to the Program Agreement and 2) the allocation of certain credit card losses between HSBC and NMG (subject to a contractual limit on the losses allocable to NMG).  As a result of current higher delinquencies and losses on consumer indebtednesses in light of current economic conditions, we recorded a charge of approximately $2.1 million in the first quarter of fiscal year 2009 for our allocable portion of credit card losses, which is included as a reduction to HSBC Program Income.  As of November 1, 2008, our reserve for credit card losses aggregated $2.9 million.

10.Commitments and Contingencies

Long-term Incentive Plan.  The Company has a long-term incentive plan (Long-term Incentive Plan) that provides for a cash incentive payable upon a change of control, as defined, subject to the attainment of certain performance objectives to certain employees.  Performance objectives and targets are based on cumulative EBITDA percentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performance period will be credited to a book account and will earn interest at a contractually defined annual rate until the award is paid.  Awards will be paid within 30 days of a change of control or the first day there is a public market of at least 20% of total outstanding common stock.  As of November 1, 2008, the vested participant balance in the Long-Term Incentive Plan aggregated $3.7 million.

Cash Incentive Plan.  The Company also has a cash incentive plan (Cash Incentive Plan) to aid in the retention of certain key executives.  The Cash Incentive Plan provides for the creation of a $14 million cash bonus pool. Each participant in the Cash Incentive Plan will be entitled to a cash bonus upon the earlier to occur of a change of control or an initial public offering, as defined in the Cash Incentive Plan, provided that the internal rate of return to the Sponsors is positive.

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

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11.Accumulated Other Comprehensive (Loss) Income

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

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

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

12.Segment Reporting

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

Operating earnings for the segments include 1) revenues, 2) cost of sales, 3) direct selling, general, and administrative expenses, 4) other direct operating expenses, 5) income from credit card program and 6) depreciation expense for the respective segment.  Items not allocated to our operating segments include those items not considered by management in measuring the assets and profitability of our segments. These amounts include 1) corporate expenses including, but not limited to, treasury, investor relations, legal and finance support services, and general corporate management, 2) charges related to the application of purchase accounting adjustments made in connection with the Acquisition including amortization of customer lists and favorable lease commitments and other non-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 operating management and the chief operating decision maker in assessing segment operating performance.  The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (except with respect to purchase accounting adjustments not allocated to the operating segments).

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The following tables set forth the information for our reportable segments:

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

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

(1) For the first quarter of fiscal year 2008, other income represents a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007.

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13.Condensed Consolidating Financial Information (with respect to NMG’s obligations under the Senior Notes and the Senior Subordinated Notes)

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

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

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

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	August 2, 2008
(in thousands)	Company		NMG		Guarantor Subsidiaries			Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	238,204	$	601		$	375	$	—		$	239,180
Merchandise inventories	—		884,808		93,236			—		—			978,044
Other current assets	—		137,738		8,697			—		—			146,435
Total current assets	—		1,260,750		102,534			375		—			1,363,659
Property and equipment, net	—		939,522		134,940			832		—			1,075,294
Goodwill and intangible assets, net	—		1,889,445		2,153,172			—		—			4,042,617
Other assets	—		75,249		—			—		—			75,249
Investments in subsidiaries	1,676,519		2,288,802		—			—		(3,965,321		)	—
Total assets	$	1,676,519	$	6,453,768	$	2,390,646		$	1,207	$	(3,965,321	)	$	6,556,819
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	311,994	$	33,593		$	53	$	—		$	345,640
Accrued liabilities	—		289,352		69,930			117		—			359,399
Other current liabilities	—		1,695		—			—		—			1,695
Total current liabilities	—		603,041		103,523			170		—			706,734
Long-term liabilities:
Long-term debt	—		2,946,102		—			—		—			2,946,102
Deferred income taxes	—		929,970		—			—		—			929,970
Other long-term liabilities	—		298,136		(642		)	—		—			297,494
Total long-term liabilities	—		4,174,208		(642		)	—		—			4,173,566
Total shareholders’ equity	1,676,519		1,676,519		2,287,765			1,037		(3,965,321		)	1,676,519
Total liabilities and shareholders’ equity	$	1,676,519	$	6,453,768	$	2,390,646		$	1,207	$	(3,965,321	)	$	6,556,819

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

19

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

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

20

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

	Thirteen weeks ended October 27, 2007
(in thousands)	Company			NMG			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net earnings (loss)	$	78,758		$	78,758		$	97,237		$	217		$	(176,212	)	$	78,758
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expense	—			48,895			7,687			103			—			56,685
Deferred income taxes	—			(9,180		)	—			—			—			(9,180		)
Gain on curtailment of defined benefit retirement obligations	—			(32,450		)	—			—			—			(32,450		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			7,612			559			—			—			8,171
Intercompany royalty income payable (receivable)	—			56,995			(56,995		)	—			—			—
Equity in earnings of subsidiaries	(78,758		)	(97,454		)	—			—			176,212			—
Changes in operating assets and liabilities, net	—			(68,554		)	(46,729		)	(525		)	—			(115,808		)
Net cash (used for) provided by operating activities	—			(15,378		)	1,759			(205		)	—			(13,824		)
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(43,652		)	(2,558		)	172			—			(46,038		)
Purchases of short-term investments	—			(10,000		)	—			—			—			(10,000		)
Sales of short-term investments	—			10,000			—			—			—			10,000
Net cash (used for) provided by investing activities	—			(43,652		)	(2,558		)	172			—			(46,038		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(789		)	—			—			—			(789		)
Net cash used for financing activities	—			(789		)	—			—			—			(789		)
CASH AND CASH EQUIVALENTS
Decrease during the period	—			(59,819		)	(799		)	(33		)	—			(60,651		)
Beginning balance	—			139,333			1,196			678			—			141,207
Ending balance	$	—		$	79,514		$	397		$	645		$	—		$	80,556

21

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

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

The following condensed consolidating financial information represents the financial information of Neiman Marcus, Inc. and its non-guarantor subsidiaries, prepared on the equity basis of accounting. The information is presented in accordance with the requirements of Rule 3-10 under the Securities and Exchange Commission’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities.

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

22

	August 2, 2008
(in thousands)	Company		NMG		Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	238,204	$	976		$	—		$	239,180
Merchandise inventories	—		884,808		93,236			—			978,044
Other current assets	—		137,738		8,697			—			146,435
Total current assets	—		1,260,750		102,909			—			1,363,659
Property and equipment, net	—		939,522		135,772			—			1,075,294
Goodwill and intangible assets, net	—		1,889,445		2,153,172			—			4,042,617
Other assets	—		75,249		—			—			75,249
Investments in subsidiaries	1,676,519		2,288,802		—			(3,965,321		)	—
Total assets	$	1,676,519	$	6,453,768	$	2,391,853		$	(3,965,321	)	$	6,556,819
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	311,994	$	33,646		$	—		$	345,640
Accrued liabilities	—		289,352		70,047			—			359,399
Other current liabilities	—		1,695		—			—			1,695
Total current liabilities	—		603,041		103,693			—			706,734
Long-term liabilities:
Long-term debt	—		2,946,102		—			—			2,946,102
Deferred income taxes	—		929,970		—			—			929,970
Other long-term liabilities	—		298,136		(642		)	—			297,494
Total long-term liabilities	—		4,174,208		(642		)	—			4,173,566
Total shareholders’ equity	1,676,519		1,676,519		2,288,802			(3,965,321		)	1,676,519
Total liabilities and shareholders’ equity	$	1,676,519	$	6,453,768	$	2,391,853		$	(3,965,321	)	$	6,556,819

23

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

24

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

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

25

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

	Thirteen weeks ended October 27, 2007
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net earnings (loss)	$	78,758		$	78,758		$	97,454		$	(176,212	)	$	78,758
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expense	—			48,895			7,790			—			56,685
Deferred income taxes	—			(9,180		)	—			—			(9,180		)
Gain on curtailment of defined benefit retirement obligations	—			(32,450		)	—			—			(32,450		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			7,612			559			—			8,171
Intercompany royalty income payable (receivable)	—			56,995			(56,995		)	—			—
Equity in earnings of subsidiaries	(78,758		)	(97,454		)	—			176,212			—
Changes in operating assets and liabilities, net	—			(68,554		)	(47,254		)	—			(115,808		)
Net cash (used for) provided by operating activities	—			(15,378		)	1,554			—			(13,824		)
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(43,652		)	(2,386		)	—			(46,038		)
Purchases of short-term investments	—			(10,000		)	—			—			(10,000		)
Sales of short-term investments	—			10,000			—			—			10,000
Net cash used for investing activities	—			(43,652		)	(2,386		)	—			(46,038		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(789		)	—			—			(789		)
Net cash used for financing activities	—			(789		)	—			—			(789		)
CASH AND CASH EQUIVALENTS
Decrease during the period	—			(59,819		)	(832		)	—			(60,651		)
Beginning balance	—			139,333			1,874			—			141,207
Ending balance	$	—		$	79,514		$	1,042		$	—		$	80,556

26

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

EXECUTIVE OVERVIEW

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

Overview

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

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

Factors Affecting Our Results

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

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

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

Our revenues can be affected by the following factors:

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

·changes in the level of full-price sales;

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

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

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

·general economic conditions.

In addition, our revenues are 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 consists of the following components:

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

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

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

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

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold.  We received vendor allowances of $12.1 million, or 1.2% of revenues, for the first quarter of fiscal year 2009 and $12.5 million, or 1.1% of revenues, for the first quarter of fiscal year 2008.

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

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

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

·factors affecting revenues generally;

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

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

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

Advertising costs incurred by our Specialty Retail segment consist primarily of print media costs related to promotional materials mailed to our customers, while advertising costs incurred by our Direct Marketing operations relate to the production, printing and distribution of our print catalogs and the production of the photographic content on our websites, as well as online marketing costs. We receive advertising allowances from certain of our merchandise vendors. Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor’s merchandise in connection with our various advertising programs, primarily catalogs and other print media. As a result, these allowances are recorded as a reduction of our advertising costs when earned. Vendor allowances earned and recorded as a reduction to selling, general and administrative expenses aggregated approximately $23.9 million, or 2.4% of revenues, for the first quarter of fiscal year 2009 and $28.2 million, or 2.5% of revenues, for the first quarter of fiscal year 2008.

We also receive allowances from certain merchandise vendors in conjunction with compensation programs for employees who sell the vendor’s merchandise. These allowances are netted against the related compensation expense that we incur. Amounts received from vendors related to compensation programs were $17.9 million, or 1.8% of revenues, for the first quarter of fiscal year 2009 and $17.9 million, or 1.6% of revenues, for the first quarter of fiscal year 2008.

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

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

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

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

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

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

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

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

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

·decreased for our allocable share of certain credit card losses generated from the credit card portfolio (subject to a contractual limit).

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Seasonality

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

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

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

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

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

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OPERATING RESULTS

Performance Summary

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

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

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

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

(1)  For the first quarter of fiscal year 2008, other income represents a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007.

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

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

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First Quarter Fiscal Year 2009 Summary

We continue to experience a challenging economic and retail environment, and expect these conditions will continue for an extended period of time.  Consistent with the significant declines in overall macroeconomic factors, capital markets and consumer confidence that accelerated throughout the first quarter of fiscal year 2009, most notably in October, customer demand was well below our initial expectations and the prior year.  The current softness in customer demand exists across all geographic areas, all distribution channels and all merchandise categories, particularly the apparel and home categories.  We believe affluent customers are continuing to react to the conditions mentioned above.  However, based on our experience in previous business cycles, we believe our customers’ buying levels will increase once the economic environment improves.

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

·stimulate sales through additional promotional and other events;

·reduce inventory levels and purchases;

·implement expense control initiatives; and

·review future capital expenditures and eliminate certain projects.

A summary of our operating results for the first quarter of fiscal year 2009 is as follows:

·Revenues—Our revenues for the first quarter of fiscal year 2009 were $985.8 million, a decrease of 12.9% as compared to the first quarter of fiscal year 2008. This decrease was attributable to a decrease in comparable revenues of 14.5%.  Comparable revenues decreased in the first quarter of fiscal year 2009 for both our Specialty Retail stores and Direct Marketing operations.

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

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

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

·Selling, general and administrative expenses (excluding depreciation)—SG&A represented 24.6% of revenues in the first quarter of fiscal year 2009 and 24.0% of revenues in the first quarter of fiscal year 2008. The increase in SG&A as a percentage of revenues was primarily due to the deleveraging of payroll costs and certain benefits expenses on the significant decrease in revenues for the quarter.  We are implementing both short-term expense control initiatives and longer-term adjustments to our cost structure.  We continue to review and evaluate additional initiatives to reduce our cost structure.

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

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

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

Thirteen Weeks Ended November 1, 2008 Compared to Thirteen Weeks Ended October 27, 2007

Revenues.  Our revenues for the first quarter of fiscal year 2009 of $985.8 million decreased $146.4 million, or 12.9%, from $1,132.2 million in the first quarter of fiscal year 2008.  The decrease in revenues was due to decreases in comparable revenues for both our Specialty Retail stores and Direct Marketing operations as a result of the challenging economic environment.  New stores generated sales of $17.8 million for the first quarter of fiscal year 2009.

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

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

Cost of goods sold including buying and occupancy costs (excluding depreciation).  COGS for the first quarter of fiscal year 2009 were 62.7% of revenues compared to 58.9% of revenues for the first quarter of fiscal year 2008.

The increase in COGS as a percentage of revenues in the first quarter of fiscal year 2009 was primarily due to decreased product margins generated by both our Specialty Retail stores and Direct Marketing operations of approximately 2.8% of revenues.  The decrease in COGS as a percentage of revenues reflects the lower level of customer demand we continue to experience.  As a result, we generated a lower level of full-price sales in the first quarter of fiscal year 2009 and incurred higher markdowns and sales promotions costs to liquidate on-hand inventories held in excess of sales trends.  Additionally, buying and occupancy costs increased 1.0% of revenues primarily due to the deleveraging of payroll and rent expenses on the lower level of revenues generated.

Selling, general and administrative expenses (excluding depreciation).  SG&A expenses were 24.6% of revenues in the first quarter of fiscal year 2009 compared to 24.0% of revenues in the prior year fiscal quarter.

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

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

·a lower level of advertising and promotions costs incurred in the first quarter of fiscal year 2009 of approximately 0.2% of revenues.  During the first quarter of the prior year, we incurred incremental advertising and promotions costs in connection with the celebration of the 100^th anniversary of Neiman Marcus in October 2007.  This increase was partially offset in the first quarter of fiscal year 2009 by an increase in advertising costs as a percentage of revenues for our Direct Marketing operations, primarily related to the deleveraging of catalog production costs on lower catalog revenues.

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

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

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

Other income.  In the first quarter of fiscal year 2008, we recorded a one-time pension curtailment gain of $32.5 million, or 2.9% of revenues, as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007.

Segment operating earnings.  Segment operating earnings for our Specialty Retail stores and Direct Marketing segments do not reflect the impact of adjustments to revalue our assets and liabilities to estimated fair value at the Acquisition date.

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

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

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

·net decreases in advertising and promotion costs; and

·lower estimated annual incentive compensation costs.

Operating earnings for Direct Marketing were $19.4 million, or 12.2% of Direct Marketing revenues, in the first quarter of fiscal year 2009 compared to $23.2 million, or 13.6% of Direct Marketing revenues, for the prior year fiscal quarter.  The decrease in operating margin as a percentage of revenues for Direct Marketing was primarily the result of 1) a decrease in margins primarily due to higher markdowns and 2) the deleveraging of a significant portion of our expenses on the lower level of sales, including catalog production costs.

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

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Interest expense, net.  Net interest expense was $57.8 million, or 5.9% of revenues, in the first quarter of fiscal year 2009 and $61.2 million, or 5.4% of revenues, for the prior year fiscal quarter.  The decrease in interest expense is primarily due to the decrease in interest rates on our variable-rate indebtedness.  The significant components of interest expense are as follows:

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

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

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

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions.  The IRS is now examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as of November 1, 2008 are sufficient to cover any potential assessments to be made by the IRS upon the completion of their examinations. We will continue to monitor the progress of the IRS examinations and review our recorded tax liabilities for potential audit assessments.  With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2004.  During the fourth quarter of fiscal year 2008, we entered into a negotiated settlement with a state tax authority regarding a state non-filing position which resulted in a reduction to our gross unrecognized tax benefits of $7.2 million and a corresponding decrease to goodwill of $3.0 million related to the resolution of uncertainties that existed at the time of the Acquisition. We believe it is reasonably possible that additional adjustments in the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities.  At this time, we do not believe such adjustments will have a material impact on our consolidated financial statements.

Non-GAAP Financial Measure – EBITDA and Adjusted EBITDA

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

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

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

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

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

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

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

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

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

(1)For the first quarter of fiscal year 2008, operating earnings and EBITDA include a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze certain Pension and SERP benefits as of December 31, 2007.

Inflation and Deflation

We believe changes in revenues and net earnings that have resulted from inflation or deflation have not been material during the periods presented. In recent years, we have experienced certain inflationary conditions related to 1) increases in product costs due primarily to changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and 2) increases in SG&A. We purchase a substantial portion of our inventory from foreign suppliers whose costs are affected by the fluctuation of their local currency against the dollar or who price their merchandise in currencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in numerous currencies and, generally, by fluctuations in the U.S. dollar relative to such currencies. Accordingly, changes in the value of the dollar relative to foreign currencies may increase our cost of goods sold and if we are unable to pass such cost increases to our customers, our gross margins, and ultimately our earnings, would decrease. Foreign currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future. We attempt to offset the effects of inflation through price increases and control of expenses, although our ability to increase prices may be limited by competitive factors. We attempt to offset the effects of merchandise deflation, which has occurred on a limited basis in recent years, through control of expenses. There is no assurance, however, that inflation or deflation will not materially affect our operations in the future.

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LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements consist principally of:

·the funding of our merchandise purchases;

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

·debt service requirements;

·income tax payments; and

·obligations related to our Pension Plan.

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

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

We believe that operating cash flows, available vendor financing and amounts available pursuant to our senior secured Asset-Based Revolving Credit Facility will be sufficient to fund our operations, anticipated capital expenditure requirements, debt service obligations, contractual obligations and commitments and Pension Plan funding requirements through the end of fiscal year 2009.

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

Net cash used for investing activities, representing capital expenditures, was $33.5 million in the first quarter of fiscal year 2009 and $46.0 million in the first quarter of fiscal year 2008.  We incurred significant capital expenditures in the first quarter of fiscal year 2009 related to the construction of new stores in Topanga (the greater Los Angeles area) and Bellevue (suburban Seattle). We incurred capital expenditures in the first quarter of fiscal year 2008 related to the construction of new stores in Natick and Topanga and the remodel of our Atlanta store. We opened our Natick store in September 2007 and our Topanga store in September 2008. In light of current economic conditions and delays in certain real estate projects, we currently project gross capital expenditures for fiscal year 2009 to be approximately $115 to $125 million compared to capital expenditures of $183 million in fiscal year 2008.  Net of developer contributions, capital expenditures for fiscal year 2009 are projected to be approximately $100 to $110 million.

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

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Financing Structure at November 1, 2008

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

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

As of November 1, 2008, NMG had $576.3 million of unused borrowing availability under the Asset-Based Revolving Credit Facility based on a borrowing base of over $600.0 million and after giving effect to $23.7 million used for letters of credit.

See Note 3 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the Asset-Based Revolving Credit Facility.

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

At November 1, 2008, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 4.57% at November 1, 2008, which margin is subject to adjustment based on contractually defined debt coverage ratios.  At November 1, 2008, the applicable margin with respect to base rate borrowings was 0.75% and the applicable margin with respect to LIBOR borrowings was 1.75%.  Based upon current operating performance expectations, we anticipate the applicable margin with respect to LIBOR borrowings will increase by 0.25% beginning in December 2008.

See Note 3 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description 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% 2028 Debentures.  NMG’s 2028 Debentures mature on June 1, 2028.

See Note 3 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the 2028 Debentures.

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

See Note 3 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the Senior Notes.

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

See Note 3 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the Senior Subordinated Notes.

Interest Rate Swaps.  NMG uses derivative financial instruments to help manage our interest rate risk. Effective December 6, 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. The interest rate swap agreements terminate after five years.  At November 1, 2008, the fair value of NMG’s interest rate swap agreements was a loss of approximately $47.7 million, which amount is included in other long-term liabilities.

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As of the effective date, NMG designated the interest rate swaps as cash flow hedges. As a result, changes in the fair value of NMG’s swaps are recorded subsequent to the effective date as a component of accumulated other comprehensive (loss) income.

As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.535% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.618%.

OTHER MATTERS

Factors That May Affect Future Results

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

Political and General Economic Conditions

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

·terrorist activities in the United States and elsewhere;

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

Customer Considerations

·changes in the demographic or retail environment;

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

·changes in consumer preferences or fashion trends;

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

Merchandise Procurement and Supply Chain Considerations

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

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

·changes in foreign currency exchange or inflation rates;

·significant increases in paper, printing and postage costs;

Industry and Competitive Factors

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

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·seasonality of the retail business;

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

·delays in anticipated store openings and renovations;

·our success in enforcing our intellectual property rights;

Employee Considerations

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

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

Legal and Regulatory Issues

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

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

Leverage Considerations

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

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

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

Other Factors

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

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

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

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

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions about future events.  These estimates and assumptions affect amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the Condensed Consolidated Financial Statements.  Our current estimates are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates we used in preparing the accompanying Condensed Consolidated Financial Statements.

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

Recent Accounting Pronouncements.  As more fully explained in Note 4, we adopted in the first quarter of fiscal year 2009 Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure certain assets and liabilities.  SFAS 157 applies whenever another standard requires or permits assets or liabilities to be measured at fair value.  The standard does not expand the use of fair value to any new circumstances.

In February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least 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 of adopting FSP 157-2 on our consolidated financial statements.

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

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)), which addresses the recognition and accounting for identifiable assets acquired, liabilities assumed and non-controlling interests in business combinations.  In addition, SFAS 141(R) changes the accounting treatment for certain acquisition-related items, including requirements to expense acquisition-related costs as incurred, expense restructuring costs associated with an acquired business and recognize post-acquisition changes in tax uncertainties associated with a business combination as a component of tax expense.  SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after December 15, 2008, or our fiscal year ending July 31, 2010.  Generally, the effect of SFAS 141(R) will depend 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 SFAS 141(R).  We have not yet evaluated the impact, if any, of adopting SFAS 141(R) on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161).  SFAS 161 enhances current disclosures related to derivative instruments and hedging activities to provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, or our second fiscal quarter ending January 31, 2009.  We have not yet evaluated the impact, if any, of adopting the disclosure requirements of SFAS 161.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s financial instruments represents the potential loss arising from adverse changes in interest rates. The Company does not enter into derivative financial instruments for trading purposes. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities. The Company is exposed to interest rate risk through its borrowing activities, which are described in Note 3 to our condensed consolidated financial statements.

As of November 1, 2008, NMG had no borrowings outstanding under its Asset-Based Revolving Credit Facility that bears interest at floating rates. Future borrowings under NMG’s Asset-Based Revolving Facility, to the extent of outstanding borrowings, would be affected by interest rate changes.

At November 1, 2008, NMG had $1,625.0 million of debt under its Senior Secured Term Loan Facility issued in connection with the Acquisition that bears interest at floating rates.

NMG uses derivative financial instruments to help manage our interest rate risk.  Effective December 6, 2005, NMG  entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. The interest rate swap agreements terminate after five years.  As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.535% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.618%.

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With respect to outstanding borrowings in excess of $1,000.0 million on the Senior Secured Term Loan Facility, such borrowings are at floating rates.  A 1% increase in these floating rates would increase annual interest expense by approximately $6.3 million.

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

ITEM 4.  CONTROLS AND PROCEDURES

a.  Disclosure Controls and Procedures.

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of November 1, 2008, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely basis within the time periods specified in the Securities and Exchange Commission’s rules and forms.

b.  Changes in Internal Control over Financial Reporting.

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. No change occurred in our internal controls over financial reporting during the quarter ended November 1, 2008 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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NEIMAN MARCUS, INC.

PART II

ITEM 1.           LEGAL PROCEEDINGS

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

Note 10 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference as if fully restated herein.  Note 10 contains forward-looking statements that are subject to the risks and uncertainties discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results.”

ITEM 1A.        RISK FACTORS

Risks Related to Our Structure and NMG’s Indebtedness

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

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

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

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

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

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

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

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

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

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

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

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In addition, NMG’s interest expense could increase if interest rates increase because the entire amount of the indebtedness under the senior secured credit facilities bears interest at floating rates.  As of November 1, 2008, NMG had approximately $1,625.0 million principal amount of floating rate debt, consisting of outstanding borrowings under the Senior Secured Term Loan Facility.  NMG also had at that date approximately $576.3 million of unused floating rate debt borrowing capacity available under the Asset-Based Revolving Credit Facility, based on a borrowing base of over $600.0 million after giving effect to $23.7 million used for letters of credit.  Effective December 6, 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness.

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

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

If NMG does not generate sufficient cash flow from operations to satisfy the debt service obligations, NMG may have to undertake alternative financing plans, such as refinancing or restructuring its indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital.  Our ability to restructure or refinance NMG’s debt will depend on the condition of the capital markets and our financial condition at such time.  Any refinancing of NMG’s debt could be at higher interest rates and may require it to comply with more onerous covenants, which could further restrict its business operations.  The terms of existing or future debt instruments may restrict NMG from adopting some of these alternatives.  In addition, any failure to make payments of interest and principal on NMG’s outstanding indebtedness on a timely basis would likely result in a reduction of NMG’s credit rating, which could harm its ability to incur additional indebtedness on acceptable terms.

Contractual limitations on NMG’s ability to execute any necessary alternative financing plans could exacerbate the effects of any failure to generate sufficient cash flow to satisfy its debt service obligations.  The Asset-Based Revolving Credit Facility permits NMG to borrow up to $600.0 million; however, NMG’s ability to borrow thereunder is limited by a borrowing base, which at any time will equal the lesser of 80% of eligible inventory valued at the lower of cost or market value and 85% of the net orderly liquidation value of the eligible inventory, less certain reserves.  In addition, our ability to borrow under this facility is limited by a minimum liquidity condition, providing that, if less than $60.0 million is available at any time, NMG is not permitted to borrow any additional amounts under the Asset-Based Revolving Credit Facility unless NMG’s pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement for the Asset-Based Revolving Credit Facility) is at least 1.1 to 1.0.  Our ability to meet this financial ratio may be affected by events beyond our control which may prevent us from meeting this ratio.

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

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

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

·incur additional indebtedness;

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

·make investments;

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

·engage in transactions with its affiliates;

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

·consolidate or merge;

·create liens; and

·enter into sale and lease back transactions.

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

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

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

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

Risks Related to Our Business and Industry

The specialty retail industry is highly competitive.

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

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

Deterioration in economic conditions could adversely affect our business.

The merchandise we sell consists in large part of luxury retail goods. The purchase of these goods by customers is discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. Accordingly, sales of these products may be adversely affected by an economic downturn, increases in consumer debt levels, uncertainties regarding future economic prospects or a decline in consumer confidence. During an actual or perceived economic downturn (as a result of increases in consumer debt levels, increases in interest rates, a tightening of consumer credit, uncertainties regarding future economic performance and tax rates and policies, or a decline in consumer confidence, among other factors), fewer customers may shop our stores and websites.  As a result, we may be required to take significant additional markdowns and/or increase our marketing and promotional expenses in response to the lower levels of demand for luxury goods.

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

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We are currently experiencing a challenging economic and retail environment, and expect these conditions will continue for an extended period of time.  Consistent with the significant declines in overall macroeconomic factors, capital markets and consumer confidence that accelerated throughout the first quarter of fiscal year 2009, most notably in October, customer demand was well below our initial expectations and the prior year.  The current softness in customer demand exists across all geographic areas, all distribution channels and all merchandise categories, particularly the apparel and home categories.  We expect retail demand and revenues will remain weak for an extended period of time.  Based on our inventory levels, we expect higher markdowns compared to the prior year will be required to reduce Fall season merchandise resulting in lower gross margins in the second quarter of fiscal year 2009.  In addition, with softer revenue levels anticipated for fiscal year 2009, our SG&A expenses as a percentage of revenues will continue to be under pressure throughout the year.  The prolonged continuation of current market conditions could adversely affect our business.

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

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

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

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

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

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

A breach in information privacy could negatively impact our operations.

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

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

Based upon our expansion strategy, we expect that planned new stores will add over 432,000 square feet of new store space over approximately the next four fiscal years, representing an increase of approximately 8% above the current aggregate square footage of our 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 cost effective manner, accurately assessing the demographic or retail environment at a given location, hiring and training quality staff, obtaining necessary permits and zoning approvals, obtaining commitments from a core group of vendors to supply the new store, integrating the new store into our distribution network and building customer awareness and loyalty. In undertaking store remodels, we must complete the remodel in a timely, cost effective manner, minimize disruptions to our existing operations, and succeed in creating an improved shopping environment. If we fail to execute on these or other aspects of our store expansion and remodeling strategy, we could suffer harm to our sales, an increase in costs and expenses and an adverse effect on our business.

Acts of terrorism could adversely affect our business.

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

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

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

Inflation may adversely affect our business operations in the future.

In recent years, we have experienced certain inflationary conditions in our cost base due primarily to (1) changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar, (2) increases in selling, general and administrative expenses, particularly with regard to employee benefits and (3) increases in fuel prices and costs impacted by increases in fuel prices, such as freight and transportation costs. Inflation can harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base. If inflation in these or other costs worsens, we may not be able to offset the effects of inflation and cost increases through control of expenses, passing cost increases on to customers or any other method.  Any future inflation could adversely affect our profitability and our business.

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

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

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

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

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“Bergdorf Goodman” names. Because a majority of our revenues are transacted through our proprietary credit cards, changes in our proprietary credit card arrangement that adversely impact our ability to facilitate the provision of consumer credit may adversely affect our performance.

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

Under the terms of this alliance, HSBC offers credit cards and non-card payment plans and bears substantially all credit risk with respect to sales transacted on the cards bearing our brands. We receive ongoing payments from HSBC related to credit card sales and compensation for marketing and servicing activities. During fiscal year 2006, we outsourced various administrative elements of the proprietary credit card program to HSBC, including the processing of data, although we continue to handle key customer service functions, including customer inquiries and collections.

In April 2008, we entered into an amendment to the program agreement with HSBC. The amendment, among other things, provides for 1) the allocation between HSBC and NMG of additional income, if any, to be generated from the credit card program as a result of certain changes made to the Program Agreement and 2) the allocation of certain credit card losses between HSBC and NMG (subject to a contractual limit on the losses allocable to NMG).

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

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

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

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

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

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

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

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

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Our business is affected by foreign currency fluctuations.

We purchase a substantial portion of our inventory from foreign suppliers whose cost to us is affected by the fluctuation of their local currency against the dollar or who price their merchandise in currencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in numerous currencies and, generally, by fluctuations in the U.S. dollar relative to such currencies.  Accordingly, changes in the value of the dollar relative to foreign currencies may increase our cost of goods 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 currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future.

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

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

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

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

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

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

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

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

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

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

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

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

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

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4.3	Senior Indenture dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.4	Senior Subordinated Indenture dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.5	Form of 9%/9 3/4% Senior Notes due 2015, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.6	Form of 10 3/8% Senior Subordinated Notes due 2015, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.7	Registration Rights Agreement dated October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial Purchasers, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.8	First Supplemental Indenture, dated as of July 11, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated July 11, 2006.
4.9	Second Supplemental Indenture, dated as of August 14, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor trustee, incorporated herein by reference to the Company’s Current Report on Form 8-K dated August 15, 2006.
10.1*	Employment Agreement dated as of October 6, 2005 by and among The Neiman Marcus Group, Inc., Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.2*	First Amendment to Employment Agreement by and between The Neiman Marcus Group, Inc., a Delaware corporation, Neiman Marcus, Inc., a Delaware corporation, and Burton M. Tansky effective December 21, 2007 incorporated herein by reference to the Neiman Marcus, Inc.’s Current Report on Form 8-K dated December 21, 2007.
10.3*	Rollover Agreement dated as of October 4, 2005 by and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.4*	Form of Rollover Agreement by and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and certain members of management, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.5	Credit Agreement dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as administrative agent and collateral agent, Credit Suisse and Deutsche Bank Securities Inc., as joint lead arrangers, Banc of America Securities LLC and Goldman Sachs Credit Partners L.P., as co-arrangers, Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit Partners L.P., as joint bookrunners, and Credit Suisse, Banc of America Securities LLC and Goldman Sachs Credit Partners L.P., as co-syndication agents, General Electric Capital Corporation as documentation agent and the lenders thereunder, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

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

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10.18	Amendment No. 2 dated as of January 26, 2006 to the Credit Agreement dated as of October 6, 2005, as amended, among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc. from time to time party thereto, the Lenders thereunder and Credit Suisse, as administrative agent and collateral agent for the Lenders, incorporated by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated January 30, 2006.
10.19*	Employment Agreement between The Neiman Marcus Group, Inc. and Karen Katz, dated February 1, 2006, effective as of October 6, 2005, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated February 1, 2006.
10.20	Management Services Agreement, dated as of October 6, 2005 among Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P., TPG GenPar III, L.P. and Warburg Pincus LLC incorporated herein by reference to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 28, 2006.
10.21	Registration Rights Agreement, dated as of October 6, 2005, among Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and the “Holders” identified therein as parties thereto incorporated herein by reference to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 28, 2006.
10.22	Amendment No. 1, dated as of March 28, 2006, to the Pledge and Security Intercreditor Agreement dated as of October 6, 2005, among Neiman Marcus, Inc., The Neiman Marcus Group, Inc., the Subsidiaries party thereto and Credit Suisse, as administrative agent and collateral agent, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated March 29, 2006.
10.23	Credit Card Program Agreement, dated as of June 8, 2005, by and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A. and Household Corporation, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated June 8, 2005.
10.24	Form of Servicing Agreement, by and between The Neiman Marcus Group, Inc. and HSBC Bank Nevada, N.A., incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated June 8, 2005.
10.25*	Confidentiality, Non-Competition and Termination Benefits Agreement between Bergdorf Goodman, Inc. and James J. Gold dated May 3, 2004, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.
10.26	Stockholder Agreement, dated as of May 1, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc. and the other parties signatory thereto, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.
10.27*	Neiman Marcus, Inc. Cash Incentive Plan amended as of January 21, 2008, incorporated herein by reference to the Neiman Marcus, Inc. Quarterly Report on Form 10-Q for the quarter ended April 26, 2008.
10.28	Management Stockholders’ Agreement dated as of October 6, 2005 between Newton Acquisition, Inc., Newton Holding, LLC, TPG Newton III, LLC, TPG Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg Pincus Private Equity VIII, L.P., Warburg Pincus Netherlands Private Equity VIII C.V. I, Warburg Pincus Germany Private Equity VIII K.G , Warburg Pincus Private Equity IX, L.P., and the other parties signatory thereto, incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended July 29, 2006.
10.29*	The Neiman Marcus Group, Inc. Key Employee Deferred Compensation Plan amended and restated effective January 1, 2008, incorporated herein by reference to the Neiman Marcus, Inc. Quarterly Report on Form 10-Q for the quarter ended April 26, 2008.
10.30	Amendment No. 3 dated as of October 12, 2006 to the Credit Agreement dated as of October 6, 2005 among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from time to time party thereto, the Lenders thereunder and Credit Suisse, as administrative agent and collateral

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	agent for the Lenders, incorporated by reference to Neiman Marcus, Inc.’s Current Report on Form 8-K dated October 17, 2006.
10.31	Amendment No. 4 dated as of February 8, 2007 to the Credit Agreement dated as of October 6, 2005, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from time to time party thereto, the lenders thereunder, and Credit Suisse, as administrative agent and collateral agent for the lenders incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated February 14, 2007.
10.32	The Neiman Marcus Group, Inc. Supplemental Executive Retirement Plan as amended through December 31, 2007, incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended August 2, 2008.
10.33	The Neiman Marcus Group, Inc. Defined Contribution Supplemental Executive Retirement Plan, as amended and restated effective as of January 1, 2008, incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended August 2, 2008.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

NEIMAN MARCUS, INC.

(Registrant)

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

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EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Burton M. Tansky, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Neiman Marcus, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 10, 2008

/s/  BURTON M. TANSKY

Burton M. Tansky
President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, James E. Skinner, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Neiman Marcus, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)    designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)    designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)    evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)    disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)    all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 10, 2008

/s/  JAMES E. SKINNER

James E. Skinner

Executive Vice President and Chief Financial Officer

EX-32

EXHIBIT 32

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the following certifications are being made to accompany the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended November 1, 2008:

Certification of Chief Executive Officer(1)

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Neiman Marcus, Inc. (the Company) hereby certifies, to such officer’s knowledge, that:

(i) the Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended November 1, 2008 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: December 10, 2008	/s/  BURTON M. TANSKY
	Burton M. Tansky President and Chief Executive Officer

Certification of Chief Financial Officer(1)

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Neiman Marcus, Inc. (the Company) hereby certifies, to such officer’s knowledge, that:

(i) the Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended November 1, 2008 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: December 10, 2008	/s/  JAMES E. SKINNER
	James E. Skinner Executive Vice President and Chief Financial Officer

(1) A signed original for this written statement required by Section 906 has been provided to Neiman Marcus, Inc. and will be retained by Neiman Marcus, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.