** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

 

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

** **

**For the fiscal year ended July 28, 2007**

** **

**OR**

 

** ̈**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For the transition periodfrom                  to                  **

** **

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

**Neiman Marcus, Inc.******(Exact name of registrant asspecified in its charter)

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

 

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

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Securities registered pursuant toSection 12(b) of the Act:**None**

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

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

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) of theExchange Act. Yes p  No x

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

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

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

Large accelerated filer p                    Acceleratedfiler p                              Non-acceleratedfiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes  ̈  No x

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

As of September 20, 2007, the registrant hadoutstanding 1,012,919 shares of its common stock, par value $0.01 per share.

 

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**NEIMAN MARCUS, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED JULY 28, 2007TABLE OF CONTENTS**
|              | ** ** | ** **                                                                                                    | ** ** | **Page No.** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I**   |       |                                                                                                          |       |         |
| Item 1.      |       | Business                                                                                                      |       | 2            |
| Item  1A.    |       | Risk  Factors                                                                                                 |       | 11           |
| Item  2.     |       | Properties                                                                                                    |       | 18           |
| Item  3.     |       | Legal  Proceedings                                                                                            |       | 20           |
| Item 4.      |       | Submission of Matters to a Vote of Security Holders                                                           |       | 20           |
| **PART II**  |       |                                                                                                          |       |         |
| Item 6.      |       | Selected Financial Data                                                                                       |       | 21           |
| Item 7.      |       | Management’s Discussion and Analysis of Financial Condition  and Results of Operations                   |       | 23           |
| Item 7A.     |       | Quantitative and Qualitative Disclosures about Market  Risk                                                   |       | 52           |
| Item 8.      |       | Financial Statements and Supplementary Data                                                                   |       | 52           |
| Item 9.      |       | Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure                         |       | 53           |
| Item 9A.     |       | Controls and Procedures                                                                                       |       | 53           |
| Item  9B.    |       | Other  information                                                                                            |       | 53           |
| **PART III** |       |                                                                                                          |       |         |
| Item 10.     |       | Directors and Executive Officers of the Registrant                                                            |       | 54           |
| Item 11.     |       | Executive Compensation                                                                                        |       | 57           |
| Item 12.     |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder     Matters |       | 79           |
| Item 13.     |       | Certain Relationships and Related Transactions                                                                |       | 82           |
| Item 14.     |       | Principal Accounting Fees and Services                                                                        |       | 84           |
| **PART IV**  |       |                                                                                                          |       |         |
| Item 15.     |       | Exhibits, Financial Statement Schedules and Reports on  Form 8-K                                              |       | 85           |
| Signatures   |       | Signatures                                                                                                    |       | 90           |

 

 

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**PART I**

**ITEM 1. BUSINESS**

**Business Overview**

We are one of the nation’s leading luxury retailers,offering distinctive merchandise and excellent customer service that cater tothe needs of the affluent consumer. Since our founding in the early 1900s, wehave established ourselves as a leading fashion authority among luxuryconsumers and have become a premier U.S. retail channel for many of the world’smost exclusive designers. Currently, we operate 39 Neiman Marcus full-linestores at prime retail locations in major U.S. markets and two Bergdorf Goodmanstores on Fifth Avenue in New York City. We also operate catalogs ande-commerce websites under the brands Neiman Marcus®, Bergdorf Goodman® andHorchow®. During fiscal years 2007, 2006 and 2005, we generated revenues of$4,390.1 million, $4,030.1 million and $3,695.1 million, respectively, andoperating earnings of $476.8 million, $329.0 million and $397.4million, respectively.

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

***Specialty Retail.***  Ourspecialty retail store operations (Specialty Retail) consist primarily of our39 Neiman Marcus stores and two Bergdorf Goodman stores. We also operate 21clearance centers to provide an outlet for the sale of end-of-season clearancemerchandise. Over our past five fiscal years, Specialty Retail has achieved acompounded annual growth rate, or CAGR, in revenues of 8.7%. Specialty Retailaccounted for 83.7% of our total revenues in fiscal year 2007, 83.7% in fiscalyear 2006 and 84.0% in fiscal year 2005.

·                    Neiman Marcus Stores.  Neiman Marcus stores offer distinctive luxurymerchandise, including women’s couture and designer apparel, contemporarysportswear, handbags, fashion accessories, shoes, cosmetics, men’s clothing andfurnishings, precious and designer jewelry, decorative home accessories, finechina, crystal and silver, children’s apparel and gift items. We locate ourNeiman Marcus stores at carefully selected venues that cater to our targetcustomers in major metropolitan markets across the United States, and designour stores to provide a feeling of residential luxury by blending art andarchitectural details from the communities in which they are located. Ourfull-line Neiman Marcus stores and clearance centers accounted for 71.6% of ourtotal revenues in fiscal year 2007, 72.2% in fiscal year 2006 and 72.9% infiscal year 2005 and 85.6% of Specialty Retail revenues in fiscal  year 2007, 86.3% in fiscal year 2006 and86.8% in fiscal year 2005.

·                  Bergdorf GoodmanStores. Bergdorf Goodman is a premier luxury retailer in New York City wellknown for its couture merchandise, opulent shopping environment and landmarkFifth Avenue locations. Bergdorf Goodman features high-end apparel, fashionaccessories, shoes, decorative home accessories, precious and designer jewelry,cosmetics and gift items. Our Bergdorf Goodman stores accounted for 12.1% ofour total revenues in fiscal year 2007, 11.5% in fiscal year 2006 and 11.1% infiscal year 2005 and 14.4% of Specialty Retail revenues in fiscal year 2007,13.7% in fiscal year 2006 and 13.2% in fiscal year 2005.

In the fourth quarter of fiscal year 2006, we opened one store under anew concept called CUSP.  We opened twoadditional CUSP stores in fiscal year 2007 and one store in early fiscal year2008. CUSP is a smaller store format (7,000 to 11,000 square feet) that targetsa younger, fashion savvy customer with a contemporary point of view. To date,the operations of the CUSP stores are insignificant to the revenues andoperating earnings of our Specialty Retail stores. We are currently evaluatingthe performance of our existing CUSP stores and the potential, if any, forfuture CUSP stores.

***DirectMarketing.***  Ourupscale direct-to-consumer operation (Direct Marketing) conducts online andcatalog sales of fashion apparel, accessories and home furnishings through theNeiman Marcus brand, online and catalog sales of home furnishings andaccessories through the Horchow brand, and online sales of fashion apparel andaccessories through the Bergdorf Goodman brand. In addition, Direct Marketing currently operates 11 designer websites(including one that was launched at the beginning of fiscal year 2008).  In connection with the designer websites,Direct Marketing creates and/or maintains separate e-commerce sites bearing thedesigners’ brand names.  Direct Marketingprocures inventory from each designer to be showcased on that designer’swebsite and bears all the responsibilities related to the fulfillment of goodspurchased on the designer website.

Direct Marketing generated 16.3% of our total revenues infiscal years 2007 and 2006 and 16.0% in fiscal year 2005. Over one millioncustomers made a purchase through one of our websites or catalogs in fiscalyear 2007. In recent years, internet sales have increased as a percentage ofDirect Marketing revenues.  As apercentage of total revenues of Direct Marketing,

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internet sales were 69.7% in fiscal year 2007, 62.1% in fiscal year 2006and 51.6% in fiscal year 2005. Our catalog business circulated over95 million catalogs in fiscal year 2007. With the growth of internetsales, we have reduced catalog circulation in recent years and would expectflat to declining catalog circulation in the foreseeable future.

We regularly send e-mails to over 2.4 million e-mailaddresses, alerting our customers to our newest merchandise and the latestfashion trends. Over the last five fiscal years, Direct Marketing has achieveda CAGR in revenues (excluding revenues of our Chef’s Catalog brand sold inNovember 2004) of 14.8%.

For more information about ourreportable segments, see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and Note 17 of the Notes toConsolidated Financial Statements in Item 15.

Our fiscal year ends on theSaturday closest to July 31.  Allreferences to fiscal year 2007 relate to the 52 weeks ended July 28, 2007;all references to fiscal year 2006 relate to the combined 52 weeks endedJuly 29, 2006 (calculated as described in “The Transactions”) and allreferences to fiscal year 2005 relate to the 52 weeks ended July 30,2005.  References to fiscal years 2008and years thereafter relate to our fiscal years for such periods.

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

**The Transactions**

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

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

The acquisition of NMG was completed on October 6,2005 through the merger of Merger Sub with and into NMG, with NMG being thesurviving entity (the Acquisition). Subsequent to the Acquisition, NMG is asubsidiary of the Company, which is controlled by Holding.

The Sponsors financed the purchase of NMG and theconcurrent redemption of the 6.65% senior notes due 2008 (2008 Notes) through:

·                  application ofthe proceeds from the offering of senior notes and senior subordinated notes;

·                  initialborrowings under a senior secured asset-based revolving credit facilityand a senior secured term loan facility;

·                  equityinvestments funded by direct and indirect equity investments from the Sponsorsand other investors; and

·                  cash on hand atNMG.

The Acquisition occurred simultaneously with:

·                  the closing ofthe offering of our senior notes (Senior Notes) and our senior subordinatednotes (Senior Subordinated Notes);

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·                  the closing ofour new senior secured asset-based revolving credit facility (Asset-BasedRevolving Credit Facility);

·                  the closing ofour new senior secured term loan facility (Senior Secured Term Loan Facility);

·                  the call forredemption of, the deposit into a segregated account of the estimated amount ofthe redemption payment related to, and the ratable provision of securitypursuant to the terms thereof for, the 2008 Notes;

·                  the ratableprovision of security for the 2028 debentures (2028 Debentures) pursuant to theterms thereof;

·                  the terminationof our existing $350 million unsecured revolving credit facility; and

·                  the equityinvestments described above.

We refer to these transactions, including the merger andour payment of any costs related to these transactions and certain relatedtransactions as the “Transactions.” See “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Liquidity and CapitalResources” for a description of our senior secured credit facilities and seniorand senior subordinated notes.

Priorto the Acquisition, the Company had no independent assets or operations.  After the Acquisition, the Company representsthe Successor to NMG since the Company’s sole asset is its investment in NMGand its operations consist solely of the operating activities of NMG as well ascosts incurred by the Company related to its investment in NMG.  For periods prior to the Acquisition, NMG isdeemed to be the predecessor to the Company. As a result, for periods prior to the Transactions, the financialstatements of the Company consist of the financial statements of NMG for suchperiods.  The accompanying consolidatedstatements of earnings and cash flows present our results of operations andcash flows for the periods preceding the Acquisition (Predecessor) and theperiods succeeding the Acquisition (Successor), respectively. All references to“we” and “our” relate to the Company for periods subsequent to the Transactionsand to NMG for periods prior to the Transactions.

We have prepared our discussionof the results of operations for the fiscal year ended July 29, 2006 bycombining the earnings and cash flows for the Predecessor nine-week periodended October 1, 2005 and the Successor forty-three week period ended July 29,2006. Although this combined presentationdoes not comply with generally accepted accounting principles (GAAP), webelieve that it provides a meaningful method of comparison. The combinedoperating results have not been prepared on a pro forma basis under applicableregulations and may not reflect the actual results we would have achievedabsent the Transactions.

In connection with the Transactions, we incurredsignificant indebtedness and became highly leveraged. See “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.” In addition, the purchase pricepaid in connection with the Acquisition was allocated to state the acquiredassets and liabilities at fair value at the Acquisition date. The purchaseaccounting adjustments increased the carrying values of our property andequipment and inventory, established intangible assets for our tradenames,customer lists and favorable lease commitments and revalued our long-termbenefit plan obligations, among other things. Subsequent to the Transactions,interest expense and non-cash depreciation and amortization charges havesignificantly increased. As a result, our successor financial statementssubsequent to the Transactions are not comparable to our predecessor financialstatements.

**Discontinued Operations**

***Gurwitch Products, L.L.C.*** On July 27, 2006, we sold our majorityinterest in Gurwitch Products, L.L.C. to Alticor Inc., for pretax net cashproceeds of approximately $40.8 million (Gurwitch Disposition).  Gurwitch Products, L.L.C. designs and marketsthe Laura Mercier cosmetics line and had revenues of approximately $59.0million (after intercompany eliminations) in fiscal year 2006. The net assetsof Gurwitch Products, L.L.C. were sold for their net carrying value (afterpurchase accounting adjustments made in connection with the Transactions tostate such assets at fair value).

***Kate Spade LLC.***In April 2005, the minority investor inKate Spade LLC exercised the put option with respect to the sale of the fullamount of its 44% stake in such company to NMG. In October 2006, we enteredinto an agreement to settle the put option whereby we purchased the interestheld by the minority investor for approximately $59.4 million.

In November 2006,we entered into a definitive agreement to sell 100% of the ownership interestsin Kate Spade LLC to Liz Claiborne, Inc. (consisting of both our original 56%interest and the 44% minority interest subsequently purchased by NMG) forpretax net cash proceeds of approximately $121.5 million. Both the purchase of the minority interest

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inKate Spade LLC and the sale of Kate Spade LLC to Liz Claiborne, Inc. wereconsummated in December 2006.

Kate Spade LLCdesigns and markets high-end accessories and had revenues of approximately$75.5 million (after intercompany eliminations) in fiscal year 2006. Fiscalyear 2007 revenues of Kate Spade LLC through its disposition in December 2006aggregated $29.6 million.

The Company’s consolidatedfinancial statements, accompanying notes and other information provided in thisAnnual Report on Form 10-K reflect Gurwitch Products, L.L.C. and Kate Spade LLCas discontinued operations for all periods presented.

**Recent Developments**

On September 6, 2007, we announced preliminary totalrevenues and comparable revenues of approximately $282.6 million and$276.3 million, respectively, for the four-week August period of fiscalyear 2008, representing increases of 7.0% and 4.6%, respectively, compared tothe four-week August period of fiscal year 2007. For the four-week Augustperiod of fiscal year 2008, comparable revenues increased 5.0% in our SpecialtyRetail stores and 2.5% in Direct Marketing.

All the financial data set forth above for the four-weekAugust period of fiscal year 2008 are preliminary and unaudited and subject torevision based upon our review and a review by our independent registeredpublic accounting firm of our financial condition and results of operations forthe quarter ending October 27, 2007. Once we and our independent registered publicaccounting firm have completed our respective reviews of our financialinformation for the quarter ending October 27, 2007, we may report financialresults that are different from those set forth above.

**Industry Overview**

We operate in the luxury apparel and accessories segmentof the U.S. retail industry and have arrangements with luxury-brandedfashion vendors, including, but not limited to, Chanel, Prada, Giorgio Armani,David Yurman, St. John, Gucci, Ermenegildo Zegna, Theory, Manolo Blahnik and Brioni to market and selltheir merchandise. Luxury-branded fashion vendors typically manage thedistribution and marketing of their merchandise to maximize the perception ofbrand exclusivity and to facilitate the sale of their goods at premium prices,including limitations on the number of retail locations through which theydistribute their merchandise. These retail locations typically consist of alimited number of specialty stores, high-end department stores and, in someinstances, vendor-owned proprietary boutiques. Retailers that competewith us for the distribution of luxury fashion brands include Saks FifthAvenue, Nordstrom, Barney’s New York and other national, regional and localretailers.

We believe that the following factors benefitwell-positioned luxury retailers:

·                  attractivedemographic trends, including increasing wealth concentration and an aging babyboomer population;

·                  growing consumerdemand for prestige brands and exclusive products;

·                  retailconsumption patterns of affluent consumers that are generally less influencedby economic cycles than middle or lower income consumers;

·                  higher pricepoints and limited distribution of luxury merchandise, which have generallyprotected high-end specialty retailing from the growth of discounters and massmerchandisers;

·                  aggressivemarketing by luxury brands; and

·                  consumer trendstowards aspirational lifestyles.

**Customer Service and Marketing**

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

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·                  knowledgeable,professional and well-trained sales associates;

·                  marketingprograms designed to promote customer awareness of our offerings of the latestfashion trends;

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

·                  facilitating theextension of credit to our customers through our proprietary credit cardprogram.

***SalesAssociates.***  We seek to maintain a sales force ofknowledgeable, professional and well-trained sales associates to deliverpersonal attention and service to our customers through our relationship-basedcustomer service model. We compensate our sales associates primarily on acommission basis and provide them with training in the areas of customerservice, selling skills and product knowledge. Our sales associates participatein active clienteling programs designed to maintain contact with our customersbetween store visits and to ensure that our customers are aware of the latestmerchandise offerings and fashion trends that we present in our stores. Weempower our sales associates to act as personal shoppers and in many cases, asthe personal style advisor to our customers.

***Marketing Programs.***  We conducta wide variety of marketing programs to support our sales associates in thecommunication of fashion trends to our customers in order to create fashionexcitement and enhance our customer relationships. The programs include bothin-store events and targeted, brand-consistent print mediacommunications.

We maintain an active calendar of in-store events topromote our sales efforts. The activities include in-store visits and trunkshows by leading designers featuring the newest fashions from the designer,in-store promotions of the merchandise of selected designers or merchandisecategories, often through events conducted in connection with our loyaltyprograms, and participation in charitable functions in each of our markets.Past trunk shows and in-store promotions at our Neiman Marcus and BergdorfGoodman stores have featured vendors such as Chanel, Giorgio Armani, Oscar dela Renta and Manolo Blahnik.

Through our print media programs, we mail variouspublications to our customers communicating upcoming in-store events, newmerchandise offerings and fashion trends. In connection with these programs,Neiman Marcus produces The Book® approximately eight to nine times each year.The Book is a high-quality publication featuring the latest fashion trends thatis mailed on a targeted basis to our customers and has a yearly printing inexcess of 4.0 million. Our other print publications include The Book forMen, the Bergdorf Goodman Magazine and specific designer mailers. Recently, weadded The Addition®, which identifies for our younger, aspirational customers,as well as our core customers, “must have items” for the current season.

We also believe that the online and print catalogoperations of Direct Marketing promote brand awareness, which benefits theoperations of our retail stores.

***Loyalty Programs.***  Wemaintain a loyalty program under the InCircle® brand name designed to cultivatelong-term relationships with our customers. Our loyalty program focuses on ourmost active customers. This program includes marketing features, includingprivate in-store events, special magazine issues, as well as the ability toaccumulate points for qualifying purchases. Increased points are periodicallyoffered in connection with in-store promotional and other events. Uponattaining specified point levels, customers may redeem their points for a widevariety of gifts ranging from gift cards to designer merchandise and trips toexotic locations. Approximately 50% of our revenues at Neiman Marcus storesduring each of the last three calendar years were generated by our InCircleloyalty program members. Beginning in calendar 2006, we transitioned customersin our previous Bergdorf Goodman loyalty program to our InCircle loyaltyprogram.

***Proprietary CreditCard Program.***  We maintain a proprietary credit card programthrough which we facilitate the extension of credit to customers under the “NeimanMarcus” and “Bergdorf Goodman” names.

On July 7, 2005, HSBC purchased our approximatelythree million private label Neiman Marcus and Bergdorf Goodman credit cardaccounts and related assets, as well as the outstanding balances associatedwith such accounts and we entered into a long-term marketing and servicingalliance with HSBC that expires in June 2010. Under the terms of this alliance,HSBC offers credit cards and non-card payment plans and bears all credit riskwith respect to sales transacted on the cards bearing our brands. We receiveongoing payments from HSBC related to credit card sales and compensation formarketing and servicing activities (HSBC Program Income). During fiscal year2006, we outsourced various administrative elements of the proprietary creditcard program, including the processing of data with respect to our proprietarycredit card program to HSBC as provided for in the program agreement withHSBC.  We continue to handle key customerservice functions, primarily customer inquiries and collections.

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In connection with our agreement with HSBC, we havechanged and may continue to change, the terms of credit offered to ourcustomers.  In addition, HSBC will havediscretion over certain policies and arrangements with credit card customersand may change these policies and arrangements in ways that affect our relationshipwith these customers. Any such changes in our credit card arrangements mayadversely affect our credit card program and ultimately, our business.

Historically, our customers holding a proprietary creditcard have tended to shop more frequently and have a higher level of spendingthan customers paying with cash or third-party credit cards. In fiscalyears 2007 and 2006, approximately 55% of our revenues were transacted throughour proprietary credit cards.

We utilize data captured through our proprietary creditcard program in connection with promotional events and customer relationshipprograms targeting specific customers based upon their past spending patternsfor certain brands, merchandise categories and store locations.

***IntegratedMulti-Channel Model.***  We offer products through ourcomplementary Direct Marketing and Specialty Retail businesses, which enablesus to maximize our brand recognition and strengthen our customer relationshipsacross all channels. Our well-established catalog and online operation expandsour reach beyond the trading area of our retail stores, as over 40% of ourDirect Marketing customers in fiscal years 2007 and 2006 were located outsideof the trade areas of our existing retail locations. We also use our catalogsand e-commerce websites as selling and marketing tools to increase thevisibility and exposure of our brand and generate customer traffic within ourretail stores. We believe the combination of our retail stores and directselling efforts is the main reason that our multi-channel customers spendmore on average than our single-channel customers (over 3 times more ineach of fiscal year 2007 and fiscal year 2006).

**Merchandise**

Our percentages of revenues bymajor merchandise category are as follows:

|                                               | ** ** | **Years Ended**    | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** | **July 30,  2005** | ** ** |
| Women’s Apparel                          |       | 37                      | %          | 38 | % | 36 | % |
| Women’s Shoes,  Handbags and Accessories |       | 20                      | %          | 18 | % | 18 | % |
| Cosmetics and  Fragrances                     |       | 11                      | %          | 11 | % | 11 | % |
| Men’s Apparel  and Shoes                 |       | 12                      | %          | 13 | % | 12 | % |
| Designer and  Precious Jewelry                |       | 11                      | %          | 11 | % | 10 | % |
| Home Furnishings  and Décor              |       | 9                       | %          | 9 | % | 9 | % |
| Other                                         |       | 0                       | %          | 0 | % | 4 | % |
|                                          |       | 100                     | %          | 100 | % | 100 | % |

 

Substantially all of our merchandise is delivered to usby our vendors as finished goods and is manufactured in numerous locations, includingEurope and the United States and, to a lesser extent, China, Mexico and SouthAmerica.

Our merchandise consists primarily of apparel andaccessories from luxury-branded designers. Our major merchandisecategories are as follows:

*Women’s Apparel:* Women’s apparel consists of dresses,eveningwear, suits, coats, and sportswear separates—skirts, pants, blouses,jackets, and sweaters. Women’s apparel occupies the largest amount of squarefootage within our stores. We work with women’s apparel vendors to present themerchandise and highlight the best of the vendor’s product. Our primary women’sapparel vendors include Chanel, Prada, Gucci, St. John, Theory, Giorgio Armani,Escada, Diane Von Furstenberg and Ellen Tracy.

*Women’s Shoes, Handbags and Accessories:*  Women’saccessories include belts, gloves, scarves, hats and sunglasses. Our primaryvendors in this category include Manolo Blahnik, Prada, Gucci, Chanel, Dior andChristian Louboutin in ladies shoes, and handbags from Chanel, Prada, Gucci,Marc Jacobs and Judith Leiber.

*Cosmetics and Fragrances:*  Cosmetics and fragrances includefacial and skin cosmetics, skin therapy and lotions, soaps, fragrance, candlesand beauty accessories. Our primary vendors of cosmetics and beauty productsinclude La Mer, Bobbi Brown, La Prairie, Sisley, Chanel and Laura Mercier.

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*Men’s Apparel and Shoes:*  Men’s apparel and shoes includesuits, dress shirts and ties, sport coats, jackets, trousers, casual wear andeveningwear as well as business and casual footwear.  In recent years, this category has been anarea of increased focus.  BergdorfGoodman has a fully dedicated men’s store in New York. Our primary vendors inthis category include Ermenegildo Zegna, Brioni, Giorgio Armani, and Prada inmen’s clothing and sportswear and Ermenegildo Zegna, Brioni, Prada, Ferragamo,Gucci and Stefano Ricci in men’s furnishings and shoes.

*Designer and Precious Jewelry:*  Our designer and preciousjewelry offering includes women’s necklaces, bracelets, rings, earrings andwatches that are selected to complement our apparel merchandise offering. Ourprimary vendors in this category include David Yurman, John Hardy and StephenDweck in designer jewelry, Henry Dunay, Cartier and Roberto Coin in preciousjewelry. We often sell precious jewelry which has been consigned to us from thevendor.

*Home Furnishings and Décor:*  Home furnishings and décorinclude linens, tabletop, kitchen accessories, furniture, rugs, decoratives(frames, candlesticks, vases and sculptures) as well as collectables. Merchandisefor the home complements our apparel offering in terms of quality and design.Our primary vendors in this category include Jay Strongwater, Daum, Waterford,Steuben and Baccarat.

**Vendor Relationships**

Our merchandise assortment consists of a wide selectionof luxury goods purchased from both well-known luxury-branded fashionvendors as well as new and emerging designers. We communicate with our vendorsfrequently, providing feedback on current demand for their products,suggesting, at times, changes to specific product categories or items andgaining insight into their future fashion direction. Certain designers selltheir merchandise, or certain of their design collections, exclusively to usand other designers sell to us pursuant to their limited distribution policies.We compete for quality merchandise and assortment principally based onrelationships and purchasing power with designer resources. Our women’s and men’sapparel and fashion accessories businesses are especially dependent upon ourrelationships with these designer resources. We monitor and evaluate the salesand profitability performance of each vendor and adjust our future purchasingdecisions from time to time based upon the results of this analysis. We have noguaranteed supply arrangements with our principal merchandising sources and,accordingly, there can be no assurance that such sources will continue to meetour needs for quality, style and volume. In addition, our vendor base isdiverse, with no single vendor representing more than 5% of the cost of ourtotal purchases in fiscal years 2007 or 2006. The breadth of our sourcing helpsmitigate risks associated with a single brand or designer.

Consistent with industry business practice, we receiveallowances from certain of our vendors in support of the merchandise wepurchase for resale. We receive certain allowances to reimburse us formarkdowns taken or to support the gross margins that we earn in connection withthe sales of the vendor’s merchandise. Other allowances we receive representreductions to the amounts we pay to acquire the merchandise. We also receiveadvertising allowances from certain of our merchandise vendors, substantiallyall of which represent reimbursements of direct, specified and incrementalcosts we incurred to promote the vendors’ merchandise. These allowances arerecorded as a reduction of our advertising costs when incurred. In addition, wereceive allowances from certain merchandise vendors in conjunction withcompensation allowances for employees who sell the vendors’ merchandise, whichallowances are netted against the related compensation expenses that weincur.  For more information related toallowances received from vendors, see Note 1 to our audited consolidatedfinancial statements included herein.

In order to expand our product assortment, we offercertain merchandise, primarily precious jewelry, which has been consigned to usfrom the vendor. As of July 28, 2007 and July 29, 2006, we held consignedinventories with a cost basis of approximately $307.6 million and $251.3million, respectively, (consigned inventories are not reflected in ourconsolidated balance sheet as we do not take title to consignedmerchandise).  From time to time, we makeadvances to certain of our vendors. These advances are typically deducted fromamounts paid to vendors at the time we receive the merchandise or, in the caseof advances made for consigned goods, at the time we sell the goods. We had netoutstanding advances to vendors of approximately $31.4 million at July 28,2007 and $25.0 million at July 29, 2006.

**Inventory Management**

Our merchandising function is decentralized with separatemerchandising functions for Neiman Marcus stores, Bergdorf Goodman and DirectMarketing. Each merchandising function is responsible for the determination ofthe merchandise assortment and quantities to be purchased and, in the case ofNeiman Marcus stores, for the allocation of merchandise to each store. Wecurrently have over 400 merchandise buyers and merchandise planners.

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The majority of the merchandise we purchase is initiallyreceived at one of our centralized distribution facilities. To support ourSpecialty Retail stores, we utilize a primary distribution facility inLongview, Texas, a regional distribution facility in Totowa, New Jersey andfive regional service centers. We also operate two distribution facilities inthe Dallas-Fort Worth area to support our Direct Marketing operation.

Our distribution facilities are linked electronically toour various merchandising staffs to facilitate the distribution of goods to ourstores. We utilize electronic data interchange (EDI) technology with certain ofour vendors, which is designed to move merchandise onto the selling floorquickly and cost-effectively by allowing vendors to deliver floor-readymerchandise to the distribution facilities. In addition, we utilize high-speedautomated conveyor systems capable of scanning the bar coded labels on incomingcartons of merchandise and directing the cartons to the proper processingareas. Many types of merchandise are processed in the receiving area andimmediately “cross docked” to the shipping dock for delivery to the stores.Certain processing areas are staffed with personnel equipped with hand-heldradio frequency terminals that can scan a vendor’s bar code and transmit thenecessary information to a computer to record merchandise on hand. We utilizethird-party carriers to distribute our merchandise to individual stores.

With respect to the Specialty Retail stores, the majorityof the merchandise is held in our retail stores.  We primarily operate on a pre-distributionmodel through which we allocate merchandise on our initial purchase orders toeach store. This merchandise is shipped from our vendors to our distributionfacilities for delivery to designated stores. We closely monitor the inventorylevels and assortments in our retail stores to facilitate reorder andreplenishment decisions, satisfy customer demand and maximize sales. Transfersof goods between stores are made primarily at the direction of merchandisingpersonnel and, to a lesser extent, by store management primarily to fulfillcustomer requests.

We also maintain certain inventories at the Longviewdistribution facility. The goods held at the Longview distribution facilityconsist primarily of goods held in limited assortment or quantity by our storesand replenishment goods available to stores achieving high initial saleslevels.  With our “locker stock”inventory management program, we maintain a portion of our most in-demand and highfashion merchandise at our distribution facilities.  For products stored in locker stock, we canship replenishment merchandise to the stores that demonstrate the highestcustomer demand.  In addition, our salesassociates can use the program to ship items directly to our customers, therebyimproving customer service and increasing productivity.  This program also helps us to restockinventory at individual stores more efficiently, to maximize the opportunityfor full-price selling and to minimize the potential risks related to excessinventories.  We plan to continue toexpand this program to deliver goods to our customers more quickly and toenhance the allocation of goods to our stores.

**Capital Investments**

We make capital investments annually to support ourlong-term business goals and objectives. We invest capital in new and existingstores, distribution and support facilities as well as information technology.We have gradually increased the number of our stores over the past ten years,growing our full-line Neiman Marcus and Bergdorf Goodman store base from 27stores at the beginning of fiscal year 1997 to our current 41 stores.

We invest capital in the development and construction ofnew stores in both existing and new markets. We conduct extensive demographic,marketing and lifestyle research to identify attractive retail markets with ahigh concentration of our target customers prior to our decision to construct anew store. We compete with other retailers for real estate opportunitiesprincipally on the basis of our ability to attract customers. In addition tothe construction of new stores, we also invest in the on-going maintenance ofour stores to ensure an elegant shopping experience for our customers. Capitalexpenditures for existing stores range from minor renovations of certain areaswithin the store to major remodels and renovations and store expansions. We arefocused on operating only in attractive markets that can profitably support ourstores and are focused on maintaining the quality of our stores and,consequently, our brand. With respect to our major remodels, we only expandafter extensive analysis of our projected returns on capital. We generallyexperience an increase in both total sales and sales per square foot at storesthat undergo a remodel or expansion.

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

In the past three fiscal years, we have made capitalexpenditures aggregating $502 million related primarily to:

·                  the constructionof new stores in San Antonio, Boca Raton, Charlotte, Austin and Natick (suburbanBoston);

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·                  the renovationand expansion of our main Bergdorf Goodman store in New York City and NeimanMarcus stores in San Francisco, Newport Beach, Las Vegas, Houston, and BeverlyHills;

·                  the expansion ofour distribution facilities;

·                  the developmentand installation of a new point-of-sale system in our retail stores;

·                  the installationof new warehousing and distribution systems for both Direct Marketing andSpecialty Retail stores; and

·                  a new humancapital management system (including the outsourcing of payroll and benefitsadministration).

In fiscal year 2008, we anticipate capital expendituresfor planned new stores in Natick, the greater Los Angeles area and suburbanSeattle and for renovations of our Atlanta and Westchester stores, as well asthe main Bergdorf Goodman store. We also expect to make technology relatedexpenditures to enhance existing systems and reporting capabilities in a numberof areas, including our warehousing systems at Direct Marketing.

We receive allowances from developers related to theconstruction of our stores thereby reducing our cash investment in thesestores. We record these allowances as deferred real estate credits which arerecognized as a reduction of rent expense on a straight-line basis over thelease term. We received construction allowances aggregating $24.6 millionin fiscal year 2007 and $32.7 million in fiscal year 2006.

**Competition**

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

We believe we are differentiated from other nationalretailers by our distinctive merchandise assortment, which we believe is moreupscale than other high-end department stores, excellent customer service,prime real estate locations and elegant shopping environment. We believe wedifferentiate ourselves from regional and local high-end luxury retailersthrough our diverse product selection, strong national brand, loyalty programs,customer service, prime shopping locations and strong vendor relationships thatallow us to offer the top merchandise from each vendor. Vendor-ownedproprietary boutiques and specialty stores carry a much smaller selection ofbrands and merchandise, lack the overall shopping experience we provide andhave a limited number of retail locations.

**Employees**

As of September 1, 2007, we had approximately 17,900employees. Neiman Marcus stores had approximately 14,700 employees, BergdorfGoodman stores had approximately 1,300 employees, Direct Marketing hadapproximately 1,800 employees and Neiman Marcus Group had approximately 100employees. Our staffing requirements fluctuate during the year as a result ofthe seasonality of the retail industry. We hire additional temporary associatesand increase the hours of part-time employees during seasonal peak sellingperiods. None of our employees is subject to a collective bargaining agreement,except for approximately 13% of the Bergdorf Goodman employees. We believe thatour relations with our employees are good.

 

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**Seasonality**

Our business, like that of mostretailers, is affected by seasonal fluctuations in customer demand, productofferings and working capital expenditures. For additional information onseasonality, see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Executive Overview—Seasonality.”

**Regulation**

The credit card operations that are conducted under ourarrangements with HSBC are subject to numerous federal and state laws thatimpose disclosure and other requirements upon the origination, servicing andenforcement of credit accounts and limitations on the maximum amount of financecharges that may be charged by a credit provider. HSBC is subject toregulations to which we were not subject prior to the Credit Card Sale. Inaddition to our proprietary credit cards, credit to our customers is alsoprovided primarily through third parties. Any effect of these regulations orchange in the regulation of credit arrangements that would materially limit theavailability of credit to our customer base could adversely affect our resultsof operations or financial condition.

Our practices, as well as our competitors, are subject toreview in the ordinary course of business by the Federal Trade Commission andare subject to numerous federal and state laws. Additionally, we are subject tocertain customs, truth-in-advertising and other laws, including consumerprotection regulations that regulate retailers generally and/or govern theimportation, promotion and sale of merchandise. We undertake to monitor changesin these laws and believe that we are in material compliance with allapplicable state and federal regulations with respect to such practices.

**ITEM 1A. RISK FACTORS**

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

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

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

**NMG has asubstantial amount of indebtedness, which may adversely affect NMG’s cash flowand its ability to operate the business, to comply with debt covenants and makepayments on its indebtedness.**

As a result of the Transactions,we are highly leveraged.  As of July 28,2007, the principal amount of NMG’s total indebtedness was approximately$2,955.3 million and the unused borrowing availability under the $600 millionAsset-Based Revolving Credit Facility was approximately $573.1 million aftergiving effect to $26.9 million of letters of credit outstandingthereunder.  NMG’s substantialindebtedness, combined with its lease and other financial obligations andcontractual commitments, could have other important consequences. For example,it could:

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

·                  make NMG morevulnerable to adverse changes in general economic, industry and competitiveconditions and adverse changes in government regulation;

·                  require NMG todedicate a substantial portion of its cash flow from operations to payments onits indebtedness, thereby reducing the availability of cash flows to fund workingcapital, capital expenditures, acquisitions and other general corporatepurposes;

·                  limit NMG’sflexibility in planning for, or reacting to, changes in NMG’s business and theindustry in which it operates;

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·                  place NMG at acompetitive disadvantage compared to its competitors that are less highlyleveraged and therefore may be able to take advantage of opportunities that itsleverage prevents it from exploiting; and

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

Any of the above listed factorscould materially adversely affect NMG’s business, financial condition andresults of operations.

In addition, NMG’s interestexpense could increase if interest rates increase because the entire amount ofthe indebtedness under the senior secured credit facilities bears interest atfloating rates.  As of July 28, 2007, NMGhad approximately $1,625.0 million principal amount of floating rate debt,consisting of outstanding borrowings under Senior Secured Term LoanFacility.  NMG also had at that dateapproximately $573.1 million of unused floating rate debt borrowing capacityavailable under the Asset-Based Revolving Credit Facility based on a borrowingbase of over $600.0 million at that date and after giving effect to $26.9million used for letters of credit. Effective December 6, 2005, NMG entered into floating to fixed interestrate swap agreements for an aggregate notional amount of $1,000.0 million tolimit its exposure to interest rate increases related to a portion of itsfloating rate indebtedness.

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

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

If NMG does not generatesufficient cash flow from operations to satisfy the debt service obligations,NMG may have to undertake alternative financing plans, such as refinancing orrestructuring its indebtedness, selling assets, reducing or delaying capitalinvestments or seeking to raise additional capital.  Our ability to restructure or refinance itsdebt will depend on the condition of the capital markets and our financialcondition at such time.  Any refinancingof NMG’s debt could be at higher interest rates and may require it to complywith more onerous covenants, which could further restrict its businessoperations.  The terms of existing orfuture debt instruments may restrict NMG from adopting some of thesealternatives.  In addition, any failureto make payments of interest and principal on NMG’s outstanding indebtedness ona timely basis would likely result in a reduction of NMG’s credit rating, whichcould harm its ability to incur additional indebtedness on acceptable terms.

Contractual limitations on NMG’sability to execute any necessary alternative financing plans could exacerbatethe effects of any failure to generate sufficient cash flow to satisfy its debtservice obligations.  The Asset-BasedRevolving 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 atthe lower of cost or market value and 85% of the net orderly liquidation valueof the eligible inventory, less certain reserves.  In addition, our ability to borrow under thisfacility is limited by a minimum liquidity condition, providing that, if lessthan $60.0 million is available at any time, NMG is not permitted toborrow any additional amounts under the Asset-Based Revolving Credit Facilityunless NMG’s pro forma ratio of consolidated EBITDA to consolidated FixedCharges (as such terms are defined in the credit agreement for the seniorsecured asset-based revolving credit facility) is at least 1.1 to1.0.  Our ability to meet this financialratio may be affected by events beyond our control which may prevent us frommeeting this ratio.

NMG’s inability to generatesufficient cash flow to satisfy its debt service obligations, or to refinanceits obligations at all or on commercially reasonable terms, would have anadverse effect, which could be material, on NMG’s business, financial conditionand results of operations.

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

The credit agreements governingNMG’s Asset-Based Revolving Credit Facility and Senior Secured Term LoanFacility credit facilities and the indentures governing the Senior Notes, theSenior Subordinated Notes and the 2028 Debentures contain, and any futureindebtedness of NMG would likely contain, a number of restrictive covenantsthat impose significant operating and financial restrictions, includingrestrictions on NMG’s ability to engage in acts that may be in its bestlong-term 

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interests. The indentures governing the Senior Notes, theSenior Subordinated Notes and the 2028 Debentures and the credit agreementsgoverning the senior secured credit facilities include covenants that, amongother things, restrict NMG’s ability to:

·                  incur additionalindebtedness;

·                  pay dividends onNMG’s capital stock or redeem, repurchase or retire its capital stock orindebtedness;

·                  makeinvestments;

·                  createrestrictions on the payment of dividends or other amounts to NMG from NMG’srestricted subsidiaries;

·                  engage intransactions with its affiliates;

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

·                  consolidate ormerge;

·                  create liens;and

·                  enter into saleand lease back transactions.

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

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

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

The operating and financialrestrictions and covenants in these debt agreements and any future financingagreements may adversely affect NMG’s ability to finance future operations orcapital 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 highlycompetitive and fragmented. Competition is strong both to attract and sell tocustomers and to establish relationships with, and obtain merchandise from, keyvendors.

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

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

Our relationships withestablished and emerging designers are a key factor in our position as aretailer of high-fashion merchandise, and a substantial portion of our revenuesis attributable to our sales of designer merchandise. Many of our key vendorslimit the number of retail channels they use to sell their merchandise andcompetition among luxury retailers to obtain 

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and sell these goods is intense. Our relationships withour designers have been a significant contributor to our past success. We haveno guaranteed supply arrangements with our principal merchandising sources.Accordingly, there can be no assurance that such sources will continue to meetour quality, style and volume requirements. Moreover, nearly all of the brandsof our top designers are sold by competing retailers, and many of our topdesigners also have their own dedicated retail stores. If one or more of ourtop designers were to cease providing us with adequate supplies of merchandiseor, conversely, were to increase sales of merchandise through its own stores orto the stores of our competitors, our business could be adversely affected. Inaddition, any decline in the popularity or quality of any of our designerbrands could adversely affect our business.

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

We make decisions regarding thepurchase of our merchandise well in advance of the season in which it will besold. For example, women’s apparel, men’s apparel and shoes are typicallyordered six to nine months in advance of the products being offered for salewhile handbags, jewelry and other categories are typically ordered three to sixmonths in advance.  If our sales duringany season, particularly a peak season, are significantly lower than we expectfor any reason, we may not be able to adjust our expenditures for inventory andother expenses in a timely fashion and may be left with a substantial amount ofunsold inventory. If that occurs, we may be forced to rely on markdowns orpromotional sales to dispose of excess inventory. This could have an adverseeffect on our margins and operating income. At the same time, if we fail topurchase a sufficient quantity of merchandise, we may not have an adequatesupply of products to meet consumer demand. This may cause us to lose sales orharm our customer relationships.

**Our failure to identify changes inconsumer preferences or fashion trends may adversely affect our performance.**

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

**Our business and performance may beaffected by our ability to implement our store expansion and remodelingstrategies.**

Based upon our expansionstrategy, we expect that planned new stores will add over 565,000 square feetof new store space over approximately the next four fiscal years, representingan increase of approximately 10% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores, and that ourstore remodeling program will add additional new store space from remodels thatare already underway.  New store openingsinvolve certain risks, including constructing, furnishing and supplying a storein a timely and cost effective manner, accurately assessing the demographic orretail environment at a given location, hiring and training quality staff,obtaining necessary permits and zoning approvals, obtaining commitments from acore group of vendors to supply the new store, integrating the new store intoour distribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, costeffective manner, minimize disruptions to our existing operations, and succeedin creating an improved shopping environment. If we fail to execute on these orother aspects of our store expansion and remodeling strategy, we could sufferharm to our sales, an increase in costs and expenses and an adverse effect onour business.

**Acts of terrorism could adversely affectour business.**

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

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**Deterioration in economic conditionscould adversely affect our business.**

The merchandise we sell consistsin large part of luxury retail goods. The purchase of these goods by customersis discretionary, and therefore highly dependent upon the level of consumerspending, particularly among affluent customers. Accordingly, sales of theseproducts may be adversely affected by an economic downturn, increases inconsumer debt levels, uncertainties regarding future economic prospects or a declinein consumer confidence. An economic downturn in the United States generally orin any of the geographic areas in which we have stores, particularly in Texas,California, Florida and the New York City metropolitan area, from which wederive a significant portion of our revenues, could have a material adverseeffect on our business and results of operations.

**The loss of any of our senior managementteam or attrition among our buyers or key sales associates could adverselyaffect our business.**

Our success in the specialtyretail industry will continue to depend to a significant extent on our seniormanagement team, buyers and key sales associates. We rely on the experience ofour senior management, who have specific knowledge relating to us and our industrythat would be difficult to replace. If we were to lose a portion of our buyersor key sales associates, our ability to benefit from long-standingrelationships with key vendors or to provide relationship-based customerservice may suffer. We may not be able to retain our current senior managementteam, buyers or key sales associates and the loss of any of these individualscould adversely affect our business.

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

In recent years, we have experiencedcertain inflationary conditions in our cost base due primarily to(1) changes in foreign currency exchange rates that have reduced thepurchasing power of the U.S. dollar and (2) increases in selling, generaland administrative expenses, particularly with regard to employee benefits.Inflation can harm our margins and profitability if we are unable to increaseprices or cut costs enough to offset the effects of inflation in our cost base.If inflation in these or other costs worsens, we may not be able to offset theeffects of inflation and cost increases through control of expenses, passingcost increases on to customers or any other method.  Any future inflation could adversely affectour profitability and our business.

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

We maintain loyalty programs thatare designed to cultivate long-term relationships with our customers andenhance the quality of service we provide to our customers. We must constantlymonitor and update the terms of our loyalty programs so that they continue tomeet the demands and needs of our customers and remain competitive with loyaltyprograms offered by other high-end specialty retailers. Given thatapproximately 50% of our revenues at Neiman Marcus stores during each of thelast three calendar years were generated by our InCircle loyalty programmembers, our failure to continue to provide quality service and competitiveloyalty programs to our customers through the InCircle loyalty program couldadversely affect our business.

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

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

In July 2005, we sold ourapproximately three million private label credit card accounts and relatedassets, as well as the outstanding balances associated with such accounts andwe entered into a long-term marketing and servicing alliance with HSBC thatexpires in June 2010.  Under the terms ofthis alliance, HSBC offers credit cards and non-card payment plans and bearsall credit risk with respect to sales transacted on the cards bearing ourbrands. We receive on-going payments from HSBC related to credit cardsales.  In addition, we continue tohandle key customer service functions, including new account processing, mosttransaction authorization, billing adjustments, collection services andcustomer inquiries for which we receive additional compensation from HSBC.  As part of this transaction, we have changed,and will continue to change, the terms of credit offered to our customersfollowing the Credit Card Sale.

The purchaser of our credit cardbusiness has discretion over certain policies and arrangements with our creditcard customers and may change these policies and arrangements in ways thataffect our relationship with these customers. In addition, there can be noassurance that, upon expiration of the current alliance with HSBC, that we willbe able to enter into a 

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replacement arrangement on terms comparable to thecurrent arrangement. Any changes in our credit card arrangements may adverselyaffect our credit card program and ultimately, our business.

Credit card operations aresubject to numerous federal and state laws that impose disclosure and otherrequirements upon the origination, servicing and enforcement of credit accountsand limitations on the maximum amount of finance charges that may be charged bya credit provider. The purchaser of our credit card business is subject toregulations to which we were not subject prior to the Credit Card Sale. Anyeffect of these regulations or change in the regulation of credit arrangementsthat would materially limit the availability of credit to our customer basecould 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 withcertainty.

**Our business can be affected by extremeor unseasonable weather conditions.**

Extreme weather conditions in theareas in which our stores are located could adversely affect our business. Forexample, heavy snowfall, rainfall or other extreme weather conditions over aprolonged period might make it difficult for our customers to travel to our storesand thereby reduce our sales and profitability. Our business is alsosusceptible to unseasonable weather conditions. For example, extended periodsof unseasonably warm temperatures during the winter season or cool weatherduring the summer season could render a portion of our inventory incompatiblewith those unseasonable conditions. Reduced sales from extreme or prolongedunseasonable weather conditions would adversely affect our business.

**We are subject to numerous regulationsthat could affect our operations.**

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

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

The specialty retail industry isseasonal in nature, with a higher level of sales typically generated in thefall and holiday selling seasons. We have in the past experienced significantfluctuation in our revenues from quarter to quarter with a disproportionate amountof our revenues falling in our second fiscal quarter, which coincides with theholiday season. In addition, we have significant additional cash requirementsin the period leading up to the months of November and December in anticipationof higher sales volume in those periods, including payments relating to foradditional inventory, advertising and employees.

**Our business is affected by foreigncurrency fluctuations.**

We purchase a substantial portionof our inventory from foreign suppliers whose cost to us is affected by thefluctuation of their local currency against the dollar or who price theirmerchandise in currencies other than the dollar. Fluctuations in the Euro-U.S.dollar exchange rate affect us most significantly; however, we source goods fromnumerous 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 thedollar relative to foreign currencies may increase our cost of goods sold andif we are unable to pass such cost increases on to our customers, our grossmargins, and ultimately our earnings, would decrease. Foreign currencyfluctuations could have a material adverse effect on our business, financialcondition and results of operations in the future.

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

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

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merchandise produced elsewhere, our business could beadversely affected.

**Significant increases in costsassociated with the production of catalogs and other promotional materials mayadversely affect our operating income.**

We advertise and promote in-storeevents, new merchandise and fashion trends through print catalogs and otherpromotional materials mailed on a targeted basis to our customers. Significantincreases in paper, printing and postage costs could affect the cost ofproducing these materials and as a result, may adversely affect our operatingincome.

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

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

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

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

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

**Failure to successfully maintain andupdate information technology systems and enhance existing systems mayadversely affect our business.**

To keep pace with changingtechnology, we must continuously provide for the design and implementation ofnew information technology systems as well as enhancements of our existingsystems. Any failure to adequately maintain and update the informationtechnology systems supporting our online operations, sales operations orinventory control could prevent our customers from purchasing merchandise onour websites or prevent us from processing and delivering merchandise, whichcould adversely affect our business.

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

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

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**ITEM 2. PROPERTIES**

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

Properties that we use in our operations include NeimanMarcus stores, Bergdorf Goodman stores, clearance centers and distribution,support and office facilities. As of September 20, 2007, the approximateaggregate square footage of the properties used in our operations was asfollows:

|                                              | ** ** | **Owned** | ** ** | **Owned  Subject  to Ground  Lease** | ** ** | **Leased** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-----------|------------|-------------------------------------------|------------|------------|------------|-----------|------------|
| Neiman Marcus  Stores                        |       | 752,000   |       | 2,257,000                                 |       | 2,313,000  |       | 5,322,000 |       |
| Bergdorf Goodman  Stores                     |       | —    |       | —                                    |       | 316,000    |       | 316,000   |       |
| Clearance  Centers and Other                 |       | —    |       | —                                    |       | 631,000    |       | 631,000   |       |
| Distribution, Support  and Office Facilities |       | 1,317,000 |       | 150,000                                   |       | 1,074,000  |       | 2,541,000 |       |

 

***Neiman MarcusStores. ***As of September 20, 2007, we operated 39 NeimanMarcus stores, with an aggregate total property size of approximately 5,322,000square feet. The following table sets forth certain details regarding eachNeiman Marcus store:

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

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(1)             Ownedsubject to partial ground lease.

(2)             Leased.

(3)             Ownedsubject to ground lease.

(4)             Owned.

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

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We recently opened new stores in San Antonio (120,000square feet) in September 2005, Boca Raton (136,000 square feet) in November2005, Charlotte (80,000 square feet) in September 2006, Austin (80,000 squarefeet) in March 2007 and Natick (102,000 square feet) in September 2007 andcurrently plan to open new stores in:

·                  the greater LosAngeles area in Fall 2008 (120,000 square feet planned),

·                  suburban Seattlein Fall 2009 (125,000 square feet planned),

·                  Princeton inSpring 2010 (90,000 square feet planned),

·                  Long Island inFall 2010 (150,000 square feet planned), and

·                  Sarasota,Florida in Fall 2010 (80,000 square feet planned).

***BergdorfGoodman Stores. ***We operate two Bergdorf Goodman stores, both ofwhich are located in Manhattan at 58th Street and Fifth Avenue. The following tablesets forth certain details regarding these stores:

**Bergdorf GoodmanStores**

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

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(1)             Leased.

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

***ClearanceCenters. ***As of September 20, 2007, we operated 21 clearancecenters that average approximately 28,300 square feet each in size.

***Distribution,support and office facilities. ***We own approximately 34 acres of land in Longview,Texas, where our primary distribution facility is located. The Longviewfacility is the principal merchandise processing and distribution facility forNeiman Marcus stores. We currently utilize a regional distribution facility inTotowa, New Jersey and five regional service centers in New York, Florida, Illinois,Texas and California. We also own approximately 50 acres of land in Irving,Texas, where our Direct Marketing operating headquarters and distributionfacility is located.  In addition, wecurrently utilize another regional distribution facility in Dallas, Texas tosupport our Direct Marketing operation.

***Lease Terms.***  The termsof the leases for substantially all of our stores, assuming all outstandingrenewal options are exercised, range from 12 to 101 years. The lease onthe Bergdorf Goodman Main Store expires in 2050, with no renewal options, andthe lease on the Bergdorf Goodman Men’s Store expires in 2010, with two 10-yearrenewal options. Most leases provide for monthly fixed rentals or contingentrentals based upon sales in excess of stated amounts and normally require us topay real estate taxes, insurance, common area maintenance costs and otheroccupancy costs.

For further information on ourproperties and lease obligations, see Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and Note 15 ofthe Notes to Consolidated Financial Statements in Item 15.

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**ITEM 3. LEGAL PROCEEDINGS**

We are currently involved in various legal actions andproceedings that arose in the ordinary course of our business. We believe thatany liability arising as a result of these actions and proceedings will nothave a material adverse effect on our financial position, results of operationsor cash flows.

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

No matters were submitted to a vote of our securityholders during the quarter ended July 28, 2007.

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**PART II**

**ITEM 6. SELECTED FINANCIAL DATA**

The following selected financialdata is qualified in entirety by our consolidated financial statements (and therelated Notes thereto) contained in Item 15 and should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in Item 7. We derived the selected financialdata as of July 28, 2007 and July 29, 2006 and for the fiscal year ended July28, 2007, the forty-three weeks ended July 29, 2006, nine weeks ended October1, 2005 and fiscal year ended July 30, 2005 from our audited consolidatedfinancial statements and related notes. The selected financial data as of July 30, 2005, July 31, 2004 andAugust 2, 2003 and for the fiscal years ended July 31, 2004 and August 2, 2003reflect adjustments to the Predecessor’s audited consolidated financialstatements to reclassify the operations of Gurwitch Products, L.L.C. and KateSpade LLC as discontinued operations.
|                                                                                             | ** ** | **(Successor)**                              | ** ** | ** **                                         | ** ** | **(Predecessor)** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                                                     | ** ** | **Fiscal  year  ended  July 28,  2007** | ** ** | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** | **Fiscal  year  ended  July 30,  2005** | ** ** | **Fiscal  year  ended  July 31,  2004** | ** ** | **Fiscal  year  ended  August 2,  2003** | ** ** |
| **OPERATING  RESULTS**                                                                      |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| ** **                                                                                  |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| Revenues                                                                                    |       | $                                            | 4,390.1    |                                               | $          | 3,397.7           |       |   |   | $ | 632.4 |   | $ | 3,695.1 |   | $ | 3,420.7 |   | $ | 3,000.5 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation)           |       | 2,753.8                                      |       | 2,219.4                                            |       |              |       | 371.5 |   | 2,349.2 |   | 2,201.2 |   | 1,976.2 |   |
| Selling, general and  administrative expenses (excluding depreciation)                      |       | 1,015.1                                      |       | 802.4                                              |       |              |       | 155.6 |   | 907.3 |   | 842.9 |   | 783.0 |   |
| Income from credit card  program                                                            |       | (65.7                                        | )          | (49.4                                              | )          |              |       | (7.8 | ) | (71.6 | ) | (55.8 | ) | (53.3 | ) |
| Depreciation and  amortization                                                              |       | 208.7                                        |       | 166.6                                              |       |              |       | 19.2 |   | 103.6 |   | 96.3 |   | 80.7 |   |
| Operating earnings                                                                          |       | 476.8                                        | (1)        | 258.7                                              |       |              |       | 70.3 | (2) | 397.4 | (3) | 332.2 | (5) | 213.8 |   |
| Earnings from  continuing operations before income taxes and change in accounting principle |       | 217.0                                        |       | 41.0                                               |       |              |       | 71.2 |   | 385.2 |   | 316.3 |   | 197.6 |   |
| (Loss) earnings from  discontinued operations, net of tax                                   |       | (22.8                                        | )          | (14.0                                              | )          |              |       | (0.8 | ) | 5.0 |   | 4.7 |   | 2.5 |   |
| Net earnings                                                                                |       | $                                            | 111.9      |                                               | $          | 12.5              |       |   |   | $ | 44.2 |   | $ | 248.8 | (4) | $ | 204.8 | (6) | $ | 109.3 | (7) |
|                                                                                        |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| ** **                                                                                  | ** ** | **(Successor)**                              | ** ** | ** **                                         | ** ** | **(Predecessor)** | ** ** |
| ** **                                                                                  | ** ** | **July 28,  2007**                      | ** ** | **July 29,  2006**                            | ** ** | ** **        | ** ** | ** ** | ** ** | **July 30,  2005** | ** ** | **July 31,  2004** | ** ** | **August 2,  2003** | ** ** |
|                                                                                        |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| **FINANCIAL  POSITION**                                                                     |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                  |       | $                                            | 141.2      |                                               | $          | 223.7             |       |   |   |   |   | $ | 852.6 |   | $ | 364.2 |   | $ | 202.9 |   |
| Merchandise  inventories                                                                    |       | 918.3                                        |       | 793.6                                              |       |              |       |   |   | 729.3 |   | 703.6 |   | 676.1 |   |
| Total current  assets                                                                       |       | 1,215.0                                      |       | 1,135.9                                            |       |              |       |   |   | 1,708.5 |   | 1,706.2 |   | 1,246.1 |   |
| Property and  equipment, net                                                                |       | 1,043.7                                      |       | 1,030.3                                            |       |              |       |   |   | 836.7 |   | 740.1 |   | 726.7 |   |
| Total assets                                                                                |       | 6,501.0                                      |       | 6,608.0                                            |       |              |       |   |   | 2,660.7 |   | 2,617.6 |   | 2,104.5 |   |
| Current  liabilities                                                                        |       | 767.9                                        |       | 699.1                                              |       |              |       |   |   | 617.3 |   | 727.7 |   | 530.4 |   |
| Long-term  liabilities                                                                      |       | $                                            | 4,175.1    |                                               | $          | 4,474.9           |       |   |   |   |   | $ | 457.3 |   | $ | 509.1 |   | $ | 428.0 |   |

 

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|                                           | ** ** | **(Successor)**                              | ** ** | ** **                                         | ** ** | **(Predecessor)** | ** ** |
|-------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **Fiscal  year  ended  July 28,  2007** | ** ** | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** | **Fiscal  year  ended  July 30,  2005** | ** ** | **Fiscal  year  ended  July 31,  2004** | ** ** | **Fiscal  year  ended  August 2,  2003** | ** ** |
| **OTHER  OPERATING DATA**                 |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                     |       | $                                            | 147.9      |                                               | $          | 138.2             |       |   |   | $ | 25.6 |   | $ | 190.3 |   | $ | 114.4 |   | $ | 127.6 |   |
| Depreciation  expense                     |       | $                                            | 136.5      |                                               | $          | 107.0             |       |   |   | $ | 19.2 |   | $ | 103.6 |   | $ | 96.3 |   | $ | 80.7 |   |
| Rent expense and  related occupancy costs |       | $                                            | 87.5       |                                               | $          | 69.3              |       |   |   | $ | 12.5 |   | $ | 72.3 |   | $ | 65.3 |   | $ | 62.5 |   |
| Change in  comparable revenues (8)        |       | 6.7                                          | %          | 6.8                                                | %          |              |       | 9.8 | % | 9.8 | % | 14.0 | % | 3.8 | % |
| Number of stores  open at period end      |       | 40                                           |       | 38                                                 |       |              |       | 37 |   | 36 |   | 37 |   | 37 |   |
|                                      |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| **NON-GAAP  FINANCIAL MEASURE**           |       |                                         |       |                                               |       |              |       |   |   |   |   |   |   |   |   |
| EBITDA (9)                                |       | $                                            | 685.6      | (1)                                                | $          | 425.3             |       |   |   | $ | 89.5 | (2) | $ | 501.1 | (3) | $ | 428.6 | (5) | $ | 279.8 | (7) |

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(1)             Forfiscal year 2007, operating earnings and EBITDA include 1) $11.5 million pretaximpairment charge related to the writedown to fair value in the net carryingvalue of the Horchow tradename, offset by 2) $4.2 million of other income wereceived in connection with the merger of Wedding Channel.com, in which we helda minority interest, and The Knot and 3) $6.0M of other income related to aged,non-escheatable gift cards.

(2)             Forthe nine weeks ended October 1, 2005, operating earnings and EBITDAinclude $23.5 million of transaction and other costs incurred inconnection with the Transactions. These costs consist primarily of$4.5 million of accounting, investment banking, legal and other costsassociated with the Transactions and a $19.0 million non-cash charge forstock compensation resulting from the accelerated vesting of Predecessor stockoptions and restricted stock in connection with the Acquisition.

(3)             Forfiscal year 2005, operating earnings and EBITDA include a $15.3 millionpretax loss related to the disposition of Chef’s Catalog in November 2004 and a$6.2 million pretax gain related to the sale of our credit card portfolio.

(4)             Forfiscal year 2005, net earnings reflect tax benefits aggregating$7.6 million resulting from favorable settlements associated with previousstate tax filings and reductions in previously recorded deferred taxliabilities.

(5)             Forfiscal year 2004, operating earnings and EBITDA include a $3.9 millionpretax impairment charge related to the writedown to fair value in the netcarrying value of the Chef’s Catalog tradename intangible asset.

(6)             Forfiscal year 2004, net income reflects a $7.5 million tax benefit relatedto favorable settlements associated with previous state tax filings.

(7)             Forfiscal year 2003, net earnings and EBITDA reflect an after-tax charge of$14.8 million for the writedown of certain intangible assets related toprior purchase business combinations as a result of the implementation of a newaccounting principle.

(8)             Comparablerevenues include 1) revenues derived from our retail stores open for morethan 52 weeks, including stores that have been relocated or expanded and2) revenues from our Direct Marketing operation. Comparable revenuesexclude 1) revenues of closed stores, 2) revenues from our discontinuedoperations (Gurwitch Products, L.L.C. and Kate Spade LLC) and 3) revenues ofour previous Chef’s Catalog operations (sold in November 2004).  The calculation of the change in comparablerevenues for 2003 is based on revenues for the 52 weeks endedAugust 2, 2003 compared to revenues for the 52 weeks endedJuly 27, 2002.

(9)             Foran explanation of EBITDA, see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Non-GAAP FinancialMeasure-EBITDA.”

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**ITEM 7.****          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

**EXECUTIVEOVERVIEW**

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

**Overview**

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

The Company acquired The Neiman Marcus Group, Inc.(NMG) on October 6, 2005 through a merger transaction with NewtonAcquisition Merger Sub, Inc., a wholly-owned subsidiary of NeimanMarcus, Inc.  The acquisition wasaccomplished through the merger of the Newton Acquisition Merger Sub, Inc.with and into NMG, with NMG being the surviving entity (the Acquisition).  Subsequent to the Acquisition, NMG is a subsidiaryof the Company, which is controlled by Newton Holding, LLC (Holding). Both theCompany and Holding were formed by investment funds affiliated with TPG Capital(formerly Texas Pacific Group) and Warburg Pincus LLC (collectively, theSponsors).

Prior to the Acquisition, the Company had no independentassets or operations.  After theAcquisition, the Company represents the Successor to NMG since the Company’ssole asset is its investment in NMG and its operations consist solely of theoperating activities of NMG as well as costs incurred by the Company related toits investment in NMG.  For periods priorto the Acquisition, NMG is deemed to be the predecessor to the Company.  As a result, for periods prior to the Transactions,the financial statements of the Company consist of the financial statements ofNMG for such periods.  The accompanyingconsolidated statements of earnings and cash flows present our results ofoperations and cash flows for the periods preceding the Acquisition(Predecessor) and the periods succeeding the Acquisition (Successor),respectively. All references to “we” and “our” relate to the Company forperiods subsequent to the Transactions and to NMG for periods prior to theTransactions.

We have prepared our discussion of the results ofoperations for the fiscal year ended July 29, 2006 by combining theearnings and cash flows for the Predecessor nine-week period ended October 1,2005 and the Successor forty-three week period ended July 29, 2006. Although this combined presentation does notcomply with generally accepted accounting principles (GAAP), we believe that itprovides a meaningful method of comparison. The combined operating results havenot been prepared on a pro forma basis under applicable regulations and may notreflect the actual results we would have achieved absent the Transactions.

In connection with the Transactions, we incurredsignificant indebtedness and became highly leveraged. See “Liquidity andCapital Resources.” In addition, the purchase price paid in connection with theAcquisition was allocated to state the acquired assets and liabilities at fairvalue at the Acquisition date. The purchase accounting adjustments increasedthe carrying values of our property and equipment and inventory, establishedintangible assets for our tradenames, customer lists and favorable leasecommitments and revalued our long-term benefit plan obligations, among otherthings. Subsequent to the Transactions, interest expense and non-cashdepreciation and amortization charges have significantly increased. As aresult, our successor financial statements subsequent to the Transactions arenot comparable to our predecessor financial statements.

Our fiscal year ends on the Saturday closest toJuly 31. All references to fiscal year 2007 relate to the 52 weeks endedJuly 28, 2007; all references to fiscal year 2006 relate to the combined 52weeks ended July 29, 2006 (calculated as described above) and allreferences to fiscal year 2005 relate to the 52 weeks ended July 30,2005.

On July 27, 2006, we soldour majority interest in Gurwitch Products, L.L.C. to Alticor Inc., forpretax net cash proceeds of approximately $40.8 million (GurwitchDisposition).  Gurwitch Products, L.L.C.designs and markets the Laura Mercier cosmetics line and had annual revenues ofapproximately $59.0 million (after intercompany eliminations) in fiscal year2006.  The net assets of GurwitchProducts, L.L.C. were sold for their net carrying value (after purchaseaccounting adjustments made in connection with the Transactions to state suchassets at fair value).

23

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In April 2005, theminority investor in Kate Spade LLC exercised the put option with respect tothe sale of the full amount of its 44% stake in such company to NMG. In October2006, we entered into an agreement to settle the put option whereby we purchasedthe interest held by the minority investor for approximately $59.4 million.

In November 2006,we entered into a definitive agreement to sell 100% of the ownership interestsin Kate Spade LLC to Liz Claiborne, Inc. (consisting of both our original 56%interest and the 44% minority interest subsequently purchased by NMG) forpretax net cash proceeds of approximately $121.5 million. Both the purchase of the minority interest in KateSpade LLC and the sale of Kate Spade LLC to Liz Claiborne, Inc. were consummatedin December 2006.

Kate Spade LLCdesigns and markets high-end accessories and had revenues of approximately$75.5 million (after intercompany eliminations) in fiscal year 2006. Fiscalyear 2007 revenues of Kate Spade LLC through its disposition in December 2006aggregated $29.6 million.

The Company’s consolidatedfinancial statements, accompanying notes and other information provided in thisAnnual Report on Form 10-K reflect Gurwitch Products, L.L.C. and Kate Spade LLCas discontinued operations for all periods presented.

**Recent Developments**

On September 6, 2007, we announced preliminary totalrevenues and comparable revenues of approximately $282.6 million and$276.3 million, respectively, for the four-week August period of fiscalyear 2008, representing increases of 7.0% and 4.6%, respectively, compared tothe four-week August period of fiscal year 2007. For the four-week Augustperiod of fiscal year 2008, comparable revenues increased 5.0% in our SpecialtyRetail stores and 2.5% in Direct Marketing.

All the financial data set forth above for the four-weekAugust period of fiscal year 2008 are preliminary and unaudited and subject torevision based upon our review and a review by our independent registeredpublic accounting firm of our financial condition and results of operations forthe quarter ending October 27, 2007. Once we and our independent registeredpublic accounting firm have completed our respective reviews of our financialinformation for the quarter ending October 27, 2007, we may report financialresults that are different from those set forth above.

**Factors Affecting Our Results**

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

·                  Salesof merchandise—Revenues from our Specialty Retail stores are recognized at thelater of the point of sale or the delivery of goods to the customer. Revenuesfrom our Direct Marketing operation are recognized when the merchandise is deliveredto the customer. We maintain reserves for anticipated sales returns primarilybased on our historical trends related to returns by both our Specialty Retailand Direct Marketing customers. Revenues exclude sales taxes collected from ourcustomers.

·                  Deliveryand processing—We generate revenues from delivery and processing chargesrelated to merchandise delivered to our customers from both our retail anddirect marketing operations.

Our revenues can be affected by the following factors:

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

·                  changesin the level of full-price sales;

·                  changesin the level of promotional events conducted by our Specialty Retail and Directmarketing operations;

·                  ourability to successfully implement our store expansion and remodelingstrategies;

·                  therate of growth in internet sales by our Direct Marketing operation; and

·                  generaleconomic conditions.

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

***Cost of goods sold includingbuying and occupancy costs (excluding depreciation) (COGS).***  COGS consists of the following components:

·                  Inventorycosts—We utilize the retail method of accounting. Under the retail inventory method,the valuation of inventories at cost and the resulting gross margins aredetermined by applying a calculated cost-to-retail ratio, for various groupingsof similar items, to the retail value of our inventories. Merchandiseinventories are stated at the lower of cost or market. The cost of theinventory reflected on the consolidated balance sheet is decreased by chargesto cost of goods sold at the time the retail value of the inventory is loweredthrough the use of markdowns. Hence, earnings are negatively impacted whenmerchandise is marked down. With the introduction of new fashions in the firstand third fiscal quarters and our emphasis on full-price selling in thesequarters, a lower level of markdowns and higher margins are characteristic ofthese quarters.

·                  Buyingcosts—Buying costs consist primarily of salaries and expenses incurred by ourmerchandising and buying operations.

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

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

Consistent with industry business practice, we receiveallowances from certain of our vendors in support of the merchandise wepurchase for resale. Certain allowances are received to reimburse us formarkdowns taken or to support the gross margins that we earn in connection withthe sales of the vendor’s merchandise. These allowances result in an increaseto gross margin when we earn the allowances and they are approved by thevendor. Other allowances we receive represent reductions to the amounts we payto acquire the merchandise. These allowances reduce the cost of the acquiredmerchandise and are recognized at the time the goods are sold.  We received vendor allowances of $103.4 million, or 2.4% of revenues, in fiscalyear 2007, $94.5 million, or 2.3% of revenues, in fiscal year 2006(including $2.4 million for the Predecessor prior to the Acquisition) and $87.7million, or 2.4% of revenues, in fiscal year 2005.

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

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

·                  ourability to order an appropriate amount of merchandise to match customer demandand the related impact on the level of net markdowns incurred;

·                  factorsaffecting revenues generally;

·                  changesin occupancy costs primarily associated with the opening of new stores ordistribution facilities; and

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

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

Advertising costs incurred by our Specialty Retailsegment consist primarily of print media costs related to promotional materialsmailed to our customers, while advertising costs incurred by our DirectMarketing operation relate to the production, printing and distribution of ourprint catalogs and the production of the photographic content on our websites,as well as online marketing costs. We receive advertising allowances fromcertain of our merchandise vendors. Substantially all the advertising allowanceswe receive represent reimbursements of direct, specific and incremental coststhat we incur to promote the vendor’s merchandise in connection with ourvarious advertising programs, primarily catalogs and other print media. As aresult, these allowances are recorded as a reduction of our advertising costswhen earned. Vendor allowances earned and recorded as a 

25

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reduction to selling, general and administrative expenses aggregatedapproximately $63.4 million, or 1.4% of revenues, in fiscal year 2007, $61.7million, or 1.5% of revenues, in fiscal year 2006 (including $18.6 million forthe Predecessor prior to the Acquisition) and $57.5 million, or 1.6% ofrevenues, in fiscal year 2005.

We also receive allowances from certain merchandisevendors in conjunction with compensation programs for employees who sell thevendor’s merchandise. These allowances are netted against the relatedcompensation expense that we incur. Amounts received from vendors related tocompensation programs were $65.4 million, or 1.5% of revenues, in fiscal year2007, $59.5 million, or 1.5% of revenues, in fiscal year 2006 (including$10.1 million for the Predecessor prior to the Acquisition) and$53.2 million, or 1.4% of revenues, in fiscal year 2005.

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

·                  changesin the number of sales associates primarily due to new store openings andexpansion of existing stores, including increased health care and relatedbenefits expenses;

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

·                  changesin expenses related to insurance and long-term benefits due to general economicconditions such as rising health care costs.

***Income from credit card program***.  Prior tothe Credit Card Sale on July 7, 2005, our credit card operations generatedfinance charge income, net of credit losses, which we recognized as income whenearned. As a part of the Credit Card Sale, we entered into a long-termmarketing and servicing alliance with HSBC that expires in June 2010. Under theterms of this alliance, HSBC offers credit card and non-card payment plans andbears all credit risk with respect to sales transacted on the cards bearing ourbrands. We receive ongoing payments from HSBC based on net credit card salesand compensation for marketing and servicing activities (HSBC Program Income).We recognize HSBC Program Income when earned.

As a percentage of revenues, the HSBC Program Income islower than the net finance charge income we earned prior to the Credit CardSale. However, the resulting decrease in income from credit card program ismitigated, in part, by 1) decreases in SG&A expenses we incur due tothe transfer of certain servicing functions to HSBC after the sale, 2) decreasesin our capital investments related to the servicing of the credit cardportfolio and 3) decreases in carrying costs related to our previousfunding of the seasonal working capital requirements of the credit cardportfolio. In tandem with HSBC, we initiated various changes in our credit cardprogram to alter the credit terms available to our cardholders and to enhancethe earnings of the portfolio.  In thefuture, the HSBC Program Income may be:

·                  increasedor decreased based upon future changes to our historical credit card programrelated to, among other things, the interest rates applied to unpaid balancesand the assessment of late fees; and

·                  decreasedbased upon the level of future services we provide to HSBC.

 

26

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**Fiscal Year 2007 Highlights**

We believe that our productassortment of luxury, designer and fashion merchandise, coupled with our salespromotion activities and our commitment to superior customer service, have beencritical to our success in the past. In addition, we believe these factors arecritical to our future growth and success. Highlights from fiscal year 2007 include:

·                  **Increases in revenues**—Our revenues for fiscal year 2007 were$4,390.1 million, the highest in our history. Revenues increased by 8.9% infiscal year 2007 as compared to fiscal year 2006. This increase wasattributable to 1) increases in comparable revenues, 2) revenues from newstores and 3) higher internet sales.

Comparablerevenues increased 6.7% in fiscal year 2007 and were achieved on top ofincreases in comparable revenues of 7.3% in fiscal year 2006.  Comparable revenues percentage increases byfiscal quarter for fiscal year 2007 as compared to the same periods in fiscalyear 2006 were:

| First fiscal quarter  |   | 6.8 | % |
|-----------------------|--------|-----|---|
| Second fiscal quarter |   | 6.8 | % |
| Third fiscal quarter  |   | 6.1 | % |
| Fourth fiscal quarter |   | 7.0 | % |

 

For Specialty Retailstores, our sales per square foot increased by 4.4% to $638 in fiscal year 2007compared to $611 in fiscal year 2006.

·                  **Decreases in cost of goods sold including buying and occupancy costs(excluding depreciation)**—COGS represented 62.7% of revenues infiscal year 2007 and 64.3% of revenues in fiscal year 2006. This decrease isprimarily due to non-cash purchase accounting adjustments in fiscal year 2006of $38.1 million, or 0.9% of revenues. Excluding the impact of purchase accounting adjustments, COGS decreasedby 0.7% of revenues in fiscal year 2007. The fiscal year 2007 decrease in COGS was achieved on top of a decreasein COGS of 0.2% of revenues in fiscal year 2006.  We believe these decreases are reflective ofa both lower product costs and a lower level of markdowns required in the FallSeason of fiscal year 2007 as well as our continuing emphasis on full-pricesales and inventory management.

·                  **Decreases in selling, general and administrative expenses (excludingdepreciation)**—SG&A decreased in fiscal year 2007 to 23.1% ofrevenues from 23.8% of revenues in fiscal year 2006.  The fiscal 2007 decrease in SG&A wasachieved on top of a decrease in SG&A of 0.8% of revenues in fiscal year2006.  We believe these decreases arereflective of both our continued leveraging of certain costs, primarilyadvertising, and emphasis on expense containment and control.

·                  **Increases in operating earnings—**For fiscal year 2007, ouroperating earnings were $476.8 million, or 10.9% of revenues, compared to$329.0 million, or 8.2% of revenues, for fiscal year 2006.  Fiscal year 2007 operating earnings increasedprimarily due to 1) an increase of $104.7 million in the operating earningsgenerated by our Specialty Retail Stores and Direct Marketing segments giventhe year-over-year increases in revenues, gross margins achieved and expenseleveraging, 2) a decrease of $23.5 million in transaction costs incurred in thefirst quarter of fiscal year 2006 and 3) a $21.7 million net decrease innon-cash items related to the amortization of intangible assets and other assetvaluation adjustments recorded in connection with the Acquisition.

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**Seasonality**

We conduct our selling activities in two primary sellingseasons—Fall and Spring. The Fall season is comprised of our first and secondfiscal quarters and the Spring season is comprised of our third and fourthfiscal quarters.

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

Similarly, the third fiscal quarter is generally characterizedby a higher level of full-price selling with a focus on the initialintroduction of Spring season fashions. Aggressive in-store marketingactivities designed to stimulate customer buying, a lower level of markdownsand higher margins are again characteristic of this quarter. Revenues aregenerally the lowest in the fourth fiscal quarter with a focus on promotionalactivities offering Spring season goods to the customer on a marked down basis,resulting in lower margins during the quarter. Our working capital requirementsare typically lower in the third and fourth fiscal quarters than in the otherquarters.

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

We monitor the sales performance of our inventoriesthroughout each season. We seek to order additional goods to supplement ouroriginal purchasing decisions when the level of customer demand is higher thanoriginally anticipated. However, in certain merchandise categories,particularly fashion apparel, our ability to purchase additional goods can belimited. This can result in lost sales in the event of higher than anticipateddemand of the fashion goods we offer or a higher than anticipated level of consumerspending. Conversely, in the event we buy fashion goods that are not acceptedby 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 vendorallowances, to sell the goods that remain at the end of the season, resultingin lower operating profits. We believe that the experience of our merchandisingand selling organizations helps to minimize the inherent risk in predictingfashion trends.

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**OPERATING RESULTS**

**Performance Summary**

The following table sets forth certain items expressed aspercentages of net revenues for the periods indicated.
| ** **                                                                        | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Fiscal year  ended  July 29,  2006** | ** ** | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **(Successor)**                                  | ** ** | **(Combined)**                                   | ** ** | **(Successor)**                                    | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** | **(Predecessor)**                                | ** ** |
| Revenues                                                                          |       | 100.0                                            | %          | 100.0                                            | %          | 100.0                                              | %          |       |       | 100.0                                             | %          | 100.0                                            | %          |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 62.7                                             |       | 64.3                                             |       | 65.3                                               |       |       |       | 58.8                                              |       | 63.6                                             |       |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 23.1                                             |       | 23.8                                             |       | 23.6                                               |       |       |       | 24.6                                              |       | 24.6                                             |       |
| Income from credit card  program                                                  |       | (1.5                                             | )          | (1.4                                             | )          | (1.5                                               | )          |       |       | (1.2                                              | )          | (1.9                                             | )          |
| Depreciation expense                                                              |       | 3.1                                              |       | 3.1                                              |       | 3.1                                                |       |       |       | 3.0                                               |       | 2.8                                              |       |
| Amortization of  customer lists                                                   |       | 1.2                                              |       | 1.1                                              |       | 1.3                                                |       |       |       | —                                            |       | —                                           |       |
| Amortization of  favorable lease commitments                                      |       | 0.4                                              |       | 0.4                                              |       | 0.4                                                |       |       |       | —                                            |       | —                                           |       |
| Other expense, net                                                                |       | —                                           |       | —                                           |       | —                                             |       |       |       | —                                            |       | —                                           |       |
| Transaction and other  costs                                                      |       | —                                           |       | 0.6                                              |       | —                                             |       |       |       | 3.7                                               |       | —                                           |       |
| Loss on disposition of  Chef’s Catalog                                       |       | —                                           |       | —                                           |       | —                                             |       |       |       | —                                            |       | 0.4                                              |       |
| Gain on credit card  sale                                                         |       | —                                           |       | —                                           |       | —                                             |       |       |       | —                                            |       | (0.2                                             | )          |
| Operating earnings                                                                |       | 10.9                                             |       | 8.2                                              |       | 7.6                                                |       |       |       | 11.1                                              |       | 10.8                                             |       |
| Interest expense  (income), net                                                   |       | 5.9                                              |       | 5.4                                              |       | 6.4                                                |       |       |       | (0.1                                              | )          | 0.3                                              |       |
| Earnings from  continuing operations before income taxes                          |       | 4.9                                              |       | 2.8                                              |       | 1.2                                                |       |       |       | 11.3                                              |       | 10.4                                             |       |
| Income taxes                                                                      |       | 1.9                                              |       | 1.0                                              |       | 0.4                                                |       |       |       | 4.1                                               |       | 3.8                                              |       |
| Earnings from  continuing operations                                              |       | 3.1                                              |       | 1.8                                              |       | 0.8                                                |       |       |       | 7.1                                               |       | 6.6                                              |       |
| (Loss) earnings from  discontinued operations, net of taxes                       |       | (0.5                                             | )          | (0.4                                             | )          | (0.4                                               | )          |       |       | (0.1                                              | )          | 0.1                                              |       |
| Net earnings                                                                      |       | 2.5                                              | %          | 1.4                                              | %          | 0.4                                                | %          |       |       | 7.0                                               | %          | 6.7                                              | %          |

 

In connection with the Transactions, the Company incurredsignificant indebtedness and became highly leveraged.  See “Liquidity and Capital Resources.”  In addition, the purchase price paid inconnection with the Acquisition was allocated to state the acquired assets andliabilities at fair value.  The purchaseaccounting adjustments increased the carrying values of our property andequipment and inventory, established intangible assets for our tradenames, customerlists and favorable lease commitments and revalued our long-term benefit planobligations, among other things. Subsequent to the Transactions, interest expense and non-cashdepreciation and amortization charges have significantly increased.  As a result, our Successor financial statementssubsequent to the Transactions are not comparable to our Predecessor financialstatements.

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Set forth in the following table is certain summary information withrespect to our operations for the periods indicated.
| **(dollars in millions, except sales per square foot)**      | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Fiscal year  ended  July 29,  2006** | ** ** | **Forty-three weeks  ended  July 29,  2006** | ** ** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **(Successor)**                                  | ** ** | **(Combined)**                                   | ** ** | **(Successor)**                                        | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** | **(Predecessor)**                                | ** ** |
| REVENUES                                                                                        |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Specialty Retail  stores                                                                        |       | $                                                | 3,674.6    |                                             | $          | 3,374.8                                                |       | $          | 2,829.9    |                                              |       |                                             | $          | 544.9 |   | $ | 3,103.0 |   |
| Direct Marketing                                                                                |       | 715.5                                            |       | 655.3                                            |       | 567.8                                                  |       |       |       | 87.5                                              |       | 592.1                                            |       |
| Total                                                                                           |       | $                                                | 4,390.1    |                                             | $          | 4,030.1                                                |       | $          | 3,397.7    |                                              |       |                                             | $          | 632.4 |   | $ | 3,695.1 |   |
|                                                                                            |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| OPERATING EARNINGS                                                                              |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Specialty Retail  stores                                                                        |       | $                                                | 490.6      |                                             | $          | 403.7                                                  |       | $          | 312.3      |                                              |       |                                             | $          | 91.4 |   | $ | 377.8 |   |
| Direct Marketing                                                                                |       | 116.0                                            |       | 98.2                                             |       | 90.0                                                   |       |       |       | 8.2                                               |       | 75.2                                             |       |
| Subtotal                                                                                        |       | 606.6                                            |       | 501.9                                            |       | 402.3                                                  |       |       |       | 99.6                                              |       | 453.0                                            |       |
| Corporate  expenses                                                                             |       | (56.2                                            | )          | (55.4                                            | )          | (49.6                                                  | )          |       |       | (5.8                                              | )          | (46.5                                            | )          |
| Amortization of  customer lists and favorable lease commitments                                 |       | (72.3                                            | )          | (59.6                                            | )          | (59.6                                                  | )          |       |       | —                                            |       | —                                           |       |
| Non-cash  items related to other valuation adjustments made in connection with the  Acquisition |       | —                                           |       | (34.4                                            | )          | (34.4                                                  | )          |       |       | —                                            |       | —                                           |       |
| Other expense,  net (1)                                                                         |       | (1.3                                             | )          | —                                           |       | —                                                 |       |       |       | —                                            |       | —                                           |       |
| Transaction and  other costs                                                                    |       | —                                           |       | (23.5                                            | )          | —                                                 |       |       |       | (23.5                                             | )          | —                                           |       |
| Loss on  disposition of Chef’s Catalog                                                     |       | —                                           |       | —                                           |       | —                                                 |       |       |       | —                                            |       | (15.3                                            | )          |
| Gain on Credit  Card Sale                                                                       |       | —                                           |       | —                                           |       | —                                                 |       |       |       | —                                            |       | 6.2                                              |       |
| Total                                                                                           |       | $                                                | 476.8      |                                             | $          | 329.0                                                  |       | $          | 258.7      |                                              |       |                                             | $          | 70.3 |   | $ | 397.4 |   |
|                                                                                            |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| OPERATING PROFIT MARGIN                                                                         |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Specialty Retail  stores                                                                        |       | 13.4                                             | %          | 12.0                                             | %          | 11.0                                                   | %          |       |       | 16.8                                              | %          | 12.2                                             | %          |
| Direct Marketing                                                                                |       | 16.2                                             | %          | 15.0                                             | %          | 15.8                                                   | %          |       |       | 9.4                                               | %          | 12.7                                             | %          |
| Total                                                                                           |       | 10.9                                             | %          | 8.2                                              | %          | 7.6                                                    | %          |       |       | 11.1                                              | %          | 10.8                                             | %          |
|                                                                                            |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| CHANGE IN COMPARABLE  REVENUES (2)                                                              |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Specialty Retail  stores                                                                        |       | 6.2                                              | %          | 6.1                                              | %          | 5.4                                                    | %          |       |       | 9.8                                               | %          | 8.7                                              | %          |
| Direct Marketing                                                                                |       | 9.2                                              | %          | 13.3                                             | %          | 13.9                                                   | %          |       |       | 9.6                                               | %          | 16.3                                             | %          |
| Total                                                                                           |       | 6.7                                              | %          | 7.3                                              | %          | 6.8                                                    | %          |       |       | 9.8                                               | %          | 9.8                                              | %          |
|                                                                                            |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| SALES PER SQUARE FOOT                                                                           |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Specialty Retail  stores                                                                        |       | $                                                | 638        |                                             | $          | 611                                                    |       | $          | 508        |                                              |       |                                             | $          | 103 |   | $ | 577 |   |
|                                                                                            |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| STORE COUNT                                                                                     |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Neiman Marcus and  Bergdorf Goodman stores:                                                     |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Open at  beginning of period                                                                    |       | 38                                               |       | 36                                               |       | 37                                                     |       |       |       | 36                                                |       | 37                                               |       |
| Opened during  the period                                                                       |       | 2                                                |       | 2                                                |       | 1                                                      |       |       |       | 1                                                 |       | (1                                               | )          |
| Open at end of  period                                                                          |       | 40                                               |       | 38                                               |       | 38                                                     |       |       |       | 37                                                |       | 36                                               |       |
| Clearance centers:                                                                              |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| Open at  beginning of period                                                                    |       | 18                                               |       | 16                                               |       | 17                                                     |       |       |       | 16                                                |       | 14                                               |       |
| Opened during  the period                                                                       |       | 2                                                |       | 2                                                |       | 1                                                      |       |       |       | 1                                                 |       | 2                                                |       |
| Open at end of  period                                                                          |       | 20                                               |       | 18                                               |       | 18                                                     |       |       |       | 17                                                |       | 16                                               |       |
|                                                                                            |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| NON-GAAP FINANCIAL DATA                                                                         |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |                                             |       |
| EBITDA (3)                                                                                      |       | $                                                | 685.6      |                                             | $          | 514.8                                                  |       | $          | 425.3      |                                              |       |                                             | $          | 89.5 |   | $ | 501.1 |   |

 

30

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(1)             Forfiscal year 2007, other expense, net includes 1) $11.5 million pretaximpairment charge related to the writedown to fair value in the net carryingvalue of the Horchow tradename, offset by 2) $4.2 million of other income we receivedin connection with the merger of Wedding Channel.com, in which we held aminority interest, and The Knot and 3) $6.0M of other income related to aged,non-escheatable gift cards.

(2)             Comparablerevenues include 1) revenues derived from our retail stores open for morethan 52 weeks, including stores that have been relocated or expanded and2) revenues from our Direct Marketing operation. Comparable revenuesexclude 1) revenues of closed stores, 2) revenues from our discontinuedoperations (Gurwitch Products, L.L.C. and Kate Spade LLC) and 3) revenues ofour previous Chef’s Catalog operations (sold in November 2004).

(3)             Foran explanation of EBITDA, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Non-GAAP FinancialMeasure-EBITDA.”

**Fiscal Year Ended July 28, 2007 Compared to FiscalYear Ended July 29, 2006**

***Revenues.**** *Our revenues forfiscal year 2007 of $4,390.1 million increased $360.0 million, or 8.9%, from$4,030.1 million in fiscal year 2006. The increase in revenues was due to increases in comparable revenues,revenues from new stores and a net increase in revenues from our DirectMarketing operation. Internet sales by Direct Marketing were $499.0 million, anincrease of 22.5% compared to fiscal year 2006. The increase in internet saleswas partially offset by decreases in catalog sales as well as decreases inrevenues from the Horchow brand. Revenues increased in fiscal year 2007compared to the prior fiscal year at all our operating companies.

Comparablerevenues for fiscal year ended July 28, 2007 were $4,299.2 million compared to$4,030.1 million in fiscal year 2006, representing an increase of 6.7%.Comparable revenues increased in fiscal year 2007 by 6.2% for Specialty Retailstores and 9.2% for Direct Marketing compared to fiscal year 2006. New storesgenerated sales of $88.7 million in fiscal year 2007.

Changes in comparable revenues by fiscal quarter are asfollows:
| ** **              | ** ** | **Fiscal Year 2007** | ** ** | **Fiscal Year 2006** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **Fourth  Quarter**            | ** ** | **Third  Quarter**             | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
| Specialty Retail stores |       | 6.6                            | %          | 5.6                            | %          | 7.0 | % | 5.4 | % | 5.8 | % | 5.7 | % | 4.5 | % | 8.8 | % |
| Direct Marketing        |       | 9.0                            | %          | 8.7                            | %          | 6.1 | % | 14.7 | % | 13.2 | % | 16.5 | % | 13.2 | % | 10.4 | % |
| Total                   |       | 7.0                            | %          | 6.1                            | %          | 6.8 | % | 6.8 | % | 7.0 | % | 7.3 | % | 6.0 | % | 9.0 | % |

 

***Costof goods sold including buying and occupancy costs (excluding depreciation).***  COGS for fiscal year 2007 and fiscal year2006 were:
| ** **                                                                                                                 | ** ** | **Fiscal year ended  July 28, 2007  (Successor)** | ** ** | **Fiscal year ended  July 29, 2006  (Combined)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in millions, except percentages)**                                                                       | ** ** | **$**                                                                 | ** ** | **% of  revenues**                                              | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| COGS, before purchase  accounting adjustments                                                                              |       | $                                                                     | 2,753.8    |                                                                 | 62.7       | % | $ | 2,552.9 |   | 63.4 | % |
| Purchase accounting  adjustments, primarily non-cash charges related to step-up in carrying value  of acquired inventories |       | —                                                                |       | —                                                               |       | 38.1 |   | 0.9 |   |
| COGS, as reported                                                                                                          |       | $                                                                     | 2,753.8    |                                                                 | 62.7       | % | $ | 2,591.0 |   | 64.3 | % |

 

We present the non-GAAP financial measure COGS, before purchaseaccounting adjustments because we use this measure to monitor and evaluate theperformance of our business and believe the presentation of this measure willenhance investors’ ability to analyze trends in our business and evaluate ourperformance relative to other companies in our industry.

The decrease inCOGS as reported under GAAP to 62.7% of revenues from 64.3% in the prior fiscalyear is primarily due to:

·            $38.1million of non-cash charges included in COGS in fiscal year 2006 primarilyrelated to the step-up in the carrying value of the acquired inventoriesrecorded in connection with the Transactions; and

·            increasedmargins of approximately 0.6% of revenues primarily attributable to ourSpecialty Retail stores due 

31

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primarily to lowerproduct costs, a decrease in net markdowns incurred in the Fall Season and ahigher level of full-price sales in fiscal year 2007.

Consistent with industry business practice, we receiveallowances from certain of our vendors in support of the merchandise wepurchase for resale.  We receive certainallowances to reimburse us for markdowns taken and/or to support the grossmargins realized in connection with the sales of the vendor’s merchandise.  We recognize these allowances as a decreasein COGS when the allowances are earned and approved by the vendor.  Other allowances we receive representreductions to the amounts paid to acquire the merchandise.  We recognize these allowances as a reductionin the cost of the acquired merchandise resulting in a decrease in COGS at thetime the goods are sold.  We received vendor allowances of $103.4 million, or 2.4%of revenues, in fiscal year 2007 and $94.5 million, or 2.3% of revenues,in fiscal year 2006.

***Selling,general and administrative expenses (excluding depreciation)*.**  SG&A expenses were 23.1% of revenues infiscal year 2007 compared to 23.8% of revenues in the prior fiscal year.

The net decreasein SG&A expenses as a percentage of revenues in fiscal year 2007 wasprimarily due to:

·            adecrease in marketing and advertising costs of approximately 0.4% of revenuesprimarily due to 1) higher internet sales by our Direct Marketing segment,which have a lower expense to revenue ratio than catalog sales and 2) adecrease in costs incurred by our Specialty Retail stores;

·            adecrease of approximately 0.4% of revenues in our payroll and employee benefitcosts, primarily due to the leveraging of these expenses on a higher level ofrevenues in fiscal year 2007 and favorable insurance claims experience; and

·            adecrease in preopening expenses of approximately 0.1% of revenues.

These decreases inSG&A expenses, as a percentage of revenues, were partially offset by anincrease in estimated annual incentive compensation costs in fiscal year 2007of approximately 0.2% of revenues.

***Income from credit card program.  ***We received HSBC Program Income of $65.7 million,or 1.5% of revenues, in fiscal year 2007 compared to $57.2 million, or 1.4% ofrevenues, in fiscal year 2006.  HSBCProgram Income increased as a percentage of revenues in fiscal year 2007compared to the prior fiscal year as a result of changes made to our creditcard program in fiscal year 2006 related to, among other things, the interestrates applied to unpaid balances and the assessment of late fees.

***Depreciationexpense. ***Depreciationexpense was $136.5 million, or 3.1% of revenues, in fiscal year 2007 comparedto $126.2 million, or 3.1% of revenues, in the prior fiscal year.  The increase in depreciation expense wasprimarily due to new store construction, store renovations and other capitalspending in recent years.

***Amortizationexpense. ***Amortizationof acquisition related intangibles (customer lists and favorable leasecommitments) recorded as a result of the application of purchase accounting inconnection with the Acquisition aggregated $72.3 million, or 1.6% of revenues,for fiscal year 2007 and $59.6 million, or 1.5% of revenues, for fiscal year2006.  The increase in amortizationexpense in fiscal year 2007 is due primarily to the fact that the Successorperiod in which amortization expense was recorded in fiscal year 2006 consistedof only forty-three weeks.

***Segmentoperating earnings.*** Segment operating earnings for our Specialty Retail stores and DirectMarketing segments do not reflect the impact of adjustments to revalue ourassets and liabilities to estimated fair value at the Acquisition date.  See Note 17 to our consolidated financialstatements.

Operating earningsfor our Specialty Retail stores segment were $490.6 million, or 13.4% ofSpecialty Retail stores revenues, for fiscal year 2007 compared to $403.7million, or 12.0% of Specialty Retail stores revenues, for the prior fiscalyear.  The increase in operating marginas a percentage of revenues was primarily due to 1) increased product marginsdue primarily to both lower product costs and lower markdowns and a higherportion of full-price sales and 2) net reductions in expenses as a percentageof revenues, primarily marketing and advertising, insurance, benefits andpre-opening expenses partially offset by higher incentive compensation.

Operating earningsfor Direct Marketing increased to $116.0 million, or 16.2% of Direct Marketingrevenues, in fiscal year 2007 from $98.2 million, or 15.0% of Direct Marketingrevenues, for the prior fiscal year.  Theincreases in operating earnings and operating margin for Direct Marketing wereprimarily the result of 1) a decrease in advertising and marketing costs, as apercentage of revenues, due to the continued growth in internet sales,partially offset by 2) an increase 

32

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in buying andoccupancy costs required to support the growth in sales.

***Interestexpense, net*.**  Netinterest expense was $259.8 million, or 5.9% of revenues, in fiscal year 2007and $216.8 million, or 5.4% of revenues, for the prior fiscal year.  Thesignificant components of interest expense are as follows:

| (in thousands)                    | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Fiscal year  ended  July 29,  2006** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **(Successor)**                                  | ** ** | **(Combined)**                                   | ** ** | **(Successor)**                                        | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** |
|                                   |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |
| Asset-Based  Revolving Credit Facility |       | $                                                | —     |                                             | $          | 1,332                                                  |       | $          | 1,332      |                                              |       |   | $ | — |   |
| Senior Secured Term  Loan Facility     |       | 128,380                                          |       | 111,662                                          |       | 111,662                                                |       |       |       | —                                            |       |
| 2028 Debentures                        |       | 8,915                                            |       | 8,808                                            |       | 7,266                                                  |       |       |       | 1,542                                             |       |
| Senior Notes                           |       | 63,000                                           |       | 51,421                                           |       | 51,421                                                 |       |       |       | —                                            |       |
| Senior Subordinated  Notes             |       | 51,875                                           |       | 42,339                                           |       | 42,339                                                 |       |       |       | —                                            |       |
| 2008 Notes                             |       | —                                           |       | 2,077                                            |       | 638                                                    |       |       |       | 1,439                                             |       |
| Amortization of debt  issue costs      |       | 14,141                                           |       | 11,824                                           |       | 11,728                                                 |       |       |       | 96                                                |       |
| Other                                  |       | 3,689                                            |       | 316                                              |       | 111                                                    |       |       |       | 205                                               |       |
| Total interest  expense                |       | 270,000                                          |       | 229,779                                          |       | 226,497                                                |       |       |       | 3,282                                             |       |
| Less:                                  |       |                                             |       |                                             |       |                                                   |       |       |       |                                              |       |
| Interest income                        |       | 7,370                                            |       | 8,432                                            |       | 5,386                                                  |       |       |       | 3,046                                             |       |
| Capitalized  interest                  |       | 2,825                                            |       | 4,592                                            |       | 3,446                                                  |       |       |       | 1,146                                             |       |
| Interest expense (income), net         |       | $                                                | 259,805    |                                             | $          | 216,755                                                |       | $          | 217,665    |                                              |       |   | $ | (910 | ) |

 

The increase ininterest expense is due to the $3.3 billion increase in debt incurred inconnection with the Transactions.  Thedecrease in interest income in fiscal year 2007 was due primarily to loweraverage invested balances after the Transactions.

***Otherexpense, net.***In the first quarter of fiscal year 2007,we received consideration aggregating $4.2 million, or 0.1% of revenues, in connectionwith the merger of Wedding Channel.com, in which we held a minority interest,and The Knot. We accounted for our investment in Wedding Channel.com under thecost method. In prior years, we had previously reduced our carrying value ofthis investment to zero.

In the fourth quarter of fiscal year 2007, we recorded$6.0 million of other income for the breakage on gift cards we previously soldand issued.  The income was recognizedbased upon our analysis of the aging of these gift cards, our determinationthat the likelihood of future redemption is remote and our determination thatsuch balances are not subject to escheatment laws applicable to ouroperations.  Prior to the fourth quarterof fiscal year 2007, we had not recognized breakage on gift cards pending,among other things, our final determination of the applicable escheatment lawsapplicable to our operations.  We willevaluate gift card breakage in the future on an ongoing basis.  We do not believe gift card breakage willhave a material impact on our future operations.

In thefourth quarter of fiscal year 2007, we recorded a $11.5 million pretax impairment charge related to the writedown to fairvalue in the net carrying value of the Horchow tradename based upon loweranticipated future revenues associated with the brand.

***Incometaxes. ***Oureffective income tax rate was 37.9% for fiscal year 2007.  Our effective income tax rate was 35.6% forthe forty-three weeks ended July 29, 2006 and 36.8% for the nine weeks endedOctober 1, 2005, resulting in a combined fiscal year 2006 rate of 36.4%.  Our effective tax rate for fiscal year 2007was negatively impacted by increases in tax liabilities for settlements withtaxing authorities.

We closed the Internal Revenue Service (IRS)examinations of federal tax returns for fiscal years 2004 and 2003 during thefirst quarter of fiscal year 2007 and paid the related tax liability during thesecond quarter of fiscal year 2007.  TheIRS is now examining our federal tax returns for fiscal years 2005 and2006.  We believe our recorded taxliabilities as of July 28, 2007 are sufficient to cover any potentialassessments to be made by the IRS upon the completion of their examinations. Wewill continue to monitor the progress of the IRS examinations and review our recordedtax liabilities for potential audit assessments.  Adjustments to increase or decrease therecorded tax liabilities may be required in the future as additional factsbecome known.

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**Fiscal Year Ended July 29, 2006 Compared to FiscalYear Ended July 30, 2005**

***Revenues*.**  Revenues for fiscal year 2006 of$4,030.1 million increased $335.0 million, or 9.1%, from$3,695.1 million in fiscal year 2005, reflecting increases in comparablerevenues, revenues from new stores and higher internet sales.  Revenues increased in fiscal year 2006compared to fiscal year 2005 at all our operating companies.

Comparable revenues for fiscal year 2006 were$3,922.9 million compared to $3,671.7 million in fiscal year 2005,representing an increase of 7.3%. Comparable revenues increased in fiscal year2006 by 6.1% for Specialty Retail stores and 13.3% for Direct Marketingcompared to fiscal year 2005.

Changes in comparable revenues by fiscal quarter are as follows:

|                         | ** ** | **Fiscal Year 2006** | ** ** | **Fiscal Year 2005** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **Fourth  Quarter**            | ** ** | **Third  Quarter**             | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
| Specialty Retail stores |       | 5.8                            | %          | 5.7                            | %          | 4.5 | % | 8.8 | % | 7.4 | % | 6.5 | % | 9.6 | % | 11.1 | % |
| Direct Marketing        |       | 13.2                           | %          | 16.5                           | %          | 13.2 | % | 10.4 | % | 19.5 | % | 16.8 | % | 15.8 | % | 13.1 | % |
| Total                   |       | 7.0                            | %          | 7.3                            | %          | 6.0 | % | 9.0 | % | 9.2 | % | 7.9 | % | 10.7 | % | 11.4 | % |

 

In fiscal year 2006, internet sales by Direct Marketingwere $405.7 million, an increase of 33.0% from fiscal year 2005, excludingChef’s Catalog. Total revenues of Chef’s Catalog (prior to its sale inNovember 2004) of $13.9 million are included in consolidated revenuesfor fiscal year 2005.

*                **Cost of goods sold including buying and occupancy costs (excluding depreciation).***  COGS forfiscal year 2006 and fiscal year 2005 were:

|                                                                                                                            | ** ** | **Fiscal year ended  July 29, 2006** | ** ** | **Fiscal year ended  July 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **(Combined)**                                           | ** ** | **(Predecessor)**                                        | ** ** |
| **(in millions, except percentages)**                                                                       | ** ** | **$**                                                    | ** ** | **% of  revenues**                                  | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                                               | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| COGS, before purchase  accounting adjustments                                                                              |       | $                                                        | 2,552.9    |                                                     | 63.4       | % | $ | 2,349.2 |   | 63.6 | % |
| Purchase accounting  adjustments, primarily non-cash charges related to step-up in  carrying value of acquired inventories |       | 38.1                                                     |       | 0.9                                                      |       | — |   | — |   |
| COGS, as reported                                                                                                          |       | $                                                        | 2,591.0    |                                                     | 64.3       | % | $ | 2,349.2 |   | 63.6 | % |

 

We present the non-GAAP financial measure COGS, before purchaseaccounting adjustments because we use this measure to monitor and evaluate theperformance of our business and believe the presentation of this measure willenhance investors’ ability to analyze trends in our business and evaluate ourperformance relative to other companies in our industry.

The increase inCOGS as reported under GAAP to 64.3% of revenues from 63.6% in the prior fiscalyear is primarily due to $38.1 million of non-cash charges included in COGS infiscal year 2006 primarily related to the step-up in the carrying value of theacquired inventories recorded in connection with the Transactions.  COGS before purchase accounting adjustmentswas 63.4% of revenues compared to 63.6% of revenues in the prior yearreflecting a decrease in product costs primarily due to lower net markdowns.

We incurred a lower level ofnet markdowns in our Specialty Retail stores in fiscal year 2006 primarily dueto:

·                    higher levelsof full-price selling; and

·                  markdownsavings, primarily in the Spring season, related to lower markdown percentagestaken in connection with the end-of-season clearance activities in ourfull-line stores.

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Consistent with industry business practice, we receiveallowances from certain of our vendors in support of the merchandise wepurchase for resale. We receive certain allowances to reimburse us formarkdowns taken and/or to support the gross margins realized in connection withthe sales of the vendor’s merchandise. We recognize these allowances as adecrease in COGS when the allowances are earned and approved by the vendor.Other allowances we receive represent reductions to the amounts initially paidto acquire the merchandise. We recognize these allowances as a reduction in thecost of the acquired merchandise resulting in a decrease in COGS at the timethe goods are sold. We received vendor allowances of $94.5 million, or 2.3% ofrevenues, in fiscal year 2006 and $87.7 million, or 2.4% of revenues, infiscal year 2005.

***Selling, general and administrative expenses(excluding depreciation).***  SG&A expenses were 23.8% ofrevenues in fiscal year 2006 compared to 24.6% of revenues in the prior fiscalyear period.

The net decrease in SG&A expenses as a percentage ofrevenues in fiscal year 2006 was primarily due to:

·                  adecrease in marketing and advertising costs of approximately 0.3% of revenuesprimarily due to higher internet sales by our Direct Marketing segment, whichhave a lower expense to revenue ratio than catalog sales;

·                  adecrease of approximately 0.3% of revenues in our payroll and employee benefitcosts primarily due to the leveraging of these expenses on a higher level ofrevenues in fiscal year 2006 period and favorable insurance claims experience;

·                  lowerannual incentive compensation costs of approximately 0.1% of revenues;

·                  adecrease in costs incurred to support our credit card operations subsequent tothe Credit Card Sale of approximately 0.1% of revenues; and

·                  adecrease of approximately 0.1% of revenues in professional and legal feesincurred primarily due to a higher level of costs incurred in the fourthquarter of fiscal year 2005 related to the Transactions.

These decreases in SG&A expenses, as a percentage ofrevenues, were partially offset by:

·                  managementservices fees of $8.7 million, or 0.2% of revenues, payable to theSponsors as a result of the Acquisition; and

·                  anincrease in preopening expenses and store remodeling expenses primarilyincurred in connection with the opening of our San Antonio store inSeptember 2005 and our Boca Raton store in November 2005 byapproximately 0.1% of revenues.

***Income from credit card program.***  Wereceived HSBC Program Income of $57.2 million, or 1.4% of revenues, infiscal year 2006 compared to net finance charge income of $71.6 million,or 1.9% of revenues, in fiscal year 2005.

***Depreciation expense.*** Depreciation expense was $126.2 million, or 3.1% of revenues, infiscal year 2006 compared to $103.6 million, or 2.8% of revenues, in theprior fiscal year. The increase in depreciation was primarily due to 1) ahigher level of capital spending in recent years and 2) additionaldepreciation expense resulting from the revaluation of our property and equipmentat fair value in connection with the Acquisition.

***Amortization expense.*** Amortization of acquisition related intangibles (customer lists andfavorable lease commitments) recorded as a result of the application ofpurchase accounting in connection with the Acquisition aggregated$59.6 million, or 1.5% of revenues, for fiscal year 2006. We had noamortization expense in the prior year period.

***Transaction and other costs.***  During theperiod July 30, 2005 to October 1, 2005, we expensed$23.5 million of costs incurred in connection with the Transactions. Thesecosts consisted of $4.5 million of accounting, investment banking, legaland other costs associated with the Transactions and a $19.0 millionnon-cash charge for stock compensation resulting from the accelerated vestingof Predecessor stock options and restricted stock.

***Segment operating earnings.***  Segmentoperating earnings for our Specialty Retail stores and Direct Marketingsegments do not reflect the impact of adjustments to revalue our assets and liabilitiesto estimated fair value at the Acquisition date. See Note 17 to ourconsolidated financial statements.

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Operating earnings for our Specialty Retail storessegment were $403.7 million, or 12.0% of Specialty Retail stores revenues,for fiscal year 2006 compared to $377.8 million, or 12.2% of SpecialtyRetail stores revenues, for the prior year period. Operating margin forSpecialty Retail stores was positively impacted by 1) higher productmargins, 2) lower SG&A expenses for compensation and related benefits,as a percentage of revenues, as a result of leveraging these expenses on ahigher level of revenues in fiscal year 2006 and 3) the leveraging ofbuying and occupancy costs on a higher level of revenues. These effects wereoffset, in part, by 1) a lower level of income from our credit cardoperations due to the sale of our credit card operations to HSBC inJuly 2005, 2) higher preopening costs and 3) higher depreciationcharges as a result of higher levels of capital expenditures for new stores andstore remodels in recent years.

Operating earnings for Direct Marketing increased to$98.2 million, or 15.0% of Direct Marketing revenues, in fiscal year 2006from $75.2 million, or 12.7% of Direct Marketing revenues, for the prioryear period. The increase in operating earnings and operating margin for DirectMarketing was primarily the result of 1) higher product margins and2) the decrease in advertising and marketing costs, as a percentage ofrevenues, incurred to support internet sales.

***Interest expense, net.***  Netinterest expense was $216.8 million in fiscal year 2006 and$12.3 million for the prior year period. The significant components ofinterest expense are as follows:

| (in thousands)                    | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | ** ** | **Nine weeks  Ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 29,  2006** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **(Successor)**                                        | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** | **(Combined)**                                   | ** ** | **(Predecessor)**                                | ** ** |
|                                   |       |                                                   |       |       |       |                                              |       |                                             |       |                                             |       |
| Asset-Based  Revolving Credit Facility |       | $                                                      | 1,332      |       |       |                                              | $          | —                                           |       | $                                                | 1,332      |   | $ | — |   |
| Senior Secured Term  Loan Facility     |       | 111,662                                                |       |       |       | —                                            |       | 111,662                                          |       | —                                           |       |
| 2028 Debentures                        |       | 7,266                                                  |       |       |       | 1,542                                             |       | 8,808                                            |       | 8,904                                            |       |
| Senior Notes                           |       | 51,421                                                 |       |       |       | —                                            |       | 51,421                                           |       | —                                           |       |
| Senior Subordinated  Notes             |       | 42,339                                                 |       |       |       | —                                            |       | 42,339                                           |       | —                                           |       |
| Credit Card Facility                   |       | —                                                 |       |       |       | —                                            |       | —                                           |       | 5,526                                            |       |
| 2008 Notes                             |       | 638                                                    |       |       |       | 1,439                                             |       | 2,077                                            |       | 8,308                                            |       |
| Amortization of debt  issue costs      |       | 11,728                                                 |       |       |       | 96                                                |       | 11,824                                           |       | 831                                              |       |
| Other                                  |       | 111                                                    |       |       |       | 205                                               |       | 316                                              |       | 598                                              |       |
| Total interest  expense                |       | 226,497                                                |       |       |       | 3,282                                             |       | 229,779                                          |       | 24,167                                           |       |
| Less:                                  |       |                                                   |       |       |       |                                              |       |                                             |       |                                             |       |
| Interest income                        |       | 5,386                                                  |       |       |       | 3,046                                             |       | 8,432                                            |       | 6,556                                            |       |
| Capitalized  interest                  |       | 3,446                                                  |       |       |       | 1,146                                             |       | 4,592                                            |       | 5,350                                            |       |
| Interest expense (income), net         |       | $                                                      | 217,665    |       |       |                                              | $          | (910                                             | )          | $                                                | 216,755    |   | $ | 12,261 |   |

 

The increase in interest expense is due to the$3.3 billion increase in debt incurred in connection with theTransactions. The increase in interest income in fiscal year 2006 was dueprimarily to interest earned on higher average invested balances after theCredit Card Sale in July 2005 and prior to the Transactions.

***Income taxes.***  Oureffective income tax rate was 35.6% for the forty-three weeks endedJuly 29, 2006 and 36.8% for the nine weeks ended October 1, 2005,resulting in an effective tax rate of 36.4% for the combined fiscal year 2006period.  Our combined effective tax ratefor fiscal year 2006 was favorably impacted by a higher level of tax-exemptinterest income earned.  Our effectiveincome tax rate was 36.7% for the fiscal year ended July 30, 2005 and wasfavorably impacted by tax-exempt interest income, offset by non-deductibletransaction costs.  In the fourth fiscalquarter of fiscal year 2005, we recognized tax benefits aggregating$7.6 million related to a favorable settlement associated with previousstate tax filings and reductions in previously recorded deferred taxliabilities. Excluding these benefits, our effective tax rate was 38.6% forfiscal year 2005.

**Non-GAAPFinancial Measure - EBITDA**

We present the non-GAAP financialmeasure EBITDA because we use this measure to monitor and evaluate theperformance of our business and believe the presentation of this measure willenhance investors’ ability to analyze trends in our business, evaluate ourperformance relative to other companies in our industry and evaluate ourability to service our debt.  Inaddition, we use EBITDA as a component of the measurement of incentivecompensation.

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EBITDA is not a presentation madein accordance with GAAP and our computation of EBITDA may vary from others inour industry.  In addition, EBITDAcontains some, but not all, adjustments that are taken into account in thecalculation of the components of various covenants in the indentures governingNMG’s senior secured Asset-Based Revolving Credit Facility, Senior Secured TermLoan Facility, Senior Notes and Senior Subordinated Notes.  EBITDA should not be considered as analternative to operating earnings or net earnings as measures of operatingperformance or cash flows as measures of liquidity.  EBITDA has important limitations as ananalytical tool and should not be considered in isolation, or as a substitutefor analysis of our results as reported under GAAP.  For example, EBITDA:

·                  doesnot reflect our cash expenditures, or future requirements, for capitalexpenditures or contractual commitments;

·                  doesnot reflect changes in, or cash requirements for, our working capital needs;

·                  doesnot reflect our considerable interest expense, or the cash requirementsnecessary to service interest or principal payments, on our debt;

·                  excludestax payments that represent a reduction in cash available; and

·                  doesnot reflect any cash requirements for assets being depreciated and amortizedthat may have to be replaced in the future.

The following table reconcilesearnings from continuing operations as reflected in our consolidated statementsof earnings prepared in accordance with GAAP to EBITDA:
| **(dollars in millions)**                             | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Fiscal year  ended  July 29,  2006** | ** ** | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **(Successor)**                                  | ** ** | **(Combined)**                                   | ** ** | **(Successor)**                                    | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** | **(Predecessor)**                                | ** ** |
|                                                            |       |                                             |       |                                             |       |                                               |       |       |       |                                              |       |                                             |       |
| Earnings from  continuing operations                            |       | $                                                | 134.7      | (1)                                              | $          | 71.4                                               |       | $          | 26.4       |                                              |       |                                             | $          | 45.0 | (2) | $ | 243.8 | (3) |
| Income taxes                                                    |       | 82.3                                             |       | 40.8                                             |       | 14.6                                               |       |       |       | 26.2                                              |       | 141.4                                            |       |
| Interest expense  (income), net                                 |       | 259.8                                            |       | 216.8                                            |       | 217.7                                              |       |       |       | (0.9                                              | )          | 12.3                                             |       |
| Depreciation                                                    |       | 136.5                                            |       | 126.2                                            |       | 107.0                                              |       |       |       | 19.2                                              |       | 103.6                                            |       |
| Amortization of  customer lists and favorable lease commitments |       | 72.3                                             |       | 59.6                                             |       | 59.6                                               |       |       |       | —                                            |       | —                                           |       |
| EBITDA                                                          |       | $                                                | 685.6      | (1)                                              | $          | 514.8                                              |       | $          | 425.3      |                                              |       |                                             | $          | 89.5 | (2) | $ | 501.1 | (3) |

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(1)             Forfiscal year 2007, operating earnings and EBITDA include 1) $11.5 million pretaximpairment charge related to the writedown to fair value in the net carryingvalue of the Horchow tradename, offset by 2) $4.2 million of other income wereceived in connection with the merger of Wedding Channel.com, in which we helda minority interest, and The Knot and 3) $6.0M of other income related to aged,non-escheatable gift cards.

(2)             Forthe nine weeks ended October 1, 2005, operating earnings and EBITDAinclude $23.5 million of transaction and other costs incurred inconnection with the Transactions. These costs consist primarily of$4.5 million of accounting, investment banking, legal and other costsassociated with the Transactions and a $19.0 million non-cash charge forstock compensation resulting from the accelerated vesting of Predecessor stockoptions and restricted stock in connection with the Acquisition.

(3)             Forfiscal year 2005, operating earnings and EBITDA include a $15.3 millionpretax loss related to the disposition of Chef’s Catalog in November 2004 and a$6.2 million pretax gain related to the sale of our credit card portfolio.

 

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**Inflation and Deflation**

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

**LIQUIDITY ANDCAPITAL RESOURCES**

Our cash requirements consist principally of:

·                  thefunding of our merchandise purchases;

·                  capitalexpenditures for new store construction, store renovations and upgrades of ourmanagement information systems;

·                  debtservice requirements;

·                  incometax payments; and

·                  obligationsrelated to our Pension Plan.

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

Our working capital requirements fluctuate during thefiscal year, increasing substantially during the first and second quarters ofeach fiscal year as a result of higher seasonal levels of inventories.  We have typically financed the increases inworking capital needs during the first and second fiscal quarters with cashflows from operations and, to a lesser extent, with cash provided fromborrowings under our credit facilities. During fiscal year 2006, we financedour seasonal increases in working capital with cash flows from operations andborrowings under our Asset-Based Revolving Credit Facility. During thefirst quarter of fiscal year 2006, we borrowed $150 million under ourAsset-Based Revolving Credit Facility. We repaid these borrowings in thesecond quarter of fiscal year 2006.  Infiscal year 2007, we have made no borrowings under our Asset-Based RevolvingCredit Facility.

We believe that operating cash flows, available vendorfinancing and amounts available pursuant to our senior secured Asset-BasedRevolving Credit Facility will be sufficient to fund our operations,anticipated capital expenditure requirements, debt service obligations,contractual obligations and commitments and Pension Plan funding requirementsthrough the end of fiscal year 2008.

At July 28, 2007, cash and cash equivalents were$141.2 million compared to $223.7 million at July 29, 2006. Net cashprovided by operating activities was $258.9 million in fiscal year 2007compared to net cash provided by operating activities of $400.2 million infiscal year 2006. Cash flows related to operating activities were lower infiscal year 2007 than in the prior fiscal year primarily due to 1) an $78.6million increase in cash interest requirements on indebtedness incurred inconnection with the Transactions and 2) a $122.1 million increase in cashrequirements for income taxes. These increases in cash 

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requirements for interest and taxes were partially offset by increasesin cash flows generated by our Specialty Retail stores and Direct Marketingoperations given the year-over-year increases in revenues and operatingearnings.

Net cash used for investing activities was$85.9 million in fiscal year 2007 which consisted of 1) capitalexpenditures of $147.9 million, 2) $121.5 million pretax net cash proceedsreceived from Liz Claiborne, Inc. for the sale of Kate Spade LLC and 3) thepurchase of the minority interest held in Kate Spade LLC for $59.4million.  Net cash used in investingactivities was $5,286.1 million in fiscal year 2006, which consisted of 1)$5,156.4 million paid in connection with the Acquisition and 2) $163.8 millionfor capital expenditures, partially offset by 3) $40.8 million pretax net cashproceeds received in connection with the sale of Gurwitch Products.

We incurred capital expenditures in fiscal year 2007related to the construction of new stores in Charlotte, Austin and Natick andthe remodel of our Atlanta and San Diego stores. We incurred capitalexpenditures in fiscal 2006 related to the construction of new stores in SanAntonio and Boca Raton and the remodels of our San Francisco, Houston, BeverlyHills, Newport Beach and Bergdorf Goodman stores. We opened our San Antoniostore in September 2005, our Boca Raton store in November 2005 andour Charlotte store in September 2006. We opened our Austin store in March 2007 and plan to open the Natickstore in September 2007.  We currentlyproject capital expenditures for fiscal year 2008 to be approximately $200 to$210 million.

Net cash used for financing activities was$256.9 million in fiscal year 2007 as compared to net cash provided byfinancing activities of $4,257.6 million in fiscal year 2006. In fiscalyear 2007, we voluntarily repaid $250.0 million principal amount of the loansunder the Senior Secured Term Loan Facility. In fiscal year 2006, proceeds from debt incurred in connection with theTransactions, net of issuance costs, aggregated $3,222.1 million and cashequity contributions received in connection with the Transactions aggregated$1,427.7 million.  In fiscal year2006, we also repaid our $150.0 million of seasonal borrowings under ourAsset-Based Revolving Credit Facility, paid $134.7 million for the redemptionof our 2008 Notes pursuant to our call of such notes for redemption inconnection with the Transactions and voluntarily repaid $100.0 millionprincipal amount of borrowings on the Senior Secured Term Loan Facility.

**Financing Structure at July 28,2007**

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

***Senior Secured Asset-Based RevolvingCredit Facility.***  On October 6, 2005, in connection withthe Transactions, NMG entered into a credit agreement and related security andother agreements for a senior secured Asset-Based Revolving CreditFacility with Deutsche Bank Trust Company Americas as administrative agent andcollateral agent. The Asset-Based Revolving Credit Facility providesfinancing of up to $600.0 million, subject to a borrowing base equal to atany time the lesser of 80% of eligible inventory (valued at the lower of costor market value) and 85% of net orderly liquidation value of the eligibleinventory, less certain reserves. The Asset-Based Revolving CreditFacility includes borrowing capacity available for letters of credit and forborrowings on same-day notice. At the closing of the Transactions, NMG utilized$150.0 million of the Asset-Based Revolving Credit Facility forloans and approximately $16.5 million for letters of credit. In the secondquarter of fiscal year 2006, NMG repaid all loans under the Asset-BasedRevolving Credit Facility.

As of July 28, 2007, NMG had $573.1 million ofunused borrowing availability under the Asset-Based Revolving CreditFacility based on a borrowing base of over $600.0 million and after givingeffect to $26.9 million used for letters of credit.

The Asset-Based Revolving Credit Facility providesthat NMG has the right at any time to request up to $200.0 million ofadditional commitments, but the lenders are under no obligation to provide anysuch additional commitments, and any increase in commitments will be subject tocustomary conditions precedent. If NMG were to request any such additionalcommitments and the existing lenders or new lenders were to agree to providesuch commitments, the Asset-Based Revolving Credit Facility size could beincreased to up to $800.0 million, but NMG’s ability to borrow would stillbe limited by the amount of the borrowing base.

Borrowings under the Asset-Based Revolving CreditFacility 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) theprime rate of Deutsche Bank Trust Company Americas and (2) the federalfunds effective rate plus  1¤2 of 1% or(b) a LIBOR rate, subject to certain adjustments, in each case plus anapplicable margin. The initial applicable margin is 0% with respect to baserate borrowings and 1.75% with respect to 

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LIBOR borrowings. The applicable margin is subject to adjustment basedon the historical availability under the Asset-Based Revolving CreditFacility. In addition, NMG is required to pay a commitment fee of 0.375% perannum in respect of the unutilized commitments. If the average revolving loanutilization is 50% or more for any applicable period, the commitment fee willbe reduced to 0.250% for such period. NMG must also pay customary letter ofcredit fees and agency fees.

If at any time the aggregate amount of outstanding loans,unreimbursed letter of credit drawings and undrawn letters of credit under theAsset-Based Revolving Credit Facility exceeds the lesser of (i) thecommitment amount and (ii) the borrowing base, NMG will be required torepay outstanding loans or cash collateralize letters of credit in an aggregateamount equal to such excess, with no reduction of the commitment amount. If theamount available under the Asset-Based Revolving Credit Facility is lessthan $60 million or an event of default has occurred, NMG will be requiredto repay outstanding loans and cash collateralize letters of credit with thecash NMG would then be required to deposit daily in a collection accountmaintained with the agent under the Asset-Based Revolving CreditFacility. NMG may voluntarily reduce the unutilized portion of the commitmentamount and repay outstanding loans at any time without premium or penalty otherthan customary “breakage” costs with respect to LIBOR loans. There is noscheduled amortization under the Asset-Based Revolving Credit Facility;the principal amount of the loans outstanding is due and payable in full onOctober 6, 2010.

All obligations under the Asset-Based RevolvingCredit Facility are guaranteed by the Company and certain of NMG’s existing andfuture domestic subsidiaries. As of July 28, 2007, the liabilities of NMG’snon-guarantor subsidiaries totaled approximately $4.3 million, or 0.1% ofconsolidated liabilities, and the assets of NMG’s non-guarantor subsidiariesaggregated approximately $6.5 million, or 0.1% of consolidated totalassets. All obligations under NMG’s Asset-Based Revolving CreditFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiaries that have guaranteed the Asset-BasedRevolving Credit Facility (subsidiary guarantors), including:

·                  afirst-priority security interest in personal property consisting ofinventory and related accounts, cash, deposit accounts, all payments receivedby NMG or the subsidiary guarantors from credit card clearinghouses andprocessors or otherwise in respect of all credit card charges for sales ofinventory by NMG and the subsidiary guarantors, certain related assets andproceeds of the foregoing; and

·                  asecond-priority pledge of 100% of NMG’s capital stock and certain of thecapital stock held by NMG, the Company or any subsidiary guarantor (whichpledge, in the case of any foreign subsidiary is limited to 100% of thenon-voting stock (if any) and 65% of the voting stock of such foreignsubsidiary); and

·                  asecond-priority security interest in, and mortgages on, substantially allother tangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s owned and leased realproperty (which currently consists of approximately half of NMG’s full-lineretail stores) and equipment.

Capital stock and other securities of a subsidiary of NMGthat are owned by NMG or any subsidiary guarantor will not constitutecollateral under NMG’s Asset-Based Revolving Credit Facility to theextent that such securities cannot secure NMG’s 2028 Debentures or othersecured public debt obligations without requiring the preparation and filing ofseparate financial statements of such subsidiary in accordance with applicableSEC rules. As a result, the collateral under NMG’s Asset-Based RevolvingCredit Facility will include shares of capital stock or other securities ofsubsidiaries of NMG or any subsidiary guarantor only to the extent that theapplicable value of such securities (on a subsidiary-by-subsidiary basis) isless than 20% of the aggregate principal amount of the 2028 Debentures or othersecured public debt obligations of NMG.

NMG’s Asset-Based Revolving Credit Facilitycontains a number of covenants that, among other things and subject to certainsignificant exceptions, restrict its ability and the ability of itssubsidiaries to:

·                  incuradditional indebtedness;

·                  paydividends on NMG’s capital stock or redeem, repurchase or retire NMG’s capitalstock or indebtedness;

·                  makeinvestments, loans, advances and acquisitions;

·                  createrestrictions on the payment of dividends or other amounts to NMG from itssubsidiaries that are not guarantors;

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·                  engagein transactions with NMG’s affiliates;

·                  sellassets, including capital stock of NMG’s subsidiaries;

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

The covenants limiting dividends and other restrictedpayments; investments, loans, advances and acquisitions; and prepayments orredemptions of other indebtedness, each permit the restricted actions in anunlimited amount, subject to the satisfaction of certain payment conditions,principally that NMG must have at least $75.0 million of pro forma excessavailability under the Asset-Based Revolving Credit Facility and that NMGmust be in pro forma compliance with the fixed charge coverage ratio describedbelow.

Although the credit agreement governing the Asset-BasedRevolving Credit Facility does not require NMG to comply with any financialratio maintenance covenants, if less than $60.0 million were available tobe borrowed under the Asset-Based Revolving Credit Facility at any time,NMG would not be permitted to borrow any additional amounts unless its proforma ratio of consolidated EBITDA to consolidated Fixed Charges (as such termsare defined in the credit agreement) were at least 1.1 to 1.0. The creditagreement also contains customary affirmative covenants and events of default.

***Senior Secured Term Loan Facility.***  OnOctober 6, 2005, in connection with the Transactions, NMG entered into acredit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility with Credit Suisse asadministrative agent and collateral agent. The full amount of the SeniorSecured Term Loan Facility was borrowed on October 6, 2005. In the secondquarter of fiscal year 2006, NMG voluntarily repaid $100.0 millionprincipal amount of the loans under the Senior Secured Term Loan Facility andin fiscal year 2007, NMG voluntarily repaid $250.0 million principal amount.

At July 28, 2007,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and(2) the federal funds effective rate plus  1¤2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. At July 28, 2007,the applicable margin with respect to base rate borrowings was 0.75% and theapplicable margin with respect to LIBOR borrowings was 1.75%. The interest rateon the outstanding borrowings pursuant to the Senior Secured Term Loan Facilitywas 7.36% at July 28, 2007.

The credit agreement governing the Senior Secured TermLoan Facility requires NMG to prepay outstanding term loans with 50% (whichpercentage will be reduced to 25% if NMG’s total leverage ratio is less than aspecified ratio and will be reduced to 0% if NMG’s total leverage ratio is lessthan a specified ratio) of its annual excess cash flow (as defined in the creditagreement).  For fiscal year 2007, NMGwas not required to prepay any outstanding term loans pursuant to the annualexcess cash flow requirements.  If achange of control (as defined in the credit agreement) occurs, NMG will berequired to offer to prepay all outstanding term loans, at a prepayment priceequal to 101% of the principal amount to be prepaid, plus accrued and unpaidinterest to the date of prepayment. NMG also must offer to prepay outstandingterm loans at 100% of the principal amount to be prepaid, plus accrued andunpaid interest, with the proceeds of certain asset sales under certaincircumstances.

NMG may voluntarily prepay outstanding loans under theSenior Secured Term Loan Facility at any time without premium or penalty otherthan customary “breakage” costs with respect to LIBOR loans. There is noscheduled amortization under the Senior Secured Term Loan Facility. Theprincipal amount of the loans outstanding is due and payable in full onApril 6, 2013.

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

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·                  afirst-priority pledge of 100% of NMG’s capital stock and certain of thecapital stock held by NMG, the Company or any subsidiary guarantor (whichpledge, in the case of any foreign subsidiary is limited to 100% of thenon-voting stock (if any) and 65% of the voting stock of such foreignsubsidiary); and

·                  afirst-priority security interest in, and mortgages on, substantially allother tangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s owned and leased real property(which currently consists of approximately half of NMG’s full-line retailstores) and equipment, but excluding, among other things, the collateraldescribed in the following bullet point; and

·                  asecond-priority security interest in personal property consisting ofinventory and related accounts, cash, deposit accounts, all payments receivedby NMG or the subsidiary guarantors from credit card clearinghouses andprocessors or otherwise in respect of all credit card charges for sales ofinventory by NMG and the subsidiary guarantors, certain related assets andproceeds of the foregoing.

Capital stock and other securities of a subsidiary of NMGthat are owned by NMG or any subsidiary guarantor will not constitutecollateral under NMG’s Senior Secured Term Loan Facility to the extent thatsuch securities cannot secure the 2028 Debentures or other secured public debtobligations without requiring the preparation and filing of separate financialstatements of such subsidiary in accordance with applicable SEC rules. As aresult, the collateral under NMG’s Senior Secured Term Loan Facility willinclude shares of capital stock or other securities of subsidiaries of NMG orany subsidiary guarantor only to the extent that the applicable value of suchsecurities (on a subsidiary-by-subsidiary basis) is less than 20% of theaggregate principal amount of the 2028 Debentures or other secured public debtobligations of NMG.

The credit agreement governing the Senior Secured TermLoan Facility contains a number of negative covenants that are substantiallysimilar to those governing the Senior Notes and additional covenants related tothe security arrangements for the Senior Secured Term Loan Facility. The creditagreement also contains customary affirmative covenants and events of default.

***2028 Debentures.***  InMay 1998, NMG issued $125.0 million aggregate principal amount of its7.125% 2028 Debentures. In connection with the Transactions, NMG equally andratably secured the 2028 Debentures by a first lien security interest oncertain collateral subject to liens granted under NMG’s Senior Secured CreditFacilities constituting (a) (i) 100% of the capital stock of certain ofNMG’s existing and future domestic subsidiaries, and (ii) 100% of thenon-voting stock and 65% of the voting stock of certain of NMG’s existing andfuture foreign subsidiaries and (b) certain of NMG’s principal propertiesthat include approximately half of NMG’s full-line stores, in each case, to theextent required by the terms of the indenture governing the 2028 Debentures.The 2028 Debentures contain covenants that restrict NMG’s ability to createliens and enter into sale and lease back transactions. The collateral securingthe 2028 Debentures will be released upon the release of liens on such collateralunder NMG’s Senior Secured Credit Facilities and any other debt (other than the2028 Debentures) secured by such collateral. Capital stock and other securitiesof a subsidiary of NMG that are owned by NMG or any subsidiary will notconstitute collateral under the 2028 Debentures to the extent such propertydoes not constitute collateral under NMG’s Senior Secured Credit Facilities, asdescribed above. The 2028 Debentures are guaranteed on an unsecured, seniorbasis by the Company.

***Senior Notes.**** *On October 6, 2005,Newton Acquisition Merger Sub, Inc. issued $700.0 million aggregateoriginal principal amount of 9.0% / 9.75% Senior Notes under a senior indenture(Senior Indenture) with Wells Fargo Bank, National Association, as trustee. At theclosing of the Transactions, as the surviving corporation in the Acquisition,NMG assumed all the obligations of Newton Acquisition Merger Sub, Inc.under the Senior Indenture. The 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 Notesentirely in cash (Cash Interest) or entirely by increasing the principal amountof the outstanding Senior Notes or by issuing additional Senior Notes (PIKInterest). Cash Interest on the Senior Notes accrues at the rate of 9% perannum. 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, 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 Notesis 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 guaranteedon a joint and several unsecured, senior basis, by each of NMG’s wholly-owneddomestic subsidiaries that guarantee NMG’s obligations under its Senior SecuredCredit Facilities and by the Company. The Senior Notes and the guarantees thereofare 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’sSenior Secured Credit Facilities and the guarantees thereof and NMG’s 2028Debentures; and 

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(ii) senior to all of NMG’s and its guarantors’ existing and futuresubordinated indebtedness, including the Senior Subordinated Notes due 2015 andthe guarantees thereof. The Senior Notes also are effectively junior inpriority to NMG’s and its guarantors’ obligations under all securedindebtedness, including NMG’s Senior Secured Credit Facilities, the 2028Debentures, and any other secured obligations of NMG, in each case, to theextent of the value of the assets securing such obligations. In addition, theSenior Notes are structurally subordinated to all existing and futureliabilities, including trade payables, of NMG’s subsidiaries that are notproviding guarantees.

NMG is not required to make any mandatory redemption orsinking fund payments with respect to the Senior Notes, but under certaincircumstances, NMG may be required to offer to purchase Senior Notes asdescribed below. NMG may from time to time acquire Senior Notes by means other thana redemption, whether by tender offer, in open market purchases, throughnegotiated transactions or otherwise, in accordance with applicable securitieslaws.

Except as described below, the Senior Notes are notredeemable at NMG’s option prior to October 15, 2010. From and afterOctober 15, 2010, NMG may redeem the Senior Notes, in whole or in part, ata redemption price equal to 104.5% of principal amount, declining annually to100% of the principal amount on October 15, 2013, plus accrued and unpaidinterest, and Additional Interest (as defined in the Senior Indenture), if any,thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option,subject to certain conditions, redeem up to 35% of the original aggregateprincipal amount of Senior Notes at a redemption price equal to 109% of theaggregate principal amount thereof, plus accrued and unpaid interest, andAdditional Interest, if any, thereon to the redemption date, with the net cashproceeds of one or more equity offerings of NMG or any direct or indirectparent of NMG to the extent such net proceeds are contributed to NMG. At anytime prior to October 15, 2010, NMG also may redeem all or a part of theSenior Notes at a redemption price equal to 100% of the principal amount ofSenior Notes redeemed plus an applicable premium, as provided in the SeniorIndenture, and accrued and unpaid interest and Additional Interest, if any, tothe redemption date.

Upon the occurrence of a change of control (as defined inthe Senior Indenture), each holder of the Senior Notes has the right to requireNMG to repurchase some or all of such holder’s Senior Notes at a price in cashequal to 101% of the aggregate principal amount thereof plus accrued and unpaidinterest, and Additional Interest, if any, to the date of purchase.

The indenture governing the Senior Notes containscovenants that limit NMG’s ability and certain of its subsidiaries’ ability to:

·                  incuradditional indebtedness;

·                  paydividends on NMG’s capital stock or redeem, repurchase or retire NMG’s capitalstock or subordinated indebtedness;

·                  makeinvestments;

·                  createrestrictions on the payment of dividends or other amounts to NMG from itsrestricted subsidiaries that are not guarantors of the notes;

·                  engagein transactions with NMG’s affiliates;

·                  sellassets, including capital stock of NMG’s subsidiaries;

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

The Senior Indenture also provides for events of default,which, if any of them occurs, would permit or require the principal, premium,if any, interest and any other monetary obligations on all outstanding SeniorNotes to be due and payable immediately.

***Senior Subordinated Notes.**** *On October 6, 2005,Newton Acquisition Merger Sub, Inc. issued $500.0 million aggregateprincipal amount of 10.375% Senior Subordinated Notes under a seniorsubordinated indenture (Senior Subordinated Indenture) with Wells Fargo Bank,National Association, as trustee. At the closing of the Transactions, as thesurviving corporation in the Acquisition, NMG assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior 

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Subordinated Indenture. The Senior Subordinated Notes mature onOctober 15, 2015. Interest on the Senior Subordinated Notes is payable incash semi-annually in arrears on each April 15 and October 15,commencing April 15, 2006.

The Senior Subordinated Notes are fully andunconditionally guaranteed, on a joint and several unsecured, seniorsubordinated basis, by each of NMG’s wholly-owned domestic subsidiariesthat guarantee NMG’s obligations under its Senior Secured Credit Facilities andby the Company. The Senior Subordinated Notes and the guarantees thereof areNMG’s and the guarantors’ unsecured, senior subordinated obligations and rank(i) junior to all of NMG’s and the guarantors’ existing and future seniorindebtedness, including the Senior Notes and any borrowings under NMG’s SeniorSecured Credit Facilities, and the guarantees thereof and NMG’s 2028Debentures; (ii) equally with any of NMG’s and the guarantors’ futuresenior subordinated indebtedness; and (iii) senior to any of NMG’s and theguarantors’ future subordinated indebtedness. In addition, the SeniorSubordinated Notes are structurally subordinated to all existing and futureliabilities, including trade payables, of NMG’s subsidiaries that are notproviding guarantees.

NMG is not required to make any mandatory redemption orsinking fund payments with respect to the Senior Subordinated Notes, but, undercertain circumstances, NMG may be required to offer to purchase SeniorSubordinated Notes as described below. NMG may from time to time acquire SeniorSubordinated Notes by means other than a redemption, whether by tender offer,in open market purchases, through negotiated transactions or otherwise, inaccordance with applicable securities laws.

Except as described below, the Senior Subordinated Notesare not redeemable at NMG’s option prior to October 15, 2010. From andafter October 15, 2010, NMG may redeem the Senior Subordinated Notes, inwhole or in part, at a redemption price equal to 105.188% of principal amount,declining annually to 100% of principal amount on October 15, 2013, plusaccrued and unpaid interest, and Additional Interest (as defined in the SeniorSubordinated Indenture), if any, thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option,subject to certain conditions, redeem up to 35% of the original aggregateprincipal amount of Senior Subordinated Notes at a redemption price equal to110.375% of the aggregate principal amount thereof, plus accrued and unpaidinterest, and Additional Interest, if any, thereon to the redemption date, withthe net cash proceeds of one or more equity offerings of NMG or any direct orindirect parent of NMG to the extent such net proceeds are contributed to NMG.

At any time prior to October 15, 2010, NMG also mayredeem all or a part of the Senior Subordinated Notes at a redemption priceequal to 100% of the principal amount of Senior Subordinated Notes redeemedplus an applicable premium, as provided in the Senior Subordinated Indenture,as of, and accrued and unpaid interest and Additional Interest, if any, to theredemption date.

Upon the occurrence of a change of control (as defined inthe Senior Subordinated Indenture), NMG will make an offer to purchase all ofthe Senior Subordinated Notes at a price in cash equal to 101% of the aggregateprincipal amount thereof plus accrued and unpaid interest, and AdditionalInterest, if any, to the date of purchase.

The indenture governing the Senior Subordinated Notescontains covenants substantially similar to those applicable to NMG’s SeniorNotes described above. The Senior Subordinated Indenture also provides forevents of default, which, if any of them occurs, would permit or require theprincipal, premium, if any, interest and any other monetary obligations on alloutstanding Senior Notes to be due and payable immediately, subject to certainexceptions.

***Redemption of 2008 Notes.***  InMay 1998, NMG issued $125.0 million aggregate principal amount of its2008 Notes. Upon closing of the Transactions, NMG called its 2008 Notes forredemption pursuant to their terms. On November 7, 2005, NMG used$134.7 million of reserved cash to redeem its 2008 Notes, which included acall premium of $6.2 million plus accrued interest of $3.5 millionthrough the redemption date.

***Interest Rate Swaps.***  NMG usesderivative financial instruments to help manage its interest rate risk.Effective December 6, 2005, NMG entered into floating to fixed interestrate swap agreements for an aggregate notional amount of $1,000.0 millionto limit its exposure to interest rate increases related to a portion of itsfloating rate indebtedness. The interest rate swap agreements terminate afterfive years.  At July 28, 2007, the fairvalue of NMG’s interest rate swap agreements was a gain of approximately$8.2 million, which amount is included in other assets.

As of the effective date, NMG designated the interestrate swaps as cash flow hedges. As a result, changes in the fair value of NMG’sswaps are recorded subsequent to the effective date as a component of othercomprehensive income.

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As a result of the swap agreements, NMG’s effective fixedinterest rates as to the $1,000.0 million in floating rate indebtednesswill currently range from 6.482% to 6.733% per quarter through 2010 and resultin an average fixed rate of 6.577%.

**Contractual Obligations and Commitments**

The following table summarizes our estimated significantcontractual cash obligations at July 28, 2007:
| ** **                              | ** ** | **Payments Due By Period** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                 | ** ** | **Total**                                 | ** ** | **Fiscal Year  2008** | ** ** | **Fiscal  Years  2009-2010** | ** ** | **Fiscal  Years  2011-2012** | ** ** | **Fiscal Year  2013 and  Beyond** | ** ** |
| Contractual  obligations:               |       |                                      |       |   |   |   |   |   |   |   |   |
| Senior Secured  Term Loan Facility (1)  |       | $                                         | 1,625,000  |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,625,000 |   |
| Senior Notes                            |       | 700,000                                   |       | — |   | — |   | — |   | 700,000 |   |
| Senior  Subordinated Notes              |       | 500,000                                   |       | — |   | — |   | — |   | 500,000 |   |
| 2028 Debentures                         |       | 125,000                                   |       | — |   | — |   | — |   | 125,000 |   |
| Interest  requirements (2)              |       | 1,780,900                                 |       | 235,200 |   | 471,800 |   | 484,600 |   | 589,300 |   |
| Lease  obligations                      |       | 951,300                                   |       | 54,000 |   | 101,900 |   | 96,500 |   | 698,900 |   |
| Minimum pension  funding obligation (3) |       | —                                    |       | — |   | — |   | — |   | — |   |
| Other long-term  liabilities (4)        |       | 62,800                                    |       | 4,100 |   | 9,300 |   | 11,100 |   | 38,300 |   |
| Construction  commitments (5)           |       | 261,000                                   |       | 118,300 |   | 92,100 |   | 50,600 |   | — |   |
| Inventory  purchase commitments (6)     |       | 1,068,500                                 |       | 1,068,500 |   | — |   | — |   | — |   |
|                                    |       | $                                         | 7,074,500  |   | $ | 1,480,100 |   | $ | 675,100 |   | $ | 642,800 |   | $ | 4,276,500 |   |

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(1)             Wevoluntarily repaid $100.0 million of term loans under this facility in thesecond quarter of fiscal year 2006 and $250.0 million in fiscal year 2007.  The above table does not reflect futureexcess cash flow prepayments, if any, that may be required under the term loanfacility.

(2)             The cash obligationsfor interest requirements reflect 1) interest requirements on our fixed-ratedebt obligations at their contractual rates, 2) interest requirements onfloating rate debt obligations not subject to interest rate swaps at rates ineffect at July 28, 2007 and 3) interest requirements on floating rate debtobligations subject to interest rate swaps at the fixed rates provided throughthe swap agreements.  A 1% increase inthe floating rates related to floating rate debt outstanding at July 28, 2007not subject to interest rate swaps would increase annual interest raterequirements by approximately $6.3 million.

(3)             Minimumpension funding requirements are not included above as such amounts are notcurrently quantifiable for all periods presented. At August 1, 2007 (themost recent measurement date), our actuarially calculated projected benefitobligation for our Pension Plan was $380.2 million and the fair value ofthe assets was $324.6 million. Our policy is to fund the Pension Plan ator above the minimum amount required by law. We did not make any contributions to the Pension Plan in fiscal year2007 or fiscal year 2006.   Based uponcurrently available information, we will not be required to make significantcontributions in fiscal year 2008 to the Pension Plan.

(4)             Otherlong-term liabilities of $172.1 million reflected on our balance sheet atJuly 28, 2007 include our obligations related to our supplementalretirement and postretirement health care benefit plans. The future obligationsrelated to our other long-term liabilities consist of the expected benefitpayments for these obligations through 2015, as currently estimated usinginformation provided by our actuaries. The timing of the expected payments forour remaining long-term liabilities, primarily for other employee benefit plansand arrangements, are not currently estimable.

(5)             Constructioncommitments relate primarily to obligations pursuant to contracts for theconstruction of new stores and the renovation of existing stores expected as ofJuly 28, 2007.  These amounts representthe gross construction costs and exclude developer contributions ofapproximately $36 million which we expect to receive pursuant to the terms ofthe construction contracts.

(6)             Inthe normal course of our business, we issue purchase orders tovendors/suppliers for merchandise. Our purchase orders are not unconditionalcommitments but, rather represent executory contracts requiring performance bythe vendors/suppliers, including the delivery of the merchandise prior to aspecified cancellation date and the compliance with product specifications,quality standards and other requirements. In the event of the vendor’s failureto meet the agreed upon terms and conditions, we may cancel the order.

 

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The following table summarizes the expiration of oursignificant commercial commitments outstanding at July 28, 2007:

|                                                          | ** ** | **Amount of Commitment by Expiration Period** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **Total**                                                              | ** ** | **Fiscal Year  2008** | ** ** | **Fiscal  Years  2009-2010** | ** ** | **Fiscal  Years  2011-2012** | ** ** | **Fiscal Year  2013 and  Beyond** | ** ** |
| Other commercial  commitments:                           |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Senior secured asset-based  revolving credit facility(1) |       | $                                                                      | 600,000    |   | $ | — |   | $ | — |   | $ | 600,000 |   | $ | — |   |
| Surety bonds                                             |       | 4,100                                                                  |       | 4,100 |   | — |   | — |   | — |   |
|                                                     |       | $                                                                      | 604,100    |   | $ | 4,100 |   | $ | — |   | $ | 600,000 |   | $ | — |   |

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(1)             Asof July 28, 2007, we had no borrowings outstanding under our new seniorsecured asset-based revolving credit facility and had $573.1 million ofunused borrowing availability, after giving effect to $26.9 million ofoutstanding letters of credit. Our working capital requirements are greatest inthe first and second fiscal quarters as a result of higher seasonalrequirements. See “Description of Other Indebtedness—Senior Secured Asset-BasedRevolving Credit Facility” and “Management’s Discussion and Analysis ofFinancial Conditions and Results of Operations—Seasonality.”

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

**OTHER MATTERS**

**Factors That May Affect Future Results**

Matters discussed in MD&Ainclude forward-looking statements. Forward-looking statementsgenerally can be identified by the use of forward-looking terminologysuch as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,”“should,” “anticipate,” “believe,” “project” or “continue.” We make theseforward-looking statements based on our expectations and beliefsconcerning future events, as well as currently available data. These forward-lookingstatements involve a number of risks and uncertainties and, therefore, are notguarantees of future performance. A variety of factors could cause our actualresults to differ materially from the anticipated or expected results expressedin our forward-looking statements. Factors that could affect futureperformance include, but are not limited, to:

*Political and General EconomicConditions*

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

·                  terrorist activities in the United States andelsewhere;

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

*Customer Demographic Issues*

·                  changes in the demographic or retailenvironment;

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

·                  changes in consumer preferences or fashiontrends;

·                  changes in our relationships with keycustomers;

·                  changes in our proprietary credit cardarrangement that adversely impact the ability to provide credit to ourcustomers;

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*Merchandise Procurement and SupplyChain Considerations*

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

·                  delays in receipt of merchandise ordered dueto work stoppages or other causes of delay in connection with either themanufacture or shipment of such merchandise;

·                  changes in foreign currency exchange orinflation rates;

·                  significant increases in paper, printing andpostage costs;

*Industry and Competitive Factors*

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

·                  seasonality of the retail business;

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

·                  delays in anticipated store openings andrenovations;

·                  our success in enforcing our intellectualproperty rights;

*Employee Considerations*

·                  changes in key management personnel and ourability to retain key management personnel;

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

*Legal and Regulatory Issues*

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

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

*Leverage Considerations*

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

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

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

*Other Factors*

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

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

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

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The foregoing factors are notexhaustive, and new factors may emerge or changes to the foregoing factors mayoccur that could impact our business. Except to the extent required by law, weundertake no obligation to update or revise (publicly or otherwise) any forward-lookingstatements to reflect subsequent events, new information or futurecircumstances.

**Critical Accounting Policies**

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

While we believe that our past estimates and assumptionshave been materially accurate, the amounts we have currently estimated aresubject to change if different assumptions as to the outcome of future eventswere made. We evaluate our estimates and judgments on an ongoing basis andpredicate those estimates and judgments on historical experience and on variousother factors that we believe to be reasonable under the circumstances. We makeadjustments to our assumptions and judgments when facts and circumstancesdictate. Since future events and their effects cannot be determined withabsolute certainty, actual results may differ from the estimates used inpreparing the accompanying audited consolidated financial statements.

We believe the following critical accounting policiesencompass the more significant judgments and estimates used in the preparationof our audited consolidated financial statements.

***Revenues.***  Revenuesinclude sales of merchandise and services and delivery and processing revenuesrelated to merchandise sold. Revenues from our Specialty Retail stores arerecognized at the later of the point of sale or the delivery of goods to thecustomer. Revenues from our Direct Marketing operation are recognized when themerchandise is delivered to the customer. Revenues exclude sales taxescollected from our customers.  Wemaintain reserves for anticipated sales returns primarily based on ourhistorical trends related to returns by our retail and direct marketingcustomers. Our reserves for anticipated sales returns aggregated $48.8 millionat July 28, 2007 and $43.7 million at July 29, 2006.

***MerchandiseInventories and Cost of Goods Sold.***  Weutilize the retail method of accounting.Under the retail inventory method, the valuation of inventories at cost and theresulting gross margins are determined by applying a calculated cost-to-retailratio, for various groupings of similar items, to the retail value ofinventories. Merchandise inventories are stated at the lower of cost ormarket. The cost of the inventory reflectedon the consolidated balance sheets is decreased by charges to cost of goodssold at the time the retail value of the inventory is lowered through the useof markdowns. Hence, earnings are negatively impacted when merchandise ismarked down.

The areas requiring significant management judgmentrelated to the valuation of our inventories include (1) setting theoriginal retail value for the merchandise held for sale, (2) recognizingmerchandise for which the customer’s perception of value has declined andappropriately marking the retail value of the merchandise down to the perceivedvalue and (3) estimating the shrinkage that has occurred between physicalinventory counts. These judgments and estimates, coupled with the averagingprocesses within the retail method can, under certain circumstances, producevarying financial results. Factors that can lead to different financial resultsinclude (1) determination of original retail values for merchandise heldfor sale, (2) identification of declines in perceived value of inventoriesand processing the appropriate retail value markdowns and (3) overlyoptimistic or conservative estimation of shrinkage. We believe our merchandisevaluation and pricing controls minimize the risk that our inventory valuescould be materially misstated.

Consistent with industry business practice, we receiveallowances from certain of our vendors in support of the merchandise wepurchase for resale. We receive certain allowances to reimburse us formarkdowns taken and/or to support the gross margins earned in connection withthe sales of the vendor’s merchandise. We recognize these allowances as anincrease to gross margin when the allowances are earned and approved by thevendor. Other allowances we receive represent reductions to the amounts paid toacquire the merchandise. We recognize these allowances as a reduction in thecost of the acquired merchandise resulting in an increase to gross margin atthe time the goods are sold. The amount of vendor allowances we received didnot have a significant impact on the year-over-year change in gross marginduring fiscal year 2007, fiscal year 2006 or fiscal year 2005. We receivedvendor allowances of $103.4 million in fiscal year 2007,$94.5 million in fiscal year 2006 and $87.7 million in fiscal year2005.

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***Long-lived Assets.***  Propertyand equipment are stated at cost less accumulated depreciation. For financialreporting purposes, we compute depreciation principally using the straight-linemethod over the estimated useful lives of the assets. Buildings andimprovements are depreciated over five to 30 years while fixtures andequipment are depreciated over three to 15 years. Leasehold improvementsare amortized over the shorter of the asset life or the lease term. Costsincurred for the development of internal computer software are capitalized andamortized using the straight-line method over three to ten years.

To the extent that we remodel or otherwise replace ordispose of property and equipment prior to the end of the assigned depreciablelives, we could realize a loss or gain on the disposition. To the extent assetscontinue to be used beyond their assigned depreciable lives, no depreciationexpense is incurred. We reassess the depreciable lives of our long-lived assetsin an effort to reduce the risk of significant losses or gains at dispositionand the utilization of assets with no depreciation charges. The reassessment ofdepreciable lives involves utilizing historical remodel and dispositionactivity and forward-looking capital expenditure plans. In fiscal year2005, we made adjustments to rent and depreciation aggregating approximately$5.0 million, or 0.1% of revenues, in connection with our review of theamortization periods assigned to our leased property and equipment and deferredreal estate credits.

We assess the recoverability of the carrying values ofour store assets annually and upon the occurrence of certain events (e.g.,opening a new store near an existing store or announcing plans for a storeclosing). The recoverability assessment requires judgment and estimates forfuture store generated cash flows. The underlying estimates of cash flowsinclude estimates of future revenues, gross margin rates and store expenses andare based upon the stores’ past and expected future performance. New stores mayrequire two to five years to develop a customer base necessary to generate thecash flows of our more mature stores. To the extent our estimates for revenuegrowth and gross margin improvement are not realized, future annual assessmentscould result in impairment charges. No store impairment charges were recordedin fiscal years 2007, 2006 or 2005.

***Goodwill and Intangible Assets.***  Goodwilland indefinite-lived intangible assets, such as tradenames, are not subject toamortization. Rather, recoverability of goodwill and indefinite-livedintangible assets is assessed annually and upon the occurrence of certainevents. The recoverability assessment requires us to make judgments andestimates regarding fair values. Fair values are determined using estimatedfuture cash flows, including growth assumptions for future revenues, grossmargin rates and other estimates. To the extent that our estimates are notrealized, future assessments could result in impairment charges. In thefourth quarter of fiscal year 2007, we recorded a $11.5 million pretax impairment charge related to the writedown to fairvalue in the net carrying value of the Horchow tradename based upon loweranticipated future revenues associated with the brand.

Customer lists are amortized using the straight-linemethod over their estimated useful lives, ranging from 5 to 26 years (weightedaverage life of 13 years).  Favorablelease commitments are amortized straight-line over the remaining lives of theleases, ranging from 6 to 49 years (weighted average life of 33 years).  Total estimated amortization of allacquisition-related intangible assets for the next five fiscal years iscurrently estimated as follows (in thousands):
| 2008 |   | $      | 72,254 |   |
|------|--------|--------|--------|--------|
| 2009 |   | 72,254 |   |
| 2010 |   | 72,254 |   |
| 2011 |   | 61,543 |   |
| 2012 |   | 48,898 |   |

 

***Financial Instruments.***  NMG usesderivative financial instruments to help manage its interest rate risk.Effective December 6, 2005, NMG entered into floating to fixed interestrate swap agreements for an aggregate notional amount of $1,000.0 millionto limit its exposure to interest rate increases related to a portion of itsfloating rate indebtedness. The interest rate swap agreements terminate afterfive years.  At July 28, 2007, the fairvalue of NMG’s interest rate swap agreements was a gain of approximately$8.2 million, which amount is included in other assets.

As of the effective date, NMG designated the interestrate swaps as cash flow hedges. As a result, changes in the fair value of NMG’sswaps are recorded subsequent to the effective date as a component of othercomprehensive income.

As a result of the swap agreements, NMG’s effective fixedinterest rates as to the $1,000.0 million in floating rate indebtednesswill currently range from 6.482% to 6.733% per quarter through 2010 and resultin an average fixed rate of 6.577%.

***Advertising andCatalog Costs.***  We incur costs to advertise and promote themerchandise assortment offered by both Specialty Retail stores and DirectMarketing. Advertising costs incurred by our Specialty Retail stores consistprimarily of print 

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media costs related to promotional materials mailed to our customers.These costs are expensed at the time of mailing to the customer. Advertisingcosts incurred by Direct Marketing relate to the production, printing anddistribution of our print catalogs and the production of the photographiccontent on our websites. We amortize the costs of print catalogs during theperiods we expect to generate revenues from such catalogs, generally sixmonths. We expense the costs incurred to produce the photographic content onour websites at the time the images are first loaded onto the website. Weexpense website design costs as incurred.

***Loyalty Programs.***  Wemaintain customer loyalty programs in which customers accumulate points forqualifying purchases. Upon reaching certain levels, customers may redeem theirpoints for gifts. Generally, points earned in a given year must be redeemed nolater than 90 days subsequent to the end of the annual program period.

The estimates of the costs associated with the loyaltyprograms require us to make assumptions related to customer purchasing levels,redemption rates and costs of awards to be chosen by our customers. Ourcustomers redeem a substantial portion of the points earned in connection withour loyalty programs for gift cards. At the time the qualifying sales givingrise to the loyalty program points are made, we defer the portion of therevenues on the qualifying sales transactions equal to the estimate of theretail value of the gift cards to be issued upon conversion of the points togift cards. We record the deferral of revenues related to gift card awardsunder our loyalty programs as a reduction of revenues. In addition, we chargethe cost of all other awards under our loyalty programs to cost of goods sold.

***Benefit Plans.***  We sponsora noncontributory defined benefit pension plan (Pension Plan) coveringsubstantially all full-time employees and an unfunded supplemental executiveretirement plan (SERP Plan) which provides certain employees additional pensionbenefits. In calculating our obligations and related expense, we make variousassumptions and estimates, after consulting with outside actuaries andadvisors. The annual determination of expense involves calculating theestimated total benefits ultimately payable to plan participants and allocatingthis cost to the periods in which services are expected to be rendered. We usethe projected unit credit method in recognizing pension liabilities. ThePension and SERP Plans are valued annually as of the beginning of each fiscalyear.

Significant assumptions related to the calculation of ourobligations include the discount rate used to calculate the present value ofbenefit obligations to be paid in the future, the expected long-term rate ofreturn on assets held by the Pension Plan and the average rate of compensationincrease by plan participants. We review these assumptions annually based uponcurrently available information, including information provided by ouractuaries.

***Self-insurance and OtherEmployee Benefit Reserves.***  We use estimates in thedetermination of the required accruals for general liability, workers’compensation and health insurance as well as short-term disability andpostretirement health care benefits. We base these estimates upon anexamination of historical trends, industry claims experience and, in certaincases, calculations performed by third-party actuaries. Projected claimsinformation may change in the future and may require us to revise theseaccruals. Self-insurance reserves including general liability, workers’compensation and health insurance aggregated $44.5 million atJuly 28, 2007 and $45.5 million at July 29, 2006. Other employeebenefit reserves including short-term disability and postretirement health carebenefits aggregated $35.4 million at July 28, 2007 and$27.1 million at July 29, 2006.

***Income Taxes.***  We areroutinely under audit by federal, state or local authorities in the areas ofincome taxes. These audits include questioning the timing and amount ofdeductions and the allocation of income among various tax jurisdictions. Inevaluating the exposure associated with various tax filing positions, we accruecharges for probable exposures. Based on our annual evaluations of taxpositions, we believe we have appropriately accrued for probable exposures. Tothe extent we were to prevail in matters for which accruals have beenestablished or be required to pay amounts in excess of recorded reserves, oureffective tax rate in a given financial statement period could be materiallyimpacted.

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**Recent Accounting Pronouncements**

InJuly 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN48), which clarifies the accounting for uncertainty in tax positions.  FIN 48 requires that we recognize in ourconsolidated financial statements the impact of a tax position, if thatposition is more likely than not of being sustained upon examination, based onthe technical merits of the position. FIN 48 also provides guidance on derecognition of income tax assets andliabilities, classification of current and deferred income tax assets andliabilities, accounting for interest and penalties associated with taxpositions, accounting for income taxes in interim periods and income taxdisclosures.  We will adopt FIN 48 in thefirst quarter of fiscal year 2008, as required. We are currently evaluating the impact on our consolidated financialstatements of adopting FIN 48.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Benefit Plans” (SFAS 158). SFAS 158 requires employers to report a postretirement benefit asset forplans that are overfunded and a postretirement benefit liability for plans thatare underfunded. Deferred plan costs and income are required to be reported inaccumulated other comprehensive income (OCI), net of tax effects, until theyare amortized.  We adopted the provisionsof SFAS 158 as of July 28, 2007 which resulted in a net decrease in thecarrying values of our obligations of approximately $28.7 million, which amounthas been recorded (net of taxes of $11.3 million) as an increase in other comprehensiveincome in our statement of shareholders’ equity for fiscal year 2007.  See Note 13of the Notes to Consolidated Financial Statements in Item 15.

InSeptember 2006, the Securities and Exchange Commission issued Staff AccountingBulletin No. 108 (SAB 108).  SAB 108addresses the process and diversity in practice of quantifying financialstatement misstatements resulting in the potential build up of improper amountson the balance sheet.  The provisions ofSAB 108 became effective during the fourth quarter of fiscal year 2007 but hadno impact on the Company’s results of operations or financial position.

InSeptember 2006, the FASB issued Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (SFAS 157), which provides guidance for usingfair value to measure certain assets and liabilities.  SFAS 157 will apply whenever another standardrequires or permits assets or liabilities to be measured at fair value.  The standard does not expand the use of fairvalue to any new circumstances.  SFAS 157is effective for financial statements issued for fiscal years beginning afterNovember 15, 2007, or our fiscal year ending August 1, 2009.  We have not yet evaluated the impact, if any,of adopting SFAS 157 on our consolidated financial statements.

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards No.159, “The Fair Value Option for Financial Assets and Financial Liabilities”(SFAS 159).  SFAS 159 expandsopportunities to use fair value measurement in financial reporting and permitsentities to choose to measure many financial instruments and certain otheritems at fair value.  This Statement iseffective for fiscal years beginning after November 15, 2007, or our fiscal yearending August 1, 2009.  We have not yetevaluated the impact, if any, of adopting SFAS 159 on our consolidatedfinancial statements.

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**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The market risk inherent in the Company’s financialinstruments represents the potential loss arising from adverse changes ininterest rates. The Company does not enter into derivative financialinstruments for trading purposes. The Company seeks to manage exposure toadverse 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 9 to our consolidated financial statements.

As of July 28, 2007, NMG had no borrowings outstandingunder its Asset-Based Revolving Credit Facility that bears interest atfloating rates. Future borrowings under NMG’s Asset-Based RevolvingFacility, to the extent of outstanding borrowings, would be affected byinterest rate changes.

At July 28, 2007, NMG had $1,625.0 million of debtunder its Senior Secured Term Loan Facility issued in connection with theTransactions that bears interest at floating rates.

NMG uses derivative financial instruments to help manageits interest rate risk.  EffectiveDecember 6, 2005, NMG  entered intofloating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit its exposure to interest rateincreases related to a portion of its floating rate indebtedness. The interestrate swap agreements terminate after five years.  As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.482% to 6.733% per quarter through2010 and result in an average fixed rate of 6.577%. With respect to outstandingborrowing in excess of $1,000.0 million on the Senior Secured Term LoanFacility, such borrowings are at floating rates.  A 1% increase in these floating rates wouldincrease annual interest expense by approximately $6.3 million.

The effects of changes in theU.S. equity and bond markets serve to increase or decrease the value of pensionplan assets, resulting in increased or decreased cash funding by the Company.The Company seeks to manage exposure to adverse equity and bond returns by maintainingdiversified investment portfolios and utilizing professional investmentmanagers.

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

The following consolidatedfinancial statements of the Company and supplementary data are included aspages F-1 through F-62 at the end of this Annual Report on Form 10-K:

| Index                                                                  | ** ** | ** ** | ** ** | **Page  Number** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|------------------|------------|
| Management’s Report on  Internal Control over Financial Reporting |       | F-2        |       |
| Reports of Independent  Registered Public Accounting Firms             |       | F-3        |       |
| Consolidated Balance  Sheets                                           |       | F-6        |       |
| Consolidated Statements  of Earnings                                   |       | F-7        |       |
| Consolidated Statements  of Cash Flows                                 |       | F-8        |       |
| Consolidated Statements  of Shareholders’ Equity                  |       | F-10       |       |
| Notes to Consolidated Financial Statements                             |       | F-12       |       |

 

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

None.

**ITEM 9A. CONTROLS AND PROCEDURES**

**a.             DisclosureControls and Procedures**

In accordance with Exchange ActRules 13a-15 and 15d-15, we carried out an evaluation as of July 28,2007, under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, as well as other key members of ourmanagement, of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act).Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective toprovide reasonable assurance that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, accumulated,processed, summarized, reported and communicated on a timely basis within thetime periods specified in the Securities and Exchange Commission’s rules and forms.

**b.             InternalControl over Financial Reporting**

Our management is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Exchange Act Rule 13a-15(f). Our management conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework and criteria established in *Internal Control—Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on this evaluation, our management concluded that our internal controlover financial reporting was effective as of July 28, 2007. During itsassessment, management did not identify any material weaknesses in our internalcontrol over financial reporting. Our independent registered public accountingfirm, Ernst & Young LLP, has audited our consolidated financial statementsand has issued an attestation report on the effectiveness of our internalcontrols over financial reporting as of July 28, 2007.

**c.             Changesin Internal Control over Financial Reporting**

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter ended July 28, 2007that has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

**ITEM 9B. OTHER INFORMATION**

None.

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**PART III**

**ITEM 10.****                      DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

Thefollowing table sets forth the name, age, and position of individuals whocurrently serve as our directors and executive officers.
| **Name**           | ** ** | **Age** | ** ** | **Position**                                                         |
|--------------------|------------|---------|------------|----------------------------------------------------------------------|
| David A. Barr      |       | 44      |       | Director                                                             |
| Jonathan Coslet    |       | 42      |       | Director                                                             |
| James Coulter      |       | 47      |       | Director                                                             |
| John G. Danhakl    |       | 51      |       | Director                                                             |
| Sidney Lapidus     |       | 69      |       | Director                                                             |
| Kewsong Lee        |       | 42      |       | Director                                                             |
| Carrie Wheeler     |       | 35      |       | Director                                                             |
| Burton M. Tansky   |       | 69      |       | President and Chief Executive Officer, Director                      |
| James E. Skinner   |       | 54      |       | Senior Vice President and Chief Financial Officer                    |
| Nelson A. Bangs    |       | 54      |       | Senior Vice President and General Counsel                            |
| Marita O’Dea  |       | 58      |       | Senior Vice President and Chief Human Resource  Officer              |
| Phillip L. Maxwell |       | 59      |       | Senior Vice President and Chief Information Officer                  |
| Steven P. Dennis   |       | 47      |       | Senior Vice President, Strategy, Business  Development and Marketing |
| Karen W. Katz      |       | 50      |       | President and Chief Executive Officer of Neiman  Marcus Stores       |
| Brendan L. Hoffman |       | 39      |       | President and Chief Executive Officer of Neiman  Marcus Direct       |
| James J. Gold      |       | 43      |       | President and Chief Executive Officer of Bergdorf  Goodman           |

 

Thefollowing biographies describe the business experience of our directors andexecutive officers.

**David A.Barr**has been managing director of Warburg Pincus LLC and ageneral partner of Warburg Pincus & Co. since January 2001.  Prior to joining Warburg Pincus in 2000, Mr.Barr served as a managing director at Butler Capital where he focused onconsumer and industrial leveraged buyout transactions for more than tenyears.  Mr. Barr also serves on the boardof directors of Builders First Source, Inc., Polypore Inc., and TransDigm GroupInc.

**JonathanCoslet** has been a partner of TPG Capital, L.P. since 1993 andis currently a senior partner and member of the firm’s Executive, Managementand Investment Committees.  Prior tojoining TPG Capital, L.P., Mr. Coslet worked at Donaldson, Lufkin &Jenrette, specializing in leveraged acquisitions and high yield finance from1991 to 1993.  Mr. Coslet also serves on theboard of directors of Quintiles Transnational Corp., IASIS Healthcare Corp.,and J. Crew Group, Inc.

**JamesCoulter** co-founded TPG Capital, L.P. in 1992 and has beenManaging General Partner of TPG Capital, L.P. for more than eight years.  From 1986 to 1992, Mr. Coulter was a VicePresident of Keystone, Inc.  From 1986 to1988, Mr. Coulter was also associated with SPO Partners, an investment firmthat focuses on public market and private minority investments.  Mr. Coulter also serves on the board of directorsof Lenovo Group Limited, Seagate Technology, J. Crew Group, Inc., and ZhoneTechnologies, Inc.

**John G.Danhakl** is a Managing Partner of Leonard Green &Partners, L.P. with whom he has been a partner since 1995.  Prior to joining Leonard Green & Partners,L.P., he served as a Managing Director in the Los Angeles office of Donaldson,Lufkin & Jenrette, which he joined in 1990. From 1985 to 1990, Mr. Danhakl was a Vice President in corporate financeat Drexel Burnham Lambert.  He alsoserves on the board of directors of Arden Group, Inc., Horseshows In the Sun,Inc., Leslie’s Poolmart, Inc., Petco Animal Supplies, Inc., The Tire Rack,Inc., and Sagittarius Brands, Inc.

**SidneyLapidus** is a Managing Director and Senior Advisor of WarburgPincus LLC.  He has been employed atWarburg Pincus since 1967.  Prior to thattime, he was an attorney with the SEC. He presently serves as a director of Lennar Corporation and Knoll, Inc.  He is also a director of many nonprofitorganizations including New York University School of Medicine, and ispresident of the American Jewish Historical Society.

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**KewsongLee** has been a member and managing director of Warburg PincusLLC and a general partner of Warburg Pincus & Co. since January 1997 and iscurrently a member of Warburg Pincus LLC’s Executive Management Group.  He has been employed at Warburg Pincus since1992.  Prior to joining Warburg Pincus,Mr. Lee served as a consultant at McKinsey & Company, Inc. from 1990 to1992.  Mr. Lee also serves on the boardof directors of Arch Capital Group, Ltd., Knoll, Inc., TransDigm Group Inc.,and several privately held companies.

**CarrieWheeler** is a partner of TPG Capital, L.P.  Prior to joining TPG Capital, L.P. in 1996,she was with Goldman, Sachs & Co. from 1993 to 1996.  Ms. Wheeler also serves on the board ofdirectors of Metro-Goldwyn-Mayer Inc. and Petco Animal Supplies, Inc.

**Burton M.Tansky** has served as a director and as President and ChiefExecutive Officer since October 6, 2005. He also has served as a director and President and Chief ExecutiveOfficer of The Neiman Marcus Group, Inc. since May 2001 and as President andChief Operating Officer from December 1998 until May 2001.  He served as Executive Vice President of TheNeiman Marcus Group, Inc. from February 1998 until December 1998 and asChairman and Chief Executive Officer of Neiman Marcus Stores from May 1994until February 1998.  He served asChairman and Chief Executive Officer of Bergdorf Goodman from 1990 until 1994.  Mr. Tansky also serves on the board of directorsof International Flavors and Fragrances Inc.

**James E.Skinner** has been Senior Vice President and Chief FinancialOfficer since October 6, 2005.  SinceJune 2001, he has also served as Senior Vice President and Chief FinancialOfficer of The Neiman Marcus Group, Inc. From August 2000 through December 2000, Mr. Skinner served as SeniorVice President and Chief Financial Officer of Caprock Communications Corp. andfrom 1994 until 2000, served as Executive Vice President, Chief FinancialOfficer and Treasurer for CompUSA Inc.

**Nelson A.Bangs** has been Senior Vice President and General Counselsince October 6, 2005 and has served in that capacity for The Neiman MarcusGroup, Inc. since April 2001.  FromJanuary 1999 to April 2001, Mr. Bangs engaged in a private consulting and lawpractice; from April 1998 until January 1999, he served as Senior VicePresident and General Counsel of Pillowtex Corporation; and he served as SeniorVice President, General Counsel and Secretary of Dr Pepper/Seven Up, Inc. (and predecessors)prior thereto.

**Marita O’Dea**has been Senior Vice President and Chief Human Resource Officer since October6, 2005 and has also served in that capacity for The Neiman Marcus Group, Inc.since September 2002.  She served as VicePresident - Human Resources of The Neiman Marcus Group, Inc. from June 2001until September 2002.  Also, Ms. O’Deahas served as Senior Vice President of Human Resources of Neiman Marcus Storessince 1995.

**PhillipL. Maxwell** has been Senior Vice President and Chief InformationOfficer since October 6, 2005 and has also served in that capacity for TheNeiman Marcus Group, Inc. since May 2000. From 1993 until joining us in 2000, Mr. Maxwell advanced from ChiefInformation Officer, Director of Management Information Systems for NissanMotor Acceptance Corporation to Vice President, Chief Information Officer,Information Systems and eBusiness Strategy for Nissan North America.

**Steven P.Dennis** has been Senior Vice President of Strategy, BusinessDevelopment and Marketing since October 6, 2005 and has also served in thatcapacity for The Neiman Marcus Group, Inc. since September 2004.  Prior to joining us, Mr. Dennis served asVice President, Corporate Strategy of Sears, Roebuck and Co. from 2001 until2003.  In 2002, he assumed the additionalresponsibility for Lands’ End post-acquisition initiatives.  From September 1999 to February 2001, heserved as Sears’ Vice President, Multichannel Integration.

**Karen W.Katz** has been President and Chief Executive Officer of NeimanMarcus Stores since December 2002.  Ms.Katz served as President and Chief Executive Officer of Neiman Marcus Directfrom May 2000 to December 2002 and as Executive Vice President of Neiman MarcusStores from February 1998 until May 2000. Ms. Katz serves on the board of directors of Pier 1 Imports, Inc.

**BrendanL. Hoffman** has been President and Chief Executive Officer ofNeiman Marcus Direct since December 2002. Mr. Hoffman served as Vice President of the Neiman Marcus Last CallClearance Division from August 2000 to December 2002, and as a DivisionalMerchandise Manager of Bergdorf Goodman from October 1998 to August 2000.

**James J.Gold** has been President and Chief Executive Officer ofBergdorf Goodman since May 2004.  Mr.Gold served as Senior Vice President, General Merchandise Manager of NeimanMarcus Stores from December 2002 to May 2004, as Division Merchandise Managerfrom June 2000 to December 2002 and as Vice President of the Neiman Marcus LastCall Clearance Division from March 1997 to June 2000.

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**Code of Ethics**

The Board hasadopted The Neiman Marcus Group, Inc. Code of Ethics and Conduct which isapplicable to all our directors, officers and employees, as well as a separateCode of Ethics for Financial Professionals that applies to all financialemployees including the Chief Executive Officer, the Chief Financial Officerand the Principal Accounting Officer. Both the Code of Ethics and Conduct and the Code of Ethics for FinancialProfessionals may be accessed through our website at www.neimanmarcusgroup.comunder the “Investor Information —Governance Documents” section.  Requests for printed copies may be made inwriting to The Neiman Marcus Group, Inc., Attn. Investor Relations, One MarcusSquare, 1618 Main Street, Dallas, Texas 75201.

We haveestablished a means for employees, customers, suppliers, or other interestedparties to submit confidential and anonymous reports of suspected or actualviolations of the Company’s Code of Conduct relating, among other things, to:

·                  accountingpractices, internal accounting controls, or auditing matters and procedures;

·                  theftor fraud of any amount;

·                  performanceand execution of contracts;

·                  conflictsof interest;

·                  violationsof securities and antitrust laws; and

·                  violationsof the Foreign Corrupt Practices Act.

Any employee orother interested party can call the following toll-free number to submit areport.  This number is operational 24hours a day, seven days a week:

**1-800-573-2022**

**BoardCommittees**

Our Board ofDirectors has established an audit committee, an executive committee and acompensation committee.  The members ofour audit committee for fiscal year 2007 were David A. Barr, Carrie Wheeler,Ron Beegle, and Sidney Lapidus.  Mr.Beegle resigned as a member of the Audit Committee and the Board of Directorson August 13, 2007.  The audit committeerecommends the annual appointment of auditors with whom the audit committeereviews the scope of audit and non-audit assignments and related fees,accounting principles we use in financial reporting, internal auditingprocedures and the adequacy of our internal control procedures.  The members of our executive committee areJonathan Coslet, Kewsong Lee, and Burton M. Tansky.  The executive committee manages the affairsof the Company as necessary between meetings of our Board of Directors and actson matters that must be dealt with prior to the next scheduled Boardmeeting.  The members of our compensationcommittee are Jonathan Coslet, Kewsong Lee, and John G. Danhakl.  The compensation committee reviews andapproves the compensation and benefits of our employees, directors andconsultants, administers our employee benefit plans, authorizes and ratifiesstock option and/or restricted stock grants and other incentive arrangements,and authorizes employment and related agreements.

Each of theSponsors has the right to have at least one of its directors sit on eachcommittee of the Board of Directors, to the extent permitted by applicable lawsand regulations.

**AuditCommittee Financial Expert**

The Board ofDirectors has determined that David A. Barr, Chairman of the Audit Committee,meets the criteria set forth in the rules and regulations of the SEC for an “auditcommittee financial expert.”

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**ITEM 11.****                      EXECUTIVECOMPENSATION**

**CompensationDiscussion and Analysis**

The following ismeant to provide a clear and concise analysis of the compensation elements,arrangements, and decisions we made in fiscal year 2007 for our executiveofficers named in the Summary Compensation Table that follows this section.

**Overview**

***CompensationPhilosophy and Objectives***

We are a premierluxury retailer that has been in business for 100 years.  Our continued success depends on the skillsof talented leaders who are dedicated to achieving solid financial performance,providing outstanding service to customers, and managing the Company’s assetswisely.  Our compensation program isdesigned to meet the following objectives:

1.               To recruit andretain executives who possess the exceptional ability, experience, and visionto sustain and promote our preeminence in the marketplace.

2.               To encourage andreward the achievement of our short- and long-term goals and operating plans.

3.               To encourage andreward increasing customer satisfaction, improving customer service, providingour customers with the high-end luxury merchandise they have come to expect,and increasing the amount of business our customers do with us.

4.               To align theinterests of our executives with the financial and strategic objectives of ourequity investors.

5.               To provide totalcompensation opportunities that meet the expectations of a highly skilledexecutive team, are aligned and consistent with our fundamental performance andare competitive with the compensation practices and levels offered by companieswith whom we compete for talent.

The following arethe primary direct and indirect compensation elements that make up ourexecutive compensation program:

Direct:

·                  Basesalary

·                  AnnualBonus

·                  Long-termincentive through an initial stock option awarded in fiscal year 2006 and acash incentive plan.

Indirect:

·                  Healthand welfare benefits

·                  Retirementbenefits

·                  Lifeinsurance

·                  Deferredcompensation program

·                  Certainperquisites

The discussionbelow elaborates on these primary elements, illustrates how they have operatedin practice in determining the compensation of our named executive officers,and describes certain of the material compensation processes, policies andpractices that we have adopted.

***Whatour compensation program is designed to reward***

To assure thecontinued growth and profitability of the Company, we reward performance thatis measurable against performance targets established in our compensationprogram and that are based on annual and longer term performance objectivesapproved by the Board of Directors. Achievement of these performance targets will result in our annual andlonger term growth and profitability and will also support the financial andstrategic objectives of our equity investors.

***Roleof the Compensation Committee and the executive officers in the compensation process***

The CompensationCommittee is responsible for determining the compensation of our namedexecutive officers.  

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Except with respect tothe CEO, whose performance assessment and compensation are reviewed anddetermined solely by the Compensation Committee, the Compensation Committeeconsiders input from our CEO and our Senior Vice President and Chief HumanResource Officer in making determinations regarding our executive compensationprogram and the individual contribution of our executive officers to theCompany. As part of our annual planning process, our CEO and our Senior VicePresident and Chief Human Resource Officer, with the help of our independentconsulting firm, develop and recommend a compensation program for all executiveofficers.  Based on a performanceassessment, the CEO and the Senior Vice President and Chief Human ResourceOfficer attend a meeting of the Compensation Committee held for the purpose ofconsidering the executives’ annual compensation, and recommend the base salary,incentive or bonus awards, and long-term incentive awards, if applicable, foreach of the other executive officers, including the named executiveofficers.  The other named executiveofficers do not play a role in their own compensation determination other thandiscussing individual performance objectives with the CEO.

***Therole of compensation consultants***

The compensationconsultants used by the Compensation Committee are retained by management andapproved by the Compensation Committee. The Compensation Committee considers the advice of its compensationconsultants and actuaries to assist us in evaluating our compensation policies.  They provide information about industrycompensation practices and competitive levels at a group of industry relatedcompanies, and recommend compensation alternatives that are consistent with ourcompensation policies.  This assistancealso includes providing relevant market data and alternatives to consider indesigning the compensation packages for each of the named executive officersand assisting in the preparation of individual total compensationsummaries.  The Compensation Committeealso considers advice from various consultants regarding plan design, and recommendationsinvolving benefits plans such as our Key Employee Deferred Compensation Planand the Supplemental Executive Retirement Plan discussed later in thissection.  Consultants also provide adviceon matters relating to broad-based employee healthcare and benefits programsand related employee communications. These plans cover the named executive officers as well as other eligibleemployees.

***Roleof compensation elements and determination of amounts we pay under each elementof compensation***

***Whywe pay each element of compensation***

Our compensationdecisions start with a review of company goals and objectives together with anexamination of the competitive marketplace for luxury retail talent, based inlarge part upon our survey of a group of industry related companies and other broadbased industry surveys.  We chose acombination of base salaries, annual bonus incentives, long-term equity grants,and some level of other benefits and perquisites, together with retirement andchange of control benefits.  Theseelements are typically used by those retailers in our peer group.  Competitive base salaries assist in ourability to attract and motivate executives. Performance based incentives, including annual cash bonuses andlong-term equity grants, encourage executives towards realization of our shortand long-term goals.  We balance theseelements so our executives can achieve a competitive compensation package,which we target between the 50th and 75th percentile levelsof the compensation packages received by executives at a group of industryrelated companies, although our named executive officers also have the abilityto achieve above market compensation for Company, business unit and individualperformance that exceeds targeted levels. Please see page 60 for a more detailed description of our peer group.

*---  Base Salary*

Base salary isintended to provide a base level of compensation commensurate with an executive’sjob title, role, tenure and experience. We utilize base salary as a building block of our compensation program,establishing a salary range for particular positions based on survey data andjob responsibilities.  Being competitivein base salary is a minimum requirement to recruit and retain skilled executives.  Specifically, base salary levels of the namedexecutive officers are determined based on a combination of factors, includingour compensation philosophy, market compensation data, competition for keyexecutive talent, the named executive officer’s experience, leadership,achievement of specified business objectives, individual performance, ouroverall budget for merit increases, and attainment of our financial goals.  Salaries are reviewed before the end of eachfiscal year as part of our performance and compensation review process as wellas at other times to recognize a promotion or change in jobresponsibilities.  Merit increases areusually awarded to the named executive officers in the same percentage range asall employees and are based on overall performance and competitive market dataexcept in those situations where individual performance and other factorsinfluences awarding increases above or below this range.  Merit increases typically range between twoand eight percent.  See discussion on “*Base Salary”*****onpage 60 of this section.

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In addition, Mr.Tansky and Ms. Katz have employment agreements with the Company thatcontractually bind the Company, among other things, from lowering their basesalaries to a level below what they were paid when they first entered intotheir respective employment agreement. During the term of the agreements, the annual salary for each of Mr.Tansky and Ms. Katz must be reviewed annually and is subject to adjustment atthe discretion of the Board.  For afurther description of these employment agreements, see page 63 of thissection.

*---  Annual Incentive Compensation*

Annual bonusincentives keyed to short term objectives form the second building block of ourcompensation program and are designed to provide incentives to achieve certainannual performance objectives and financial goals of the Company.  These performance objectives, which are usedto determine annual bonus incentives for all employees, emphasize profitabilityand asset management.  The CompensationCommittee believes that a significant portion of annual cash compensation forthe named executive officers should be at risk and tied to our operational andfinancial results.  “Pay for performance”for the named executive officers has been significantly enhanced in recentyears by putting a larger part of their potential compensation at risk in theannual bonus incentive program.

All namedexecutive officers are eligible to be considered for annual bonusincentives.  Target annual performanceincentives, stated as a percentage of base salary, are established for each ofthe named executive officers.  Theobjectives set for Mr. Tansky and other senior officers with broad corporateresponsibilities are based on financial results of the overall company and individualperformance goals.  When an employee hasresponsibility for a particular business unit or division, the performancegoals are heavily weighted toward the operational performance of that unit.

Actual awardsearned by the named executive officers are determined based on an assessment ofour overall performance versus the annual objectives, a review of each namedexecutive officer’s contribution to our overall achievement and an assessmentof each named executive officer’s performance versus their individualobjectives.  Mr. Tansky recommends bonusawards for other named executive officers for the Committee’s approval.  The Committee recommends the bonus for Mr.Tansky to the full Board for its approval.

The employmentagreements of Mr. Tansky and Ms. Katz contain provisions regarding the paymentof annual incentives.  The actual amountswill be determined according to the terms of the annual bonus program and willbe payable at the discretion of the Board of Directors.  However, Mr. Tansky’s employment agreementprovides that if bonus levels for a fiscal year are met, the minimum bonusamount he will receive will be 50% of his base salary.  If the target bonus goal for the fiscal yearis met, he will receive 85% of his base salary, and if the maximum target goalis met, he will receive 170% of his base salary.  Under the terms of Ms. Katz’ employmentagreement, if the target goal set by the Compensation Committee for each fiscalyear is met, the amount of Ms. Katz’ annual bonus can be adjusted but cannot bereduced below 65% of her base salary. ** **See page 61 of this section for amore detailed discussion of the minimum, target, and maximum bonus goals set bythe Compensation Committee for fiscal year 2007.

*--  Long-Term Incentive*

Long-termincentives in the form of stock options are intended to promote sustained highperformance and to align our executives’ interests with those of our equityinvestors.  The stock options, which vestover five years other than in the case of Mr. Tansky whose options vest overfour years, will only create value for the executives if the value of theCompany increases.  This creates a directcorrelation to the interests of our equity investors.

An initial stockoption grant was made in fiscal year 2006 under the Neiman Marcus, Inc.Management Equity Incentive Plan, referred to as the Management Incentive Plan,to each of the named executive officers. No grants of stock options were made to the named executive officers infiscal year 2007 and none are anticipated until the vesting period of theinitial stock option grants has lapsed, or in the event of a promotion or a newhire.  The initial grant was madefollowing the consummation of the Transactions in order to retain the seniormanagement team and to enable them to share in the growth of the Company alongwith our equity investors.

All grants ofstock options under the Management Incentive Plan have an exercise price equalto the fair market value of our common stock on the date of grant.  Because our Company is privately held andthere is no public market for our common stock, the fair market value of ourcommon stock subsequent to the Transactions is determined by our CompensationCommittee periodically based upon a number of factors.  In April 2007, a valuation of our commonstock was performed to assist the Compensation Committee in this determinationresulting in a valuation price of $2,683.68.  We expect to update this valuation on anannual basis.  In addition, ourCompensation Committee considers such factors as the Company’s actual andprojected financial results, the principal amount of the Company’sindebtedness, the value of the Company immediately prior to the Transaction, 

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and other factors itbelieves are material to the valuation process.

In addition,following the consummation of the Transactions, the Neiman Marcus, Inc. CashIncentive Plan (referred to as the Cash Incentive Plan) was adopted in 2005 toaid in the retention of certain key executives, including our named executiveofficers.  Under the Cash Incentive Plan,a $14 million cash bonus pool was created to be shared by itsparticipants.  In the event of a changein control or an initial public offering in which the internal rate of returnto our investors is positive, each participant in the Cash Incentive Plan,subject generally to continued employment, will be entitled to a cash bonusbased upon the number of options that were granted to the participant relativeto the other participants in the Cash Incentive Plan under the Management IncentivePlan.  Mr. Tansky will be entitled toreceive (subject, with certain exceptions, to continued employment) a cashbonus under the Cash Incentive Plan in the amount of $3,080,911 pursuant to theterms of his employment agreement.  Ifthe internal rate of return to the Sponsors is not positive following a changein control or an initial public offering, no amounts will be paid to thoseparticipating in the Cash Incentive Plan. No amounts have been paid to date under the Cash Incentive Plan.

We believe thecompensation objectives described earlier effectively and appropriatelycompensate our executives by guiding their activities toward the achievement oftargeted performance objectives, both short and long term.  The amount of compensation, both in individualelements and in the aggregate, is targeted between the 50th and 75th percentile levelsof a peer group of industry related companies.

Retirement,termination, and change in control benefits are also part of the compensationpackage for each named executive officer. Our defined benefit and deferred compensation plans, as well as ourchange in control agreements and are described in more detail below.

**Compensation Actions for theNamed Executive Officers in fiscal year 2007**

**--- ***MarketComparisons*

The CompensationCommittee requests information from its outside consultants to determine if anyelement of compensation needs adjustment, including material change in order tocomply with our strategy of targeting executive compensation that is betweenthe 50th and 75th percentile levelsof the compensation packages received by executives at a group of industryrelated companies.

In fiscal year2007, the Compensation Committee, on the recommendation of its compensationconsultants, referred primarily to the 16 companies identified below forpurposes of benchmarking the compensation of our named executive officers.  These companies are intended to represent ourcompetitors for business and talent. Their executive compensation programs are compared to ours, as well asthe compensation of individual executives if the jobs are sufficiently similarto make the comparison meaningful.  Thecomparison data is used to ensure that our named executive officercompensation, both individually and as a whole, is appropriately competitiverelative to our Company’s performance.

| Abercrombie & Fitch |   | Liz Claiborne     |
|-------------------------|--------|-------------------|
| Ann Taylor              |   | Nordstrom         |
| Coach                   |   | Polo Ralph Lauren |
| Macy’s             |   | Saks              |
| The Gap                 |   | Talbots           |
| Jones Apparel           |   | Tiffany & Co. |
| Kohl’s             |   | Tommy Hilfiger    |
| Limited Brands          |   | Williams Sonoma   |

 

*---  Base Salary*

For fiscal year2007, Mr. Tansky was awarded a 5.2% increase from $1,350,000 in fiscal year2006 to $1,420,000 for fiscal year 2007. Ms. Katz was also awarded a 5.3% merit increase from $760,000 to$800,000.  Mr. Gold was awarded an 8.2%increase from $425,000 to $460,000 due to the competitive market considerationsof the New York metropolitan area.  Mr.Hoffman was awarded an 8.7% increase from $460,000 to $500,000.  Mr. Hoffman’s higher percentage increase wasdue to the performance of his division, his expertise, and the heightenedcompetition for executives in the e-commerce market.  Mr. Skinner received an 8.5% increase from$530,000 to $575,000.  Mr. Skinnerreceived a higher percentage increase in his base salary based on the increasein salaries of chief financial officers in the group of industry relatedcompanies due to the added responsibilities of chief financial officers withrespect to regulatory compliance.

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*--  Annual Incentive Compensation*

For fiscal year2007, the financial component of the annual bonus for each named executiveofficer was based on EBITDA and inventory turnover performance.  The Compensation Committee sets minimum,target, and maximum performance levels. If the minimum threshold level is not achieved, no annual bonuses arepaid.  The final award amount depends onthe actual level of performance achieved; however, the Compensation Committeehas the discretion to make adjustments. The threshold, target, and maximum levels as a percentage of salary forMr. Tansky are set by the terms of his employment agreement discussed on page70 of this section and Ms. Katz’ target bonus may not be less than 65% of herbase salary, as per the terms of her employment agreement discussed on page 71of this section.

Minimum, target,and maximum bonuses are paid based on a percentage of base salary.  If the target level is achieved, each namedexecutive officer will receive the percentage of base salary indicated below.  If the maximum level is achieved, the annualbonus incentives are paid at double the target percentage.  Minimum levels are payable at 25% of thetarget percentage.  The targetpercentages for Mr. Tansky and Mr. Skinner are weighted 75% on the overallfinancial results of the Company (EBITDA and inventory turnover) and 25% onindividual objectives.  The targetpercentages for Ms. Katz, Mr. Hoffman, and Mr. Gold are weighted 30% on theoverall financial results of the Company, 50% on the financial results of theirrespective divisions, and 20% on their individual objectives.

The targetpercentages set for fiscal year 2007 and the threshold, target, and maximumgoals for each of the named executive officers for fiscal year 2007 are asfollows:
| ** **                  | ** ** | **Burton M.  Tansky** | ** ** | **Karen W.  Katz** | ** ** | **James E.  Skinner** | ** ** | **Brendan L.  Hoffman** | ** ** | **James J.  Gold** | ** ** |
|-----------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|------------------------------|------------|-------------------------|------------|
| Target Bonus                |       |                       |       |                    |       |                       |       |                         |       |                    |       |
| Percent of Base  Salary     |       | 85                         | %          | 65                      | %          | 50                         | %          | 50                           | %          | 50                      | %          |
|                        |       |                       |       |                    |       |                       |       |                         |       |                    |       |
| **Financial  Weightings**   |       |                       |       |                    |       |                       |       |                         |       |                    |       |
| Overall  Corporate Results  |       | 75                         | %          | 30                      | %          | 75                         | %          | 30                           | %          | 30                      | %          |
| Division  Financial Results |       |                       |       | 50                      | %          |                       |       | 50                           | %          | 50                      | %          |
| Individual  Objectives      |       | 25                         | %          | 20                      | %          | 25                         | %          | 20                           | %          | 20                      | %          |
| Total                       |       | 100                        | %          | 100                     | %          | 100                        | %          | 100                          | %          | 100                     | %          |

 

Actual amountspaid to the named executive officers in fiscal year 2007 are listed in the SummaryCompensation Table under the heading “*Non-Equity Incentive PlanCompensation”*on page 65 of this section.

In addition,discretionary bonuses have been awarded by the Compensation Committee to someor all of the named executive officers from time to time to award theseindividuals for exemplary performance. Actual amounts of discretionary bonuses awarded to the named executiveofficers in fiscal year 2007 are listed in the Summary Compensation Table inthe column under the heading *“Bonus”* on page65 of this section.

*--  Long-Term Incentive*

Stock optiongrants were made to certain executive officers, including each of the namedexecutive officers, on November 29, 2005. As mentioned above, no grants of stock options were made to the namedexecutive officers in fiscal year 2007 and none are anticipated until thevesting period of the initial stock option grants has lapsed, on October 6,2010, or as a result of a promotion or a new hire.  The stock options are discussed furtherbeginning on page 67 of this section under the heading “*OutstandingEquity Awards at Fiscal Year End*.”

**Personal Benefits, Perquisites,and Other Executive Compensation**

A competitivebenefit package is considered an important factor in our overall compensationpackage.  Accordingly, executives enjoy avariety of benefits, including retirement benefits, health and life insurance,and a deferred compensation plan.  Wealso provide certain perquisites to executive officers that are not generallyavailable to other employees.  Thesebenefits are further described below.

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***RetirementPlans***

The executiveofficers, including the named executive officers, participate in ourtax-qualified retirement plans under the same rules that apply to all of ourother employees.  Mr. Tansky and Ms. Katzare provided additional retirement benefits under the provisions of theirrespective employment contracts discussed later in this section.

Named executiveofficers earn retirement benefits under The Neiman Marcus Group, Inc. EmployeeSavings Plan (the 401(k) Plan), The Neiman Marcus Group, Inc. Key EmployeeDeferred Compensation Plan, The Neiman Marcus Group, Inc. Retirement Plan, andThe Neiman Marcus Group, Inc. Supplemental Executive Retirement Plan.  Taken together, these plans are intended toprovide competitive retirement income that is linked to Company performance andlonger service.  A description of theprovisions of these plans is provided below.

*--  Savings Plan (401(k) Plan)*

We have a fundedtax-qualified defined contribution 401(k) plan, The Neiman Marcus Group, Inc.Employee Savings Plan (referred to as the Employee Savings Plan), which coverssubstantially all employees, including each of the named executiveofficers.  The Employee Savings Plan is aretirement savings plan that allows participants to contribute up to the limitprescribed by the Internal Revenue Service on a pre-tax basis (provided,however, that highly compensated employees are limited to 6% of eligiblecompensation).  The Company will match100% of the first 2% and 25% of the next 4% of pay that is contributed to theEmployee Savings Plan after the first year of employment.  All employee contributions to the EmployeeSavings Plan are fully vested upon contribution.  Company matching contributions vest afterthree years of service.  All of the namedexecutive officers participated in the Employee Savings Plan in fiscal year2007.

*--  Retirement Plan*

We also have afunded, tax-qualified pension plan known as The Neiman Marcus Group, Inc.Retirement Plan (referred to as the Retirement Plan).  The Retirement Plan is a “career-accumulation”plan and most employees qualify for participation.  Each participant becomes fully vested afterfive years of service with us.  Eachnamed executive officer participates in the Retirement Plan and is fullyvested.  The Retirement Plan is describedin more detail on page 68 under the heading “*PensionBenefits.”*

*--  Supplemental Retirement Plan and Key EmployeeDeferred Compensation Plan*

U.S. tax lawslimit the amount of benefits that we can provide under our tax-qualifiedplans.  We maintain The Neiman MarcusGroup, Inc. Supplemental Executive Retirement Plan (referred to as the SERP)and the Neiman Marcus Group, Inc. Key Employee Deferred Compensation Plan(referred to as the KEDC Plan), which are unfunded, nonqualified arrangementsintended to provide named executive officers and certain other key employeeswith additional benefits, including the benefits that they would have receivedunder the Retirement Plan and the Employee Savings Plan if the tax lawlimitations did not apply and if certain other items of compensation could be includedin calculation of benefits under our tax-qualified plans.

Participation inthe SERP is limited to employees whose base salary is equal to or greater than$160,000 and meet other stated criteria. Each SERP participant accrues a benefit for amounts in excess of thoseprovided under the Retirement Plan.  SERPrelated benefits are more fully described under “*PensionBenefits”* on page 68.

Participation inthe KEDC Plan is limited to employees whose base salary is in excess of$300,000 and meet other stated criteria. Amounts in excess of those benefits provided under the Employee SavingsPlan are credited to the account balances of each KEDC Plan participant.  KEDC Plan benefits are more fully describedunder “*Nonqualified Deferred Compensation”* onpage 69.

***Health-RelatedBenefits***

Executive officersparticipate under the same plans as all other employees for medical, dental,vision, disability and life insurance. These benefits are intended to be competitive with benefits offered inthe retail industry.  In addition, theexecutive officers, including the named executive officers, participate in anexecutive life insurance program and a medical reimbursement program.  These benefits are included with theperquisites discussed below.

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***MatchingGift Program***

All employees,including the named executive officers, may participate in our matching giftprogram.  Under the program, we willmatch charitable contributions by employees up to a maximum of $2,000 perqualifying organization on a two-for-one basis in each calendar year.  For any contribution made to a qualifyingorganization in which the employee has an active involvement (as evidenced byservice on the organization’s governing body or in one of its workingcommittees), the basis of our matching contribution may, upon application bythe employee, be increased to a level greater than two-for-one.

***Perquisites***

The Companyprovides perquisites and other personal benefits that it believes arereasonable and consistent with the nature of the individual’s responsibilitiesin order to provide a competitive level of total compensation to ourexecutives.  We believe the level ofperquisites is within an acceptable range of what is offered by a group ofindustry related companies.  TheCompensation Committee believes that these benefits are aligned with theCompany’s desire to attract and retain superior management talent for thebenefit of all stockholders.  The valueof these benefits to the named executive officers is set forth in the SummaryCompensation Table under the column *“All Other Compensation”*and detail about each element is set forth in a table following the SummaryCompensation Table.

**Compensation Following EmploymentTermination or Change in Control**

*--  **Employment Agreements***

Except for Mr.Tansky and Ms. Katz, none of our executives has an employment agreement.  The Company and the Compensation Committeebelieve that the employment agreements with Mr. Tansky and Ms. Katz are animportant component in retaining these key executives.  The employment agreements were entered intoin conjunction with the consummation of the Transactions, with Mr. Tansky’sagreement replacing a prior employment agreement that he had with theCompany.  The Compensation Committeeconsidered the importance of the continuity of senior leadership following theconsummation of the Transactions to be a compelling reason to enter into theemployment agreements.  The employmentagreements provide, among other things, for payments to the executive followinga termination of employment with the Company by the executive for “good reason”or the termination of employment by the Company without “cause.”  The triggering events constituting “goodreason” and “cause” were negotiated to provide protection to the Company and tothe executive for unwarranted terminations of employment that could cause harmto the Company.  The employmentagreements also provide for certain payments to the executives upon death ordisability.  Both Mr. Tansky and Ms. Katzare also parties to change in control agreements described below.  The employment agreements provide thatpayments to Mr. Tansky or Ms. Katz, as the case may be, under their change ofcontrol agreement, which shall terminate on October 6, 2007, are in lieu of anyseverance provided for in their employment agreement.  For a detailed description of the terms ofthese employment agreements, see *“Employment and OtherCompensation Agreements”* on page 70 of this section.

*--  **Change in ControlAgreements***

In recognition ofthe degree of consolidation within the retail industry and to enable ourexecutives to focus their efforts on the Company’s long term goals, the Companyand the Compensation Committee believe that maintaining change in controlagreements with our key executives is a sound business decision that protectsshareholder value both prior to and after a change in control.  Accordingly, each of the named executiveofficers is a party to a change of control termination protection agreement.  In order to receive the lump sum benefitunder these agreements, the executive’s employment must be terminated either bythe Company without “cause” or by the executive for “good reason” within twoyears following, or in some cases before (an “anticipatory termination”), achange in control.  The change of controltermination protection agreements for each of the named executive officers willterminate on October 6, 2007.  For adetailed description of the terms of these change of control terminationprotection agreements, see *“Change of ControlAgreements”* on page 72 of this section.

In addition to thechange of control termination protection agreements, each of the namedexecutive officers (and certain other officers except for Mr. Tansky and Ms.Katz) is a party to a confidentiality, non-competition and termination benefitsagreement with the Company.  Theconfidentiality, non-competition and termination benefits agreements providefor severance benefits once the change of control termination protectionagreements expire if the employment of the affected individual is terminatedother than for death, disability, or for cause. These agreements provide for a severance payment equal to one andone-half annual base salary of the named executive officer, payable over aneighteen month period, and reimbursement for COBRA premiums for the sameperiod.

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*--  **Other***

The Company haschange in control provisions in its Management Incentive Plan and itsretirement plans that may provide for accelerated vesting and/or distributionsin certain circumstances, and these provisions apply equally to allparticipants in the plans, including the named executive officers, except tothe extent an executive is party to an individual agreement that providesotherwise.

**Consideration of Tax andAccounting Treatment of Compensation**

When settingequity compensation, the Compensation Committee considers the estimated costfor financial reporting purposes of any equity compensation it is considering.

*--*  *Internal Revenue Code§409A*

The American JobsCreation Act of 2004 changed the tax rules applicable to nonqualified deferredcompensation arrangements.  It added newCode Section 409A, which has generally been in effect since January 1,2005.  The final regulations were issuedon April 17, 2007 and will take effect on January 1, 2008.  We have operated in good faith compliancewith the statutory provisions and will comply with the new regulations in orderto meet the January 1, 2008 deadline.

*--  Accounting for Stock-Based Compensation*

We beganaccounting for stock-based payments in accordance with the requirements of FASBStatement 123(R) on July 31, 2005.

**CompensationCommittee Report**

The CompensationCommittee has reviewed and discussed the Compensation  Discussion and Analysis required by Item402(b) of Regulation S-K with management and, based on such review anddiscussions, the Compensation Committee recommended to the Board that theCompensation Discussion and Analysis be included in this Annual Report on Form10-K.
|        | ** ** | **THE COMPENSATION COMMITTEE** |
|--------|------------|--------------------------------|
|   |       |                           |
|   |       | Jonathan J. Coslet, Chairman   |
|   |       | Kewsong Lee                    |
|   |       | John G. Danhakl                |

 

 

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**Summary Compensation Table**

The followingtable sets forth the annual compensation for the Principal Executive Officer,the Principal Financial Officer, and the three other most highly compensatedexecutive officers (referred to as the named executive officers) serving at theend of fiscal year 2007.
| Name and Principal  Position | ** ** | **Fiscal  Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)(1)** | ** ** | **Option  Awards  ($)(2)** | ** ** | **Non-Equity  Incentive  Plan  Compen-  sation  ($)(3)** | ** ** | **Change in  Pension  Value and   Non-  qualified  Deferred  Compen-  sation  Earnings  ($)(4)** | ** ** | **All Other   Compen-  sation   ($)(5)** | ** ** | **Total  ($)** | ** ** |
|----------------------------------------|------------|------------------|------------|-----------------|------------|-------------------|------------|----------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------|------------|
| **Burton M. Tansky**                   |       | 2007             |       | 1,420,000       |       | 108,027           |       | 1,458,134                  |       | 2,160,530                                                |       | 754,000                                                                                                         |       | 138,657                                                 |       | 6,039,348      |       |
| President and Chief                    |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Executive Officer                      |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| ** **                             |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| **Karen W. Katz**                      |       | 2007             |       | 800,000         |       | 45,448            |       | 791,488                    |       | 908,960                                                  |       | 284,145                                                                                                         |       | 93,187                                                  |       | 2,923,228      |       |
| President and Chief                    |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Executive Officer                      |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Neiman Marcus                          |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Stores                                 |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| ** **                             |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| **James E. Skinner**                   |       | 2007             |       | 575,000         |       | 25,228            |       | 395,744                    |       | 504,563                                                  |       | 100,983                                                                                                         |       | 36,038                                                  |       | 1,637,556      |       |
| Senior Vice President                  |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| and Chief Financial                    |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Officer                                |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| ** **                             |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| **Brendan L. Hoffman**                 |       | 2007             |       | 500,000         |       | 15,650            |       | 395,744                    |       | 313,000                                                  |       | 51,838                                                                                                          |       | 26,958                                                  |       | 1,303,190      |       |
| President and Chief                    |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Executive Officer                      |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Neiman Marcus                          |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Direct                                 |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| ** **                             |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| **James J. Gold**                      |       | 2007             |       | 460,000         |       | 21,793            |       | 395,744                    |       | 435,850                                                  |       | 158,000                                                                                                         |       | 476,144                                                 |       | 1,947,531      |       |
| President and Chief                    |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Executive Officer                      |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |
| Bergdorf Goodman                       |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                            |       |                                                    |       |           |       |

 

Footnotes:

(1)             Performancebonuses for fiscal year 2007 were paid under our bonus plan, referred to as the“bonus plan.”  In accordance with SECrequirements, these amounts are reported in the Non-Equity Incentive PlanCompensation column.  The amountsreported in this column represent a discretionary bonus awarded by theCompensation Committee to each of the named executive officers.

(2)             Shownis the expense recognized in our financial statements for fiscal year 2007under SFAS 123(R) for all outstanding option awards held by each of the namedexecutive officers.  This amount iscomprised of the portions of the fair values of options awarded in fiscal year2005, which were allocated to services provided by the named executive officersin fiscal year 2007.  The assumptions weused in calculating these amounts are incorporated herein by reference to Note1 to Consolidated Financial Statements appearing elsewhere in this AnnualReport on Form 10-K.  

(3)             Theamounts reported in the Non-Equity Incentive Plan Compensation column reflectthe amounts earned and payable to each named executive officer for fiscal year2007 under the bonus plan.  These amountsare the actual amounts earned under the awards described in the Fiscal Year2007 Grants of Plan-Based Awards table on page 66.  Payments under the bonus plan were calculatedas described in the *Compensation Discussionand Analysis* beginning on page 57.

(4)             Theamounts in this column include the change in the actuarial value of the namedexecutive officers’ benefits under The Neiman Marcus Group, Inc. RetirementPlan and the Supplemental Executive Retirement Plan from July 31, 2006 to July28, 2007 as follows:  $754,000 for Mr. Tansky;$274,000 for Ms. Katz; $98,000 for Mr. Skinner; $51,000 for Mr. Hoffman; and$158,000 for Mr. Gold.  This “change inthe actuarial value” is the difference between the fiscal year 2006 and fiscalyear 2007 present value of the pension benefits accumulated as of year-end bythe named executive officers, assuming that benefit is not paid until age65.  These amounts were computed usingthe same assumptions used for financial statement reporting purposes under FAS87, *Employers’ Accounting for Pensions* asdescribed in Note 13 to the audited consolidated financial statements on pageF-35 of this Annual Report on Form 10-K. 

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Also shown in this columnis the portion of annual earnings on the named executive officer’s principalbalance under the KEDC plan (credited monthly with interest at an annual rateequal to the prime interest rate published in The Wall Street Journal on thelast business day of the preceding calendar quarter plus two percentage points,which averaged approximately 10.25 percent during the year) that exceeds 120percent of the applicable federal long-term interest rate as follows: $10,145for Ms. Katz; $2,983 for Mr. Skinner; and $838 for Mr. Hoffman.

(5)             Includesall items listed in the following table entitled *“All OtherCompensation.”*  In theinterest of transparency, the value of perquisites and other personal benefitsis provided in this column and in the footnotes below even if the amount isless than the reporting threshold established by the SEC.

The table belowsets forth all other compensation for each of the named executive officers.
| **All Other Compensation**  | ** ** | ** ** | ** ** | **Burton M.  Tansky  ($)** | ** ** | **Karen W.  Katz  ($)** | ** ** | **James E.  Skinner  ($)** | ** ** | **Brendan L.  Hoffman  ($)** | ** ** | **James J.  Gold  ($)** | ** ** |
|---------------------------------------|------------|------------|------------|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|------------------------------|------------|
| 401(k) plan  contributions paid by us |       | $          | 6,750      |                            | $          | 6,750                        |       | $                               | 6,750      |                              | $          | 6,750                        |       | $ | 6,750 |   |
| Deferred compensation  plan match     |       | —     |       | 37,986                          |       | 22,392                       |       | 6,625                           |       | —                            |       |
| Group term life  insurance            |       | 14,087     |       | 2,191                           |       | 2,830                        |       | 927                             |       | 1,050                             |       |
| Financial  counseling/tax preparation |       | 35,087     |       | 1,167                           |       | 2,455                        |       | —                          |       | 3,044                             |       |
| Long-term disability                  |       | 2,788      |       | 2,788                           |       | 1,287                        |       | 1,287                           |       | 1,287                             |       |
| Car allowance                         |       | 12,000     |       | —                          |       | —                       |       | —                          |       | —                            |       |
| Clothing allowance                    |       | —     |       | 25,000                          |       | —                       |       | —                          |       | —                            |       |
| Cost of living  adjustment(1)         |       | —     |       | —                          |       | —                       |       | —                          |       | 167,691                           |       |
| Gross ups:                            |       | —     |       | —                          |       | —                       |       | —                          |       | —                            |       |
| New York  non-resident taxes (2)      |       | 67,945     |       | 16,745                          |       | —                       |       | 11,141                          |       | —                            |       |
| Deferred  compensation tax(2)         |       | —     |       | 560                             |       | 324                          |       | 228                             |       | —                            |       |
| Other(3)                              |       | —     |       | —                          |       | —                       |       | —                          |       | 296,322                           |       |
| **TOTALS**                            |       | $          | 138,657    |                            | $          | 93,187                       |       | $                               | 36,038     |                              | $          | 26,958                       |       | $ | 476,144 |   |

 

Footnotes:

(1)             Theamount listed for Mr. Gold represents an annualized cost of living adjustmentdue to his relocation from Texas to New York.

(2)             Theamounts shown represents gross up payments made in connection with New Yorknon-resident taxes and taxes associated with the Medicare portion of deferredcompensation.

(3)             Theamount shown for Mr. Gold represents a one-time reimbursement for New Yorkstate taxes.

**FISCALYEAR 2007 GRANTS OF PLAN BASED AWARDS**

The followingtable sets forth certain information with respect to grants of plan-basedawards during the year ended July 28, 2007 to each of our named executiveofficers.
| ** **          | ** ** | ** ** | ** ** | **Estimated Possible Payouts Under  Non-Equity Incentive Plan Awards(1)** | ** ** |
|---------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | ** ** | ** ** | **Grant Date**                                                                                     | ** ** | **Threshold  ($)** | ** ** | **Target  ($)** | ** ** | **Maximum  ($)** | ** ** |
| Tansky, Burton M.   |       | 10-24-2006 |       | 710,000                                                                                                 |       | 1,207,000 |   | 2,414,000 |   |
|                |       |       |       |                                                                                                    |       |   |   |   |   |
| Katz, Karen W.      |       | 10-24-2006 |       | 130,000                                                                                                 |       | 520,000 |   | 1,040,000 |   |
|                |       |       |       |                                                                                                    |       |   |   |   |   |
| Skinner, James E.   |       | 10-24-2006 |       | 71,875                                                                                                  |       | 287,500 |   | 575,000 |   |
|                |       |       |       |                                                                                                    |       |   |   |   |   |
| Hoffman, Brendan L. |       | 10-24-2006 |       | 62,500                                                                                                  |       | 250,000 |   | 500,000 |   |
|                |       |       |       |                                                                                                    |       |   |   |   |   |
| Gold, James J.      |       | 10-24-2006 |       | 57,500                                                                                                  |       | 230,000 |   | 460,000 |   |
|                     |            |            |            |                                                                                                         |            |  |  |  |  |  |  |

 

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Footnotes:

(1)             Non-equity incentiveawards granted each of the named executive officers pursuant to the bonusplan.  Payments under these awards have alreadybeen determined and will be made prior to October 15, 2007 and are included inthe Non-Equity Incentive Plan Compensation column of the fiscal year 2007Summary Compensation Table.  For adetailed discussion on of the annual incentive awards for fiscal year 2007, see*Compensation Discussion and Analysis*beginning on page 57.

The following table sets forth certain informationregarding the total number and aggregate value of stock options held by each ofour named executive officers at July 28, 2007.

**OUTSTANDINGEQUITY AWARDS AT FISCAL YEAR END**

 
|                    | ** ** | **Option Awards**                                                                  | ** ** | **Stock Awards**                                                                     | ** ** |
|--------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock that  have not  Vested  (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock that  have not  Vested  ($)** | ** ** | **Equity  Incentive  Plan Awards:  Number of  Unearned  Shares, Units  or Other  Rights that  have not  Vested  (#)** | ** ** | **Equity Incentive  Plan Awards:  Market or Payout  Value Of  Unearned Shares,  Units or Other  Rights that have  not Vested  ($)** | ** ** |
| Burton M. Tansky   |       | 3,742                                                                              |       | —                                                                               |       | 361.25 |   | 9-23-2010 |   | — |   | — |   | — |   | — |   |
|                    |       | 1,465                                                                              |       | —                                                                               |       | 361.25 |   | 5-15-2011 |   | — |   | — |   | — |   | — |   |
|                    |       | 2,076                                                                              |       | —                                                                               |       | 354.03 |   | 9-22-2011 |   | — |   | — |   | — |   | — |   |
|                    |       | 460                                                                                |       | 6,809                                                                                | (1)        | 1,445.00 |   | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|                    |       | 1,692                                                                              |       | 6,809                                                                                | (2)        | 1,589.50 | (2) | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|               |       |                                                                               |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Karen W. Katz      |       | 1,869                                                                              |       | 3,472                                                                                | (3)        | 1,445.00 |   | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|                    |       | 1,869                                                                              |       | 3,472                                                                                | (4)        | 1,589.50 | (4) | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|               |       |                                                                               |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| James E. Skinner   |       | 935                                                                                |       | 1,735                                                                                | (3)        | 1,445.00 |   | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|                    |       | 935                                                                                |       | 1,735                                                                                | (4)        | 1,589.50 | (4) | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|               |       |                                                                               |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Brendan L. Hoffman |       | 935                                                                                |       | 1,735                                                                                | (3)        | 1,445.00 |   | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|                    |       | 935                                                                                |       | 1,735                                                                                | (4)        | 1,589.50 | (4) | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|               |       |                                                                               |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| James J. Gold      |       | 935                                                                                |       | 1,735                                                                                | (3)        | 1,445.00 |   | 10-06-2015 |   | — |   | — |   | — |   | — |   |
|                    |       | 935                                                                                |       | 1,735                                                                                | (4)        | 1,589.50 | (4) | 10-06-2015 |   | — |   | — |   | — |   | — |   |

 

Footnotes:

(1)             Nonqualified stock options grantedNovember 29, 2005 vested with respect to 460 shares on the first anniversarydate of October 6, 2005 and thereafter on the subsequent three anniversarydates of October 6, 2005 with respect to 2,269 shares.

(2)             Nonqualified stock options granted onNovember 29, 2005 vest in four equal annual installments on October 6, 2007,October 7, 2008, October 6, 2009, and October 6, 2010, subject to earliervesting as disclosed on page 71 of this section.  The options were granted at the initialexercise price of $1,445.00 per share which will increase at a 10.00% compoundrate on each anniversary of October 6, 2005 until the earlier to occur of (i)the exercise of the option, (ii) the fifth anniversary of October 6, 2005, or(iii) the occurrence of a Change of Control, as more fully discussed on page72.  On October 6, 2007, the option pricewill increase to $1,748.48 per share.

(3)             Nonqualified stock options granted onNovember 29, 2005 at the exercise price of $1,445.00 per share which vests 20%on the first anniversary of October 6, 2005 and thereafter in forty-eight equalmonthly installments over the forty-eight months following the firstanniversary of October 6, 2005, beginning on the one-month anniversary of suchfirst anniversary and becoming fully vested on October 6, 2010, subject toearlier vesting in certain circumstances following a change in control.

(4)             Nonqualified stock options granted onNovember 29, 2005 which vests 20% on the first anniversary of October 6, 2005and thereafter in forty-eight equal monthly installments over the forty-eightmonths following the first anniversary of October 6, 2005, beginning on theone-month anniversary of such first anniversary and becoming fully vested onOctober 6, 2010.  The options weregranted at the initial exercise price of $1,445.00 per share which willincrease at a 10.00% compound rate on each anniversary of October 6, 2005 untilthe earlier to occur of (i) the exercise of the option, (ii) the fifthanniversary of October 6, 2005, or (iii) the occurrence of a Change of Control,as more fully discussed on page 72, or in the event the equity investors sell aportion of their investment, with respect to a portion of the options bearingthe same ratio as the portion of the equity investor’s equity sold.  On October 6, 2007, the option price willincrease to $1,748.48 per share.

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**OPTION EXERCISES AND STOCK VESTED**

** **
| ** **         | ** ** | ** ** | ** ** | **Option Awards**                                                   | ** ** |
|--------------------|------------|------------|------------|---------------------------------------------------------------------|------------|
| **Name**           | ** ** | ** ** | ** ** | **Number of Shares  Acquired on Exercise  (#)** | ** ** | **Value Realized  on Exercise  ($)(1)** | ** ** |
| Burton M. Tansky   |       | 578        |       | 221,050                                                             |       |
| Karen W. Katz      |       | —     |       | —                                                              |       |
| James E. Skinner   |       | —     |       | —                                                              |       |
| Brendan L. Hoffman |       | —     |       | —                                                              |       |
| James J. Gold      |       | —     |       | —                                                              |       |

----

(1)                Reflectsthe difference between the exercise price of the stock option and the valuationprice in effect on the date of the exercise as determined by the Company basedupon a number of factors, as more fully discussed on page 59.

 

**PENSION BENEFITS**

 

                The followingtable sets forth certain information with respect to retirement payments andbenefits under the Retirement Plan and the SERP for each of our named executiveofficers.

 
| Name               | ** ** | ** **       | ** ** | **Plan Name** | ** ** | **Number of Years  Credited Service  (#)(1)** | ** ** | **Present Value  of Accumulated  Benefit  ($)(2)** | ** ** | **Payments During  Last  Fiscal Year  ($)** | ** ** |
|--------------------|------------|------------------|------------|--------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Burton M. Tansky   |       | Retirement  Plan |       | 17                 |       | 391,000                                                      |       | —                                                       |       |
|                    |       | SERP             |       | 29                 | (3)        | 6,944,000                                                    |       | —                                                       |       |
| Karen W. Katz      |       | Retirement  Plan |       | 22                 |       | 176,000                                                      |       | —                                                       |       |
|               |       | SERP             |       | 22                 | (4)        | 1,189,000                                                    |       | —                                                       |       |
| James E. Skinner   |       | Retirement  Plan |       | 6                  |       | 82,000                                                       |       | —                                                       |       |
|                    |       | SERP             |       | 6                  |       | 227,000                                                      |       | —                                                       |       |
| Brendan L. Hoffman |       | Retirement  Plan |       | 9                  |       | 44,000                                                       |       | —                                                       |       |
|               |       | SERP             |       | 9                  |       | 99,000                                                       |       | —                                                       |       |
| James J. Gold      |       | Retirement  Plan |       | 16                 |       | 76,000                                                       |       | —                                                       |       |
|                    |       | SERP             |       | 16                 |       | 324,000                                                      |       | —                                                       |       |

 

Footnotes:

(1)             Computedas of July 28, 2007, which is the same pension measurement date used forfinancial statement reporting purposes with respect to our audited consolidatedfinancial statements and notes thereto.

(2)             Forpurposes of calculating the amounts in this column, retirement age was assumedto be the normal retirement age of 65, as defined in the Retirement Plan.  A description of the valuation method and allmaterial assumptions applied in quantifying the present value of accumulatedbenefit is set forth in Note 13 to the audited consolidated financialstatements on page F-35 of this Annual Report on Form 10-K.

(3)             Thedifference in years of service is a result of the provision in Mr. Tansky’semployment agreement relating to the calculation of his years of service underthe SERP.  Following his termination ofemployment with us, his years of service for purposes of calculating hisbenefit under the SERP will be determined by multiplying his actual service forpurposes of the SERP by 2, subject to the 25-year maximum set forth in theSERP, and by then providing him with an additional credit for each year ofservice to the Company following his attainment of age sixty-five (65)(disregarding the 25-year maximum set forth in the SERP).  See the discussion of his employmentagreement under “*Employment and Other CompensationAgreements”* on page 70 of this section.

(4)             Pursuantto the terms of Karen Katz’s employment agreement, after she has reached the25-year maximum set forth in the SERP, she will be entitled to an additionalone year of credit for each full year of service thereafter.  In addition, if her employment is terminatedby us for any reason other than death, disability, cause, or non-renewal of heremployment term, or if she terminates her employment with us for good reason,and she has not yet reached 65, her SERP benefit will not be reduced solely byreason of her failure to reach 65 as of the termination date.

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The Retirement Plan is a funded,tax-qualified pension plan.   Most non-union employees over age 21 who havecompleted one year of service with 1,000 or more hours participate in theRetirement Plan, which pays benefits upon retirement or termination ofemployment.  The Retirement Plan is a “career-accumulation”plan, under which a participant earns each year a retirement annuity equal to 1percent of his or her compensation for the year up to the Social Security wagebase and 1.5 percent of his or her compensation for the year in excess of suchwage base.  Benefits under the RetirementPlan become fully vested after five years of service with us.

 

The SERP is an unfunded,nonqualified plan under which benefits are paid from our general assets tosupplement Retirement Plan benefits and Social Security.  Executive, administrative and professionalemployees (other than those employed as salespersons) with an annual basesalary at least equal to a minimum established by the Company ($160,000 as ofJuly 28, 2007) are eligible to participate. At normal retirement age (age 65), a participant with 25 or more yearsof service is entitled to payments under the SERP sufficient to bring his orher combined annual benefit from the Retirement Plan and SERP, computed as astraight life annuity, up to 50 percent of the participant’s highestconsecutive 60 month average of annual pensionable earnings, less 60 percent ofhis or her estimated annual primary Social Security benefit.  If the participant has fewer than 25 years ofservice, the combined benefit is proportionately reduced.  Benefits under the SERP become fully vested afterfive years of service with us.  The SERPis designed to comply with the requirements of Section 409A of the InternalRevenue Code.

 

**NONQUALIFIED DEFERREDCOMPENSATION**

 
| **Name**           | ** ** | ** ** | ** ** | **Executive  Contributions  in Last Fiscal Year  ($)** | ** ** | **Registrant  Contributions in  Last Fiscal Year  ($)** | ** ** | **Aggregate Earnings  in Last Fiscal Year  ($)** | ** ** | **Aggregate  Withdrawals /  Distributions  ($)** | ** ** | **Aggregate Balance  at Last Fiscal Year-End  ($)** | ** ** |
|--------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Burton M. Tansky   |       | —     |       | —                                                                |       | —                                                                 |       | —                                                               |       | —                                                |       |
|               |       |       |       |                                                                  |       |                                                                   |       |                                                                 |       |                                                  |       |
| Karen W. Katz      |       | 223,678    |       | 37,986                                                                |       | 24,101                                                                 |       | —                                                               |       | 360,631                                               |       |
|               |       |       |       |                                                                  |       |                                                                   |       |                                                                 |       |                                                  |       |
| James E. Skinner   |       | 58,283     |       | 22,392                                                                |       | 7,082                                                                  |       | —                                                               |       | 109,067                                               |       |
|               |       |       |       |                                                                  |       |                                                                   |       |                                                                 |       |                                                  |       |
| Brendan L. Hoffman |       | 14,949     |       | 6,625                                                                 |       | 1,993                                                                  |       | —                                                               |       | 32,794                                                |       |
|               |       |       |       |                                                                  |       |                                                                   |       |                                                                 |       |                                                  |       |
| James J. Gold      |       | —     |       | —                                                                |       | —                                                                 |       | —                                                               |       | —                                                |       |

 

                The amountsreported in the Nonqualified Deferred Compensation Table represent deferralsand Company matching contributions credited pursuant to KEDC Plan.  The amounts reported as ExecutiveContributions in Last Fiscal Year are also included as Salary and Non-EquityIncentive Plan Compensation in the Summary Compensation Table on page 65.

 

The KEDC Plan allowseligible employees to elect to defer up to 15% of base pay and up to 15% ofannual performance bonus each year. Eligible employees generally are those employees who have completed oneyear of service with the Company, have annual base pay of at least $300,000 andare otherwise designated as eligible by the Company’s employee benefitscommittee.  The Company also credits amatching contribution each pay period equal to (A) the sum of (i) 100% of thesum of the employee’s KEDC Plan deferrals and the maximum Employee Savings Plandeferral that the employee could have made under such plan for such pay period,to the extent that such sum does not exceed 2% of the employee’s compensationfor such pay period, and (ii) 25% of the sum of the employee’s KEDC Plandeferrals and the maximum Employee Savings Plan deferral that the employeecould have made under such plan for such pay period, to the extent that suchsum does not exceed the next 4% of the employee’s compensation for such payperiod, minus (B) the maximum possible match the employee could have receivedunder the Employee Savings Plan for such pay period.  Such amounts are credited to a bookkeepingaccount for the employee and are fully vested. Accounts are credited monthly with interest at an annual rate equal tothe prime interest rate published in The Wall Street Journal on the lastbusiness day of the preceding calendar quarter plus two percentage points.  Amounts credited to an employee’s accountbecome payable to the employee upon termination of employment, death,unforeseeable emergency or change of control of the Company.  In the event of termination of employment,payment is made in a lump sum in the calendar quarter following the calendarquarter in which the termination occurs although if the employee is eligiblefor retirement upon such termination, payment may be deferred until thefollowing year or made in installments over a period of up to ten years,depending upon the distribution form previously elected by the employee.  There is no separate funding for the amountspayable under the KEDC Plan, rather the Company makes payment from its generalassets.  The KEDC Plan is designed to complywith the requirements of Section 409A of the Internal Revenue Code.

 

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**Employment and Other Compensation Agreements**

                As discussed in “*Compensation Discussion & Analysis,*” The Neiman MarcusGroup, Inc. has entered into employment agreements with Burton M. Tansky andKaren W. Katz and change of control agreements with each of the named executiveofficers.  In addition, each of the namedexecutive officers, except for Mr. Tansky, is a party to a confidentiality,non-competition and termination benefits agreement that, under certaincircumstances, will provide for severance benefits once the change of controlagreements expire.

 

                *Employment Agreement with Mr. Tansky*

 

The employment agreementwith Mr. Tansky has an employment term of five years and provides that he willact as our Chief Executive Officer until October 2008.  Thereafter, under the terms of the agreementand until October 2010, he will act as chairman of the Board and shall havesuch duties as are customary for that position. During the time that Mr. Tansky is the Chief Executive Officer (referredto herein as the “CEO term”), his base salary shall not be less then$1,300,000.  During the period he servesas chairman (referred to herein as the “Chairman term”), he will be entitled to75% of the base compensation he earned as Chief Executive Officer.  Mr. Tansky’s agreement also provides that hewill participate in the Company’s annual bonus plan.  The actual amounts will be determinedaccording to the terms of the annual bonus program and will be payable at thediscretion of the Board of Directors.  Mr.Tansky’s agreement provides that if bonus levels for a fiscal year are met, theminimum bonus amount he will receive will be 50% of his base salary, if thetarget bonus goal for the fiscal year is met, he will receive 85% of his basesalary, and if the maximum target goal is met, he will receive 170% of his basesalary.

 

In addition to theforegoing, the agreement provides that upon the occurrence of the earlier of achange of control (as defined in the employment agreement) or an initial publicoffering (as defined in the employment agreement), Mr. Tansky will be entitledto a cash bonus equal to $3,080,911, which represents his portion of the cashincentive pool pursuant to the Cash Incentive Plan (more fully described onpage 74 of this section), provided that no such bonus will be paid unless(A) he remains employed with the Company through the earlier of (x) thedate of the change of control, (y) the initial public offering or (z) thefourth anniversary of the effective date of the agreement (which effective datewas October 6, 2005), and (B) the internal rate of return (as calculatedin accordance with provisions contained in the agreement) to the majoritystockholder (as defined in the employment agreement) in respect of their directand indirect investment in the Company is positive.  The agreement also provides that at the timeof Mr. Tansky’s termination of employment with the Company, his years ofservice for purposes of calculating his benefit under the SERP shall bedetermined by multiplying his actual service for purposes of the SERP by 2,subject to the 25-year maximum set forth in the SERP, and by then providing himwith an additional credit for each year of service by him to the Companyfollowing his attainment of age sixty-five (65) (disregarding the 25-year maximumset forth in the SERP).

 

This agreement may beterminated by either party on three months notice, subject to severanceobligations in the event of termination under certain circumstances (asdescribed below).  The agreement alsoprovides that payments to Mr. Tansky under his change of control agreement,which is described below, is in lieu of any severance payment provided for inhis employment agreement.

 

                If we terminateMr. Tansky’s employment for cause (as defined in the employment agreement) orif he resigns without good reason (as defined in the employment agreement) ,Mr. Tansky will receive (i) any unpaid salary through the date of terminationor resignation and any bonus payable for the preceding fiscal year that hasotherwise not already been paid, (ii) any accrued but unused vacation days, and(iii) any reimbursement for business travel and other expenses to which he isentitled.  In addition, in the event thatfollowing a resignation by Mr. Tansky without good reason, a change of control orinitial public offering occurs in which certain of our investors recognizes apositive internal rate of return, Mr. Tansky will be entitled to a paymentequal to the product of (i) $3,080,911 and (ii) 25% multiplied by the number offull years (and not fractions thereof) from the effective date of the agreementto the resignation date.

 

                If (1) weterminate Mr. Tansky’s employment without cause or if he resigns for goodreason and, in each case, he is not entitled to receive payments or benefitsunder his change of control agreement described below, or (2) Mr. Tanskyresigns without good reason during the 30 day period following the six monthanniversary of a future change of control (referred to herein as a change ofcontrol resignation), he will receive (i) any unpaid salary through the date oftermination or resignation and any bonus payable for the preceding fiscal yearthat has otherwise not already been paid, (ii) any accrued but unused vacationdays, and (iii) any reimbursement for business travel and other expenses towhich he is entitled.  In addition,subject to his execution of a mutual release and waiver of claims, he willreceive a lump sum equal to (A) 85% of base salary multiplied by a fraction,the numerator of which is the number of days during the fiscal year up to the terminationdate and the denominator of which is 365, plus (B) if such termination occursprior to the commencement of the Chairman term and is

 

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not a change of control resignation, an amount equalto three times the sum of (i) base salary and (ii) the target bonus in effecton the termination date, or (C) if such termination occurs during the Chairmanterm or is a change of control resignation, an amount equal to two times thesum of (i) base salary and (ii) the target bonus in effect on the terminationdate; provided, however, that Mr. Tansky shall be required to repay thispayment if he violates certain of the restrictive covenants or if he is foundto have engaged in certain acts of wrongdoing, all as further described in theagreement.  In the event that following atermination of Mr. Tansky’s employment by us without cause or a resignation byMr. Tansky for good reason, after October 6, 2009 but prior to October 6, 2010,a change of control or initial public offering occurs in which certain of ourinvestors recognizes a positive internal rate of return, Mr. Tansky will beentitled to a payment equal to the product of (i) $3,080,911 and (ii) the sum(not to exceed 100%) of (A) 25% multiplied by the number of full years andfractions thereof from the effective date of the agreement to the employmenttermination date and (B) 25%.

If Mr. Tansky’semployment terminates before the end of the term due to death or inability toperform (as defined in the employment agreement), we will pay him or hisestate, as applicable (i) any unpaid salary through the date of termination orresignation and any bonus payable for the preceding fiscal year that hasotherwise not already been paid, (ii) any accrued but unused vacation days,(iii) any reimbursement for business travel and other expenses to which he isentitled, and (iv) 85% of base salary multiplied by a fraction, the numeratorof which is the number of days during the fiscal year up to the terminationdate and the denominator of which is 365. In the event that following a termination of Mr. Tansky’s employment dueto death or inability to perform, a change of control or initial public offeringoccurs in which certain of our investors recognizes a positive internal rate ofreturn, Mr. Tansky will be entitled to a payment equal to $3,080,911.

 

Pursuant to theagreement, depending on the circumstances of the termination of Mr. Tansky’semployment, he may also be entitled to up to three years of continuing coverageunder our group health, dental and life insurance plans and certain retireemedical coverages.

 

Mr. Tansky’s agreementalso contains a tax gross-up provision whereby if, in the event of a change incontrol following the existence of a public market for the Company’s stock, heincurs any excise tax by reason of his receipt of any payment that constitutesan excess parachute payment as defined in Section 280G of the Internal RevenueCode of 1986, as amended (the “Code”), he will receive a gross-up payment in anamount that would place him in the same after-tax position that he would havebeen in if no excise tax had applied. However, under certain conditions, rather than receive a gross-uppayment, the payments payable to him will be reduced so that no excise tax isimposed.

 

Pursuant to theagreement, Mr. Tansky received a grant of options to purchase 16,349.1797shares of the Company’s common stock, which vest in accordance with the termsof the agreement over the first four anniversaries of the date of grant.  The agreement provides for the acceleratedvesting of these options upon (i) a change of control or (ii) the terminationof Mr. Tansky’s employment before the end of the term due to death or inabilityto perform.  In addition, in the event thatwe terminate Mr. Tansky’s employment without cause or if he resigns for goodreason, the agreement provides that the options will vest as to (i) the numberof shares that would have become vested on the next anniversary of the grant date,plus (ii) if the termination date occurs prior to the third anniversary of the grantdate, the number of shares that would have vested on the next anniversary ofthe grant date, multiplied by a fraction, the numerator of which is the numberof days from the preceding anniversary of the grant date and the denominator ofwhich is 365.

 

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

 

                *Employment Agreement with Ms. Katz*

 

The employment agreementwith Ms. Katz provides that she will act as Chief Executive Officer andPresident of Neiman Marcus Stores, a division of The Neiman Marcus Group, Inc.,until October 2010, subject to automatic one-year renewals of the term ifneither party submits a notice of termination at least three months prior tothe end of the then-current term.  Pursuantto the agreement, her base salary shall not be less than $760,000.  Ms. Katz’s agreement also provides that shewill participate in the Company’s annual bonus plan.  The actual amounts will be determinedaccording to the terms of the annual bonus program and will be payable at thediscretion of the Board of Directors.  However,Ms. Katz’s agreement provides that her target bonus may not be reduced below65% of her base salary.  In addition, theagreement provides that during the term, Ms. Katz shall continue to accruebenefits under the SERP, provided that (i) the SERP shall not be amended

 

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or terminated in any way that adversely affects her,and (ii) after she has reached the 25-year maximum set forth in the SERP, sheshall be entitled to an additional one year of credit for each full year ofservice thereafter.  In addition, if (i)during the term, her employment is terminated by the Company for any reasonother than death, disability (as defined in the employment agreement), or cause(as defined in the employment agreement), (ii) during the term, she terminatesher employment for good reason (as defined in the employment agreement), or(iii) her employment terminates upon expiration of the term following theprovision by the Company of a notice of non-renewal, and, in any such case, onthe date of such termination she has not yet reached age 65, her SERP benefitshall not be reduced according to the terms of the SERP solely by reason of herfailure to reach age 65 as of the termination date.

This agreement may beterminated by either party on three months’ notice, subject to severanceobligations in the event of termination under certain circumstances (asdescribed below).  The agreement alsoprovides that payments to Ms. Katz under her change of control agreement, whichis described below, are in lieu of any severance payments provided for in heremployment agreement.

 

If we terminate Ms.Katz’s employment for cause or if she resigns without good reason or followingher delivery of a notice of non-renewal to the Company, Ms. Katz will receiveonly (i) any unpaid salary through the date of termination or resignation andany bonus payable for the preceding fiscal year that has otherwise not alreadybeen paid, (ii) any accrued but unused vacation days, and (iii) anyreimbursement for business travel and other expenses to which she is entitled.

 

                If , followingOctober 6, 2007, we terminate Ms. Katz’s employment without cause or if sheresigns for good reason or following her receipt of a notice of non-renewalfrom the Company, she will receive (i) any unpaid salary through the date oftermination or resignation and any bonus payable for the preceding fiscal yearthat has otherwise not already been paid, (ii) any accrued but unused vacationdays, and (iii) any reimbursement for business travel and other expenses towhich she is entitled.  In addition,subject to her execution of a release and waiver of claims, she will receive(i) an amount of annual incentive pay equal to a prorated portion of her targetbonus amount for the year in which the employment termination date occurs, (ii)a lump sum equal to two times the sum of her base salary and target bonus, atthe level in effect as of the employment termination date, and (iii) for thetwo year period following such termination, the benefits described in, andsubject to the terms of, her change of control agreement (which is furtherdescribed below); provided, however, that Ms. Katz shall be required to repaythis payment if she violates certain restrictive covenants in her agreement orif she is found to have engaged in certain acts of wrongdoing, all as furtherdescribed in the agreement.

 

If, prior to October 6,2007, Ms. Katz’s employment with the Company is terminated for any reason, herentitlements and obligations, if any, shall be governed by her change ofcontrol agreement.

 

If Ms. Katz’s employmentterminates before the end of the term due to her death or disability, we willpay her or her estate, as applicable, (i) any unpaid salary through the date oftermination and any bonus payable for the preceding fiscal year that hasotherwise not already been paid, (ii) any accrued but unused vacation days,(iii) any reimbursement for business travel and other expenses to which she isentitled, and (iv) an amount of annual incentive pay equal to a proratedportion of her target bonus amount for the year in which the employmenttermination date occurs.

 

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

 

                Ms. Katz’sagreement also contains obligations on her part regarding non-competition andnon-solicitation of employees following the termination of her employment forany reason, confidential information and non-disparagement of the Company andits business.  The non-competition agreementgenerally prohibits Ms. Katz during employment and for a period of one yearfrom termination from becoming a director, officer, employee or consultant forany competing business that owns or operates a luxury specialty retail storelocated in the geographic areas of the Company’s operations.  The agreement also requires that she discloseand assign to the Company any trademarks or inventions developed by her whichrelate to her employment by the Company or to the Company’s business.

 

                *Change of Control Agreements*

 

                Each of the namedexecutive officers is a party to a change of control termination protectionagreement that will expire on October 6, 2007. If the named executive officer’s employment is terminated by The NeimanMarcus Group, Inc.

 

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without cause or by the named executive officer forgood reason (which includes in most cases, among other things, a reduction inthe named executive officer’s base salary or total bonus, a relocation greaterthan 50 miles from the named executive officer’s current principal place ofbusiness or a diminution in the Named Executive Officer’s title or primaryreporting relationship or substantial diminution in duties or responsibilities(other than solely as a result of our ceasing to be a publicly held corporation),as those terms are defined in the agreement, prior to October 6, 2007 the namedexecutive officer will be entitled to receive a lump sum amount equal to (a)the sum of two times, or in the case of Mr. Tansky, three times, (1) theofficer’s annual base salary and (2) his or her annual target bonus for theyear of the termination, and (b) a pro rata target bonus provided that if thenamed executive officer’s employment terminates after more than 75% of ourfiscal year has elapsed, the named executive officer may be entitled to a prorata portion of the actual bonus to which he or she would have been entitled ifsuch actual bonus would have been greater than the target bonus and forpurposes of calculating the actual bonus it is assumed that all qualitative andsubjective performance criteria were achieved. Payments to Mr. Tansky and Ms. Katz under their change of controltermination protection agreements are in lieu of any severance provided for intheir employment agreements.

                If a named executive officer becomes entitled toreceive these severance amounts, the named executive officer will also beentitled to the following:

 

·              Deemed participationin and accelerated vesting of benefits under the SERP and a lump sum cashpayment equal to the actuarial equivalent of the incremental benefits payableunder the SERP if the named executive officer were credited with enhanced yearsof service (two or three years) for purposes of eligibility for participation,eligibility for retirement, for early commencement of actuarial subsidies andfor purposes of benefit accrual (modified as described above for Mr. Tansky andMs. Katz);

 

·              Continuing coverageunder our group health, dental and life insurance plans for the named executiveofficer, his or her spouse and any dependents for two years (three in the caseof Mr. Tansky) (any such medical and dental benefits will become secondary tocoverage provided by a subsequent employer) and certain retiree medicalcoverage benefits; and

 

·              Reimbursement foroutplacement expenses and merchandise discounts for the named executiveofficer, his or her spouse and dependents.

 

                Each agreementalso contains a tax gross-up provision whereby if the named executive officerincurs any excise tax by reason of his or her receipt of any payment thatconstitutes an excess parachute payment as defined in Section 280G of the Code,the named executive officer will receive a gross-up payment in an amount thatwould place the named executive officer in the same after-tax position that heor she would have been in if no excise tax had applied.  However, under certain conditions, ratherthan receive a gross-up payment, the payments payable to the named executiveofficer will be reduced so that no excise tax is imposed.  As a condition to receiving any payments orbenefits under the agreements, the officers must execute a release of claims inrespect of their employment with us.

 

                *Confidentiality, Non-Competition and Termination Benefits Agreements*

 

                In addition to thechange of control termination protection agreements, each of the namedexecutive officers and certain other officers, except for Mr. Tansky and Ms.Katz, are party to a confidentiality, non-competition and termination benefitsagreement that will provide for severance benefits once the change of controltermination protection agreements expire if the employment of the affectedindividual is terminated by the Company other than in the event of death,disability or termination for cause. These agreements provide for a severance payment equal to one andone-half annual base salary payable over an eighteen month period, andreimbursement for COBRA premiums for the same period.  Eachof the confidentiality, non-competition, termination benefits agreementcontains restrictive covenants as a condition to receipt of any paymentspayable thereunder.

** **

73

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**Cash Incentive Plan**

 

Following theconsummation of the Transactions, the Neiman Marcus, Inc. Cash Incentive Plan(referred to as the Cash Incentive Plan) was adopted to aid in the retention ofcertain key executives, including the named executive officers.  The Cash Incentive Plan provides for thecreation of a $14 million cash bonus pool to be shared by the participantsbased on the number of stock options that were granted to each such participantrelative to other participants in the Cash Incentive Plan pursuant to theManagement Incentive Plan.  Eachparticipant in the Cash Incentive Plan will be entitled to a cash bonus uponthe earlier to occur of a change of control or an initial public offering,provided that the internal rate of return to certain of our investors is positive. If the internal rate of return to certain of our investors is notpositive, no amounts will be paid under the Cash Incentive Pool.

 

                Based on the foregoing, each of the named executiveofficers would be entitled to receive the following percentages of theremaining cash bonus pool on July 28, 2007, assuming there was a change incontrol or an initial public offering on that date, and the rate of return tothe Sponsors was positive:

 

| Name               | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|--------------------|------------|------------|------------|----------------|------------|
| Burton M. Tansky   |       | 22.00      | %          |
| Karen W. Katz      |       | 13.75      | %          |
| James E. Skinner   |       | 6.88       | %          |
| Brendan L. Hoffman |       | 6.88       | %          |
| James J. Gold      |       | 6.88       | %          |

 

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

 

** **

**Potential Payments UponTermination or Change-in-Control**

** **

                The tables belowshow certain potential payments that would have been made to a named executiveofficer if the named executive officer’s employment had terminated on July 28,2007 under various scenarios, including a change-in-control.  Because the payments to be made to a namedexecutive officer depend on several factors, the actual amounts to be paid outupon a named executive officer’s termination of employment can only bedetermined at the time of an executive’s separation from the Company.

74

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**Burton M. Tansky**
| **Executive Benefits  and Payments Upon Separation** | ** ** | ** ** | ** ** | **Retirement  ($)(1)(7)(8)** | ** ** | **Termination  due to  death  ($)(2)(7)(8)** | ** ** | **Termination  due to  Disability  ($)(3)(7)(8)** | ** ** | **Termination  without cause  or   for good  reason  ($)(4)(7)(8)** | ** ** | **Change in  Control  ($)(5)(7)** | ** ** | **Termination  without cause  following a  change in  control  ($)(6)(7)** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                                        | ** ** | ** **                                             | ** ** | ** **                                                                         | ** ** | ** **                             | ** ** |
| **Compensation:**                                                        | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                                        | ** ** | ** **                                             | ** ** | ** **                                                                         | ** ** | ** **                             | ** ** |
| Severance                                                                |       | $          | —     |                         | $          | —                                            |       | $                                                      | —     |                                                                               | $          | 4,260,000                              |       | $                                                                                         | —     |   | $ | 4,260,000 |   |
| Bonus                                                                    |       | —     |       | 1,207,000                    |       | 1,207,000                                         |       | 3,621,000                                              |       | —                                                                             |       | 3,621,000                              |       |
| Stock Options                                                            |       | —     |       | 15,886,417                   |       | 15,886,417                                        |       | 9,708,366                                              |       | 15,886,417                                                                         |       | 15,886,417                             |       |
|                                                                     |       |       |       |                         |       |                                              |       |                                                   |       |                                                                               |       |                                   |       |
| **Benefits & Perquisites:**                                          | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **                                        | ** ** | ** **                                             | ** ** | ** **                                                                         | ** ** | ** **                             | ** ** |
| Retirement Plans                                                         |       | 3,192,000  |       | —                       |       | —                                            |       | —                                                 |       | —                                                                             |       | —                                 |       |
| Outplacement  Services                                                   |       | —     |       | —                       |       | —                                            |       | 75,000                                                 |       | —                                                                             |       | 75,000                                 |       |
| Cash Incentive  Plan Payment                                             |       | —     |       | —                       |       | —                                            |       | —                                                 |       | 3,080,911                                                                          |       | —                                 |       |
| Long-Term  Disability                                                    |       | —     |       | —                       |       | 240,000                                           |       | —                                                 |       | —                                                                             |       | —                                 |       |
| Health and  Welfare Benefits                                             |       | —     |       | —                       |       | —                                            |       | 44,790                                                 |       | —                                                                             |       | 44,790                                 |       |
| Life Insurance  Benefits                                                 |       | —     |       | 1,000,000                    |       | —                                            |       | —                                                 |       | —                                                                             |       | —                                 |       |
| **Total**                                                                |       | $          | 3,192,000  |                         | $          | 18,093,417                                        |       | $                                                      | 17,333,417 |                                                                               | $          | 17,709,156                             |       | $                                                                                         | 18,967,328 |   | $ | 23,887,207 |   |

                                                                                                                                                                                                                                                                                     

----

Footnotes:

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

(2)             Represents theestimated present value of amounts payable to Mr. Tansky’s beneficiaries uponhis death:  A lump sum payment of Mr.Tansky’s target bonus; the intrinsic value of all unvested equity incentiveawards (calculated as in footnote 1 above); and a lump sum basic life insurancebenefit payment of $1,000,000 payable by the Company’s life insurance provider.

(3)             Represents theintrinsic value of all unvested equity incentive awards (calculated as infootnote (1) above), and $20,000 per month payable for 12 months pursuant tothe terms and conditions of the Company’s long-term disability plan provider.

(4)             Represents a lump sumpayment of three times base salary, three times target bonus, the intrinsicvalue of 50% of the unvested equity incentive awards, which would become vestedupon the termination of employment (calculated in the same manner as describedin footnote 1 above), and the maximum allowed for outplacement service.  The amount included for health and welfarebenefits represents a continuation of COBRA benefits for a period of threeyears.  Calculations were based on COBRArates currently in effect.  See “*Change of Control Agreements”*on page 72 of this section.

(5)             Represents theintrinsic value of all unvested equity incentive awards, which will becomevested upon the change in control, calculated by taking the difference betweenthe exercise price and $2,683.68 (as described on page 59 of this section), anda lump sum amount payable under the Cash Incentive Plan, more fully describedon page 74 of this section.  

(6)             Represents a lump sumpayment of three times base salary, three times target bonus, the intrinsicvalue of all unvested equity incentive awards, which would become vested uponthe termination of employment (calculated in the same manner as described infootnote (1) above), and the maximum allowed for outplacement service.  The amount included for health and welfarebenefits represents a continuation of COBRA benefits for a period of threeyears.  Calculations were based on COBRArates currently in effect.  See “*Change in Control Agreements”* on page 72 of this section.

(7)    In addition, any earned but unpaid bonus forfiscal year 2007 would also be paid to Mr. Tansky.  See footnotes (1) and (3) of the SummaryCompensation Table on page 65 of this section.

(8)    In addition, Mr. Tansky may become entitledto receive  a portion (ranging from, asof July 28, 2007, 25% to 100%, depending on the reason for the separation fromservice) of the Cash Incentive Plan Payment indicated under the column entitled“Change in Control” if his employment is terminated for any reason other thanCause, and, subsequent to such termination, a change in control or an initialpublic offering meeting certain conditions occurs.

75

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**Karen W. Katz**
| **Executive Benefits  and Payments Upon Separation** | ** ** | ** ** | ** ** | **Termination  due to  death  ($)(1)(6)** | ** ** | **Termination  due to  Disability  ($)(2)(6)** | ** ** | **Termination  without cause  or   for good  reason  ($)(3)(6)** | ** ** | **Change in  Control  ($)(4)(6)** | ** ** | **Termination  without cause  following a  change in  control  ($)(5)(6)** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                               |       |       |       | ** **                                     | ** ** | ** **                                          | ** ** | ** **                                                                      | ** ** | ** **                             |       |
| **Compensation:**                                                        |       |       |       |                                           |       |                                                |       |                                                                            |       |                                   |       |
| Severance                                                                |       | $          | —     |                                           | $          | —                                              |       | $                                                                               | 1,600,000  |                                   | $          | —                                                                                    |       | $ | 1,600,000 |   |
| Bonus                                                                    |       | 520,000    |       | 520,000                                        |       | 1,040,000                                           |       | —                                                                          |       | 1,040,000                              |       |
| Stock Options                                                            |       | —     |       | —                                         |       | —                                              |       | —                                                                          |       | 8,098,930                              |       |
|                                                                     |       |       |       |                                           |       |                                                |       |                                                                            |       |                                   |       |
| **Benefits  & Perquisites:**                                         |       |       |       |                                           |       |                                                |       |                                                                            |       |                                   |       |
| Retirement Plans                                                         |       | —     |       | —                                         |       | 355,000                                             |       | —                                                                          |       | 355,000                                |       |
| Outplacement Services                                                    |       | —     |       | —                                         |       | 60,000                                              |       | —                                                                          |       | 60,000                                 |       |
| Deferred Compensation Plan                                               |       | 360,631    |       | 360,631                                        |       | 360,631                                             |       | 360,631                                                                         |       | 360,631                                |       |
| Cash Incentive Plan Payment                                              |       | —     |       | —                                         |       | —                                              |       | 1,925,367                                                                       |       | —                                 |       |
| Long-Term Disability                                                     |       | —     |       | 240,000                                        |       | —                                              |       | —                                                                          |       | —                                 |       |
| Health and Welfare Benefits                                              |       | —     |       | —                                         |       | 29,884                                              |       | —                                                                          |       | 29,884                                 |       |
| Life Insurance Benefits                                                  |       | 1,000,000  |       | —                                         |       | —                                              |       | —                                                                          |       | —                                 |       |
| **Total**                                                                |       | $          | 1,880,631  |                                           | $          | 1,120,631                                           |       | $                                                                               | 3,445,515  |                                   | $          | 2,285,998                                                                                 |       | $ | 11,544,445 |   |

 

----

Footnotes:

(1)             Represents Ms. Katz’target bonus and a lump sum basic life insurance benefit payment of $1,000,000payable by the Company’s life insurance provider to Ms. Katz’ beneficiariesupon her death.

(2)             Represents Ms. Katz’target bonus and long-term disability payments of $20,000 per month for twelvemonths payable from the Company’s long-term disability insurance provider.

(3)             Represents a lump sumpayment of two times base salary, two times target bonus, a lump sum retirementbenefit, and the maximum amount for outplacement service payable under Ms.Katz’ change in control agreement.  Theamount included for health and welfare benefits represents a continuation ofCOBRA benefits for a period of two years. Calculations were based on COBRA rates currently in effect.  See “*Change of Control Agreements”*on page 72 of this section.

(4)             Represents a lump sumamount payable under the Cash Incentive Plan, more fully described on page 74of this section.

(5)             Represents a lump sumpayment of two times base salary, two times target bonus, the intrinsic valueof all unvested equity incentive awards calculated by taking the differencebetween the exercise price and the valuation price of $2,683.68 (as describedon page 59 of this section), and the maximum allowed for outplacement service.  The amount included for health and welfarebenefits represents a continuation of COBRA benefits for a period of twoyears.  Calculations were based on COBRArates currently in effect.  See “*Change of Control Agreements”*on page 72 of this section.

(6)    In addition, any earned but unpaid bonusrelating to fiscal year 2007 would also be paid to Ms. Katz.  See footnotes (1) and (3) of the SummaryCompensation Table on page 65 of this section.

76

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| **Executive Benefits and  Payments Upon Separation** | ** ** | ** ** | ** ** | **Termination  due to  death  ($)(1)** | ** ** | **Termination  due to  disability  ($)(2)** | ** ** | **Termination  without cause  or for  good reason  ($)(3)** | ** ** | **Change in  Control  ($)(4)** | ** ** | **Termination   without cause  following a  change in  control  ($)(5)(6)** | ** ** |
|--------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                               | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **JAMES  E. SKINNER**                                                    | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **Compensation:**                                                        | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| Severance                                                                |       | $          | —     |                                        | $          | —                                           |       | $                                                                          | 1,150,000  |                                | $          | —                                                                                          |       | $ | 1,150,000 |   |
| Bonus                                                                    |       | —     |       | —                                      |       | 575,000                                          |       | —                                                                     |       | 575,000                             |       |
| Stock Options                                                            |       | —     |       | —                                      |       | —                                           |       | —                                                                     |       | 4,049,465                           |       |
|                                                                     |       |       |       |                                        |       |                                             |       |                                                                       |       |                                |       |
| **Benefits  & Perquisites:**                                         | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| Retirement Plans                                                         |       | —     |       | —                                      |       | 187,000                                          |       | —                                                                     |       | 187,000                             |       |
| Outplacement Services                                                    |       | —     |       | —                                      |       | 60,000                                           |       | —                                                                     |       | 60,000                              |       |
| Deferred Compensation Plan                                               |       | 109,067    |       | 109,067                                     |       | 109,067                                          |       | 109,067                                                                    |       | 109,067                             |       |
| Cash Incentive Plan Payment                                              |       | —     |       | —                                      |       | —                                           |       | 962,683                                                                    |       | —                              |       |
| Long-Term Disability                                                     |       | —     |       | 240,000                                     |       | —                                           |       | —                                                                     |       | —                              |       |
| Health and Welfare Benefits                                              |       | —     |       | —                                      |       | 31,793                                           |       | —                                                                     |       | 31,793                              |       |
| Life Insurance Benefits                                                  |       | 1,000,000  |       | —                                      |       | —                                           |       | —                                                                     |       | —                              |       |
| **Total James E. Skinner**                                               |       | $          | 1,109,067  |                                        | $          | 349,067                                          |       | $                                                                          | 2,112,860  |                                | $          | 1,071,750                                                                                       |       | $ | 6,162,325 |   |
| ** **                                                               | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **BRENDAN  L. HOFFMAN**                                                  | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **Compensation:**                                                        | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| Severance                                                                |       | $          | —     |                                        | $          | —                                           |       | $                                                                          | 1,000,000  |                                | $          | —                                                                                          |       | $ | 1,000,000 |   |
| Bonus                                                                    |       | —     |       | —                                      |       | 500,000                                          |       | —                                                                     |       | 500,000                             |       |
| Stock Options                                                            |       | —     |       | —                                      |       | —                                           |       | —                                                                     |       | 4,049,465                           |       |
| ** **                                                               | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **Benefits  & Perquisites:**                                         | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| Retirement Plans                                                         |       | —     |       | —                                      |       | 80,000                                           |       | —                                                                     |       | 80,000                              |       |
| Outplacement Services                                                    |       | —     |       | —                                      |       | 60,000                                           |       | —                                                                     |       | 60,000                              |       |
| Deferred Compensation Plan                                               |       | 32,794     |       | 32,794                                      |       | 32,794                                           |       | 32,794                                                                     |       | 32,794                              |       |
| Cash Incentive Plan Payment                                              |       | —     |       | —                                      |       | —                                           |       | 962,683                                                                    |       | —                              |       |
| Long-Term Disability                                                     |       | —     |       | 240,000                                     |       | —                                           |       | —                                                                     |       | —                              |       |
| Health and Welfare Benefits                                              |       | —     |       | —                                      |       | 41,636                                           |       | —                                                                     |       | 41,636                              |       |
| Life Insurance Benefits                                                  |       | 1,000,000  |       | —                                      |       | —                                           |       | —                                                                     |       | —                              |       |
| **Total Brendan L. Hoffman**                                             |       | $          | 1,032,794  |                                        | $          | 272,794                                          |       | $                                                                          | 1,714,430  |                                | $          | 995,477                                                                                         |       | $ | 5,763,895 |   |
| ** **                                                               | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **JAMES  J. GOLD**                                                       | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **Compensation:**                                                        | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| Severance                                                                |       | $          | —     |                                        | $          | —                                           |       | $                                                                          | 920,000    |                                | $          | —                                                                                          |       | $ | 920,000 |   |
| Bonus                                                                    |       | —     |       | —                                      |       | 460,000                                          |       | —                                                                     |       | 460,000                             |       |
| Stock Options                                                            |       | —     |       | —                                      |       | —                                           |       | —                                                                     |       | 4,049,465                           |       |
| ** **                                                               | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| **Benefits  & Perquisites:**                                         | ** ** | ** ** | ** ** | ** **                                  | ** ** | ** **                                       | ** ** | ** **                                                                 | ** ** | ** **                          | ** ** |
| Retirement Plans                                                         |       | —     |       | —                                      |       | 142,000                                          |       | —                                                                     |       | 142,000                             |       |
| Outplacement Services                                                    |       | —     |       | —                                      |       | 60,000                                           |       | —                                                                     |       | 60,000                              |       |
| Cash Incentive Plan Payment                                              |       | —     |       | —                                      |       | —                                           |       | 962,683                                                                    |       | —                              |       |
| Long-Term Disability                                                     |       | —     |       | 240,000                                     |       | —                                           |       | —                                                                     |       | —                              |       |
| Health and Welfare Benefits                                              |       | —     |       | —                                      |       | 41,636                                           |       | —                                                                     |       | 41,636                              |       |
| Life Insurance Benefits                                                  |       | 1,000,000  |       | —                                      |       | —                                           |       | —                                                                     |       | —                              |       |
| **Total  James J. Gold**                                                 |       | $          | 1,000,000  |                                        | $          | 240,000                                          |       | $                                                                          | 1,623,636  |                                | $          | 962,683                                                                                         |       | $ | 5,673,101 |   |

 

77

----

----

Footnotes:

(1)             Represents a lump sumbasic life insurance benefit payment of $1,000,000 payable by the Company’slife insurance provider to the beneficiaries of Messrs. Skinner, Hoffman, andGold.

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

(3)             Represents a lump sumpayment of two times base salary, two times target bonus, a lump sum retirementbenefit, and the maximum amount for outplacement service payable under thechange in control agreements for each of Messrs. Skinner, Hoffman, andGold.  The amount included for health andwelfare benefits represents a continuation of COBRA benefits for a period oftwo years.  Calculations were based onCOBRA rates currently in effect.  See “*Change of Control Agreements”* on page 72 of this section.

(4)             Represents a lump sumpayment of $962,683 payable to each of Messrs. Skinner, Hoffman, and Gold underthe Cash Incentive Plan, more fully described on page 74 of this section.

(5)             Represents a lump sumpayment of two times base salary, two times target bonus, the intrinsic valueof all unvested equity incentive awards calculated by taking the differencebetween the exercise price and the valuation price of $2,683.68 (as describedon page 59 of this section), and the maximum allowed for outplacementservice.  The amount included for healthand welfare benefits represents a continuation of COBRA benefits for a periodof two years.  Calculations were based onCOBRA rates currently in effect.  See “*Change of Control Agreements”*on page 72 of this section.

(6)    In addition, any earned but unpaid bonusrelating to fiscal year 2007 would also be paid to Messrs. Skinner, Hoffman andGold.  See footnotes (1) and (3) of theSummary Compensation Table on page 65 of this section.

 

**DIRECTORCOMPENSATION**

None of ourdirectors receive compensation for their service as a member of our board.  They are reimbursed for any expenses incurredas a result of their service.  As anemployee director, Mr. Tansky receives no compensation for his service as aboard member.  We offer to each of ourdirectors a discount at our stores at the same rate that is available to ouremployees.

In connection withthe Transactions, affiliates of the Sponsors receive an annual management feeequal to the lesser of (i) 0.25% of consolidated annual revenue, and (ii) $10million for consulting and management advisory services they provide to us.  See discussion on “*ManagementServices Agreement”*on**page 83 ofthis section.

**CompensationCommittee Interlocks and Insider Participation**

Infiscal year 2007, Jonathan Coslet, Kewsong Lee, and John G. Danhakl served asmembers of our Compensation Committee. No officer or employee served on the compensation committee (orequivalent), or the board of directors, of another entity whose executiveofficer(s) served on our compensation committee or board.

78

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

 

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

Thefollowing table sets forth information regarding equity compensation plansapproved by shareholders and equity compensation plans not approved byshareholders as of July 28, 2007.
| **Plan Category**                                           | ** ** | **Number of  Securities to be  Issued upon exercise  of outstanding options,  warrants and  rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants,  and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                              | ** ** | **(b)**                                                                              | ** ** | **(c)**                                                                                                                                               | ** ** |
|                                                        |       |                                                                                                 |       |                                                                                 |       |                                                                                                                                                  |       |
| Equity compensation  plans approved by security holders     |       | 83,634.2788                                                                                          | (1)        | $1,430.14                                                                            |       | 3,779.693                                                                                                                                             |       |
|                                                        |       |                                                                                                 |       |                                                                                 |       |                                                                                                                                                  |       |
| Equity compensation  plans not approved by security holders |       | 0                                                                                                    |       | 0                                                                                    |       | 0                                                                                                                                                     |       |
|                                                        |       |                                                                                                 |       |                                                                                 |       |                                                                                                                                                  |       |
| Total                                                       |       | 83,634.2788                                                                                          |       | $1,430.14                                                                            |       | 3,779.693                                                                                                                                             |       |

----

(1)             Thisnumber represents options issuable under the Management Incentive Plan that wasapproved by a majority of the shares of common stock of Neiman Marcus, Inc. onNovember 29, 2005.  The Plan becameeffective on November 29, 2005 and will expire on November 29, 2015.

79

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**Security Ownershipof Certain Beneficial Owners and Management**

Thefollowing table sets forth information regarding beneficial ownership of ourcommon stock as of September 20, 2007 by (i) each person we believe ownsbeneficially more than five percent of our outstanding common stock, (ii) eachof our directors, (iii) each of named executive officers and, (iv) alldirectors and executive officers as a group.
| Name of Beneficial Owner  | ** ** | ** ** | ** ** | **Amount and  Nature of  Beneficial  Ownership  (Common Stock)** | ** ** | **Options Currently  Exercisable  or Exercisable  within 60 days** | ** ** | **Total  Stock and  Stock Based  Holdings** | ** ** | **Percent  of Class (1)** | ** ** |
|------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Newton Holding, LLC**                  |       | 1,000,000  |       | —                                                                          |       | 1,000,000                                                                              |       | 98.72                                                 | %          |
| 301 Commerce Street                      |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Suite 3300                               |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Fort Worth, Texas76102                   |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Affiliates of TPG Capital,  L.P.(2)**  |       | 1,000,000  |       | —                                                                          |       | 1,000,000                                                                              |       | 98.72                                                 | %          |
| 301 Commerce Street                      |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Suite 3300                               |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Fort Worth, Texas76102                   |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Affiliates of Warburg Pincus, LLC(3)** |       | 1,000,000  |       | —                                                                          |       | 1,000,000                                                                              |       | 98.72                                                 | %          |
| 466 Lexington Avenue                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| New York, NY10017                        |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **David A. Barr(4)**                     |       | 1,000,000  |       | —                                                                          |       | 1,000,000                                                                              |       | 98.72                                                 | %          |
| 466 Lexington Avenue                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| New York, NY10017                        |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **James Coulter(5)**                     |       | 1,000,000  |       | —                                                                          |       | 1,000,000                                                                              |       | 98.72                                                 | %          |
| 345 California Street, Suite  3300       |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| San Francisco, CA94104                   |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Sidney Lapidus(4)**                    |       | 1,000,000  |       | —                                                                          |       | 1,000,000                                                                              |       | 98.72                                                 | %          |
| 466 Lexington Avenue                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| New York, NY10017                        |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Kewsong Lee(4)**                       |       | 1,000,000  |       | —                                                                          |       | 1,000,000                                                                              |       | 98.72                                                 | %          |
| 466 Lexington Avenue                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| New York, NY10017                        |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Burton M. Tansky**                     |       | 0          |       | 13,974                                                                          |       | 13,974                                                                                 |       | 1.38                                                  | %          |
| 1618 Main Street                         |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Dallas, TX75201                          |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Karen W. Katz**                        |       | 4,027      |       | 4,451                                                                           |       | 8,478                                                                                  |       | *                                                     |       |
| 1618 Main Street                         |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Dallas, TX75201                          |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **James E. Skinner**                     |       | 2,107      |       | 2,225                                                                           |       | 4,332                                                                                  |       | *                                                     |       |
| 1618 Main Street                         |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Dallas, TX75201                          |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                     |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Brendan L. Hoffman**                   |       | 1,449      |       | 2,225                                                                           |       | 3,674                                                                                  |       | *                                                     |       |
| 1618 Main Street                         |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Dallas, TX75201                          |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |

 

80

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| Name of Beneficial Owner | ** ** | ** ** | ** ** | **Amount and  Nature of  Beneficial  Ownership  (Common Stock)** | ** ** | **Options Currently  Exercisable  or Exercisable  within 60 days** | ** ** | **Total  Stock and  Stock Based  Holdings** | ** ** | **Percent  of Class (1)** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                              |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **James J. Gold**                       |       | 902        |       | 2,225                                                                           |       | 3,127                                                                                  |       | *                                                     |       |
| 754 Fifth Avenue                        |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| New York, NY10019                       |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                    |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Jonathan  Coslet(5)**                 |       | —     |       | —                                                                          |       | —                                                                                 |       | *                                                     |       |
| 345 California  Street                  |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Suite 3300                              |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| San Francisco,  CA94104                 |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                    |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **John G. Danhakl**                     |       | —     |       | —                                                                          |       | —                                                                                 |       | *                                                     |       |
| 11111 Santa Monica Boulevard            |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Suite 2000                              |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Los Angeles, CA90025                    |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                    |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **Carrie  Wheeler(5)**                  |       | —     |       | —                                                                          |       | —                                                                                 |       | *                                                     |       |
| 345 California  Street                  |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| Suite 3300                              |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| San Francisco,  CA94104                 |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
|                                    |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **All current executive officers and**  |       | 1,009,022  |       | 28,304                                                                          |       | 1,037,326                                                                              |       | 99.62                                                 | %          |
| **directors as a group**                |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |
| **(16 persons)**                        |       |       |       |                                                                            |       |                                                                                   |       |                                                  |       |

----

*                    Representsless than 1% of the class.

Footnotes:

(1)             Percentageof class beneficially owned is based on 1,012,919 common shares outstanding asof September 20, 2007, together with the applicable options to purchase commonshares for each shareholder exercisable on September 20, 2007 or within 60 daysthereafter.  Shares issuable upon theexercise of options currently exercisable or exercisable 60 days afterSeptember 20, 2007 are deemed outstanding for computing the percentageownership of the person holding the options, but are not deemed outstanding forcomputing the percentage of any other person. The amounts and percentages of common stock beneficially owned arereported on the basis of regulations of the SEC governing the determination ofbeneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficialowner” of a security if that person has or shares “voting power,” whichincludes the power to vote or to direct the voting of such security, or“investment power,” which includes the power to dispose of or to direct thedisposition of such security.  A personis also deemed to be a beneficial owner of any securities of which that personhas a right to acquire beneficial ownership within 60 days.  Under these rules, more than one person maybe deemed to be a beneficial owner of such securities as to which such personhas voting or investment power.

(2)             Includesthe 1,000,000 shares owned by Newton Holding, LLC over which TPG Partners IV,L.P., TPG Newton III, LLC and TPG Newton Co-Invest I, LLC (the “TPG Entities”)may be deemed, as a result of their ownership of 41.52% of Newton Holding,LLC’s total outstanding shares and certain provisions under the Newton Holding,LLC operating agreement, to have shared voting or dispositive power.  David Bonderman, James G. Coulter and WilliamS. Price, III are directors, officers and sole shareholders of each of i) TPGAdvisors III, Inc., which is the general partner of TPG Partners III, which inturn is the managing member of TPG Newton III, LLC; and ii) TPG Advisors IV,Inc., which is the general partner of TPG GenPar IC, L.P., which in turn is a)the general partner of TPG Partners IV, L.P. and b) the managing member of TPGNewton Co-Invest I, LLC.  By virtue oftheir position in relation to the TPG Entities, Mr. Bonderman, Mr. Coulter andMr. Price may be deemed to have investment powers and beneficial ownership withrespect to the securities described herein. Each of Mr. Bonderman, Mr. Coulter and Mr. Price disclaims beneficialownership of such securities.  NeitherMr. Coslet nor Ms. Wheeler has voting or dispositive power over any of theshares of common stock that may be deemed to be beneficially owned by TPGCapital, L.P.

81

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

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

(5)             Mr.Coulter, as managing general partner of TPG Capital, L.P., may be deemed tobeneficially own all of the shares of common stock owned by the TPGEntities.  Mr. Coulter disclaims anybeneficial ownership of these shares of common stock.  Neither Mr. Coslet nor Ms. Wheeler has votingor dispositive power over any of the shares of common stock that may be deemedto be beneficially owned by TPG Capital, L.P.

**ITEM13.**             CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Our board ofdirectors has adopted a formal written related person transaction approvalpolicy, which sets out our policies and procedures for the review, approval, orratification of “related party transactions.” For these purposes a “related party” is a director, a nominee fordirector, an executive officer, or any security holder who is known to us toown more than five percent of any class of our voting securities, or anyimmediate family member of any of the foregoing, as set forth in Item 404(a) ofRegulation S-K of the 1934 Act.  Thispolicy applies to any transaction or series of transactions in which the Companyor a subsidiary is a participant, the amount involved exceeds $120,000, and arelated party has a direct or indirect material interest.

Transactionsbetween us or one or more of our subsidiaries and one or more related personsmay present risks or conflicts of interest or the appearance of conflicts ofinterest.  Our Code of Ethics requiresall employees, officers and directors, without exception, to avoid engagementin activities or relationships that conflict, or would be perceived toconflict, with our interests or adversely affect our reputation.  However, certain relationships ortransactions may arise that would be deemed acceptable and appropriatefollowing review and approval to ensure there is a legitimate business reasonsfor the transaction and that the terms of the transaction or no less favorableto us than could be obtained from an unrelated person.  In accordance with our policy, the procedurerequires:

—                                         Thatall related party transactions and all material terms of the transactions mustbe communicated to the Audit Committee, including not limited to, theapproximate dollar value of the amount involved in the transaction, and all thematerial facts as to the related person’s direct or indirect interest in, orrelationship to, the related person transaction.

·                                          Thateach related person transaction, and any material amendment or modification toany related person transaction, be reviewed and approved or ratified by theAudit Committee.

Transactions thatfall within this definition will be referred to the Audit Committee forapproval, ratification or other action. Based on its consideration of all the relevant facts and circumstances,the Committee will decide whether or not to approve such transaction and willapprove only those transactions that are in the best interests of theCompany.  If the Company becomes aware ofan existing transaction with a related party which has not been approved underthis policy, the matter will be referred to the Audit Committee.  The Audit Committee will evaluate all optionsavailable, including ratification, revision or termination of such transaction.

82

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***RelatedPerson Transactions***

**Newton Holding,LLC Limited Liability Company Operating Agreement**

The investmentfunds associated with or designated by a Sponsor (Sponsor Funds) and certaininvestors who agreed to co-invest with the Sponsor Funds or through a vehiclejointly controlled by the Sponsors to provide equity financing for theTransactions (Co-Investors), entered into a limited liability company operatingagreement in respect of our parent company, Newton Holding, LLC (the “LLCAgreement”).  The LLC Agreement containsagreements among the parties with respect to the election of our directors andthe directors of our parent companies, restrictions on the issuance or transferof interests in us, including tag-along rights and drag-along rights, and othercorporate governance provisions (including the right to approve variouscorporate actions).

Pursuant to theLLC Agreement, each of TPG Capital, L.P. and Warburg Pincus has the right,which is freely assignable to other members or indirect members, to nominatefour directors, and TPG Capital, L.P. and Warburg Pincus are entitled tojointly nominate additional directors. The rights of TPG Capital, L.P. and Warburg Pincus to nominate directorsare subject to their ownership percentages in Newton Holding, LLC remainingabove a specified percentage of their initial ownership percentage.  Each of the Sponsors has the right to have atleast one of its directors sit on each committee of the Board of Directors, tothe extent permitted by applicable laws and regulations.

The Sponsors haveassigned the right to appoint one of our directors to investment funds that areaffiliates of Credit Suisse Securities (USA) LLC and the right to appoint oneof our directors to investment funds associated with Leonard Green Partners.

For purposes ofany board action, each director nominated by TPG Capital, L.P. or WarburgPincus has three votes and each of the directors (including any jointlynominated directors and the directors nominated by investment funds that areaffiliates of Credit Suisse Securities (USA) LLC and Leonard Green Partners)has one vote.  Certain major decisions ofthe board of directors of Newton Holding, LLC require the approval of each ofTPG Capital, L.P. and Warburg Pincus and certain other decisions of the boardof directors of Newton Holding, LLC require the approval of a specified numberof directors designated by each of TPG Capital, L.P. and Warburg Pincus, in eachcase subject to the requirement that their respective ownership percentage inNewton Holding, LLC remains above a specified percentage of their initialownership percentage.

**RegistrationRights Agreement**

The Sponsor Fundsand the Co-Investors entered into a registration rights agreement with us uponcompletion of the Transactions.  Pursuantto this agreement, the Sponsor Funds can cause us to register their interestsin NMG under the Securities Act and to maintain a shelf registration statementeffective with respect to such interests. The Sponsor Funds and the Co-Investors are also entitled to participateon a pro rata basis in any registration of our equity interests under theSecurities Act that we may undertake.

**ManagementServices Agreement**

In connection withthe Transactions, we entered into a management services agreement withaffiliates of the Sponsors pursuant to which affiliates of one of the Sponsorsreceived on the closing date of the Acquisition a transaction fee of $25million in cash in connection with the Transactions.  Affiliates of the other Sponsor waived anycash transaction fee in connection with the Transactions.  In addition, pursuant to such agreement, and inexchange for consulting and management advisory services that will be providedto us by the Sponsors and their affiliates, affiliates of the Sponsors willreceive an aggregate annual management fee equal to the lesser of (i) 0.25% ofconsolidated annual revenue and (ii) $10 million.  Also, affiliates of the Sponsors are entitledto receive reimbursement for out-of-pocket expenses incurred by them or theiraffiliates in connection with the provision of services pursuant to theagreement.  The management servicesagreement also provides that affiliates of the Sponsors may receive fees inconnection with certain subsequent financing and acquisition or dispositiontransactions.  The management servicesagreement includes customary exculpation and indemnification provisions infavor of the Sponsors and their affiliates.

**Certain Charter andBylaws Provisions**

Our amended andrestated certificate of incorporation and our amended and restated bylawscontain provisions limiting directors’ obligations in respect of corporateopportunities.  In addition, our amendedand restated certificate of incorporation provides that Section 203 of theDelaware General Corporation Law will not apply to the Company.  Section 

83

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203 restricts “business combinations” between acorporation and “interested stockholders,” generally defined as stockholdersowning 15% or more of the voting stock of a corporation.

**ManagementStockholders’ Agreement**

Subject to theManagement Stockholders’ Agreement, certain members of management, includingBurton M. Tansky, Karen W. Katz, James E. Skinner, Brendan L. Hoffman, andJames J. Gold, along with 22 other members of management, elected to invest inthe Company by contributing cash or equity interests in NMG, or a combinationof both, to the Company prior to the merger and receiving equity interests inthe Company in exchange therefor immediately after completion of the mergerpursuant to rollover agreements with NMG and the Company entered into prior tothe effectiveness of the merger.  Theaggregate amount of this investment was approximately $25.6 million.  The Management Stockholders’ Agreementcreates certain rights and restrictions on these equity interests, includingtransfer restrictions and tag-along, drag-along, put, call and registrationrights in certain circumstances.

**ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES**

The Audit Committee has adoptedpolicies and procedures for pre-approving all audit and permissible non-auditservices performed by our independent registered public accounting firm. Underthese policies, the Audit Committee pre-approves the use of audit and audit-relatedservices following approval of the independent registered public accountingfirm’s audit plan. All services detailed in the audit plan are consideredpre-approved. If, during the course of the audit, the independent registeredpublic accounting firm expects fees to exceed the approved fee estimate between10 percent and 15 percent, those fees must be pre-approved in advanceby the Audit Committee Chairman. If fees are expected to exceed the approvedestimate by more than 15 percent, those fees must be approved in advanceby the Audit Committee.

Other non-audit services of lessthan $50,000 that are not restricted services may be pre-approved by both thechief financial officer and the controller, provided those services will notimpair the independence of the independent auditor. These services will beconsidered approved by the Audit Committee, provided those projects arediscussed with the Audit Committee at its next scheduled meeting. Servicesbetween $50,000 and $100,000 in estimated fees must be pre-approved by theChairman of the Audit Committee, acting on behalf of the entire AuditCommittee. Services of greater than $100,000 in estimated fees must bepre-approved by the Audit Committee. All fee overruns will be discussed withthe Audit Committee at the next scheduled meeting.

**PrincipalAccounting Fees and Services**

On March 19, 2007, we dismissedDeloitte & Touche LLP as our independent registered public accounting firmand appointed Ernst & Young LLP in its place. In the discussion that follows,figures related to fiscal year 2007 reflect the combined billings of bothfirms.

***AuditFees.***  The aggregate fees billed for the audits ofthe Company’s annual financial statements for the fiscal years endedJuly 28, 2007 and July 29, 2006 and for the reviews of the financialstatements included in our Quarterly Reports on Form 10-Q were $1,718,000and $1,957,000, respectively.

***Audit-RelatedFees.***  The aggregate fees billed for audit-relatedservices for the fiscal years ended July 28, 2007 and July 29, 2006were $160,000 and $1,008,000, respectively. These fees related to accountingresearch and consultation and attestation services for certain subsidiarycompanies for the fiscal years ended July 28, 2007 and July 29, 2006.

***TaxFees.***  The aggregate fees billed for tax servicesfor the fiscal years ended July 28, 2007 and July 29, 2006 were$344,000 and $83,000, respectively. These fees related to tax compliance andplanning for the fiscal years ended July 28, 2007 and July 29, 2006.

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

84

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**PART IV**

**ITEM 15. EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

The following documents are filedas part of this report.

**1.             FinancialStatements**

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

**2.             Indexto Financial Statement Schedules**

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

 

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

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

 

85

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| 4.5    |   | Form of 9%/9 3/4% Senior Notes due 2015,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.6    |   | Form of 10 3/8% Senior Subordinated Notes due 2015,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.7    |   | Registration Rights Agreement dated October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial  Purchasers, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.8    |   | First Supplemental Indenture, dated as of July 11,  2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company,  N.A., as successor trustee, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated July 11, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.9    |   | Second Supplemental Indenture, dated as of August  14, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company,  N.A., as successor trustee, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated August 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1*  |   | Employment Agreement dated as of October 6, 2005 by  and among The Neiman Marcus Group, Inc., Newton Acquisition Merger Sub, Inc.,  Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3*  |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Credit Agreement dated as of October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company  Americas, as administrative agent and collateral agent, Credit Suisse and  Deutsche Bank Securities Inc., as joint lead arrangers, Banc of America  Securities LLC and Goldman Sachs Credit Partners L.P., as co-arrangers,  Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC  and Goldman Sachs Credit Partners L.P., as joint bookrunners, and Credit  Suisse, Banc of America Securities LLC and Goldman Sachs Credit Partners  L.P., as co-syndication agents, General Electric Capital Corporation as  documentation agent and the lenders thereunder, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | 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, 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.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

86

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| 10.7   |   | 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.                                                                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8   |   | 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.                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.9   |   | 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.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.10  |   | 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.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.11  |   | 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.                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.12  |   | 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.                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.13  |   | 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.    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.14* |   | 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.                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.15* |   | 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.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.16* |   | Form of Stock Option Grant Agreement made as of  November 29, 2005 between Newton Acquisition, Inc. and certain eligible key  employees, incorporated herein by reference to The Neiman Marcus Group,  Inc.’s Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.17  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.18* |   | 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.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.19  |   | 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.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

87

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| 10.20  |   | 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.                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.21  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.22  |   | 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.                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23  |   | 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.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24* |   | 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.                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.25  |   | 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.                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.26* |   | Confidentiality, Non-Competition and Termination  Benefits Agreement between The Neiman Marcus Group, Inc. and Steven P. Dennis  dated September 9, 2004, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated September 9, 2004.                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.27* |   | Change of Control Termination Protection Agreement  between The Neiman Marcus Group, Inc. and Burton M. Tansky, dated April 1,  2005, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended April 30, 2005.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.28* |   | Form of Change of Control Termination Protection  Agreement between The Neiman Marcus Group, Inc. and certain eligible  executives, including the Named Executive Officers, dated April 1, 2005,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Quarterly  Report on Form 10-Q for the quarter ended April 30, 2005.                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.29* |   | The Neiman Marcus Group, Inc. Executive Change of  Control Severance Plan dated April 1, 2005, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the  quarter ended April 30, 2005.                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.30* |   | The Neiman Marcus Group, Inc. General Change of  Control Severance Plan dated April 1, 2005, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the  quarter ended April 30, 2005.                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.31* |   | Newton Acquisition, Inc. Cash Incentive Plan  effective as of November 29, 2005, incorporated herein by reference to the  Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended July  29, 2006.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

88

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| 10.32  |   | 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.33* |   | The Neiman Marcus Group, Inc. Key Employee Deferred  Compensation Plan effective as of January 1, 2006, incorporated herein by  reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the  fiscal year ended July 29, 2006.                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.34  |   | Amendment No. 3 dated as of October 12,  2006 to the Credit Agreement dated as of October 6, 2005 among The  Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman  Marcus Group, Inc. from time to time party thereto, the Lenders thereunder  and Credit Suisse, as administrative agent and collateral agent for the  Lenders, incorporated by reference to Neiman Marcus, Inc.’s Current Report on  Form 8-K dated October 17, 2006.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.35  |   | 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.                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 12.1   |   | Computation of Ratio of Earnings to Fixed Charges.  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 14.1   |   | The Neiman Marcus Group, Inc. Code of Ethics and  Conduct, incorporated herein by reference to the Company’s Annual Report on  Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 14.2   |   | The Neiman Marcus Group, Inc. Code of Ethics for  Financial Professionals, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended  August 2, 2003.                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 21.1   |   | Subsidiaries of the Company. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 23.1   |   | Consent of Ernst & Young LLP. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 23.2   |   | Consent of Deloitte & Touche LLP. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32     |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

----

(1)             Filedherewith.

*                    Managementcontract or compensatory plan or arrangement.

 

89

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**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                        | ** ** | **Page** |
|------------------------------------------------------------------------|------------|----------|
| Management’s Report on Internal Control over Financial  Reporting |       | F-2      |
| Reports of Independent Registered Public Accounting  Firms             |       | F-3      |
| Consolidated  Balance Sheets                                           |       | F-6      |
| Consolidated Statements of Earnings                                    |       | F-7      |
| Consolidated Statements of Cash Flows                                  |       | F-8      |
| Consolidated Statements of Shareholders’ Equity                   |       | F-10     |
| Notes to Consolidated Financial Statements                             |       | F-12     |

 

F-1

----

**MANAGEMENT’SREPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

We are responsible forthe integrity and objectivity of the financial and operating informationcontained in this Annual Report, including the consolidated financialstatements covered by the Report of Independent Registered Public AccountingFirm. These statements were prepared in conformity with generally acceptedaccounting principles and include amounts that are based on our best estimatesand judgment.

 

We maintain a system ofinternal controls which provides management with reasonable assurance thattransactions are recorded and executed in accordance with its authorizations,assets are properly safeguarded and accounted for, and records are maintainedso as to permit preparation of financial statements in accordance withgenerally accepted accounting principles. This system includes written policiesand procedures, an organizational structure that segregates duties, financialreviews and a comprehensive program of periodic audits by the internalauditors. We have also instituted policies and guidelines which requireemployees to maintain a high level of ethical standards.

 

In addition, the AuditCommittee of the Board of Directors meets periodically with management, theinternal auditors and the independent registered public accounting firm toreview internal accounting controls, audit results and accounting principlesand practices and annually recommends to the Board of Directors the selectionof the independent registered public accounting firm.

 

We are responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Underour supervision and with the participation of other key members of ourmanagement, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework and criteriaestablished in *Internal Control—Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on this evaluation, management concluded that our internal control overfinancial reporting was effective as of July 28, 2007. During its assessment,management did not identify any material weaknesses in our internal controlover financial reporting.

 

Ernst & Young LLP,the independent registered public accounting firm that audited our consolidatedfinancial statements included in this Annual Report on Form 10-K, has issued anunqualified attestation report on the effectiveness of our internal controlsover financial reporting as of July 28, 2007.

 

BURTON M. TANSKY

President and Chief Executive Officer

 

JAMES E. SKINNER

Senior Vice President and Chief Financial Officer

 

T. DALE STAPLETON

Vice President and Controller

F-2

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

Dallas, Texas

 

We have audited theconsolidated balance sheet of Neiman Marcus, Inc. and subsidiaries as of July28, 2007, and the related consolidated statements of earnings, cash flows, andshareholders' equity for the year then ended. Our audit also included the financial statement schedule listed in theIndex at Item 15.  These financialstatements and schedule are the responsibility of the Company'smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audit. 

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

In our opinion, thefiscal year 2007 financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Neiman Marcus, Inc.and subsidiaries at July 28, 2007, and the consolidated results of theiroperations and their cash flows for the year then ended in conformity with U.S.generally accepted accounting principles.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Neiman Marcus, Inc.'s internal controlover financial reporting as of July 28, 2007, based on criteria established inInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated September 21,2007 expressed an unqualified opinion thereon.

 

/S/ ERNST & YOUNG LLP

 

Dallas, Texas

September 21, 2007

 

F-3

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

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

Dallas, Texas

 

Wehave audited Neiman Marcus, Inc.’s internal control over financial reporting asof July 28, 2007, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria). Neiman Marcus, Inc.’s management is responsiblefor maintaining effective internal control over financial reporting, and forits assessment of the effectiveness of internal control over financialreporting included in the accompanying Management’s Report on Internal ControlOver Financial Reporting. Our responsibility is to express an opinion on thecompany’s internal control over financial reporting based on our audit. 

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, Neiman Marcus, Inc. maintained, in all material respects,effective internal control over financial reporting as of July 28, 2007, basedon the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheet ofNeiman Marcus, Inc. and subsidiaries as of July 28, 2007, and the relatedconsolidated statements of earnings, cash flows, and shareholders' equity forthe year then ended and our report dated September 21, 2007 expressed anunqualified opinion thereon.

 

/S/ ERNST & YOUNG LLP

 

Dallas, Texas

September 21, 2007

 

F-4

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

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

Dallas, Texas

 

We have audited theaccompanying consolidated balance sheet of Neiman Marcus, Inc. and subsidiaries(the Company) as of July 29, 2006 (Successor Company) and the relatedconsolidated statements of earnings, cash flow, and shareholders' equity forthe forty-three weeks ended July 29, 2006 (Successor Company), and for the nineweeks ended October 1, 2005, and the fiscal period ended July 30, 2005(Predecessor Company). Our audits also included the financial statementschedule listed in the Index at Item 15. These financial statements and financial statement schedule, are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinions.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of the Company as of July 29, 2006(Successor Company) and the results of its operations and its cash flows forthe forty-three weeks ended July 29, 2006 (Successor Company) and for the nineweeks ended October 1, 2005 and the fiscal period ended July 30, 2005(Predecessor Company), in conformity with accounting principles generallyaccepted in the United States of America.  Also, in our opinion, such financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.  

 

As discussed in Note 4, theconsolidated financial statements and financial statement schedule have beenretrospectively adjusted for discontinued operations.

 

/S/ DELOITTE & TOUCHE LLP

 

Dallas, Texas

September 25, 2006 (September 24, 2007 as to Note 4)

 

F-5

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**NEIMAN MARCUS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                  | ** ** | **(Successor)**         | ** ** | **(Successor)**         | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(in thousands, except shares)**                                                                                            | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** |
| ASSETS                                                                                                                                      |       |                    |       |                    |       |
| Current assets:                                                                                                                             |       |                    |       |                    |       |
| Cash and cash  equivalents                                                                                                                  |       | $                       | 141,207    |                    | $          | 223,740 |   |
| Merchandise  inventories                                                                                                                    |       | 918,269                 |       | 793,621                 |       |
| Deferred income  taxes                                                                                                                      |       | 39,728                  |       | 31,503                  |       |
| Other current  assets                                                                                                                       |       | 115,765                 |       | 70,375                  |       |
| Current assets  of discontinued operations                                                                                                  |       | —                  |       | 16,617                  |       |
| Total current  assets                                                                                                                       |       | 1,214,969               |       | 1,135,856               |       |
| Property and Equipment:                                                                                                                     |       |                    |       |                    |       |
| Land, buildings  and improvements                                                                                                           |       | 756,100                 |       | 685,123                 |       |
| Fixtures and  equipment                                                                                                                     |       | 460,826                 |       | 378,074                 |       |
| Construction in  progress                                                                                                                   |       | 70,203                  |       | 74,032                  |       |
|                                                                                                                                        |       | 1,287,129               |       | 1,137,229               |       |
| Less accumulated  depreciation and amortization                                                                                             |       | 243,418                 |       | 106,950                 |       |
| Property and  equipment, net                                                                                                                |       | 1,043,711               |       | 1,030,279               |       |
| Customer lists, net                                                                                                                         |       | 477,245                 |       | 531,632                 |       |
| Favorable lease  commitments, net                                                                                                           |       | 447,319                 |       | 465,197                 |       |
| Tradenames                                                                                                                                  |       | 1,610,315               |       | 1,621,788               |       |
| Goodwill                                                                                                                                    |       | 1,605,140               |       | 1,605,140               |       |
| Debt issuance costs                                                                                                                         |       | 84,844                  |       | 97,537                  |       |
| Other assets                                                                                                                                |       | 17,456                  |       | 27,786                  |       |
| Non-current assets of  discontinued operations                                                                                              |       | —                  |       | 92,746                  |       |
| Total assets                                                                                                                                |       | $                       | 6,500,999  |                    | $          | 6,607,961 |   |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                  |       |                    |       |                    |       |
| Current liabilities:                                                                                                                        |       |                    |       |                    |       |
| Accounts payable                                                                                                                            |       | $                       | 361,299    |                    | $          | 300,439 |   |
| Accrued  liabilities                                                                                                                        |       | 403,162                 |       | 377,968                 |       |
| Other current  liabilities                                                                                                                  |       | 3,426                   |       | 3,887                   |       |
| Current  liabilities of discontinued operations                                                                                             |       | —                  |       | 16,764                  |       |
| Total current  liabilities                                                                                                                  |       | 767,887                 |       | 699,058                 |       |
| Long-term  liabilities:                                                                                                                     |       |                    |       |                    |       |
| Senior secured  term loan facility                                                                                                          |       | 1,625,000               |       | 1,875,000               |       |
| Senior  debentures due 2028                                                                                                                 |       | 120,906                 |       | 120,711                 |       |
| Senior notes                                                                                                                                |       | 700,000                 |       | 700,000                 |       |
| Senior  subordinated notes                                                                                                                  |       | 500,000                 |       | 500,000                 |       |
| Deferred real  estate credits, net                                                                                                          |       | 54,068                  |       | 27,316                  |       |
| Deferred income  taxes                                                                                                                      |       | 1,002,982               |       | 1,048,925               |       |
| Other long-term  liabilities                                                                                                                |       | 172,144                 |       | 190,195                 |       |
| Non-current  liabilities of discontinued operations                                                                                         |       | —                  |       | 12,775                  |       |
| Total long-term  liabilities                                                                                                                |       | 4,175,100               |       | 4,474,922               |       |
|                                                                                                                                        |       |                    |       |                    |       |
| Minority interest in  discontinued operations                                                                                               |       | —                  |       | 6,314                   |       |
|                                                                                                                                        |       |                    |       |                    |       |
| Common stock (par value  $0.01 per share, 1,012,919 shares issued at July 28, 2007 and 1,012,264  shares issued at July 29, 2006) |       | 10                      |       | 10                      |       |
| Additional paid-in  capital                                                                                                                 |       | 1,412,386               |       | 1,405,373               |       |
| Accumulated other  comprehensive income                                                                                                     |       | 21,229                  |       | 9,829                   |       |
| Retained earnings                                                                                                                           |       | 124,387                 |       | 12,455                  |       |
| Total shareholders’  equity                                                                                                            |       | 1,558,012               |       | 1,427,667               |       |
| Total liabilities and shareholders’ equity                                                                                             |       | $                       | 6,500,999  |                    | $          | 6,607,961 |   |

* *

*See Notes toConsolidated Financial Statements.*

F-6

----

**NEIMAN MARCUS, INC.CONSOLIDATED STATEMENTS OF EARNINGS**
| ** **                                                                        | ** ** | **(Successor)**                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                                           | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|                                                                              |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Revenues                                                                          |       | $                                                | 4,390,076  |                                                   | $          | 3,397,738         |       |   |   | $ | 632,372 |   | $ | 3,695,074 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 2,753,814                                        |       | 2,219,438                                              |       |              |       | 371,542 |   | 2,349,207 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 1,015,140                                        |       | 802,355                                                |       |              |       | 155,632 |   | 907,306 |   |
| Income from credit card  program                                                  |       | (65,723                                          | )          | (49,353                                                | )          |              |       | (7,818 | ) | (71,644 | ) |
| Depreciation expense                                                              |       | 136,468                                          |       | 106,950                                                |       |              |       | 19,209 |   | 103,589 |   |
| Amortization of  customer lists                                                   |       | 54,387                                           |       | 44,857                                                 |       |              |       | — |   | — |   |
| Amortization of  favorable lease commitments                                      |       | 17,878                                           |       | 14,783                                                 |       |              |       | — |   | — |   |
| Other expense, net                                                                |       | 1,309                                            |       | —                                                 |       |              |       | — |   | — |   |
| Transaction and other  costs                                                      |       | —                                           |       | —                                                 |       |              |       | 23,544 |   | — |   |
| Loss on disposition of  Chef’s Catalog                                       |       | —                                           |       | —                                                 |       |              |       | — |   | 15,348 |   |
| Gain on credit card  sale                                                         |       | —                                           |       | —                                                 |       |              |       | — |   | (6,170 | ) |
| Operating earnings                                                                |       | 476,803                                          |       | 258,708                                                |       |              |       | 70,263 |   | 397,438 |   |
| Interest expense  (income), net                                                   |       | 259,805                                          |       | 217,665                                                |       |              |       | (910 | ) | 12,261 |   |
| Earnings from  continuing operations before income taxes                          |       | 216,998                                          |       | 41,043                                                 |       |              |       | 71,173 |   | 385,177 |   |
| Income taxes                                                                      |       | 82,295                                           |       | 14,595                                                 |       |              |       | 26,226 |   | 141,373 |   |
| Earnings from  continuing operations                                              |       | 134,703                                          |       | 26,448                                                 |       |              |       | 44,947 |   | 243,804 |   |
| (Loss) earnings from  discontinued operations, net of taxes                       |       | (22,771                                          | )          | (13,993                                                | )          |              |       | (793 | ) | 5,020 |   |
| Net earnings                                                                      |       | $                                                | 111,932    |                                                   | $          | 12,455            |       |   |   | $ | 44,154 |   | $ | 248,824 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

F-7

----

**NEIMAN MARCUS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                        | ** ** | **(Successor)**                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
| ** **                                                                                        |       |                                             | ** ** | ** **                                             | ** ** |              |       | ** ** | ** ** | ** ** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                          |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Net earnings                                                                                      |       | $                                                | 111,932    |                                                   | $          | 12,455            |       |   |   | $ | 44,154 |   | $ | 248,824 |   |
| Loss (earnings) from  discontinued operations                                                     |       | 22,771                                           |       | 13,993                                                 |       |              |       | 793 |   | (5,020 | ) |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:              |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Depreciation                                                                                      |       | 136,468                                          |       | 106,950                                                |       |              |       | 19,209 |   | 103,589 |   |
| Amortization of  debt issue costs                                                                 |       | 14,141                                           |       | 11,728                                                 |       |              |       | 96 |   | 831 |   |
| Amortization of  customer lists and favorable lease commitments                                   |       | 72,265                                           |       | 59,640                                                 |       |              |       | — |   | — |   |
| Non-cash charges  related to step-up in carrying value of inventory                               |       | —                                           |       | 38,067                                                 |       |              |       | — |   | — |   |
| Stock-based  compensation charges                                                                 |       | 5,859                                            |       | 3,951                                                  |       |              |       | 19,968 |   | — |   |
| Deferred income  taxes                                                                            |       | (60,522                                          | )          | (65,620                                                | )          |              |       | (7,318 | ) | (15,925 | ) |
| Loss on  disposition of Chef’s Catalog                                                       |       | —                                           |       | —                                                 |       |              |       | — |   | 15,348 |   |
| Gain on Credit  Card Sale                                                                         |       | —                                           |       | —                                                 |       |              |       | — |   | (6,170 | ) |
| Net cash  received from Credit Card Sale                                                          |       | —                                           |       | —                                                 |       |              |       | — |   | 533,656 |   |
| Impairment of  Horchow tradename                                                                  |       | 11,473                                           |       | —                                                 |       |              |       | — |   | — |   |
| Other—primarily  costs related to defined benefit pension and other long-term benefit  plans |       | 14,672                                           |       | 15,079                                                 |       |              |       | (4,224 | ) | 42,068 |   |
|                                                                                              |       | 329,059                                          |       | 196,243                                                |       |              |       | 72,678 |   | 917,201 |   |
| Changes in operating  assets and liabilities:                                                     |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| (Increase)  decrease in merchandise inventories                                                   |       | (124,648                                         | )          | 107,829                                                |       |              |       | (172,924 | ) | (36,016 | ) |
| (Increase)  decrease in other current assets                                                      |       | (45,392                                          | )          | 2,117                                                  |       |              |       | (881 | ) | (73,924 | ) |
| (Increase)  decrease in other assets                                                              |       | (3,333                                           | )          | 5,627                                                  |       |              |       | (2,274 | ) | 10,743 |   |
| Increase in  accounts payable and accrued liabilities                                             |       | 86,256                                           |       | 61,163                                                 |       |              |       | 122,608 |   | 20,112 |   |
| Increase in  deferred real estate credits                                                         |       | 27,885                                           |       | 25,068                                                 |       |              |       | 4,326 |   | 13,782 |   |
| Payment of  deferred compensation and stock-based awards                                          |       | —                                           |       | (12,901                                                | )          |              |       | — |   | — |   |
| Funding of  defined benefit pension plan                                                          |       | —                                           |       | —                                                 |       |              |       | — |   | (20,000 | ) |
| Net cash provided by  operating activities — continuing operations                           |       | 269,827                                          |       | 385,146                                                |       |              |       | 23,533 |   | 831,898 |   |
| Net cash (used for)  provided by operating activities — discontinued operations              |       | (10,918                                          | )          | (4,381                                                 | )          |              |       | (4,098 | ) | 13,502 |   |
| **Net cash provided by operating  activities**                                                    |       | 258,909                                          |       | 380,765                                                |       |              |       | 19,435 |   | 845,400 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                          |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Capital expenditures                                                                              |       | (147,877                                         | )          | (138,212                                               | )          |              |       | (25,575 | ) | (190,255 | ) |
| Payment to minority  interest holder in Kate Spade LLC                                            |       | (59,400                                          | )          | —                                                 |       |              |       | — |   | — |   |
| Net proceeds from sale  of Kate Spade LLC                                                         |       | 121,469                                          |       | —                                                 |       |              |       | — |   | — |   |
| Acquisition of The  Neiman Marcus Group, Inc.                                                     |       | —                                           |       | (5,156,423                                             | )          |              |       | — |   | — |   |
| Proceeds from sale of  Gurwitch Products, L.L.C.                                                  |       | —                                           |       | 40,752                                                 |       |              |       | — |   | — |   |
| Net increase in cash  restricted for repayment of borrowings under Credit Card Facility           |       | —                                           |       | —                                                 |       |              |       | — |   | (40,713 | ) |
| Proceeds from sale of  Chef’s Catalog and other assets                                       |       | —                                           |       | —                                                 |       |              |       | — |   | 14,419 |   |
| Net cash used for  investing activities — continuing operations                              |       | (85,808                                          | )          | (5,253,883                                             | )          |              |       | (25,575 | ) | (216,549 | ) |
| Net cash used for  investing activities — discontinued operations                            |       | (128                                             | )          | (5,919                                                 | )          |              |       | (736 | ) | (12,280 | ) |
| **Net cash used for investing activities**                                                        |       | (85,936                                          | )          | (5,259,802                                             | )          |              |       | (26,311 | ) | (228,829 | ) |
|                                                                                                   |            |                                                  |            |                                                        |            |                   |            |  |  |  |  |  |  |  |  |

 

F-8

----

**NEIMAN MARCUS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                                       | ** ** | **(Successor)**                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                                                          | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                        |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Repayment of  borrowings                                                                         |       | (4,918                                           | )          | (1,078                                                 | )          |              |       | — |   | (113 | ) |
| Borrowings under  asset-based revolving credit facility                                          |       | —                                           |       | 150,000                                                |       |              |       | — |   | — |   |
| Repayment of borrowings  under asset-based revolving credit facility                             |       | —                                           |       | (150,000                                               | )          |              |       | — |   | — |   |
| Borrowings under  senior term loan facility                                                      |       | —                                           |       | 1,975,000                                              |       |              |       | — |   | — |   |
| Repayment of  borrowings under senior term loan facility                                         |       | (250,000                                         | )          | (100,000                                               | )          |              |       | — |   | — |   |
| Borrowings under  senior notes and subordinated debt                                             |       | —                                           |       | 1,200,000                                              |       |              |       | — |   | — |   |
| Repayment of  senior notes due 2008                                                              |       | —                                           |       | (134,734                                               | )          |              |       | — |   | — |   |
| Repayment of  borrowings under Credit Card Facility                                              |       | —                                           |       | —                                                 |       |              |       | — |   | (112,500 | ) |
| Debt issuance  costs paid                                                                        |       | (1,449                                           | )          | (102,854                                               | )          |              |       | — |   | — |   |
| Cash equity contributions                                                                        |       | —                                           |       | 1,427,739                                              |       |              |       | — |   | — |   |
| Acquisition of  treasury stock                                                                   |       | —                                           |       | —                                                 |       |              |       | — |   | (3,088 | ) |
| Cash dividends  paid                                                                             |       | —                                           |       | —                                                 |       |              |       | (7,346 | ) | (27,398 | ) |
| Proceeds from  purchase of common stock, exercises of stock options and restricted stock  grants |       | 1,148                                            |       | —                                                 |       |              |       | — |   | 16,100 |   |
| Net cash (used  for) provided by financing activities — continuing operations               |       | (255,219                                         | )          | 4,264,073                                              |       |              |       | (7,346 | ) | (126,999 | ) |
| Net cash (used  for) provided by financing activities — discontinued operations             |       | (1,675                                           | )          | (4,168                                                 | )          |              |       | 5,000 |   | (4,457 | ) |
| **Net  cash (used for) provided by financing activities**                                        |       | (256,894                                         | )          | 4,259,905                                              |       |              |       | (2,346 | ) | (131,456 | ) |
| **CASH  AND CASH EQUIVALENTS**                                                                   |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| (Decrease)  increase during the year                                                             |       | (83,921                                          | )          | (619,132                                               | )          |              |       | (9,222 | ) | 485,115 |   |
| Beginning  balance                                                                               |       | 225,128                                          |       | 844,260                                                |       |              |       | 853,482 |   | 368,367 |   |
| Ending balance                                                                                   |       | 141,207                                          |       | 225,128                                                |       |              |       | 844,260 |   | 853,482 |   |
| Less cash and  cash equivalents of discontinued operations                                       |       | —                                           |       | 1,388                                                  |       |              |       | 1,056 |   | 889 |   |
| **Ending  balance - continuing operations**                                                      |       | $                                                | 141,207    |                                                   | $          | 223,740           |       |   |   | $ | 843,204 |   | $ | 852,593 |   |
| ** **                                                                                       |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| **Supplemental  Schedule of Cash Flow Information:**                                             |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Cash paid during the year for:                                                                   |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Interest                                                                                         |       | $                                                | 259,709    |                                                   | $          | 181,022           |       |   |   | $ | 134 |   | $ | 22,717 |   |
| Income taxes                                                                                     |       | $                                                | 155,568    |                                                   | $          | 22,815            |       |   |   | $ | 10,693 |   | $ | 144,626 |   |
| Noncash activities:                                                                              |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Equity contribution from Holding                                                                 |       | $                                                | —     |                                                   | $          | 25,000            |       |   |   | $ | — |   | $ | — |   |
| Equity contribution from management shareholders                                                 |       | $                                                | —     |                                                   | $          | 17,891            |       |   |   | $ | — |   | $ | — |   |
| Reduction in equity for deemed dividend to  management shareholders                              |       | $                                                | —     |                                                   | $          | 69,200            |       |   |   | $ | — |   | $ | — |   |
| Additions to property and equipment                                                              |       | $                                                | 1,733      |                                                   | $          | 15,085            |       |   |   | $ | — |   | $ | — |   |
| Borrowings  assumed by HSBC in connection with the Credit Card Sale                              |       | $                                                | —     |                                                   | $          | —            |       |   |   | $ | — |   | $ | 112,500 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-9

----

**NEIMANMARCUS, INC.**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

** **
| ** **                                                                                     | ** ** | **Common  stocks** | ** ** | **Additional** | ** ** | **Accumulated  other** | ** ** | ** **                            | ** ** | ** **             | ** ** | **Total**           | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------|------------|------------------------|------------|---------------------------------------|------------|------------------------|------------|---------------------|------------|
| **(in  thousands)**                                                                            | ** ** | **Class  A**       | ** ** | **Class  B**   | ** ** | **paid-in  capital**   | ** ** | **comprehensive  income (loss)** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **shareholders’  equity** | ** ** |
| ** **                                                                                     | ** ** | ** **         | ** ** | ** **     | ** ** | ** **             | ** ** | ** **                            | ** ** | ** **             | ** ** | ** **          | ** ** |
| ***Predecessor:***                                                                             |       |               |       |           |       |                   |       |                                  |       |                   |       |                |       |
| BALANCE AT JULY 31,  2004                                                                      |       | 293                |       | 199            |       | $                      | 491,849    |                                  | $          | (4,536                 | )          | $                   | 905,330    |   | $ | (22,573 | ) | $ | 1,370,562 |   |
| Issuance of 491  shares for stock based compensation awards                                    |       | 5                  |       | —         |       | 16,095                 |       | —                                |       | —                 |       | —              |       | 16,100 |   |
| Acquisition of  treasury stock                                                                 |       | —             |       | —         |       | —                 |       | —                                |       | —                 |       | (3,088              | )          | (3,088 | ) |
| Cash dividends  declared ($0.58 per share)                                                     |       | —             |       | —         |       | —                 |       | —                                |       | (28,428                | )          | —              |       | (28,428 | ) |
| Other equity  transactions                                                                     |       | —             |       | —         |       | 12,470                 |       | —                                |       | —                 |       | —              |       | 12,470 |   |
| Comprehensive  income:                                                                         |       |               |       |           |       |                   |       |                                  |       |                   |       |                |       |   |   |
| Net earnings                                                                                   |       | —             |       | —         |       | —                 |       | —                                |       | 248,824                |       | —              |       | 248,824 |   |
| Adjustments for  fluctuations in fair market value of financial instruments, net of tax ($706) |       | —             |       | —         |       | —                 |       | (1,114                                | )          | —                 |       | —              |       | (1,114 | ) |
| Reclassification  of amounts to net earnings, net of tax of $349                               |       | —             |       | —         |       | —                 |       | 546                                   |       | —                 |       | —              |       | 546 |   |
| Minimum pension  liability, net of tax of ($26,511)                                            |       | —             |       | —         |       | —                 |       | (42,248                               | )          | —                 |       | —              |       | (42,248 | ) |
| Other                                                                                          |       | —             |       | —         |       | —                 |       | 322                                   |       | —                 |       | —              |       | 322 |   |
| Total  comprehensive income                                                                    |       |               |       |           |       |                   |       |                                  |       |                   |       |                |       | 206,330 |   |
| BALANCE AT JULY 30,  2005                                                                      |       | 298                |       | 199            |       | 520,414                |       | (47,030                               | )          | 1,125,726              |       | (25,661             | )          | 1,573,946 |   |
| Stock based  compensation expense                                                              |       | —             |       | —         |       | 19,032                 |       | —                                |       | —                 |       | —              |       | 19,032 |   |
| Other equity  transactions                                                                     |       | —             |       | —         |       | 637                    |       | —                                |       | —                 |       | —              |       | 637 |   |
| Comprehensive  income:                                                                         |       |               |       |           |       |                   |       |                                  |       |                   |       |                |       |   |   |
| Net earnings                                                                                   |       | —             |       | —         |       | —                 |       | —                                |       | 44,154                 |       | —              |       | 44,154 |   |
| Adjustments for  fluctuations in fair market value of financial instruments, net of tax ($593) |       | —             |       | —         |       | —                 |       | (950                                  | )          | —                 |       | —              |       | (950 | ) |
| Reclassification  of amounts to net earnings, net of tax of $706                               |       | —             |       | —         |       | —                 |       | 1,114                                 |       | —                 |       | —              |       | 1,114 |   |
| Other                                                                                          |       | —             |       | —         |       | —                 |       | 246                                   |       | —                 |       | —              |       | 246 |   |
| Total  comprehensive income                                                                    |       |               |       |           |       |                   |       |                                  |       |                   |       |                |       | 44,564 |   |
| BALANCE AT OCTOBER 1, 2005                                                                     |       | 298                |       | 199            |       | $                      | 540,083    |                                  | $          | (46,620                | )          | $                   | 1,169,880  |   | $ | (25,661 | ) | $ | 1,638,179 |   |

 

F-10

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**NEIMAN MARCUS, INC.**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

 
| **(in thousands)**                                                                                                                | ** ** | **Common  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Accumulated  other   comprehensive  income (loss)** | ** ** | **Retained  earnings** | ** ** | **Total  shareholders’  equity** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|
| *** ***                                                                                                                           |       | ** **        |       |                             |       |                                                            |       |                   |       |                                  |       |
| ***Successor:***                                                                                                                       |       |              |       |                             |       |                                                            |       |                   |       |                                  |       |
| Equity contributions                                                                                                                   |       | 10                |       | $                                | 1,470,622  |                                                            | $          | —                 |       | $                                     | —     |   | $ | 1,470,632 |   |
| Carryover basis adjustment                                                                                                             |       | —            |       | (69,200                          | )          | —                                                          |       | —                 |       | (69,200                               | )          |
| Stock based compensation expense                                                                                                       |       | —            |       | 3,951                            |       | —                                                          |       | —                 |       | 3,951                                 |       |
| Comprehensive income:                                                                                                                  |       |              |       |                             |       |                                                            |       |                   |       |                                  |       |
| Net earnings                                                                                                                           |       | —            |       | —                           |       | —                                                          |       | 12,455                 |       | 12,455                                |       |
| Adjustments for fluctuations in fair market value of  financial instruments, net of tax of $6,510                                      |       | —            |       | —                           |       | 9,990                                                           |       | —                 |       | 9,990                                 |       |
| Other                                                                                                                                  |       | —            |       | —                           |       | (161                                                            | )          | —                 |       | (161                                  | )          |
| Total comprehensive income                                                                                                             |       |              |       |                             |       |                                                            |       |                   |       | 22,284                                |       |
| BALANCE AT JULY  29, 2006                                                                                                              |       | 10                |       | $                                | 1,405,373  |                                                            | $          | 9,829                  |       | $                                     | 12,455     |   | $ | 1,427,667 |   |
| Stock based compensation expense                                                                                                       |       | —            |       | 5,859                            |       | —                                                          |       | —                 |       | 5,859                                 |       |
| Other equity transactions                                                                                                              |       | —            |       | 1,154                            |       | —                                                          |       | —                 |       | 1,154                                 |       |
| Comprehensive income:                                                                                                                  |       |              |       |                             |       |                                                            |       |                   |       |                                  |       |
| Net earnings                                                                                                                           |       | —            |       | —                           |       | —                                                          |       | 111,932                |       | 111,932                               |       |
| Adjustment for unfunded benefit obligations (upon  initial adoption of new accounting principle), net of income tax effect of  $11,289 |       | —            |       | —                           |       | 17,365                                                          |       | —                 |       | 17,365                                |       |
| Adjustments for fluctuations in fair market value of  financial instruments, net of tax of $2,425                                      |       | —            |       | —                           |       | (6,257                                                          | )          | —                 |       | (6,257                                | )          |
| Other                                                                                                                                  |       | —            |       | —                           |       | 292                                                             |       | —                 |       | 292                                   |       |
| Total comprehensive income                                                                                                             |       |              |       |                             |       |                                                            |       |                   |       | 123,332                               |       |
| BALANCE AT JULY 28,  2007                                                                                                              |       | 10                |       | $                                | 1,412,386  |                                                            | $          | 21,229                 |       | $                                     | 124,387    |   | $ | 1,558,012 |   |

* *

*See Notes to Consolidated Financial Statements.*

 

F-11

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**NEIMANMARCUS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

* *

**NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**BASIS OF PRESENTATION**

** **

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

 

Theacquisition of NMG was completed on October 6, 2005 through the merger ofMerger Sub with and into NMG, with NMG being the surviving entity (theAcquisition). Subsequent to the Acquisition, NMG is a subsidiary of theCompany, which is controlled by Holding. The Acquisition was recorded as ofOctober 1, 2005, the beginning of our October accounting period.

 

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

 

                Prior to the Acquisition, theCompany had no independent assets or operations.  After the Acquisition, the Company representsthe Successor to NMG since the Company’s sole asset is its investment in NMGand its operations consist solely of the operating activities of NMG as well ascosts incurred by the Company related to its investment in NMG.  For periods prior to the Acquisition, NMG isdeemed to be the predecessor to the Company. As a result, for periods prior to the Transactions, the financialstatements of the Company consist of the financial statements of NMG for suchperiods. The accompanying consolidated statements of earnings and cash flowspresent our results of operations and cash flows for the periods preceding theAcquisition (Predecessor) and the periods succeeding the Acquisition(Successor), respectively.  Allreferences to “we” and “our” relate to the Company for periods subsequent tothe Transactions and to NMG for periods prior to the Transactions. 

                

                Our fiscal year ends on theSaturday closest to July 31.  Allreferences to fiscal year 2007 relate to the 52 weeks ended July 28, 2007; allreferences to fiscal year 2006 relate to the combined period comprised offorty-three weeks ended July 29, 2006 (Successor) and the nine weeks endedOctober 1, 2005 (Predecessor) and all references to fiscal year 2005 relate tothe 52 weeks ended July 30, 2005.

 

F-12

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**ESTIMATES AND CRITICAL ACCOUNTING POLICIES**

** **

                We make estimates andassumptions about future events in preparing our financial statements inconformity with generally accepted accounting principles. These estimates andassumptions affect the amounts of assets, liabilities, revenues and expensesand the disclosure of gain and loss contingencies at the date of theconsolidated financial statements.

 

                While we believe that our pastestimates and assumptions have been materially accurate, the amounts currentlyestimated are subject to change if we make different assumptions as to theoutcome of future events. We evaluate our estimates and judgments on an ongoingbasis and predicate those estimates and judgments on historical experience andon various other factors that we believe to be reasonable under thecircumstances. We make adjustments to our assumptions and judgments when factsand circumstances dictate. Since future events and their effects cannot bedetermined with absolute certainty, actual results may differ from the estimatesused in preparing the accompanying consolidated financial statements.

** **

                ***Cashand Cash Equivalents.*** Cash and cash equivalents primarily consist of cash on hand in thestores, deposits with banks and overnight investments with banks and financialinstitutions. Cash equivalents are stated at cost, which approximates fairvalue. Our cash management system provides for the reimbursement of all majorbank disbursement accounts on a daily basis. Accounts payable includes$55.7 million of outstanding checks not yet presented for payment atJuly 28, 2007 and $66.5 million at July 29, 2006.

 

                ***MerchandiseInventories and Cost Of Goods Sold.***  We utilize the retail method ofaccounting. Under the retail inventorymethod, the valuation of inventories at cost and the resulting gross marginsare determined by applying a calculated cost-to-retail ratio, for variousgroupings of similar items, to the retail value of inventories. Merchandiseinventories are stated at the lower of cost or market.  The costof the inventory reflected on the consolidated balance sheets is decreased bycharges to cost of goods sold at the time the retail value of the inventory islowered through the use of markdowns. Earnings are negatively impacted whenmerchandise is marked down.

 

                Our sales activities areconducted during two primary selling seasons—Fall and Spring. The Fall sellingseason is conducted primarily in our first and second quarters and the Springselling season is conducted primarily in the third and fourth quarters. Duringeach season, we record markdowns to reduce the retail value of our inventories.Factors considered in determining markdowns include current and anticipateddemand, customer preferences, age of merchandise and fashion trends. During theseason, we record both temporary and permanent markdowns. Temporary markdownsare recorded at the time of sale and reduce the retail value of only the goodssold. Permanent markdowns are designated primarily for clearance activity andreduce the retail value of all goods subject to markdown. At the end of eachselling season, we record permanent markdowns for clearance goods remaining inending inventory.

 

                The areas requiring significantjudgment related to the valuation of our inventories include 1) settingthe original retail value for the merchandise held for sale,2) recognizing merchandise for which the customer's perception of valuehas declined and appropriately marking the retail value of the merchandise downto the perceived value and 3) estimating the shrinkage that has occurredbetween physical inventory counts. These judgments and estimates, coupled withthe averaging processes within the retail method can, under certaincircumstances, produce varying financial results. Factors that can lead todifferent financial results include 1) determination of original retailvalues for merchandise held for sale, 2) identification of declines inperceived value of inventories and processing the appropriate retail valuemarkdowns and 3) overly optimistic or conservative estimates of shrinkage.We believe appropriate merchandise valuation and pricing controls minimize therisk that our inventory values could be materially misstated.

                

Consistentwith industry business practice, we receive allowances from certain of ourvendors in support of the merchandise we purchase for resale. We receivecertain allowances to reimburse us for markdowns taken and/or to support thegross margins earned in connection with the sales of the vendor's merchandise.We recognize these allowances as an increase to gross margin when theallowances are earned and approved by the vendor. Other allowances we receiverepresent reductions to the amounts paid to acquire the merchandise. Werecognize these allowances as a reduction in the cost of the acquired merchandiseresulting in an increase to gross margin at the time the goods are sold. Theamounts of vendor allowances we received did not have a significant impact onthe year-over-year change in gross margin during fiscal years 2007, 2006 or2005. Vendor allowances received were $103.4 million in fiscal year 2007, $92.1million for the forty-three weeks ended July 29, 2006, $2.4 million for thenine weeks ended October 1, 2005 and $87.7 million in fiscal year 2005.

 

                We obtain certain merchandise,primarily precious jewelry, on a consignment basis in order to expand ourproduct assortment. Consignment merchandise with a cost basis of $307.6 millionat July 28, 2007 and $251.3 million at July 29, 2006 is not reflectedin our consolidated balance sheets.

 

F-13

----

                ***Long-livedAssets.***  Property andequipment are stated at cost less accumulated depreciation. For financialreporting purposes, we compute depreciation principally using the straight-linemethod over the estimated useful lives of the assets. Buildings andimprovements are depreciated over five to 30 years while fixtures andequipment are depreciated over three to 15 years. Leasehold improvementsare amortized over the shorter of the asset life or the lease term. Costsincurred for the development of internal computer software are capitalized andamortized using the straight-line method over three to ten years.

 

                To the extent we remodel orotherwise replace or dispose of property and equipment prior to the end of theassigned depreciable lives, we could realize a loss or gain on the disposition.To the extent assets continue to be used beyond their assigned depreciablelives, no depreciation expense is incurred. We reassess the depreciable livesof our long-lived assets in an effort to reduce the risk of significant lossesor gains at disposition and utilization of assets with no depreciation charges.The reassessment of depreciable lives involves utilizing historical remodel anddisposition activity and forward-looking capital expenditure plans. Infiscal year 2005, we made adjustments to rent and depreciation aggregatingapproximately $5.0 million, or 0.1% of revenues, in connection with ourreview of the amortization periods assigned to our leased property andequipment and deferred real estate credits. 

 

                We assess the recoverability ofthe carrying values of our store assets annually and upon the occurrence ofcertain events (e.g., opening a new store near an existing store or announcingplans for a store closing). The recoverability assessment requires judgment andestimates of future store generated cash flows. The underlying estimates ofcash flows include estimates for future revenues, gross margin rates and storeexpenses. We base these estimates upon the stores' past and expected futureperformance. New stores may require two to five years to develop a customerbase necessary to generate the cash flows of our more mature stores. To theextent our estimates for revenue growth and gross margin improvement are notrealized, future annual assessments could result in impairment charges.

*** ***

***Purchase Accounting*. **Weaccounted for the Acquisition in accordance with the provisions of Statement ofFinancial Accounting Standards No. 141, "Business Combinations,"(SFAS  141) whereby the purchase pricepaid to effect the Acquisition was allocated to state the acquired assets andliabilities at fair value. The Acquisition and the allocation of the purchaseprice were recorded as of October 1, 2005, the beginning of ourOctober 2005 accounting period. In connection with the purchase priceallocation, we made estimates of the fair values of our long-lived andintangible assets based upon assumptions related to future cash flows, discountrates and asset lives. As of October 29, 2005, we recorded preliminary purchaseaccounting adjustments to increase the carrying value of our property andequipment and inventory, to establish intangible assets for our tradenames,customer lists and favorable lease commitments and to revalue our long-termbenefit plan obligations, among other things. We revised these preliminarypurchase accounting adjustments during the second, third and fourth quarters offiscal year 2006 as additional information became available. The final purchaseaccounting adjustments are reflected in our July 29, 2006 consolidated balancesheet.

 

                ***Goodwilland Intangible Assets.*** Goodwill and indefinite-lived intangible assets, such as tradenames, arenot subject to amortization. Rather, recoverability of goodwill andindefinite-lived intangible assets is assessed annually and upon the occurrenceof certain events. The recoverability assessment requires us to make judgmentsand estimates regarding fair values. Fair values are determined using estimatedfuture cash flows, including growth assumptions for future revenues, grossmargin rates and other estimates. To the extent that our estimates are notrealized, future assessments could result in impairment charges. In thefourth quarter of fiscal year 2007, we recorded a $11.5 million pretax impairment charge related to the writedown to fairvalue in the net carrying value of the Horchow tradename based upon loweranticipated future revenues associated with the brand.

 

Customerlists are amortized using the straight-line method over their estimated usefullives, ranging from 5 to 26 years (weighted average life of 13 years).  Favorable lease commitments are amortizedstraight-line over the remaining lives of the leases, ranging from 6 to 49years (weighted average life of 33 years). Total estimated amortization of all acquisition-related intangibleassets for the next five fiscal years is currently estimated as follows (inthousands):

 
| 2008 |   | $      | 72,254 |   |
|------|--------|--------|--------|--------|
| 2009 |   | 72,254 |   |
| 2010 |   | 72,254 |   |
| 2011 |   | 61,543 |   |
| 2012 |   | 48,898 |   |

 

F-14

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                ***Leases.***  We lease certain retail stores and officefacilities. Stores we own are often subject to ground leases. The terms of ourreal estate leases, including renewal options, range from 12 to 101 years.Most leases provide for monthly fixed minimum rentals or contingent rentalsbased upon sales in excess of stated amounts and normally require us to payreal estate taxes, insurance, common area maintenance costs and other occupancycosts. For leases that contain predetermined, fixed calculations of the minimumrentals, we recognize rent expense on a straight-line basis over the leaseterm.

 

                We receive allowances fromdevelopers related to the construction of our stores. We record theseallowances as deferred real estate credits which we recognize as a reduction ofrent expense on a straight-line basis over the lease term. We receivedconstruction allowances aggregating $24.6 million in fiscal year 2007, $30.7million for the forty-three weeks ended July 29, 2006, $2.0 million for thenine weeks ended October 1, 2005 and $24.5 million in fiscal year 2005. 

 

***FinancialInstruments.***  We use derivative financial instruments to help manage our interest rate risk.Effective December 6, 2005, NMG entered into floating to fixed interestrate swap agreements for an aggregate notional amount of $1,000.0 millionto limit its exposure to interest rate increases related to a portion of ourfloating rate indebtedness. The interest rate swap agreements terminate afterfive years.  At July 28, 2007, the fairvalue of NMG's interest rate swap agreements was a gain of approximately $8.2 million,which amount is included in other assets. 

 

Asof the effective date, NMG designated the interest rate swaps as cash flowhedges. As a result, changes in the fair value of NMG's swaps are recorded as acomponent of other comprehensive income. At July 28, 2007, we have $3.7million of unrecognized gains, net of tax, on our interest rate swap agreementsincluded in other comprehensive income.

 

                As a result of the swapagreements, NMG's effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from 6.482%to 6.733% per quarter through 2010 and result in an average fixed rate of 6.577%.

 

***Benefit Plans.***  We sponsora noncontributory defined benefit pension plan (Pension Plan) coveringsubstantially all full-time employees and an unfunded supplemental executiveretirement plan (SERP Plan) which provides certain employees additional pensionbenefits. In calculating our obligations and related expense, we make variousassumptions and estimates, after consulting with outside actuaries andadvisors. The annual determination of expense involves calculating theestimated total benefits ultimately payable to plan participants and allocatingthis cost to the periods in which services are expected to be rendered. We usethe projected unit credit method in recognizing pension liabilities. ThePension and SERP Plans are valued annually as of the beginning of each fiscalyear.

 

                Significant assumptions relatedto the calculation of our obligations include the discount rate used to calculatethe present value of benefit obligations to be paid in the future, the expectedlong-term rate of return on assets held by the Pension Plan and the averagerate of compensation increase by plan participants. We review these assumptionsannually based upon currently available information, including informationprovided by our actuaries.

 

                ***Self-insuranceand Other Employee Benefit Reserves.***  We use estimates in the determination of therequired accruals for general liability, workers' compensation and healthinsurance as well as short-term disability, supplemental executive retirementbenefits and postretirement health care benefits. We base these estimates uponan examination of historical trends, industry claims experience and, in certaincases, calculations performed by third-party actuaries. Projected claimsinformation may change in the future and may require us to revise thesereserves.

 

                ***OtherLong-term Liabilities.*** Other long-term liabilities consist primarily of certain employeebenefit obligations, postretirement health care benefit obligations and theliability for scheduled rent increases.

 

                ***Revenues.***  Revenues include sales of merchandise andservices and delivery and processing revenues related to merchandise sold. Revenuesfrom our Specialty Retail stores are recognized at the later of the point ofsale or the delivery of goods to the customer. Revenues from our DirectMarketing operation are recognized when the merchandise is delivered to thecustomer. Revenues exclude sales taxes collected from our customers. Wemaintain reserves for anticipated sales returns primarily based on ourhistorical trends related to returns by our retail and direct marketingcustomers. Our reserves for anticipatedsales returns aggregated $48.8 million at July 28, 2007 and$43.7 million at July 29, 2006.

 

                ***Buyingand Occupancy Costs.***  Ourbuying costs consist primarily of salaries and expenses incurred by ourmerchandising and buying operations. Occupancy costs primarily include rent,property taxes and operating costs of our retail, distribution and supportfacilities and exclude depreciation expense.

 

F-15

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                ***Selling,General and Administrative Expenses (excluding depreciation).***  Selling, general and administrative expensesare comprised principally of the costs related to employee compensation andbenefits in the selling and administrative support areas, preopening expenses,advertising and catalog costs and insurance expense.

 

                We receive allowances fromcertain merchandise vendors in conjunction with compensation programs foremployees who sell the vendors' merchandise. These allowances are nettedagainst the related compensation expense that we incur. Amounts received fromvendors related to compensation programs were $65.4 million in fiscal year2007, $49.4 million for the forty-three weeks ended July 29, 2006, $10.1million for the nine weeks ended October 1, 2005 and $53.2 million infiscal year 2005.

*** ***

Weincur costs to advertise and promote the merchandise assortment offered by bothSpecialty Retail stores and Direct Marketing. Advertising costs incurred by ourSpecialty Retail stores consist primarily of print media costs related topromotional materials mailed to our customers. These costs are expensed at thetime of mailing to the customer. Advertising costs incurred by Direct Marketingrelate to the production, printing and distribution of our print catalogs andthe production of the photographic content on our websites. We amortize thecosts of print catalogs during the periods we expect to generate revenues fromsuch catalogs, generally six months. We expense the costs incurred to producethe photographic content on our websites at the time the images are firstloaded onto the website. We expense website design costs as incurred.

 

                Deferred catalog costs includedin other current assets in the consolidated balance sheets were $7.1 million asof July 28, 2007 and $7.0 million as of July 29, 2006.  Net advertising expenses were $100.2 millionin fiscal year 2007, $95.3 million for the forty-three weeks ended July 29,2006, $13.1 million for the nine weeks ended October 1, 2005 and $110.8 millionin fiscal year 2005.

 

                Consistent with industrypractice, we receive advertising allowances from certain of our merchandisevendors. Substantially all the advertising allowances we receive representreimbursements of direct, specific and incremental costs that we incur topromote the vendor's merchandise in connection with our various advertisingprograms, primarily catalogs and other print media. As a result, these allowancesare recorded as a reduction of our advertising costs when earned. Vendorallowances earned and recorded as a reduction to selling, general andadministrative expenses aggregated approximately $63.4 million in fiscal year2007, $43.1 million for the forty-three weeks ended July 29, 2006, $18.6million for nine weeks ended October 1, 2005 and $57.5 million in fiscalyear 2005.

 

Preopeningexpenses primarily consist of payroll and related media costs incurred inconnection with store openings and major renovations and are expensed whenincurred.  We incurred preopeningexpenses of $8.8 million in fiscal year 2007, $7.4 million for the forty-threeweeks ended July 29, 2006, $3.9 million for the nine weeks ended October 1,2005 and $5.9 million in fiscal year 2005. 

 

***Income from credit card program.***  We soldour proprietary credit card accounts to HSBC on July 7, 2005 (Credit CardSale).  As a part of the Credit CardSale, we entered into a long-term marketing and servicing alliance with HSBC.Under the terms of this alliance, HSBC offers credit card and non-card paymentplans bearing our brands and we receive ongoing payments from HSBC based oncredit card sales and compensation for marketing and servicing activities (HSBCProgram Income).  We recognize HSBCProgram Income when earned.

 

Priorto the Credit Card Sale, we extended credit to certain of our customerspursuant to our proprietary retail credit card program.  Our credit card operations generated financecharge income, net of credit losses, which was recognized as income when earnedand we maintained reserves for potential credit losses. We evaluated thecollectibility of our accounts receivable based on a combination of factors,including analysis of historical trends, aging of accounts receivable, write-offexperience and expectations of future performance.

 

***Gift Cards.***  We sellgift cards at our Specialty Retail stores and through our Direct Marketingoperation. Unredeemed gift cards aggregated $33.1 million at July 28,2007 and $30.1 million at July 29, 2006. The gift cards sold to ourcustomers have no stated expiration dates and are subject to actual and/orpotential escheatment rights in various of the jurisdictions in which weoperate. In the fourth quarter of fiscal year 2007, we recorded $6.0 million ofother income for the breakage on gift cards we previously sold and issued.  The income was recognized based upon ouranalysis of the aging of these gift cards, our determination that thelikelihood of future redemption is remote and our determination that suchbalances are not subject to escheatment laws applicable to our operations.  Prior to the fourth quarter of fiscal year2007, we had not recognized breakage on gift cards pending, among other things,our final determination of the applicable escheatment laws applicable to ouroperations.  We will evaluate gift cardbreakage in the future on an ongoing basis. We do not believe gift card breakage will have a material impact on ourfuture operations.

 

F-16

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***Loyalty Programs.***  Wemaintain customer loyalty programs in which customers accumulate points forqualifying purchases. Upon reaching certain levels, customers may redeem theirpoints for gifts. Generally, points earned in a given year must be redeemed nolater than 90 days subsequent to the end of the annual program period.

 

                The estimates of the costsassociated with the loyalty programs require us to make assumptions related tocustomer purchasing levels, redemption rates and costs of awards to be chosenby our customers. Our customers redeem a substantial portion of the pointsearned in connection with our loyalty programs for gift cards. At the time thequalifying sales giving rise to the loyalty program points are made, we deferthe portion of the revenues on the qualifying sales transactions equal to theestimate of the retail value of the gift cards to be issued upon conversion ofthe points to gift cards. We record the deferral of revenues related to giftcard awards under our loyalty programs as a reduction of revenues. In addition,we charge the cost of all other awards under our loyalty programs to cost ofgoods sold.

 

***Stock-Based Compensation - Predecessor.***  ThePredecessor accounted for stock-based compensation awards to employees inaccordance with Accounting Principles Board Opinion No. 25 “Accounting forStock Issued to Employees” (APB 25) and its related interpretations.Accordingly, we recognized compensation expense on our restricted stock awardsbut did not recognize compensation expense for stock options since all optionsgranted had an exercise price equal to the market value of our common stock onthe grant date. We did not adopt the previous voluntary expense recognitionprovisions of SFAS No. 123, "Accounting for Stock-BasedCompensation" (SFAS 123), whereby the fair value of stock-basedcompensation awards would have been expensed over the terms of awards. However,consistent with the disclosure requirements of SFAS 123, we made pro formadisclosures of the effect that application of the fair value expenserecognition provisions of SFAS 123 would have had on our net earnings.

 

                In December 2004, the FASBissued SFAS No. 123(R), “Share-Based Payment” (SFAS 123(R)). This standardis a revision of SFAS 123 and supersedes APB 25 and its related implementationguidance. SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values. We adopted SFAS 123(R) as of thebeginning of our first quarter of fiscal year 2006 using the modifiedprospective method, which required us to record stock compensation for allunvested and new awards as of the adoption date. Accordingly, we have notrestated prior period amounts presented herein.

                

Thefollowing table illustrates the pro forma effect on net earnings for periodsprior to the adoption of SFAS 123(R) as if the Predecessor had applied the fairvalue recognition provisions of SFAS 123 during fiscal year 2005:

 

| (in thousands)                                                                                        | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                                                                                                       |       |                                             |       |
| Net earnings:                                                                                              |       |                                             |       |
| As reported                                                                                                |       | $                                                | 248,824    |   |
| Add: stock-based  employee compensation recorded under intrinsic value method, net of related  taxes       |       | 4,999                                            |       |
| Less: stock-based  employee compensation expense determined under fair value method, net of  related taxes |       | (13,302                                          | )          |
| Pro forma net earnings                                                                                     |       | $                                                | 240,521    |   |

                

ThePredecessor estimated the fair value of each option grant on the date of thegrant using the Black-Scholes option pricing model with the followingassumptions used for grants in fiscal year 2005:

 

|                          | ** ** | **July 30,  2005** | ** ** |
|--------------------------|------------|-------------------------|------------|
| Expected life  (years)   |       | 5                       |       |
| Expected  volatility     |       | 25.0                    | %          |
| Risk-free  interest rate |       | 3.3                     | %          |
| Dividend yield           |       | 1.0                     | %          |

 

                The weighted-average fairvalue of options granted was $14.38 in fiscal year 2005.                

 

Inconnection with the adoption of the provisions of SFAS 123(R), we recordednon-cash charges for stock compensation of approximately $20.0 million inthe period from July 31, 2005 to October 1, 2005 primarily as aresult of the accelerated vesting of all Predecessor options and restrictedstock in connection with the Transactions (see Note 2).

 

F-17

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***Stock-Based Compensation - Successor.***The Company has approved equity-basedmanagement arrangements which authorize equity awards to be granted to certainmanagement employees for up to 87,992.0 shares of the common stock of theCompany, of which options for 81,716.3 shares were issued in fiscal year 2006and options for 2,496.0 shares were issued in fiscal year 2007.  At July 28, 2007, options for 83,634.3 shareswere outstanding.  Options generally vestover four to five years and expire 10 years from the date of grant.  At July 28, 2007, options for 29,764.1 shareswere vested.

 

Theexercise price of approximately 50% of such options escalate at a 10% compoundrate per year until the earlier to occur of (i) exercise, (ii) thefifth anniversary of the date of grant or (iii) the occurrence of a changein control. However, in the event the Sponsors cause the sale of shares of theCompany to an unaffiliated entity, the exercise price will cease to accrete atthe time of the sale with respect to a pro rata portion of the accretingoptions.  

 

Weuse the Black-Scholes option-pricing model to determine the fairvalue of our options as of the date of grant in accordance with the provisionsof SFAS 123(R).  A summary of the 2007and 2006 grants and fair value assumptions is as follows:

 
| ** **                            | ** ** | **2007 Grants**         | ** ** | **2006 Grants**                        | ** ** |
|---------------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|
| ** **                            | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise Price  Options** | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise Price  Options** | ** ** |
| Options outstanding  at July 28, 2007 |       | 1,248.0                      |       | 1,248.0                                     |       | 43,594.6 |   | 37,543.7 |   |
| Exercise Price  at July 28, 2007      |       | $                            | 1,942      |                                        | $          | 1,942 |   | $ | 1,445 |   | $ | 1,590 |   |
| Term                                  |       | 5                            |       | 5                                           |       | 5 |   | 5 |   |
| Volatility                            |       | 29.96                        | %          | 29.96                                       | %          | 29.72 | % | 29.72 | % |
| Risk-Free Rate                        |       | 4.53                         | %          | 4.53                                        | %          | 4.23 | % | 4.23 | % |
| Dividend Yield                        |       | —                       |       | —                                      |       | — |   | — |   |
| Fair Value                            |       | $                            | 676        |                                        | $          | 341 |   | $ | 494 |   | $ | 247 |   |

 

 

Expectedvolatility is based on a combination of the Predecessor's historical volatilityadjusted for our new leverage and estimates of implied volatility of ourpeer group.

 

                ***IncomeTaxes.***  We are routinelyunder audit by federal, state or local authorities in the area of income taxes.These audits include questioning the timing and amount of deductions and theallocation of income among various tax jurisdictions. In evaluating theexposure associated with various tax filing positions, we accrue charges forprobable exposures. Based on our annual evaluations of tax positions, webelieve we have appropriately accrued for probable exposures. To the extent wewere to prevail in matters for which accruals have been established or berequired to pay amounts in excess of recorded reserves, our effective tax ratein a given financial statement period could be materially impacted. 

 

Weclosed the Internal Revenue Service (IRS) examinations of federal tax returnsfor fiscal years 2004 and 2003 during the first quarter of fiscal year 2007 andpaid the related tax liability during the second quarter of fiscal year 2007.   The IRS is now examining our federal taxreturns for fiscal years 2005 and 2006. We believe our recorded tax liabilities as of July 28, 2007 aresufficient to cover any potential assessments to be made by the IRS upon thecompletion of their examinations. We will continue to monitor the progress ofthe IRS examinations and review our recorded tax liabilities for potentialaudit assessments.  Adjustments toincrease or decrease the recorded tax liabilities may be required in the futureas additional facts become known.

 

                ***RecentAccounting Pronouncements.*** In July 2006, the FASB issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109” (FIN 48), which clarifies the accounting for uncertainty intax positions.  FIN 48 requires that werecognize in our consolidated financial statements the impact of a taxposition, if that position is more likely than not of being sustained uponexamination, based on the technical merits of the position.  FIN 48 also provides guidance onderecognition of income tax assets and liabilities, classification of currentand deferred income tax assets and liabilities, accounting for interest andpenalties associated with tax positions, accounting for income taxes in interimperiods and income tax disclosures.  Wewill adopt FIN 48 in the first quarter of fiscal year 2008, as required.  We are currently evaluating the impact on ourconsolidated financial statements of adopting FIN 48. 

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans”(SFAS 158).  SFAS 158 requires employersto report a postretirement benefit asset for plans that are overfunded and apostretirement benefit liability for plans that are underfunded. Deferred plancosts and income are required to be reported in accumulated other comprehensiveincome (OCI), net of tax effects, until they are amortized.  We adopted the provisions of SFAS 158 as ofJuly 28, 2007 which resulted in a net decrease in the carrying values of ourobligations of approximately $28.7 million, which amount has been recorded (net

 

F-18

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of taxes of $11.3 million) as an increase in othercomprehensive income in our statement of shareholders’ equity for fiscal year2007.  See Note 13 of the Notes to Consolidated Financial Statements inItem 15.  

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin No. 108(SAB 108).  SAB 108 addresses the processand diversity in practice of quantifying financial statement misstatementsresulting in the potential build up of improper amounts on the balancesheet.  The provisions of SAB 108 becameeffective during the fourth quarter of fiscal year 2007 but had no impact on theCompany’s results of operations or financial position.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS 157), which provides guidance for using fair value tomeasure certain assets and liabilities. SFAS 157 will apply whenever another standard requires or permits assetsor liabilities to be measured at fair value. The standard does not expand the use of fair value to any newcircumstances.  SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007,or our fiscal year ending August 1, 2009. We have not yet evaluated the impact, if any, of adopting SFAS 157 onour consolidated financial statements.

 

In February 2007, theFASB issued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (SFAS 159).  SFAS 159 expands opportunities to use fairvalue measurement in financial reporting and permits entities to choose tomeasure many financial instruments and certain other items at fair value.  This Statement is effective for fiscal yearsbeginning after November 15, 2007, or our fiscal year ending August 1,2009.  We have not yet evaluated the impact,if any, of adopting SFAS 159 on our consolidated financial statements.  

 

**NOTE 2.  THETRANSACTIONS**

** **

                ***TheTransactions.***  Asdiscussed in Note 1, the Acquisition was completed on October 6, 2005and was financed by:

 

·                  Borrowings undera senior secured asset-based revolving credit facility (Asset-BasedRevolving Credit Facility) and a secured term loan credit facility (SeniorSecured Term Loan Facility) (collectively, the Secured Credit Facilities);

 

·                  the issuance of9.0%/9.75% senior notes due 2015 (Senior Notes);

 

·                  the issuance of10.375% senior subordinated notes due 2015 (Senior Subordinated Notes); and

 

·                  equityinvestments funded by direct and indirect equity investments from the Sponsors,co-investors and management.

 

                The Acquisition occurredsimultaneously with:

 

·                  the closing ofthe financing transactions and equity investments described above;

 

·                  the call forredemption of, the deposit into a segregated account of the estimated amount ofthe redemption payment related to, and the ratable provision of securitypursuant to the terms thereof, for our 6.65% senior notes due 2008 (2008Notes);

 

·                  the ratableprovision of security to our 7.125% senior debentures due 2028 (2028Debentures) pursuant to the terms thereof; and

 

·                  the terminationof a previous $350 million unsecured revolving credit agreement (CreditAgreement).

 

                We refer to the abovetransactions, the Acquisition and our payment of any costs related to thesetransactions collectively herein as the "Transactions." 

 

                ***Transactionand Other Costs***.  Duringthe period from July 30, 2005 to October 1, 2005, the Predecessorexpensed $23.5 million in connection with the Transactions. These costsconsisted primarily of $4.5 million of accounting, investment banking,legal and other costs associated with the Transactions and a $19.0 millionnon-cash charge for stock compensation resulting from the accelerated vestingof Predecessor stock options and restricted stock in connection with theAcquisition.

** **

F-19

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**NOTE 3. PURCHASEACCOUNTING**

We accounted for the Acquisition in accordance with theprovisions of Statement of Financial Accounting Standards No. 141 “BusinessCombinations” (SFAS 141), whereby the purchase price paid to effect theAcquisition was allocated to state the acquired assets and liabilities at fairvalue. The Acquisition and the allocation of the purchase price were recordedas of October 1, 2005, the beginning of our October accounting period. Thepurchase price was approximately $5,461.7 million. The sources and uses offunds in connection with the Transactions and the redemption of our 2008 Notesare summarized below (in millions):
| **Sources**                                                                                   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|
| Asset-Based  Revolving Credit Facility                                                        |       | $          | 150.0      |   |
| Secured Term Loan  Facility                                                                   |       | 1,975.0    |       |
| Senior Notes                                                                                  |       | 700.0      |       |
| Senior Subordinated  Notes                                                                    |       | 500.0      |       |
| Cash on hand                                                                                  |       | 666.1      |       |
| Equity  contribution—cash                                                                |       | 1,427.7    |       |
| Equity contribution—non-cash                                                             |       | 42.9       |       |
| Total sources                                                                                 |       | $          | 5,461.7    |   |
| ** **                                                                                    | ** ** | ** ** | ** ** |
| **Uses**                                                                                      | ** ** | ** ** | ** ** |
| Consideration paid to  stockholders (including non-cash management rollover of $17.9 million) |       | $          | 5,110.8    |   |
| Transaction costs  (including non-cash items of $18.8 million)                                |       | 82.3       |       |
| Redemption of existing  2008 Notes                                                            |       | 134.7      |       |
| Debt issuance costs  (including non-cash items of $6.3 million)                               |       | 109.2      |       |
| Payment of deferred  compensation obligations and other accrued liabilities                   |       | 24.7       |       |
| Total uses                                                                                    |       | $          | 5,461.7    |   |

 

In connection with the purchase price allocation, we madeestimates of the fair values of our long-lived and intangible assets based uponassumptions related to future cash flows, discount rates and asset lives. As ofOctober 29, 2005, we recorded preliminary purchase accounting adjustments toincrease the carrying values of our property and equipment and inventory, toestablish intangible assets for our tradenames, customer lists and favorablelease commitments and to revalue our long-term benefit plan obligations, amongother things. We revised these preliminary purchase accounting adjustmentsduring the second, third and fourth quarters of fiscal year 2006 as additionalinformation became available. The final purchase accounting adjustments, asreflected in our July 29, 2006 consolidated balance sheet, were as follows (inmillions):

F-20

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| Cash consideration:                                                                    |   |     |   |    |    |
|----------------------------------------------------------------------------------------|--------|----------|--------|---------|---------|
| Paid to  shareholders                                                                  |   |     |   | $       | 5,092.9 |   |
| Transaction  costs                                                                     |   |     |   | 63.5    |    |
|                                                                                   |   |     |   | 5,156.4 |    |
| Non-cash  consideration                                                                |   |     |   | 36.7    |    |
| Total consideration                                                                    |   |     |   | 5,193.1 |    |
|                                                                                   |   |     |   |    |    |
| Net assets acquired at  historical cost                                                |   |     |   | 1,638.2 |    |
| Adjustments to state  acquired assets at fair value:                                   |   |     |   |    |    |
|  1) Increase carrying value of property and  equipment                            |   | $        | 137.8  |    |    |   |
|  2) Increase carrying value of inventory                                          |   | 38.1     |   |    |    |
|  3) Write-off historical goodwill and  tradenames                                 |   | (71.5    | )      |    |    |
|  4) Record intangible assets acquired                                             |   |     |   |    |    |
|  Customer lists                                                                   |   | 576.5    |   |    |    |
|  Favorable lease commitments                                                      |   | 480.0    |   |    |    |
|  Tradenames                                                                       |   | 1,621.8  |   |    |    |
|  5) Write-off other assets, primarily  debt issue costs                           |   | (3.7     | )      |    |    |
|  6) Adjustment to state 2008 Notes at  redemption value                           |   | (6.2     | )      |    |    |
|  7) Adjustment to state 2028 Debentures at  fair value                            |   | 4.5      |   |    |    |
|  8) Write-off deferred real estate  credits                                       |   | 90.2     |   |    |    |
|  9) Increase in long-term benefit  obligations, primarily pension obligations     |   | (57.6    | )      |    |    |
| 10) Tax impact  of purchase accounting adjustments                                     |   | (1,019.7 | )      |    |    |
| 11) Increase  carrying values of assets of Gurwitch Products, L.L.C and Kate Spade LLC |   | 90.4     |   |    |    |
| Deemed dividend to  management shareholders                                            |   | 69.2     |   | 1,949.8 |    |
| Net assets acquired at  fair value                                                     |   |     |   | 3,588.0 |    |
| Goodwill at Acquisition date                                                           |   |     |   | $       | 1,605.1 |   |
|                                                                                        |        |          |        |         |         |  |  |

 

***Pro Forma Financial Information.*** The following unaudited pro forma results ofoperations assume that the Transactions occurred on August 1, 2004. Thefollowing unaudited pro forma results reflect Gurwitch Products, L.L.C. andKate Spade LLC as discontinued operations and do not give effect to the sale ofour credit card receivables, which was completed on July 7, 2005, or thedisposition of Chef’s Catalog, which was completed on November 8, 2004. Thisunaudited pro forma information should not be relied upon as necessarily beingindicative of the historical results that would have been obtained if theTransactions had actually occurred on that date, nor the results that may beobtained in the future.

|            | ** ** | **Fiscal years ended** | ** ** |
|------------|------------|----------------------------------|------------|
| ** ** | ** ** | **July 29,  2006**          | ** ** | **July 30,  2005** | ** ** |
|       |       |                             |       |   |   |
| Revenues   |       | $                                | 4,030,110  |   | $ | 3,695,074 |   |
| Net income |       | $                                | 44,692     |   | $ | 35,517 |   |

 

Pro forma adjustments for fiscal year 2006 consistprimarily of adjustments for the nine-week Predecessor period prior to theAcquisition for 1) depreciation and amortization charges of $13.4 million and2) interest expense of $44.4 million offset by 3) the reversal of thehistorical non-cash charges of $38.1 million to cost of goods sold recordedsubsequent to the Acquisition related to the step-up in the carrying value ofour inventories as of the Acquisition date.

Pro forma adjustments for fiscal year 2005 consistprimarily of 1) non-cash charges of $38.1 million to cost of goods sold relatedto the step-up in the carrying value of our inventories as of the Acquisitiondate, 2) depreciation and amortization charges aggregating $77.5 million and 3)interest expense of $225.0 million.

F-21

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**NOTE 4. DISCONTINUEDOPERATIONS**

***Gurwitch Products, L.L.C.*** On July 27, 2006, we sold our majorityinterest in Gurwitch Products, L.L.C. to Alticor Inc., for pretax net cashproceeds of approximately $40.8 million (Gurwitch Disposition). GurwitchProducts, L.L.C. designs and markets the Laura Mercier cosmetics line and hadrevenues of approximately $59.0 million (after intercompany eliminations) infiscal year 2006.

***Kate Spade LLC.***In April 2005, the minority investor inKate Spade LLC exercised the put option with respect to the sale of the fullamount of its 44% stake in such company to NMG. In October 2006, we enteredinto an agreement to settle the put option whereby we purchased the interestheld by the minority investor for approximately $59.4 million.

In November 2006,we entered into a definitive agreement to sell 100% of the ownership interestsin Kate Spade LLC to Liz Claiborne, Inc. (consisting of both our original 56%interest and the 44% minority interest subsequently purchased by NMG) forpretax net cash proceeds of approximately $121.5 million. Both the purchase of the minority interest in KateSpade LLC and the sale of Kate Spade LLC to Liz Claiborne, Inc. wereconsummated in December 2006.

Kate Spade LLCdesigns and markets high-end accessories and had revenues of approximately$75.5 million (after intercompany eliminations) in fiscal year 2006.

The Company’s consolidated financial statements, accompanying notes andother information provided in this Annual Report on Form 10-K reflect GurwitchProducts, L.L.C. and Kate Spade LLC as discontinued operations for all periodspresented.

***Results of Discontinued Operations.*** Summarized financial information with respect tothe results of operations of Kate Spade LLC and Gurwitch Products L.L.C. is asfollows:

 
| ** **                                                        | ** ** | **(Successor)**                             | ** ** | ** **                                         | ** ** | **(Predecessor)** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                           | ** ** | **Fiscal  year  ended  July 28  2007** | ** ** | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** | **Fiscal  year  ended  July 30,  2005** | ** ** |
|                                                              |       |                                        |       |                                               |       |              |       |   |   |   |   |
| Revenues                                                          |       | $                                           | 29,612     |                                               | $          | 115,225           |       |   |   | $ | 19,277 |   | $ | 126,850 |   |
|                                                              |       |                                        |       |                                               |       |              |       |   |   |   |   |
| Earnings (loss)  from discontinued operations before income taxes |       | $                                           | 3,494      |                                               | $          | (1,497            | )          |   |   | $ | (1,412 | ) | $ | 10,134 |   |
| Income taxes                                                      |       | 1,967                                       |       | 12,496                                             |       |              |       | (619 | ) | 5,114 |   |
| Net earnings  (loss) from discontinued operations                 |       | 1,527                                       |       | (13,993                                            | )          |              |       | (793 | ) | 5,020 |   |
|                                                              |       |                                        |       |                                               |       |              |       |   |   |   |   |
| Loss on  disposition before income taxes                          |       | (13,398                                     | )          | —                                             |       |              |       | — |   | — |   |
| Income taxes                                                      |       | (10,900                                     | )          | —                                             |       |              |       | — |   | — |   |
| Net loss on  disposition                                          |       | (24,298                                     | )          | —                                             |       |              |       | — |   | — |   |
|                                                              |       |                                        |       |                                               |       |              |       |   |   |   |   |
| (Loss) earnings from  discontinued operations, net of taxes       |       | $                                           | (22,771    | )                                                  | $          | (13,993           | )          |   |   | $ | (793 | ) | $ | 5,020 |   |

 

In the first quarter of fiscal year 2007, we impaired the intangibleassets of Kate Spade LLC by $12.5 million in order to state the net assets ofKate Spade LLC at their estimated net realizable value to NMG.

F-22

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**NOTE 5. TRANSACTIONSWITH SPONSORS**

In connection with the Transactions, we entered into amanagement services agreement with affiliates of the Sponsors pursuant to whichaffiliates of one of the Sponsors received on the closing date a transactionfee of $25 million in cash. Affiliates of the other Sponsor waived anycash transaction fee in connection with the Transactions.

In addition, pursuant to such agreement, and in exchangefor on-going consulting and management advisory services that will be providedto us by the Sponsors and their affiliates, affiliates of the Sponsors willreceive 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 will also receivereimbursement for out-of-pocket expenses incurred by them or their affiliatesin connection with services provided pursuant to the agreement. Thesemanagement fees are payable quarterly in arrears. During fiscal year 2007 andthe forty-three weeks ended July 29, 2006, we recorded management fees of$10.0 million and $8.7 million, respectively, which are included inselling, general and administrative expenses in the consolidated statements ofearnings.

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

**NOTE 6. CREDITCARD PROGRAM**

***Credit Card Sale.*** On July 7, 2005, HSBC Bank Nevada, NationalAssociation (HSBC) purchased our approximately three million private labelNeiman Marcus and Bergdorf Goodman credit card accounts and related assets, aswell as the outstanding balances associated with such accounts (Credit CardSale). The total purchase price was approximately $647 million, consistingof $534 million in net cash proceeds and the assumption of approximately$113 million of our outstanding debt under our previous revolving creditcard securitization facility (Credit Card Facility). We recognized a gain of$6.2 million in connection with the sale of our credit card portfolio toHSBC in the fourth quarter of fiscal year 2005.

As a part of the Credit Card Sale, we entered into along-term marketing and servicing alliance with HSBC that expires in June 2010.Under the terms of this alliance, HSBC offers credit card and non-card paymentplans and bears all credit risk with respect to sales transacted on the cardsbearing our brands. We receive ongoing payments from HSBC related to creditcard sales and compensation for marketing and servicing activities (HSBCProgram Income). In addition, we continue to handle certain key customerservice functions. In tandem with HSBC, we have initiated various changes inour credit card program to alter the credit terms available to our cardholdersand to enhance the earnings of the portfolio. These changes have increased thelevel of HSBC Program Income earned by the Company. In the future, the HSBCProgram Income may be either decreased based upon the level of future serviceswe provide to HSBC or increased based upon other changes to our historicalcredit card program related to, among other things, the interest rates appliedto unpaid balances and the assessment of late fees.

***Prior to the Credit Card Sale.*** Pursuant to a revolving credit cardsecuritization program that began in September 2000 (Credit Card Facility), wesecuritized our credit card receivables in a series of transactions involvingthe transfer of the receivables to a wholly-owned subsidiary and the sale ofthe receivables to a special-purpose entity. As a result of these transactions,we borrowed $225.0 million from third-party investors, which borrowings werecollateralized by undivided interests in our credit card portfolio.

During the term of the Credit Card Facility, we recordedthe finance charge income generated by our credit card operations, net ofcredit losses as finance charge income. In addition, we incurred interest onthe $225.0 million principal amount of the outstanding borrowings pursuant tothe Credit Card Facility at a contractually-defined rate of one month LIBORplus 0.27% annually.

Beginning in April 2005, the $225.0 millionprincipal balance of the outstanding borrowings pursuant to the Credit CardFacility were payable in six monthly installments of $37.5 million. Priorto the Credit Card Sale, we had repaid $112.5 million of the principalbalance and had placed $40.7 million on deposit to fund future repaymentobligations. In connection with the Credit Card Sale, HSBC assumed ouroutstanding obligations related to the Credit Card Facility.

F-23

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A summary of the income earned in connection with ourproprietary credit card program is as follows:

|                         | ** ** | **(Successor)**                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)** | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
| ** **              | ** ** | ** **                                       | ** ** | ** **                                             | ** ** |              |       | ** ** | ** ** | ** ** | ** ** |
| Income:                 |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| HSBC Program Income     |       | $                                                | 65,723     |                                                   | $          | 49,353            |       |   |   | $ | 7,818 |   | $ | 2,157 |   |
| Finance charge income   |       | —                                           |       | —                                                 |       |              |       | — |   | 84,143 |   |
| Expenses:               |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Bad debt, net           |       | —                                           |       | —                                                 |       |              |       | — |   | (14,656 | ) |
|                    |       | $                                                | 65,723     |                                                   | $          | 49,353            |       |   |   | $ | 7,818 |   | $ | 71,644 |   |

 

**NOTE 7. GOODWILLAND INTANGIBLE ASSETS**

The significant components of our intangible assets and goodwill, by ouroperating segments, are as follows:

| (in thousands)                      | ** **   | **Customer  lists** | ** **   | **Favorable  lease  commitments** | ** **   | **Tradenames  (indefinite  lives)** | ** **   | **Goodwill** | ** **   |
|------------------------------------------|--------------|---------------------|--------------|-----------------------------------|--------------|-------------------------------------|--------------|--------------|--------------|
| ** **                               | ** **   | ** **          | ** **   | ** **                        | ** **   | ** **                          | ** **   | ** **   | ** **   |
| **Specialty  Retail**                    | *** *** | *** ***        | *** *** | *** ***                      | *** *** | *** ***                        | *** *** | *** *** | *** *** |
| Recorded in  connection with Acquisition |         | $                   | 490,314      |                              | $            | 479,980                             |         | $            | 1,406,030    |   | $ | 1,300,253 |   |
| Amortization                             |         | (32,641             | )            | (14,783                           | )            |                                |         |         |         |
| Balance at July  29, 2006                |         | 457,673             |         | 465,197                           |         | 1,406,030                           |         | 1,300,253    |         |
| Amortization                             |         | (39,615             | )            | (17,878                           | )            |                                |         |         |         |
| Balance at July  28, 2007                |         | $                   | 418,058      |                              | $            | 447,319                             |         | $            | 1,406,030    |   | $ | 1,300,253 |   |
|                                     |         |                |         |                              |         |                                |         |         |         |
| **Direct  Marketing**                    | *** *** | *** ***        | *** *** | *** ***                      | *** *** | *** ***                        | *** *** | *** *** | *** *** |
| Recorded in  connection with Acquisition |         | $                   | 86,174       |                              | $            | —                              |         | $            | 215,758      |   | $ | 304,887 |   |
| Amortization                             |         | (12,215             | )            | —                            |         |                                |         |         |         |
| Balance at July  29, 2006                |         | 73,959              |         | —                            |         | 215,758                             |         | 304,887      |         |
| Amortization                             |         | (14,772             | )            | —                            |         |                                |         |         |         |
| Writedown of  Horchow tradename          |         | —              |         | —                            |         | (11,473                             | )            | —       |         |
| Balance at July  28, 2007                |         | $                   | 59,187       |                              | $            | —                              |         | $            | 204,285      |   | $ | 304,887 |   |
|                                     |         |                |         |                              |         |                                |         |         |         |
| **Total at July 28, 2007**               |         | $                   | 477,245      |                              | $            | 447,319                             |         | $            | 1,610,315    |   | $ | 1,605,140 |   |

 

In the fourthquarter of fiscal year 2007, we recorded a $11.5million pretax impairment charge related to the writedown to fair value in thenet carrying value of the Horchow tradename based upon lower anticipated futurerevenues associated with the brand.

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**NOTE 8.  ACCRUEDLIABILITIES**

The significant components ofaccrued liabilities are as follows:

|                                           | ** ** | **(Successor)**         | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** |
|                                      |       |                    |       |   |   |
| Accrued salaries and  related liabilities |       | $                       | 79,021     |   | $ | 65,803 |   |
| Amounts due customers                     |       | 51,750                  |       | 49,968 |   |
| Self-insurance  reserves                  |       | 44,544                  |       | 45,505 |   |
| Sales returns reserves                    |       | 48,819                  |       | 43,742 |   |
| Interest payable                          |       | 35,146                  |       | 40,337 |   |
| Income taxes payable                      |       | 30,052                  |       | 32,745 |   |
| Sales tax                                 |       | 23,429                  |       | 21,556 |   |
| Loyalty program  liability                |       | 20,477                  |       | 18,127 |   |
| Other                                     |       | 69,924                  |       | 60,185 |   |
| Total                                     |       | $                       | 403,162    |   | $ | 377,968 |   |

 

**NOTE 9.  LONG-TERM DEBT**

The significant components of ourlong-term debt are as follows:

|                                    | ** ** | ** **             | ** ** | **(Successor)**         | ** ** |
|------------------------------------|------------|------------------------|------------|-------------------------|------------|
| **(in thousands)**            | ** ** | **Interest Rate** | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** |
|                               |       |                   |       |                    |       |   |   |
| Senior Secured Term  Loan Facility |       | variable               |       | $                       | 1,625,000  |   | $ | 1,875,000 |   |
| 2028 Debentures                    |       | 7.125                  | %          | 120,906                 |       | 120,711 |   |
| Senior Notes                       |       | 9.0%/9.75%             |       | 700,000                 |       | 700,000 |   |
| Senior Subordinated  Notes         |       | 10.375                 | %          | 500,000                 |       | 500,000 |   |
| Long-term debt                     |       |                   |       | $                       | 2,945,906  |   | $ | 3,195,711 |   |

 

***Senior Secured Asset-Based RevolvingCredit Facility.***  On October 6, 2005, in connection withthe Transactions, NMG entered into a credit agreement and related security andother agreements for a senior secured Asset-Based Revolving CreditFacility with Deutsche Bank Trust Company Americas as administrative agent andcollateral agent. The Asset-Based Revolving Credit Facility providesfinancing of up to $600.0 million, subject to a borrowing base equal to atany time the lesser of 80% of eligible inventory (valued at the lower of costor market value) and 85% of net orderly liquidation value of the eligibleinventory, less certain reserves. The Asset-Based Revolving CreditFacility includes borrowing capacity available for letters of credit and forborrowings on same-day notice. At the closing of the Transactions, NMG utilized$150.0 million of the Asset-Based Revolving Credit Facility forloans and approximately $16.5 million for letters of credit. In the secondquarter of fiscal year 2006, NMG repaid all loans under the Asset-BasedRevolving Credit Facility.

As of July 28, 2007, NMG had $573.1 million ofunused borrowing availability under the Asset-Based Revolving CreditFacility based on a borrowing base of over $600.0 million and after givingeffect to $26.9 million used for letters of credit.

The Asset-Based Revolving Credit Facility providesthat NMG has the right at any time to request up to $200.0 million ofadditional commitments, but the lenders are under no obligation to provide anysuch additional commitments, and any increase in commitments will be subject tocustomary conditions precedent. If NMG were to request any such additionalcommitments and the existing lenders or new lenders were to agree to providesuch commitments, the Asset-Based Revolving Credit Facility size could beincreased to up to $800.0 million, but NMG’s ability to borrow would stillbe limited by the amount of the borrowing base.

Borrowings under the Asset-Based Revolving CreditFacility 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) theprime rate of Deutsche Bank Trust Company Americas and (2) the federalfunds effective rate plus  1¤2 of 1% or(b) a LIBOR rate, subject to certain adjustments, in each case 

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plus an applicable margin. The initial applicable margin is 0% withrespect to base rate borrowings and 1.75% with respect to LIBOR borrowings. Theapplicable margin is subject to adjustment based on the historical availabilityunder the Asset-Based Revolving Credit Facility. In addition, NMG isrequired to pay a commitment fee of 0.375% per annum in respect of theunutilized commitments. If the average revolving loan utilization is 50% ormore 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 agencyfees.

If at any time the aggregate amount of outstanding loans,unreimbursed letter of credit drawings and undrawn letters of credit under theAsset-Based Revolving Credit Facility exceeds the lesser of (i) thecommitment amount and (ii) the borrowing base, NMG will be required torepay outstanding loans or cash collateralize letters of credit in an aggregateamount equal to such excess, with no reduction of the commitment amount. If theamount available under the Asset-Based Revolving Credit Facility is lessthan $60 million or an event of default has occurred, NMG will be requiredto repay outstanding loans and cash collateralize letters of credit with thecash NMG would then be required to deposit daily in a collection accountmaintained with the agent under the Asset-Based Revolving CreditFacility. NMG may voluntarily reduce the unutilized portion of the commitmentamount and repay outstanding loans at any time without premium or penalty otherthan customary “breakage” costs with respect to LIBOR loans. There is noscheduled amortization under the Asset-Based Revolving Credit Facility;the principal amount of the loans outstanding is due and payable in full onOctober 6, 2010.

All obligations under the Asset-Based RevolvingCredit Facility are guaranteed by the Company and certain of NMG’s existing andfuture domestic subsidiaries. As of July 28, 2007, the liabilities of NMG’snon-guarantor subsidiaries totaled approximately $4.3 million, or 0.1% ofconsolidated liabilities, and the assets of NMG’s non-guarantor subsidiariesaggregated approximately $6.5 million, or 0.1% of consolidated totalassets. All obligations under NMG’s Asset-Based Revolving CreditFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiaries that have guaranteed the Asset-BasedRevolving Credit Facility (subsidiary guarantors), including:

·                  afirst-priority security interest in personal property consisting ofinventory and related accounts, cash, deposit accounts, all payments receivedby NMG or the subsidiary guarantors from credit card clearinghouses and processorsor otherwise in respect of all credit card charges for sales of inventory byNMG and the subsidiary guarantors, certain related assets and proceeds of theforegoing; and

·                  asecond-priority pledge of 100% of NMG’s capital stock and certain of thecapital stock held by NMG, the Company or any subsidiary guarantor (whichpledge, in the case of any foreign subsidiary is limited to 100% of thenon-voting stock (if any) and 65% of the voting stock of such foreignsubsidiary); and

·                  asecond-priority security interest in, and mortgages on, substantially allother tangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s owned and leased realproperty (which currently consists of approximately half of NMG’s full-lineretail stores) and equipment.

Capital stock and other securities of a subsidiary of NMGthat are owned by NMG or any subsidiary guarantor will not constitutecollateral under NMG’s Asset-Based Revolving Credit Facility to theextent that such securities cannot secure NMG’s 2028 Debentures or othersecured public debt obligations without requiring the preparation and filing ofseparate financial statements of such subsidiary in accordance with applicableSecurities and Exchange Commission’s rules. As a result, the collateral underNMG’s Asset-Based Revolving Credit Facility will include shares ofcapital stock or other securities of subsidiaries of NMG or any subsidiaryguarantor only to the extent that the applicable value of such securities (on asubsidiary-by-subsidiary basis) is less than 20% of the aggregate principalamount of the 2028 Debentures or other secured public debt obligations of NMG.

The Asset-Based Revolving Credit Facility containsa number of covenants that, among other things and subject to certainsignificant exceptions, restrict its ability and the ability of itssubsidiaries to:

·                  incuradditional indebtedness;

·                  paydividends on NMG’s capital stock or redeem, repurchase or retire NMG’s capitalstock or indebtedness;

·                  makeinvestments, loans, advances and acquisitions;

·                  createrestrictions on the payment of dividends or other amounts to NMG from itssubsidiaries that are not guarantors;

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·                  engagein transactions with NMG’s affiliates;

·                  sellassets, including capital stock of NMG’s subsidiaries;

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

The covenants limiting dividends and other restrictedpayments; investments, loans, advances and acquisitions; and prepayments orredemptions of other indebtedness, each permit the restricted actions in anunlimited amount, subject to the satisfaction of certain payment conditions,principally that NMG must have at least $75.0 million of pro forma excessavailability under the Asset-Based Revolving Credit Facility and that NMGmust be in pro forma compliance with the fixed charge coverage ratio describedbelow.

Although the credit agreement governing the Asset-BasedRevolving Credit Facility does not require NMG to comply with any financialratio maintenance covenants, if less than $60.0 million were available tobe borrowed under the Asset-Based Revolving Credit Facility at any time,NMG would not be permitted to borrow any additional amounts unless its proforma ratio of consolidated EBITDA to consolidated Fixed Charges (as such termsare defined in the credit agreement) were at least 1.1 to 1.0. The creditagreement also contains customary affirmative covenants and events of default.

***Senior Secured Term Loan Facility.***  On October 6,2005, in connection with the Transactions, NMG entered into a credit agreementand related security and other agreements for a $1,975.0 million SeniorSecured Term Loan Facility with Credit Suisse as administrative agent andcollateral agent. The full amount of the Senior Secured Term Loan Facility wasborrowed on October 6, 2005. In the second quarter of fiscal year 2006,NMG voluntarily repaid $100.0 million principal amount of the loans underthe Senior Secured Term Loan Facility and in fiscal year 2007, NMG voluntarilyrepaid $250.0 million principal amount.

At July 28, 2007,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and(2) the federal funds effective rate plus  1¤2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. At July 28, 2007,the applicable margin with respect to base rate borrowings was 0.75% and theapplicable margin with respect to LIBOR borrowings was 1.75%. The interest rateon the outstanding borrowings pursuant to the Senior Secured Term Loan Facilitywas 7.36% at July 28, 2007.

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

NMG may voluntarily prepay outstanding loans under theSenior Secured Term Loan Facility at any time without premium or penalty otherthan customary “breakage” costs with respect to LIBOR loans. There is noscheduled amortization under the Senior Secured Term Loan Facility. Theprincipal amount of the loans outstanding is due and payable in full onApril 6, 2013.

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

·                  afirst-priority pledge of 100% of NMG’s capital stock and certain of thecapital stock held by NMG, the Company or any subsidiary guarantor (whichpledge, in the case of any foreign subsidiary is limited to 100% of thenon-voting stock (if any) and 65% of the voting stock of such foreignsubsidiary); and

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·                  afirst-priority security interest in, and mortgages on, substantially allother tangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s owned and leased realproperty (which currently consists of approximately half of NMG’s full-lineretail stores) and equipment, but excluding, among other things, the collateraldescribed in the following bullet point; and

·                  asecond-priority security interest in personal property consisting ofinventory and related accounts, cash, deposit accounts, all payments receivedby NMG or the subsidiary guarantors from credit card clearinghouses andprocessors or otherwise in respect of all credit card charges for sales ofinventory by NMG and the subsidiary guarantors, certain related assets andproceeds of the foregoing.

Capital stock and other securities of a subsidiary of NMGthat are owned by NMG or any subsidiary guarantor will not constitutecollateral under NMG’s Senior Secured Term Loan Facility to the extent thatsuch securities cannot secure the 2028 Debentures or other secured public debtobligations without requiring the preparation and filing of separate financialstatements of such subsidiary in accordance with applicable SEC rules. As aresult, the collateral under NMG’s Senior Secured Term Loan Facility willinclude shares of capital stock or other securities of subsidiaries of NMG orany subsidiary guarantor only to the extent that the applicable value of suchsecurities (on a subsidiary-by-subsidiary basis) is less than 20% of theaggregate principal amount of the 2028 Debentures or other secured public debtobligations of NMG.

The credit agreement governing the Senior Secured TermLoan Facility contains a number of negative covenants that are substantiallysimilar to those governing the Senior Notes and additional covenants related tothe security arrangements for the Senior Secured Term Loan Facility. The creditagreement also contains customary affirmative covenants and events of default.

***2028 Debentures.***  InMay 1998, NMG issued $125.0 million aggregate principal amount of its7.125% 2028 Debentures. In connection with the Transactions, NMG equally andratably secured the 2028 Debentures by a first lien security interest oncertain collateral subject to liens granted under NMG’s Senior Secured CreditFacilities constituting (a) (i) 100% of the capital stock of certain ofNMG’s existing and future domestic subsidiaries, and (ii) 100% of thenon-voting stock and 65% of the voting stock of certain of NMG’s existing andfuture foreign subsidiaries and (b) certain of NMG’s principal propertiesthat include approximately half of NMG’s full-line stores, in each case, to theextent required by the terms of the indenture governing the 2028 Debentures.The 2028 Debentures contain covenants that restrict NMG’s ability to createliens and enter into sale and lease back transactions. The collateral securingthe 2028 Debentures will be released upon the release of liens on suchcollateral under NMG’s Senior Secured Credit Facilities and any other debt(other than the 2028 Debentures) secured by such collateral. Capital stock andother securities of a subsidiary of NMG that are owned by NMG or any subsidiarywill not constitute collateral under the 2028 Debentures to the extent suchproperty does not constitute collateral under NMG’s Senior Secured CreditFacilities as described above. The 2028 Debentures are guaranteed on anunsecured, senior basis by the Company.

Thefair value of 2028 Debentures at July 28, 2007 was approximately $130.0million.

***Senior Notes.**** *On October 6, 2005,Newton Acquisition Merger Sub, Inc. issued $700.0 million aggregateoriginal principal amount of 9.0% / 9.75% Senior Notes under a senior indenture(Senior Indenture) with Wells Fargo Bank, National Association, as trustee. Atthe closing of the Transactions, as the surviving corporation in theAcquisition, NMG assumed all the obligations of Newton Acquisition MergerSub, Inc. under the Senior Indenture. The Senior Notes mature onOctober 15, 2015.

For any interest payment period through October 15,2010, NMG may, at its option, elect to pay interest on the Senior Notesentirely in cash (Cash Interest) or entirely by increasing the principal amountof the outstanding Senior Notes or by issuing additional Senior Notes (PIKInterest). Cash Interest on the Senior Notes accrues at the rate of 9% perannum. 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, 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 Notesis 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 unconditionallyguaranteed, on a joint and several unsecured, senior basis, by each of NMG’swholly-owned domestic subsidiaries that guarantee NMG’s obligations underits Senior Secured Credit Facilities and by the Company. The Senior Notes andthe guarantees thereof are NMG’s and the guarantors’ unsecured, seniorobligations and rank (i) equal in the right of payment with all of NMG’sand the guarantors’ existing and future senior indebtedness, including anyborrowings under NMG’s Senior Secured Credit Facilities and the guaranteesthereof and NMG’s 2028 Debentures; and (ii) senior to all of NMG’s and itsguarantors’ existing and future subordinated indebtedness, including the SeniorSubordinated Notes due 2015 and the guarantees thereof. The Senior Notes alsoare effectively junior in priority to NMG’s and its guarantors’ 

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obligations under all secured indebtedness, including NMG’s SeniorSecured Credit Facilities, the 2028 Debentures, and any other securedobligations of NMG, in each case, to the extent of the value of the assetssecuring such obligations. In addition, the Senior Notes are structurally subordinatedto all existing and future liabilities, including trade payables, of NMG’ssubsidiaries that are not providing guarantees.

NMG is not required to make any mandatory redemption orsinking fund payments with respect to the Senior Notes, but under certaincircumstances, NMG may be required to offer to purchase Senior Notes asdescribed below. NMG may from time to time acquire Senior Notes by means otherthan a redemption, whether by tender offer, in open market purchases, throughnegotiated transactions or otherwise, in accordance with applicable securitieslaws.

Except as described below, the Senior Notes are notredeemable at NMG’s option prior to October 15, 2010. From and afterOctober 15, 2010, NMG may redeem the Senior Notes, in whole or in part, ata redemption price equal to 104.5% of principal amount, declining annually to100% of the principal amount on October 15, 2013, plus accrued and unpaidinterest, and Additional Interest (as defined in the Senior Indenture), if any,thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option,subject to certain conditions, redeem up to 35% of the original aggregateprincipal amount of Senior Notes at a redemption price equal to 109% of theaggregate principal amount thereof, plus accrued and unpaid interest, andAdditional Interest, if any, thereon to the redemption date, with the net cashproceeds of one or more equity offerings of NMG or any direct or indirectparent of NMG to the extent such net proceeds are contributed to NMG. At anytime prior to October 15, 2010, NMG also may redeem all or a part of theSenior Notes at a redemption price equal to 100% of the principal amount ofSenior Notes redeemed plus an applicable premium, as provided in the SeniorIndenture, and accrued and unpaid interest and Additional Interest, if any, tothe redemption date.

Upon the occurrence of a change of control (as defined inthe Senior Indenture), each holder of the Senior Notes has the right to requireNMG to repurchase some or all of such holder’s Senior Notes at a price in cashequal to 101% of the aggregate principal amount thereof plus accrued and unpaidinterest, and Additional Interest, if any, to the date of purchase.

The indenture governing the Senior Notes containscovenants that limit NMG’s ability and certain of its subsidiaries’ ability to:

·                  incuradditional indebtedness;

·                  paydividends on NMG’s capital stock or redeem, repurchase or retire NMG’s capitalstock or subordinated indebtedness;

·                  makeinvestments;

·                  createrestrictions on the payment of dividends or other amounts to NMG from itsrestricted subsidiaries that are not guarantors of the notes;

·                  engagein transactions with NMG’s affiliates;

·                  sellassets, including capital stock of NMG’s subsidiaries;

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

The Senior Indenture also provides for events of default,which, if any of them occurs, would permit or require the principal, premium,if any, interest and any other monetary obligations on all outstanding SeniorNotes to be due and payable immediately.

The fair value ofNMG’s Senior Notes at July 28, 2007 was approximately $729.8 million.

***Senior Subordinated Notes.**** *On October 6, 2005,Newton Acquisition Merger Sub, Inc. issued $500.0 million aggregateprincipal amount of 10.375% Senior Subordinated Notes under a seniorsubordinated indenture (Senior Subordinated Indenture) with Wells Fargo Bank,National Association, as trustee. At the closing of the Transactions, as thesurviving 

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corporation in the Acquisition, NMG assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior SubordinatedIndenture. The Senior Subordinated Notes mature on October 15, 2015.Interest on the Senior Subordinated Notes is payable in cash semi-annually inarrears on each April 15 and October 15, commencing April 15,2006.

The Senior Subordinated Notes are fully andunconditionally guaranteed, on a joint and several unsecured, seniorsubordinated basis, by each of NMG’s wholly-owned domestic subsidiariesthat guarantee NMG’s obligations under its Senior Secured Credit Facilities andby the Company. The Senior Subordinated Notes and the guarantees thereof areNMG’s and the guarantors’ unsecured, senior subordinated obligations and rank(i) junior to all of NMG’s and the guarantors’ existing and future seniorindebtedness, including the Senior Notes and any borrowings under NMG’s SeniorSecured Credit Facilities, and the guarantees thereof and NMG’s 2028Debentures; (ii) equally with any of NMG’s and the guarantors’ futuresenior subordinated indebtedness; and (iii) senior to any of NMG’s and theguarantors’ future subordinated indebtedness. In addition, the SeniorSubordinated Notes are structurally subordinated to all existing and futureliabilities, including trade payables, of NMG’s subsidiaries that are notproviding guarantees.

NMG is not required to make any mandatory redemption orsinking fund payments with respect to the Senior Subordinated Notes, but, undercertain circumstances, NMG may be required to offer to purchase SeniorSubordinated Notes as described below. The Company may from time to timeacquire Senior Subordinated Notes by means other than a redemption, whether bytender offer, in open market purchases, through negotiated transactions orotherwise, in accordance with applicable securities laws.

Except as described below, the Senior Subordinated Notesare not redeemable at NMG’s option prior to October 15, 2010. From andafter October 15, 2010, NMG may redeem the Senior Subordinated Notes, inwhole or in part, at a redemption price equal to 105.188% of principal amount,declining annually to 100% of principal amount on October 15, 2013, plusaccrued and unpaid interest, and Additional Interest (as defined in the SeniorSubordinated Indenture), if any, thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option,subject to certain conditions, redeem up to 35% of the original aggregateprincipal amount of Senior Subordinated Notes at a redemption price equal to110.375% of the aggregate principal amount thereof, plus accrued and unpaidinterest, and Additional Interest, if any, thereon to the redemption date, withthe net cash proceeds of one or more equity offerings of NMG or any direct or indirectparent of NMG to the extent such net proceeds are contributed to NMG.

At any time prior to October 15, 2010, NMG also mayredeem all or a part of the Senior Subordinated Notes at a redemption priceequal to 100% of the principal amount of Senior Subordinated Notes redeemedplus an applicable premium, as provided in the Senior Subordinated Indenture,and accrued and unpaid interest and Additional Interest, if any, to theredemption date.

Upon the occurrence of a change of control (as defined inthe Senior Subordinated Indenture), NMG will make an offer to purchase all ofthe Senior Subordinated Notes at a price in cash equal to 101% of the aggregateprincipal amount thereof plus accrued and unpaid interest, and AdditionalInterest, if any, to the date of purchase.

The indenture governing the Senior Subordinated Notescontains covenants substantially similar to those applicable to NMG’s SeniorNotes described above. The Senior Subordinated Indenture also provides forevents of default, which, if any of them occurs, would permit or require theprincipal, premium, if any, interest and any other monetary obligations on alloutstanding Senior Notes to be due and payable immediately, subject to certainexceptions.

The fair value ofNMG’s Senior Subordinated Notes at July 28, 2007 was approximately $528.8million.

***Redemption of 2008 Notes.***  InMay 1998, NMG issued $125.0 million aggregate principal amount of its2008 Notes. Upon closing of the Transactions, NMG called its 2008 Notes forredemption pursuant to their terms. On November 7, 2005, NMG used$134.7 million of reserved cash to redeem its 2008 Notes, which included acall premium of $6.2 million plus accrued interest of $3.5 millionthrough the redemption date.

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***Maturities of Long-TermDebt.***  At July 28, 2007, annual maturities oflong-term debt during the next five fiscal years and thereafter are as follows(in millions):
| 2008       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2009       |   | —  |   |
| 2010       |   | —  |   |
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| Thereafter |   | 2,945.9 |   |

 

The above table does not reflect future excess cash flowprepayments, if any, that may be required under the Senior Secured Term LoanFacility.

***Interest Rate Swaps.***  TheCompany uses derivative financial instruments to help manage its interest raterisk. Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit its exposure to interest rate increases relatedto a portion of its floating rate indebtedness. The interest rate swapagreements terminate after five years. At July 28, 2007, the fair value of NMG’s interest rate swap agreementswas a gain of approximately $8.2 million, which amount is included inother assets.

As of the effective date, NMG designated the interest rate swaps as cashflow hedges. As a result, changes in the fair value of NMG’s swaps are recordedas a component of other comprehensive income. At July 28, 2007, we have$3.7 million of unrecognized gains, net of tax, on our interest rate swapagreements included in other comprehensive income.

As a result of the swap agreements, NMG’s effective fixedinterest rates as to the $1,000.0 million in floating rate indebtednesswill currently range from 6.482% to 6.733% per quarter through 2010 and resultin an average fixed rate of 6.577%.

***Interest expense.***  Thesignificant components of interest expense are as follows:
| ** **                             | ** ** | **(Successor)**                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|                                   |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Asset-Based  Revolving Credit Facility |       | $                                                | —     |                                                   | $          | 1,332             |       |   |   | $ | — |   | $ | — |   |
| Senior Secured Term  Loan Facility     |       | 128,380                                          |       | 111,662                                                |       |              |       | — |   | — |   |
| 2028 Debentures                        |       | 8,915                                            |       | 7,266                                                  |       |              |       | 1,542 |   | 8,904 |   |
| Senior Notes                           |       | 63,000                                           |       | 51,421                                                 |       |              |       | — |   | — |   |
| Senior Subordinated  Notes             |       | 51,875                                           |       | 42,339                                                 |       |              |       | — |   | — |   |
| Credit Card Facility                   |       | —                                           |       | —                                                 |       |              |       | — |   | 5,526 |   |
| 2008 Notes                             |       | —                                           |       | 638                                                    |       |              |       | 1,439 |   | 8,308 |   |
| Amortization of debt  issue costs      |       | 14,141                                           |       | 11,728                                                 |       |              |       | 96 |   | 831 |   |
| Other                                  |       | 3,689                                            |       | 111                                                    |       |              |       | 205 |   | 598 |   |
| Total interest  expense                |       | 270,000                                          |       | 226,497                                                |       |              |       | 3,282 |   | 24,167 |   |
| Less:                                  |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Interest income                        |       | 7,370                                            |       | 5,386                                                  |       |              |       | 3,046 |   | 6,556 |   |
| Capitalized  interest                  |       | 2,825                                            |       | 3,446                                                  |       |              |       | 1,146 |   | 5,350 |   |
| Interest expense (income), net         |       | $                                                | 259,805    |                                                   | $          | 217,665           |       |   |   | $ | (910 | ) | $ | 12,261 |   |

 

 

F-31

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**NOTE 10. OTHER EXPENSE, NET**

***OtherIncome.*** In the first quarter of fiscal year 2007, wereceived consideration aggregating $4.2 million, or 0.1% of revenues, inconnection with the merger of Wedding Channel.com, in which we held a minorityinterest, and The Knot. We accounted for our investment in Wedding Channel.comunder the cost method. In prior years, we had previously reduced our carryingvalue of this investment to zero.

In the fourth quarter of fiscal year 2007, we recorded$6.0 million of other income for the breakage on gift cards we previously soldand issued.  The income was recognizedbased upon our analysis of the aging of these gift cards, our determinationthat the likelihood of future redemption is remote and our determination thatsuch balances are not subject to escheatment laws applicable to ouroperations.  Prior to the fourth quarterof fiscal year 2007, we had not recognized breakage on gift cards pending,among other things, our final determination of the applicable escheatment lawsapplicable to our operations.  We willevaluate gift card breakage in the future on an ongoing basis.  We do not believe gift card breakage willhave a material impact on our future operations.

***OtherExpense.***In the fourth quarter of fiscal year 2007, werecorded a $11.5 million pretax impairmentcharge related to the writedown to fair value in the net carrying value of theHorchow tradename based upon lower anticipated future revenues associated withthe brand.

**NOTE 11. COMMON SHAREHOLDERS’ EQUITY**

**Successor**

***Carryover Basis Adjustment for ManagementShareholders.***  Executive management participants heldcertain equity interests, including stock options, in the Predecessor prior tothe Transactions and continue to hold equity interests in the  Company, representing indirect equityinterests in the Successor after the Transactions.  In accordance with the provisions of EmergingIssues Task Force No. 88-16, “Basis in Leveraged Buyout Transactions,” thebasis of executive management’s indirect interests in the Successor after theTransactions is carried over at the basis of their interests in the Predecessorprior to the Transactions. The carryover basis of such interests less the netcash received by the management participants represents a deemed dividend of$69.2 million to the management participants and has been recognized as areduction to shareholders’ equity in connection with the Transactions.

***Successor Stock-Based CompensationAccounting.***  The Company has approved equity-basedmanagement arrangements which authorize equity awards to be granted to certainmanagement employees for up to 87,992.0 shares of the common stock of theCompany. Options generally vest over four to five years and expire 10 yearsfrom the date of grant.

A summary of the status of our stock option plan as ofJuly 28, 2007 and July 29, 2006 and changes during the fiscal periods ended onthese dates is as follows:
| ** **                          | ** ** | **July 28, 2007** | ** ** | **July 29, 2006**                | ** ** |
|-------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Shares**                  | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding at  beginning of year   |       | 81,716.3                    |       | $                                          | 1,416      |   | — |   | $ | — |   |
| Granted                             |       | 2,496.0                     |       | 1,942                                      |       | 81,716.3 |   | 1,416 |   |
| Exercised                           |       | (578.0                      | )          | 1,590                                      |       | — |   | — |   |
| Outstanding at  end of year         |       | 83,634.3                    |       | $                                          | 1,430      |   | 81,716.3 |   | $ | 1,416 |   |
| Options exercisable at  end of year |       | 29,764.1                    |       | $                                          | 1,233      |   | 7,283.3 |   | $ | 359 |   |

 

The exercise price of approximately 50% of such optionsescalate 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 theSponsors cause the sale of shares of the Company to an unaffiliated entity, theexercise price will cease to accrete at the time of the sale with respect to apro rata portion of the accreting options.

All grants of stock options have an exerciseprice equal to the fair market value of our common stock on the date ofgrant.  Because we are privately held andthere is no public market for our common stock subsequent to the Transactions,the fair market value of our common stock is determined by our CompensationCommittee periodically based upon a number of factors. In October 2006, avaluation of our common stock was performed to assist the CompensationCommittee in this 

F-32

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determination, and we expect to update thisvaluation on an annual basis. In addition, our Compensation Committee considerssuch factors as the Company’s actual and projected financial results, theprincipal amount of the Company’s indebtedness, the value of the Companyimmediately prior to the Transactions, and other factors it believes arematerial to the valuation process.

We recognized non-cash stock compensation expense of$5.9 million in fiscal year 2007 and $4.0 million for the forty-threeweeks ended July 29, 2006, which is included in selling, general and administrativeexpenses. At July 28, 2007, unearned non-cash stock-based compensationthat we expect to recognize as expense over the next 5 years aggregatesapproximately $18.8 million.

**Predecessor**

***Cashdividend program.***  In the second quarter of 2005, the PredecessorBoard of Directors increased the Predecessor quarterly cash dividend from $0.13per share to $0.15 per share.  In fiscalyear 2006, the Predecessor did not declare or pay any dividends.  In 2005, the Predecessor declared dividendsaggregating $28.4 million, of which dividends payable of $7.3 millionwere included in accrued liabilities in the accompanying consolidated balancesheet as of July 30, 2005 and were paid in August 2005.

***StockRepurchase Program.***  In prior years, the Predecessor Board ofDirectors authorized various stock repurchase programs and increases in thenumber of shares subject to repurchase. The Predecessor repurchased 58,504shares at an average price of $52.74 in fiscal year 2005.

***Common Stock IncentivePlans.***  The Predecessor had established common stockincentive plans allowing for the granting of 1) stock options,2) stock appreciation rights, 3) restricted stock and stock units(restricted stock awards) and 4) other stock-based awards to ouremployees. All outstanding Predecessor options and restricted shares as ofOctober 5, 2005 were accelerated in connection with the Transactions resultingin a $19.0 million non-cash charge for stock compensation.

In fiscal year 2005, thePredecessor made stock-based awards in the form of 1) restrictedstock awards for which there was no exercise price payable by the employee,2) purchased restricted stock awards for which the exercise price wasequal to 50% of the fair value of our common stock on the date of grant and 3) matchingrestricted stock awards pursuant to which restricted stock awards were grantedequal to qualifying stock purchases by the employees. In fiscal year 2005, thePredecessor restricted stock and purchased restricted stock awards aggregated261,998 shares at a weighted-average exercise price of $23.82 as of thegrant date.

Compensation cost for Predecessorrestricted stock and purchased restricted stock awards was recognized in anamount equal to the difference between the exercise price of the award and fairvalue at the date of grant. The Predecessor recorded such expense on astraight-line basis over the expected life of the award with the offsettingentry to additional paid-in capital. For performance accelerated restrictedstock, the expected life was determined based on the best estimate of thenumber of years from the grant date to the date at which it was probable thatthe performance targets would be met (four or five years, depending on thegrant). Compensation cost was calculated as if all instruments granted thatwere subject only to a service requirement would vest.  Compensation expense related to thePredecessor restricted stock grants was $8.5 million in the nine-weeksended October 1, 2005 and $5.0 million in fiscal year 2005.

Asummary of the status of the Predecessor common stock incentive plans asOctober 1, 2005 and July 30, 2005 and changes during the fiscal yearsended on those dates are presented in the following table:

|                                   | ** ** | **October 1, 2005** | ** ** | **July 30, 2005**             | ** ** |
|-----------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **Shares**                    | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of year |       | 3,050,855                     |       | $                                       | 38.12      |   | 3,009,155 |   | $ | 33.35 |   |
| Granted                           |       | —                        |       | —                                  |       | 569,161 |   | 56.89 |   |
| Exercised                         |       | (3,050,855                    | )          | 38.12                                   |       | (376,140 | ) | 28.38 |   |
| Canceled                          |       | —                        |       | —                                  |       | (151,321 | ) | 38.87 |   |
| Outstanding at  end of year       |       | —                        |       | $                                       | —     |   | 3,050,855 |   | $ | 38.12 |   |
| Exercisable at year end           |       | —                        |       | $                                       | —     |   | 717,890 |   | $ | 28.76 |   |

 

Predecessor options exercised inthe period ended October 1, 2005 were cashed out in connection with theTransaction, with the same economic effect as an exercise and sale for theTransaction consideration.

F-33

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**NOTE 12. INCOME TAXES**

The significant components ofincome tax expense are as follows:
| ** **              | ** ** | **(Successor)**                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)** | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|                    |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Current:                |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Federal                 |       | $                                                | 127,725    |                                                   | $          | 71,689            |       |   |   | $ | 31,002 |   | $ | 143,898 |   |
| State                   |       | 15,063                                           |       | 8,408                                                  |       |              |       | 2,522 |   | 13,093 |   |
| Foreign                 |       | 29                                               |       | 118                                                    |       |              |       | 20 |   | 307 |   |
|                    |       | 142,817                                          |       | 80,215                                                 |       |              |       | 33,544 |   | 157,298 |   |
| Deferred:               |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Federal                 |       | (53,763                                          | )          | (58,291                                                | )          |              |       | (6,501 | ) | (14,039 | ) |
| State                   |       | (6,759                                           | )          | (7,329                                                 | )          |              |       | (817 | ) | (1,886 | ) |
|                    |       | (60,522                                          | )          | (65,620                                                | )          |              |       | (7,318 | ) | (15,925 | ) |
| Income tax expense      |       | $                                                | 82,295     |                                                   | $          | 14,595            |       |   |   | $ | 26,226 |   | $ | 141,373 |   |

 

A reconciliation of income taxexpense to the amount calculated based on the federal and state statutory ratesis as follows:
| ** **                                                                             | ** ** | **(Successor)**                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                                                | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|                                                                                   |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Income tax  expense at statutory rate                                                  |       | $                                                | 75,954     |                                                   | $          | 14,366            |       |   |   | $ | 24,910 |   | $ | 134,812 |   |
| State income  taxes, net of federal income tax benefit                                 |       | 6,989                                            |       | 1,411                                                  |       |              |       | 2,177 |   | 13,809 |   |
| Tax expense (benefit)  related to tax settlements and other changes in tax liabilities |       | 1,925                                            |       | (113                                                   | )          |              |       | (222 | ) | (7,585 | ) |
| Impact of  non-taxable income                                                          |       | (2,422                                           | )          | (1,378                                                 | )          |              |       | (1,058 | ) | (2,121 | ) |
| Impact of  non-deductible expenses                                                     |       | 326                                              |       | 256                                                    |       |              |       | 607 |   | 2,633 |   |
| Other                                                                                  |       | (477                                             | )          | 53                                                     |       |              |       | (188 | ) | (175 | ) |
| Total                                                                                  |       | $                                                | 82,295     |                                                   | $          | 14,595            |       |   |   | $ | 26,226 |   | $ | 141,373 |   |

 

Our effective income tax rate was 37.9% for fiscalyear 2007.  Our effective income tax ratewas 35.6% for the forty-three weeks ended July 29, 2006 and 36.8% for the nineweeks ended October 1, 2005, resulting in a combined fiscal year 2006 rate of36.4%.  Our effective tax rate for fiscalyear 2007 was negatively impacted by increases in tax liabilities forsettlements with taxing authorities.  Our combined effective tax rate for fiscal year2006 was favorably impacted by a higher level of tax-exempt interest incomeearned.  Our effective income tax ratewas 36.7% for the fiscal year ended July 30, 2005 and was favorablyimpacted by tax-exempt interest income, offset by non-deductible transactioncosts.  In the fourth fiscal quarter offiscal year 2005, we recognized tax benefits aggregating $7.6 millionrelated to a favorable settlement associated with previous state tax filingsand reductions in previously recorded deferred tax liabilities. Excluding thesebenefits, our effective tax rate was 38.6% for fiscal year 2005.

We closed the Internal Revenue Service (IRS) examinationsof federal tax returns for fiscal years 2004 and 2003 during the first quarterof fiscal year 2007 and paid the related tax liability during the secondquarter of fiscal year 2007.   The IRS isnow examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofJuly 28, 2007 are sufficient to cover any potential assessments to be madeby the IRS upon the completion of their examinations. We will continue tomonitor the progress of the IRS examinations and review our recorded taxliabilities for potential audit assessments. Adjustments to increase or decrease the recorded tax liabilities may berequired in the future as additional facts become known.

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Significant components of our net deferred income taxasset (liability) are as follows:

| (in thousands)                         | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | ** **              | ** ** | ** **              | ** ** |
| Deferred income  tax assets:                |       |                    |       |                    |       |
| Accruals and reserves                       |       | $                       | 29,202     |                    | $          | 33,560 |   |
| Employee benefits                           |       | 86,842                  |       | 92,461                  |       |
| Other                                       |       | 11,174                  |       | 2,043                   |       |
| Total deferred tax assets                   |       | $                       | 127,218    |                    | $          | 128,064 |   |
|                                        |       |                    |       |                    |       |
| Deferred income  tax liabilities:           |       |                    |       |                    |       |
| Inventory                                   |       | $                       | (10,215    | )                       | $          | (11,032 | ) |
| Depreciation and amortization               |       | (83,820                 | )          | (115,825                | )          |
| Intangible assets                           |       | (990,745                | )          | (1,012,833              | )          |
| Other                                       |       | (5,692                  | )          | (4,096                  | )          |
| Total deferred tax liabilities              |       | (1,090,472              | )          | (1,143,786              | )          |
| Net deferred  income tax asset (liability)  |       | $                       | (963,254   | )                       | $          | (1,015,722 | ) |
|                                        |       |                    |       |                    |       |
| Net deferred  income tax asset (liability): |       |                    |       |                    |       |
| Current                                     |       | $                       | 39,728     |                    | $          | 33,409 |   |
| Non-current                                 |       | (1,002,982              | )          | (1,049,131              | )          |
| Total                                       |       | $                       | (963,254   | )                       | $          | (1,015,722 | ) |

 

The net deferred tax liability of$963.3 million at July 28, 2007 decreased from a $1,015.7 million net deferredliability at July 29, 2006.  Thisdecrease was comprised primarily of 1) a $60.5 million deferred tax benefit forfiscal year 2007 (including $36.7 million related to the amortization of intangibleassets recorded in connection with the Acquisition), partially offset by 2) anincrease in deferred tax liabilities of $11.3 million related primarily toincreases in long-term benefit obligations recorded, net of tax, as increasesin other comprehensive income in the accompanying statements of shareholders’equity. We believe it is more likely than not that we will realize the benefitsof our recorded deferred tax assets.

**NOTE 13. EMPLOYEE BENEFIT PLANS**

***Description of Benefit Plans.***  We sponsora defined benefit pension plan (Pension Plan) covering substantially allfull-time employees. We also sponsor an unfunded supplemental executiveretirement plan (SERP Plan) which provides certain employees additional pensionbenefits. Benefits under both plans are based on the employees’ years of serviceand compensation over defined periods of employment.

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

We have a qualified definedcontribution 401(k) plan, which covers substantially all employees. Employeesmake contributions to the plan and we match an employee’s contribution up to amaximum of 6% of the employee’s compensation subject to statutory limitations.We also sponsor an unfunded key employee deferred compensation plan, whichprovides certain employees additional benefits. Our aggregate expense relatedto these plans was approximately $11.0 million in fiscal year 2007, $8.7million for the forty-three weeks ended July 29, 2006, $1.8 million for thenine weeks ended October 1, 2005 and $10.1 million for fiscal year 2005.

F-35

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***Costsof Benefits.***  The components of the expenses we incurredunder our Pension Plan, SERP Plan and Postretirement Plan are as follows:
| ** **                                         | ** ** | **(Successor)**                                  | ** ** | ** **                                                     | ** ** | **(Predecessor)** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                            | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | ** Forty-three   weeks  ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|                                               |       |                                             |       |                                                           |       |              |       |   |   |   |   |
| Pension Plan:                                      |       |                                             |       |                                                           |       |              |       |   |   |   |   |
| Service cost                                       |       | $                                                | 14,886     |                                                           | $          | 13,320            |       |   |   | $ | 2,823 |   | $ | 12,785 |   |
| Interest cost                                      |       | 22,214                                           |       | 17,365                                                         |       |              |       | 3,468 |   | 18,544 |   |
| Expected return on plan assets                     |       | (23,458                                          | )          | (18,802                                                        | )          |              |       | (3,636 | ) | (19,307 | ) |
| Net amortization of losses and prior service costs |       | —                                           |       | —                                                         |       |              |       | 1,205 |   | 4,835 |   |
| Pension Plan expense                               |       | $                                                | 13,642     |                                                           | $          | 11,883            |       |   |   | $ | 3,860 |   | $ | 16,857 |   |
| SERP Plan:                                         |       |                                             |       |                                                           |       |              |       |   |   |   |   |
| Service cost                                       |       | $                                                | 1,719      |                                                           | $          | 1,570             |       |   |   | $ | 330 |   | $ | 1,445 |   |
| Interest cost                                      |       | 4,928                                            |       | 3,685                                                          |       |              |       | 730 |   | 4,057 |   |
| Net amortization of losses and prior service costs |       | —                                           |       | —                                                         |       |              |       | 394 |   | 1,535 |   |
| SERP Plan expense                                  |       | $                                                | 6,647      |                                                           | $          | 5,255             |       |   |   | $ | 1,454 |   | $ | 7,037 |   |
| Postretirement  Plan:                              |       |                                             |       |                                                           |       |              |       |   |   |   |   |
| Service cost                                       |       | $                                                | 57         |                                                           | $          | 38                |       |   |   | $ | 8 |   | $ | 57 |   |
| Interest cost                                      |       | 786                                              |       | 708                                                            |       |              |       | 139 |   | 1,168 |   |
| Net amortization of losses                         |       | (64                                              | )          | —                                                         |       |              |       | (5 | ) | 75 |   |
| Postretirement  expense                            |       | $                                                | 779        |                                                           | $          | 746               |       |   |   | $ | 142 |   | $ | 1,300 |   |

 

***BenefitObligations.***  Our obligations for the Pension Plan, SERPPlan and Postretirement Plan are valued annually as of the beginning of each fiscalyear. With respect to the Pension Plan and the SERP Plan, our obligationsconsist of both a projected benefit obligation (PBO) and an accumulated benefitobligation (ABO). The PBO represents the present value of benefits ultimatelypayable to plan participants for both past and future services expected to beprovided by the plan participants. The ABO represents the present value ofbenefits payable to plan participants for only services rendered at thevaluation date. Our obligations pursuant to our Pension Plan, SERP Plan andPostretirement Plan are as follows:
| ** **                        | ** ** | **Pension Plan** | ** ** | **SERP Plan**    | ** ** | **Postretirement Plan** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Fiscal years** | ** ** | **Fiscal years** | ** ** | **Fiscal years**        | ** ** |
| **(in thousands)**           | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2007**                     | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(Successor)**       | ** ** | **(Successor)**       | ** ** | **(Successor)**              | ** ** |
| Projected  benefit obligations:   |       |                  |       |                  |       |                         |       |   |   |   |   |   |   |
| Beginning of year                 |       | $                     | 364,720    |                  | $          | 361,434                      |       | $ | 78,322 |   | $ | 78,259 |   | $ | 12,975 |   | $ | 15,755 |   |
| Service cost                      |       | 14,886                |       | 16,143                |       | 1,719                        |       | 1,900 |   | 57 |   | 46 |   |
| Interest cost                     |       | 22,214                |       | 20,834                |       | 4,928                        |       | 4,415 |   | 786 |   | 847 |   |
| Actuarial loss (gain)             |       | (9,695                | )          | (25,168               | )          | 3,076                        |       | (4,549 | ) | 9,104 |   | (2,625 | ) |
| Benefits paid, net                |       | (11,890               | )          | (8,523                | )          | (1,899                       | )          | (1,703 | ) | (831 | ) | (1,048 | ) |
| End of year                       |       | $                     | 380,235    |                  | $          | 364,720                      |       | $ | 86,146 |   | $ | 78,322 |   | $ | 22,091 |   | $ | 12,975 |   |
|                              |       |                  |       |                  |       |                         |       |   |   |   |   |   |   |
| Accumulated  benefit obligations: |       |                  |       |                  |       |                         |       |   |   |   |   |   |   |
| Beginning of year                 |       | $                     | 308,255    |                  | $          | 304,063                      |       | $ | 66,890 |   | $ | 65,028 |   |   |   |   |   |
| End of year                       |       | $                     | 337,047    |                  | $          | 308,255                      |       | $ | 68,105 |   | $ | 66,890 |   |   |   |   |   |

 

F-36

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A summary of expected benefit payments related to ourPension Plan, SERP Plan and Postretirement Plan is as follows:

| (in thousands)    | ** ** | **Pension  Plan** | ** ** | **SERP  Plan** | ** ** | **Postretirement  Plan** | ** ** |
|------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|
| ** **             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** |
| Fiscal year 2008       |       | $                 | 10,943     |           | $          | 2,951                    |       | $ | 1,068 |   |
| Fiscal year 2009       |       | 12,440            |       | 3,222          |       | 1,187                    |       |
| Fiscal year 2010       |       | 13,768            |       | 3,673          |       | 1,255                    |       |
| Fiscal year 2011       |       | 15,267            |       | 4,022          |       | 1,340                    |       |
| Fiscal year 2012       |       | 17,040            |       | 4,348          |       | 1,415                    |       |
| Fiscal years 2013-2017 |       | $                 | 116,274    |           | $          | 30,557                   |       | $ | 7,769 |   |

 

***FundingPolicy and Plan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law. Based upon currently availableinformation, we will not be required to make significant contributions to thePension Plan during fiscal year 2008. Infiscal years 2007 and 2006, we made no contributions to our Pension Plan and infiscal year 2005, we made a $20.0 million voluntary contribution for the planyear ended July 31, 2004.

Assets held by the Pension Planare invested in accordance with the provisions of our approved investmentpolicy. The asset allocation for our Pension Plan at the end of fiscal years2007 and 2006 and the target allocation for fiscal year 2008, by assetcategory, are as follows:

|                            | ** ** | **Pension Plan**                       | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **Allocation  at July 31,  2007** | ** ** | **Allocation at  July 31,  2006** | ** ** | **2008  Target  Allocation** | ** ** |
| Equity securities          |       | 76%                                         |       | 73% |   | 80 | % |
| Fixed income securities    |       | 22%                                         |       | 24% |   | 20 | % |
| Cash and cash  equivalents |       | 2%                                          |       | 3% |   | — |   |
| Total                      |       | 100%                                        |       | 100% |   | 100 | % |

 

The Pension Plan’s strategicasset allocation was structured to reduce volatility through diversificationand enhance return to approximate the amounts and timing of the expectedbenefit payments.

Changes in the assets held by the Pension Plan in fiscal years 2007 and2006 are as follows:

|                                            | ** ** | **Fiscal years** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                    | ** ** | **2007**              | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(Successor)**       | ** ** |
| Fair value of assets at  beginning of year |       | $                     | 293,720    |   | $ | 288,267 |   |
| Actual return on assets                    |       | 42,802                |       | 13,976 |   |
| Benefits paid                              |       | (11,890               | )          | (8,523 | ) |
| Fair value of assets at end of year        |       | $                     | 324,632    |   | $ | 293,720 |   |

 

***FundedStatus.***  The funded status of our Pension Plan, SERPPlan and Postretirement Plan is as follows:
| ** **                                                             | ** ** | **Pension Plan** | ** ** | **SERP Plan**    | ** ** | **Postretirement Plan** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                                                             | ** ** | **Fiscal years** | ** ** | **Fiscal years** | ** ** | **Fiscal years**        | ** ** |
| **(in thousands)**                                                | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2007**                     | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(Successor)**       | ** ** | **(Successor)**       | ** ** | **(Successor)**              | ** ** |
| Projected benefit  obligation                                          |       | $                     | 380,235    |                  | $          | 364,720                      |       | $ | 86,146 |   | $ | 78,322 |   | $ | 22,091 |   | $ | 12,975 |   |
| Fair value of plan  assets                                             |       | 324,632               |       | 293,720               |       | —                       |       | — |   | — |   | — |   |
| Excess of projected  benefit obligation over fair value of plan assets |       | (55,603               | )          | (71,000               | )          | (86,146                      | )          | (78,322 | ) | (22,091 | ) | (12,975 | ) |
| Unrecognized net  actuarial gain                                       |       | —                |       | (7,819                | )          | —                       |       | (2,036 | ) | — |   | (2,004 | ) |
| Accrued obligation                                                     |       | $                     | (55,603    | )                     | $          | (78,819                      | )          | $ | (86,146 | ) | $ | (80,358 | ) | $ | (22,091 | ) | $ | (14,979 | ) |

 

F-37

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In connection with purchase accounting adjustments, werecorded liabilities for the unfunded status of our Pension Plan, SERP Plan andPostretirement Plan as of the Acquisition date. These aggregate adjustments resulted in a net increase in the carryingvalues of the Predecessor obligations previously recorded pursuant to generallyaccepted accounting principles by approximately $57.6 million.

Weadopted the provisions of SFAS 158 in the fourth quarter of fiscal year 2007.SFAS 158 requires employers to report a postretirement benefit asset for plansthat are overfunded and a postretirement benefit liability for plans that areunderfunded. Deferred plan costs and income are required to be reported inaccumulated other comprehensive income (OCI), net of tax effects, until theyare amortized.  Such amounts will beadjusted as they are subsequently recognized as components of net periodicbenefit cost or income pursuant to the current recognition and amortizationprovisions.

In connection with the adoptionof SFAS 158, we adjusted the carrying values of our previously recordedobligations to equal their unfunded status at July 28, 2007.  These aggregate adjustments resulted in a netdecrease in the carrying values of our obligations by approximately $28.7million, which amount has been recorded (net of taxes of $11.3 million) as anincrease in other comprehensive income in our statement of shareholders’ equityfor fiscal year 2007.

A rollforward of our recordedobligation for the Pension Plan, SERP Plan and Postretirement Plan from theAcquisition date to July 28, 2007 is as follows:
| **(in thousands)**                                                                            | ** ** | **Pension Plan** | ** ** | **SERP Plan** | ** ** | **Postretirement  Plan** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|--------------------------|------------|
|                                                                                               |       |                  |       |               |       |                     |       |
| Predecessor obligations  at Acquisition date                                                       |       | $                     | 19,655     |               | $          | 63,540                   |       | $ | 18,205 |   |
| Net purchase accounting  adjustments to record unfunded obligations at Acquisition date            |       | 47,281                |       | 13,266             |       | (2,924                   | )          |
| Unfunded obligations at  Acquisition date                                                          |       | 66,936                |       | 76,806             |       | 15,281                   |       |
|                                                                                               |       |                  |       |               |       |                     |       |
| Expense                                                                                            |       | 11,883                |       | 5,255              |       | 746                      |       |
| Benefits paid, net                                                                                 |       |                  |       | (1,703             | )          | (1,048                   | )          |
| Balance at July 29,  2006                                                                          |       | 78,819                |       | 80,358             |       | 14,979                   |       |
|                                                                                               |       |                  |       |               |       |                     |       |
| Expense                                                                                            |       | 13,642                |       | 6,647              |       | 779                      |       |
| Benefits paid, net                                                                                 |       |                  |       | (1,899             | )          | (831                     | )          |
| Adjustments for  unfunded benefit obligations (upon initial adoption of new accounting  principle) |       | (36,858               | )          | 1,040              |       | 7,164                    |       |
| Balance at July 28,  2007                                                                          |       | 55,603                |       | 86,146             |       | 22,091                   |       |
|                                                                                               |       |                  |       |               |       |                     |       |
| Less: current portion                                                                              |       | —                |       | (2,951             | )          | (1,068                   | )          |
|                                                                                               |       |                  |       |               |       |                     |       |
| Long-term portion of benefit obligations                                                           |       | $                     | 55,603     |               | $          | 83,195                   |       | $ | 21,023 |   |

 

***Assumptions.*** Significant assumptions related to the calculation of our obligationspursuant to our employee benefit plans include the discount rate used tocalculate the present value of benefit obligations to be paid in the future,the expected long-term rate of return on assets held by the Pension Plan, theaverage rate of compensation increase by Pension Plan and SERP Planparticipants and the health care cost trend rate for the Postretirement Plan.We review these assumptions annually based upon currently availableinformation. The assumptions we utilized in calculating the projected benefitobligations and periodic expense of our Pension Plan, SERP Plan andPostretirement Plan are as follows:

|                                                   | ** ** | **August 1,  2007** | ** ** | **August 1,  2006** | ** ** | **October 1,  2005** | ** ** | **August 1,  2005** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------------|------------|
| Pension Plan:                                     |       |                     |       |                     |       |                      |       |                     |       |
| Discount rate                                     |       | 6.25%                    |       | 6.25%                    |       | 5.75%                     |       | 5.50%                    |       |
| Expected long-term  rate of return on plan assets |       | 8.00%                    |       | 8.00%                    |       | 8.00%                     |       | 8.00%                    |       |
| Rate of future  compensation increase             |       | 4.50%                    |       | 4.50%                    |       | 4.50%                     |       | 4.50%                    |       |
| SERP Plan:                                        |       |                     |       |                     |       |                      |       |                     |       |
| Discount rate                                     |       | 6.25%                    |       | 6.25%                    |       | 5.75%                     |       | 5.50%                    |       |
| Rate of future  compensation increase             |       | 4.50%                    |       | 4.50%                    |       | 4.50%                     |       | 4.50%                    |       |
| Postretirement Plan:                              |       |                     |       |                     |       |                      |       |                     |       |
| Discount rate                                     |       | 6.25%                    |       | 6.25%                    |       | 5.75%                     |       | 5.50%                    |       |
| Initial health  care cost trend rate              |       | 8.00%                    |       | 8.00%                    |       | 8.00%                     |       | 9.00%                    |       |
| Ultimate health care  cost trend rate             |       | 8.00%                    |       | 5.00%                    |       | 5.00%                     |       | 5.00%                    |       |

 

F-38

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*Discount rate.*  Theassumed discount rate utilized is based on a broad sample of Moody’s highquality corporate bond yields as of the measurement date. The projected benefitpayments are matched with the yields on these bonds to determine an appropriatediscount rate for the plan. The discount rate is utilized principally incalculating the present value of our pension obligation and net pensionexpense. At August 1, 2007 and August 1, 2006, the discount rate was6.25%. As a result of the increase in the discount rate from 5.75% at the Acquisitiondate to 6.25% at August 1, 2006, the projected benefit obligations relatedto our employee benefit plans decreased $37.4 million.

The estimated effect of a 0.25%decrease in the discount rate would increase the Pension Plan obligation by$16.4 million, increase the SERP Plan obligation by $3.0 million andincrease the Postretirement Plan obligation by $0.1 million.  The estimated effect of a 0.25% decrease inthe discount rate would increase the annual Pension Plan expense by$1.0 million, increase the SERP Plan annual expense by $0.1 millionand increase the Postretirement Plan annual expense by an immaterial amount.

*Expectedlong-term rate of return on plan assets.*  Theassumed expected long-term rate of return on assets is the weighted averagerate of earnings expected on the funds invested or to be invested to providefor the pension obligation. During fiscal year 2007, we utilized 8.0% as theexpected long-term rate of return on plan assets. We periodically evaluate theallocation between investment categories of the assets held by the PensionPlan. We estimate the expected average long-term rate of return on assets basedon our future asset performance expectations using currently available marketand other data and the counsel of our outside actuaries and advisors. This rateis utilized primarily in calculating the expected return on plan assetscomponent of the annual pension expense. To the extent the actual rate ofreturn on assets realized over the course of a year is greater than the assumedrate, that year’s annual pension expense is not affected. Rather this gainreduces future pension expense over a period of approximately 10 to16 years. To the extent the actual rate of return on assets is less thanthe assumed rate, that year’s annual pension expense is likewise not affected.Rather this loss increases pension expense over approximately 10 to16 years.

*Rate of futurecompensation increase.*  The assumed average rate of compensationincrease is the average annual compensation increase expected over theremaining employment periods for the participating employees. We utilized arate of 4.5% for the periods beginning July 28, 2007. This rate isutilized principally in calculating the obligation and annual expense for thePension and SERP Plans. The estimated effect of a 0.25% increase in the assumedrate of compensation increase would increase the projected benefit obligationfor the Pension Plan by $2.4 million and increase the SERP Plan projectedbenefit obligation by $1.1 million. The estimated effect of a 0.25% increase in the assumed rate ofcompensation increase would increase annual pension expense by$0.4 million and increase the SERP Plan annual expense by$0.1 million.

*Health carecost trend rate.*  The assumed health care cost trend rate representsour estimate of the annual rates of change in the costs of the health carebenefits currently provided by the Postretirement Plan. The health care costtrend rate implicitly considers estimates of health care inflation, changes inhealth care utilization and delivery patterns, technological advances andchanges in the health status of the plan participants. We utilized a healthcare cost trend rate of 8% as of August 1, 2007, remaining constant overtime to yield an ultimate health care cost trend rate of 8%. If the assumedhealth care cost trend rate were increased one percentage point, PostretirementPlan costs for 2007 would have been $0.2 million higher and theaccumulated postretirement benefit obligation as of July 28, 2007 wouldhave been $2.9 million higher. If the assumed health care trend rate weredecreased one percentage point, Postretirement Plan costs for 2007 would havebeen $0.2 million lower and the accumulated postretirement benefitobligation as of July 28, 2007 would have been $2.4 million lower.

*Effect ofMedicare Subsidy on Postretirement Plan.*  InDecember 2003, the U.S. Congress enacted the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (Act) that provides a prescriptiondrug subsidy, beginning in January 2006, to companies that sponsorpostretirement health care plans that provide drug benefits. Based upon theprovisions of the legislation enacted in January 2005, we reviewed theprovisions of our Postretirement Plan to determine whether the benefits offeredby our plan met the statutory definition of “actuarially equivalent”prescription drug benefits that qualify for the federal subsidy. Based uponthis review, we believe that our benefits qualify for the subsidy.

In accordance with the provisionsof the FASB Staff Position 106-2, “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug, Improvement and Modernization Act of2003,” we revalued our projected benefit obligation as of January 31, 20051) to incorporate the benefit associated with the federal subsidy weexpect to receive and 2) to reduce the discount rate to 5.75%. The revisedobligation as of January 31, 2005 was approximately $19.1 million,reflecting a reduction of approximately $2.6 million for the impact of thefederal subsidy, offset by an increase of approximately $0.8 million forthe change in discount rate.

Effective August 1, 2006, we moved to an Enhanced PartD arrangement and will no longer directly receive the federal subsidy.  The move to an Enhanced Part D plan isexpected to result in additional savings which reduced our obligation at August1, 2006 by $2.2 million and is estimated to reduce the net periodic cost forfiscal years 2007 and 2008 by $0.2 million.

F-39

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***SubsequentPlan Redesign.***  In September 2007, our Board of Directorsapproved certain changes to our long-term benefits program.  Effective January 1, 2008, we will offer anew, enhanced retirement savings plan (RSP) whereby:

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

·                  Our matching contributions to the RSP willincrease to a potential maximum 75% of the employee contribution (up to a 6%deferral) from the potential maximum 50% to the current 401(k) Plan.

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

·                  All current and future employees who do notparticipate in the current 401(k) Plan will be automatically enrolled in theRSP at a salary deferral rate of 3% once eligibly requirements have been met.

Effective January 1, 2008, wewill also offer a new defined contribution supplemental executive retirementplan to eligible employees.

Concurrent with theimplementation of the RSP and the new supplemental executive retirement plan,we will freeze the benefits offered under our Pension Plan and SERP Plan formost employees.  An employee with tenyears of service or whose age plus years of service equals at least 65 as ofDecember 31, 2007 will be allowed either 1) to continue participation in ourcurrent 401(k) Plan and Pension Plan (and SERP Plan, if eligible) or 2) tofreeze the benefit earned under the Pension Plan (and SERP Plan, if eligible)and participate in the RSP. No employee who has met vesting requirements willforfeit benefits earned prior to January 1, 2008.

We have not yet determined theimpact of the above design changes to 1) the future benefits payments to bemade under our Pension Plan and SERP Plan, 2) the actuarial determination ofthe funded status of those plans or 3) the accrued obligations to be reflectedon our balance sheet for periods subsequent to September 2007.

**NOTE 14. LOSS ON DISPOSITION OF CHEF’S CATALOG**

In November 2004, we soldour Chef’s Catalog direct marketing business to a private equity firm. Chef’sCatalog is a multi-channel retailer of professional-qualitykitchenware with revenues of approximately $73 million in fiscal year2004. At October 30, 2004, Chef’s Catalog had net tangible assets,primarily inventory, of $12.5 million and net intangible assets of$17.2 million. We received proceeds, net of selling costs, of$14.4 million from the sale. As the carrying value of the Chef’s Catalogassets exceeded the net proceeds from the sale, we incurred a pretax loss of$15.3 million in the first quarter of 2005 related to the disposition ofChef’s Catalog.

**NOTE 15. COMMITMENTS AND CONTINGENCIES**

***Leases.***  We leasecertain property and equipment under various non-cancelable capital andoperating leases. The leases provide for monthly fixed rentals and/orcontingent rentals based upon sales in excess of stated amounts and normallyrequire us to pay real estate taxes, insurance, common area maintenance costsand other occupancy costs. Generally, the leases have primary terms rangingfrom one to 99 years and include renewal options ranging from two to80 years.

Rent expense and relatedoccupancy costs under operating leases is as follows:

|                         | ** ** | **(Successor)**                                  | ** ** | ** **                                         | ** ** | **(Predecessor)** | ** ** |
|-------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------|------------|-------------------|------------|
| **(in thousands)** | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|                    |       |                                             |       |                                               |       |              |       |   |   |   |   |
| Minimum rent            |       | $                                                | 45,200     |                                               | $          | 36,000            |       |   |   | $ | 5,800 |   | $ | 36,300 |   |
| Contingent rent         |       | 28,600                                           |       | 22,900                                             |       |              |       | 4,700 |   | 23,800 |   |
| Other occupancy costs   |       | 13,700                                           |       | 10,400                                             |       |              |       | 2,000 |   | 12,200 |   |
| Total rent expense      |       | $                                                | 87,500     |                                               | $          | 69,300            |       |   |   | $ | 12,500 |   | $ | 72,300 |   |

 

F-40

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Future minimum rental commitments,excluding renewal options, under non-cancelable leases are as follows: fiscalyear 2008—$54.0 million; fiscal year 2009—$52.5 million; fiscal year2010—$49.4 million; fiscal year 2011—$48.9 million; fiscal year2012—$47.6 million; all fiscal years thereafter—$698.9 million.

***Long-termIncentive Plan.*** Following the consummation of the Transactions, the Company created along-term incentive plan (Long-term Incentive Plan) that provides for a cashincentive payable upon a change of control, as defined, subject to theattainment of certain performance objectives to employees who had historicallybeen eligible for stock-based compensation programs of the Predecessor.  Performance objectives and targets are basedon cumulative EBITDA percentages for three year periods beginning in fiscalyear 2006.  Earned awards for eachcompleted performance period will be credited to a book account and will earninterest at a contractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% oftotal outstanding common stock.

***CashIncentive Plan. ***Followingthe consummation of the Transactions, the Company also adopted a cash incentiveplan (Cash Incentive Plan) to aid in the retention of certain keyexecutives.  The Cash Incentive Planprovides for the creation of a $14 million cash bonus pool to be shared by allparticipants based on the number of vested and unvested stock options andunderlying shares that were granted pursuant to the Management Equity IncentivePlan.  Each participant in the CashIncentive Plan will be entitled to a cash bonus upon the earlier to occur of achange of control or an initial public offering, as defined in the CashIncentive Plan, provided that the internal rate of return to the Sponsors is positive.

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

***Other.***  We hadapproximately $26.9 million of outstanding irrevocable letters of creditrelating to purchase commitments and insurance and other liabilities atJuly 28, 2007. We had approximately $4.1 million in surety bonds atJuly 28, 2007 relating primarily to merchandise imports, state sales taxand utility requirements.

F-41

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**NOTE 16. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**

The following table shows thecomponents of accumulated other comprehensive income (loss):

|                                                                                                    | ** ** | **(Successor)**         | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| **(in thousands)**                                                                            | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** |
| ** **                                                                                         | ** ** | ** **              | ** ** | ** ** | ** ** |
| Unrealized gain on  financial instruments                                                          |       | $                       | 3,733      |   | $ | 9,990 |   |
| Adjustments for  unfunded benefit obligations (upon initial adoption of new accounting  principle) |       | 17,365                  |       | — |   |
| Other                                                                                              |       | 131                     |       | (161 | ) |
| Total accumulated other comprehensive income                                                       |       | $                       | 21,229     |   | $ | 9,829 |   |

 

**NOTE 17. SEGMENT REPORTING**

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

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

F-42

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The following tables set forth the information for ourreportable segments:
| ** **                                                                                     | ** ** | **(Successor**)                                  | ** ** | ** **                                             | ** ** | **(Predecessor)** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------|------------|
| **(in thousands)**                                                                        | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** **        | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Fiscal year  ended  July 30,  2005** | ** ** |
|                                                                                           |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| REVENUES                                                                                       |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                | 3,674,600  |                                                   | $          | 2,829,967         |       |   |   | $ | 544,857 |   | $ | 3,102,952 |   |
| Direct Marketing                                                                               |       | 715,476                                          |       | 567,771                                                |       |              |       | 87,515 |   | 592,122 |   |
| Total                                                                                          |       | $                                                | 4,390,076  |                                                   | $          | 3,397,738         |       |   |   | $ | 632,372 |   | $ | 3,695,074 |   |
|                                                                                           |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| OPERATING EARNINGS                                                                             |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                | 490,564    |                                                   | $          | 312,296           |       |   |   | $ | 91,372 |   | $ | 377,772 |   |
| Direct Marketing                                                                               |       | 116,042                                          |       | 89,967                                                 |       |              |       | 8,246 |   | 75,178 |   |
| Subtotal                                                                                       |       | 606,606                                          |       | 402,263                                                |       |              |       | 99,618 |   | 452,950 |   |
| Corporate expenses                                                                             |       | (56,229                                          | )          | (49,504                                                | )          |              |       | (5,811 | ) | (46,334 | ) |
| Amortization of  customer lists and favorable lease commitments                                |       | (72,265                                          | )          | (59,640                                                | )          |              |       | — |   | — |   |
| Non-cash items related  to other valuation adjustments made in connection with the Acquisition |       | —                                           |       | (34,411                                                | )          |              |       | — |   | — |   |
| Other expense, net (1)                                                                         |       | (1,309                                           | )          | —                                                 |       |              |       | — |   | — |   |
| Transaction and other  costs                                                                   |       | —                                           |       | —                                                 |       |              |       | (23,544 | ) | — |   |
| Loss on disposition of  Chef’s Catalog                                                    |       | —                                           |       | —                                                 |       |              |       | — |   | (15,348 | ) |
| Gain on Credit Card  Sale                                                                      |       | —                                           |       | —                                                 |       |              |       | — |   | 6,170 |   |
| Total                                                                                          |       | $                                                | 476,803    |                                                   | $          | 258,708           |       |   |   | $ | 70,263 |   | $ | 397,438 |   |
|                                                                                           |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| CAPITAL EXPENDITURES                                                                           |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                | 124,402    |                                                   | $          | 123,693           |       |   |   | $ | 22,784 |   | $ | 176,519 |   |
| Direct Marketing                                                                               |       | 23,475                                           |       | 14,519                                                 |       |              |       | 2,791 |   | 13,736 |   |
| Total                                                                                          |       | $                                                | 147,877    |                                                   | $          | 138,212           |       |   |   | $ | 25,575 |   | $ | 190,255 |   |
|                                                                                           |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| DEPRECIATION EXPENSE                                                                           |       |                                             |       |                                                   |       |              |       |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                | 118,126    |                                                   | $          | 93,599            |       |   |   | $ | 17,313 |   | $ | 94,386 |   |
| Direct Marketing                                                                               |       | 13,671                                           |       | 9,580                                                  |       |              |       | 1,896 |   | 9,203 |   |
| Subtotal                                                                                       |       | 131,797                                          |       | 103,179                                                |       |              |       | 19,209 |   | 103,589 |   |
| Depreciation expense on  step-up of fixed assets made in connection with the Acquisition       |       | 4,671                                            |       | 3,771                                                  |       |              |       | — |   | — |   |
| Total                                                                                          |       | $                                                | 136,468    |                                                   | $          | 106,950           |       |   |   | $ | 19,209 |   | $ | 103,589 |   |

 
| ** **                                            | ** ** | **(Successor)**         | ** ** | ** **              | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                            | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                |       |                    |       |                    |       |       |       |   |   |
| Tangible assets of  Specialty Retail stores           |       | $                       | 1,928,889  |                    | $          | 1,791,392  |       |   |   |   |   |
| Tangible assets of  Direct Marketing                  |       | 167,541                 |       | 143,927                 |       |       |       |   |   |
| Corporate assets:                                     |       |                    |       |                    |       |       |       |   |   |
| Intangible  assets related to Specialty Retail stores |       | 3,571,660               |       | 3,629,153               |       |       |       |   |   |
| Intangible assets related to Direct Marketing         |       | 568,359                 |       | 594,604                 |       |       |       |   |   |
| Other                                                 |       | 264,550                 |       | 339,522                 |       |       |       |   |   |
| Assets of  discontinued operations                    |       | —                  |       | 109,363                 |       |       |       |   |   |
| Total                                                 |       | $                       | 6,500,999  |                    | $          | 6,607,961  |       |   |   |   |   |

----

(1)           For fiscal year2007, other expense, net includes 1) $11.5 million pretax impairment chargerelated to the writedown to fair value in the net carrying value of the Horchowtradename, offset by 2) $4.2 million of other income we received in connectionwith the merger of Wedding Channel.com, in which we held a minority interest,and The Knot and 3) $6.0M of other income related to aged, non-escheatable giftcards.

F-43

----

**NOTE 18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (with respect to NMG’sobligations under the****SeniorNotes and the Senior Subordinated Notes)**

All of NMG’s obligations under the Senior Notes and theSenior Subordinated Notes, as well as its obligations under the Asset-BasedRevolving Credit Facility and the Senior Secured Term Loan Facility, areguaranteed by the Company and certain of NMG’s existing and future domesticsubsidiaries (principally, Bergdorf Goodman, Inc. through which NMGconducts the operations of its Bergdorf Goodman stores and NM Nevada Trustwhich holds legal title to certain real property and intangible assets used bythe Company in conducting its operations). The guarantees by the Company andeach subsidiary guarantor are full and unconditional and joint andseveral.  Currently, the Company’snon-guarantor subsidiaries consist principally of an operating subsidiarydomiciled in Canada providing support services to our Direct Marketingoperations and Neiman Marcus Funding Corporation through which the Companypreviously conducted its credit card operations prior to the Credit Card Sale.Previously, our non-guarantor subsidiaries also included Kate Spade LLC (priorto its sale in December 2006) and Gurwitch Products, L.L.C. (prior to its salein July 2006), which are reflected in the tables below as discontinuedoperations.

The following condensed consolidating financialinformation represents the financial information of Neiman Marcus, Inc.and its wholly-owned subsidiary guarantors, prepared on the equity basisof accounting. The information is presented in accordance with the requirementsof Rule 3-10 under the Securities and Exchange Commission’sRegulation S-X. The financial information may not necessarily beindicative of results of operations, cash flows or financial position had thesubsidiary guarantors operated as independent entities.
| ** **                                      | ** ** | **July 28, 2007 (Successor)** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                 |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                      |       | $                                            | —     |   | $ | 139,333 |   | $ | 1,196 |   | $ | 678 |   | $ | — |   | $ | 141,207 |   |
| Merchandise  inventories                        |       | —                                       |       | 821,749 |   | 96,513 |   | 7 |   | — |   | 918,269 |   |
| Other current  assets                           |       | —                                       |       | 142,632 |   | 8,636 |   | 3,681 |   | 544 |   | 155,493 |   |
| Total current  assets                           |       | —                                       |       | 1,103,714 |   | 106,345 |   | 4,366 |   | 544 |   | 1,214,969 |   |
| Property and equipment,  net                    |       | —                                       |       | 901,072 |   | 140,473 |   | 2,166 |   | — |   | 1,043,711 |   |
| Goodwill and  intangibles, net                  |       | —                                       |       | 1,945,040 |   | 2,194,979 |   | — |   | — |   | 4,140,019 |   |
| Other assets                                    |       | —                                       |       | 102,108 |   | 192 |   | — |   | — |   | 102,300 |   |
| Investments in  subsidiaries                    |       | 1,558,012                                    |       | 2,333,438 |   | — |   | — |   | (3,891,450 | ) | — |   |
| Total assets                                    |       | $                                            | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,441,989 |   | $ | 6,532 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**  | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                            |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                                            | —     |   | $ | 318,439 |   | $ | 38,080 |   | $ | 4,236 |   | $ | 544 |   | $ | 361,299 |   |
| Accrued  liabilities                            |       | —                                       |       | 329,625 |   | 73,479 |   | 58 |   | — |   | 403,162 |   |
| Other current  liabilities                      |       | —                                       |       | 3,426 |   | — |   | — |   | — |   | 3,426 |   |
| Total current  liabilities                      |       | —                                       |       | 651,490 |   | 111,559 |   | 4,294 |   | 544 |   | 767,887 |   |
| Long-term  liabilities:                         |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Long-term  debt                                 |       | —                                       |       | 2,945,906 |   | — |   | — |   | — |   | 2,945,906 |   |
| Deferred income  taxes                          |       | —                                       |       | 1,002,982 |   | — |   | — |   | — |   | 1,002,982 |   |
| Other long-term  liabilities                    |       | —                                       |       | 226,982 |   | (770 | ) | — |   | — |   | 226,212 |   |
| Total long-term  liabilities                    |       | —                                       |       | 4,175,870 |   | (770 | ) | — |   | — |   | 4,175,100 |   |
| Total shareholders’  equity                |       | 1,558,012                                    |       | 1,558,012 |   | 2,331,200 |   | 2,238 |   | (3,891,450 | ) | 1,558,012 |   |
| Total liabilities and shareholders’ equity |       | $                                            | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,441,989 |   | $ | 6,532 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |

 

F-44

----

 
| ** **                                          | ** ** | **July 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                             | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                          | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                     |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                          |       | $                                            | —     |   | $ | 222,308 |   | $ | 986 |   | $ | 446 |   | $ | — |   | $ | 223,740 |   |
| Merchandise  inventories                            |       | —                                       |       | 711,443 |   | 84,252 |   | 7 |   | (2,081 | ) | 793,621 |   |
| Other current  assets                               |       | —                                       |       | 89,359 |   | 8,294 |   | 3,681 |   | 544 |   | 101,878 |   |
| Current assets  of discontinued operations          |       | —                                       |       | — |   | — |   | 16,617 |   | — |   | 16,617 |   |
| Total current  assets                               |       | —                                       |       | 1,023,110 |   | 93,532 |   | 20,751 |   | (1,537 | ) | 1,135,856 |   |
| Property and equipment,  net                        |       | —                                       |       | 875,725 |   | 152,109 |   | 2,445 |   | — |   | 1,030,279 |   |
| Goodwill and  intangibles, net                      |       | —                                       |       | 2,007,770 |   | 2,215,987 |   | — |   | — |   | 4,223,757 |   |
| Other assets                                        |       | —                                       |       | 124,929 |   | 389 |   | 5 |   | — |   | 125,323 |   |
| Investments in  subsidiaries                        |       | 1,427,667                                    |       | 2,429,916 |   | — |   | — |   | (3,857,583 | ) | — |   |
| Non-current assets of  discontinued operations      |       | —                                       |       | — |   | — |   | 92,746 |   | — |   | 92,746 |   |
| Total assets                                        |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,462,017 |   | $ | 115,947 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**      | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                                |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                    |       | $                                            | —     |   | $ | 263,800 |   | $ | 31,835 |   | $ | 4,260 |   | $ | 544 |   | $ | 300,439 |   |
| Accrued  liabilities                                |       | —                                       |       | 310,551 |   | 67,340 |   | 77 |   | — |   | 377,968 |   |
| Other current  liabilities                          |       | —                                       |       | 3,887 |   | — |   | — |   | — |   | 3,887 |   |
| Current  liabilities of discontinued operations     |       | —                                       |       | — |   | — |   | 16,764 |   | — |   | 16,764 |   |
| Total current  liabilities                          |       | —                                       |       | 578,238 |   | 99,175 |   | 21,101 |   | 544 |   | 699,058 |   |
| Long-term  liabilities:                             |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Long-term  debt                                     |       | —                                       |       | 3,195,711 |   | — |   | — |   | — |   | 3,195,711 |   |
| Deferred income  taxes                              |       | —                                       |       | 1,048,925 |   | — |   | — |   | — |   | 1,048,925 |   |
| Other long-term  liabilities                        |       | —                                       |       | 210,909 |   | 6,597 |   | 5 |   | — |   | 217,511 |   |
| Non-current  liabilities of discontinued operations |       | —                                       |       | — |   | — |   | 12,775 |   | — |   | 12,775 |   |
| Total long-term  liabilities                        |       | —                                       |       | 4,455,545 |   | 6,597 |   | 12,780 |   | — |   | 4,474,922 |   |
| Minority interest                                   |       | —                                       |       | — |   | — |   | — |   | 6,314 |   | 6,314 |   |
| Total shareholders’  equity                    |       | 1,427,667                                    |       | 1,427,667 |   | 2,356,245 |   | 82,066 |   | (3,865,978 | ) | 1,427,667 |   |
| Total liabilities and shareholders’ equity     |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,462,017 |   | $ | 115,947 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |

 

F-45

----

 
| ** **                                                                        | ** ** | **Fiscal year ended July 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                   | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                             | —     |   | $ | 3,700,513 |   | $ | 689,563 |   | $ | — |   | $ | — |   | $ | 4,390,076 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                        |       | 2,316,301 |   | 436,749 |   | 764 |   | — |   | 2,753,814 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                        |       | 880,136 |   | 135,613 |   | (609 | ) | — |   | 1,015,140 |   |
| Income from credit card  program                                                  |       | —                                                                        |       | (59,090 | ) | (6,633 | ) | — |   | — |   | (65,723 | ) |
| Depreciation expense                                                              |       | —                                                                        |       | 116,984 |   | 19,099 |   | 385 |   | — |   | 136,468 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                        |       | 60,500 |   | 11,765 |   | — |   | — |   | 72,265 |   |
| Other (income) expense,  net                                                      |       | —                                                                        |       | (9,816 | ) | 11,125 |   | — |   | — |   | 1,309 |   |
| Operating earnings  (loss)                                                        |       | —                                                                        |       | 395,498 |   | 81,845 |   | (540 | ) | — |   | 476,803 |   |
| Interest expense, net                                                             |       | —                                                                        |       | 259,801 |   | 4 |   | — |   | — |   | 259,805 |   |
| Intercompany royalty  charges (income)                                            |       | —                                                                        |       | 276,095 |   | (276,095 | ) | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (111,932                                                                      | )          | (334,625 | ) | — |   | — |   | 446,557 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 111,932                                                                       |       | 194,227 |   | 357,936 |   | (540 | ) | (446,557 | ) | 216,998 |   |
| Income taxes                                                                      |       | —                                                                        |       | 82,295 |   | — |   | — |   | — |   | 82,295 |   |
| Earnings (loss) from  continuing operations                                       |       | 111,932                                                                       |       | 111,932 |   | 357,936 |   | (540 | ) | (446,557 | ) | 134,703 |   |
| Loss from discontinued  operations, net of taxes                                  |       | —                                                                        |       | — |   | — |   | (21,282 | ) | (1,489 | ) | (22,771 | ) |
| Net earnings (loss)                                                               |       | $                                                                             | 111,932    |   | $ | 111,932 |   | $ | 357,936 |   | $ | (21,822 | ) | $ | (448,046 | ) | $ | 111,932 |   |

 

F-46

----

 
| ** **                                                                        | ** ** | **Forty-three weeks ended July 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                         | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                   | —     |   | $ | 2,885,321 |   | $ | 512,007 |   | $ | 410 |   | $ | — |   | $ | 3,397,738 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                              |       | 1,885,917 |   | 332,938 |   | 583 |   | — |   | 2,219,438 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                              |       | 704,720 |   | 97,767 |   | (132 | ) | — |   | 802,355 |   |
| Income from credit card  program                                                  |       | —                                                                              |       | (44,765 | ) | (4,588 | ) | — |   | — |   | (49,353 | ) |
| Depreciation expense                                                              |       | —                                                                              |       | 89,545 |   | 17,028 |   | 377 |   | — |   | 106,950 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                              |       | 49,880 |   | 9,760 |   | — |   | — |   | 59,640 |   |
| Operating earnings  (loss)                                                        |       | —                                                                              |       | 200,024 |   | 59,102 |   | (418 | ) | — |   | 258,708 |   |
| Interest expense, net                                                             |       | —                                                                              |       | 217,665 |   | — |   | — |   | — |   | 217,665 |   |
| Intercompany royalty  charges (income)                                            |       | —                                                                              |       | 201,879 |   | (201,879 | ) | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (12,455                                                                             | )          | (246,570 | ) | — |   | — |   | 259,025 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 12,455                                                                              |       | 27,050 |   | 260,981 |   | (418 | ) | (259,025 | ) | 41,043 |   |
| Income taxes                                                                      |       | —                                                                              |       | 14,595 |   | — |   | — |   | — |   | 14,595 |   |
| Earnings (loss) from  continuing operations                                       |       | 12,455                                                                              |       | 12,455 |   | 260,981 |   | (418 | ) | (259,025 | ) | 26,448 |   |
| (Loss) earnings from  discontinued operations, net of taxes                       |       | —                                                                              |       | — |   | — |   | (14,251 | ) | 258 |   | (13,993 | ) |
| Net earnings (loss)                                                               |       | $                                                                                   | 12,455     |   | $ | 12,455 |   | $ | 260,981 |   | $ | (14,669 | ) | $ | (258,767 | ) | $ | 12,455 |   |

 
| ** **                                                                        | ** ** | ** ** | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | ** ** | ** ** | **NMG**                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       |       |       | $                                                                                | 530,667    |   | $ | 101,556 |   | $ | 149 |   | $ | — |   | $ | 632,372 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       |       |       | 312,454                                                                          |       | 58,986 |   | 102 |   | — |   | 371,542 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       |       |       | 135,279                                                                          |       | 20,491 |   | (138 | ) | — |   | 155,632 |   |
| Income from credit card  program                                                  |       |       |       | (6,994                                                                           | )          | (824 | ) | — |   | — |   | (7,818 | ) |
| Depreciation expense                                                              |       |       |       | 16,118                                                                           |       | 3,015 |   | 76 |   | — |   | 19,209 |   |
| Transaction and other  costs                                                      |       |       |       | 23,544                                                                           |       | — |   | — |   | — |   | 23,544 |   |
| Operating earnings                                                                |       |       |       | 50,266                                                                           |       | 19,888 |   | 109 |   | — |   | 70,263 |   |
| Interest income, net                                                              |       |       |       | (910                                                                             | )          | — |   | — |   | — |   | (910 | ) |
| Intercompany royalty  charges (income)                                            |       |       |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       |       |       | (65,444                                                                          | )          | — |   | — |   | 65,444 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       |       |       | 70,380                                                                           |       | 66,128 |   | 109 |   | (65,444 | ) | 71,173 |   |
| Income taxes                                                                      |       |       |       | 26,226                                                                           |       | — |   | — |   | — |   | 26,226 |   |
| Earnings (loss) from  continuing operations                                       |       |       |       | 44,154                                                                           |       | 66,128 |   | 109 |   | (65,444 | ) | 44,947 |   |
| (Loss) earnings from  discontinued operations, net of taxes                       |       |       |       | —                                                                           |       | — |   | (1,346 | ) | 553 |   | (793 | ) |
| Net earnings (loss)                                                               |       |       |       | $                                                                                | 44,154     |   | $ | 66,128 |   | $ | (1,237 | ) | $ | (64,891 | ) | $ | 44,154 |   |

 

F-47

----

 
| ** **                                                                        | ** ** | **Fiscal year ended July 30, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **NMG**                                                                         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                               | 3,175,675  |   | $ | 518,492 |   | $ | 907 |   | $ | — |   | $ | 3,695,074 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 2,009,096                                                                       |       | 339,543 |   | 568 |   | — |   | 2,349,207 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 796,060                                                                         |       | 112,101 |   | (855 | ) | — |   | 907,306 |   |
| Income from credit card  program                                                  |       | —                                                                          |       | — |   | (71,644 | ) | — |   | (71,644 | ) |
| Depreciation expense                                                              |       | 84,832                                                                          |       | 18,301 |   | 456 |   | — |   | 103,589 |   |
| Loss on disposition of  Chef’s Catalog                                       |       | 7,048                                                                           |       | 8,300 |   | — |   | — |   | 15,348 |   |
| Gain on credit card  sale                                                         |       | —                                                                          |       | — |   | (6,170 | ) | — |   | (6,170 | ) |
| Operating earnings                                                                |       | 278,639                                                                         |       | 40,247 |   | 78,552 |   | — |   | 397,438 |   |
| Interest expense, net                                                             |       | 7,019                                                                           |       | — |   | 5,242 |   | — |   | 12,261 |   |
| Intercompany royalty  charges (income)                                            |       | 195,572                                                                         |       | (195,572 | ) | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (314,149                                                                        | )          | — |   | — |   | 314,149 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 390,197                                                                         |       | 235,819 |   | 73,310 |   | (314,149 | ) | 385,177 |   |
| Income taxes                                                                      |       | 141,373                                                                         |       | — |   | — |   | — |   | 141,373 |   |
| Earnings (loss) from  continuing operations                                       |       | 248,824                                                                         |       | 235,819 |   | 73,310 |   | (314,149 | ) | 243,804 |   |
| Earnings (loss) from  discontinued operations, net of taxes                       |       | —                                                                          |       | — |   | 8,857 |   | (3,837 | ) | 5,020 |   |
| Net earnings (loss)                                                               |       | $                                                                               | 248,824    |   | $ | 235,819 |   | $ | 82,167 |   | $ | (317,986 | ) | $ | 248,824 |   |

 

F-48

----

 
| ** **                                                                                    | ** ** | **Fiscal year ended July 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                   | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss)                                                                           |       | $                                                                             | 111,932    |   | $ | 111,932 |   | $ | 357,936 |   | $ | (21,822 | ) | $ | (448,046 | ) | $ | 111,932 |   |
| Loss from discontinued  operations                                                            |       | —                                                                        |       | — |   | — |   | 21,282 |   | 1,489 |   | 22,771 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                        |       | 116,984 |   | 19,099 |   | 385 |   | — |   | 136,468 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                        |       | 14,141 |   | — |   | — |   | — |   | 14,141 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                        |       | 60,500 |   | 11,765 |   | — |   | — |   | 72,265 |   |
| Stock-based  compensation charges                                                             |       | —                                                                        |       | 5,859 |   | — |   | — |   | — |   | 5,859 |   |
| Deferred income  taxes                                                                        |       | —                                                                        |       | (60,522 | ) | — |   | — |   | — |   | (60,522 | ) |
| Impairment of  Horchow tradename                                                              |       | —                                                                        |       | — |   | 11,473 |   | — |   | — |   | 11,473 |   |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                        |       | 21,842 |   | (7,170 | ) | — |   | — |   | 14,672 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                        |       | 276,095 |   | (276,095 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (111,932                                                                      | )          | (334,625 | ) | — |   | — |   | 446,557 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | —                                                                        |       | 37,744 |   | (108,511 | ) | 11,535 |   | — |   | (59,232 | ) |
| Net cash provided by  continuing operating activities                                         |       | —                                                                        |       | 249,950 |   | 8,497 |   | 11,380 |   | — |   | 269,827 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                        |       | — |   | — |   | (10,918 | ) | — |   | (10,918 | ) |
| Net cash provided by  operating activities                                                    |       | —                                                                        |       | 249,950 |   | 8,497 |   | 462 |   | — |   | 258,909 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                          |       | —                                                                        |       | (139,775 | ) | (8,287 | ) | 185 |   | — |   | (147,877 | ) |
| Payment to minority  interest holder in Kate Spade LLC                                        |       | —                                                                        |       | (59,400 | ) | — |   | — |   | — |   | (59,400 | ) |
| Net proceeds from sale  of Kate Spade LLC                                                     |       | —                                                                        |       | 121,469 |   | — |   | — |   | — |   | 121,469 |   |
| Net cash (used for)  provided by continuing investing activities                              |       | —                                                                        |       | (77,706 | ) | (8,287 | ) | 185 |   | — |   | (85,808 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                        |       | — |   | — |   | (128 | ) | — |   | (128 | ) |
| Net cash (used for)  provided by investing activities                                         |       | —                                                                        |       | (77,706 | ) | (8,287 | ) | 57 |   | — |   | (85,936 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Repayment of borrowings                                                                       |       | —                                                                        |       | (254,918 | ) | — |   | — |   | — |   | (254,918 | ) |
| Debt issuance costs  paid                                                                     |       | —                                                                        |       | (1,449 | ) | — |   | — |   | — |   | (1,449 | ) |
| Proceeds from purchase  of common stock                                                       |       | —                                                                        |       | 1,148 |   | — |   | — |   | — |   | 1,148 |   |
| Net cash used for  continuing financing activities                                            |       | —                                                                        |       | (255,219 | ) | — |   | — |   | — |   | (255,219 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                        |       | — |   | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for  financing activities                                                       |       | —                                                                        |       | (255,219 | ) | — |   | (1,675 | ) | — |   | (256,894 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Decrease) increase  during the period                                                        |       | —                                                                        |       | (82,975 | ) | 210 |   | (1,156 | ) | — |   | (83,921 | ) |
| Beginning balance                                                                             |       | —                                                                        |       | 222,308 |   | 986 |   | 1,834 |   | — |   | 225,128 |   |
| Ending balance                                                                                |       | $                                                                             | —     |   | $ | 139,333 |   | $ | 1,196 |   | $ | 678 |   | $ | — |   | $ | 141,207 |   |

 

F-49

----

 
| ** **                                                                                    | ** ** | **Forty-three weeks ended July 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                         | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss)                                                                           |       | $                                                                                   | 12,455     |   | $ | 12,455 |   | $ | 260,981 |   | $ | (14,669 | ) | $ | (258,767 | ) | $ | 12,455 |   |
| Loss (earnings) from  discontinued operations                                                 |       | —                                                                              |       | — |   | — |   | 14,251 |   | (258 | ) | 13,993 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                              |       | 89,545 |   | 17,028 |   | 377 |   | — |   | 106,950 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                              |       | 11,728 |   | — |   | — |   | — |   | 11,728 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                              |       | 49,880 |   | 9,760 |   | — |   | — |   | 59,640 |   |
| Non-cash  charges related to step-up in carrying value of inventory                           |       | —                                                                              |       | 32,890 |   | 5,177 |   | — |   | — |   | 38,067 |   |
| Stock-based  compensation charges                                                             |       | —                                                                              |       | 3,951 |   | — |   | — |   | — |   | 3,951 |   |
| Deferred income  taxes                                                                        |       | —                                                                              |       | (65,620 | ) | — |   | — |   | — |   | (65,620 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                              |       | 14,745 |   | 1,590 |   | (1,256 | ) | — |   | 15,079 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                              |       | 201,878 |   | (201,878 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (12,455                                                                             | )          | (246,570 | ) | — |   | — |   | 259,025 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | —                                                                              |       | 253,825 |   | (81,204 | ) | 16,282 |   | — |   | 188,903 |   |
| Net cash provided by  continuing operating activities                                         |       | —                                                                              |       | 358,707 |   | 11,454 |   | 14,985 |   | — |   | 385,146 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                              |       | — |   | — |   | (4,381 | ) | — |   | (4,381 | ) |
| Net cash provided by  operating activities                                                    |       | —                                                                              |       | 358,707 |   | 11,454 |   | 10,604 |   | — |   | 380,765 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                          |       | —                                                                              |       | (126,546 | ) | (11,390 | ) | (276 | ) | — |   | (138,212 | ) |
| Acquisition of The  Neiman Marcus Group, Inc.                                                 |       | —                                                                              |       | (5,156,423 | ) | — |   | — |   | — |   | (5,156,423 | ) |
| Net proceeds from the  Gurwitch Disposition                                                   |       | —                                                                              |       | 40,752 |   | — |   | — |   | — |   | 40,752 |   |
| Intercompany  (receivable) payable                                                            |       | (1,427,739                                                                          | )          | — |   | — |   | — |   | 1,427,739 |   | — |   |
| Net cash (used for)  provided by continuing investing activities                              |       | (1,427,739                                                                          | )          | (5,242,217 | ) | (11,390 | ) | (276 | ) | 1,427,739 |   | (5,253,883 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                              |       | — |   | — |   | (5,919 | ) | — |   | (5,919 | ) |
| Net cash (used for)  provided by investing activities                                         |       | (1,427,739                                                                          | )          | (5,242,217 | ) | (11,390 | ) | (6,195 | ) | 1,427,739 |   | (5,259,802 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from  borrowings                                                                     |       | —                                                                              |       | 3,325,000 |   | — |   | — |   | — |   | 3,325,000 |   |
| Repayment of borrowings                                                                       |       | —                                                                              |       | (385,812 | ) | — |   | — |   | — |   | (385,812 | ) |
| Debt issuance costs  paid                                                                     |       | —                                                                              |       | (102,854 | ) | — |   | — |   | — |   | (102,854 | ) |
| Cash equity  contributions                                                                    |       | 1,427,739                                                                           |       | 1,427,739 |   | — |   | — |   | (1,427,739 | ) | 1,427,739 |   |
| Net cash provided by  (used for) continuing financing activities                              |       | 1,427,739                                                                           |       | 4,264,073 |   | — |   | — |   | (1,427,739 | ) | 4,264,073 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                              |       | — |   | — |   | (4,168 | ) | — |   | (4,168 | ) |
| Net cash provided by  (used for) financing activities                                         |       | 1,427,739                                                                           |       | 4,264,073 |   | — |   | (4,168 | ) | (1,427,739 | ) | 4,259,905 |   |
| **CASH AND CASH EQUIVALENTS**                                                                 | ** ** | ** **                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Decrease) increase  during the period                                                        |       | —                                                                              |       | (619,437 | ) | 64 |   | 241 |   | — |   | (619,132 | ) |
| Beginning balance                                                                             |       | —                                                                              |       | 841,745 |   | 922 |   | 1,593 |   | — |   | 844,260 |   |
| Ending balance                                                                                |       | —                                                                              |       | 222,308 |   | 986 |   | 1,834 |   | — |   | 225,128 |   |
| Less cash of discontinued  operations                                                         |       | —                                                                              |       | — |   | — |   | 1,388 |   | — |   | 1,388 |   |
| Ending balance                                                                                |       | $                                                                                   | —     |   | $ | 222,308 |   | $ | 986 |   | $ | 446 |   | $ | — |   | $ | 223,740 |   |

 

F-50

----

 
| ** **                                                                                    | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **NMG**                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss)                                                                           |       | $                                                                                | 44,154     |   | $ | 66,128 |   | $ | (1,237 | ) | $ | (64,891 | ) | $ | 44,154 |   |
| Loss (earnings) from  discontinued operations                                                 |       | —                                                                           |       | — |   | 1,346 |   | (553 | ) | 793 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | 16,118                                                                           |       | 3,015 |   | 76 |   | — |   | 19,209 |   |
| Amortization of  debt issue costs                                                             |       | 96                                                                               |       | — |   | — |   | — |   | 96 |   |
| Stock-based  compensation charges                                                             |       | 19,968                                                                           |       | — |   | — |   | — |   | 19,968 |   |
| Deferred income  taxes                                                                        |       | (7,318                                                                           | )          | — |   | — |   | — |   | (7,318 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | (4,971                                                                           | )          | 254 |   | 493 |   | — |   | (4,224 | ) |
| Intercompany  royalty income payable (receivable)                                             |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (65,444                                                                          | )          | — |   | — |   | 65,444 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | 505,357                                                                          |       | (20,294 | ) | (534,208 | ) | — |   | (49,145 | ) |
| Net cash provided by  (used for) continuing operating activities                              |       | 554,200                                                                          |       | 2,863 |   | (533,530 | ) | — |   | 23,533 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                           |       | — |   | (4,098 | ) | — |   | (4,098 | ) |
| Net cash provided by  (used for) operating activities                                         |       | 554,200                                                                          |       | 2,863 |   | (537,628 | ) | — |   | 19,435 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                          |       | (22,455                                                                          | )          | (2,736 | ) | (384 | ) | — |   | (25,575 | ) |
| Net cash used for  continuing investing activities                                            |       | (22,455                                                                          | )          | (2,736 | ) | (384 | ) | — |   | (25,575 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                           |       | — |   | (736 | ) | — |   | (736 | ) |
| Net cash used for  investing activities                                                       |       | (22,455                                                                          | )          | (2,736 | ) | (1,120 | ) | — |   | (26,311 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash dividends paid                                                                           |       | (7,346                                                                           | )          | — |   | — |   | — |   | (7,346 | ) |
| Net cash used for  continuing financing activities                                            |       | (7,346                                                                           | )          | — |   | — |   | — |   | (7,346 | ) |
| Net cash provided by  discontinued operations                                                 |       | —                                                                           |       | — |   | 5,000 |   | — |   | 5,000 |   |
| Net cash (used for)  provided by financing activities                                         |       | (7,346                                                                           | )          | — |   | 5,000 |   | — |   | (2,346 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Increase (decrease)  during the period                                                        |       | 524,399                                                                          |       | 127 |   | (533,748 | ) | — |   | (9,222 | ) |
| Beginning balance                                                                             |       | 317,346                                                                          |       | 795 |   | 535,341 |   | — |   | 853,482 |   |
| Ending balance                                                                                |       | 841,745                                                                          |       | 922 |   | 1,593 |   | — |   | 844,260 |   |
| Less cash of  discontinued operations                                                         |       | —                                                                           |       | — |   | 1,056 |   | — |   | 1,056 |   |
| Ending balance                                                                                |       | $                                                                                | 841,745    |   | $ | 922 |   | $ | 537 |   | $ | — |   | $ | 843,204 |   |

 

F-51

----

 
| ** **                                                                                    | ** ** | **Fiscal year ended July 30, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **NMG**                                                                         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS - OPERATING  ACTIVITIES**                                                        | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings (loss)                                                                           |       | $                                                                               | 248,824    |   | $ | 235,819 |   | $ | 82,167 |   | $ | (317,986 | ) | $ | 248,824 |   |
| (Earnings) loss from  discontinued operations                                                 |       | —                                                                          |       | — |   | (8,857 | ) | 3,837 |   | (5,020 | ) |
| Adjustments to  reconcile net earnings to net cashprovided by operating activities:           |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | 84,832                                                                          |       | 18,301 |   | 456 |   | — |   | 103,589 |   |
| Deferred income  taxes                                                                        |       | (15,925                                                                         | )          | — |   | — |   | — |   | (15,925 | ) |
| Loss on  disposition of Chef’s catalog                                                   |       | 7,048                                                                           |       | 8,300 |   | — |   | — |   | 15,348 |   |
| Gain on Credit  Card Sale                                                                     |       | —                                                                          |       | — |   | (6,170 | ) | — |   | (6,170 | ) |
| Net cash  received from Credit Card Sale                                                      |       | —                                                                          |       | — |   | 533,656 |   | — |   | 533,656 |   |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | 40,783                                                                          |       | 1,474 |   | 642 |   | — |   | 42,899 |   |
| Intercompany  royalty income payable (receivable)                                             |       | 195,572                                                                         |       | (195,572 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (314,149                                                                        | )          | — |   | — |   | 314,149 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | (119,816                                                                        | )          | (51,468 | ) | 85,981 |   | — |   | (85,303 | ) |
| Net cash provided by  continuing operating activities                                         |       | 127,169                                                                         |       | 16,854 |   | 687,875 |   | — |   | 831,898 |   |
| Net cash provided by  discontinued operations                                                 |       | —                                                                          |       | — |   | 13,502 |   | — |   | 13,502 |   |
| Net cash provided by  operating activities                                                    |       | 127,169                                                                         |       | 16,854 |   | 701,377 |   | — |   | 845,400 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                          |       | (172,806                                                                        | )          | (16,887 | ) | (562 | ) | — |   | (190,255 | ) |
| Net increase in cash  restricted for repayment of borrowings under Credit Card Facility       |       | —                                                                          |       | — |   | (40,713 | ) | — |   | (40,713 | ) |
| Proceeds from the sale  of Chef’s Catalog                                                |       | 14,419                                                                          |       | — |   | — |   | — |   | 14,419 |   |
| Net cash used for  continuing investing activities                                            |       | (158,387                                                                        | )          | (16,887 | ) | (41,275 | ) | — |   | (216,549 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                          |       | — |   | (12,280 | ) | — |   | (12,280 | ) |
| Net cash used for  investing activities                                                       |       | (158,387                                                                        | )          | (16,887 | ) | (53,555 | ) | — |   | (228,829 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Repayment of borrowings  on lines of credit                                                   |       | (113                                                                            | )          | — |   | — |   | — |   | (113 | ) |
| Repayment of borrowings  under Credit Card Facility                                           |       | —                                                                          |       | — |   | (112,500 | ) | — |   | (112,500 | ) |
| Acquisitions of  treasury stock                                                               |       | (3,088                                                                          | )          | — |   | — |   | — |   | (3,088 | ) |
| Proceeds from stock-based  compensation awards                                                |       | 16,100                                                                          |       | — |   | — |   | — |   | 16,100 |   |
| Cash dividends paid                                                                           |       | (27,398                                                                         | )          | — |   | — |   | — |   | (27,398 | ) |
| Net cash used for continuing  financing activities                                            |       | (14,499                                                                         | )          | — |   | (112,500 | ) | — |   | (126,999 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                          |       | — |   | (4,457 | ) | — |   | (4,457 | ) |
| Net cash used for  financing activities                                                       |       | (14,499                                                                         | )          | — |   | (116,957 | ) | — |   | (131,456 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| (Decrease) increase  during the period                                                        |       | (45,717                                                                         | )          | (33 | ) | 530,865 |   | — |   | 485,115 |   |
| Beginning balance                                                                             |       | 363,063                                                                         |       | 828 |   | 4,476 |   | — |   | 368,367 |   |
| Ending balance                                                                                |       | 317,346                                                                         |       | 795 |   | 535,341 |   | — |   | 853,482 |   |
| Less cash of  discontinued operations                                                         |       | —                                                                          |       | — |   | 889 |   | — |   | 889 |   |
| Ending balance                                                                                |       | $                                                                               | 317,346    |   | $ | 795 |   | $ | 534,452 |   | $ | — |   | $ | 852,593 |   |

 

F-52

----

**NOTE 19. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (with respect to****NMG’s obligations under the 2028Debentures)**

** **

                All of NMG’s obligations underthe 2028 Debentures are guaranteed by the Company. The guarantee by the Companyis full and unconditional and joint and several. Currently, the Company’s non-guarantorsubsidiaries consist principally of Bergdorf Goodman, Inc. through whichNMG conducts the operations of its Bergdorf Goodman stores, NM Nevada Trustwhich holds legal title to certain real property and intangible assets used byNMG in conducting its operations and Neiman Marcus Funding Corporation throughwhich the Company previously conducted its credit card operations prior to theCredit Card Sale. Previously, our non-guarantor subsidiaries also included KateSpade LLC (prior to its sale in December 2006) and Gurwitch Products, L.L.C.(prior to its sale in July 2006), which are reflected in the tables below asdiscontinued operations.

 

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

 
| ** **                                 | ** ** | **July 28, 2007 (Successor)** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                    | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Current assets:                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                 |       | $                                            | —     |   | $ | 139,333 |   | $ | 1,874 |   | $ | — |   | $ | 141,207 |   |
| Merchandise  inventories                   |       | —                                       |       | 821,749 |   | 96,520 |   | — |   | 918,269 |   |
| Other current  assets                      |       | —                                       |       | 142,632 |   | 12,317 |   | 544 |   | 155,493 |   |
| Total current  assets                      |       | —                                       |       | 1,103,714 |   | 110,711 |   | 544 |   | 1,214,969 |   |
| Property and equipment,  net               |       | —                                       |       | 901,072 |   | 142,639 |   | — |   | 1,043,711 |   |
| Goodwill and  intangibles, net             |       | —                                       |       | 1,945,040 |   | 2,194,979 |   | — |   | 4,140,019 |   |
| Other assets                               |       | —                                       |       | 102,108 |   | 192 |   | — |   | 102,300 |   |
| Investments in  subsidiaries               |       | 1,558,012                                    |       | 2,333,438 |   | — |   | (3,891,450 | ) | — |   |
| Total assets                               |       | $                                            | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,448,521 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |
| **LIABILITIES AND SHAREHOLDERS'  EQUITY**  |       |                                         |       |   |   |   |   |   |   |   |   |
| Current liabilities:                       |       |                                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                           |       | $                                            | —     |   | $ | 318,439 |   | $ | 42,316 |   | $ | 544 |   | $ | 361,299 |   |
| Accrued  liabilities                       |       | —                                       |       | 329,625 |   | 73,537 |   | — |   | 403,162 |   |
| Other current  liabilities                 |       | —                                       |       | 3,426 |   | — |   | — |   | 3,426 |   |
| Total current  liabilities                 |       | —                                       |       | 651,490 |   | 115,853 |   | 544 |   | 767,887 |   |
| Long-term  liabilities:                    |       |                                         |       |   |   |   |   |   |   |   |   |
| Long-term  debt                            |       | —                                       |       | 2,945,906 |   | — |   | — |   | 2,945,906 |   |
| Deferred income  taxes                     |       | —                                       |       | 1,002,982 |   | — |   | — |   | 1,002,982 |   |
| Other long-term  liabilities               |       | —                                       |       | 226,982 |   | (770 | ) | — |   | 226,212 |   |
| Total long-term  liabilities               |       | —                                       |       | 4,175,870 |   | (770 | ) | — |   | 4,175,100 |   |
| Total shareholders'  equity                |       | 1,558,012                                    |       | 1,558,012 |   | 2,333,438 |   | (3,891,450 | ) | 1,558,012 |   |
| Total liabilities and shareholders' equity |       | $                                            | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,448,521 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |

 

F-53

----

 

 
| ** **                                         | ** ** | **July 29, 2006 (Successor)** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                            | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| Current assets:                                    |       |                                         |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                          |       | $                                            | —     |   | $ | 222,308 |   | $ | 1,432 |   | $ | — |   | $ | 223,740 |   |
| Merchandise inventories                            |       | —                                       |       | 711,443 |   | 84,259 |   | (2,081 | ) | 793,621 |   |
| Other current assets                               |       | —                                       |       | 89,359 |   | 11,975 |   | 544 |   | 101,878 |   |
| Current assets of discontinued operations          |       | —                                       |       | — |   | 16,617 |   | — |   | 16,617 |   |
| Total current assets                               |       | —                                       |       | 1,023,110 |   | 114,283 |   | (1,537 | ) | 1,135,856 |   |
| Property and  equipment, net                       |       | —                                       |       | 875,725 |   | 154,554 |   | — |   | 1,030,279 |   |
| Goodwill and  intangibles, net                     |       | —                                       |       | 2,007,770 |   | 2,215,987 |   | — |   | 4,223,757 |   |
| Other assets                                       |       | —                                       |       | 124,929 |   | 394 |   | — |   | 125,323 |   |
| Investments in  subsidiaries                       |       | 1,427,667                                    |       | 2,429,916 |   | — |   | (3,857,583 | ) | — |   |
| Non-current  assets of discontinued operations     |       | —                                       |       | — |   | 92,746 |   | — |   | 92,746 |   |
| Total assets                                       |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,577,964 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |
| **LIABILITIES  AND SHAREHOLDERS' EQUITY**          |       |                                         |       |   |   |   |   |   |   |   |   |
| Current  liabilities:                              |       |                                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                   |       | $                                            | —     |   | $ | 263,800 |   | $ | 36,095 |   | $ | 544 |   | $ | 300,439 |   |
| Accrued liabilities                                |       | —                                       |       | 310,551 |   | 67,417 |   | — |   | 377,968 |   |
| Other current liabilities                          |       | —                                       |       | 3,887 |   | — |   | — |   | 3,887 |   |
| Current liabilities of discontinued operations     |       | —                                       |       | — |   | 16,764 |   | — |   | 16,764 |   |
| Total current liabilities                          |       | —                                       |       | 578,238 |   | 120,276 |   | 544 |   | 699,058 |   |
| Long-term  liabilities:                            |       |                                         |       |   |   |   |   |   |   |   |   |
| Long-term debt                                     |       | —                                       |       | 3,195,711 |   | — |   | — |   | 3,195,711 |   |
| Deferred income taxes                              |       | —                                       |       | 1,048,925 |   | — |   | — |   | 1,048,925 |   |
| Other long-term liabilities                        |       | —                                       |       | 210,909 |   | 6,602 |   | — |   | 217,511 |   |
| Non-current liabilities of discontinued operations |       | —                                       |       | — |   | 12,775 |   | — |   | 12,775 |   |
| Total long-term liabilities                        |       | —                                       |       | 4,455,545 |   | 19,377 |   | — |   | 4,474,922 |   |
| Minority  interest                                 |       | —                                       |       | — |   | — |   | 6,314 |   | 6,314 |   |
| Total  shareholders' equity                        |       | 1,427,667                                    |       | 1,427,667 |   | 2,438,311 |   | (3,865,978 | ) | 1,427,667 |   |
| Total liabilities and  shareholders' equity        |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,577,964 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |

 

F-54

----

 

 
| ** **                                                                        | ** ** | **Fiscal year ended July 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                   | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                             | —     |   | $ | 3,700,513 |   | $ | 689,563 |   | $ | — |   | $ | 4,390,076 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                        |       | 2,316,301 |   | 437,513 |   | — |   | 2,753,814 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                        |       | 880,136 |   | 135,004 |   | — |   | 1,015,140 |   |
| Income from credit card  program                                                  |       | —                                                                        |       | (59,090 | ) | (6,633 | ) | — |   | (65,723 | ) |
| Depreciation expense                                                              |       | —                                                                        |       | 116,984 |   | 19,484 |   | — |   | 136,468 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                        |       | 60,500 |   | 11,765 |   | — |   | 72,265 |   |
| Other (income) expense,  net                                                      |       | —                                                                        |       | (9,816 | ) | 11,125 |   | — |   | 1,309 |   |
| Operating earnings                                                                |       | —                                                                        |       | 395,498 |   | 81,305 |   | — |   | 476,803 |   |
| Interest expense, net                                                             |       | —                                                                        |       | 259,801 |   | 4 |   | — |   | 259,805 |   |
| Intercompany royalty  charges (income)                                            |       | —                                                                        |       | 276,095 |   | (276,095 | ) | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (111,932                                                                      | )          | (334,625 | ) | — |   | 446,557 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 111,932                                                                       |       | 194,227 |   | 357,396 |   | (446,557 | ) | 216,998 |   |
| Income taxes                                                                      |       | —                                                                        |       | 82,295 |   | — |   | — |   | 82,295 |   |
| Earnings (loss) from  continuing operations                                       |       | 111,932                                                                       |       | 111,932 |   | 357,396 |   | (446,557 | ) | 134,703 |   |
| Loss from discontinued  operations, net of taxes                                  |       | —                                                                        |       | — |   | (21,282 | ) | (1,489 | ) | (22,771 | ) |
| Net earnings (loss)                                                               |       | $                                                                             | 111,932    |   | $ | 111,932 |   | $ | 336,114 |   | $ | (448,046 | ) | $ | 111,932 |   |

 

F-55

----

| ** **                                                                        | ** ** | **Forty-three weeks ended July 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                         | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                   | —     |   | $ | 2,885,321 |   | $ | 512,417 |   | $ | — |   | $ | 3,397,738 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                              |       | 1,885,917 |   | 333,521 |   | — |   | 2,219,438 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                              |       | 704,720 |   | 97,635 |   | — |   | 802,355 |   |
| Income from credit card  program                                                  |       | —                                                                              |       | (44,765 | ) | (4,588 | ) | — |   | (49,353 | ) |
| Depreciation expense                                                              |       | —                                                                              |       | 89,545 |   | 17,405 |   | — |   | 106,950 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                              |       | 49,880 |   | 9,760 |   | — |   | 59,640 |   |
| Operating earnings                                                                |       | —                                                                              |       | 200,024 |   | 58,684 |   | — |   | 258,708 |   |
| Interest expense, net                                                             |       | —                                                                              |       | 217,665 |   | — |   | — |   | 217,665 |   |
| Intercompany royalty charges  (income)                                            |       | —                                                                              |       | 201,879 |   | (201,879 | ) | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (12,455                                                                             | )          | (246,570 | ) | — |   | 259,025 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 12,455                                                                              |       | 27,050 |   | 260,563 |   | (259,025 | ) | 41,043 |   |
| Income taxes                                                                      |       | —                                                                              |       | 14,595 |   | — |   | — |   | 14,595 |   |
| Earnings (loss) from  continuing operations                                       |       | 12,455                                                                              |       | 12,455 |   | 260,563 |   | (259,025 | ) | 26,448 |   |
| (Loss) earnings from  discontinued operations, net of taxes                       |       | —                                                                              |       | — |   | (14,251 | ) | 258 |   | (13,993 | ) |
| Net earnings (loss)                                                               |       | $                                                                                   | 12,455     |   | $ | 12,455 |   | $ | 246,312 |   | $ | (258,767 | ) | $ | 12,455 |   |

 
| ** **                                                                        | ** ** | ** ** | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | ** ** | ** ** | **NMG**                                                                          | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       |       |       | $                                                                                | 530,667    |   | $ | 101,705 |   | $ | — |   | $ | 632,372 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       |       |       | 312,454                                                                          |       | 59,088 |   | — |   | 371,542 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       |       |       | 135,279                                                                          |       | 20,353 |   | — |   | 155,632 |   |
| Income from credit card  program                                                  |       |       |       | (6,994                                                                           | )          | (824 | ) | — |   | (7,818 | ) |
| Depreciation expense                                                              |       |       |       | 16,118                                                                           |       | 3,091 |   | — |   | 19,209 |   |
| Transaction and other  costs                                                      |       |       |       | 23,544                                                                           |       | — |   | — |   | 23,544 |   |
| Operating earnings                                                                |       |       |       | 50,266                                                                           |       | 19,997 |   | — |   | 70,263 |   |
| Interest income, net                                                              |       |       |       | (910                                                                             | )          | — |   | — |   | (910 | ) |
| Intercompany royalty  charges (income)                                            |       |       |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       |       |       | (65,444                                                                          | )          | — |   | 65,444 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       |       |       | 70,380                                                                           |       | 66,237 |   | (65,444 | ) | 71,173 |   |
| Income taxes                                                                      |       |       |       | 26,226                                                                           |       | — |   | — |   | 26,226 |   |
| Earnings (loss) from  continuing operations                                       |       |       |       | 44,154                                                                           |       | 66,237 |   | (65,444 | ) | 44,947 |   |
| (Loss) earnings from  discontinued operations, net of taxes                       |       |       |       | —                                                                           |       | (1,346 | ) | 553 |   | (793 | ) |
| Net earnings (loss)                                                               |       |       |       | $                                                                                | 44,154     |   | $ | 64,891 |   | $ | (64,891 | ) | $ | 44,154 |   |

 

F-56

----

| ** **                                                                        | ** ** | **Fiscal year ended July 30, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **NMG**                                                                         | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                               | 3,175,675  |   | $ | 519,399 |   | $ | — |   | $ | 3,695,074 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 2,009,096                                                                       |       | 340,111 |   | — |   | 2,349,207 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 796,060                                                                         |       | 111,246 |   | — |   | 907,306 |   |
| Income from credit card  program                                                  |       | —                                                                          |       | (71,644 | ) | — |   | (71,644 | ) |
| Depreciation expense                                                              |       | 84,832                                                                          |       | 18,757 |   | — |   | 103,589 |   |
| Loss on disposition of  Chef's Catalog                                            |       | 7,048                                                                           |       | 8,300 |   | — |   | 15,348 |   |
| Gain on credit card  sale                                                         |       | —                                                                          |       | (6,170 | ) | — |   | (6,170 | ) |
| Operating earnings                                                                |       | 278,639                                                                         |       | 118,799 |   | — |   | 397,438 |   |
| Interest expense, net                                                             |       | 7,019                                                                           |       | 5,242 |   | — |   | 12,261 |   |
| Intercompany royalty  charges (income)                                            |       | 195,572                                                                         |       | (195,572 | ) | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (314,149                                                                        | )          | — |   | 314,149 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 390,197                                                                         |       | 309,129 |   | (314,149 | ) | 385,177 |   |
| Income taxes                                                                      |       | 141,373                                                                         |       | — |   | — |   | 141,373 |   |
| Earnings (loss) from  continuing operations                                       |       | 248,824                                                                         |       | 309,129 |   | (314,149 | ) | 243,804 |   |
| Earnings (loss) from  discontinued operations, net of taxes                       |       | —                                                                          |       | 8,857 |   | (3,837 | ) | 5,020 |   |
| Net earnings (loss)                                                               |       | $                                                                               | 248,824    |   | $ | 317,986 |   | $ | (317,986 | ) | $ | 248,824 |   |

 

F-57

----

| ** **                                                                                    | ** ** | **Fiscal year ended July 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                   | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                             | 111,932    |   | $ | 111,932 |   | $ | 336,114 |   | $ | (448,046 | ) | $ | 111,932 |   |
| Loss from discontinued  operations                                                            |       | —                                                                        |       | — |   | 21,282 |   | 1,489 |   | 22,771 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                        |       | 116,984 |   | 19,484 |   | — |   | 136,468 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                        |       | 14,141 |   | — |   | — |   | 14,141 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                        |       | 60,500 |   | 11,765 |   | — |   | 72,265 |   |
| Stock-based  compensation charges                                                             |       | —                                                                        |       | 5,859 |   | — |   | — |   | 5,859 |   |
| Deferred income  taxes                                                                        |       | —                                                                        |       | (60,522 | ) | — |   | — |   | (60,522 | ) |
| Impairment of  Horchow tradename                                                              |       | —                                                                        |       | — |   | 11,473 |   | — |   | 11,473 |   |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                        |       | 21,842 |   | (7,170 | ) | — |   | 14,672 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                        |       | 276,095 |   | (276,095 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (111,932                                                                      | )          | (334,625 | ) | — |   | 446,557 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | —                                                                        |       | 37,744 |   | (96,976 | ) | — |   | (59,232 | ) |
| Net cash provided by  continuing operating activities                                         |       | —                                                                        |       | 249,950 |   | 19,877 |   | — |   | 269,827 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                        |       | — |   | (10,918 | ) | — |   | (10,918 | ) |
| Net cash provided by  operating activities                                                    |       | —                                                                        |       | 249,950 |   | 8,959 |   | — |   | 258,909 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | —                                                                        |       | (139,775 | ) | (8,102 | ) | — |   | (147,877 | ) |
| Payment to minority  interest holder in Kate Spade                                            |       | —                                                                        |       | (59,400 | ) | — |   | — |   | (59,400 | ) |
| Net proceeds from sale  of Kate Spade                                                         |       | —                                                                        |       | 121,469 |   | — |   | — |   | 121,469 |   |
| Net cash used for  continuing investing activities                                            |       | —                                                                        |       | (77,706 | ) | (8,102 | ) | — |   | (85,808 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                        |       | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for  investing activities                                                       |       | —                                                                        |       | (77,706 | ) | (8,230 | ) | — |   | (85,936 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                       |       | —                                                                        |       | (254,918 | ) | — |   | — |   | (254,918 | ) |
| Debt issuance costs  paid                                                                     |       | —                                                                        |       | (1,449 | ) | — |   | — |   | (1,449 | ) |
| Proceeds from purchase  of common stock                                                       |       | —                                                                        |       | 1,148 |   | — |   | — |   | 1,148 |   |
| Net cash used for  continuing financing activities                                            |       | —                                                                        |       | (255,219 | ) | — |   | — |   | (255,219 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                        |       | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for  financing activities                                                       |       | —                                                                        |       | (255,219 | ) | (1,675 | ) | — |   | (256,894 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                          |       |   |   |   |   |   |   |   |   |
| Decrease during the  period                                                                   |       | —                                                                        |       | (82,975 | ) | (946 | ) | — |   | (83,921 | ) |
| Beginning balance                                                                             |       | —                                                                        |       | 222,308 |   | 2,820 |   | — |   | 225,128 |   |
| Ending balance                                                                                |       | $                                                                             | —     |   | $ | 139,333 |   | $ | 1,874 |   | $ | — |   | $ | 141,207 |   |

 

F-58

----

| ** **                                                                                    | ** ** | **Forty-three weeks ended July 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                         | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                                   | 12,455     |   | $ | 12,455 |   | $ | 246,312 |   | $ | (258,767 | ) | $ | 12,455 |   |
| Loss (earnings) from  discontinued operations                                                 |       | —                                                                              |       | — |   | 14,251 |   | (258 | ) | 13,993 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                              |       | 89,545 |   | 17,405 |   | — |   | 106,950 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                              |       | 11,728 |   | — |   | — |   | 11,728 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                              |       | 49,880 |   | 9,760 |   | — |   | 59,640 |   |
| Non-cash  charges related to step-up in carrying value of inventory                           |       | —                                                                              |       | 32,890 |   | 5,177 |   | — |   | 38,067 |   |
| Stock-based  compensation charges                                                             |       | —                                                                              |       | 3,951 |   | — |   | — |   | 3,951 |   |
| Deferred income  taxes                                                                        |       | —                                                                              |       | (65,620 | ) | — |   | — |   | (65,620 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                              |       | 14,745 |   | 334 |   | — |   | 15,079 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                              |       | 201,878 |   | (201,878 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (12,455                                                                             | )          | (246,570 | ) | — |   | 259,025 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | —                                                                              |       | 253,825 |   | (64,922 | ) | — |   | 188,903 |   |
| Net cash provided by  continuing operating activities                                         |       | —                                                                              |       | 358,707 |   | 26,439 |   | — |   | 385,146 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                              |       | — |   | (4,381 | ) | — |   | (4,381 | ) |
| Net cash provided by  operating activities                                                    |       | —                                                                              |       | 358,707 |   | 22,058 |   | — |   | 380,765 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | —                                                                              |       | (126,546 | ) | (11,666 | ) | — |   | (138,212 | ) |
| Acquisition of The  Neiman Marcus Group, Inc.                                                 |       | —                                                                              |       | (5,156,423 | ) | — |   | — |   | (5,156,423 | ) |
| Net proceeds from the  Gurwitch Disposition                                                   |       | —                                                                              |       | 40,752 |   | — |   | — |   | 40,752 |   |
| Intercompany  (receivable) payable                                                            |       | (1,427,739                                                                          | )          | — |   | — |   | 1,427,739 |   | — |   |
| Net cash (used for)  provided by continuing investing activities                              |       | (1,427,739                                                                          | )          | (5,242,217 | ) | (11,666 | ) | 1,427,739 |   | (5,253,883 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                              |       | — |   | (5,919 | ) | — |   | (5,919 | ) |
| Net cash (used for)  provided by investing activities                                         |       | (1,427,739                                                                          | )          | (5,242,217 | ) | (17,585 | ) | 1,427,739 |   | (5,259,802 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                                |       |   |   |   |   |   |   |   |   |
| Proceeds from  borrowings                                                                     |       | —                                                                              |       | 3,325,000 |   | — |   | — |   | 3,325,000 |   |
| Repayment of borrowings                                                                       |       | —                                                                              |       | (385,812 | ) | — |   | — |   | (385,812 | ) |
| Debt issuance costs  paid                                                                     |       | —                                                                              |       | (102,854 | ) | — |   | — |   | (102,854 | ) |
| Cash equity contributions                                                                     |       | 1,427,739                                                                           |       | 1,427,739 |   | — |   | (1,427,739 | ) | 1,427,739 |   |
| Net cash provided by  (used for) continuing financing activities                              |       | 1,427,739                                                                           |       | 4,264,073 |   | — |   | (1,427,739 | ) | 4,264,073 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                              |       | — |   | (4,168 | ) | — |   | (4,168 | ) |
| Net cash provided by  (used for) financing activities                                         |       | 1,427,739                                                                           |       | 4,264,073 |   | (4,168 | ) | (1,427,739 | ) | 4,259,905 |   |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                                |       |   |   |   |   |   |   |   |   |
| (Decrease) increase  during the period                                                        |       | —                                                                              |       | (619,437 | ) | 305 |   | — |   | (619,132 | ) |
| Beginning balance                                                                             |       | —                                                                              |       | 841,745 |   | 2,515 |   | — |   | 844,260 |   |
| Ending balance                                                                                |       | —                                                                              |       | 222,308 |   | 2,820 |   | — |   | 225,128 |   |
| Less cash of  discontinued operations                                                         |       | —                                                                              |       | — |   | 1,388 |   | — |   | 1,388 |   |
| Ending balance                                                                                |       | $                                                                                   | —     |   | $ | 222,308 |   | $ | 1,432 |   | $ | — |   | $ | 223,740 |   |

 

F-59

----

| ** **                                                                                    | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **NMG**                                                                          | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                             |       |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                                | 44,154     |   | $ | 64,891 |   | $ | (64,891 | ) | $ | 44,154 |   |
| Loss (earnings) from  discontinued operations                                                 |       | —                                                                           |       | 1,346 |   | (553 | ) | 793 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                             |       |   |   |   |   |   |   |
| Depreciation                                                                                  |       | 16,118                                                                           |       | 3,091 |   | — |   | 19,209 |   |
| Amortization of  debt issue costs                                                             |       | 96                                                                               |       | — |   | — |   | 96 |   |
| Stock-based  compensation charges                                                             |       | 19,968                                                                           |       | — |   | — |   | 19,968 |   |
| Deferred income  taxes                                                                        |       | (7,318                                                                           | )          | — |   | — |   | (7,318 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | (4,971                                                                           | )          | 747 |   | — |   | (4,224 | ) |
| Intercompany  royalty income payable (receivable)                                             |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (65,444                                                                          | )          | — |   | 65,444 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | 505,357                                                                          |       | (554,502 | ) | — |   | (49,145 | ) |
| Net cash provided by  (used for) continuing operating activities                              |       | 554,200                                                                          |       | (530,667 | ) | — |   | 23,533 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                           |       | (4,098 | ) | — |   | (4,098 | ) |
| Net cash provided by  (used for) operating activities                                         |       | 554,200                                                                          |       | (534,765 | ) | — |   | 19,435 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                             |       |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | (22,455                                                                          | )          | (3,120 | ) | — |   | (25,575 | ) |
| Net cash used for  continuing investing activities                                            |       | (22,455                                                                          | )          | (3,120 | ) | — |   | (25,575 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                           |       | (736 | ) | — |   | (736 | ) |
| Net cash used for  investing activities                                                       |       | (22,455                                                                          | )          | (3,856 | ) | — |   | (26,311 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                             |       |   |   |   |   |   |   |
| Cash dividends paid                                                                           |       | (7,346                                                                           | )          | — |   | — |   | (7,346 | ) |
| Net cash used for  continuing financing activities                                            |       | (7,346                                                                           | )          | — |   | — |   | (7,346 | ) |
| Net cash provided by  discontinued operations                                                 |       | —                                                                           |       | 5,000 |   | — |   | 5,000 |   |
| Net cash (used for)  provided by financing activities                                         |       | (7,346                                                                           | )          | 5,000 |   | — |   | (2,346 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                             |       |   |   |   |   |   |   |
| Increase (decrease)  during the period                                                        |       | 524,399                                                                          |       | (533,621 | ) | — |   | (9,222 | ) |
| Beginning balance                                                                             |       | 317,346                                                                          |       | 536,136 |   | — |   | 853,482 |   |
| Ending balance                                                                                |       | 841,745                                                                          |       | 2,515 |   | — |   | 844,260 |   |
| Less cash of  discontinued operations                                                         |       | —                                                                           |       | 1,056 |   | — |   | 1,056 |   |
| Ending balance                                                                                |       | $                                                                                | 841,745    |   | $ | 1,459 |   | $ | — |   | $ | 843,204 |   |

 

F-60

----

| ** **                                                                                    | ** ** | **Fiscal year ended July 30, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **NMG**                                                                         | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                            |       |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                               | 248,824    |   | $ | 317,986 |   | $ | (317,986 | ) | $ | 248,824 |   |
| (Earnings) loss from  discontinued operations                                                 |       | —                                                                          |       | (8,857 | ) | 3,837 |   | (5,020 | ) |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                            |       |   |   |   |   |   |   |
| Depreciation                                                                                  |       | 84,832                                                                          |       | 18,757 |   | — |   | 103,589 |   |
| Deferred income  taxes                                                                        |       | (15,925                                                                         | )          | — |   | — |   | (15,925 | ) |
| Loss on disposition  of Chef's catalog                                                        |       | 7,048                                                                           |       | 8,300 |   | — |   | 15,348 |   |
| Gain on Credit  Card Sale                                                                     |       | —                                                                          |       | (6,170 | ) | — |   | (6,170 | ) |
| Net cash  received from Credit Card Sale                                                      |       | —                                                                          |       | 533,656 |   | — |   | 533,656 |   |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | 40,783                                                                          |       | 2,116 |   | — |   | 42,899 |   |
| Intercompany  royalty income payable (receivable)                                             |       | 195,572                                                                         |       | (195,572 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (314,149                                                                        | )          | — |   | 314,149 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | (119,816                                                                        | )          | 34,513 |   | — |   | (85,303 | ) |
| Net cash provided by  continuing operating activities                                         |       | 127,169                                                                         |       | 704,729 |   | — |   | 831,898 |   |
| Net cash provided by  discontinued operations                                                 |       | —                                                                          |       | 13,502 |   | — |   | 13,502 |   |
| Net cash provided by  operating activities                                                    |       | 127,169                                                                         |       | 718,231 |   | — |   | 845,400 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                            |       |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | (172,806                                                                        | )          | (17,449 | ) | — |   | (190,255 | ) |
| Net increase in cash  restricted for repayment of borrowings under Credit Card Facility       |       | —                                                                          |       | (40,713 | ) | — |   | (40,713 | ) |
| Proceeds from the sale  of Chef's Catalog                                                     |       | 14,419                                                                          |       | — |   | — |   | 14,419 |   |
| Net cash used for  continuing investing activities                                            |       | (158,387                                                                        | )          | (58,162 | ) | — |   | (216,549 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                          |       | (12,280 | ) | — |   | (12,280 | ) |
| Net cash used for  investing activities                                                       |       | (158,387                                                                        | )          | (70,442 | ) | — |   | (228,829 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                            |       |   |   |   |   |   |   |
| Repayment of borrowings  on lines of credit                                                   |       | (113                                                                            | )          | — |   | — |   | (113 | ) |
| Repayment of borrowings  under Credit Card Facility                                           |       | —                                                                          |       | (112,500 | ) | — |   | (112,500 | ) |
| Acquisitions of  treasury stock                                                               |       | (3,088                                                                          | )          | — |   | — |   | (3,088 | ) |
| Proceeds from stock-based  compensation awards                                                |       | 16,100                                                                          |       | — |   | — |   | 16,100 |   |
| Cash dividends paid                                                                           |       | (27,398                                                                         | )          | — |   | — |   | (27,398 | ) |
| Net cash used for  continuing financing activities                                            |       | (14,499                                                                         | )          | (112,500 | ) | — |   | (126,999 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                          |       | (4,457 | ) | — |   | (4,457 | ) |
| Net cash used for financing  activities                                                       |       | (14,499                                                                         | )          | (116,957 | ) | — |   | (131,456 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                            |       |   |   |   |   |   |   |
| (Decrease) increase  during the period                                                        |       | (45,717                                                                         | )          | 530,832 |   | — |   | 485,115 |   |
| Beginning balance                                                                             |       | 363,063                                                                         |       | 5,304 |   | — |   | 368,367 |   |
| Ending balance                                                                                |       | 317,346                                                                         |       | 536,136 |   | — |   | 853,482 |   |
| Less cash of  discontinued operations                                                         |       | —                                                                          |       | 889 |   | — |   | 889 |   |
| Ending balance                                                                                |       | $                                                                               | 317,346    |   | $ | 535,247 |   | $ | — |   | $ | 852,593 |   |

 

F-61

----

**NOTE 20.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**
|                                                           | ** ** | ** ** | **Fiscal year 2007** | ** ** |
|-----------------------------------------------------------|------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | ** ** | **First  Quarter**             | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total** | ** ** |
| ** **                                                | ** ** | ** ** | ** **                     | ** ** | **(Successor)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                  |       |       | $                              | 1,039.2    |   | $ | 1,295.8 |   | $ | 1,073.4 |   | $ | 981.7 |   | $ | 4,390.1 |   |
| Gross profit (1)                                          |       |       | $                              | 432.4      |   | $ | 445.6 |   | $ | 445.5 |   | $ | 312.8 |   | $ | 1,636.3 |   |
| Earnings from continuing  operations (2)                  |       |       | $                              | 51.4       |   | $ | 38.2 |   | $ | 60.9 |   | $ | (15.9 | ) | $ | 134.7 |   |
| (Loss) earnings from  discontinued operations, net of tax |       |       | $                              | (24.2      | ) | $ | 2.8 |   | $ | (1.4 | ) | $ | 0.0 |   | $ | (22.8 | ) |
| Net earnings                                              |       |       | $                              | 27.2       |   | $ | 41.0 |   | $ | 59.5 |   | $ | (15.9 | ) | $ | 111.9 |   |

 
| ** **                                                | ** ** | **Fiscal year 2006**                    | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | ** ** | ** ** | **Four  weeks ended  October 29,   2005** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total** | ** ** |
| ** **                                                | ** ** | **(Predecessor)**                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                  |       | $                                                 | 632.4      |   |   |   | $ | 313.8 |   | $ | 1,194.5 |   | $ | 992.3 |   | $ | 897.1 |   | $ | 4,030.1 |   |
| Gross profit (1)                                          |       | $                                                 | 260.8      |   |   |   | $ | 122.3 |   | $ | 372.3 |   | $ | 403.0 |   | $ | 280.7 |   | $ | 1,439.1 |   |
| Earnings from  continuing operations                      |       | $                                                 | 45.0       |   |   |   | $ | 10.6 |   | $ | 2.0 |   | $ | 41.0 |   | $ | (27.2 | ) | $ | 71.4 |   |
| (Loss) earnings from  discontinued operations, net of tax |       | $                                                 | (0.8       | ) |   |   | $ | 0.2 |   | $ | 1.0 |   | $ | (0.4 | ) | $ | (14.8 | ) | $ | (14.8 | ) |
| Net earnings                                              |       | $                                                 | 44.2       | (3) |   |   | $ | 10.8 |   | $ | 3.0 |   | $ | 40.6 |   | $ | (42.0 | ) | $ | 56.6 |   |

----

(1)      Gross profit includesrevenues less cost of goods sold including buying and occupancy costs(excluding depreciation).

(2)      For fiscal year 2007,earnings from continuing operations includes 1) $11.5 million pretax impairmentcharge related to the writedown to fair value in the net carrying value of theHorchow tradename recorded in the fourth quarter, offset by 2) $4.2 million ofother income we received in connection with the merger of Wedding Channel.com,in which we held a minority interest, and The Knot recorded in the firstquarter and 3) $6.0M of other income related to aged, non-escheatable giftcards recorded in the fourth quarter.  

(3)      For the nine weeks endedOctober 1, 2005, net earnings includes $23.5 million of pretaxtransaction and other costs incurred in connection with the Transactions. Thesecosts consist primarily of $4.5 million of accounting, investment banking,legal and other costs associated with the Transactions and a $19.0 millionnon-cash charge for stock compensation resulting from the accelerated vestingof Predecessor stock options and restricted stock in connection with theAcquisition.

F-62

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**SIGNATURES**

** **

                Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

|        | NEIMAN  MARCUS, INC. |
|--------|----------------------|
|   |                 |
|   |                 |
|   | By:                  | /S/ NELSON A. BANGS |
|   |                 | Nelson  A. Bangs

Senior  Vice President and General Counsel |

 

Dated:September 26, 2007

 

                Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the following capacitiesand on the dates indicated.

 

|                                           | **Signature**                                                                     | ** **         | ** ** | **Title** | ** ** | ** ** | **Date** | ** ** |
|-------------------------------------------|-----------------------------------------------------------------------------------|--------------------|------------|-----------|------------|------------|----------|------------|
| ** **                                | ** **                                                                        | ** **         |
| /s/  BURTON M. TANSKY

Burton M. Tansky   | President and Chief Executive  Officer, Director                                  | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  JAMES E. SKINNER

James E. Skinner   | Senior Vice President and Chief  Financial Officer  (principal financial officer) | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  T. DALE STAPLETON

T. Dale Stapleton | Vice President and Controller  (principal accounting officer)                     | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  DAVID A. BARR

David A. Barr         | Director                                                                          | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  JONATHAN COSLET

Jonathan Coslet     | Director                                                                          | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  JAMES G. COULTER 

James G. Coulter  | Director                                                                          | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  JOHN G. DANHAKL

John G. Danhakl     | Director                                                                          | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  SIDNEY LAPIDUS

Sidney Lapidus       | Director                                                                          | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  KEWSONG LEE

Kewsong Lee             | Director                                                                          | September 26, 2007 |
|                                      |                                                                              |               |
| /s/  CARRIE WHEELER

Carrie Wheeler       | Director                                                                          | September 26, 2007 |
|                                      |                                                                              |               |

 

90

----

**SCHEDULE II**

 

Neiman Marcus, Inc.

Valuation and Qualifying Accounts and Reserves

(in thousands)

 

Three years ended July 28, 2007

 
| Column A                                                        | ** ** | **Column B** | ** ** | **Column C**                                                                  | ** ** | **Column D**                             | ** ** | **Column E**                    | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                           | ** ** | ** **        | ** ** | ** **                                                                         | ** ** | ** **                                    | ** ** | ** **                           | ** ** | ** ** | ** ** |
| ** **                                                           | ** ** | ** **        | ** ** | **Additions**                                                                      | ** ** | ** **                                    | ** ** | ** **                           | ** ** |
| **Description**                                                      | ** ** | ** **        | ** ** | **Balance at     Beginning of     Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
| *Year ended July 28, 2007  (Successor)(B)*                           |       |              |       |                                                                               |       |                                          |       |                                 |       |   |   |
| Reserve for estimated sales returns                                  |       | $                 | 43,742     |                                                                               | $          | 606,263                                       |       | $                                    | —     |   | $ | (601,186 | )(A) | $ | 48,819 |   |
|                                                                 |       |              |       |                                                                               |       |                                          |       |                                 |       |   |   |
| *Forty-three weeks ended July  29, 2006 (Successor) (B)*             |       |              |       |                                                                               |       |                                          |       |                                 |       |   |   |
| Reserve for estimated  sales returns                                 |       | $                 | 45,180     |                                                                               | $          | 445,398                                       |       | $                                    | —     |   | $ | (446,836 | )(A) | $ | 43,742 |   |
|                                                                 |       |              |       |                                                                               |       |                                          |       |                                 |       |   |   |
| *Nine weeks ended October 1,  2005 (Predecessor) (B)*                |       |              |       |                                                                               |       |                                          |       |                                 |       |   |   |
| Reserve for estimated sales returns                                  |       | $                 | 35,170     |                                                                               | $          | 90,653                                        |       | $                                    | —     |   | $ | (80,643 | )(A) | $ | 45,180 |   |
|                                                                 |       |              |       |                                                                               |       |                                          |       |                                 |       |   |   |
| *Year ended July 30, 2005  (Predecessor)(B)*                         |       |              |       |                                                                               |       |                                          |       |                                 |       |   |   |
| Allowance for doubtful  accounts (deducted from accounts receivable) |       | $                 | 9,668      |                                                                               | $          | 14,656                                        |       | $                                    | (11,116    | )(C) | $ | (13,208 | )(D) | $ | — |   |
| Reserve for estimated sales returns                                  |       | $                 | 31,629     |                                                                               | $          | 462,095                                       |       | $                                    | —     |   | $ | (458,554 | )(A) | $ | 35,170 |   |
|                                                                      |            |                   |            |                                                                                    |            |                                               |            |                                      |            |  |  |  |  |  |  |  |  |  |

----

 

 

(A)                              Gross margin on actual sales returns, net ofcommissions.

 

(B)                                All periods presented have been adjusted toexclude the operations of Gurwitch Products, L.L.C. and Kate Spade LLC.

 

(C)                                Reserve eliminated in connection with the sale ofour proprietary credit card receivables.

 

(D)                               Write-off of uncollectible accounts net ofrecoveries and other miscellaneous deductions.

91

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