Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-K**

 

| **(Mark One)**                                                                                                                                                                                                                                                | ** ** | ** **                                                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| **x**** **                                                                                                                                                                                                                                               | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
| ** **                                                                                                                                                                                                                                                    |
| **For the fiscal year ended August 2,  2008**                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                                    |
| **OR**                                                                                                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                                                    |
| ** ̈**** **                                                                                                                                                                                                                                          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                    |
| **For the transition period  from                  to                  ** |

 

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

 

**NeimanMarcus, Inc.**

(Exact name of registrant as specified in itscharter)

 

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

 

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

 

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Securities registered pursuant to Section 12(b) ofthe Act:

**None**

 

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. Yes o  No x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch 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 o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer x                       |   | Smaller reporting company o |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o No x

 

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

 

As of September 15, 2008, the registranthad outstanding 1,012,919 shares of its common stock, par value $0.01 pershare.

 

 

 

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**NEIMANMARCUS, INC.**

**ANNUALREPORT ON FORM 10-K**

**FOR THEFISCAL YEAR ENDED AUGUST 2, 2008**

**TABLE OFCONTENTS**

 
| ** **        | ** **                                                                                      | **Page No.** |
|-------------------|-------------------------------------------------------------------------------------------------|-------------------|
| **PART I**   |                                                                                            |              |
| Item 1.           | Business                                                                                        | 2                 |
| Item 1A.          | Risk Factors                                                                                    | 11                |
| Item 1B.          | Unresolved Staff Comments                                                                       | 17                |
| Item 2.           | Properties                                                                                      | 18                |
| Item 3.           | Legal Proceedings                                                                               | 19                |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                            | 20                |
| **PART II**  |                                                                                            |              |
| Item 6.           | Selected Financial Data                                                                         | 20                |
| Item 7.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations     | 22                |
| Item 7A.          | Quantitative and Qualitative Disclosures  about Market Risk                                     | 46                |
| Item 8.           | Financial Statements and Supplementary Data                                                     | 46                |
| Item 9.           | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure           | 46                |
| Item 9A.          | Controls and Procedures                                                                         | 47                |
| Item 9B.          | Other information                                                                               | 47                |
| **PART III** |                                                                                            |              |
| Item 10.          | Directors and Executive Officers of the  Registrant                                             | 48                |
| Item 11.          | Executive Compensation                                                                          | 51                |
| Item 12.          | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters | 70                |
| Item 13.          | Certain Relationships and Related  Transactions                                                 | 73                |
| Item 14.          | Principal Accounting Fees and Services                                                          | 75                |
| **PART IV**  |                                                                                            |              |
| Item 15.          | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                           | 76                |
| Signatures        | Signatures                                                                                      | 81                |

 

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**PART I**

 

**ITEM 1. BUSINESS**

 

**Business Overview**

 

We are one of the nation’s leading luxuryretailers, offering distinctive merchandise and excellent customer service thatcater to the needs of the affluent consumer. Since our founding in the early1900s, we have established ourselves as a leading fashion authority amongluxury consumers and have become a premier U.S. retail channel for many of theworld’s most exclusive designers. Currently, we operate 40 Neiman Marcusfull-line stores at prime retail locations in major U.S. markets and twoBergdorf Goodman stores on Fifth Avenue in New York City. We also operatecatalogs and e-commerce websites under the brands Neiman Marcus®, BergdorfGoodman® and Horchow®. During fiscal years 2008, 2007 and 2006, we generatedrevenues of $4,600.5 million, $4,390.1 million and $4,030.1 million,respectively, and operating earnings of $466.4 million,$476.8 million and $329.0 million, respectively.

 

We operate an integrated, multi-channelretailing model as described below:

 

***Specialty Retail.***  Our specialty retail store operations(Specialty Retail) consist primarily of our 40 Neiman Marcus stores and twoBergdorf Goodman stores. Over our past five fiscal years, Specialty Retail hasachieved a compounded annual growth rate, or CAGR, in revenues of 9.0%.Specialty Retail accounted for 83.8% of our total revenues in fiscal year 2008,83.7% in fiscal year 2007 and 83.7% in fiscal year 2006.

 

·                 Neiman MarcusStores.  Neiman Marcus stores offerdistinctive luxury merchandise, including women’s couture and designer apparel,contemporary sportswear, handbags, fashion accessories, shoes, cosmetics, men’sclothing and furnishings, precious and designer jewelry, decorative homeaccessories, fine china, crystal and silver, children’s apparel and gift items.We locate our Neiman Marcus stores at carefully selected venues that cater toour target customers in major metropolitan markets across the United States,and design our stores to provide a feeling of residential luxury by blendingart and architectural details from the communities in which they are located.We also operate 24 clearance centers offering for sale end-of-season clearancegoods from our Neiman Marcus stores, Bergdorf Goodman stores anddirect-to-consumer operations as well as clearance goods purchased directly forresale by our clearance centers.  Ourfull-line Neiman Marcus stores and clearance centers accounted for 71.2% of ourtotal revenues in fiscal year 2008, 71.6% in fiscal year 2007 and 72.2% infiscal year 2006 and 85.0% of Specialty Retail revenues in fiscal year 2008,85.6% in fiscal year 2007 and 86.3% in fiscal year 2006.

 

·                 Bergdorf Goodman Stores. Bergdorf Goodman is apremier luxury retailer in New York City well known for its couturemerchandise, opulent shopping environment and landmark Fifth Avenue locations.Bergdorf Goodman features high-end apparel, fashion accessories, shoes,decorative home accessories, precious and designer jewelry, cosmetics and giftitems. Our Bergdorf Goodman stores accounted for 12.6% of our total revenues infiscal year 2008, 12.1% in fiscal year 2007 and 11.5% in fiscal year 2006 and15.0% of Specialty Retail revenues in fiscal year 2008, 14.4% in fiscal year2007 and 13.7% in fiscal year 2006.

 

We currently operate 5 stores under the CUSP name. CUSP is a smallerstore format (6,000 to 11,000 square feet) that targets a younger, fashionsavvy customer with a contemporary point of view. To date, the operations ofthe CUSP stores are insignificant to the revenues and operating earnings of ourSpecialty Retail stores.  We plan to open4 to 6 more CUSP stores over the next 12 to 15 months.  We continue to evaluate the performance ofour existing CUSP stores and the potential for future CUSP stores.

 

***Direct Marketing.***  Our upscale direct-to-consumer operation(Direct Marketing) conducts online and catalog sales of fashion apparel,accessories and home furnishings through the Neiman Marcus brand, online andcatalog sales of home furnishings and accessories through the Horchow brand,and online sales of fashion apparel and accessories through the BergdorfGoodman brand.  In addition, DirectMarketing currently operates 9 designer websites.  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 16.2% of our totalrevenues in fiscal year 2008 and 16.3% in fiscal years 2007 and 2006. Over onemillion customers made a purchase through one of our websites or catalogs infiscal year 2008. In recent years, internet sales have increased as apercentage of Direct Marketing revenues. As a percentage of total revenues of Direct Marketing, internet saleswere 75.5% in fiscal year 2008, 69.7% in fiscal year 2007 and 62.1% in fiscalyear 2006. Our catalog business 

 

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circulated approximately 90 million catalogs in fiscal year 2008.With the growth of internet sales, we have reduced catalog circulation inrecent years and would expect flat to declining catalog circulation in theforeseeable future.

 

We regularly send e-mails to over 2.9 million e-mail addresses,alerting our customers to our newest merchandise and the latest fashion trends.Over the last five fiscal years, Direct Marketing has achieved a CAGR inrevenues (excluding revenues of our Chef’s Catalog brand sold in November 2004)of 12.4%.

 

For more information about ourreportable segments, see Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and Note 16 of the Notes toConsolidated Financial Statements in Item 15.

 

Our fiscal year ends on theSaturday closest to July 31. Like many other retailers, we follow a4-5-4 reporting calendar which resulted in an extra week in fiscal year 2008(the 53rd week). All references to fiscal year 2008 relate tothe 53 weeks ended August 2, 2008; all references to fiscal year 2007relate to the 52 weeks ended July 28, 2007 and all references to fiscalyear 2006 relate to the combined 52 weeks ended July 29, 2006 (calculatedas described in “The Acquisition”). References to fiscal years 2009 and years thereafter relate to ourfiscal years for such periods.

 

We make our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K, andrelated amendments, available free of charge through our website atwww.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 Acquisition**

 

On April 22, 2005, Neiman Marcus, Inc., formerly NewtonAcquisition, Inc. (the Company), and its wholly-owned subsidiary, NewtonAcquisition Merger Sub, Inc. (Merger Sub), were formed and incorporated inthe state of Delaware. On April 29, 2005, the Company receivedsubscriptions for 900 shares of its common stock from Newton Holding, LLC(Holding) in exchange for a capital contribution of $900 and Merger Sub issued900 shares of its common stock to the Company in exchange for a capitalcontribution of $900. Holding, the Company and Merger Sub were formed byinvestment funds affiliated with TPG Capital (formerly Texas Pacific Group) andWarburg Pincus LLC (collectively, the Sponsors) for the purpose of acquiringThe Neiman Marcus Group, Inc. (NMG).

 

In connection with the acquisition of NMG,Holding made an aggregate cash equity contribution of $1,420.0 million anda noncash equity contribution of $25.0 million to the Company in exchangefor the Company issuing 999,100 shares of its common stock to Holding. Inaddition, certain members of executive management of the Company made cashequity contributions aggregating $7.7 million and noncash equitycontributions, consisting of shares of common stock and common stock options inNMG, aggregating $17.9 million in exchange for 12,264 shares of commonstock in the 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. In connection withthe Acquisition, NMG incurred significant indebtedness and became highlyleveraged.  See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.” All references to “we” and “our” relate to the Company for periodssubsequent to the Acquisition and to NMG for periods prior to the Acquisition.

 

Prior to the Acquisition, the Company had noindependent 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 Acquisition, 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.

 

The purchase price paid in connection with the Acquisition wasallocated to state the acquired assets and liabilities at fair value at theAcquisition date. The purchase accounting adjustments increased the carryingvalues of our property and equipment and inventory, established intangibleassets for our tradenames, customer lists and favorable lease commitments and revaluedour long-term benefit plan obligations, among other things. Subsequent to theAcquisition, interest expense and non-cash 

 

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depreciation and amortization charges have significantly increased. Asa result, our successor financial statements subsequent to the Acquisition arenot comparable to our predecessor financial statements.

 

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 presentation does not comply with generallyaccepted accounting principles (GAAP), we believe that it provides a meaningfulmethod of comparison. The combined operating results have not been prepared ona pro forma basis under applicable regulations and may not reflect the actualresults we would have achieved absent the Acquisition.

 

**Discontinued Operations**

 

***Gurwitch Products, L.L.C.***In July 2006, we sold our majority interest in Gurwitch Products, L.L.C.to Alticor Inc., for pretax net cash proceeds of approximately$40.8 million (Gurwitch Disposition). Gurwitch Products, L.L.C. designs and markets the Laura Merciercosmetics line and had revenues of approximately $59.0 million (afterintercompany eliminations) in fiscal year 2006. The net assets of GurwitchProducts, L.L.C. were sold for their net carrying value (after purchaseaccounting adjustments made in connection with the Acquisition to state suchassets at fair value).

 

***Kate Spade LLC.***In February 1999, NMG acquired a 56% controlling interest in Kate SpadeLLC, a designer and marketer of high-end accessories.  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, weentered into an agreement to settle the put option whereby we purchased theinterest held by the minority investor for approximately $59.4 million.

 

In November 2006, we entered into adefinitive agreement to sell 100% of the ownership interests in Kate Spade LLC toLiz Claiborne, Inc. (consisting of both our original 56% interest and the44% minority interest subsequently purchased by NMG) for pretax net cashproceeds of approximately $121.5 million. Both the purchase of the minorityinterest in Kate Spade LLC and the sale of Kate Spade LLC to Liz Claiborne, Inc.were consummated in December 2006.

 

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 KateSpade LLC as discontinued operations for all periods presented.

 

**Recent Developments**

 

On September 4, 2008, we announcedpreliminary total revenues and comparable revenues of approximately$285 million and $281 million, respectively, for the four-week August periodof fiscal year 2009. In the four-week August period, total revenuesincreased 0.7% and comparable revenues decreased 0.5% compared to the four-weekAugust period of fiscal year 2008. Comparable revenues decreased 0.4% inour Specialty Retail stores and 1.1% in Direct Marketing for the four-week August periodof fiscal year 2009.

 

All the financial data set forth above forthe four-week August period of fiscal year 2009 are preliminary andunaudited and subject to revision based upon our review and a review by ourindependent registered public accounting firm of our financial condition andresults of operations for the quarter ending November 1, 2008. Once we andour independent registered public accounting firm have completed our respectivereviews of our financial information for the quarter ending November 1,2008, we may report financial results that are different from those set forthabove.

 

**Industry Overview**

 

We operate in the luxury apparel andaccessories segment of the U.S. retail industry and have arrangements withluxury-branded fashion vendors, including, but not limited to, Chanel, Prada,Giorgio Armani, David Yurman, St. John, Gucci, Ermenegildo Zegna, Manolo Blahnik and Brioni to market and sell theirmerchandise. Luxury-branded fashion vendors typically manage the distributionand marketing of their merchandise to maximize the perception of brandexclusivity 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

 

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some instances, vendor-owned proprietary boutiques. Retailers thatcompete with us for the distribution of luxury fashion brands include SaksFifth Avenue, Nordstrom, Barney’s New York and other national, regional andlocal retailers.

 

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

 

·                 attractive demographic trends, including increasingwealth concentration and an aging baby boomer population;

 

·                 growing consumer demand for prestige brands andexclusive products;

 

·                 retail consumption patterns of affluent consumersthat are generally less influenced by economic cycles than middle or lowerincome consumers;

 

·                 higher price points and limited distribution ofluxury merchandise, which have generally protected high-end specialty retailingfrom the growth of discounters and mass merchandisers;

 

·                 aggressive marketing by luxury brands; and

 

·                 consumer trends towards aspirational lifestyles.

 

**Customer Service and Marketing**

 

We are committed to providing our customerswith a premier shopping experience through our relationship-based customer servicemodel, with superior merchandise selection and elegant store settings of ourstores. Critical elements to our customer service approach are:

 

·                 knowledgeable, professional and well-trained salesassociates;

 

·                 marketing programs designed to promote customerawareness of our offerings of the latest fashion trends;

 

·                 loyalty programs designed to cultivate long-termrelationships with our customers; and

 

·                 facilitating the extension of credit to ourcustomers through our proprietary credit card program.

 

We believe we offer our customers fair andliberal return policies consistent with the practices of other luxury andspecialty retailers.  We believe thesepolicies help to cultivate long-term relationships with our customers.

 

***Sales Associates.***  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 a commissionbasis and provide them with training in the areas of customer service, sellingskills and product knowledge. Our sales associates participate in activeclienteling programs designed to maintain contact with our customers betweenstore 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 conduct a wide variety of marketingprograms to support our sales associates in the communication of fashion trendsto our customers in order to create fashion excitement and enhance our customerrelationships. The programs include both in-store events and targeted,brand-consistent print media communications.

 

We maintain an active calendar of in-storeevents to promote our sales efforts. The activities include in-store visits andtrunk shows by leading designers featuring the newest fashions from thedesigner, in-store promotions of the merchandise of selected designers ormerchandise categories, often through events conducted in connection with ourloyalty programs, and participation in charitable functions in each of ourmarkets. Past trunk shows and in-store promotions at our Neiman Marcus andBergdorf Goodman stores have featured vendors such as Chanel, Giorgio Armani,Oscar de la Renta and Manolo Blahnik.

 

Through our print media programs, we mailvarious publications to our customers communicating upcoming in-store events,new merchandise offerings and fashion trends. In connection with theseprograms, Neiman Marcus produces The Book® approximately eight to nine timeseach year. The Book is a high-quality publication featuring the latest fashiontrends that is mailed on a targeted basis to our customers and has a yearlyprinting in excess of 4.3 million. Our other print publications includeThe Book for Men, the Bergdorf Goodman Magazine and specific designer mailers.

 

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We also believe that the online and printcatalog operations of Direct Marketing promote brand awareness, which benefitsthe operations of our retail stores.

 

***Loyalty Programs.***  We maintain a loyalty program under theInCircle® brand name designed to cultivate long-term relationships with ourcustomers. Our loyalty program focuses on our most active customers. Thisprogram includes marketing features, including private in-store events, specialmagazine issues, as well as the ability to accumulate points for qualifyingpurchases. Increased points are periodically offered in connection within-store promotional and other events. Upon attaining specified point levels,customers may redeem their points for a wide variety of gifts ranging from giftcards to designer merchandise and trips to exotic locations. Beginning incalendar 2006, we transitioned customers in our previous Bergdorf Goodmanloyalty program to our InCircle loyalty program. Approximately 40% of ourrevenues during each of the last two calendar years was generated by ourInCircle loyalty program members.

 

***Proprietary CreditCard Program.*** Pursuant to a five-year programagreement entered into in July 2005 (Program Agreement), we entered into along-term marketing and servicing alliance with HSBC Bank Nevada, N.A.and HSBC Private Label Corporation (formerly known as Household Corporation)(collectively referred to as HSBC)whereby HSBC offers proprietary credit card accounts to our customers underboth the “Neiman Marcus” and “Bergdorf Goodman” brand names.

 

Under the terms of this alliance, HSBC offers credit cards and non-cardpayment plans and bears substantially all credit risk with respect to salestransacted on the cards bearing our brands. We receive ongoing payments fromHSBC related to credit card sales and compensation for marketing and servicingactivities (HSBC Program Income). During fiscal year 2006, we outsourcedvarious administrative elements of the proprietary credit card program,including the processing of data with respect to our proprietary credit cardprogram to HSBC as provided for in the program agreement with HSBC.  We continue to handle key customer servicefunctions, primarily customer inquiries and collections.

 

In connection with our agreement with HSBC, we have changed and maycontinue to change, the terms of credit offered to our customers.  In addition, HSBC will have discretion overcertain policies and arrangements with credit card customers and may changethese policies and arrangements in ways that affect our relationship with thesecustomers. Any such changes in our credit card arrangements may adverselyaffect our credit card program and ultimately, our business.

 

On April 21, 2008, we entered into an amendment to the ProgramAgreement, dated as of June 8, 2005, with HSBC. The amendment was enteredinto subsequent to the filing of a lawsuit by the Company against HSBC alleginga breach of the Program Agreement, as well as other claims, and an applicationfor the granting of a temporary restraining order and other injunctive relief.The amendment, among other things, provides for 1) the allocation between HSBCand NMG of additional income, if any, to be generated from the credit cardprogram as a result of certain changes made to the Program Agreement, 2) theallocation of certain credit card losses between HSBC and NMG (subject to acontractual limit on the losses allocable to NMG) and 3) the dismissal of thelawsuit and temporary restraining order without prejudice. We do not expectthat the amendment will have a material impact on the level of our futureincome under the Program Agreement.

 

Historically, our customers holding a proprietary credit card havetended to shop more frequently and have a higher level of spending thancustomers paying with cash or third-party credit cards. In fiscal years 2008and 2007, approximately 55% of our revenues were transacted through ourproprietary credit cards.

 

We utilize data captured through ourproprietary credit card program in connection with promotional events andcustomer relationship programs targeting specific customers based upon theirpast spending patterns for certain brands, merchandise categories and storelocations.

 

***Integrated Multi-Channel Model.***  We offer products through our complementaryDirect Marketing and Specialty Retail businesses, which enables us to maximizeour brand recognition and strengthen our customer relationships across allchannels. Our well-established catalog and online operation expands our reachbeyond the trading area of our retail stores, as over 40% of our DirectMarketing customers in fiscal years 2008 and 2007 were located outside of thetrade areas of our existing retail locations. We also use our catalogs ande-commerce websites as selling and marketing tools to increase the visibilityand exposure of our brand and generate customer traffic within our retailstores. We believe the combination of our retail stores and direct sellingefforts is the main reason that our multi-channel customers spend more onaverage than our single-channel customers (over 3 times more in each of fiscalyears 2008 and 2007).

 

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**Merchandise**

 

We carry luxury merchandise fromwell-recognized designers as well as emerging designers.  We believe our merchandising experience andin-depth knowledge of our customers and the markets within which we operate,allow us to select an appropriate merchandise assortment for each of our storesthat is tailored to our customers’ tastes and lifestyles.

 

Our percentages of revenues bymajor merchandise category are as follows:

 
| ** **                                   | ** ** | **Years Ended**     | ** ** |
|----------------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** | **July 29,  2006** | ** ** |
| Women’s Apparel                         |       | 36                       | %          | 37 | % | 38 | % |
| Women’s Shoes, Handbags and Accessories |       | 20                       | %          | 20 | % | 18 | % |
| Cosmetics and Fragrances                     |       | 11                       | %          | 11 | % | 11 | % |
| Men’s Apparel and Shoes                 |       | 12                       | %          | 12 | % | 13 | % |
| Designer and Precious Jewelry                |       | 12                       | %          | 11 | % | 11 | % |
| Home Furnishings and Décor              |       | 8                        | %          | 9 | % | 9 | % |
| Other                                        |       | 1                        | %          | 0 | % | 0 | % |
|                                         |       | 100                      | %          | 100 | % | 100 | % |

 

Substantially all of our merchandise isdelivered to us by our vendors as finished goods and is manufactured innumerous locations, including Europe and the United States and, to a lesserextent, China, Mexico and South America.

 

Our major merchandise categories are asfollows:

 

*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, Giorgio Armani, St. John, Gucci, Akris,Escada and Dolce & Gabbana.

 

*Women’s Shoes, Handbags and Accessories:*  Women’s accessories include belts, gloves,scarves, hats and sunglasses. Our primary vendors in this category includeManolo Blahnik, Prada, Christian Louboutin, Gucci, Chanel and Dior in ladiesshoes, and handbags from Chanel, Prada, Gucci, Nancy Gonzalez and Balenciaga.

 

*Cosmetics and Fragrances:*  Cosmetics and fragrances include facial andskin cosmetics, skin therapy and lotions, soaps, fragrances, candles and beautyaccessories. Our primary vendors of cosmetics and beauty products include LaMer, Chanel, Sisley, Bobbi Brown, La Prairie and Laura Mercier.

 

*Men’s Apparel and Shoes:*  Men’s apparel and shoes include suits, dressshirts and ties, sport coats, jackets, trousers, casual wear and eveningwear aswell as business and casual footwear.  Inrecent years, this category has been an area of increased focus.  Bergdorf Goodman has a fully dedicated men’sstore in New York. Our primary vendors in this category include ErmenegildoZegna, Brioni, Giorgio Armani, and Prada in men’s clothing and sportswear andErmenegildo Zegna, Brioni, Prada, Ferragamo, Gucci and Stefano Ricci in men’sfurnishings and shoes.

 

*Designer and Precious Jewelry:*  Our designer and precious jewelry offeringincludes women’s necklaces, bracelets, rings, earrings and watches that areselected to complement our apparel merchandise offering. Our primary vendors inthis category include David Yurman, John Hardy and Stephen Dweck in designerjewelry and Henry Dunay, Cartier and Roberto Coin in precious jewelry. We oftensell precious jewelry which has been consigned to us from the vendor.

 

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

 

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**Vendor Relationships**

 

Our merchandise assortment consists of a wideselection of 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 is diverse,with only one vendor representing slightly more than 5% of the cost of ourtotal purchases in fiscal year 2008. The breadth of our sourcing helps mitigaterisks associated with a single brand or designer.

 

Consistent with industry business practice,we receive allowances from certain of our vendors in support of the merchandisewe purchase 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 incur 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 with compensationallowances for employees who sell the vendors’ merchandise, which allowancesare netted against the related compensation expenses that we incur.  For more information related to allowancesreceived from vendors, see Note 1 to our audited consolidated financialstatements included herein.

 

In order to expand our product assortment, weoffer certain merchandise, primarily precious jewelry, which has been consignedto us from the vendor. As of August 2, 2008 and July 28, 2007, weheld consigned inventories with a cost basis of approximately $362.7 millionand $307.6 million, respectively (consigned inventories are not reflected inour consolidated 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 $42.1 million at August 2,2008 and $31.4 million at July 28, 2007.

 

**Inventory Management**

 

Our merchandising function is decentralizedwith separate merchandising functions for Neiman Marcus stores, BergdorfGoodman and Direct Marketing. Each merchandising function is responsible forthe determination of the merchandise assortment and quantities to be purchasedand, in the case of Neiman Marcus stores, for the allocation of merchandise toeach store. We currently have over 450 merchandise buyers and merchandiseplanners.

 

The majority of the merchandise we purchaseis initially received at one of our centralized distribution facilities. Tosupport our Specialty Retail stores, we utilize a primary distribution facilityin Longview, Texas, a regional distribution facility in Dayton, New Jersey andfive regional service centers. We also operate two distribution facilities inthe Dallas-Fort Worth area to support our Direct Marketing operations.

 

Our distribution facilities are linkedelectronically to our various merchandising staffs to facilitate thedistribution of goods to our stores. We utilize electronic data interchange(EDI) technology with certain of our vendors, which is designed to movemerchandise onto the selling floor quickly and cost-effectively by allowingvendors to deliver floor-ready merchandise to the distribution facilities. Inaddition, we utilize high-speed automated conveyor systems capable of scanningthe bar coded labels on incoming cartons of merchandise and directing thecartons to the proper processing areas. Many types of merchandise are processedin the receiving area and immediately “cross docked” to the shipping dock fordelivery to the stores. Certain processing areas are staffed with personnelequipped with hand-held radio frequency terminals that can scan a vendor’s barcode and transmit the necessary information to a computer to record merchandiseon hand. We utilize third-party carriers to distribute our merchandise toindividual stores.

 

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With respect to the Specialty Retail stores,the majority of 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 Longview distributionfacility. The goods held at the Longview distribution facility consistprimarily of goods held in limited assortment or quantity by our stores andreplenishment goods available to stores achieving high initial saleslevels.  With our “locker stock”inventory management program, we maintain a portion of our most in-demand andhigh fashion 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 our long-term businessgoals and objectives. We invest capital in new and existing stores,distribution and support facilities as well as information technology. We havegradually increased the number of our stores over the past ten years, growingour full-line Neiman Marcus and Bergdorf Goodman store base from 28 stores atthe beginning of fiscal year 1998 to our current 42 stores.

 

We invest capital in the development andconstruction of new stores in both existing and new markets. We conductextensive demographic, marketing and lifestyle research to identify attractiveretail markets with a high concentration of our target customers prior to ourdecision to construct a new store. We compete with other retailers for realestate opportunities principally on the basis of our ability to attractcustomers. In addition to the construction of new stores, we also invest in theon-going maintenance of our stores to ensure an elegant shopping experience forour customers. Capital expenditures for existing stores range from minorrenovations of certain areas within the store to major remodels and renovationsand store expansions. We are focused on operating only in attractive marketsthat can profitably support our stores as well as maintaining the quality ofour stores and, consequently, our brand. With respect to our major remodels, weonly expand after extensive analysis of our projected returns on capital. Wegenerally experience an increase in both total sales and sales per square footat stores that undergo a remodel or expansion.

 

We also believe capital investments forinformation technology in our stores, distribution facilities and supportfunctions are necessary to support our business strategies. As a result, we arecontinually upgrading our information systems to improve efficiency andproductivity.

 

In the past three fiscal years, we have madecapital expenditures aggregating $495 million related primarily to:

 

·                 the construction of new stores in San Antonio, BocaRaton, Charlotte, Austin, Natick (suburban Boston) and Topanga (greater LosAngeles area);

 

·                 the renovation and expansion of our main BergdorfGoodman store in New York City and Neiman Marcus stores in San Francisco,Houston, Beverly Hills, Atlanta and Westchester;

 

·                 the expansion of our distribution facilities;

 

·                 the installation of new warehousing and distributionsystems for Specialty Retail stores; and

 

·                 a new human capital management system (including theoutsourcing of payroll and benefits administration).

 

In fiscal year 2009, we anticipate capitalexpenditures for planned new stores in Topanga, suburban Seattle, Walnut Creekand Sarasota and for renovations of our Chicago store, as well as the mainBergdorf Goodman store. We also expect to make technology related expendituresto enhance existing systems and reporting capabilities in a number of areas,including our warehousing systems at Direct Marketing.

 

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We receive allowances from developers related to the construction ofour stores thereby reducing our cash investment in these stores. We recordthese allowances as deferred real estate credits which are recognized as areduction of rent expense on a straight-line basis over the lease term. Wereceived construction allowances aggregating $36.8 million in fiscal year2008 and $24.6 million in fiscal year 2007.

 

**Competition**

 

The specialtyretail industry is highly competitive and fragmented. We compete for customerswith specialty retailers, traditional and high-end department stores, nationalapparel chains, vendor-owned proprietary boutiques, individual specialty apparelstores and direct marketing firms. We compete for customers principally on thebasis 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. Retailers thatcompete with us for distribution of luxury fashion brands include Saks FifthAvenue, Nordstrom, Barney’s New York and other national, regional and localretailers. Many of these competitors have greater financial resources than wedo. In addition, following consummation of the Acquisition many of thosecompetitors are significantly less leveraged than we are, and therefore mayhave greater flexibility to respond to changes in our industry.

 

We believe weare differentiated from other national retailers by our distinctive merchandiseassortment, which we believe is more upscale than other high-end departmentstores, excellent customer service, prime real estate locations and elegantshopping environment. We believe we differentiate ourselves from regional andlocal high-end luxury retailers through our diverse product selection, strongnational brand, loyalty programs, customer service, prime shopping locationsand strong vendor relationships that allow us to offer the top merchandise fromeach vendor. Vendor-owned proprietary boutiques and specialty stores carry amuch smaller selection of brands and merchandise, lack the overall shoppingexperience we provide and have a limited number of retail locations.

 

**Employees**

 

As of September 1, 2008, we had approximately 17,000 employees.Neiman Marcus stores had approximately 14,000 employees, Bergdorf Goodmanstores had approximately 1,200 employees, Direct Marketing had approximately1,700 employees and Neiman Marcus Group had approximately 100 employees. Ourstaffing requirements fluctuate during the year as a result of the seasonalityof the retail industry. We hire additional temporary associates and increasethe hours of part-time employees during seasonal peak selling periods.  Except for approximately 13% of the BergdorfGoodman employees, none of our employees is subject to a collective bargainingagreement. We believe that our relations with our employees are good.

 

**Seasonality**

 

Our business, like that of most retailers, is affected by seasonalfluctuations in customer demand, product offerings and working capitalexpenditures. For additional information on seasonality, see Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—ExecutiveOverview—Seasonality.”

 

**Regulation**

 

The creditcard operations that are conducted under our arrangements with HSBC are subjectto 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. In addition to our proprietary credit cards, credit to ourcustomers is also provided primarily through third parties. Any regulation 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 to review in the ordinary course ofbusiness by the Federal Trade Commission and are subject to numerous federaland state laws. Additionally, we are subject to certain customs,truth-in-advertising and other laws, including consumer protection regulationsthat regulate retailers generally and/or govern the importation, promotion andsale of merchandise. We undertake to monitor changes in these laws and believethat we are in material compliance with all applicable state and federal regulationswith respect to such practices.

 

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**ITEM 1A.RISK FACTORS**

 

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

 

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

 

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

 

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

 

We are highly leveraged.  As of August 2,2008, the principal amount of NMG’s total indebtedness was approximately$2,951.9 million and the unused borrowing availability under the $600 millionAsset-Based Revolving Credit Facility was approximately $576.0 million aftergiving effect to $24.0 million of letters of credit outstandingthereunder.  NMG’s substantialindebtedness, combined with its lease and other financial obligations andcontractual commitments, could have other important consequences. For example,it could:

 

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

 

·                 make NMG more vulnerable to adverse changes in generaleconomic, industry and competitive conditions and adverse changes in governmentregulation;

 

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

 

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

 

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

 

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

 

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

 

In addition, NMG’s interest expense could increase if interest ratesincrease because the entire amount of the indebtedness under the senior securedcredit facilities bears interest at floating rates.  As of August 2, 2008, NMG hadapproximately $1,625.0 million principal amount of floating rate debt,consisting of outstanding borrowings under the Senior Secured Term LoanFacility.  NMG also had at that dateapproximately $576.0 million of unused floating rate debt borrowing capacityavailable under the Asset-Based Revolving Credit Facility, based on a borrowingbase of over $600.0 million after giving effect to $24.0 million used forletters of credit.  Effective December 6,2005, NMG entered into floating to fixed interest rate swap agreements for anaggregate notional amount of $1,000.0 million to limit our exposure to interestrate increases related to a portion of our floating rate indebtedness.

 

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

 

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

 

If NMG does not generate sufficient cash flow from operations tosatisfy the debt service obligations, NMG may have to undertake alternativefinancing plans, such as refinancing or restructuring its indebtedness, sellingassets, reducing or delaying capital investments or seeking to raise additionalcapital.  Our ability to restructure orrefinance NMG’s debt will depend on the condition of the capital markets andour financial condition at such time. Any refinancing of NMG’s debt could be at higher interest rates and mayrequire it to comply with more onerous covenants, which could further restrictits business operations.  The terms ofexisting or future debt instruments may restrict NMG from adopting some ofthese alternatives.  In addition, anyfailure to make payments of interest and principal on NMG’s outstandingindebtedness on a timely basis would likely result in a reduction of NMG’scredit rating, which could harm its ability to incur additional indebtedness onacceptable terms.

 

Contractual limitations on NMG’s ability to execute any necessaryalternative financing plans could exacerbate the effects of any failure togenerate sufficient cash flow to satisfy its debt service obligations.  The Asset-Based Revolving Credit Facilitypermits NMG to borrow up to $600.0 million; however, NMG’s ability toborrow thereunder is limited by a borrowing base, which at any time will equalthe lesser of 80% of eligible inventory valued at the lower of cost or marketvalue and 85% of the net orderly liquidation value of the eligible inventory,less certain reserves.  In addition, ourability to borrow under this facility is limited by a minimum liquiditycondition, providing that, if less than $60.0 million is available at anytime, NMG is not permitted to borrow any additional amounts under the Asset-BasedRevolving Credit Facility unless NMG’s pro forma ratio of consolidated EBITDAto consolidated Fixed Charges (as such terms are defined in the creditagreement for the 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 generate sufficient cash flow to satisfy its debtservice obligations, or to refinance its obligations at all or on commerciallyreasonable terms, would have an adverse effect, which could be material, on NMG’sbusiness, financial condition and results of operations.

 

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

 

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

 

·                 incur additional indebtedness;

 

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

 

·                 make investments;

 

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

 

·                 engage in transactions with its affiliates;

 

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

 

·                 consolidate or merge;

 

·                 create liens; and

 

·                 enter into sale and lease back transactions.

 

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

 

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

 

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

 

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

 

**Risks Related to Our Business and Industry**

 

**The specialty retail industry is highlycompetitive.**

 

The specialty retail industryis highly competitive and fragmented. Competition is strong both to attract andsell to customers and to establish relationships with, and obtain merchandisefrom, key vendors.

 

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 ourSpecialty Retail business, merchandise assortment is a critical competitivefactor, and retail stores compete for exclusive, preferred and limiteddistribution arrangements with key designers. Many of our competitors arelarger than we are and have greater financial resources than we do. Inaddition, certain designers from whom we source merchandise have establishedcompeting free-standing retail stores in the same vicinity as our stores. If wefail to successfully compete for customers or merchandise, our business willsuffer.

 

**Deterioration in economic conditions couldadversely affect our business.**

 

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

 

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

 

**We are dependent on our relationships withcertain 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 and sell these goods is intense.Our relationships with our designers have been a significant contributor to ourpast success. We have no guaranteed supply arrangements with our principalmerchandising sources. Accordingly, there can be no assurance that such sourceswill continue to meet our quality, style and volume requirements. Moreover,nearly all of the brands of our top designers are sold by competing retailers,and many of our top designers also have their own dedicated retail stores. Ifone or more of our top designers were to cease providing us with adequatesupplies of merchandise or, conversely, were to increase 

 

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sales of merchandise through their own stores or to the stores of ourcompetitors, our business could be adversely affected. In addition, any declinein the popularity or quality of any of our designer brands could adverselyaffect our business.

 

**If we significantly overestimate our futuresales, 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 in consumerpreferences or fashion trends may adversely affect our performance.**

 

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

 

**A breach in information privacy could negatively impact our operations.**

 

The protection of our customer, employee andcompany data is critically important to us. We utilize customer data captured through both our proprietary creditcard programs and our direct marketing activities. Our customers have a highexpectation that we will adequately safeguard and protect their personalinformation.  The regulatory environmentsurrounding information security and privacy is evolving and increasinglydemanding, with the frequent imposition of new and constantly changing requirementsacross all our business units.  Asignificant breach of customer, employee or company data could damage ourreputation and relationships with our customers and result in lost sales, finesand lawsuits.

 

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

 

Based upon our expansionstrategy, we expect that planned new stores will add over 522,000 square feetof new store space over approximately the next four fiscal years, representingan increase of approximately 9% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores.  New store openings involve certain risks,including constructing, furnishing and supplying a store in a timely and costeffective manner, accurately assessing the demographic or retail environment ata given location, hiring and training quality staff, obtaining necessarypermits and zoning approvals, obtaining commitments from a core group ofvendors to supply the new store, integrating the new store into ourdistribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, costeffective manner, minimize disruptions to our existing operations, and succeedin creating an improved shopping environment. If we fail to execute on these orother aspects of our store expansion and remodeling strategy, we could sufferharm to our sales, an increase in costs and expenses and an adverse effect onour business.

 

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

 

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 with ourability to obtain merchandise from foreign manufacturers. Any future inabilityto obtain merchandise from our foreign manufacturers or to substitute othermanufacturers, at similar costs and in a timely manner, could adversely affectour business.

 

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

 

Our success in the 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 ourindustry that would be difficult to replace. If we were to lose a portion ofour buyers or key sales associates, our ability to benefit from long-standingrelationships with key vendors or to provide relationship-based customer servicemay suffer. We may not be able to retain our current senior management team,buyers or key sales associates and the loss of any of these individuals couldadversely affect our business.

 

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

 

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

 

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

 

We maintain loyalty programsthat are 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 40% of our revenues during each of the last two calendar yearswas generated by our InCircle loyalty program members, our failure to continueto provide quality service and competitive rewards to our customers through theInCircle loyalty program could adversely 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 proprietarycredit card program through which credit is extended to customers under the “NeimanMarcus” and “Bergdorf Goodman” names. Because a majority of our revenues aretransacted through our proprietary credit cards, changes in our proprietarycredit card arrangement that adversely impact our ability to facilitate theprovision of consumer credit may adversely affect our performance.

 

We entered into a five-year program agreementwith HSBC in July 2005 which provides for a long-term marketing andservicing alliance under which HSBC offers proprietary credit card accounts toour customers under both the “Neiman Marcus” and “Bergdorf Goodman” brandnames.

 

Under the terms of thisalliance, HSBC offers credit cards and non-card payment plans and bearssubstantially 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. Duringfiscal year 2006, we outsourced various administrative elements of theproprietary credit card program to HSBC, including the processing of data,although we continue to handle key customer service functions, includingcustomer inquiries and collections.

 

HSBC has discretion overcertain policies and arrangements with our credit card customers and may changethese policies and arrangements in ways that affect our relationship with thesecustomers. In addition, there can be no assurance that, upon expiration of ourcurrent alliance with HSBC, that we will be able to enter into a replacementarrangement on terms comparable to the current arrangement. Any changes in ourcredit card arrangements may adversely affect our credit card program andultimately, 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. Any regulation or change in the regulation of creditarrangements that would materially limit the availability of credit to ourcustomer base could adversely affect our business. In addition, changes incredit card use, payment patterns, and default rates may result from a varietyof economic, legal, social, and other factors that we cannot control or predictwith certainty.

 

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

 

Extreme weather conditions inthe areas in which our stores are located could adversely affect our business.For example, heavy snowfall, rainfall or other extreme weather conditions overa prolonged period might make it difficult for our customers to travel to ourstores and 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 regulations thatcould 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 industryis seasonal 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 disproportionateamount of our revenues falling in our second fiscal quarter, which coincideswith the holiday season. In addition, we have significant additional cashrequirements in the period leading up to the months of November and December inanticipation of higher sales volume in those periods, including paymentsrelating to additional inventory, advertising and employees.

 

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

 

We purchase a substantialportion of our inventory from foreign suppliers whose cost to us is affected bythe fluctuation of their local currency against the dollar or who price theirmerchandise in currencies other than the dollar. Fluctuations in the Euro-U.S.dollar exchange rate affect us most significantly; however, we source goodsfrom numerous countries and thus are affected by changes in numerous currenciesand, generally, by fluctuations in the U.S. dollar relative to suchcurrencies.  Accordingly, changes in thevalue of the dollar relative to foreign currencies may increase our cost ofgoods sold and if we are unable to pass such cost increases on to ourcustomers, our gross margins, and ultimately our earnings, will decrease.Foreign currency fluctuations could have a material adverse effect on ourbusiness, financial condition and results of operations in the future.

 

**Conditions in, and the United States’relationship with, the countries where we source our merchandise could 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 themerchandise we currently source with merchandise produced elsewhere, ourbusiness could be adversely affected.

 

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

 

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

 

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**We are indirectly owned and controlled by the Sponsors, and theirinterests as equity holders 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 our intellectualproperty rights, or if we are accused of infringing on a third party’sintellectual property rights, our net income may decline.**

 

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

 

Additionally, 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 and updateinformation technology systems and enhance existing systems may adverselyaffect 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 existing systems.Any failure to adequately maintain and update the information technologysystems supporting our online operations, sales operations or inventory controlcould prevent our customers from purchasing merchandise on our websites orprevent us from processing and delivering merchandise, which could adverselyaffect our business.

 

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

 

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

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

 

None.

 

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**ITEM 2. PROPERTIES**

 

Our corporate headquarters are located at theDowntown Neiman Marcus store location in Dallas, Texas. The operatingheadquarters for Neiman Marcus, Bergdorf Goodman and Direct Marketing arelocated in Dallas, Texas; New York, New York; and Irving, Texas, respectively.

 

Properties that we use in our operationsinclude Neiman Marcus stores, Bergdorf Goodman stores, clearance centers anddistribution, support and office facilities. As of September 15, 2008, theapproximate aggregate square footage of the properties used in our operationswas as follows:

 
| ** **                                  | ** ** | **Owned** | ** ** | **Owned  Subject  to Ground  Lease** | ** ** | **Leased** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|-----------|------------|-------------------------------------------|------------|------------|------------|-----------|------------|
| Neiman Marcus Stores                        |       | 752,000   |       | 2,513,000                                 |       | 2,177,000  |       | 5,442,000 |       |
| Bergdorf Goodman Stores                     |       | —    |       | —                                    |       | 316,000    |       | 316,000   |       |
| Clearance Centers and Other                 |       | —    |       | —                                    |       | 706,000    |       | 706,000   |       |
| Distribution, Support and Office Facilities |       | 1,317,000 |       | 150,000                                   |       | 1,075,000  |       | 2,542,000 |       |

 

***Neiman MarcusStores. ***Asof September 15, 2008, we operated 40 Neiman Marcus stores, with anaggregate total property size of approximately 5,442,000 square feet. Thefollowing table sets forth certain details regarding each Neiman Marcus store:

 

**Neiman Marcus Stores**

 
| **Locations**                        | ** ** | **Fiscal Year  Operations  Began** | ** ** | **Gross  Store  Sq. Feet** | ** ** |
|--------------------------------------|------------|-----------------------------------------|------------|---------------------------------|------------|
| Dallas, Texas (Downtown)(1)          |       | 1908                                    |       | 129,000                         |       |
| Dallas, Texas (NorthPark)(2)*        |       | 1965                                    |       | 218,000                         |       |
| Houston, Texas (Galleria)(3)*        |       | 1969                                    |       | 224,000                         |       |
| Bal Harbour, Florida(2)              |       | 1971                                    |       | 97,000                          |       |
| Atlanta, Georgia(2)*                 |       | 1973                                    |       | 206,000                         |       |
| St. Louis, Missouri(2)               |       | 1975                                    |       | 145,000                         |       |
| Northbrook, Illinois(3)              |       | 1976                                    |       | 144,000                         |       |
| Fort Worth, Texas(2)                 |       | 1977                                    |       | 119,000                         |       |
| Washington, D.C.(2)*                 |       | 1978                                    |       | 130,000                         |       |
| Newport Beach, California(3)*        |       | 1978                                    |       | 154,000                         |       |
| Beverly Hills, California(1)*        |       | 1979                                    |       | 185,000                         |       |
| Westchester, New York(2)*            |       | 1981                                    |       | 138,000                         |       |
| Las Vegas, Nevada(2)                 |       | 1981                                    |       | 174,000                         |       |
| Oak Brook, Illinois(2)               |       | 1982                                    |       | 119,000                         |       |
| San Diego, California(2)             |       | 1982                                    |       | 106,000                         |       |
| Fort Lauderdale, Florida(3)*         |       | 1983                                    |       | 94,000                          |       |
| San Francisco, California(4)*        |       | 1983                                    |       | 251,000                         |       |
| Chicago, Illinois (Michigan Ave.)(2) |       | 1984                                    |       | 188,000                         |       |
| Boston, Massachusetts(2)             |       | 1984                                    |       | 111,000                         |       |
| Palo Alto, California(3)*            |       | 1986                                    |       | 120,000                         |       |
| McLean, Virginia(4)*                 |       | 1990                                    |       | 130,000                         |       |
| Denver, Colorado(3)*                 |       | 1991                                    |       | 90,000                          |       |
| Minneapolis, Minnesota(2)            |       | 1992                                    |       | 119,000                         |       |
| Scottsdale, Arizona(2)*              |       | 1992                                    |       | 118,000                         |       |
| Troy, Michigan(3)*                   |       | 1993                                    |       | 157,000                         |       |
| Short Hills, New Jersey(3)*          |       | 1996                                    |       | 138,000                         |       |
| King of Prussia, Pennsylvania(3)*    |       | 1996                                    |       | 142,000                         |       |
| Paramus, New Jersey(3)*              |       | 1997                                    |       | 141,000                         |       |
| Honolulu, Hawaii(3)                  |       | 1999                                    |       | 181,000                         |       |
| Palm Beach, Florida(2)               |       | 2001                                    |       | 53,000                          |       |
| Plano, Texas (Willow Bend)(4)*       |       | 2002                                    |       | 156,000                         |       |
| Tampa, Florida(3)*                   |       | 2002                                    |       | 96,000                          |       |
| Coral Gables, Florida(2)*            |       | 2003                                    |       | 136,000                         |       |
| Orlando, Florida(4)*                 |       | 2003                                    |       | 95,000                          |       |
| San Antonio, Texas(4)*               |       | 2006                                    |       | 120,000                         |       |
| Boca Raton, Florida(3)               |       | 2006                                    |       | 136,000                         |       |
| Charlotte, North Carolina(3)         |       | 2007                                    |       | 80,000                          |       |
| Austin, Texas(3)                     |       | 2007                                    |       | 80,000                          |       |
| Natick, Massachusetts(1)             |       | 2008                                    |       | 102,000                         |       |
| Topanga, California(3)               |       | 2009                                    |       | 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.

 

We recently opened new stores in Charlotte (80,000 square feet) in September 2006,Austin (80,000 square feet) in March 2007, Natick (102,000 square feet) inSeptember 2007 and Topanga (120,000 square feet) in September 2008and currently plan to open new stores in:

 

·                  suburban Seattle, Washington in Fall 2009 (125,000square feet planned);

 

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·                 Sarasota, Florida in Fall 2010 (80,000 square feetplanned);

 

·                 Walnut Creek, California in Fall 2010 (107,000square feet planned);

 

·                 Princeton, New Jersey in Fall 2011 (90,000 squarefeet planned); and

 

·                 San Jose, California in Fall 2011 (120,000 squarefeet planned).

 

***Bergdorf GoodmanStores. ***Weoperate two Bergdorf Goodman stores, both of which are located in Manhattan at58th Street and Fifth Avenue. The following table sets forth certaindetails regarding these stores:

 

**Bergdorf Goodman Stores**

 
| **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. ***Asof September 15, 2008, we operated 24 clearance centers that averageapproximately 27,700 square feet each in size.

 

***Distribution,support and office facilities. ***Weown approximately 41 acres of land in Longview, Texas, where our primarydistribution facility is located. The Longview facility is the principalmerchandise processing and distribution facility for Neiman Marcus stores. Wecurrently utilize a regional distribution facility in Dayton, New Jersey andfive regional service centers in New York, Florida, Texas and California. Wealso own approximately 50 acres of land in Irving, Texas, where our DirectMarketing operating headquarters and distribution facility is located.   In addition, we currently utilize anotherregional distribution facility in Dallas, Texas to support our Direct Marketingoperations.

 

***Lease Terms.***  The terms of the leases for substantially allof our stores, assuming all outstanding renewal options are exercised, rangefrom 2 to 101 years. The lease on the Bergdorf Goodman Main Store expiresin 2050, with no renewal options, and the lease on the Bergdorf Goodman Men’sStore expires in 2010, with two 10-year renewal options. Most leases providefor monthly fixed rentals or contingent rentals based upon sales in excess of statedamounts and normally require us to pay real estate taxes, insurance, commonarea maintenance costs and other occupancy 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 14 ofthe Notes to Consolidated Financial Statements in Item 15.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

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

 

On April 21, 2008, we entered into an amendment to the ProgramAgreement, dated as of June 8, 2005, by and among NMG, Bergdorf Goodman, Inc.,(a wholly owned subsidiary of NMG), HSBC Bank Nevada, N.A. and HSBC PrivateLabel Corporation (formerly known as Household Corporation) (collectivelyreferred to as HSBC). The amendment was entered into subsequent to the filingof a lawsuit by the Company against HSBC alleging a breach of the ProgramAgreement, as well as other claims, and an application for the granting of atemporary restraining order and other injunctive relief. The amendment, amongother things, provides for 1) the allocation between HSBC and NMG of additionalincome, if any, to be generated from the credit card program as a result ofcertain changes made to the Program Agreement, 2) the allocation of certaincredit card losses between HSBC and NMG (subject to a contractual limit on thelosses allocable to NMG) and 3) the dismissal of the lawsuit and temporaryrestraining order without prejudice. We do not expect that the amendment willhave a material impact on the level of our future income under the ProgramAgreement.

 

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

 

No matterswere submitted to a vote of our security holders during the quarter ended August 2,2008.

 

**PART II**

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

The followingselected financial data is qualified in entirety by our consolidated financialstatements (and the related Notes thereto) contained in Item 15 and shouldbe read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 7. We derived the selectedfinancial data as of August 2, 2008 and July 28, 2007 and for thefiscal year ended August, 2, 2008, July 28, 2007, the forty-three weeksended July 29, 2006 and nine weeks ended October 1, 2005 from ouraudited consolidated financial statements and related notes.  The selected financial data as of July 29,2006, July 30, 2005 and July 31, 2004 and for the fiscal years ended July 30,2005 and July 31, 2004 reflect adjustments to the Predecessor’s auditedconsolidated financial statements to reclassify the operations of GurwitchProducts, L.L.C. and Kate Spade LLC as discontinued operations.

 
| ** **                                                                        | ** ** | ** **                                    | ** ** | ** **                                   | ** **        | ** **                                         | ** ** | ** ** | ** **                                    | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|-------------------|----------------------------------------------------|------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                        | ** ** | **(Successor)**                               | ** ** | ** **                                   | **(Predecessor)** | ** **                                         |
| **(in millions)**                                                            | ** ** | **Fiscal  year  ended  August 2,  2008** | ** ** | **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** | ** ** |
| **OPERATING RESULTS**                                                             |       |                                          |       |                                         |              |                                               |       |       |                                          |       |                                         |       |                                         |       |
| Revenues                                                                          |       | $                                             | 4,600.5    |                                         | $                 | 4,390.1                                            |       | $          | 3,397.7                                       |       |                                         | $          | 632.4                                        |       | $ | 3,695.1 |   | $ | 3,420.7 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 2,935.0                                       |       | 2,753.8                                      |              | 2,219.4                                            |       |       | 371.5                                         |       | 2,349.2                                      |       | 2,201.2                                      |       |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 1,045.4                                       |       | 1,015.1                                      |              | 802.4                                              |       |       | 155.6                                         |       | 907.3                                        |       | 842.9                                        |       |
| Income from credit card program                                                   |       | (65.7                                         | )          | (65.7                                        | )                 | (49.4                                              | )          |       | (7.8                                          | )          | (71.6                                        | )          | (55.8                                        | )          |
| Depreciation and amortization                                                     |       | 220.6                                         |       | 208.7                                        |              | 166.6                                              |       |       | 19.2                                          |       | 103.6                                        |       | 96.3                                         |       |
| Operating earnings                                                                |       | 466.4                                         | (1)        | 476.8                                        | (2)               | 258.7                                              |       |       | 70.3                                          | (3)        | 397.4                                        | (4)        | 332.2                                        | (5)        |
| Earnings from continuing operations before  income taxes                          |       | 226.6                                         |       | 217.0                                        |              | 41.0                                               |       |       | 71.2                                          |       | 385.2                                        |       | 316.3                                        |       |
| (Loss) earnings from discontinued  operations, net of tax                         |       | —                                        |       | (22.8                                        | )                 | (14.0                                              | )          |       | (0.8                                          | )          | 5.0                                          |       | 4.7                                          |       |
| Net earnings                                                                      |       | $                                             | 142.8      |                                         | $                 | 111.9                                              |       | $          | 12.5                                          |       |                                         | $          | 44.2                                         |       | $ | 248.8 |   | $ | 204.8 |   |
|                                                                              |       |                                          |       |                                         |              |                                               |       |       |                                          |       |                                         |       |                                         |       |
| ** **                                                                        | ** ** | **(Successor)**                               | ** ** | ** **                                   | **(Predecessor)** | ** **                                         |
| **(in millions)**                                                            | ** ** | **August 2,  2008**                      | ** ** | **July 28,  2007**                      | ** **        | **July 29,  2006**                            | ** ** | ** ** | ** **                                    | ** ** | **July 30,  2005**                      | ** ** | **July 31,  2004**                      | ** ** |
| **FINANCIAL POSITION**                                                            |       |                                          |       |                                         |              |                                               |       |       |                                          |       |                                         |       |                                         |       |
| Cash and cash equivalents                                                         |       | $                                             | 239.2      |                                         | $                 | 141.2                                              |       | $          | 223.7                                         |       |                                         |       |                                         | $          | 852.6 |   | $ | 364.2 |   |
| Merchandise inventories                                                           |       | 978.0                                         |       | 918.3                                        |              | 793.6                                              |       |       |                                          |       | 729.3                                        |       | 703.6                                        |       |
| Total current assets                                                              |       | 1,389.8                                       |       | 1,215.0                                      |              | 1,135.9                                            |       |       |                                          |       | 1,708.5                                      |       | 1,706.2                                      |       |
| Property and equipment, net                                                       |       | 1,075.3                                       |       | 1,043.7                                      |              | 1,030.3                                            |       |       |                                          |       | 836.7                                        |       | 740.1                                        |       |
| Total assets                                                                      |       | 6,582.9                                       |       | 6,501.0                                      |              | 6,608.0                                            |       |       |                                          |       | 2,660.7                                      |       | 2,617.6                                      |       |
| Current liabilities                                                               |       | 732.8                                         |       | 767.9                                        |              | 699.1                                              |       |       |                                          |       | 617.3                                        |       | 727.7                                        |       |
| Long-term liabilities                                                             |       | $                                             | 4,173.6    |                                         | $                 | 4,175.1                                            |       | $          | 4,474.9                                       |       |                                         |       |                                         | $          | 457.3 |   | $ | 509.1 |   |

 

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| ** **                                                                | ** ** | **(Successor)**                               | ** ** | ** **                                   | **(Predecessor)** | ** **                                         |
|---------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|-------------------|----------------------------------------------------|
| **(in millions, except sales  per square foot)** | ** ** | **Fiscal  year  ended  August 2,  2008** | ** ** | **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** | ** ** |
| **OTHER OPERATING DATA**                                                  |       |                                          |       |                                         |              |                                               |   |   |   |   |   |   |   |   |
| Capital expenditures                                                      |       | $                                             | 183.5      |                                         | $                 | 147.9                                              |   | $ | 138.2 |   |   | $ | 25.6 |   | $ | 190.3 |   | $ | 114.4 |   |
| Depreciation expense                                                      |       | $                                             | 148.4      |                                         | $                 | 136.5                                              |   | $ | 107.0 |   |   | $ | 19.2 |   | $ | 103.6 |   | $ | 96.3 |   |
| Rent expense and related occupancy costs                                  |       | $                                             | 92.6       |                                         | $                 | 87.5                                               |   | $ | 69.3 |   |   | $ | 12.5 |   | $ | 72.3 |   | $ | 65.3 |   |
| Change in comparable revenues (6)                                         |       | 1.7                                           | %          | 6.7                                          | %                 | 6.8                                                | % |   | 9.8 | % | 9.8 | % | 14.0 | % |
| Number of stores open at period end                                       |       | 41                                            |       | 40                                           |              | 38                                                 |   |   | 37 |   | 36 |   | 37 |   |
| Sales per square foot                                                     |       | $                                             | 634        | (7)                                          | $                 | 638                                                |   | $ | 508 |   |   | $ | 103 |   | $ | 577 |   | $ | 528 |   |
|                                                                      |       |                                          |       |                                         |              |                                               |   |   |   |   |   |   |   |   |
| **NON-GAAP FINANCIAL MEASURE**                                            |       |                                          |       |                                         |              |                                               |   |   |   |   |   |   |   |   |
| EBITDA (8)                                                                |       | $                                             | 687.0      | (1)                                          | $                 | 685.6                                              | (2) | $ | 425.3 |   |   | $ | 89.5 | (3) | $ | 501.1 | (4) | $ | 428.6 | (5) |

 

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(1)           For fiscal year 2008, operating earnings andEBITDA include 1) $32.5 million of other income related to a one-time pensioncurtailment gain as a result of our decision to freeze certain Pension and SERPbenefits as of December 31, 2007, offset by 2) $31.3 million pretax impairmentcharge related to the writedown to fair value of the net carrying value of theHorchow tradename.

 

(2)           For fiscal year 2007, operating earnings andEBITDA include 1) $11.5 million pretax impairment charge related to thewritedown to fair value of the net carrying value of the Horchow tradename,offset by 2) $4.2 million of other income we received in connection with themerger of Wedding Channel.com, in which we held a minority interest, and TheKnot and 3) $6.0M of other income related to aged, non-escheatable gift cards.

 

(3)           For the nine weeks ended October 1, 2005,operating earnings and EBITDA include $23.5 million of transaction andother costs incurred in connection with the Acquisition. These costs consistprimarily of $4.5 million of accounting, investment banking, legal andother costs associated with the Acquisition and a $19.0 million non-cashcharge for stock compensation resulting from the accelerated vesting ofPredecessor stock options and restricted stock in connection with theAcquisition.

 

(4)           For fiscal year 2005, operating earnings andEBITDA include a $15.3 million pretax loss related to the disposition ofChef’s Catalog in November 2004 and a $6.2 million pretax gain related tothe sale of our credit card portfolio.

 

(5)           For fiscal year 2004, operating earnings andEBITDA include a $3.9 million pretax impairment charge related to thewritedown to fair value in the net carrying value of the Chef’s Catalogtradename intangible asset.

 

(6)           Comparable revenues include 1) revenuesderived from our retail stores open for more than 52 weeks, includingstores that have been relocated or expanded and 2) revenues from ourDirect Marketing operations. Comparable revenues exclude 1) revenues of closedstores, 2) revenues from our discontinued operations (Gurwitch Products, L.L.C.and Kate Spade LLC) and 3) revenues of our previous Chef’s Catalog operations(sold in November 2004).  Thecalculation of the change in comparable revenues for fiscal year 2008 is basedon revenues for the 52 weeks ended July 26, 2008 compared to revenues forthe 52 weeks ended July 28, 2007.

 

(7)           Sales per square foot for fiscal year 2008 isbased on revenues for the 52 weeks ended July 26, 2008.

 

(8)           For an explanation of EBITDA, see Item 7,“Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Non-GAAP Financial Measure-EBITDA.”

 

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**ITEM 7.   MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**EXECUTIVE OVERVIEW**

** **

The following discussion and analysis of our financial condition andresults of operations should be read together with our audited consolidatedfinancial statements and related notes. Unless otherwise specified, themeanings of all defined terms in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (MD&A) are consistent withthe meanings of such terms as defined in the Notes to Consolidated FinancialStatements. This discussion contains forward-looking statements. Please see“Forward-Looking Statements” for a discussion of the risks, uncertainties andassumptions relating to these statements.

 

**Overview**

** **

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

 

TheCompany acquired The Neiman Marcus Group, Inc. (NMG) on October 6,2005 through a merger transaction with Newton Acquisition MergerSub, Inc., a wholly-owned subsidiary of Neiman Marcus, Inc.  The acquisition was accomplished through themerger of the Newton Acquisition Merger Sub, Inc. with and into NMG, withNMG being the surviving entity (the Acquisition).  Subsequent to the Acquisition, NMG is asubsidiary of the Company, which is controlled by Newton Holding, LLC(Holding). Both the Company and Holding were formed by investment fundsaffiliated with TPG Capital (formerly Texas Pacific Group) and Warburg PincusLLC (collectively, the Sponsors).  Inconnection with the Acquisition, NMG incurred significant indebtedness andbecame highly leveraged.  Allreferences to “we” and “our” relate to the Company for periods subsequent tothe Acquisition and to NMG for periods prior to the Acquisition.

 

Prior tothe Acquisition, the Company had no independent assets 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.  Forperiods prior to the Acquisition, NMG is deemed to be the predecessor to theCompany.  As a result, for periods priorto the Acquisition, the financial statements of the Company consist of thefinancial statements of NMG for such periods. The accompanying consolidated statements of earnings and cash flows presentour results of operations and cash flows for the periods preceding theAcquisition (Predecessor) and the periods succeeding the Acquisition(Successor), respectively.

 

Thepurchase price paid in connection with the Acquisition was allocated to statethe acquired assets and liabilities at fair value at the Acquisition date. Thepurchase accounting adjustments increased the carrying values of our propertyand equipment 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 Acquisition,interest expense and non-cash depreciation and amortization charges havesignificantly increased. As a result, our Successor financial statementssubsequent to the Acquisition are not comparable to our Predecessor financialstatements.

 

We haveprepared our discussion of the results of operations for the fiscalyear ended July 29, 2006 by combining the earnings and cash flows for thePredecessor nine-week period ended October 1, 2005 and the Successor forty-threeweek period ended July 29, 2006. Althoughthis combined presentation does not comply with generally accepted accountingprinciples (GAAP), we believe that it provides a meaningful method ofcomparison. The combined operating results have not been prepared on a proforma basis under applicable regulations and may not reflect the actual resultswe would have achieved absent the Acquisition.

 

Our fiscalyear ends on the Saturday closest to July 31. Like many other retailers, we follow a 4-5-4reporting calendar which resulted in an extra week in fiscal year 2008 (the 53rdweek).  All references to fiscal year 2008 relate to the 53 weeks ended August2, 2008; all references to fiscal year 2007 relate to the 52 weeks ended July28, 2007; all references to fiscal year 2006 relate to the combined 52 weeksended July 29, 2006 (calculated as described above).

 

In July2006, we sold our majority interest in Gurwitch Products, L.L.C. toAlticor Inc., for pretax net cash proceeds of approximately$40.8 million (Gurwitch Disposition). Gurwitch Products, L.L.C. designs and markets the Laura Merciercosmetics line and had annual revenues of approximately $59.0 million (afterintercompany eliminations) in fiscal year 2006.

 

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The net assets of GurwitchProducts, L.L.C. were sold for their net carrying value (after purchaseaccounting adjustments made in connection with the Acquisition to state suchassets at fair value).

 

In February 1999, NMG acquired a 56%controlling interest in Kate Spade LLC, a designer and marketer of high-endaccessories.  In April 2005, the minorityinvestor in Kate Spade LLC exercised the put option with respect to the sale ofthe full amount of its 44% stake in such company to NMG. In October 2006, weentered into an agreement to settle the put option whereby we purchased theinterest held by the minority investor for approximately $59.4 million.

 

In November 2006, we entered into adefinitive agreement to sell 100% of the ownership interests in Kate Spade LLCto Liz Claiborne, Inc. (consisting of both our original 56% interest and the44% minority interest subsequently purchased by NMG) for pretax net cashproceeds 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.

 

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.

 

**Recent Developments**

** **

On September4, 2008, we announced preliminary total revenues and comparable revenues ofapproximately $285 million and $281 million, respectively, for thefour-week August period of fiscal year 2009. In the four-week August period,total revenues increased 0.7% and comparable revenues decreased 0.5% comparedto the four-week August period of fiscal year 2008. Comparable revenuesdecreased 0.4% in our Specialty Retail stores and 1.1% in Direct Marketing forthe four-week August period of fiscal year 2009.

 

All thefinancial data set forth above for the four-week August period of fiscal year2009 are preliminary and unaudited and subject to revision based upon ourreview and a review by our independent registered public accounting firm of ourfinancial condition and results of operations for the quarter ending November1, 2008. Once we and our independent registered public accounting firm havecompleted our respective reviews of our financial information for the quarterending November 1, 2008, we may report financial results that are differentfrom those set forth above.

 

**Factors Affecting Our Results**

** **

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

 

·      Sales of merchandise—Revenues from 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 operations are recognized when themerchandise is delivered to the customer. We maintain reserves for anticipatedsales returns primarily based on our historical trends related to returns byboth our retail and direct marketing customers. Revenues exclude sales taxescollected from our customers.

 

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

 

Ourrevenues can be affected by the following factors:

 

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

 

·      changes in the level of full-price sales;

 

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

 

·      our ability to successfully implement our store expansion andremodeling strategies;

 

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

 

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·      general economic conditions.

 

Inaddition, our revenues are seasonal. For a description of the seasonality ofour business, see "Seasonality."

 

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

 

·      Inventorycosts—We utilize the retail method of accounting. 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 our inventories. The cost ofthe inventory reflected on the consolidated balance sheet is decreased bycharges to cost of goods sold at the time the retail value of the inventory islowered through the use of markdowns. Hence, earnings are negatively impactedwhen merchandise is marked down. With the introduction of new fashions in thefirst and 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 related to thefulfillment of customer orders not delivered at the point-of-sale.

 

Consistentwith industry business practice, we receive allowances from certain of our vendorsin support of the merchandise we purchase for resale. Certain allowances arereceived to reimburse us for markdowns taken or to support the gross marginsthat we earn in connection with the sales of the vendor's merchandise. Theseallowances result in an increase to gross margin when we earn the allowancesand they are approved by the vendor. Other allowances we receive representreductions to the amounts we pay to acquire the merchandise. These allowancesreduce the cost of the acquired merchandise and are recognized at the time thegoods are sold. We received vendorallowances of $109.6 million, or 2.4% of revenues, in fiscal year 2008, $96.1 million,or 2.2% of revenues, in fiscal year 2007 and $94.5 million, or 2.3% ofrevenues, in fiscal year 2006 (including $2.4 million for the Predecessor priorto the Acquisition). The amounts of vendor allowances we received did not havea significant impact on the year-over-year change in gross margin during fiscalyears 2008, 2007 or 2006.

 

Changes inour COGS as a percentage of revenues are affected primarily by the followingfactors:

 

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

 

·      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;

 

·      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 costsrelated to employee compensation and benefits in the selling and administrativesupport areas, advertising and catalog costs and insurance and long-termbenefits expenses. A significant portion of our selling, general andadministrative expenses are variable in nature and are dependent on the saleswe generate.

 

Advertisingcosts incurred by our Specialty Retail segment consist primarily of print mediacosts related to promotional materials mailed to our customers, whileadvertising costs incurred by our Direct Marketing operations relate to theproduction, printing and distribution of our print catalogs and the production ofthe photographic content on our websites, as well as online marketing costs. Wereceive advertising allowances from certain of our merchandise vendors.Substantially all the advertising allowances we receive representreimbursements of direct, specific and incremental costs that we incur topromote the vendor's merchandise in connection with our various advertisingprograms, primarily catalogs and other print media. As a result, these

 

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allowances are recorded as areduction of our advertising costs when earned. Vendor allowances earned andrecorded as a reduction to selling, general and administrative expenses aggregatedapproximately $75.7 million, or 1.6% of revenues, in fiscal year 2008, $63.4million, or 1.4% of revenues, in fiscal year 2007 and $61.7 million, or 1.5% ofrevenues, in fiscal year 2006 (including $18.6 million for the Predecessorprior to the Acquisition).

 

We alsoreceive allowances from certain merchandise vendors in conjunction withcompensation programs for employees who sell the vendor's merchandise. Theseallowances are netted against the related compensation expense that we incur.Amounts received from vendors related to compensation programs were $71.6million, or 1.6% of revenues, in fiscal year 2008, $65.4 million, or 1.5%of revenues, in fiscal year 2007 and $59.5 million, or 1.5% of revenues,in fiscal year 2006 (including $10.1 million for the Predecessor prior to theAcquisition).

 

Changes inour selling, general and administrative expenses are affected primarily by thefollowing 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.

 

***Incomefrom credit card program***.  Pursuant to a long-termmarketing and servicing alliance with HSBC, HSBC offers credit card andnon-card payment plans bearing our brands and we receive ongoing payments fromHSBC based on net credit card sales and compensation for marketing andservicing activities (HSBC Program Income). We recognize HSBC Program Income whenearned.  In the future, the HSBC ProgramIncome may be:

 

·      increasedor decreased based upon the level of utilization of our proprietary creditcards by our customers;

 

·      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.

 

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**Seasonality**

** **

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

 

Our firstfiscal quarter is generally characterized by a higher level of full-price saleswith a focus on the initial introduction of Fall season fashions. Aggressivein-store marketing activities designed to stimulate customer buying, a lowerlevel of markdowns and higher margins are characteristic of this quarter. Thesecond fiscal quarter is more focused on promotional activities related to theDecember holiday season, the early introduction of resort season collectionsfrom certain designers and the sale of Fall season goods on a marked downbasis. As a result, margins are typically lower in the second fiscal quarter.However, due to the seasonal increase in sales that occurs during the holidayseason, the second fiscal quarter is typically the quarter in which ourrevenues are the highest and in which expenses as a percentage of revenues arethe lowest. Our working capital requirements are also the greatest in the firstand second fiscal quarters as a result of higher seasonal requirements.

 

Similarly,the third fiscal quarter is generally characterized by a higher level offull-price sales with a focus on the initial introduction of Spring seasonfashions. Aggressive in-store marketing activities designed to stimulatecustomer buying, a lower level of markdowns and higher margins are againcharacteristic of this quarter. Revenues are generally the lowest in the fourthfiscal quarter with a focus on promotional activities offering Spring seasongoods to the customer on a marked down basis, resulting in lower margins duringthe quarter. Our working capital requirements are typically lower in the thirdand fourth fiscal quarters than in the other quarters.

 

A largepercentage of our merchandise assortment, particularly in the apparel, fashionaccessories and shoe categories, is ordered months in advance of theintroduction of such goods. For example, women's apparel, men's apparel andshoes are typically ordered six to nine months in advance of the products beingoffered for sale while handbags, jewelry and other categories are typicallyordered three to six months in advance. As a result, inherent in the successfulexecution of our business plans is our ability both to predict the fashiontrends that will be of interest to our customers and to anticipate futurespending patterns of our customer base.

 

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

 

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**FiscalYear 2008 Highlights**

** **

Fiscal year 2008 presented us with a challenging economic and retailenvironment.  During the Fall season offiscal year 2008, we began to experience a lower level of customerspending.  This weakness in consumerspending continued and deepened during the remainder of fiscal year 2008.  In response to the challenges associated withlower demand, we took actions to:

 

·      stimulate sales through promotional and other events;

 

·      reduce inventory purchases; and

 

·      implement expense control initiatives.

 

With a slower retail environment, we grew our revenues by 4.8% and ourpretax earnings by 4.4% over fiscal year 2007 despite higher levels ofmarkdowns required to sell inventories held in excess of demand.  We believe the increase in revenues speaks toour dedication to deliver distinctive and unique merchandise of the highestquality and fashion and provide excellent customer service at all times,regardless of economic conditions.

 

Like many other retailers,we follow a 4-5-4 reporting calendar which resulted in an extra week in fiscalyear 2008 (the 53rd week).

 

Key highlights from fiscal year 2008 include:

 

·      **Revenues**—Our revenues for fiscal year 2008 were $4,600.5million, an increase of 4.8% as compared to fiscal year 2007. This increase wasattributable to 1) increases in comparable revenues of 1.7%, 2) revenues fromnew stores, 3) higher internet revenues and 4) sales generated in the 53rdweek of $49.8 million.

 

Comparable revenues by quarterfor fiscal year 2008 are as follows:

 
| First fiscal quarter  |   | 6.5  | %  |
|-----------------------|--------|------|----|
| Second fiscal quarter |   | 3.7  | %  |
| Third fiscal quarter  |   | (2.5 | )% |
| Fourth fiscal quarter |   | (1.4 | )% |

 

Revenues inthe 53rd week are not included in our comparable revenuescalculations.

 

For SpecialtyRetail stores, our sales per square foot decreased to $634 for the 52 weeksended July 26, 2008 from $638 for the 52 weeks ended July 28, 2007.

 

·      **Cost of goods sold including buying and occupancy costs (excludingdepreciation)**—COGS represented 63.8% of revenues in fiscal year 2008and 62.7% of revenues in fiscal year 2007. These increases in COGS were due primarily to higher levels of markdownsincurred by our Specialty Retail stores due to a lower than anticipated levelof demand.

 

·      **Selling, general and administrative expenses (excluding depreciation)**—SG&Arepresented 22.7% of revenues in fiscal year 2008 and 23.1% of revenues infiscal year 2007. The decrease in SG&A as a percentage of revenues wasprimarily due to lower estimated annual incentive compensation costs in fiscalyear 2008, partially offset by increases in certain components of SG&A(primarily benefits and insurance expense).

 

·      **Operating earnings—**For fiscal year 2008, our operatingearnings were $466.4 million, or 10.1% of revenues compared to fiscal year 2007operating earnings of $476.8 million, or 10.9% of revenues.  Operating earnings margin decreased in fiscalyear 2008 by 0.8% of revenues primarily as a result of lower levels offull-price sales and higher net markdowns that resulted in an increase in COGSby 1.1% of revenues, offset by a decrease in SG&A expenses by 0.4% ofrevenues.

 

·      **Pretax earnings—**For fiscal year 2008, our pretax earningswere $226.6 million, or 4.9% of revenues, compared to fiscal year 2007 pretaxearnings of $217.0 million, or 4.9% of revenues.  Pretax earnings for fiscal year 2008benefited from lower interest expense incurred as a result of both lowerinterest rates and debt levels.  Inaddition, we estimate the 53rd week in fiscal year 2008 generatedapproximately $3 million of pretax earnings.

 

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**OPERATING RESULTS**

** **

**Performance Summary**

** **

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

 
| ** **                                                                        | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **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)**                                   | ** ** | **(Successor)**                                  | ** ** | **(Combined)**                                   | ** ** | **(Successor)**                                          | ** ** | ** ** | **(Predecessor)**                                 | ** ** |
| Revenues                                                                          |       | 100.0                                             | %          | 100.0                                            | %          | 100.0                                            | %          | 100.0                                                    | %          |       | 100.0                                             | %          |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 63.8                                              |       | 62.7                                             |       | 64.3                                             |       | 65.3                                                     |       |       | 58.8                                              |       |
| Selling, general and administrative  expenses (excluding depreciation)            |       | 22.7                                              |       | 23.1                                             |       | 23.8                                             |       | 23.6                                                     |       |       | 24.6                                              |       |
| Income from credit card program                                                   |       | (1.4                                              | )          | (1.5                                             | )          | (1.4                                             | )          | (1.5                                                     | )          |       | (1.2                                              | )          |
| Depreciation expense                                                              |       | 3.2                                               |       | 3.1                                              |       | 3.1                                              |       | 3.1                                                      |       |       | 3.0                                               |       |
| Amortization of customer lists                                                    |       | 1.2                                               |       | 1.2                                              |       | 1.1                                              |       | 1.3                                                      |       |       | —                                            |       |
| Amortization of favorable lease commitments                                       |       | 0.4                                               |       | 0.4                                              |       | 0.4                                              |       | 0.4                                                      |       |       | —                                            |       |
| Other expense, net                                                                |       | —                                            |       | —                                           |       | 0.6                                              |       | —                                                   |       |       | 3.7                                               |       |
| Operating earnings                                                                |       | 10.1                                              |       | 10.9                                             |       | 8.2                                              |       | 7.6                                                      |       |       | 11.1                                              |       |
| Interest expense (income), net                                                    |       | 5.2                                               |       | 5.9                                              |       | 5.4                                              |       | 6.4                                                      |       |       | (0.1                                              | )          |
| Earnings from continuing operations before  income taxes                          |       | 4.9                                               |       | 4.9                                              |       | 2.8                                              |       | 1.2                                                      |       |       | 11.3                                              |       |
| Income taxes                                                                      |       | 1.8                                               |       | 1.9                                              |       | 1.0                                              |       | 0.4                                                      |       |       | 4.1                                               |       |
| Earnings from continuing operations                                               |       | 3.1                                               |       | 3.1                                              |       | 1.8                                              |       | 0.8                                                      |       |       | 7.1                                               |       |
| Loss from discontinued operations, net of  taxes                                  |       | —                                            |       | (0.5                                             | )          | (0.4                                             | )          | (0.4                                                     | )          |       | (0.1                                              | )          |
| Net earnings                                                                      |       | 3.1                                               | %          | 2.5                                              | %          | 1.4                                              | %          | 0.4                                                      | %          |       | 7.0                                               | %          |

 

Inconnection with the Acquisition, the Company incurred significant indebtednessand became highly leveraged.  See“Liquidity and Capital Resources.”  Inaddition, the purchase price paid in connection with the Acquisition wasallocated to state the acquired assets and liabilities at fair value.  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 Acquisition,interest expense and non-cash depreciation and amortization charges havesignificantly increased.   As a result,our Successor financial statements subsequent to the Acquisition are notcomparable to our Predecessor financial statements.

 

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Set forthin the following table is certain summary information with respect to ouroperations for the periods indicated.

 
| **(in millions, except sales per square foot)**                  | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **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)**                                   | ** ** | **(Successor)**                                  | ** ** | **(Combined)**                                   | ** ** | **(Successor)**                                    | ** ** |   | **(Predecessor)**                                 | ** ** |
| REVENUES                                                                                       |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Specialty Retail stores                                                                        |       | $                                                 | 3,853.0    |                                             | $          | 3,674.6                                          |       | $                                                  | 3,374.8    |   | $                                                 | 2,829.9    |   |   | $ | 544.9 |   |
| Direct Marketing                                                                               |       | 747.5                                             |       | 715.5                                            |       | 655.3                                            |       | 567.8                                              |       |   | 87.5                                              |       |
| Total                                                                                          |       | $                                                 | 4,600.5    |                                             | $          | 4,390.1                                          |       | $                                                  | 4,030.1    |   | $                                                 | 3,397.7    |   |   | $ | 632.4 |   |
|                                                                                           |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| OPERATING EARNINGS                                                                             |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Specialty Retail stores                                                                        |       | $                                                 | 476.7      |                                             | $          | 490.6                                            |       | $                                                  | 403.7      |   | $                                                 | 312.3      |   |   | $ | 91.4 |   |
| Direct Marketing                                                                               |       | 117.7                                             |       | 116.0                                            |       | 98.2                                             |       | 90.0                                               |       |   | 8.2                                               |       |
| Subtotal                                                                                       |       | 594.4                                             |       | 606.6                                            |       | 501.9                                            |       | 402.3                                              |       |   | 99.6                                              |       |
| Corporate expenses                                                                             |       | (57.0                                             | )          | (56.2                                            | )          | (55.4                                            | )          | (49.6                                              | )          |   | (5.8                                              | )          |
| Amortization of customer lists and  favorable lease commitments                                |       | (72.2                                             | )          | (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 income (expense), net (1)                                                                |       | 1.2                                               |       | (1.3                                             | )          | (23.5                                            | )          | —                                             |       |   | (23.5                                             | )          |
| Total                                                                                          |       | $                                                 | 466.4      |                                             | $          | 476.8                                            |       | $                                                  | 329.0      |   | $                                                 | 258.7      |   |   | $ | 70.3 |   |
|                                                                                           |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| OPERATING PROFIT MARGIN                                                                        |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Specialty Retail stores                                                                        |       | 12.4                                              | %          | 13.4                                             | %          | 12.0                                             | %          | 11.0                                               | %          |   | 16.8                                              | %          |
| Direct Marketing                                                                               |       | 15.7                                              | %          | 16.2                                             | %          | 15.0                                             | %          | 15.8                                               | %          |   | 9.4                                               | %          |
| Total                                                                                          |       | 10.1                                              | %          | 10.9                                             | %          | 8.2                                              | %          | 7.6                                                | %          |   | 11.1                                              | %          |
|                                                                                           |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| CHANGE IN COMPARABLE REVENUES (2)                                                              |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Specialty Retail stores                                                                        |       | 1.3                                               | %          | 6.2                                              | %          | 6.1                                              | %          | 5.4                                                | %          |   | 9.8                                               | %          |
| Direct Marketing                                                                               |       | 3.8                                               | %          | 9.2                                              | %          | 13.3                                             | %          | 13.9                                               | %          |   | 9.6                                               | %          |
| Total                                                                                          |       | 1.7                                               | %          | 6.7                                              | %          | 7.3                                              | %          | 6.8                                                | %          |   | 9.8                                               | %          |
|                                                                                           |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| SALES PER SQUARE FOOT                                                                          |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Specialty Retail stores                                                                        |       | $                                                 | 634        | (3)                                              | $          | 638                                              |       | $                                                  | 611        |   | $                                                 | 508        |   |   | $ | 103 |   |
|                                                                                           |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| STORE COUNT                                                                                    |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Neiman Marcus and Bergdorf  Goodman stores:                                                    |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Open at beginning of period                                                                    |       | 40                                                |       | 38                                               |       | 36                                               |       | 37                                                 |       |   | 36                                                |       |
| Opened during the period                                                                       |       | 1                                                 |       | 2                                                |       | 2                                                |       | 1                                                  |       |   | 1                                                 |       |
| Open at end of period                                                                          |       | 41                                                |       | 40                                               |       | 38                                               |       | 38                                                 |       |   | 37                                                |       |
| Clearance centers:                                                                             |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| Open at beginning of period                                                                    |       | 20                                                |       | 18                                               |       | 16                                               |       | 17                                                 |       |   | 16                                                |       |
| Opened during the period                                                                       |       | 4                                                 |       | 2                                                |       | 2                                                |       | 1                                                  |       |   | 1                                                 |       |
| Open at end of period                                                                          |       | 24                                                |       | 20                                               |       | 18                                               |       | 18                                                 |       |   | 17                                                |       |
|                                                                                           |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| NON-GAAP FINANCIAL DATA                                                                        |       |                                              |       |                                             |       |                                             |       |                                               |       |   |                                              |       |
| EBITDA (4)                                                                                     |       | $                                                 | 687.0      |                                             | $          | 685.6                                            |       | $                                                  | 514.8      |   | $                                                 | 425.3      |   |   | $ | 89.5 |   |

 

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(1)           For fiscal year 2008, other income (expense),net includes 1) a one-time pension curtailment gain of $32.5 million as aresult of our decision to freeze certain Pension and SERP benefits as of December 31,2007, offset by 2) $31.3 million pretax impairment charge related to thewritedown to fair value of the net carrying value of the Horchow tradename.

 

For fiscal year 2007, other income (expense),net includes 1) $11.5 million pretax impairment charge related to the writedownto fair value of the net carrying value of the Horchow tradename, offset by 2)$4.2 million of other income we received in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot and 3)$6.0M of other income related to aged, non-escheatable gift cards.

 

For the nine weeks ended October 1,2005, other income (expense), net includes $23.5 million of transactionand other costs incurred in connection with the Acquisition. These costsconsist primarily of $4.5 million of accounting, investment banking, legaland other costs associated with the Acquisition 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.

 

(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 operations. 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). Thecalculation of the change in comparable revenues for fiscal year 2008 is basedon revenues for the 52 weeks ended July 26, 2008 compared to revenuesfor the 52 weeks ended July 28, 2007.

 

(3)           Salesper square foot for fiscal year 2008 is based on revenues for the 52 weeksended July 26, 2008.

 

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

 

**Fiscal Year Ended August 2, 2008Compared to Fiscal Year Ended July 28, 2007**

 

***Revenues.**** *Our revenues forfiscal year 2008 of $4,600.5 million increased $210.4 million, or 4.8%, from$4,390.1 million in fiscal year 2007. The increase in revenues was due to increases in comparable revenues,revenues from new stores, higher internet revenues and revenues generated inthe 53rd week of fiscal year 2008.  Revenues increased in fiscal year 2008compared to the prior fiscal year at all our operating companies.

 

Comparable revenues for the 52 weeks ended July 26,2008 were $4,464.4 million compared to $4,390.1 million in fiscal year 2007,representing an increase of 1.7%. Comparable revenues increased in fiscal year 2008 by 1.3% for SpecialtyRetail stores and 3.8% for Direct Marketing compared to fiscal year 2007. Newstores generated sales of $86.4 million for the 52 weeks ended July 26,2008 while revenues for the 53rd week were $49.8 million.

 

Our comparable sales trends were stronger inthe first part of fiscal year 2008.  Webegan to experience a lower level of customer spending in the second quarter offiscal year 2008 which continued into the third and fourth quarters of fiscalyear 2008.

 

Changes in comparable revenues by fiscal quarter are as follows:

 
| ** **              | ** ** | **Fiscal Year 2008** | ** ** | **Fiscal Year 2007** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **Fourth  Quarter**            | ** ** | **Third  Quarter**             | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Third  Quarter** | ** ** | **Second  Quarter** | ** ** | **First  Quarter** | ** ** |
| Specialty Retail stores |       | (1.8                           | )%         | (3.4                           | )%         | 3.4 | % | 6.4 | % | 6.6 | % | 5.6 | % | 7.0 | % | 5.4 | % |
| Direct Marketing        |       | 0.7                            | %          | 2.0                            | %          | 5.2 | % | 7.1 | % | 9.0 | % | 8.7 | % | 6.1 | % | 14.7 | % |
| Total                   |       | (1.4                           | )%         | (2.5                           | )%         | 3.7 | % | 6.5 | % | 7.0 | % | 6.1 | % | 6.8 | % | 6.8 | % |

 

The increase in comparable revenues forDirect Marketing was due to higher internet revenues.  Internet revenues were $564.5 million forfiscal year 2008, an increase of 13.1% compared to the prior fiscal year. Theincrease in internet revenues was partially offset by decreases in catalogrevenues as well as a decrease in revenues from the home décor category,primarily offered by our Horchow brand.

 

***Cost of goods sold including buying andoccupancy costs (excluding depreciation).***  COGS for fiscal year 2008 was 63.8% ofrevenues compared to 62.7% of revenues for fiscal year 2007.

 

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The net increase in COGS as a percentage ofrevenues in fiscal year 2008 was primarily due to decreased margins generatedby both our Specialty Retail stores and Direct Marketing operations of approximately1.1% of revenues.  The increase in COGSas a percentage of revenues reflects the lower level of customer demand weexperienced in fiscal year 2008.  As aresult, we generated a lower level of full-price sales in fiscal year 2008 andincurred higher markdowns and sales promotions costs to liquidate on-handinventories held in excess of sales trends. In addition, our Direct Marketing operations realized lower margins ondelivery and processing revenues as a result of discounted and free shippingpromotions.

 

***Selling, general and administrative expenses(excluding depreciation)*.**  SG&A expenses were 22.7% of revenues infiscal year 2008 compared to 23.1% of revenues in the prior fiscal year.

 

The net decrease in SG&A expenses as a percentage of revenues infiscal year 2008 of approximately 0.4% of revenues was primarily due to:

 

·                  Lower payroll costs, includingestimated annual incentive compensation, of approximately 0.4% of revenues; and

 

·                  a decrease in marketing andadvertising costs of approximately 0.2% of revenues incurred by DirectMarketing primarily due to higher internet revenues, which have a lower expenseto revenue ratio than catalog revenues.

 

These decreases in SG&A expenses, as a percentage of revenues, werepartially offset by:

 

·                  higher benefits expenses ofapproximately 0.2% of revenues reflecting increases in long-term benefits; and

 

·                  a higher level of advertising andpromotions costs of approximately 0.1% of revenues incurred by our SpecialtyRetail stores during fiscal year 2008 in connection with 1) the celebration ofthe 100th anniversary of Neiman Marcus in October 2007and 2) promotional events and activities conducted to facilitate thesell-through of on-hand inventories held in excess of sales trends.

 

***Income from credit card program. ***We earned HSBCProgram Income of $65.7 million, or 1.4% of revenues, in fiscal year 2008compared to $65.7 million, or 1.5% of revenues, in fiscal year 2007.

 

***Depreciation expense. ***Depreciationexpense was $148.4 million, or 3.2% of revenues, in fiscal year 2008 comparedto $136.5 million, or 3.1% of revenues, in fiscal year 2007.

 

***Amortization expense. ***Amortization ofintangible assets (customer lists and favorable lease commitments) aggregated$72.2 million, or 1.6% of revenues, in fiscal year 2008 compared to $72.3million, or 1.6% of revenues, in fiscal year 2007.

 

***Other (income) expense, net.* **Other income, net was $1.2 million infiscal year 2008 and was comprised of a pension curtailment gain offset by animpairment charge for the Horchow tradename. In the first quarter of fiscal year 2008, we recorded a one-time pensioncurtailment gain of $32.5 million, or 0.7% of revenues, as a result of ourdecision to freeze certain Pension and SERP benefits as of December 31,2007.  In the fourth quarter of fiscalyear 2008, we recorded a $31.3 million, or 0.7% of revenues, pretax impairmentcharge related to the writedown to fair value of the net carrying value of theHorchow tradename based upon lower revenues and royalty rate expectations withrespect to the Horchow brand in light of current operating performance andfuture operating expectations.

 

Other expense, net was $1.3 million in fiscal year 2007 and wascomprised of income related to proceeds received from an investment and giftcard breakage, net of an impairment charge for the Horchow tradename.  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 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, or0.1% of revenues, of other income for the breakage on gift cards we previouslysold and issued.  The income wasrecognized based upon our analysis of the aging of these gift cards, ourdetermination that the likelihood of future redemption was remote and ourdetermination that such balances were not subject to escheatment lawsapplicable to our operations.  Prior tothe fourth quarter of fiscal year 2007, we had not recognized breakage on giftcards pending, among other things, our final determination of the applicableescheatment laws applicable to our operations. Gift card breakage during fiscal year 2008 was not significant.

 

In the fourth quarter of fiscal year 2007, we recorded a $11.5 million,or 0.3% of revenues, pretax impairment charge 

 

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related to the writedown to fair value of thenet carrying value of the Horchow tradename.

 

***Segment operating earnings.***  Segment operating earnings for our SpecialtyRetail stores and Direct Marketing segments do not reflect the impact ofadjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date.

 

Operating earnings for our Specialty Retailstores segment were $476.7 million, or 12.4% of Specialty Retail storesrevenues, for fiscal year ended August 2, 2008 compared to $490.6 million,or 13.4% of Specialty Retail stores revenues, for the prior fiscal year.  The decrease in operating margin as apercentage of revenues was primarily due to:

 

·                  lower than anticipated demandresulting in a lower level of full-price sales and higher markdowns; and

 

·                  net increases in advertising andpromotion costs; partially offset by

 

·                  lower estimated annual incentivecompensation costs.

 

Operating earnings for Direct Marketing were$117.7 million, or 15.7% of Direct Marketing revenues, in fiscal year 2008compared to $116.0 million, or 16.2% of Direct Marketing revenues, for theprior fiscal year.  The decrease inoperating margin as a percentage of revenues for Direct Marketing was primarilythe result of 1) a decrease in margins realized on delivery and processingrevenues, partially offset by 2) a decrease in advertising and marketing costs,as a percentage of revenues, due to the continued growth in internet revenues.

 

Total operating earnings in fiscal year 2008were $466.4 million, or 10.1% of revenues. Total operating earnings in fiscal year 2007 were $476.8 million, or10.9% of revenues.  Operating earningsmargin decreased in fiscal year 2008 by 0.8% of revenues as a result of 1) anincrease in COGS by 1.1% of revenues due primarily to lower margins at bothSpecialty Retail stores and Direct Marketing, partially offset by 2) a decreasein SG&A expenses by 0.4% of revenues (primarily lower incentive compensation).

 

***Interest expense, net*.**  Net interest expense was $239.8 million, or5.2% of revenues, in fiscal year 2008 and $259.8 million, or 5.9% of revenues,for the prior fiscal year.  The decreasein interest expense is primarily due to the decrease in term loan interestrates as well as the paydown of $250 million of debt during fiscal year2007.  The significant components ofinterest expense are as follows:

 
| **(in thousands)**           | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                        | ** ** | **(Successor)**                                   | ** ** | **(Successor)**                                  | ** ** |
| Senior Secured Term Loan Facility |       | $                                                 | 106,504    |                                             | $          | 128,380 |   |
| 2028 Debentures                   |       | 8,903                                             |       | 8,915                                            |       |
| Senior Notes                      |       | 63,000                                            |       | 63,000                                           |       |
| Senior Subordinated Notes         |       | 51,875                                            |       | 51,875                                           |       |
| Amortization of debt issue costs  |       | 14,217                                            |       | 14,141                                           |       |
| Other                             |       | 3,275                                             |       | 3,689                                            |       |
| Total interest expense            |       | 247,774                                           |       | 270,000                                          |       |
| Less:                             |       |                                              |       |                                             |       |
| Interest income                   |       | 4,933                                             |       | 7,370                                            |       |
| Capitalized interest              |       | 3,036                                             |       | 2,825                                            |       |
| Interest expense, net             |       | $                                                 | 239,805    |                                             | $          | 259,805 |   |

 

***Income taxes.***  Our effective income tax rate for fiscal yearended August 2, 2008 was 37.0% compared to 37.9% for fiscal year ended July 28,2007.  Our effective tax rate for fiscalyear 2008 was favorably impacted by a decrease in tax liabilities resultingfrom settlements with taxing authorities.

 

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

 

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We file income tax returns inthe U.S. federal jurisdiction and various state and local jurisdictions.  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 and 2006.  We believe our recorded tax liabilities as ofAugust 2, 2008 are sufficient to cover any potential assessments to bemade by the IRS upon the completion of their examinations. We will continue tomonitor the progress of the IRS examinations and review our recorded taxliabilities for potential audit assessments. With respect to state and local jurisdictions, with limited exceptions,the Company and its subsidiaries are no longer subject to income tax audits forfiscal years before 2003.  During the fourthquarter, we entered into a negotiated settlement with a state tax authorityregarding a state non-filing position which resulted in a reduction to ourgross unrecognized tax benefits of $7.2 million and a corresponding decrease togoodwill of $3.0 million related to the resolution of uncertainties thatexisted at the time of the Acquisition. We believe it is reasonably possiblethat additional adjustments in the amounts of our unrecognized tax benefitscould occur within the next 12 months as a result of negotiated settlementswith tax authorities.  At this time, wedo not believe such adjustments will have a material impact on our consolidatedfinancial statements.

 

**Fiscal Year Ended July 28, 2007 Comparedto Fiscal Year 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 an increase in internet revenues generated by ourDirect Marketing operations.  Revenuesincreased in fiscal year 2007 compared to the prior fiscal year at all ouroperating companies.

 

Comparable revenues for fiscal year ended July 28, 2007 were$4,299.2 million compared to $4,030.1 million in fiscal year 2006, representingan increase of 6.7%. Comparable revenues increased in fiscal year 2007 by 6.2%for Specialty Retail stores and 9.2% for Direct Marketing compared to fiscalyear 2006. New stores generated sales of $88.7 million in fiscal year 2007.

 

Changes in comparable revenuesby fiscal quarter are as follows:

 
| ** **              | ** ** | **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 | % |

 

The increase in comparable revenues forDirect Marketing reflects increases in internet revenues. Internet sales byDirect Marketing were $499.0 million, an increase of 22.5% compared to fiscalyear 2006.  The increase in internetsales was partially offset by decreases in catalog sales as well as decreasesin revenues from the Horchow brand.

 

***Cost of goods sold including buying andoccupancy 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 in COGS as reported under GAAPto 62.7% of revenues from 64.3% in the prior fiscal year is primarily due to:

 

·                  $38.1 million of non-cash chargesincluded in COGS in fiscal year 2006 primarily related to the step-up in the 

 

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carrying value of the acquired inventories recorded in connection withthe Acquisition; and

 

·                  increased margins of approximately0.6% of revenues primarily attributable to our Specialty Retail stores dueprimarily to lower product costs, a decrease in net markdowns incurred in theFall Season and a higher level of full-price sales in fiscal year 2007.

 

***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 decrease in SG&A expenses as apercentage of revenues in fiscal year 2007 was primarily due to:

 

·                  a decrease in marketing andadvertising costs of approximately 0.4% of revenues primarily due to 1) higherinternet sales by our Direct Marketing segment, which have a lower expense torevenue ratio than catalog sales and 2) a decrease in costs incurred by ourSpecialty Retail stores;

 

·                  a decrease of approximately 0.4% ofrevenues in our payroll and employee benefit costs, primarily due to theleveraging of these expenses on a higher level of revenues in fiscal year 2007and favorable insurance claims experience; and

 

·                  a decrease in preopening expenses ofapproximately 0.1% of revenues.

 

These decreases in SG&A expenses, as apercentage of revenues, were partially offset by an increase in estimatedannual incentive compensation costs in fiscal year 2007 of approximately 0.2%of revenues.

 

***Income from credit card program.  ***We receivedHSBC Program Income of $65.7 million, or 1.5% of revenues, in fiscal year 2007compared to $57.2 million, or 1.4% of revenues, in fiscal year 2006.  HSBC Program Income increased as a percentageof revenues in fiscal year 2007 compared to the prior fiscal year as a resultof changes made to our credit card program in fiscal year 2006 related to,among other things, the interest rates applied to unpaid balances and the assessmentof late fees.

 

***Depreciation expense. ***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.

 

***Amortization expense. ***Amortization ofacquisition 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 amortization expensein fiscal year 2007 is due primarily to the fact that the Successor period inwhich amortization expense was recorded in fiscal year 2006 consisted of onlyforty-three weeks.

 

***Other expense, net.***Inthe first quarter of fiscal year 2007, we received consideration aggregating$4.2 million, or 0.1% of revenues, in connection with the merger of WeddingChannel.com, in which we held a minority interest, and The Knot. We accountedfor our investment in Wedding Channel.com under the cost method. In prioryears, we had previously reduced our carrying value of this investment to zero.

 

In the fourth quarter of fiscal year 2007, werecorded $6.0 million of other income for the breakage on gift cards wepreviously sold and issued.  The incomewas recognized based upon our analysis of the aging of these gift cards, ourdetermination that the likelihood of future redemption is remote and ourdetermination that such balances are not subject to escheatment laws applicableto our operations.  Prior to the fourthquarter of fiscal year 2007, we had not recognized breakage on gift cardspending, among other things, our final determination of the applicableescheatment laws applicable to our operations.

 

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

 

For the nine weeks ended October 1,2005, other expense, net includes $23.5 million of transaction and othercosts incurred in connection with the Acquisition. These costs consistprimarily of $4.5 million of accounting, investment banking, legal andother costs associated with the Acquisition and a $19.0 million non-cashcharge for stock compensation resulting from 

 

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the accelerated vesting of Predecessor stock options and restrictedstock in connection with the Acquisition.

 

***Segment operating earnings.***  Segment operating earnings for our SpecialtyRetail stores and Direct Marketing segments do not reflect the impact ofadjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date.

 

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

 

Operating earnings for Direct Marketingincreased to $116.0 million, or 16.2% of Direct Marketing revenues, in fiscalyear 2007 from $98.2 million, or 15.0% of Direct Marketing revenues, for theprior fiscal year.  The increases inoperating earnings and operating margin for Direct Marketing were primarily theresult of 1) a decrease in advertising and marketing costs, as a percentage ofrevenues, due to the continued growth in internet sales, partially offset by 2)an increase in buying and occupancy costs required to support the growth insales.

 

***Interest expense, net*.**  Net interest expense was $259.8 million, or5.9% of revenues, in fiscal year 2007 and $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 in interest expense is due tothe $3.3 billion increase in debt incurred in connection with theAcquisition.  The decrease in interestincome in fiscal year 2007 was due primarily to lower average invested balancesafter the Acquisition.

 

***Income taxes.  ***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 weeksended 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.

 

We closed the Internal RevenueService (IRS) examinations of federal tax returns for fiscal years 2004 and2003 during the first quarter of fiscal year 2007 and paid the related taxliability 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.

 

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**Non-GAAP Financial Measure - EBITDA**

 

We present thenon-GAAP financial measure EBITDA because we use this measure to monitor andevaluate the performance of our business and believe the presentation of thismeasure will enhance investors’ ability to analyze trends in our business,evaluate our performance relative to other companies in our industry andevaluate our ability to service our debt. In addition, we use EBITDA as a component of the measurement ofincentive compensation.

 

EBITDA is nota presentation made in accordance with GAAP and our computation of EBITDA mayvary from others in our industry.  Inaddition, EBITDA contains some, but not all, adjustments that are taken intoaccount in the calculation of the components of various covenants in theindentures governing NMG’s senior secured Asset-Based Revolving CreditFacility, Senior Secured Term Loan Facility, Senior Notes and SeniorSubordinated Notes.  EBITDA should not beconsidered as an alternative to operating earnings or net earnings as measuresof operating performance 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:

 

·                  does not reflect our cash expenditures, or futurerequirements, for capital expenditures or contractual commitments;

 

·                  does not reflect changes in, or cash requirementsfor, our working capital needs;

 

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

 

·                  excludes tax payments that represent a reduction incash available; and

 

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

 

The followingtable reconciles earnings from continuing operations as reflected in ourconsolidated statements of earnings prepared in accordance with GAAP to EBITDA:

 
| **(dollars in millions)**                             | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **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)**                                   | ** ** | **(Successor)**                                  | ** ** | **(Combined)**                                   | ** ** | **(Successor)**                                      | ** ** | ** ** | **(Predecessor)**                                 | ** ** |
| Earnings from continuing operations                             |       | $                                                 | 142.8      | (1)                                              | $          | 134.7                                            | (2)        | $                                                    | 71.4       |       | $                                                 | 26.4       |   |   | $ | 45.0 | (3) |
| Income taxes                                                    |       | 83.8                                              |       | 82.3                                             |       | 40.8                                             |       | 14.6                                                 |       |       | 26.2                                              |       |
| Interest expense (income), net                                  |       | 239.8                                             |       | 259.8                                            |       | 216.8                                            |       | 217.7                                                |       |       | (0.9                                              | )          |
| Depreciation                                                    |       | 148.4                                             |       | 136.5                                            |       | 126.2                                            |       | 107.0                                                |       |       | 19.2                                              |       |
| Amortization of customer lists and  favorable lease commitments |       | 72.2                                              |       | 72.3                                             |       | 59.6                                             |       | 59.6                                                 |       |       | —                                            |       |
| EBITDA                                                          |       | $                                                 | 687.0      | (1)                                              | $          | 685.6                                            | (2)        | $                                                    | 514.8      |       | $                                                 | 425.3      |   |   | $ | 89.5 | (3) |
| EBITDA rate                                                     |       | 14.9                                              | %          | 15.6                                             | %          | 12.8                                             | %          |                                                 |       |       |                                              |       |

 

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(1)   For fiscal year 2008, operatingearnings and EBITDA include other income, net consisting of 1) $32.5 million ofother income related to a one-time pension curtailment gain as a result of ourdecision to freeze certain Pension and SERP benefits as of December 31,2007, offset by 2) $31.3 million pretax impairment charge related to thewritedown to fair value of the net carrying value of the Horchow tradename.

 

(2)   For fiscal year 2007, operatingearnings and EBITDA include other expense, net consisting of 1) $11.5 millionpretax impairment charge related to the writedown to fair value of the netcarrying value of the Horchow tradename, offset by 2) $4.2 million of otherincome we received in connection with the merger of Wedding Channel.com, inwhich we held a minority interest, and The Knot and 3) $6.0M of other incomerelated to aged, non-escheatable gift cards.

 

(3)   For the nine weeks ended October 1,2005, operating earnings and EBITDA include other expense, net consisting of$23.5 million of transaction and other costs incurred in connection withthe Acquisition. These costs consist primarily 

 

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of$4.5 million of accounting, investment banking, legal and other costsassociated with the Acquisition 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.

 

**Inflation andDeflation**

 

We believe changes in revenuesand net earnings that have resulted from inflation or deflation have not beenmaterial during the periods presented. In recent years, we have experiencedcertain inflationary conditions related to 1) increases in product costsdue primarily to changes in foreign currency exchange rates that have reducedthe purchasing power of the U.S. dollar and 2) increases in SG&A. We purchasea substantial portion of our inventory from foreign suppliers whose costs areaffected by the fluctuation of their local currency against the dollar or whoprice their merchandise in currencies other than the dollar. Fluctuations inthe Euro-U.S. dollar exchange rate affect us most significantly; however, wesource goods from numerous countries and thus are affected by changes innumerous currencies and, generally, by fluctuations in the U.S. dollar relativeto such currencies. Accordingly, changes in the value of the dollar relative toforeign currencies may increase our cost of goods sold and if we are unable topass such cost increases to our customers, our gross margins, and ultimatelyour earnings, would decrease. Foreign currency fluctuations could have amaterial adverse effect on our business, financial condition and results ofoperations in the future. We attempt to offset the effects of inflation throughprice increases and control of expenses, although our ability to increaseprices may be limited by competitive factors. We attempt to offset the effectsof merchandise deflation, which has occurred on a limited basis in recentyears, through control of expenses. There is no assurance, however, thatinflation or deflation will not materially affect our operations in the future.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

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

 

Our working capitalrequirements fluctuate during the fiscal year, increasing substantially duringthe first and second quarters of each fiscal year as a result of higherseasonal levels of inventories.  We havetypically financed the increases in working capital needs during the first andsecond fiscal quarters with available cash balances, cash flows from operationsand, if necessary, with cash provided from borrowings under our creditfacilities. In fiscal years 2008 and 2007, we have made no borrowings under ourAsset-Based Revolving Credit Facility.

 

We believe that operating cashflows, available vendor financing and amounts available pursuant to our seniorsecured Asset-Based Revolving Credit Facility will be sufficient to fund ouroperations, anticipated capital expenditure requirements, debt serviceobligations, contractual obligations and commitments and Pension Plan fundingrequirements through the end of fiscal year 2009.

 

At August 2, 2008, cashand cash equivalents were $239.2 million compared to $141.2 millionat July 28, 2007. Net cash provided by operating activities was$285.3 million in fiscal year 2008 compared to $258.9 million infiscal year 2007. Cash flows provided by operating activities were higher infiscal year 2008 than in the prior fiscal year primarily due to:

 

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·                  a$26.7 million decrease in pretax cash interest requirements on indebtednessincurred in connection with the Acquisition;

 

·                  a$9.8 million decrease in cash requirements for income taxes; offset by

 

·                  a$15.0 million voluntary contribution to our defined benefit pension plan.

 

Net cash used for investingactivities, representing capital expenditures, was $183.5 million infiscal year 2008.  Net cash used forinvesting activities was $85.9 million in fiscal year 2007 which consistedof:

 

·                  capitalexpenditures of $147.9 million; and

 

·                  thepurchase of the minority interest held in Kate Spade for $59.4 million;partially offset by

 

·                  $121.5million received from Liz Claiborne, Inc. for the sale of Kate Spade.

 

We incurred significant capitalexpenditures in fiscal 2008 related to the construction of new stores in Natickand Topanga (the greater Los Angeles area) and the remodel of our Atlanta andWestchester stores. We incurred significant capital expenditures in fiscal 2007related to the construction of new stores in Charlotte, Austin and Natick andthe remodel of our Atlanta store. We opened our Charlotte store in September 2006,our Austin store in March 2007 and our Natick store in September 2007.  We opened our Topanga store in September 2008.We currently project capital expenditures for fiscal year 2009 to beapproximately $155 to $165 million.

 

Net cash used for financingactivities was $3.9 million in fiscal year 2008 as compared to$256.9 million in fiscal year 2007. In fiscal year 2007, we voluntarily repaid $250.0 million principalamount of the loans under the Senior Secured Term Loan Facility.

 

**FinancingStructure at August 2, 2008**

 

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

 

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

 

As of August 2, 2008, NMGhad $576.0 million of unused borrowing availability under the Asset-BasedRevolving Credit Facility based on a borrowing base of over $600.0 millionand after giving effect to $24.0 million used for letters of credit.

 

See Note 9 of our Notes toConsolidated Financial Statements in Item 15 for a further description of theterms of the Asset-Based Revolving Credit Facility.

 

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

 

At August 2, 2008, borrowings under theSenior Secured Term Loan Facility bore interest at a rate per annum equal to,at NMG’s option, either (a) a base rate determined by reference to the higherof (1) the prime rate of Credit Suisse and (2) the federal funds effective rateplus 1/2 of 1% or (b) a LIBOR rate, subject to certainadjustments, in each case plus an applicable margin. At August 2, 2008, theapplicable 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 4.42% at August 2, 2008.

 

See Note 9 of our Notes toConsolidated Financial Statements in Item 15 for a further description of theterms of the Senior Secured Term Loan Facility.

 

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

 

See Note 9 of our Notes toConsolidated Financial Statements in Item 15 for a further description of theterms of the 2028 Debentures.

 

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

 

See Note 9 of our Notes toConsolidated Financial Statements in Item 15 for a further description of theterms of the Senior Notes.

 

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

 

See Note 9 of our Notes toConsolidated Financial Statements in Item 15 for a further description of theterms of the Senior Subordinated Notes.

 

***Interest Rate Swaps.***  NMG uses derivative financial instruments tohelp manage our interest rate risk. Effective December 6, 2005, NMGentered into floating to fixed interest rate swap agreements for an aggregatenotional amount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness. The interestrate swap agreements terminate after five years.  At August 2, 2008, the fair value of NMG’sinterest rate swap agreements was a loss of approximately $34.4 million,which amount is included in other long-term liabilities.

 

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

 

As a result of the swapagreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.524% to 6.733% per quarter through 2010 and result in an average fixed rateof 6.608%.

 

**ContractualObligations and Commitments**

 

The following table summarizesour estimated significant contractual cash obligations at August 2, 2008:

 
| ** **                                | ** ** | **Payments Due By Period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                   | ** ** | **Total**                                 | ** ** | **Fiscal Year  2009** | ** ** | **Fiscal  Years  2010-2011** | ** ** | **Fiscal Years  2012-2013** | ** ** | **Fiscal Year  2014 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)                 |       | 1,391,300                                 |       | 217,100 |   | 421,200 |   | 367,300 |   | 385,700 |   |
| Lease obligations                         |       | 938,700                                   |       | 56,300 |   | 106,500 |   | 93,400 |   | 682,500 |   |
| Minimum pension funding obligation (3)    |       | —                                    |       | — |   | — |   | — |   | — |   |
| Other long-term liabilities (4)           |       | 62,100                                    |       | 4,200 |   | 9,700 |   | 11,500 |   | 36,700 |   |
| Construction and purchase commitments (5) |       | 1,380,600                                 |       | 1,113,100 |   | 218,500 |   | 49,000 |   | — |   |
|                                      |       | $                                         | 6,722,700  |   | $ | 1,390,700 |   | $ | 755,900 |   | $ | 2,146,200 |   | $ | 2,429,900 |   |

 

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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 August 2, 2008 and 3) interest requirements on floating ratedebt obligations subject to interest rate swaps at the fixed rates providedthrough the swap agreements.  A 1%increase in the floating rates related to floating rate debt outstanding at August 2,2008 not 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 July 31, 2008 (themost recent measurement date), our actuarially calculated projected benefitobligation for our Pension Plan was $354.3 million and the fair value ofthe assets was $313.4 million. Our policy is to fund the Pension Plan ator above the minimum amount required by law. We made a $15.0 million voluntary contribution to the Pension Plan infiscal year 2008 and did not make any contributions to the Pension Plan infiscal year 2007.  Based upon currentlyavailable information, we will not be required to make significantcontributions in fiscal year 2009 to the Pension Plan.

 

(4)           Includedin other long-term liabilities at August 2, 2008 are our liabilities forour Pension, SERP and Postretirement Plans aggregating $134.6 million.  Our scheduled obligations with respect tothese liabilities consist of expected benefit payments through 2018, ascurrently estimated using information provided by our actuaries.  Also included in other long-term liabilitiesat August 2, 2008 are our liabilities related to 1) the unrealized loss onfinancial instruments of $34.4 million, 2) uncertain tax positions (includingrelated accruals for interest and penalties) of $30.8 million and 3) otherobligations aggregating $13.7 million, primarily for employee benefits.  Future cash obligations related to theseliabilities 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 ofAugust 2, 2008.  These amountsrepresent the gross construction costs and exclude developer contributions ofapproximately $91 million which we expect to receive pursuant to the terms ofthe construction contracts.

 

In the normal course of ourbusiness, we issue purchase orders to vendors/suppliers for merchandise. Ourpurchase orders are not unconditional commitments but, rather representexecutory contracts requiring performance by the vendors/suppliers, includingthe delivery of the merchandise prior to a specified cancellation date and thecompliance with product specifications, quality standards and other requirements.In the event of the vendor’s failure to meet the agreed upon terms andconditions, we may cancel the order.

 

The following table summarizesthe expiration of our significant commercial commitments outstanding at August 2,2008:

 
| ** **                                                   | ** ** | **Amount of Commitment by Expiration Period** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands)**                                      | ** ** | **Total**                                                              | ** ** | **Fiscal Year  2009** | ** ** | **Fiscal  Years  2010-2011** | ** ** | **Fiscal  Years  2012-2013** | ** ** | **Fiscal Year  2014 and  Beyond** | ** ** |
| Other commercial commitments:                                |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Senior secured asset-based revolving credit facility(1) |       | $                                                                      | 600,000    |   | $ | — |   | $ | — |   | $ | 600,000 |   | $ | — |   |
| Surety bonds                                                 |       | 4,000                                                                  |       | 3,300 |   | 700 |   | — |   | — |   |
|                                                         |       | $                                                                      | 604,000    |   | $ | 3,300 |   | $ | 700 |   | $ | 600,000 |   | $ | — |   |

 

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(1)           Asof August 2, 2008, we had no borrowings outstanding under our seniorsecured asset-based revolving credit facility and had $576.0 million of unusedborrowing availability, after giving effect to $24.0 million of outstandingletters of credit. Our working capital requirements are greatest in the firstand second fiscal quarters as a result of higher seasonal requirements. See “Descriptionof Other Indebtedness—Senior Secured Asset-Based Revolving Credit Facility” and“Management’s Discussion and Analysis of Financial Conditions and Results ofOperations—Seasonality.”

 

In addition to the itemspresented above, our other principal commercial commitments are comprised ofcommon area maintenance costs, tax and insurance obligations and contingentrent payments.

 

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**OTHERMATTERS**

** **

**Factors That May AffectFuture Results**

** **

Mattersdiscussed in MD&A include forward-looking statements. Forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,”“could,” “should,” “anticipate,” “believe,” “project” or “continue.” We makethese forward-looking statements based on our expectations and beliefsconcerning future events, as well as currently available data.  While we believe there is a reasonablebasis for our forward-looking statements, they involve a number of risksand uncertainties. Therefore, these statements are not guarantees of futureperformance and you should notplace undue reliance on them. A variety of factors could cause ouractual results to differ materially from the anticipated or expected resultsexpressed in our forward-looking statements. Factors that could affect futureperformance include, but are not limited, to:

 

*Political andGeneral Economic Conditions*

* *

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

 

·                  terrorist activities inthe United States and elsewhere;

 

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

 

*CustomerConsiderations*

* *

·                  changes in the demographicor retail environment;

 

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

 

·                  changes in consumerpreferences or fashion trends;

 

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

 

*MerchandiseProcurement and Supply Chain Considerations*

* *

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

 

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

 

·                  changes in foreigncurrency exchange or inflation rates;

 

·                  significant increases inpaper, printing and postage costs;

 

*Industry andCompetitive Factors*

* *

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

 

·                  seasonality of the retailbusiness;

 

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

 

·                  delays in anticipatedstore openings and renovations;

 

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·                  our success in enforcingour intellectual property rights;

 

*EmployeeConsiderations*

* *

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

 

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

 

*Legal andRegulatory Issues*

* *

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

 

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

 

*LeverageConsiderations*

* *

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

 

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

 

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

 

*Other Factors*

* *

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

 

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

 

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

 

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

 

**CriticalAccounting Policies**

** **

Our accounting policies aremore fully described in Note 1 of the notes to our audited consolidatedfinancial statements appearing elsewhere in this Annual Report. As disclosed inNote 1 of the notes to our audited consolidated financial statements, thepreparation of financial statements in conformity with generally acceptedaccounting principles requires us to make estimates and assumptions aboutfuture events. These estimates and assumptions affect the amounts of assets,liabilities, revenues and expenses and the disclosure of gain and loss contingenciesat the date of our audited consolidated financial statements appearingelsewhere in this Annual Report on Form 10-K.

 

While we believe that our pastestimates and assumptions have been materially accurate, the amounts we havecurrently estimated are subject to change if different assumptions as to theoutcome of future events were made. We evaluate our estimates and judgments onan ongoing basis and predicate those estimates and judgments on historicalexperience and on various other factors that we believe to be reasonable underthe circumstances. We make adjustments to our assumptions and judgments whenfacts and circumstances dictate. Since future events and their effects cannotbe determined with absolute certainty, actual results may differ from theestimates used in preparing the accompanying audited consolidated financialstatements.

 

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We believe the followingcritical accounting policies encompass the more significant judgments andestimates used in the preparation of our audited consolidated financialstatements.

 

***Revenues.***  Revenues include sales of merchandise andservices and delivery and processing revenues related to merchandise sold.Revenues from our Specialty Retail stores are recognized at the later of thepoint of sale or the delivery of goods to the customer. Revenues from ourDirect Marketing operations are recognized when the merchandise is delivered tothe customer. Revenues associated withgift cards are recognized at the time of redemption by the customer. Revenuesexclude sales taxes collected from our customers.

 

We maintain reserves foranticipated sales returns primarily based on our historical trends related toreturns by our retail and direct marketing customers. Our reserves foranticipated sales returns aggregated $45.0 million at August 2, 2008and $48.8 million at July 28, 2007. As the vast majority ofmerchandise returns are made in less than 30 days after the sales transaction,we believe the risk that differences between our estimated and actual returnswill have a material impact on our consolidated financial statements isminimal.

 

***Merchandise Inventories and Cost of GoodsSold.***  We utilize the retail method of accounting. Underthe 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. The cost of theinventory reflected on the consolidated balance sheets is decreased by chargesto cost of goods sold at the time the retail value of the inventory is loweredthrough the use of markdowns. Earnings are negatively impacted when merchandiseis marked down. As we adjust theretail value of our inventories through the use of markdowns to reflect marketconditions, our merchandise inventories are stated at the lower of cost ormarket.

 

The areas requiring significantmanagement judgment related to the valuation of our inventories include1) setting the 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 estimation ofshrinkage. We believe our merchandise valuation and pricing controls minimizethe risk that our inventory values could be materially misstated.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold. Theamounts of vendor allowances we received did not have a significant impact onthe year-over-year change in gross margin during fiscal years 2008, 2007 or2006. We received vendor allowances of $109.6 million, or 2.4% ofrevenues, in fiscal year 2008, $96.1 million, or 2.2% of revenues, infiscal year 2007 and $94.5 million, or 2.3% of revenues, in fiscal year 2006.

 

***Long-lived Assets.***  Property and equipment are stated at costless accumulated depreciation. For financial reporting purposes, we computedepreciation principally using the straight-line method over the estimateduseful lives of the assets. Buildings and improvements are depreciated overfive to 30 years while fixtures and equipment are depreciated over threeto 15 years. Leasehold improvements are amortized over the shorter of theasset life or the lease term (which mayinclude renewal periods when exercise of the renewal option is at ourdiscretion and considered reasonably assured at the inception of the lease).Costs incurred for the development of internal computer software arecapitalized and amortized using the straight-line method over three to tenyears.

 

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 the utilization of assets with no depreciation charges.The reassessment of depreciable lives involves utilizing historical remodel anddisposition activity and forward-looking capital expenditure plans.

 

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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 not realized,future annual assessments could result in impairment charges. No storeimpairment charges were recorded in fiscal years 2008, 2007 or 2006.

 

***Goodwill and Intangible Assets.***  Goodwill and indefinite-lived intangibleassets, such as tradenames, are not subject to amortization. Rather,recoverability of goodwill and indefinite-lived intangible assets is assessedannually and upon the occurrence of certain events. The recoverabilityassessment requires us to make judgments and estimates regarding fair values.Fair values are determined using estimated future cash flows, including growthassumptions for future revenues, gross margin rates and other estimates.  In addition, the fair values of ourtradenames are based, in part, on our estimates of royalties which could bederived from the licensing of such tradenames to third parties.

 

To the extent that ourestimates are not realized, future assessments could result in impairmentcharges. In the fourth quarters of fiscal years 2008 and 2007, we recorded $31.3million and $11.5 million pretax impairment charges related to the writedown tofair value of the net carrying value of the Horchow tradename based upon lowerrevenues and royalty rate expectations with respect to the Horchow brand inlight of current operating performance and future operating expectations.

 

Customer lists are amortizedusing the straight-line method over their estimated useful lives, ranging from5 to 24 years (weighted average life of 13 years).  Favorable lease commitments are amortizedstraight-line over the remaining lives of the leases, ranging from 6 to 49years (weighted average life of 33 years).

 

***Financial Instruments.***  NMG uses derivative financial instruments tohelp manage our interest rate risk. Effective December 6, 2005, NMGentered into floating to fixed interest rate swap agreements for an aggregatenotional amount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness. The interestrate swap agreements terminate after five years.  At August 2, 2008, the fair value of NMG’sinterest rate swap agreements was a loss of approximately $34.4 million,which amount is included in other long-term liabilities.

 

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

 

As a result of the swapagreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.524% to 6.733% per quarter through 2010 and result in an average fixed rateof 6.608%.

 

***Advertising and Catalog 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 media costs related to promotional materials mailed to ourcustomers. These costs are expensed at the time of mailing to the customer.Advertising costs incurred by Direct Marketing relate to the production,printing and distribution of our print catalogs and the production of thephotographic content on our websites. We amortize the costs of print catalogsduring the periods we expect to generate revenues from such catalogs, generallysix months. We expense the costs incurred to produce the photographic contenton our websites at the time the images are first loaded onto the website. Weexpense website design and web advertising costs as incurred.

 

***Loyalty Programs.***  We maintain customer loyalty programs inwhich customers accumulate points for qualifying purchases. Upon reachingcertain levels, customers may redeem their points for gifts. Generally, pointsearned in a given year must be redeemed no later than 90 days subsequent to theend 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.

 

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***Benefit Plans.***  We sponsor a noncontributory defined benefitpension plan (Pension Plan) and an unfunded supplemental executive retirementplan (SERP Plan) which provides certain employees additional pension benefits.In calculating our obligations and related expense, we make various assumptionsand estimates, after consulting with outside actuaries and advisors. The annualdetermination of expense involves calculating the estimated total benefitsultimately payable to plan participants and allocating this cost to the periodsin which services are expected to be rendered. We use the projected unit creditmethod in recognizing pension liabilities. The Pension and SERP Plans arevalued annually as of the beginning of each fiscal year.

 

Significant assumptions relatedto the calculation of our obligations 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 andthe average rate of compensation increase by plan participants. We review theseassumptions annually based upon currently available information, includinginformation provided by our actuaries.

 

***Self-insurance and Other Employee BenefitReserves.*** We use estimates in the determination of the required accruals forgeneral liability, workers’ compensation and health insurance as well asshort-term disability and postretirement health care benefits. We base theseestimates upon an examination of historical trends, industry claims experienceand independent actuarial estimates. Projected claims information may change inthe future and may require us to revise these reserves. Although we do not expect that we will ultimately pay claimssignificantly different from our estimates, self-insurance reserves could beaffected if future claims experience differ significantly from our historicaltrends and assumptions. Self-insurance reserves including generalliability, workers’ compensation and health insurance aggregated$44.1 million at August 2, 2008 and $44.5 million at July 28,2007. Other employee benefit reserves including short-term disability andpostretirement health care benefits aggregated $37.0 million at August 2,2008 and $35.4 million at July 28, 2007.

 

***Income Taxes.***  We use the asset and liability method ofaccounting for income taxes.  Under thismethod, deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax basis of assets and liabilities and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse.  Weare routinely under audit by federal, state or local authorities in the area ofincome taxes. We regularly evaluate the likelihood of realization of taxbenefits derived from positions we have taken in various federal and statefilings after consideration of all relevant facts, circumstances and availableinformation. For those tax benefits we believe more likely than not will besustained, we recognize the benefit we believe is cumulatively greater than 50%likely to be realized. To the extent we were to prevail in matters for whichaccruals have been established or be required to pay amounts in excess ofrecorded reserves, our effective tax rate in a given financial statement periodcould be materially impacted.

 

**RecentAccounting Pronouncements**

** **

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (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 on our consolidated financial statements.

 

In February 2007, the FASBissued 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 theimpact, if any, of adopting SFAS 159 on our consolidated financial statements.

 

In December 2007, the FASBissued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (SFAS 141(R)), which addresses the recognition and accounting foridentifiable assets acquired, liabilities assumed and non-controlling interestsin business combinations.  In addition,SFAS 141(R) changes the accounting treatment for certainacquisition-related items, including requirements to expenseacquisition-related costs as incurred, expense restructuring costs associatedwith an acquired business and recognize post-acquisition changes in taxuncertainties associated with a business combination as a component of taxexpense.  SFAS 141(R) is to beapplied prospectively to business combinations for which the acquisition dateis on or after December 15, 2008, or our fiscal year ending July 31,2010.  Generally, the effect of SFAS 141(R) willdepend on future acquisitions.  However,the accounting for the resolution of any tax uncertainties remaining as of August 1,2009 related to the Acquisition will be subject to the provisions of SFAS141(R).  We have not yet evaluated theimpact, if any, of adopting SFAS 141(R) on our consolidated financialstatements.

 

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

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

** **

The market risk inherent in theCompany’s financial instruments represents the potential loss arising fromadverse changes in interest rates. The Company does not enter into derivativefinancial instruments for trading purposes. The Company seeks to manageexposure to adverse interest rate changes through its normal operating andfinancing activities. The Company is exposed to interest rate risk through itsborrowing activities, which are described in Note 9 to our consolidatedfinancial statements.

 

As of August 2, 2008, NMGhad no borrowings outstanding under its Asset-Based Revolving Credit Facilitythat bears interest at floating rates. Future borrowings under NMG’sAsset-Based Revolving Facility, to the extent of outstanding borrowings, wouldbe affected by interest rate changes.

 

At August 2, 2008, NMG had$1,625.0 million of debt under its Senior Secured Term Loan Facilityissued in connection with the Acquisition that bears interest at floatingrates.

 

NMG uses derivative financialinstruments to help manage our interest rate risk.  Effective December 6, 2005, NMG enteredinto floating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness. The interestrate swap agreements terminate after five years.  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 6.524% to 6.733% per quarter through2010 and result in an average fixed rate of 6.608%. With respect to outstandingborrowings 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 ofchanges in the U.S. equity and bond markets serve to increase or decrease thevalue of pension plan assets, resulting in increased or decreased cash fundingby the Company. The Company seeks to manage exposure to adverse equity and bondreturns by maintaining diversified investment portfolios and utilizingprofessional investment managers.

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

** **

The followingconsolidated financial statements of the Company and supplementary data areincluded as pages F-1 through F-56 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-11             |       |

** **

**ITEM 9.****   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

 

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**ITEM 9A. CONTROLS AND PROCEDURES**

** **

**a.****             Disclosure Controls and Procedures**

** **

In accordancewith Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation asof August 2, 2008, under the supervision and with the participation of ourChief Executive Officer and Chief Financial Officer, as well as other keymembers of our management, of the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act). Based on that evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,accumulated, processed, summarized, reported and communicated on a timely basiswithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**b.****             Internal Control over Financial Reporting**

** **

Our managementis responsible for establishing and maintaining adequate internal control overfinancial reporting as defined in Exchange Act Rule 13a-15(f). Ourmanagement conducted an evaluation of the effectiveness of our internal controlover financial reporting 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 August 2, 2008. 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 August 2, 2008.

 

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

** **

In theordinary course of business, we routinely enhance our information systems byeither upgrading our current systems or implementing new systems. No changeoccurred in our internal controls over financial reporting during the quarterended August 2, 2008 that has materially affected, or is reasonably likelyto materially affect, our internal controls over financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

** **

None.

 

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**PART III**

** **

**ITEM 10.****                     ****DIRECTORS AND EXECUTIVE OFFICERSOF 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      |       | 45      |       | Director  since 2005                                                                        |
| Jonathan  Coslet    |       | 43      |       | Director  since 2005                                                                        |
| James  Coulter      |       | 48      |       | Director  since 2005                                                                        |
| John  G. Danhakl    |       | 52      |       | Director  since 2005                                                                        |
| Sidney  Lapidus     |       | 70      |       | Director  since 2005                                                                        |
| Kewsong  Lee        |       | 43      |       | Director since 2005                                                                         |
| Carrie  Wheeler     |       | 36      |       | Director since 2005                                                                         |
| Burton  M. Tansky   |       | 70      |       | Director since 2005, President and Chief Executive  Officer                                 |
| Karen  W. Katz      |       | 51      |       | Executive Vice President and President and Chief  Executive Officer of Neiman Marcus Stores |
| James  E. Skinner   |       | 55      |       | Executive Vice President and Chief Financial Officer                                        |
| Brendan  L. Hoffman |       | 40      |       | President and Chief Executive Officer of Neiman  Marcus Direct                              |
| James  J. Gold      |       | 44      |       | President and Chief Executive Officer of Bergdorf  Goodman                                  |
| Nelson  A. Bangs    |       | 55      |       | Senior Vice President and General Counsel                                                   |
| Marita  O’Dea  |       | 59      |       | Senior Vice President and Chief Human Resource  Officer                                     |
| Phillip  L. Maxwell |       | 60      |       | Senior Vice President and Chief Information  Officer                                        |
| Wayne  A. Hussey    |       | 58      |       | Senior Vice President, Properties and Store  Development                                    |

 

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

 

**David A. Barr**hasbeen a member and managing director of Warburg Pincus LLC and a general partnerof Warburg Pincus & Co. since January 2001.  Prior to joining Warburg Pincus in 2000, Mr. Barrserved as a managing director at Butler Capital where he focused on consumerand industrial leveraged buyout transactions for more than ten years.  Mr. Barr also serves on the board ofdirectors of Builders First Source, Inc., Polypore Inc., and TransDigmGroup Inc.

 

**Jonathan Coslet**has been a partner of TPG Capital, L.P. since 1993 and is currently a seniorpartner and member of the firm’s Executive, Management and InvestmentCommittees.  Prior to joining TPGCapital, L.P., Mr. Coslet worked at Donaldson, Lufkin & Jenrette,specializing in leveraged acquisitions and high yield finance from 1991 to1993.  Mr. Coslet also serves on theboard of directors of Harrah’s Entertainment, Inc., QuintilesTransnational Corp., IASIS Healthcare Corp., J. Crew Group, Inc., PetcoAnimal Supplies, Inc., and Biomet, Inc.

 

**James Coulter**co-founded TPG Capital, L.P. in 1992 and has been Managing General Partner ofTPG Capital, L.P. for more than eight years. From 1986 to 1992, Mr. Coulter was a Vice President of Keystone, Inc.  From 1986 to 1988, Mr. Coulter was alsoassociated with SPO Partners, an investment firm that focuses on public marketand private minority investments.  Mr. Coulteralso serves on the board of directors of Lenovo Group Limited, J. Crew Group, Inc.,and Alltel Corporation.

 

**John G. Danhakl**is a Managing Partner of Leonard Green & Partners, L.P. with whom hehas been a partner since 1995.  Prior tojoining Leonard Green & Partners, L.P., he served as a ManagingDirector in the Los Angeles office of Donaldson, Lufkin & Jenrette,which he joined in 1990.  From 1985 to1990, Mr. Danhakl was a Vice President in corporate finance at DrexelBurnham Lambert.  He also serves on theboard 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.

 

**Sidney Lapidus**retired in December 2007 as Managing Director and Senior Advisor ofWarburg Pincus LLC.  He had been employedat Warburg Pincus since 1967.  Prior tothat time, he was an attorney with the SEC. He presently serves as a director of Lennar Corporation and Knoll, Inc.  He is also trustee of the New York UniversityMedical Center and chairman of the American Jewish Historical Society andUnited Neighborhood Houses of New York.

 

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**Kewsong Lee**has been a member and managing director of Warburg Pincus LLC and a generalpartner 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. Leeserved as a consultant at McKinsey & Company, Inc. from 1990 to1992.  Mr. Lee also serves on theboard of directors of Arch Capital Group, Ltd., Knoll, Inc., TransDigmGroup Inc., and several privately held companies.

 

**Carrie Wheeler**is a partner of TPG Capital, L.P.  Priorto joining TPG Capital, L.P. in 1996, she was with Goldman, Sachs &Co. from 1993 to 1996.  Ms. Wheeleralso serves on the board of directors of Metro-Goldwyn-Mayer Inc. and PetcoAnimal Supplies, Inc.

 

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

 

**Karen W. Katz** was elected Executive Vice President in October 2007and appointed a member of the Office of the Chairman.  Since December 2002, she has also servedas President and Chief Executive Officer of Neiman Marcus Stores.  Ms. Katz served as President and ChiefExecutive Officer of Neiman Marcus Direct from May 2000 to December 2002and as Executive Vice President of Neiman Marcus Stores from February 1998until May 2000.  Ms. Katzserves on the board of directors of Pier I Imports, Inc.

 

**James E. Skinner** was elected Executive Vice President andChief Financial Officer and appointed a member of the Office of the Chairman inOctober 2007.  He has served asSenior Vice President and Chief Financial Officer since October 2005.  Since 2001, he has also served as Senior VicePresident and Chief Financial Officer of The Neiman Marcus Group, Inc.  From August 2000 through December 2000,Mr. Skinner served as Senior Vice President and Chief Financial Officer ofCaprock Communications Corp. and from 1994 until 2000, he served as ExecutiveVice President, Chief Financial Officer and Treasurer for CompUSA Inc.  Mr. Skinner serves on the board ofdirectors of Fossil, Inc.

** **

**Brendan L. Hoffman** has been President and Chief ExecutiveOfficer of Neiman Marcus Direct since December 2002.  Mr. Hoffman served as Vice President ofthe Neiman Marcus Last Call Clearance Division from August 2000 to December 2002,and as a Divisional Merchandise Manager of Bergdorf Goodman from October 1998to August 2000.

 

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

 

**Nelson A. Bangs**has been Senior Vice President and General Counsel since October 6, 2005and has served in that capacity for The Neiman Marcus Group, Inc. since April 2001.  From January 1999 to April 2001, Mr. Bangsengaged in a private consulting and law practice; and from April 1998until January 1999, he served as Senior Vice President and General Counselof Pillowtex Corporation.  Prior to April 1998,Mr. Bangs served as Senior Vice President, General Counsel and Secretaryof Dr Pepper/Seven Up, Inc. and its predecessors.

 

**Marita O’Dea**has been Senior Vice President and Chief Human Resource Officer since October 6,2005 and has also served in that capacity for The Neiman Marcus Group, Inc.since September 2002.  She served asVice President - 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.

 

**Phillip L. Maxwell** has been Senior Vice President and Chief Information Officer since October 6,2005 and has also served in that capacity for The Neiman Marcus Group, Inc.since May 2000.  From 1993 untiljoining us in 2000, Mr. Maxwell advanced from Chief Information Officer,Director of Management Information Systems for Nissan Motor AcceptanceCorporation to Vice President, Chief Information Officer, Information Systemsand eBusiness Strategy for Nissan North America.

 

**Wayne A. Hussey**hasbeen Senior Vice President, Properties and Store Development since October 22,2007.  From May 1999 to October 2007he served as Senior Vice President, Properties and Store Development of NeimanMarcus stores.

 

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**Code ofEthics**

 

TheBoard has adopted The Neiman Marcus Group, Inc. Code of Ethics and Conductwhich is applicable to all our directors, officers and employees, as well as aseparate Code of Ethics for Financial Professionals that applies to allfinancial employees including the Chief Executive Officer, the Chief FinancialOfficer and 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, OneMarcus Square, 1618 Main Street, Dallas, Texas 75201.

 

Wehave established a means for employees, customers, suppliers, or otherinterested parties to submit confidential and anonymous reports of suspected oractual violations of the Company’s Code of Conduct relating, among otherthings, to:

 

—                      accounting practices, internal accountingcontrols, or auditing matters and procedures;

—                      theft or fraud of any amount;

—                      performance and execution of contracts;

—                      conflicts of interest;

—                      violations of securities and antitrust laws;and

—                      violations of the Foreign Corrupt PracticesAct.

 

Anyemployee or other interested party can call the following toll-free number tosubmit a report.  This number isoperational 24 hours a day, seven days a week: **1-866-384-4277**

 

**BoardCommittees**

 

OurBoard of Directors has established an audit committee, an executive committee,and a compensation committee.  Themembers of our audit committee for fiscal year 2008 were David A. Barr, CarrieWheeler, and Sidney Lapidus.  The auditcommittee recommends the annual appointment of auditors with whom the auditcommittee reviews the scope of audit and non-audit assignments and relatedfees, accounting principles we use in financial reporting, internal auditing proceduresand 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 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.

 

Eachof the Sponsors 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**

 

TheBoard of Directors has determined that David A. Barr, Chairman of the AuditCommittee, meets the criteria set forth in the rules and regulations ofthe SEC for an “audit committee financial expert.”

 

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**ITEM 11.****                     ****EXECUTIVE COMPENSATION**

 

**CompensationCommittee Interlocks and Insider Participation**

 

In fiscal year 2008, Jonathan Coslet, KewsongLee, and John G. Danhakl served as members of our Compensation Committee.  No officer or employee served on thecompensation committee (or equivalent), or the board of directors, of anotherentity whose executive officer(s) served on our Compensation Committee orBoard.

 

**Compensation Discussion and Analysis**

 

**Overview**

 

·* Compensation Philosophy and Objectives*

 

We are a premier luxury retailer that has been in business over 100years.  Our continued success depends onthe skills of talented leaders who are dedicated to achieving solid financialperformance, providing outstanding service to customers, and managing theCompany’s assets wisely.  Ourcompensation program is designed to meet the following objectives:

 

1.     Torecruit and retain executives who possess the exceptional ability, experience,and vision to sustain and promote our preeminence in the marketplace.

2.     Toencourage and reward the achievement of our short- and long-term goals andoperating plans.

3.     Toencourage and reward increasing customer satisfaction, improving customerservice, providing our customers with the high-end luxury merchandise they havecome to expect, and increasing the amount of business our customers do with us.

4.     Toalign the interests of our executives with the financial and strategicobjectives of our equity investors.

5.     Toprovide total compensation opportunities that meet the expectations of a highlyskilled executive team, are aligned and consistent with our fundamentalperformance and are competitive with the compensation practices and levelsoffered by companies with whom we compete for talent.

 

**Elementsof Direct Compensation**

 

The following are the primary direct and indirect compensation elementsthat make up our executive compensation program:

 

The three primary forms of direct compensation we provide are:

·                  Base salary

·                  Annual Bonus

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

 

The discussion and analysis below is focused primarily on theseelements.

 

·*  Base Salary*

 

Base salary is intended toprovide a base level of compensation commensurate with an executive’s jobtitle, role, tenure, and experience.  Weutilize 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 skilledexecutives.  Specifically, base salarylevels of the named executive officers are determined based on a combination offactors, including our compensation philosophy, market compensation data,competition for key executive talent, the named executive officer’s experience,leadership, achievement of specified business objectives, individualperformance, our overall budget for merit increases, and attainment of ourfinancial goals.  Salaries are reviewedbefore the end of each fiscal year as part of our performance and compensationreview process as well as at other times to recognize a promotion or change injob responsibilities.  Meritincreases are usually awarded to the named executive officers in the samepercentage range as all employees and are based on overall performance andcompetitive market data except in those situations where individual performanceand other factors justify awarding increases above or below this range.  Merit increases typically range between twoand eight percent.  See discussion on “*Base Salary”*****on page 54of this section.

 

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In addition, Mr. Tansky and Ms. Katz have employmentagreements, described in more detail below that set a minimum salary uponexecution of the agreement.

 

·* Annual Incentive Compensation*

 

Annual bonus incentives keyed to short-term objectives form the secondbuilding block of our compensation program and are designed to provideincentives to achieve certain financial goals of the Company and personalobjectives.  These financial goals, whichare used to determine annual bonus incentives for all employees, emphasizeprofitability and asset management.  TheCompensation Committee believes that a significant portion of annual cashcompensation for the named executive officers should be at risk and tied to ouroperational and financial results.  “Payfor performance” for the named executive officers has been significantlyenhanced in recent years by putting a larger part of their potentialcompensation at risk in the annual bonus incentive program.

 

All named executive officers are eligible to be considered for annualbonus incentives.  Target annualperformance incentives, stated as a percentage of base salary, are establishedfor each of the named executive officers. The objectives set for Mr. Tansky and other senior officers withbroad corporate responsibilities are based on financial results of the overallcompany.  When an employee hasresponsibility for a particular business unit or division, the performancegoals are heavily weighted toward the operational performance of that unit.

 

Actual awards earned by the named executive officers are determinedbased on an assessment of our overall performance versus the annual objectives,a review of each named executive officer’s contribution to our overallachievement and an assessment of each named executive officer’s performanceversus their individual objectives.  Mr. Tanskyrecommends bonus awards for other named executive officers for the Committee’sapproval.

 

The employment agreements of Mr. Tansky and Ms. Katz containprovisions regarding target levels and the payment of annual incentives and aredescribed in more detail below.

 

·* Long-Term Incentive*

 

Long-term incentives in the form of stock options are intended topromote sustained high performance and to align our executives’ interests withthose of our equity investors.  The stockoptions, which vest over five years (other than in the case of Mr. Tanskywhose options vest over four years), will only create value for the executivesif the value of the Company increases. This creates a direct correlation to the interests of our equityinvestors.

 

Aninitial stock option 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. The initial grant was made following the consummation of the Acquisitionin order to retain the senior management team and enable them to share in thegrowth of the Company along with our equity investors.  All grants of stock options under theManagement Incentive Plan have an exercise price equal to the fair market valueof our common stock on the date of grant. No grants of stock options have been made to the named executiveofficers since the initial grant in fiscal year 2006 and currently, none areanticipated except in the event of a promotion or new hire.

 

Inaddition, following the consummation of the Acquisition, the Neiman Marcus, Inc.Cash Incentive Plan (referred to as the Cash Incentive Plan) was adopted in2005 to aid in the retention of certain key executives, including our namedexecutive officers.  Under the CashIncentive 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 ManagementIncentive Plan.  Mr. Tansky will beentitled to receive (subject, with certain exceptions, to continued employment)a cash bonus under the Cash Incentive Plan in the amount of $3,080,911 pursuantto the terms of his employment agreement. If the internal rate of return to the Sponsors is not positive followinga change in control or an initial public offering, no amounts will be paid tothose participating in the Cash Incentive Plan. No amounts have been paid to date under the Cash Incentive Plan.

 

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**How Executive Direct Compensation is Determined**

 

To assure the continued growth and profitability of the Company, wereward performance that is measurable against performance targets establishedin our compensation program that are based on annual and longer term performanceobjectives approved 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.

 

·  *Role of the CompensationCommittee*

 

The Compensation Committee is responsible for determining thecompensation of our named executive officers. The Compensation Committee considers input from our CEO, our Senior VicePresident and Chief Human Resource Officer, and compensation consultants inmaking determinations regarding our executive compensation program and theindividual contribution of our executive officers to the Company.  The CEO does not play a role in his own compensationdeterminations other than discussing individual performance objectives.  The CEO’s performance assessment andcompensation are reviewed and determined solely by the Compensation Committee.

 

·  *Role of Management*

 

As part of our annual planning process, our CEO and our Senior Vice Presidentand Chief Human Resource Officer, with the help of our consultants, develop andrecommend a compensation program for all executive officers.  Based on a performance assessment, the CEOand the Senior Vice President and Chief Human Resource Officer attend a meetingof the Compensation Committee held for the purpose of considering theexecutives’ annual compensation, and recommend the base salary, incentive bonusawards, long-term incentive awards, if applicable, for each of the otherexecutive officers, including the named executive officers.  The other named executive officers do notplay a role in their own compensation determination other than discussingindividual performance objectives with the CEO.

 

·* Role of CompensationConsultants*

 

Withthe approval of the Compensation Committee, management retained compensationconsultants in fiscal year 2008 to advise the Company on executive compensationmatters.  They provide information aboutindustry compensation practices and competitive levels at a group of industryrelated companies, and recommend compensation programs and approaches that areconsistent with our compensation policies. This assistance also includes providing relevant market data andalternatives to consider in designing the compensation packages for each of thenamed executive officers and assisting in the preparation of individual totalcompensation summaries.  The CompensationCommittee considers the advice of the compensation consultants to assist us inevaluating our compensation policies. The Compensation Committee also considers advice from various otherconsultants regarding plan design, and recommendations involving benefits planssuch as our Key Employee Deferred Compensation Plan and the SupplementalExecutive Retirement Plan discussed later in this section.  These consultants also provide advice onmatters relating to broad-based employee healthcare and benefit programs andrelated employee communications.  Theseplans cover the named executive officers as well as other eligible employees.

 

·* Market Comparisons*

 

The Compensation Committee and management request information from thecompensation consultants to determine if any element of compensation needsadjustment in order to comply with our strategy of targeting executive compensationthat is between the 50th and 75th percentile levels ofthe compensation packages received by executives at a group of industry relatedcompanies.

 

In fiscal year 2008, the Compensation Committee, on the recommendationof the consultants, 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 the compensation for our named executiveofficers, both individually and as a whole, is appropriately competitiverelative to our Company’s performance.

 

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Abercrombie &Fitch

AnnTaylor

Coach

Macy’s

TheGap

JonesApparel

Kohl’s

LimitedBrands

LizClaiborne

Nordstrom

PoloRalph Lauren

Saks

Talbots

Tiffany &Co.

TommyHilfiger

WilliamsSonoma

 

Inaddition to the select companies above, we also review various third partycompensation survey reports.

 

·  *Assessment of Fiscal Year 2008 Performance*

 

Indetermining specific compensation actions for the named executive officers, theCompensation Committee considers the performance relative to thepre-established goals that are set at the beginning of the year.  For fiscal year 2008, our annual financialgoals were based on EBITDA, return on invested capital and/or inventoryturnover performance.  We do not discloseour business plan or the components thereof because they constitute confidentialbusiness information that could impair our ability to compete effectively inthe retail market.  However, by settingminimum, target, and maximum performance levels, the Compensation Committeebelieves the performance targets are challenging based on historical companyperformance and industry and market conditions. Similar goals are established at the division and business unit levelswhere appropriate for certain of our named executive officers.  As it relates to our annual incentivecompensation program in particular, this performance assessment is a keydeterminant in total compensation paid to our named executive officers.

 

**2008Direct Compensation Actions for Our Chief Executive Officer and Other NamedExecutive Officers**

 

Asdescribed above, compensation decisions for our named executive officers arebased upon a review of the Company’s performance versus the Company’s annualgoals and objectives, an examination of the competitive marketplace for luxuryretail talent, and our relative competitive compensation position based inlarge part upon our survey of a group of industry related companies and otherbroad-based industry surveys.  We targetour direct compensation to be positioned between the 50th and 75thpercentile levels of the compensation packages received by executives in ourpeer group of industry related companies. Ultimately, our named executive officers’ total compensation is based onthe level of achievement versus Company, business unit, and individual targetperformance levels.

 

·* Base Salary*

 

OnSeptember 18, 2007, the Compensation Committee approved the followingsalary increases for the named executive officers:

 
| **Name**           | ** ** | **2007 Salary** | ** ** | **Increase** | ** ** | **2008 Salary** | ** ** |
|--------------------|------------|----------------------|------------|--------------|------------|----------------------|------------|
| ** **         | ** ** | **($)**              | ** ** | **(%)**      | ** ** | **($)**              | ** ** |
| Burton M. Tansky   |       | $                    | 1,420,000  |         | 5.6        | %                    | $          | 1,500,000 |   |
| Karen W. Katz      |       | 800,000              |       | 9.4          | %          | 875,000              |       |
| James E. Skinner   |       | 575,000              |       | 8.7          | %          | 625,000              |       |
| Brendan L. Hoffman |       | 500,000              |       | 6.0          | %          | 530,000              |       |
| James J. Gold      |       | 460,000              |       | 6.5          | %          | 490,000              |       |
|                    |            |                      |            |              |            |                      |            |  |  |

 

Forall of the named executive officers above, the salary adjustments reflect meritincreases and adjustments relative to competitive market benchmarks asdiscussed above.  For each of Ms. Katzand Mr. Skinner, the salary adjustment also includes the promotion toExecutive Vice President.

 

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·* Annual Incentive Compensation*

 

For fiscal year 2008, the financial component of the annual bonus foreach named executive officer was based on EBITDA, return on invested capitaland/or inventory turnover performance, as described above.

 

Minimum,target, and maximum bonuses are paid based on a percentage of base salary.  If the target performance level is achieved,each named executive officer will receive the percentage of base salaryindicated below.  If the maximum level isachieved, the annual bonus incentives are paid at 200% of the targetpercentage.  Minimum levels are payable at25% of the target percentage.  If theresults are below the minimum performance level, no bonus award is paid.  Results between minimum, target, and maximumare extrapolated.  The target awardlevels and relative weightings between Company, division, and individualresults for 2008 are as follows:

 
| ** **         | ** ** | **Target Bonus**       | ** ** | ** **                                   | ** ** | ** **   | ** ** | ** **     | ** ** |
|--------------------|------------|-----------------------------|------------|----------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **         | ** ** | **As Percent of** | ** ** | **Relative Performance Weighting** | ** ** |
| **Name**           | ** ** | **Salary**                  | ** ** | **Company**                                  | ** ** | **Division** | ** ** | **Individual** | ** ** |
| Burton M. Tansky   |       | 100                         | %          | 75                                           | %          | —       |       | 25             | %          |
| Karen W. Katz      |       | 75                          | %          | 30                                           | %          | 50           | %          | 20             | %          |
| James E. Skinner   |       | 60                          | %          | 75                                           | %          | —       |       | 25             | %          |
| Brendan L. Hoffman |       | 60                          | %          | 30                                           | %          | 50           | %          | 20             | %          |
| James J. Gold      |       | 60                          | %          | 30                                           | %          | 50           | %          | 20             | %          |

 

Forfiscal 2008, the Compensation Committee determined that with the exception of Mr. Gold,performance levels were below the minimum performance level set at thebeginning of the fiscal year.  Targetbonus opportunity and actual bonus awards paid for fiscal year 2008 annualperformance are as follows:

 
| ** **         | ** ** | ** **                    | ** ** | **Bonus Target** | ** ** |
|--------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **         | ** ** | ** **                    | ** ** | ** **            | ** ** | ** ** | ** ** | **2008 Annual** | ** ** |
| ** **         | ** ** | ** **                    | ** ** | **Percent of**   | ** ** | ** ** | ** ** | **Incentive** | ** ** |
| **Name**           | ** ** | **2008 Salary ($)** | ** ** | **Salary**            | ** ** | **$ Value** | ** ** | **Award ($)** | ** ** |
| Burton M. Tansky   |       | $                             | 1,500,000  |                  | 100        | % | $ | 1,500,000 |   | $ | — |   |
| Karen W. Katz      |       | 875,000                       |       | 75                    | %          | 656,250 |   | — |   |
| James E. Skinner   |       | 625,000                       |       | 60                    | %          | 375,000 |   | — |   |
| Brendan L. Hoffman |       | 530,000                       |       | 60                    | %          | 318,000 |   | — |   |
| James J. Gold      |       | 490,000                       |       | 60                    | %          | 294,000 |   | 253,546 |   |
|                    |            |                               |            |                       |            |  |  |  |  |  |  |  |

 

Actualamounts paid to the named executive officers in fiscal year 2008 as illustratedabove are listed in the Summary Compensation Table under the heading “*Non-Equity Incentive Plan Compensation”*on page 59 ofthis section.

 

Inaddition, discretionary bonuses have been awarded by the Compensation Committeeto certain of the named executive officers from time to time to reward theseindividuals for exemplary performance. No such discretionary bonuses were awarded in fiscal year 2008.

 

·* Long-Term Incentive*

 

Stockoption grants were made to certain executive officers, including each of thenamed executive officers, on November 29, 2005.  As mentioned above, no grants of stockoptions have been made to the named executive officers since the initial grantand none are anticipated except in the event of a promotion or a new hire.  The stock options are discussed furtherbeginning on page 61 of this section under the heading “*Outstanding Equity Awards at Fiscal Year End*.”

 

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**IndirectCompensation**

 

Indirect compensation is comprised of thefollowing elements:

 

·                  Health andwelfare benefits

·                  Retirementbenefits

·                  Life insurance

·                  Deferredcompensation programs

·                  Certainperquisites

 

·* Health and Welfare Benefits*

 

Executiveofficers participate 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 described below.

 

·  *Retirement Plan*

 

Priorto 2008, most non-union employees over age 21 who had completed one year ofservice with 1,000 or more hours participated in The Neiman Marcus Group, Inc.Retirement Plan (referred to as the Retirement Plan), which paid benefits uponretirement or termination of employment. Effective as of December 31, 2007, eligibility and benefit accrualsunder the Retirement Plan were frozen for all participants except for those “Rule of65” employees who elected to continue participation in the RetirementPlan.  “Rule of 65” employeesincluded only those active employees who had completed at least 10 years ofservice and whose combined years of service and age equaled at least 65 as of December 31,2007.  The Retirement Plan is a “career-accumulation”plan, under which a participant earns each year a retirement annuity equal toone percent of his or her compensation for the year up to the Social Securitywage base and 1.5 percent of his or her compensation for the year in excess ofsuch wage base.  A participant becomesfully vested after five years of service with us.  Mr. Tansky and Ms. Katz were Rule of65 employees, as of December 31, 2007, and elected to continueparticipation in the Retirement Plan. For Messrs. Skinner, Hoffman, and Gold, benefits and accruals underthe Retirement Plan were frozen effective as of December 31, 2007.

 

·* Savings Plan (401(k) Plan)*

 

EffectiveJanuary 1, 2008, a new enhanced 401(k) plan, The Neiman Marcus Group, Inc.Retirement Savings Plan (referred to as the RSP), was offered to all employees,including the named executive officers, as the primary retirement plan.  Benefits and accruals under The Neiman MarcusGroup, Inc. Employee Savings Plan (referred to as the ESP) were frozen aswell as benefits and accruals under the Retirement Plan and all future andcurrent employees who were not already enrolled in the ESP and the RetirementPlan were automatically enrolled in the RSP. “Rule of 65” employees, as described above, were given a choice toeither continue participation in the Retirement Plan and the ESP or freeze whatwas earned under those plans through December 31, 2007 and participate inthe RSP.  Mr. Tansky and Ms. Katzwere “Rule of 65” employees and elected to remain in the Retirement Planand the ESP.  Messrs. Skinner,Hoffman, and Gold were not eligible to continue participating in the ESP andamounts in their Retirement Plan were frozen and the balances in their ESP weretransferred to the RSP.  The RSP is atax-qualified defined contribution 401(k) plan that allows participants tocontribute up to the limit prescribed by the Internal Revenue Service on apre-tax basis.  The Company will match 100%of the first 3% and 50% of the next 3% of pay that is contributed to the RSPafter the first year of employment.  Allemployee contributions to the RSP are fully vested upon contribution.  Company matching contributions vest after twoyears of service.

 

Forthose who remain eligible, the ESP is a retirement savings plan that allowsparticipants to contribute up to the limit prescribed by the Internal RevenueService on a pre-tax basis (provided, however, that highly compensatedemployees are limited to 6% of eligible compensation).  The Company will match 100% of the first 2%and 25% of the next 4% of pay that is contributed to the ESP after the firstyear of employment.  All employeecontributions to the ESP are fully vested upon contribution.  Company matching contributions vest afterthree years of service.

 

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·* Supplemental Retirement Plan and Key EmployeeDeferred Compensation Plan*

 

U.S.tax laws limit the amount of benefits that we can provide under ourtax-qualified plans.  We maintain TheNeiman Marcus Group, Inc. Supplemental Executive Retirement Plan (referredto as the SERP) and the Neiman Marcus Group, Inc. Key Employee DeferredCompensation Plan (referred to as the KEDC Plan), which are unfunded,nonqualified arrangements intended to provide named executive officers andcertain other key employees with additional benefits, including the benefitsthat they would have received under the Retirement Plan, 401(k) plan, theESP and the RSP if the tax law limitations did not apply and if certain otheritems of compensation could be included in calculation of benefits under ourtax-qualified plans.  Prior to 2008,executive, administrative and professional employees (other than those employedas salespersons) with an annual base salary at least equal to a minimumestablished by the Company ($160,000 as of July 28, 2007) were eligible toparticipate in the SERP.  Similar to theRetirement Plan, effective December 31, 2007, eligibility and benefitaccruals under the SERP were frozen for all participants except for those “Rule of65” employees who elected to continue participating in the RetirementPlan.  Each SERP participant accrues abenefit for amounts in excess of those provided under the Retirement Plan.  SERP related benefits are more fullydescribed under “*Pension Benefits”* on page 62.

 

Participationin the 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 401(K) plansare credited to the account balances of each KEDC Plan participant.  KEDC Plan benefits are more fully describedunder “*Nonqualified Deferred Compensation”* on page 63.

 

·* Matching Gift Program*

 

All employees, including the named executiveofficers, may participate in our matching gift program.  Under the program, we will match charitablecontributions by employees up to a maximum of $2,000 per qualifyingorganization 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 Company provides perquisites and otherpersonal benefits that it believes are reasonable and consistent with thenature of the individual’s responsibilities in order to provide a competitivelevel of total compensation to our executives. We believe the level of perquisites is within an acceptable range ofwhat is offered by a group of industry related companies.  The Compensation Committee believes thatthese benefits are aligned with the Company’s desire to attract and retainsuperior management talent for the benefit of all stockholders.  The value of these benefits to the named executiveofficers is set forth in the Summary Compensation Table under the column “*All Other Compensation*” and detail about each element is setforth in a table following the Summary Compensation Table.

 

**CompensationFollowing Employment Termination or Change in Control**

 

·** ***EmploymentAgreements*

 

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. Katzare an important component in retaining these key executives.  The employment agreements were entered intoin conjunction with the consummation of the Acquisition, 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 Acquisition 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 by the executive for “good reason” or a terminationof the executive’s 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.  For a detailed descriptionof the terms of these employment agreements, see “*Employmentand Other Compensation Agreements”* on page 64 of this section.

 

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·* Confidentiality, Non-Competition andTermination Benefits Agreements*

 

Eachof the named executive officers (and certain other officers except for Mr. Tansky)is a party to a confidentiality, non-competition and termination benefitsagreement with the Company.  Theconfidentiality, non-competition and termination benefits agreements providefor severance benefits if the employment of the affected individual isterminated other than for death, disability, or for cause.  These agreements provide for a severancepayment equal to one and one-half annual base salary of the named executiveofficer, payable over an eighteen month period, and reimbursement for COBRApremiums for the same period.

 

·  *Other*

 

TheCompany has change in control provisions in its Management Incentive Plan andits retirement plans that may provide for accelerated vesting and/ordistributions in certain circumstances and these provisions apply equally toall participants in the plans, including the named executive officers, exceptto the extent an executive is party to an individual agreement that providesotherwise.

 

**Considerationof Tax and Accounting Treatment of Compensation**

 

·  *Internal Revenue Code §409A*

 

The American Jobs Creation Act of 2004 added a new Section 409A tothe Internal Revenue Code which applies to compensation deferred under anonqualified deferred compensation plan after December 31, 2004 and willbecome effective on December 31, 2008. Section 409A imposes restrictions on funding, distributions, andelection to participate in the affected plans. Our executive compensation plans and arrangements are intended to complywith Section 409A.

 

·* Accounting for Stock-Based Compensation*

 

Webegan accounting for stock-based payments in accordance with the requirementsof FASB Statement 123(R) on July 31, 2005.  When setting equity compensation, theCompensation Committee considers the estimated cost for financial reportingpurposes of any equity compensation it is considering.  However, the accounting impact does not havea material impact on the design of our equity compensation plan.

 

**Compensation Committee Report**

 

TheCompensation Committee has reviewed and discussed the Compensation  Discussion and Analysis required by Item 402(b) ofRegulation S-K with management and, based on such review and discussions, theCompensation Committee recommended to the Board that the CompensationDiscussion and Analysis be included in this Annual Report on Form 10-K.

 
| ** ** | **THE  COMPENSATION COMMITTEE** |
|------------|---------------------------------|
| ** ** |                            |
| ** ** | Jonathan  J. Coslet, Chairman   |
| ** ** | Kewsong  Lee                    |
| ** ** | John  G. Danhakl                |

 

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**Summary Compensation Table**

 

Thefollowing table sets forth the annual compensation for the Principal ExecutiveOfficer, the Principal Financial Officer, and the three other most highlycompensated executive officers (referred to as the named executive officers)serving at the end of fiscal year 2008.

 
| **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**                                                              |       | 2008             |       | 1,500,000       |       | —            |       | 1,458,134                  |       | —                                                   |       | 205,000                                                                                                   |       | 145,992                                     |       | 3,309,126      |       |
| President and Chief   Executive Officer                                            |       | 2007             |       | 1,420,000       |       | 108,027           |       | 1,458,134                  |       | 2,160,530                                                |       | 754,000                                                                                                   |       | 138,657                                     |       | 6,039,348      |       |
|                                                                               |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| **Karen W. Katz**                                                                  |       | 2008             |       | 875,000         |       | —            |       | 791,488                    |       | —                                                   |       | 145,369                                                                                                   |       | 113,324                                     |       | 1,925,181      |       |
| Executive Vice                                                                     |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| President and  President and Chief  Executive Officer  Neiman Marcus  Stores  |       | 2007             |       | 800,000         |       | 45,448            |       | 791,488                    |       | 908,960                                                  |       | 284,145                                                                                                   |       | 93,187                                      |       | 2,923,228      |       |
|                                                                               |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| **James E. Skinner**                                                               |       | 2008             |       | 625,000         |       | —            |       | 395,744                    |       | —                                                   |       | 54,653                                                                                                    |       | 52,381                                      |       | 1,127,778      |       |
| Executive Vice                                                                     |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| President and Chief Financial Officer                                         |       | 2007             |       | 575,000         |       | 25,228            |       | 395,744                    |       | 504,563                                                  |       | 100,983                                                                                                   |       | 36,038                                      |       | 1,637,556      |       |
|                                                                               |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| **Brendan L. Hoffman**                                                             |       | 2008             |       | 530,000         |       | —            |       | 395,744                    |       | —                                                   |       | 914                                                                                                       |       | 31,823                                      |       | 958,481        |       |
| President and Chief                                                                |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| Executive Officer  Neiman Marcus  Direct                                      |       | 2007             |       | 500,000         |       | 15,650            |       | 395,744                    |       | 313,000                                                  |       | 51,838                                                                                                    |       | 26,958                                      |       | 1,303,190      |       |
| ** **                                                                         |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
|                                                                               |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| **James J. Gold**                                                                  |       | 2008             |       | 490,000         |       | —            |       | 395,744                    |       | 253,546                                                  |       | —                                                                                                    |       | 196,001                                     |       | 1,335,291      |       |
| President and Chief                                                                |       |             |       |            |       |              |       |                       |       |                                                     |       |                                                                                                      |       |                                        |       |           |       |
| Executive Officer  Bergdorf Goodman                                           |       | 2007             |       | 460,000         |       | 21,793            |       | 395,744                    |       | 435,850                                                  |       | 158,000                                                                                                   |       | 476,144                                     |       | 1,947,531      |       |

 

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Footnotes:

 
| (1)    |   | For  fiscal year 2007, the amount shown represents discretionary bonuses awarded  by the Compensation Committee. For fiscal year 2008, no such discretionary  bonuses were made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    |   | Shown  is the expense recognized in our financial statements for fiscal year 2008  under SFAS 123(R) for all outstanding option awards held by each of the  named executive officers. This amount is comprised of the portions of the  fair values of options awarded in fiscal year 2005, which were allocated to  services provided by the named executive officers in fiscal year 2008. The  assumptions we used in calculating these amounts are incorporated herein by  reference to Note 13 to Consolidated Financial Statements appearing elsewhere  in this Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    |   | The  amounts reported in the Non-Equity Incentive Plan Compensation column reflect  the actual amounts earned under the bonus plan described in the *Compensation Discussion and Analysis* section beginning on  page 51.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    |   | The amounts in this column include the change in the actuarial value  of the named executive officers’ benefits under our retirement and  supplemental executive retirement plans from July 30, 2007 to  August 2, 2008 as follows: $205,000 for Mr. Tansky; $134,000 for  Ms. Katz; and $51,000 for Mr. Skinner. This “change in the  actuarial value” is the difference between the fiscal year 2007 and fiscal  year 2008 present value of the pension benefits accumulated as of year-end by  the named executive officers, assuming that benefit is not paid until age 65.  These amounts were computed using the same assumptions used for financial  statement reporting purposes under FAS 87, Employers’ Accounting for Pensions  as described in Note 13 to the audited consolidated financial statements on  page F-32 of this Annual Report on Form 10-K. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   | Also  shown in this column is the portion of annual earnings on the named executive  officer’s principal balance under the KEDC plan (credited monthly with  interest at an annual rate equal to the prime interest rate published                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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|   |   | in  The Wall Street Journal on the last business day of the preceding calendar  quarter plus two percentage points, which averaged approximately 7.5 percent  during the year) that exceeds 120 percent of the applicable federal long-term  interest rate as follows: $11,369 for Ms. Katz; $3,653 for  Mr. Skinner; and $914 for Mr. Hoffman. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                           |
| (5)    |   | Includes  all items listed in the following table entitled *“All Other  Compensation.”* In the interest of transparency, the value of  perquisites and other personal benefits is provided in this column and in the  footnotes below even if the amount is less than the reporting threshold  established by the SEC.                               |

 

The table below sets forth all other compensation for each of the namedexecutive officers.

 
| **All Other Compensation**       | ** ** | **Burton M.  Tansky** | ** ** | **Karen W.  Katz** | ** ** | **James E.  Skinner** | ** ** | **Brendan L.  Hoffman** | ** ** | **James J.  Gold** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **($)**                    | ** ** | **($)**                 | ** ** | **($)**                    | ** ** | **($)**                      | ** ** | **($)**                 | ** ** |
| 401(k) plans contributions paid by us |       | $                          | 6,900      |                    | $          | 6,900                      |       | $                            | 10,350     |                    | $          | 10,350 |   | $ | 10,350 |   |
| Deferred compensation plan match           |       | —                     |       | 48,868                  |       | 27,145                     |       | 6,898                        |       | —                  |       |
| Group term life insurance                  |       | 15,867                     |       | 2,326                   |       | 3,075                      |       | 926                          |       | 1,185                   |       |
| Financial counseling/tax preparation       |       | 24,898                     |       | 3,000                   |       | 6,000                      |       | —                       |       | 3,000                   |       |
| Long-term disability                       |       | 3,180                      |       | 3,180                   |       | 1,468                      |       | 1,468                        |       | 1,468                   |       |
| Car allowance                              |       | 12,000                     |       | —                  |       | —                     |       | —                       |       | —                  |       |
| Clothing allowance                         |       | —                     |       | 25,000                  |       | —                     |       | —                       |       | —                  |       |
| Cost of living adjustment(1)               |       | —                     |       | —                  |       | —                     |       | —                       |       | 179,998                 |       |
| Gross ups:                                 |       | —                     |       | —                  |       | —                     |       | —                       |       | —                  |       |
| New York non-resident taxes (2)            |       | 83,147                     |       | 24,050                  |       | 4,343                      |       | 12,181                       |       | —                  |       |
| **TOTALS**                                 |       | $                          | 145,992    |                    | $          | 113,324                    |       | $                            | 52,381     |                    | $          | 31,823 |   | $ | 196,001 |   |

 

----

Footnotes:
| (1) |   | The  amount listed for Mr. Gold represents an annualized cost of living  adjustment due to his relocation from Texas to New York. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The  amounts shown represent gross up payments made in connection with New York  non-resident taxes.                                   |

 

**FISCAL YEAR 2008 GRANTS OF PLAN BASED AWARDS**

 

Thefollowing table sets forth certain information with respect to grants ofplan-based awards during the year ended August 2, 2008 to each of ournamed executive officers.

 
| ** **          | ** ** | ** **          | ** ** | **Estimated Possible Future Payouts Under** | ** ** |
|---------------------|------------|---------------------|------------|-----------------------------------------------------------------|------------|
| ** **          | ** ** | ** **          | ** ** | **Non-Equity Incentive Plan Awards(1)**          | ** ** |
| **Name**            | ** ** | **Grant Date** | ** ** | **Threshold**                                                   | ** ** | **Target** | ** ** | **Maximum** | ** ** |
| ** **          | ** ** | ** **          | ** ** | **($)**                                                         | ** ** | **($)** | ** ** | **($)** | ** ** |
|                |       |                |       |                                                            |       |   |   |   |   |
| Tansky, Burton M.   |       | 9-18-2007           |       | 750,000                                                         |       | 1,500,000 |   | 3,000,000 |   |
|                |       |                |       |                                                            |       |   |   |   |   |
| Katz, Karen W.      |       | 9-18-2007           |       | 164,063                                                         |       | 656,250 |   | 1,312,500 |   |
|                |       |                |       |                                                            |       |   |   |   |   |
| Skinner, James E.   |       | 9-18-2007           |       | 93,730                                                          |       | 375,000 |   | 750,000 |   |
|                |       |                |       |                                                            |       |   |   |   |   |
| Hoffman, Brendan L. |       | 9-18-2007           |       | 79,500                                                          |       | 318,000 |   | 636,000 |   |
|                |       |                |       |                                                            |       |   |   |   |   |
| Gold, James J.      |       | 9-18-2007           |       | 73,500                                                          |       | 294,000 |   | 588,000 |   |

 

----

Footnotes:
| (1) |   | Non-equity incentive awards granted each of the named executive  officers pursuant to the bonus plan. Payments under these awards have already  been determined and will be made prior to October 15, 2008 and are  included in the Non-Equity Incentive Plan Compensation column of the fiscal  year 2008 Summary Compensation Table. For a detailed discussion of the annual  incentive awards for fiscal year 2008, see *Compensation  Discussion and Analysis* beginning on page 51. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Thefollowing table sets forth certain information regarding the total number andaggregate value of stock options held by each of our named executive officersat August 2, 2008.

 

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**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END**

 
| ** **          | ** ** | ** **                                                                         | ** ** | ** **                                                                           | ** ** | ** **                       | ** ** | ** **                   | ** ** | **Stock Awards**                                                                          | ** ** |
|---------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | ** **                                                                         | ** ** | ** **                                                                           | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** | **Equity** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **                                                                         | ** ** | ** **                                                                           | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** | **Incentive** | ** ** | ** ** | ** ** |
| ** **          | ** ** | ** **                                                                         | ** ** | ** **                                                                           | ** ** | ** **                       | ** ** | ** **                   | ** ** | ** **                                                                                     | ** ** | ** ** | ** ** | **Plan Awards:** | ** ** | **Equity Incentive** | ** ** |
| ** **          | ** ** | **Option Awards**                                                             | ** ** | ** **                                                                           | ** ** | ** **                       | ** ** | **Market**                   | ** ** | **Number of**                                                                             | ** ** | **Plan Awards:** | ** ** |
| **Name**            | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or  Units of  Stock that  have not  Vested  (#)** | ** ** | **Value of  Shares or  Units of  Stock that  have not  Vested  ($)** | ** ** | **Unearned  Shares, Units  or Other  Rights that  have not  Vested  (#)** | ** ** | **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                    |       | —                                                                                         |       | — |   | — |   | — |   |
|                |       | 2,729                                                                              |       | 4,539                                                                                | (1)        | 1,445.00                         |       | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
|                |       | 3,961                                                                              |       | 4,539                                                                                | (2)        | 1,748.45                         | (2)        | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
| Karen W. Katz       |       | 2,937                                                                              |       | 2,403                                                                                | (3)        | 1,445.00                         |       | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
|                |       | 2,937                                                                              |       | 2,403                                                                                | (4)        | 1,748.45                         | (4)        | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
| James E. Skinner    |       | 1,468                                                                              |       | 1,201                                                                                | (3)        | 1,445.00                         |       | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
|                |       | 1,468                                                                              |       | 1,201                                                                                | (4)        | 1,748.45                         | (4)        | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
| Brendan L.  Hoffman |       | 1,468                                                                              |       | 1,201                                                                                | (3)        | 1,445.00                         |       | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
|                |       | 1,468                                                                              |       | 1,201                                                                                | (4)        | 1,748.45                         | (4)        | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
| James J. Gold       |       | 1,468                                                                              |       | 1,201                                                                                | (3)        | 1,445.00                         |       | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |
|                |       | 1,468                                                                              |       | 1,201                                                                                | (4)        | 1,748.45                         | (4)        | 10-06-2015                   |       | —                                                                                         |       | — |   | — |   | — |   |

 

----

Footnotes:
| (1)    |   | Nonqualified stock options granted November 29, 2005 vested with  respect to 460 shares on the first anniversary date of October 6, 2005  and thereafter on the subsequent three anniversary dates of October 6,  2005 with respect to 2,269 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (2)    |   | Nonqualified stock options granted on November 29, 2005 vest in  four equal annual installments on October 6, 2007, October 7, 2008,  October 6, 2009, and October 6, 2010, subject to earlier vesting.  The options were granted at the initial exercise price of $1,445.00 per share  which will increase at a 10.00% compound rate 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.  On October 6, 2008, the option price  will increase to $1,923.30 per share.                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (3)    |   | Nonqualified stock options granted on November 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 equal  monthly installments over the forty-eight months following the first  anniversary of October 6, 2005, beginning on the one-month anniversary  of such first anniversary and becoming fully vested on October 6, 2010,  subject to earlier vesting in certain circumstances following a change in  control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4)    |   | Nonqualified stock options granted on November 29, 2005 which  vests 20% on the first anniversary of October 6, 2005 and thereafter in  forty-eight equal monthly installments over the forty-eight months following  the first anniversary of October 6, 2005, beginning on the one-month  anniversary of such first anniversary and becoming fully vested on  October 6, 2010.  The options were  granted at the initial exercise price of $1,445.00 per share which will  increase at a 10.00% compound rate 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, or in the event the equity investors sell  a portion of their investment, with respect to a portion of the options  bearing the same ratio as the portion of the equity investor’s equity  sold.  On October 6, 2008, the  option price will increase to $1,923.30 per share. |

 

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**PENSION BENEFITS**

** **

Thefollowing table sets forth certain information with respect to retirementpayments and benefits under the Retirement Plan and the SERP for each ofour named executive officers.

 
| **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    |       | 18                                                           |       | 393,000                                                      |       | —                                                |       |
|               |       | SERP               |       | 30                                                           | (3)        | 7,147,000                                                    |       | —                                                |       |
| Karen W. Katz      |       | Retirement Plan    |       | 23                                                           |       | 181,000                                                      |       | —                                                |       |
|               |       | SERP               |       | 23                                                           | (4)        | 1,318,000                                                    |       | —                                                |       |
| James E. Skinner   |       | Retirement Plan    |       | 7                                                            | (5)        | 87,000                                                       |       | —                                                |       |
|               |       | SERP               |       | 7                                                            | (5)        | 273,000                                                      |       | —                                                |       |
| Brendan L. Hoffman |       | Retirement Plan    |       | 9                                                            | (5)        | 43,000                                                       |       | —                                                |       |
|               |       | SERP               |       | 9                                                            | (5)        | 64,000                                                       |       | —                                                |       |
| James J. Gold      |       | Retirement Plan    |       | 17                                                           | (5)        | 74,000                                                       |       | —                                                |       |
|               |       | SERP               |       | 17                                                           | (5)        | 203,000                                                      |       | —                                                |       |

 

----

Footnotes:
| (1)    |   | Computed  as of August 2, 2008, which is the same pension measurement date used  for financial statement reporting purposes with respect to our audited  consolidated financial statements and notes thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (2)    |   | For  purposes of calculating the amounts in this column, retirement age was  assumed to be the normal retirement age of 65, as defined in the Retirement  Plan.  A description of the valuation  method and all material assumptions applied in quantifying the present value  of accumulated benefit is set forth in Note 13 to the audited consolidated  financial statements on page F-32 of this Annual Report on  Form 10-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (3)    |   | The  difference in years of service is a result of the provision in  Mr. Tansky’s employment agreement relating to the calculation of his  years of service under the SERP.   Following his termination of employment with us, his years of service  for purposes of calculating his benefit under the SERP will be determined 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 him with an  additional credit for each year of service to the Company following his  attainment of age sixty-five (65) (disregarding the 25-year maximum set forth  in the SERP).  The value of  Mr. Tansky’s actual years of service under the SERP is $3,975,000.  See the discussion of his employment  agreement under “*Employment and Other  Compensation Agreements”* on page 64 of this section. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (4)    |   | Pursuant  to the terms of Karen Katz’s employment agreement, after she has reached the  25-year maximum set forth in the SERP, she will be entitled to an additional  one year of credit for each full year of service thereafter.  In addition, if her employment is  terminated by us for any reason other than death, disability, cause, or for  non-renewal of her employment 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 by reason of her failure to reach 65 as of the termination  date.                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (5)    |   | Effective  December 31, 2007, benefit accruals for Messrs. Skinner, Hoffman,  and Gold under the Retirement Plan and the SERP were frozen, as further  described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

The Retirement Plan is afunded, tax-qualified pension plan. Prior to 2008, most non-union employees over age 21 who had completedone year of service with 1,000 or more hours were eligible to participate inthe Retirement Plan, which paid benefits upon retirement or termination ofemployment.  Effective as of December 31,2007, eligibility and benefit accruals under the Retirement Plan were frozenfor all participants except for those “Rule of 65” employees who electedto continue participating in the Retirement Plan.  “Rule of 65” employees included only thoseactive employees who had completed at least 10 years of service and whosecombined years of service and age equaled at least 65 as of December 2007.  The Retirement Plan is a “career-accumulation”plan, under which a participant earns each year a retirement annuity equal toone percent of his or her compensation for the year up to the Social Securitywage base and 1.5 percent of his or her compensation for the year in excess ofsuch wage base.  Benefits under theRetirement Plan become fully vested after five years of service with us.

 

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The SERP is an unfunded,nonqualified plan under which benefits are paid from our general assets tosupplement Retirement Plan benefits and Social Security.  Prior to 2008, executive, administrative andprofessional employees (other than those employed as salespersons) with anannual base salary at least equal to a minimum established by the Company($160,000 as of July 28, 2007) were eligible to participate.  Similar to the Retirement Plan, effective December 31,2007, eligibility and benefit accruals under the SERP were frozen for allparticipants except for those “Rule of 65” employees who elected tocontinue participating in the Retirement Plan. 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 vestedafter five years of service with us.  TheSERP is designed to comply with the requirements of Section 409A of theInternal Revenue 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      |       | 278,841                                                          |       | 48,868                                                            |       | 47,234                                                          |       | —                                           |       | 735,576                                                              |       |
|               |       |                                                             |       |                                                              |       |                                                            |       |                                             |       |                                                                 |       |
| James E. Skinner   |       | 69,078                                                           |       | 47,534                                                            |       | 14,185                                                          |       | —                                           |       | 239,864                                                              |       |
|               |       |                                                             |       |                                                              |       |                                                            |       |                                             |       |                                                                 |       |
| Brendan L. Hoffman |       | 16,470                                                           |       | 19,421                                                            |       | 3,769                                                           |       | —                                           |       | 72,455                                                               |       |
|               |       |                                                             |       |                                                              |       |                                                            |       |                                             |       |                                                                 |       |
| James J.  Gold     |       | —                                                           |       | 26,708                                                            |       | 156                                                             |       | —                                           |       | 26,864                                                               |       |

 

The amounts reported in the Nonqualified Deferred Compensation Tablerepresent deferrals and Company matching contributions credited pursuant to theKEDC Plan and Company contributions credited pursuant to The Neiman MarcusGroup, Inc. Defined Contribution Supplemental Executive Retirement Plan(referred to herein as the DC SERP).  Theamounts reported as Executive Contributions in Last Fiscal Year are alsoincluded as Salary and Non-Equity Incentive Plan Compensation in the SummaryCompensation Table on page 59.

 

The KEDC Plan allows eligible employees toelect to defer up to 15% of base pay and up to 15% of annual performance bonuseach year.  Eligible employees generallyare those employees who have completed one year of service with the Company,have annual base pay of at least $300,000 and are otherwise designated aseligible by the Company’s employee benefits committee; provided, however, thateffective January 1, 2008, only those persons who were eligible for theKEDC as of January 1, 2007 are permitted to continue participating in theKEDC.  No new participants will beadded.  The Company also credits amatching contribution each pay period equal to (A) the sum of (i) 100%of the sum of the employee’s KEDC Plan deferrals and the maximum ESP or RSP, asapplicable, deferral that the employee could have made under such plan for suchpay period, to the extent that such sum does not exceed 2% of the employee’scompensation for such pay period, and (ii) 25% of the sum of the employee’sKEDC Plan deferrals and the maximum ESP or RSP, as applicable, deferral thatthe employee could have made under such plan for such pay period, to the extentthat such sum does not exceed the next 4% of the employee’s compensation forsuch pay period, minus (B) the maximum possible match the employee couldhave received under the ESP or RSP, as applicable, for such pay period.  Such amounts are credited to a bookkeepingaccount for the employee and are fully vested with respect to matchingcontributions made for calendar years prior to 2008.  Amounts attributable to matchingcontributions, plus interest thereon, for calendar years on and after 2008 aresubject to forfeiture in the event the employee is terminated for cause.  Accounts are credited monthly with interestat an annual rate equal to the prime interest rate published in The Wall StreetJournal on the last business day of the preceding calendar quarter plus twopercentage points provided, however that beginning January 1, 2008,accounts are credited monthly with interest at an annual rate equal to theprime interest rate published in The Wall Street Journal on the last businessday of the preceding calendar quarter. Amounts credited to an employee’s account become payable to the employeeupon separation from service, death, unforeseeable emergency, or change ofcontrol of the Company.  In the event ofseparation of service, payment is made in a lump sum in the calendar quarterfollowing the calendar quarter in which the separation occurs although if theemployee is eligible for retirement upon such separation, payment may bedeferred until the following year or the nine subsequent years, and may be madein a lump sum or in installments over a period of up to ten years, dependingupon the distribution form elected by the employee.  There is no separate funding for the amountspayable under the KEDC 

 

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Plan, rather the Company makes payment fromits general assets.  The KEDC Plan isdesigned to comply with the requirements of Section 409A of the InternalRevenue Code.

 

Effective as of January 1, 2008, the DCSERP is an unfunded, nonqualified deferred compensation plan under whichbenefits are paid from our general assets to provide eligible employees withthe opportunity to receive employer contributions on the portion of theireligible compensation that exceeds the compensation limit imposed by InternalRevenue Code Section 401(a)(17) (the “IRS Limit”).  The IRS Limit for 2008 is $230,000.  Eligible employees generally are thoseemployees who have completed one year of service with the Company, who haveannual base pay of at least 80% of the IRS Limit (or were eligible toparticipate in the SERP as of December 31, 2007 and ceased to be eligibleto participate in the SERP as of January 1, 2008), and who are otherwisedesignated as eligible by the Company’s employee benefits committee.  The Company will make transitional andnon-transitional credits to the accounts of eligible participants each payperiod.  Transitional credits apply onlyto participants who were eligible to participate in the SERP as of December 31,2007 but ceased participating in the SERP as of that date and became aparticipant in the DC SERP on January 1, 2008.  The amount of a transitional credit is theproduct of a participant’s eligible compensation in excess of the IRS Limit andan applicable percentage ranging from 0% to 6% depending upon the age of theparticipant.  Non-transitional creditsapply to all eligible participants.  Theamount of a non-transitional credit is the product of a participant’s eligiblecompensation in excess of the IRS Limit and 10.5%.  All transitional and non-transitional creditsare credited to a bookkeeping account and vest upon the earlier of (i) aneligible employee’s attainment of five years of service, (ii) an eligibleemployee’s attainment of age 65, (iii) an eligible employee’s death, (iv) aneligible employee’s disability, or (v) a change of control (as defined inthe DC SERP) while in the employ of the Company.  Notwithstanding the preceding, amountscredited to an account are subject to forfeiture in the event the employee isterminated for cause.  Accounts arecredited monthly with interest at an annual rate equal to the prime interestrate published in The Wall Street Journal on the last business day of thepreceding calendar quarter. Vested amounts credited to an employee’s accountbecome payable in the form of five annual installments beginning upon the laterof the employee’s separation from service and age 55, or such later age as theemployee may elect. Upon the employee’s death or disability or upon a change ofcontrol of the Company, vested amounts credited to an employee’s account willbe paid in a single lump sum.

 

**Employment and Other Compensation Agreements**

** **

As discussedin “*Compensation Discussion & Analysis,*”The Neiman Marcus Group, Inc. has entered into employment agreements withBurton M. Tansky and Karen W. Katz.  Inaddition, each of the named executive officers, except for Mr. Tansky, isa party to a confidentiality, non-competition and termination benefitsagreement, discussed below.

 

*Employment Agreement with Mr. Tansky*

 

Theemployment agreement with Mr. Tansky, as amended, has an employment termof five years until October 2010, subject to automatic one-year renewalsof the term if neither party submits a notice of termination at least sixmonths prior to the end of the then-current term, and provides for a basesalary of not less than $1,300,000 per year. Mr. Tansky’s agreement also provides that he will participate inthe Company’s annual bonus plan.  Mr. Tansky’sagreement provides that if bonus levels for a fiscal year are met, the minimumbonus amount he will receive will be 50% of his base salary, if the targetbonus goal for the fiscal year is met, he will receive 85% of his base salary,and if the maximum target goal is met, he will receive 170% of his basesalary.  The actual amounts will bedetermined according to the terms of the annual bonus program and will be payableat the discretion of the Compensation Committee.

 

Inaddition to the foregoing, the agreement provides that upon the occurrence ofthe earlier of a change of control or an initial public offering, Mr. Tanskywill be entitled to a cash bonus equal to $3,080,911, which represents hisportion of the cash incentive pool pursuant to the Cash Incentive Plan (morefully described on page 66 of this section).  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-yearmaximum set forth in the SERP).

 

If(1) we terminate Mr. Tansky’s employment without cause or if heresigns for good reason, or (2) Mr. Tansky resigns without goodreason during the 30 day period following the six month anniversary of a futurechange of control (referred to herein as a change of control resignation), hewill receive, subject to his execution of a mutual release and waiver ofclaims, a lump sum equal to (A) 85% of base salary multiplied by afraction, the numerator of which is the number of days during the fiscal yearup to the termination date and the denominator of which is 365, plus (B) ifsuch termination is not a change of control resignation, an amount equal tothree times the sum of (i) base salary and (ii) the target bonus ineffect on 

 

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thetermination date, or (C) if such termination is a change of controlresignation, an amount equal to two times the sum of (i) base salary and (ii) thetarget bonus in effect on the termination date; provided, however, that Mr. Tanskyshall be required to repay this payment if he violates certain of therestrictive covenants or if he is found to have engaged in certain acts ofwrongdoing, all as further described in the agreement.  In certain circumstances, Mr. Tanskywill also be entitled to some or all of the benefits under the Cash IncentivePlan.

 

IfMr. Tansky’s employment terminates before the end of the term due to deathor inability to perform (as defined in the employment agreement), we will payhim or his estate, as applicable, 85% of base salary multiplied by a fraction,the numerator of which is the number of days during the fiscal year up to thetermination date and the denominator of which is 365.

 

Pursuant to the agreement, depending on thecircumstances of the termination of Mr. Tansky’s employment, he may alsobe entitled to up to three years of continuing coverage under our group health,dental, and life insurance plans and certain retiree medical coverages.

 

Mr. Tansky’s agreement also contains atax gross-up provision whereby if, in the event of a change in controlfollowing the existence of a public market for the Company’s stock, he incursany excise tax by reason of his receipt of any payment that constitutes anexcess parachute payment as defined in Section 280G of the InternalRevenue Code of 1986, as amended (the “Code”), he will receive a gross-uppayment in an amount that would place him in the same after-tax position thathe would have been in if no excise tax had applied.  However, under certain conditions, ratherthan receive a gross-up payment, the payments payable to him will be reduced sothat no excise tax is imposed.

 

Pursuant to the agreement, Mr. Tanskyreceived a grant of options to purchase 16,349.1797 shares of the Company’scommon stock, which vest in accordance with the terms of the agreement over thefirst four anniversaries of the date of grant. The agreement provides for the accelerated vesting of these options upon(i) a change of control or (ii) the termination of Mr. Tansky’semployment before the end of the term due to death or inability toperform.  In addition, in the event thatwe terminate Mr. Tansky’s employment without cause or if he resigns forgood reason, the agreement provides that the options will vest as to (i) thenumber of shares that would have become vested on the next anniversary of thegrant date, plus (ii) if the termination date occurs prior to the thirdanniversary of the grant date, the number of shares that would have vested onthe next anniversary of the grant date, multiplied by a fraction, the numeratorof which is the number of days from the preceding anniversary of the grant dateand the denominator of which 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 hisemployment and for a period of three years from termination from becoming adirector, officer, employee or consultant for any competing business that ownsor operates a luxury specialty retail store located in the geographic areas ofthe Company’s operations.  The agreementalso requires 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*

* *

Theemployment agreement with Ms. Katz provides that she will act as ChiefExecutive Officer and President of Neiman Marcus Stores, a division of TheNeiman Marcus Group, Inc., until October 2010, subject to automaticone-year renewals of the term if neither party submits a notice of terminationat least three months prior to the end of the then-current term.  Pursuant to the agreement, her base salaryshall not be less than $760,000.  Ms. Katz’sagreement also provides that she will participate in the Company’s annual bonusplan.  The actual amounts will be determinedaccording to the terms of the annual bonus program and will be payable at thediscretion of the Compensation Committee. However, Ms. Katz’s agreement provides that her target bonus maynot be reduced below 65% of her base salary. In addition, the agreement provides that during the term, Ms. Katzshall continue to accrue benefits under the SERP, provided that (i) theSERP shall not be amended or terminated in any way that adversely affects her,and (ii) after she has reached the 25-year maximum set forth in the SERP,she shall be entitled to an additional one year of credit for each full year ofservice thereafter.  In addition, if (i) duringthe term, her employment is terminated by the Company for any reason other thandeath, disability, or cause (as defined in the employment agreement), (ii) duringthe term, she terminates her employment for good reason (as defined in theemployment agreement), or (iii) her employment terminates upon expirationof the term following the provision by the Company of a notice of non-renewal,and, in any such case, on the date of such termination she has not yet reachedage 65, her SERP benefit shall not be reduced according to the terms of theSERP solely by reason of her failure to reach age 65 as of the termination date.

 

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Thisagreement may be terminated by either party on three months’ notice, subject toseverance obligations in the event of termination under certain circumstances(as described below).

 

Ifwe terminate Ms. Katz’s employment without cause or if she resigns forgood reason or following her receipt of a notice of non-renewal from theCompany relating to the employment term, she will receive (i) an amount ofannual incentive pay equal to a prorated portion of her target bonus amount forthe year in which the employment termination date occurs, and (ii) a lumpsum equal to two times the sum of her base salary and target bonus, atthe level in effect as of the employment termination date; provided, however, that Ms. Katz shallbe required to repay this payment if she violates certain restrictive covenantsin her agreement or if she is found to have engaged in certain acts ofwrongdoing, all as further described in the agreement.  Ms. Katz is also entitled tocontinuation of certain benefits for a two-year period following a terminationof her employment for any reason as set forth more fully in her employmentagreement.

 

IfMs. Katz’s employment terminates before the end of the term due to herdeath or disability, we will pay her or her estate, as applicable, (i) anyunpaid salary through the date of termination and any bonus payable for thepreceding fiscal year that has otherwise not already been paid, (ii) anyaccrued but unused vacation days, (iii) any reimbursement for businesstravel and other expenses to which she is entitled, and (iv) an amount ofannual incentive pay equal to a prorated portion of her target bonus amount forthe year in which the employment termination date occurs.

 

Ms. Katz’sagreement also contains a tax gross-up provision whereby if, in the event of achange in control following the existence of a public market for the Company’sstock, she incurs any excise tax by reason of her receipt of any payment thatconstitutes an excess parachute payment as defined in Section 280G of theCode, she will receive a gross-up payment in an amount that would place her inthe same after-tax position that she would have been in if no excise tax hadapplied.  However, under certainconditions, rather than receive a gross-up payment, the payments payable to herwill be reduced so that no excise tax is imposed.

 

Ms. Katz’s agreement also containsobligations on her part regarding non-competition and non-solicitation ofemployees following the termination of her employment for any reason,confidential information and non-disparagement of the Company and itsbusiness.  The non-competition agreementgenerally prohibits Ms. Katz during employment and for a period of oneyear from termination from becoming a director, officer, employee or consultantfor any competing business that owns or operates a luxury specialty retailstore located 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.

 

*Confidentiality, Non-Competitionand Termination Benefits Agreements*

* *

Each of the named executive officers andcertain other officers, except for Mr. Tansky, are party to aconfidentiality, non-competition and termination benefits agreement that willprovide for severance benefits if the employment of the affected individual isterminated by the Company other than in the event of death, disability ortermination for cause.  These agreementsprovide for a severance payment equal to one and one-half annual base salarypayable over an eighteen month period, and reimbursement for COBRA premiums forthe same period.  Each confidentiality, non-competition andtermination benefits agreement contains restrictive covenants as a condition toreceipt of any payments payable thereunder.

 

**CashIncentive Plan**

** **

Following the consummation of theAcquisition, the Neiman Marcus, Inc. Cash Incentive Plan (referred to asthe Cash Incentive Plan) was adopted to aid in the retention of certain keyexecutives, 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 participantpursuant to the Management Incentive Plan. Each participant in the Cash Incentive Plan will be entitled to a cashbonus upon the earlier to occur of a change of control or an initial publicoffering, provided that the internal rate of return to certain of our investorsis positive.  If the internal rate of return to certain ofour investors is not positive, no amounts will be paid under the Cash Incentivepool.

 

Based on the foregoing, each of the namedexecutive officers would be entitled to receive the following percentages ofthe remaining cash bonus pool on August 2, 2008, assuming there was achange in control or an initial public offering on that date, and the rate ofreturn to the Sponsors was positive:

 

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| **Name**           | ** ** | **Percentage** | ** ** |
|--------------------|------------|----------------|------------|
| Burton M.  Tansky  |       | 22.00          | %          |
| Karen W. Katz      |       | 13.86          | %          |
| James E. Skinner   |       | 6.93           | %          |
| Brendan L. Hoffman |       | 6.93           | %          |
| James J. Gold      |       | 6.93           | %          |

 

Allrequired federal, state, or local government tax will be withheld from allpayments made to participants under the Cash Incentive Plan.  No payments have been made or are currentlyanticipated under the Cash Incentive Plan.

 

**PotentialPayments Upon Termination or Change-in-Control**

** **

Thetables below show certain potential payments that would have been made to anamed executive officer if the named executive officer’s employment hadterminated on August 2, 2008 under various scenarios, including a changein control.  Because the payments to bemade to a named executive officer depend on several factors, the actual amountsto be paid out upon a named executive officer’s termination of employment canonly be determined at the time of an executive’s separation from the Company.

 

**BurtonM. Tansky**

 
| **Executive Benefits  and Payments Upon  Separation** | ** ** | **Retirement  ($)(1)(7)** | ** ** | **Termination  due to  death  ($)(2)(7)** | ** ** | **Termination  due to  disability  ($)(3)(7)** | ** ** | **Termination  without  cause  or  for good  reason  ($)(4)(7)** | ** ** | **Change in  Control  ($)(5)(7)** | ** ** | **Termination  without  cause  following a  change in  control  ($)(6)(7)** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
|                                                                 |       |                      |       |                                           |       |                                                |       |                                                                  |       |                                   |       |                                                                                  |       |
| **Compensation:**                                                    |       |                      |       |                                           |       |                                                |       |                                                                  |       |                                   |       |                                                                                  |       |
| Severance                                                            |       | $                         | —     |                                           | $          | —                                              |       | $                                                                     | —     |                                   | $          | 5,775,000                                                                             |       | $ | — |   | $ | 4,275,000 |   |
| Bonus                                                                |       | —                    |       | 1,275,000                                      |       | 1,275,000                                           |       | 3,825,000                                                             |       | —                                 |       | 2,550,000                                                                             |       |
| Stock Options                                                        |       | —                    |       | 6,316,858                                      |       | 6,316,858                                           |       | 5,763,051                                                             |       | 6,316,858                              |       | 6,316,858                                                                             |       |
|                                                                 |       |                      |       |                                           |       |                                                |       |                                                                  |       |                                   |       |                                                                                  |       |
| **Benefits & Perquisites:**                                 |       |                      |       |                                           |       |                                                |       |                                                                  |       |                                   |       |                                                                                  |       |
| Retirement Plans                                                     |       | 3,172,000                 |       | —                                         |       | —                                              |       | —                                                                |       | —                                 |       | —                                                                                |       |
| Cash Incentive Plan Payment                                          |       | —                    |       | —                                         |       | —                                              |       | —                                                                |       | 3,080,911                              |       | —                                                                                |       |
| Long-Term Disability                                                 |       | —                    |       | —                                         |       | 240,000                                             |       | —                                                                |       | —                                 |       | —                                                                                |       |
| Health and Welfare Benefits                                          |       | —                    |       | —                                         |       | —                                              |       | 47,092                                                                |       | —                                 |       | 47,092                                                                                |       |
| Life Insurance Benefits                                              |       | —                    |       | 1,000,000                                      |       | —                                              |       | —                                                                |       | —                                 |       | —                                                                                |       |
| **Total**                                                            |       | $                         | 3,172,000  |                                           | $          | 8,591,858                                           |       | $                                                                     | 7,831,858  |                                   | $          | 15,410,143                                                                            |       | $ | 9,397,769 |   | $ | 13,188,950 |   |

 

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Footnotes:
|   |   | (1)    |   | Represents  the SERP enhancement provided in Mr. Tansky’s employment agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | (2)    |   | Represents  the estimated present value of amounts payable to Mr. Tansky’s  beneficiaries upon his death: A lump sum payment of Mr. Tansky’s target  bonus; a lump sum basic life insurance benefits payment of $1,000,000 payable  by the Company’s life insurance provider, and the intrinsic value of all  unvested equity incentive awards, which will become vested upon  Mr. Tansky’s death, disability, or change in control, calculated by  taking the difference between the exercise price and $2,292.43, the price as  of the end of the fiscal year, and a lump sum amount payable under the Cash  Incentive Plan, more fully described on page 66 of this Section. |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | (3)    |   | Represents  the intrinsic value of all unvested equity incentive awards (calculated as in  footnote (2) above), a lump sum payment of Mr. Tansky’s target  bonus, and $20,000 per month payable for 12 months pursuant to the terms and  conditions of the Company’s long-term disability plan provider.                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | (4)    |   | Represents  a lump sum payment of 85% percent of base salary in effect at the time of  termination, three times base salary, three times target bonus, the intrinsic  value of a prorated amount of the unvested equity incentive awards, which  would become vested upon the termination of employment (calculated in the  same manner as described in footnote 2 above). The amount included for health  and welfare benefits represents a continuation of COBRA benefits for a period  of three years. Calculations were based on COBRA rates currently in effect.  See “*Employment and Other Compensation Agreements”*  on page 64 of this section.                                                 |

 

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|   |   | (5)    |   | Represents  the intrinsic value of all unvested equity incentive awards, which will  become vested upon the change in control (calculated in the same manner as  described in footnote (2) above), and a lump sum amount payable under  the Cash Incentive Plan, more fully described on page 66 of this  section.                                                                                                                                                                                                                |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | (6)    |   | Represents  a lump sum payment of 85% of base salary in effect at the time of  termination, two times base salary, two times target bonus, the intrinsic  value of all unvested equity incentive awards, which would become vested upon  the termination of employment (calculated in the same manner as described in  footnote (2) above). The amount included for health and welfare benefits  represents a continuation of COBRA benefits for a period of three years. Calculations  were based on COBRA rates currently in effect. |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   | (7)    |   | In  addition, Mr. Tansky may become entitled to receive a portion (ranging  from, as of August 2, 2008, 25% to 100%, depending on the reason for the  separation from service) of the Cash Incentive Plan Payment indicated under  the column entitled “Change in Control” if his employment is terminated for  any reason other than Cause, and, subsequent to such termination, a change in  control or an initial public offering meeting certain conditions occurs.                                                 |

 

**KarenW. Katz**

 
| ** **                           | ** ** | ** **      | ** ** | ** **      | ** ** | **Termination**    | ** ** | ** **     | ** ** |
|--------------------------------------|------------|-----------------|------------|-----------------|------------|--------------------|------------|----------------|------------|
| ** **                           | ** ** | ** **      | ** ** | ** **      | ** ** | **without  cause** | ** ** | ** **     | ** ** |
| ** **                           | ** ** | **Termination** | ** ** | **Termination** | ** ** | **or**             | ** ** | ** **     | ** ** |
| ** **                           | ** ** | **due to**      | ** ** | **due to**      | ** ** | **for good**       | ** ** | **Change  in** | ** ** |
| **Executive Benefits**               | ** ** | **death**       | ** ** | **Disability**  | ** ** | **reason**         | ** ** | **Control**    | ** ** |
| **and Payments Upon Separation**     | ** ** | **($)(1)**      | ** ** | **($)(2)**      | ** ** | **($)(3)**         | ** ** | **($)(4)**     | ** ** |
| ** **                           |       |            |       |            |       |               |       |           |       |
| **Compensation:**                    |       |            |       |            |       |               |       |           |       |
| Severance                            |       | $               | —     |            | $          | —             |       | $              | 1,750,000  |   | $ | — |   |
| Bonus                                |       | 656,250         |       | 656,250         |       | 1,312,500          |       | —         |       |
| Stock Options                        |       | —          |       | —          |       | —             |       | —         |       |
|                                 |       |            |       |            |       |               |       |           |       |
| **Benefits & Perquisites:** |       |            |       |            |       |               |       |           |       |
| Retirement Plans                     |       | —          |       | —          |       | —             |       | —         |       |
| Deferred Compensation Plan           |       | 735,576         |       | 735,576         |       | 735,576            |       | 735,576        |       |
| Cash Incentive Plan Payment          |       | —          |       | —          |       | —             |       | 1,940,994      |       |
| Long-Term Disability                 |       | —          |       | 240,000         |       | —             |       | —         |       |
| Health and Welfare Benefits          |       | —          |       | —          |       | 31,374             |       | —         |       |
| Life Insurance Benefits              |       | 1,000,000       |       | —          |       | —             |       | —         |       |
| **Total**                            |       | $               | 2,391,826  |            | $          | 1,631,826          |       | $              | 3,829,450  |   | $ | 2,676,570 |   |

 

----

Footnotes:
|   |   | (1)    |   | Represents  Ms. Katz’ target bonus and a lump sum basic life insurance benefit  payment of $1,000,000 payable by the Company’s life insurance provider to Ms. Katz’  beneficiaries upon her death.                                                                                                                                                    |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | (2)    |   | Represents  Ms. Katz’ target bonus and long-term disability payments of $20,000 per  month for twelve months payable from the Company’s long-term disability  insurance provider.                                                                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | (3)    |   | Represents  a lump sum payment of two times base salary and two times target bonus. The  amount included for health and welfare benefits represents a continuation of  COBRA benefits for a period of two years. Calculations were based on COBRA  rates currently in effect. See “*Employment and Other  Compensation Agreements”* on page 64 of this section. |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                           |
|   |   | (4)    |   | Represents  a lump sum amount payable under the Cash Incentive Plan, more fully described  on page 66 of this section.                                                                                                                                                                                                                                                    |

 

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| **Executive Benefits and  Payments Upon Separation** | ** ** | **Termination  due to  death  ($)(1)(5)** | ** ** | **Termination  due to  disability  ($)(2)(5)** | ** ** | **Termination  without cause  or for  good reason  ($)(3)** | ** ** | **Change in  Control  ($)(4)(5)** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **JAMES E. SKINNER**                                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **Compensation:**                                                        |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| Severance                                                                |       | $                                              | —     |                                                | $          | —                                                                     |       | $                                      | 937,500    |   | $ | — |   |
|                                                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **Benefits & Perquisites:**                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| Retirement Plans                                                         |       | 20,484                                         |       | 20,484                                              |       | —                                                                     |       | 20,484                                 |       |
| Deferred Compensation Plan                                               |       | 219,380                                        |       | 219,380                                             |       | 219,380                                                                    |       | 219,380                                |       |
| Cash Incentive Plan Payment                                              |       | —                                         |       | —                                              |       | —                                                                     |       | 970,497                                |       |
| Long-Term Disability                                                     |       | —                                         |       | 240,000                                             |       | —                                                                     |       | —                                 |       |
| Health and Welfare Benefits                                              |       | —                                         |       | —                                              |       | 25,431                                                                     |       | —                                 |       |
| Life Insurance Benefits                                                  |       | —                                         |       | —                                              |       | —                                                                     |       | —                                 |       |
| **Total  James E. Skinner**                                              |       | $                                              | 239,864    |                                                | $          | 479,864                                                                    |       | $                                      | 1,182,311  |   | $ | 1,210,361 |   |
|                                                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **BRENDAN L. HOFFMAN**                                                   |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **Compensation:**                                                        |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| Severance                                                                |       | $                                              | —     |                                                | $          | —                                                                     |       | $                                      | 795,000    |   | $ | — |   |
|                                                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **Benefits & Perquisites:**                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| Retirement Plans                                                         |       | 12,565                                         |       | 12,565                                              |       | —                                                                     |       | 12,565                                 |       |
| Deferred Compensation Plan                                               |       | 59,890                                         |       | 59,890                                              |       | 59,890                                                                     |       | 59,890                                 |       |
| Cash Incentive Plan Payment                                              |       | —                                         |       | —                                              |       | —                                                                     |       | 970,497                                |       |
| Long-Term Disability                                                     |       | —                                         |       | 240,000                                             |       | —                                                                     |       | —                                 |       |
| Health and Welfare Benefits                                              |       | —                                         |       | —                                              |       | 33,271                                                                     |       | —                                 |       |
| Life Insurance Benefits                                                  |       | —                                         |       | —                                              |       | —                                                                     |       | —                                 |       |
| **Total  Brendan L. Hoffman**                                            |       | $                                              | 72,455     |                                                | $          | 312,455                                                                    |       | $                                      | 888,161    |   | $ | 1,042,952 |   |
|                                                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **JAMES J. GOLD**                                                        |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **Compensation:**                                                        |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| Severance                                                                |       | $                                              | —     |                                                | $          | —                                                                     |       | $                                      | 735,000    |   | $ | — |   |
|                                                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| **Benefits & Perquisites:**                                     |       |                                           |       |                                                |       |                                                                       |       |                                   |       |
| Retirement Plans                                                         |       | 26,864                                         |       | 26,864                                              |       | —                                                                     |       | 26,864                                 |       |
| Cash Incentive Plan Payment                                              |       | —                                         |       | —                                              |       | —                                                                     |       | 970,497                                |       |
| Long-Term Disability                                                     |       | —                                         |       | 240,000                                             |       | —                                                                     |       | —                                 |       |
| Health and Welfare Benefits                                              |       | —                                         |       | —                                              |       | 33,271                                                                     |       | —                                 |       |
| Life Insurance Benefits                                                  |       | —                                         |       | —                                              |       | —                                                                     |       | —                                 |       |
| **Total  James J. Gold**                                                 |       | $                                              | 26,864     |                                                | $          | 266,864                                                                    |       | $                                      | 768,271    |   | $ | 997,361 |   |

 

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Footnotes:
|   |   | (1)    |   | Represents  a lump sum payout under the deferred compensation plans. See *“Nonqualified Deferred Compensation”* on page 63 of  this section.                                                                                                                                                                                                                                                                |
|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (2)    |   | Represents  long-term disability payments of $20,000 per month for twelve months payable  from the Company’s long-term disability insurance provider.                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (3)    |   | Represents  a lump sum payment of one and one-half times base salary for each of  Messrs. Skinner, Hoffman, and Gold. The amount included for health and  welfare benefits represents a continuation of COBRA benefits for a period of  eighteen months. Calculations were based on COBRA rates currently in effect.  See “*Employment and Other Compensation Agreements”*on  page 64 of this section. |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (4)    |   | Represents  a lump sum payment of $970,497 payable to each of Messrs. Skinner,  Hoffman, and Gold under the Cash Incentive Plan, more fully described on  page 66 of this section.                                                                                                                                                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (5)    |   | Represents  the lump sum balance of the amount held by each of Messrs. Skinner,  Hoffman, and Gold in The Neiman Marcus Group, Inc. Defined Contribution  Supplemental Executive Retirement Plan, more fully described on page 63  of this section.                                                                                                                                                         |

 

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**DIRECTOR COMPENSATION**

 

Noneof our directors receive compensation for their service as a member of ourboard.  They are reimbursed for anyexpenses incurred as a result of their service. As an employee director, Mr. Tansky receives no compensation forhis service as a board member.  We offerto each of our directors a discount at our stores at the same rate that isavailable to our employees.

 

Inconnection with the Acquisition, affiliates of the Sponsors receive an annualmanagement fee equal to the lesser of (i) 0.25% of consolidated annualrevenue, and (ii) $10 million for consulting and management advisoryservices they provide to us.  Seediscussion on “*Management Services Agreement”*onpage 74 of this section.

 

**ITEM 12.****                ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

**Securities Authorized for Issuance under Equity Compensation Plans**

 

The following table setsforth information regarding equity compensation plans approved by shareholdersand equity compensation plans not approved by shareholders as of August 2,2008.

 
| **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     |       | 83,147                                                                                                                                       | (1)        | $                                                                                                        | 1,553      |                                                                                                                                                                                                         | 4,268      |   |
|                                                        |       |                                                                                                                                         |       |                                                                                                     |       |                                                                                                                                                                                                         |       |
| Equity compensation plans not approved by  security holders |       | 0                                                                                                                                            |       | 0                                                                                                        |       | 0                                                                                                                                                                                                            |       |
|                                                        |       |                                                                                                                                         |       |                                                                                                     |       |                                                                                                                                                                                                         |       |   |
| Total                                                       |       | 83,147                                                                                                                                       |       | $                                                                                                        | 1,553      |                                                                                                                                                                                                         | 4,268      |   |

 

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(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.on November 29, 2005.  The Planbecame effective on November 29, 2005 and will expire on November 29,2015.

 

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**Security Ownership of Certain Beneficial Owners and Management**

 

The following table setsforth, as of August 2, 2008, the beneficial ownership of common stock byeach of our directors, each named executive officer listed in the SummaryCompensation Table appearing on page 59 of this Form 10-K, and allour directors 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, Texas 76102                     |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Affiliates of TPG Capital, L.P.(2)**      |       | 1,000,000                                                                       |       | —                                                                                 |       | 1,000,000                                             |       | 98.72                           | %          |
| 301 Commerce Street                         |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Suite 3300                             |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Fort Worth, Texas 76102                     |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Affiliates of Warburg Pincus, LLC(3)**    |       | 1,000,000                                                                       |       | —                                                                                 |       | 1,000,000                                             |       | 98.72                           | %          |
| 466 Lexington Avenue                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| New York, NY 10017                          |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **David A. Barr(4)**                        |       | 1,000,000                                                                       |       | —                                                                                 |       | 1,000,000                                             |       | 98.72                           | %          |
| 466 Lexington Avenue                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| New York, NY 10017                          |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **James Coulter(5)**                        |       | 1,000,000                                                                       |       | —                                                                                 |       | 1,000,000                                             |       | 98.72                           | %          |
| 345 California Street, Suite 3300      |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| San Francisco, CA 94104                     |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Sidney Lapidus(4)**                       |       | 1,000,000                                                                       |       | —                                                                                 |       | 1,000,000                                             |       | 98.72                           | %          |
| 466 Lexington Avenue                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| New York, NY 10017                          |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Kewsong Lee(4)**                          |       | 1,000,000                                                                       |       | —                                                                                 |       | 1,000,000                                             |       | 98.72                           | %          |
| 466 Lexington Avenue                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| New York, NY 10017                          |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Burton M. Tansky**                        |       | 0                                                                               |       | 18,514                                                                                 |       | 18,514                                                |       | 1.79                            | %          |
| 1618 Main Street                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Dallas, TX 75201                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Karen W. Katz**                           |       | 3,083                                                                           |       | 6,587                                                                                  |       | 9,670                                                 |       | *                               |       |
| 1618 Main Street                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Dallas, TX 75201                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **James E. Skinner**                        |       | 2,107                                                                           |       | 3,294                                                                                  |       | 5,401                                                 |       | *                               |       |
| 1618 Main Street                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Dallas, TX 75201                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |

 

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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)** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | ** **                                                                      | ** ** | ** **                                                                             | ** ** | ** **                                            | ** ** | ** **                      | ** ** |
| **Brendan L. Hoffman**                      |       | 1,449                                                                           |       | 3,294                                                                                  |       | 4,743                                                 |       | *                               |       |
| 1618 Main Street                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Dallas, TX 75201                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **James J. Gold**                           |       | 902                                                                             |       | 3,294                                                                                  |       | 4,196                                                 |       | *                               |       |
| 754 Fifth Avenue                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| New York, NY 10019                          |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Jonathan Coslet(5)**                      |       | —                                                                          |       | —                                                                                 |       | —                                                |       | *                               |       |
| 345 California Street                       |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Suite 3300                             |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| San Francisco, CA 94104                     |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **John G. Danhakl**                         |       | —                                                                          |       | —                                                                                 |       | —                                                |       | *                               |       |
| 11111 Santa Monica Boulevard                |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Suite 2000                             |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Los Angeles, CA 90025                       |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **Carrie Wheeler(5)**                       |       | —                                                                          |       | —                                                                                 |       | —                                                |       | *                               |       |
| 345 California Street                       |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| Suite 3300                             |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| San Francisco, CA 94104                     |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
|                                        |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **All current executive officers and**      |       | 1,008,931                                                                       |       | 39,561                                                                                 |       | 1,048,492                                             |       | 99.61                           | %          |
| **directors as a group**                    |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |
| **(16 persons)**                            |       |                                                                            |       |                                                                                   |       |                                                  |       |                            |       |

 

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*  Representsless than 1% of the class.

 

Footnotes:
| (1)    | Percentage  of class beneficially owned is based on 1,012,919 common shares outstanding  as of September 19, 2008, together with the applicable options to  purchase common shares for each shareholder exercisable on September 19,  2008 or within 60 days thereafter. Shares issuable upon the exercise of  options currently exercisable or exercisable 60 days after September 19,  2008 are deemed outstanding for computing the percentage ownership of the  person holding the options, but are not deemed outstanding for computing the  percentage of any other person. The amounts and percentages of common stock  beneficially owned are reported on the basis of regulations of the SEC  governing the determination of beneficial ownership of securities. Under the  rules of the SEC, a person is deemed to be a “beneficial owner” of a  security if that person has or shares “voting power,” which includes 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 the disposition  of such security. A person is also deemed to be a beneficial owner of any  securities of which that person has a right to acquire beneficial ownership  within 60 days. Under these rules, more than one person may be deemed to be a  beneficial owner of such securities as to which such person has voting or  investment power.      |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (2)    | Includes  the 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 William S. Price, III are  directors, officers and sole shareholders of each of i) TPG Advisors  III, Inc., which is the general partner of TPG Partners III, which in  turn 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 TPG Newton Co-Invest I, LLC. By virtue of their position in  relation to the TPG Entities, Mr. Bonderman, Mr. Coulter and  Mr. Price may be deemed to have investment powers and beneficial  ownership with respect to the securities described herein. Each of  Mr. Bonderman, Mr. Coulter and Mr. Price disclaims beneficial  ownership of such securities. Neither Mr. Coslet nor Ms. Wheeler  has voting or dispositive power over any of the shares of common stock that  may be deemed to be beneficially owned by TPG Capital, L.P. |

 

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| (3)    | Includes  the 1,000,000 shares owned by Newton Holding, LLC over which Warburg Pincus  Private 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 result of their ownership of 43.25% 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. Warburg Pincus  Partners, LLC, a direct subsidiary of Warburg Pincus & Co. (“WP”),  is the general partner of WP VIII. Warburg Pincus IX, LLC, an indirect  subsidiary of WP, is the general partner of WP IX. Warburg Pincus LLC (“WP  LLC”) is the manager of each of WP VIII and WP IX. WP and WP LLC may be  deemed to beneficially own all of the shares of common stock owned by WP VIII  and WP IX. Messrs. Barr, Lapidus, and Lee disclaim beneficial ownership  of all of the shares of common stock owned by the Warburg Pincus entities. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (4)    | Messrs. Barr  and Lee, as partners of WP and managing directors and members of WP LLC, may  be deemed to beneficially own all of the shares of common stock beneficially  owned by the Warburg Pincus entities. Messrs. Barr and Lee disclaim any  beneficial ownership of these shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5)    | Mr. Coulter,  as managing general partner of TPG Capital, L.P., may be deemed to  beneficially own all of the shares of common stock owned by the TPG Entities.  Mr. Coulter disclaims any beneficial ownership of these shares of common  stock. Neither Mr. Coslet nor Ms. Wheeler has voting or dispositive  power over any of the shares of common stock that may be deemed to be beneficially  owned by TPG Capital, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

**ITEM 13.****                  ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Our board of directors hasadopted a formal written related person transaction approval policy, which setsout our policies and procedures for the review, approval, or ratification of “relatedparty transactions.”  For these purposesa “related party” is a director, a nominee for director, an executive officer,or any security holder who is known to us to own more than five percent of anyclass of our voting securities, or any immediate family member of any of theforegoing, as set forth in Item 404(a) of Regulation S-K of the 1934Act.  This policy applies to anytransaction or series of transactions in which the Company or a subsidiary is aparticipant, the amount involved exceeds $120,000, and a related party has adirect or indirect material interest.

 

Transactions between us orone or more of our subsidiaries and one or more related persons may presentrisks or conflicts of interest or the appearance of conflicts of interest.  Our Code of Ethics requires all employees,officers and directors, without exception, to avoid engagement in activities orrelationships that conflict, or would be perceived to conflict, with ourinterests or adversely affect our reputation. However, certain relationships or transactions may arise that would bedeemed acceptable and appropriate following review and approval to ensure thereis a legitimate business reason for the transaction and that the terms of thetransaction are no less favorable to us than could be obtained from anunrelated person.  In accordance with ourpolicy, the procedure requires:

 

—                That all related party transactions and allmaterial terms of the transactions must be communicated to the Audit Committee,including but not limited to, the approximate dollar value of the amountinvolved in the transaction, and all the material facts as to the relatedperson’s direct or indirect interest in, or relationship to, the related persontransaction.

 

—                That each related person transaction, and anymaterial amendment or modification to any related person transaction, bereviewed and approved or ratified by the Audit Committee.

 

Transactionsthat fall 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.

 

***Related Person Transactions***

 

**NewtonHolding, LLC Limited Liability Company Operating Agreement**

 

The investment fundsassociated 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 theAcquisition (Co-Investors), entered into a limited liability company operatingagreement in respect of our parent 

 

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company,Newton Holding, LLC (the “LLC Agreement”). The LLC Agreement contains agreements among the parties with respect tothe election of our directors and the directors of our parent companies,restrictions on the issuance or transfer of interests in us, includingtag-along rights and drag-along rights, and other corporate governanceprovisions (including the right to approve various corporate actions).

 

Pursuant to the LLCAgreement, each of TPG Capital, L.P. and Warburg Pincus has the right, which isfreely assignable to other members or indirect members, to nominate fourdirectors, and TPG Capital, L.P. and Warburg Pincus are entitled to jointlynominate additional directors.  Therights of TPG Capital, L.P. and Warburg Pincus to nominate directors aresubject to their ownership percentages in Newton Holding, LLC remaining above aspecified 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 have assignedthe 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 of any boardaction, each director nominated by TPG Capital, L.P. or Warburg Pincus hasthree votes and each of the other directors (including any jointly nominateddirectors and the directors nominated by investment funds that are affiliatesof Credit Suisse Securities (USA) LLC and Leonard Green Partners) has onevote.  Certain major decisions of theboard of directors of Newton Holding, LLC require the approval of each of TPGCapital, L.P. and Warburg Pincus and certain other decisions of the board ofdirectors of Newton Holding, LLC require the approval of a specified number ofdirectors 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 Funds and theCo-Investors entered into a registration rights agreement with us uponcompletion of the Acquisition.  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 with theAcquisition, we entered into a management services agreement with affiliates ofthe Sponsors pursuant to which affiliates of one of the Sponsors received onthe closing date of the Acquisition a transaction fee of $25 million in cash inconnection with the Acquisition. Affiliates of the other Sponsor waived any cash transaction fee inconnection with the Acquisition.  Inaddition, pursuant to such agreement, and in exchange for consulting andmanagement advisory services that will be provided to us by the Sponsors andtheir affiliates, affiliates of the Sponsors will receive an aggregate annualmanagement fee equal to the lesser of (i) 0.25% of consolidated annualrevenue and (ii) $10 million.  Also,affiliates of the Sponsors are entitled to receive reimbursement forout-of-pocket expenses incurred by them or their affiliates in connection withthe provision of services pursuant to the agreement.  The management services agreement alsoprovides that affiliates of the Sponsors may receive fees in connection withcertain subsequent financing and acquisition or disposition transactions.  The management services agreement includescustomary exculpation and indemnification provisions in favor of the Sponsorsand their affiliates.

 

**CertainCharter and Bylaws Provisions**

 

Our amended and restatedcertificate of incorporation and our amended and restated bylaws containprovisions 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 203 restricts “business combinations”between a corporation and “interested stockholders,” generally defined asstockholders owning 15% or more of the voting stock of a corporation.

 

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**Management Stockholders’ Agreement**

 

Subject to the Management Stockholders’ Agreement, certain members ofmanagement, including Burton M. Tansky, Karen W. Katz, James E. Skinner,Brendan L. Hoffman, and James J. Gold, along with 22 other members ofmanagement, elected to invest in the Company by contributing cash or equityinterests in NMG, or a combination of both, to the Company prior to the mergerand receiving equity interests in the Company in exchange therefor immediatelyafter completion of the merger pursuant to rollover agreements with NMG and theCompany entered into prior to the effectiveness of the merger.  The aggregate amount of this investment wasapproximately $25.6 million.  TheManagement Stockholders’ Agreement creates certain rights and restrictions onthese equity interests, including transfer restrictions and tag-along,drag-along, put, call, and registration rights in certain circumstances.

 

**ITEM 14.  PRINCIPAL ACCOUNTINGFEES 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 ofless than $50,000 that are not restricted services may be pre-approved by boththe chief financial officer and the controller, provided those services willnot impair 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.

 

**Principal Accounting Fees and Services**

 

On March 19, 2007, wedismissed Deloitte & Touche LLP as our independent registered publicaccounting firm and appointed Ernst & Young LLP in its place. In thediscussion that follows, figures related to fiscal year 2007 reflect thecombined billings of both firms.

 

***Audit Fees.***  The aggregate fees billed for the audits ofthe Company’s annual financial statements for the fiscal years ended August 2,2008 and July 28, 2007 and for the reviews of the financial statementsincluded in our Quarterly Reports on Form 10-Q were $1,535,000 and$1,718,000, respectively.

 

***Audit-Related Fees.***  The aggregate fees billed for audit-relatedservices for the fiscal years ended August 2, 2008 and July 28, 2007were $96,000 and $160,000, respectively. These fees related to accountingresearch and consultation and attestation services for certain subsidiarycompanies for the fiscal years ended August 2, 2008 and July 28,2007.

 

***Tax Fees.***  The aggregate fees billed for tax servicesfor the fiscal years ended August 2, 2008 and July 28, 2007 were$192,000 and $344,000, respectively. These fees are related to tax complianceand planning.

 

The Audit Committee hasconsidered and concluded that the provision of permissible non-audit servicesis compatible with maintaining our independent registered public accountingfirm’s independence.

 

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**PART IV**

 

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

 

The following documents arefiled as part of this report.

 

**1.****                                     FinancialStatements**

 

The list of financialstatements required 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 |       | 82               |       |

 

All other financial statement schedules forwhich provision is made in the applicable accounting regulations of theSecurities and Exchange Commission are not required under the relatedinstructions 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. |

 

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| 4.5    |   | Form of 9%/9 3/4% Senior Notes due 2015, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6    |   | Form of 10 3/8% Senior Subordinated Notes due 2015, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7    |   | Registration Rights Agreement dated October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial  Purchasers, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8    |   | First Supplemental Indenture, dated as of July 11, 2006, to the  Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust  Company, N.A., as successor trustee, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  July 11, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.9    |   | Second Supplemental Indenture, dated as of August 14, 2006, to  the Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust  Company, N.A., as successor trustee, incorporated herein by reference to the  Company’s Current Report on Form 8-K dated August 15, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.1*  |   | Employment Agreement dated as of October 6, 2005 by and among  The Neiman Marcus Group, Inc., Newton Acquisition Merger Sub, Inc.,  Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.2*  |   | First Amendment to Employment Agreement by and between The Neiman  Marcus Group, Inc., a Delaware corporation, Neiman Marcus, Inc., a  Delaware corporation, and Burton M. Tansky effective December 21, 2007  incorporated herein by reference to the Neiman Marcus, Inc. Current  Report on Form 8-K dated December 21, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3*  |   | Rollover Agreement dated as of October 4, 2005 by and among The  Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Burton M.  Tansky, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4*  |   | Form of Rollover Agreement by and among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., and certain members of  management, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.5   |   | Credit Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Deutsche Bank Trust  Company Americas, as administrative agent and collateral agent, Credit Suisse  and Deutsche Bank Securities Inc., as joint lead arrangers, Banc of America  Securities LLC and Goldman Sachs Credit Partners L.P., as co-arrangers,  Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC  and Goldman Sachs Credit Partners L.P., as joint bookrunners, and Credit  Suisse, Banc of America Securities LLC and Goldman Sachs Credit Partners  L.P., as co-syndication agents, General Electric Capital Corporation as  documentation agent and the lenders thereunder, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.6   |   | Credit Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Credit Suisse, as  administrative agent and collateral agent, Credit Suisse and Deutsche Bank  Securities Inc. as joint lead arrangers, Banc of America Securities LLC and  Goldman Sachs Credit Partners L.P. as co-arrangers, Credit Suisse, Deutsche  Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as joint bookrunners, Deutsche Bank Securities Inc., Banc of  America Securities LLC and Goldman Sachs Credit Partners L.P. as  co-syndication agents and the lenders thereunder, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                              |

 

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| 10.7   |   | Pledge and Security Agreement dated as of October 6, 2005 among  Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc.,  Newton Acquisition, Inc., the Subsidiary Guarantors and Deutsche Bank  Trust Company Americas, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8   |   | Pledge and Security and Intercreditor Agreement dated as of  October 6, 2005, among Newton Acquisition Merger Sub, Inc., The  Neiman Marcus Group, Inc., Newton Acquisition, Inc., the Subsidiary  Guarantors and Credit Suisse, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9   |   | Lien Subordination and Intercreditor Agreement dated as of  October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition  Merger Sub, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company  Americas, as revolving facility agent, and Credit Suisse, as term loan agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10  |   | Form of First Priority Mortgage, Assignment of Leases and Rents,  Security Agreement and Financing Statement from The Neiman Marcus  Group, Inc. to Credit Suisse, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11  |   | Form of First Priority Leasehold Mortgage, Assignment of Leases  and Rents, Security Agreement and Financing Statement from The Neiman Marcus  Group, Inc. to Credit Suisse, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.12  |   | Form of Second Priority Mortgage, Assignment of Leases and  Rents, Security Agreement and Financing Statement from The Neiman Marcus  Group, Inc. to Deutsche Bank Trust Company Americas, incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.13  |   | Form of Second Priority Leasehold Mortgage, Assignment of Lease  and Rents, Security Agreement and Financing Statement from The Neiman Marcus  Group, Inc. to Deutsche Bank Trust Company Americas, incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.14  |   | Amendment No. 1 dated as of October 6, 2005 to the Credit  Agreement dated as of October 6, 2005 among The Neiman Marcus  Group, Inc., Newton Acquisition, Inc., each subsidiary of The  Neiman Marcus Group, Inc. from time to time party thereto, the Lenders  thereunder, and Credit Suisse, as administrative agent and as collateral  agent for the Lenders, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.15* |   | Newton Acquisition, Inc. Management Equity Incentive Plan,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.16* |   | Stock Option Grant Agreement made as of November 29, 2005  between Newton Acquisition, Inc. and Burton M. Tansky, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.17* |   | Form of Stock Option Grant Agreement made as of  November 29, 2005 between Newton Acquisition, Inc. and certain  eligible key employees, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated December 5,  2005.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.18  |   | Amendment No. 2 dated as of January 26, 2006 to the Credit  Agreement dated as of October 6, 2005, as amended, among The Neiman  Marcus Group, Inc., Newton Acquisition, Inc., each subsidiary of  The Neiman Marcus Group, Inc. from time to time party thereto, the  Lenders thereunder and Credit Suisse, as administrative agent and collateral  agent for the Lenders, incorporated by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated January 30,  2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.19* |   | Employment Agreement between The Neiman Marcus Group, Inc. and  Karen Katz, dated February 1, 2006, effective as of October 6,  2005, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated February 1,  2006.                                                                                                                                                                                                                                               |

 

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| 10.20  |   | Management Services Agreement, dated as of October 6, 2005 among  Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., TPG  GenPar IV, L.P., TPG GenPar III, L.P. and Warburg Pincus LLC incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Quarterly Report  on Form 10-Q for the quarter ended January 28, 2006.                                                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.21  |   | Registration Rights Agreement, dated as of October 6, 2005,  among Newton Acquisition Merger Sub, Inc., Newton  Acquisition, Inc., Newton Holding, LLC and the “Holders” identified  therein as parties thereto incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended  January 28, 2006.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.22  |   | Amendment No. 1, dated as of March 28, 2006, to the Pledge  and Security Intercreditor Agreement dated as of October 6, 2005, among  Neiman Marcus, Inc., The Neiman Marcus Group, Inc., the  Subsidiaries party thereto and Credit Suisse, as administrative agent and  collateral agent, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated March 29, 2006.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.23  |   | Credit Card Program Agreement, dated as of June 8, 2005, by and  among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC  Bank Nevada, N.A. and Household Corporation, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.24  |   | Form of Servicing Agreement, by and between The Neiman Marcus  Group, Inc. and HSBC Bank Nevada, N.A., incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.25* |   | Confidentiality, Non-Competition and Termination Benefits Agreement  between Bergdorf Goodman, Inc. and James J. Gold dated May 3, 2004,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.26  |   | Stockholder Agreement, dated as of May 1, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc. and the  other parties signatory thereto, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  May 4, 2005.                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.27* |   | Neiman Marcus, Inc. Cash Incentive Plan amended as of  January 21, 2008, incorporated herein by reference to the Neiman  Marcus, Inc. Quarterly Report on Form 10-Q for the quarter ended  April 26, 2008.                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.28  |   | Management Stockholders’ Agreement dated as of October 6, 2005  between Newton Acquisition, Inc., Newton Holding, LLC, TPG Newton III,  LLC, TPG Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg Pincus  Private Equity VIII, L.P., Warburg Pincus Netherlands Private Equity VIII  C.V. I, Warburg Pincus Germany Private Equity VIII K.G , Warburg Pincus  Private Equity IX, L.P., and the other parties signatory thereto,  incorporated herein by reference to the Neiman Marcus, Inc. Annual  Report on Form 10-K for the fiscal year ended July 29, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.29* |   | The Neiman Marcus Group, Inc. Key Employee Deferred Compensation  Plan, as amended and restated effective January 1, 2008, incorporated  herein by reference to the Neiman Marcus, Inc. Quarterly Report on  Form 10-Q for the quarter ended April 26, 2008.                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.30  |   | Amendment No. 3 dated as of October 12, 2006 to the Credit  Agreement dated as of October 6, 2005, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman  Marcus Group, Inc. from time to time party thereto, the lenders  thereunder, and Credit Suisse, as administrative agent and collateral agent  for the lenders, incorporated herein by reference to Neiman  Marcus, Inc.’s Current Report on Form 8-K dated October 17,  2006.                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.31  |   | Amendment No. 4 dated as of February 8, 2007 to the Credit  Agreement dated as of October 6, 2005, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman  Marcus Group, Inc. from time to time party thereto, the lenders  thereunder, and Credit Suisse, as administrative agent and collateral agent  for the lenders incorporated herein by reference to Neiman  Marcus, Inc.’s Current Report on Form 8-K dated February 14,  2007.                                                                           |

 

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| 10.32* |   | The Neiman Marcus Group, Inc. Supplemental Executive Retirement  Plan as amended through December 31, 2007. (1)                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |
| 10.33* |   | The Neiman Marcus Group, Inc. Defined Contribution Supplemental  Executive Retirement Plan, amended and restated effective as of  January 1, 2008. (1)                                                                               |
|   |   |                                                                                                                                                                                                                                           |
| 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)    |   | Filed  herewith.                                         |
|--------|--------|----------------------------------------------------------|
|   |   |                                                     |
| *      |   | Management contract or compensatory plan or arrangement. |

 

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**INDEX TO CONSOLIDATED 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-11     |

 

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Tableof Contents

 

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

 

We are responsible for the integrity andobjectivity of the financial and operating information contained in this AnnualReport, including the consolidated financial statements covered by the Reportof Independent Registered Public Accounting Firm. These statements wereprepared in conformity with generally accepted accounting principles andinclude amounts that are based on our best estimates and judgment.

 

We maintain a system of internal controlswhich provides management with reasonable assurance that transactions arerecorded and executed in accordance with its authorizations, assets areproperly safeguarded and accounted for, and records are maintained so as topermit preparation of financial statements in accordance with generallyaccepted accounting principles. This system includes written policies andprocedures, 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 Audit Committee of the Boardof Directors meets periodically with management, the internal auditors and theindependent registered public accounting firm to review internal accountingcontrols, audit results and accounting principles and practices and annuallyrecommends to the Board of Directors the selection of the independentregistered public accounting firm.

 

We are responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934. Under our supervision and with theparticipation of other key members of our management, we 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, management concluded that our internal control overfinancial reporting was effective as of August 2, 2008. During itsassessment, management did not identify any material weaknesses in our internalcontrol over financial reporting.

 

Ernst & Young LLP, the independentregistered public accounting firm that audited our consolidated financialstatements 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 August 2, 2008.

 

 

BURTON M. TANSKY

President and Chief Executive Officer

 

JAMES E. SKINNER

Executive Vice President and Chief FinancialOfficer

 

T. DALE STAPLETON

Vice President and Controller

 

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

Dallas, Texas

 

We have audited the accompanying consolidatedbalance sheets of Neiman Marcus, Inc. and subsidiaries as of August 2,2008 and July 28, 2007, and the related consolidated statements ofearnings, cash flows, and shareholders’ equity for each of the two years in theperiod ended August 2, 2008.  Our audits also included the financialstatement schedule listed in the Index at Item 15.  These financial statements and schedule arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Neiman Marcus, Inc. and subsidiaries at August 2,2008 and July 28, 2007, and the consolidated results of its operations andits cash flows for each of the two years in the period ended August 2,2008, in conformity with U.S. generally accepted accounting principles. Also,in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

 

As discussed in Note 12 to the consolidatedfinancial statements, in fiscal year 2008 the company changed its method ofaccounting for income taxes.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States),Neiman Marcus, Inc.’s internal control over financial reporting as of August 2,2008, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated September 22, 2008 expressed an unqualified opinionthereon.

 

/S/ ERNST & YOUNG LLP

 

Dallas, Texas

September 22,2008

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

Dallas, Texas

 

Wehave audited Neiman Marcus, Inc.’s internal control over financialreporting as of August 2, 2008, based on criteria established in Internal Control—Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). Neiman Marcus, Inc.’s management is responsible formaintaining effective internal control over financial reporting, and for its assessmentof the effectiveness of internal control over financial reporting included inthe accompanying Management’s Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on the company’sinternal 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) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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 August 2, 2008,based on****the COSO criteria**.**

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofNeiman Marcus, Inc. and subsidiaries as of August 2, 2008 and July 28,2007, and the related consolidated statements of earnings, cash flows, andshareholders’ equity for each of the two years in the period ended August 2,2008 of Neiman Marcus, Inc. and our report dated September 22, 2008expressed an unqualified opinionthereon.

 

/S/ ERNST & YOUNG LLP

 

Dallas, Texas

September 22,2008

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

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

Dallas, Texas

 

We have audited the accompanying consolidated statements of earnings,cash flow and shareholders’ equity of Neiman Marcus, Inc. and subsidiaries(the Company) for the forty-three weeks ended July 29, 2006 (SuccessorCompany), and for the nine weeks ended October 1, 2005 (PredecessorCompany). Our audits also included the financial statement schedule listed inthe Index at Item 15.  These financialstatements and financial statement schedule, are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these financial statements and financial statementschedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the results of operations and cashflows of the Company for the forty-three weeks ended July 29, 2006(Successor Company) and for the nine weeks ended October 1, 2005(Predecessor Company), in conformity with accounting principles generally acceptedin the United States of America.  Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

 

As discussed in Note 3, the consolidated financial statements andfinancial statement schedule have been retrospectively adjusted fordiscontinued operations.

 

/S/ DELOITTE & TOUCHE LLP

 

Dallas, Texas

September 25, 2006 (September 24, 2007 as to Note 3)

 

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**NEIMANMARCUS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                        | ** ** | **(Successor)**          | ** ** | **(Successor)**         | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **(in thousands, except shares)**                                                                                                                  | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| ** **                                                                                                                                                        | ** ** | ** **               | ** ** | ** **              | ** ** |
| ASSETS                                                                                                                                                            |       |                     |       |                    |       |
| Current assets:                                                                                                                                                   |       |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                                         |       | $                        | 239,180    |                    | $          | 141,207 |   |
| Merchandise inventories                                                                                                                                           |       | 978,044                  |       | 918,269                 |       |
| Deferred income taxes                                                                                                                                             |       | 32,659                   |       | 39,728                  |       |
| Other current assets                                                                                                                                              |       | 139,877                  |       | 115,765                 |       |
| Total current assets                                                                                                                                              |       | 1,389,760                |       | 1,214,969               |       |
| Property and equipment, net                                                                                                                                       |       | 1,075,294                |       | 1,043,711               |       |
| Customer lists, net                                                                                                                                               |       | 422,931                  |       | 477,245                 |       |
| Favorable lease commitments, net                                                                                                                                  |       | 429,441                  |       | 447,319                 |       |
| Tradenames                                                                                                                                                        |       | 1,579,054                |       | 1,610,315               |       |
| Goodwill                                                                                                                                                          |       | 1,611,191                |       | 1,605,140               |       |
| Other assets                                                                                                                                                      |       | 75,249                   |       | 102,300                 |       |
| Total assets                                                                                                                                                      |       | $                        | 6,582,920  |                    | $          | 6,500,999 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                         |       |                     |       |                    |       |
| Current liabilities:                                                                                                                                              |       |                     |       |                    |       |
| Accounts payable                                                                                                                                                  |       | $                        | 371,741    |                    | $          | 361,299 |   |
| Accrued liabilities                                                                                                                                               |       | 359,399                  |       | 403,162                 |       |
| Other current liabilities                                                                                                                                         |       | 1,695                    |       | 3,426                   |       |
| Total current liabilities                                                                                                                                         |       | 732,835                  |       | 767,887                 |       |
| Long-term liabilities:                                                                                                                                            |       |                     |       |                    |       |
| Long-term debt                                                                                                                                                    |       | 2,946,102                |       | 2,945,906               |       |
| Deferred real estate credits, net                                                                                                                                 |       | 84,019                   |       | 54,068                  |       |
| Deferred income taxes                                                                                                                                             |       | 929,970                  |       | 1,002,982               |       |
| Other long-term liabilities                                                                                                                                       |       | 213,475                  |       | 172,144                 |       |
| Total long-term liabilities                                                                                                                                       |       | 4,173,566                |       | 4,175,100               |       |
|                                                                                                                                                              |       |                     |       |                    |       |
| Common stock (par value $0.01 per share,  5,000,000 shares authorized and 1,012,919 shares issued and outstanding at  August 2, 2008 and July 28, 2007) |       | 10                       |       | 10                      |       |
| Additional paid-in capital                                                                                                                                        |       | 1,418,473                |       | 1,412,386               |       |
| Accumulated other comprehensive (loss)  income                                                                                                                    |       | (9,164                   | )          | 21,229                  |       |
| Retained earnings                                                                                                                                                 |       | 267,200                  |       | 124,387                 |       |
| Total shareholders’ equity                                                                                                                                   |       | 1,676,519                |       | 1,558,012               |       |
| Total liabilities and shareholders’ equity                                                                                                                   |       | $                        | 6,582,920  |                    | $          | 6,500,999 |   |

 

*See Notes to ConsolidatedFinancial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONSOLIDATED STATEMENTS OF EARNINGS**

* *
| ** **                                                                        | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                             |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|--------------------------------------------------------|
| **(in thousands)**                                                           | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
|                                                                              |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Revenues                                                                          |       | $                                                 | 4,600,536  |                                             | $                 | 4,390,076                                              |   | $ | 3,397,738 |   |   | $ | 632,372 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 2,934,968                                         |       | 2,753,814                                        |              | 2,219,438                                              |   |   | 371,542 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 1,045,447                                         |       | 1,015,140                                        |              | 802,355                                                |   |   | 155,632 |   |
| Income from credit card program                                                   |       | (65,727                                           | )          | (65,723                                          | )                 | (49,353                                                | ) |   | (7,818 | ) |
| Depreciation expense                                                              |       | 148,411                                           |       | 136,468                                          |              | 106,950                                                |   |   | 19,209 |   |
| Amortization of customer lists                                                    |       | 54,314                                            |       | 54,387                                           |              | 44,857                                                 |   |   | — |   |
| Amortization of favorable lease commitments                                       |       | 17,878                                            |       | 17,878                                           |              | 14,783                                                 |   |   | — |   |
| Other (income) expense, net                                                       |       | (1,189                                            | )          | 1,309                                            |              | —                                                 |   |   | 23,544 |   |
| Operating earnings                                                                |       | 466,434                                           |       | 476,803                                          |              | 258,708                                                |   |   | 70,263 |   |
| Interest expense (income), net                                                    |       | 239,805                                           |       | 259,805                                          |              | 217,665                                                |   |   | (910 | ) |
| Earnings from continuing operations before  income taxes                          |       | 226,629                                           |       | 216,998                                          |              | 41,043                                                 |   |   | 71,173 |   |
| Income taxes                                                                      |       | 83,816                                            |       | 82,295                                           |              | 14,595                                                 |   |   | 26,226 |   |
| Earnings from continuing operations                                               |       | 142,813                                           |       | 134,703                                          |              | 26,448                                                 |   |   | 44,947 |   |
| Loss from discontinued operations, net of  taxes                                  |       | —                                            |       | (22,771                                          | )                 | (13,993                                                | ) |   | (793 | ) |
| Net earnings                                                                      |       | $                                                 | 142,813    |                                             | $                 | 111,932                                                |   | $ | 12,455 |   |   | $ | 44,154 |   |

 

*See Notes toConsolidated Financial Statements.*

 

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**NEIMANMARCUS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                                       | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                             |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|--------------------------------------------------------|
| **(in thousands)**                                                                          | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
| ** **                                                                                       | ** ** | ** **                                        | ** ** | ** **                                       | ** **        | ** **                                             | ** ** | ** ** | ** ** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                         |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Net earnings                                                                                     |       | $                                                 | 142,813    |                                             | $                 | 111,932                                                |   | $ | 12,455 |   |   | $ | 44,154 |   |
| Loss from discontinued operations                                                                |       | —                                            |       | 22,771                                           |              | 13,993                                                 |   |   | 793 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities:             |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Depreciation and amortization expense                                                            |       | 234,820                                           |       | 222,874                                          |              | 178,318                                                |   |   | 19,305 |   |
| Deferred income taxes                                                                            |       | (44,627                                           | )          | (60,522                                          | )                 | (65,620                                                | ) |   | (7,318 | ) |
| Impairment of Horchow tradename                                                                  |       | 31,261                                            |       | 11,473                                           |              | —                                                 |   |   | — |   |
| Gain on curtailment of defined benefit  retirement obligations                                   |       | (32,450                                           | )          | —                                           |              | —                                                 |   |   | — |   |
| Non-cash charges related to step-up in  carrying value of inventory                              |       | —                                            |       | —                                           |              | 38,067                                                 |   |   | — |   |
| Other—primarily costs related to defined  benefit pension and other long-term benefit plans |       | 21,997                                            |       | 20,531                                           |              | 19,030                                                 |   |   | 15,744 |   |
|                                                                                             |       | 353,814                                           |       | 329,059                                          |              | 196,243                                                |   |   | 72,678 |   |
| Changes in operating assets and  liabilities:                                                    |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Merchandise inventories                                                                          |       | (59,775                                           | )          | (124,648                                         | )                 | 107,829                                                |   |   | (172,924 | ) |
| Other current assets                                                                             |       | (24,112                                           | )          | (45,392                                          | )                 | 2,117                                                  |   |   | (881 | ) |
| Other assets                                                                                     |       | 3,118                                             |       | (3,333                                           | )                 | 5,627                                                  |   |   | (2,274 | ) |
| Accounts payable and accrued liabilities                                                         |       | (6,414                                            | )          | 86,256                                           |              | 61,163                                                 |   |   | 122,608 |   |
| Deferred real estate credits                                                                     |       | 33,694                                            |       | 27,885                                           |              | 25,068                                                 |   |   | 4,326 |   |
| Funding of defined benefit pension plan                                                          |       | (15,000                                           | )          | —                                           |              | —                                                 |   |   | — |   |
| Payment of deferred compensation and  stock-based awards                                         |       | —                                            |       | —                                           |              | (12,901                                                | ) |   | — |   |
| Net cash provided by operating activities –  continuing operations                          |       | 285,325                                           |       | 269,827                                          |              | 385,146                                                |   |   | 23,533 |   |
| Net cash used for operating activities –  discontinued operations                           |       | —                                            |       | (10,918                                          | )                 | (4,381                                                 | ) |   | (4,098 | ) |
| **Net cash provided by operating activities**                                                    |       | 285,325                                           |       | 258,909                                          |              | 380,765                                                |   |   | 19,435 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                         |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Capital expenditures                                                                             |       | (183,452                                          | )          | (147,877                                         | )                 | (138,212                                               | ) |   | (25,575 | ) |
| Purchases of short-term investments                                                              |       | (10,000                                           | )          | —                                           |              | —                                                 |   |   | — |   |
| Sales of short-term investments                                                                  |       | 10,000                                            |       | —                                           |              | —                                                 |   |   | — |   |
| 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 cash used for investing activities –  continuing operations                             |       | (183,452                                          | )          | (85,808                                          | )                 | (5,253,883                                             | ) |   | (25,575 | ) |
| Net cash used for investing activities –  discontinued operations                           |       | —                                            |       | (128                                             | )                 | (5,919                                                 | ) |   | (736 | ) |
| **Net cash used for investing activities**                                                       |       | (183,452                                          | )          | (85,936                                          | )                 | (5,259,802                                             | ) |   | (26,311 | ) |
|                                                                                                  |            |                                                   |            |                                                  |                   |                                                        |  |  |  |  |  |  |  |  |

 

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**NEIMANMARCUS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                                      | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                             |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|--------------------------------------------------------|
| **(in thousands)**                                                                         | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                        |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Repayment of borrowings                                                                         |       | (3,900                                            | )          | (4,918                                           | )                 | (1,078                                                 | ) |   | — |   |
| 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                                               | ) |   | — |   |
| Debt issuance costs paid                                                                        |       | —                                            |       | (1,449                                           | )                 | (102,854                                               | ) |   | — |   |
| Cash equity contributions                                                                       |       | —                                            |       | —                                           |              | 1,427,739                                              |   |   | — |   |
| Cash dividends paid                                                                             |       | —                                            |       | —                                           |              | —                                                 |   |   | (7,346 | ) |
| Proceeds from purchase of common stock,  exercises of stock options and restricted stock grants |       | —                                            |       | 1,148                                            |              | —                                                 |   |   | — |   |
| Net cash (used for) provided by financing  activities – continuing operations              |       | (3,900                                            | )          | (255,219                                         | )                 | 4,264,073                                              |   |   | (7,346 | ) |
| Net cash (used for) provided by financing  activities – discontinued operations            |       | —                                            |       | (1,675                                           | )                 | (4,168                                                 | ) |   | 5,000 |   |
| **Net cash (used for) provided by financing  activities**                                       |       | (3,900                                            | )          | (256,894                                         | )                 | 4,259,905                                              |   |   | (2,346 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                   |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Increase (decrease) during the year                                                             |       | 97,973                                            |       | (83,921                                          | )                 | (619,132                                               | ) |   | (9,222 | ) |
| Beginning balance                                                                               |       | 141,207                                           |       | 225,128                                          |              | 844,260                                                |   |   | 853,482 |   |
| Ending balance                                                                                  |       | 239,180                                           |       | 141,207                                          |              | 225,128                                                |   |   | 844,260 |   |
| Less cash and cash equivalents of  discontinued operations                                      |       | —                                            |       | —                                           |              | 1,388                                                  |   |   | 1,056 |   |
| **Ending balance - continuing operations**                                                      |       | $                                                 | 239,180    |                                             | $                 | 141,207                                                |   | $ | 223,740 |   |   | $ | 843,204 |   |
|                                                                                            |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| **Supplemental Schedule of Cash Flow Information:**                                             |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Cash paid during the year for:                                                                  |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Interest                                                                                        |       | $                                                 | 233,055    |                                             | $                 | 259,709                                                |   | $ | 181,022 |   |   | $ | 134 |   |
| Income taxes                                                                                    |       | $                                                 | 145,811    |                                             | $                 | 155,568                                                |   | $ | 22,815 |   |   | $ | 10,693 |   |
| 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 |   |   | $ | — |   |
| Adjustments to goodwill related to  pre-acquisition tax contingencies                           |       | $                                                 | 6,051      |                                             | $                 | —                                                 |   | $ | — |   |   | $ | — |   |

 

*See Notes toConsolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY**

 
| ** **                                                                                     | ** ** | **Common**   | ** ** | ** **     | ** ** | **Accumulated**      | ** ** | ** **                            | ** ** | ** **             | ** ** | ** **          | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------|------------|----------------|------------|----------------------|------------|---------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                                                     | ** ** | **stocks**   | ** ** | **Additional** | ** ** | **other**            | ** ** | ** **                            | ** ** | ** **             | ** ** | **Total**           | ** ** |
| **(in thousands)**                                                                        | ** ** | **Class  A** | ** ** | **Class  B**   | ** ** | **paid-in  capital** | ** ** | **comprehensive  income (loss)** | ** ** | **Retained  earnings** | ** ** | **Treasury  stock** | ** ** | **shareholders’  equity** | ** ** |
| ***Predecessor:***                                                                             |       |         |       |           |       |                 |       |                                  |       |                   |       |                |       |   |   |
| 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 to 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 |   |

 
| **(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 $6,696                                      |       | —            |       | —                           |       | 10,276                                                    |       | —                 |       | 10,276                                |       |
| Reclassification to earnings, net of tax of  ($186)                                                                                    |       | —            |       | —                           |       | (286                                                      | )          | —                 |       | (286                                  | )          |
| 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                                 |       |
| Adjustment for unfunded benefit obligations  (upon initial adoption of new accounting principle), net of income tax effect  of $11,289 |       | —            |       | —                           |       | 17,365                                                    |       | —                 |       | 17,365                                |       |
| Comprehensive income:                                                                                                                  |       |              |       |                             |       |                                                      |       |                   |       |                                  |       |
| Net earnings                                                                                                                           |       | —            |       | —                           |       | —                                                    |       | 111,932                |       | 111,932                               |       |
| Adjustments for fluctuations in fair market  value of financial instruments, net of tax of ($1,758)                                    |       | —            |       | —                           |       | (2,678                                                    | )          | —                 |       | (2,678                                | )          |
| Reclassification to earnings, net of tax of  ($2,327)                                                                                  |       | —            |       | —                           |       | (3,579                                                    | )          | —                 |       | (3,579                                | )          |
| Other                                                                                                                                  |       | —            |       | —                           |       | 292                                                       |       | —                 |       | 292                                   |       |
| Total comprehensive income                                                                                                             |       |              |       |                             |       |                                                      |       |                   |       | 105,967                               |       |
| BALANCE AT JULY 28, 2007                                                                                                               |       | 10                |       | 1,412,386                        |       | 21,229                                                    |       | 124,387                |       | 1,558,012                             |       |
| Stock based compensation expense                                                                                                       |       | —            |       | 6,087                            |       | —                                                    |       | —                 |       | 6,087                                 |       |
| Comprehensive income:                                                                                                                  |       |              |       |                             |       |                                                      |       |                   |       |                                  |       |
| Net earnings                                                                                                                           |       | —            |       | —                           |       | —                                                    |       | 142,813                |       | 142,813                               |       |
| Adjustments for fluctuations in fair market  value of financial instruments, net of tax of ($16,355)                                   |       | —            |       | —                           |       | (25,159                                                   | )          | —                 |       | (25,159                               | )          |
| Reclassification to earnings, net of tax of  ($214)                                                                                    |       | —            |       | —                           |       | (329                                                      | )          | —                 |       | (329                                  | )          |
| Change in unfunded benefit obligations, net  of tax of ($3,239)                                                                        |       | —            |       | —                           |       | (5,063                                                    | )          | —                 |       | (5,063                                | )          |
| Other                                                                                                                                  |       | —            |       | —                           |       | 158                                                       |       | —                 |       | 158                                   |       |
| Total comprehensive income                                                                                                             |       |              |       |                             |       |                                                      |       |                   |       | 112,420                               |       |
| BALANCE AT AUGUST 2, 2008                                                                                                              |       | $                 | 10         |                             | $          | 1,418,473                                                 |       | $                      | (9,164     | )                                     | $          | 267,200 |   | $ | 1,676,519 |   |

 

*See Notes toConsolidated Financial Statements.*

 

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**NEIMAN MARCUS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

**BASIS OFPRESENTATION**

 

On April 22, 2005, NeimanMarcus, Inc., formerly Newton Acquisition, Inc. (the Company), andits wholly-owned subsidiary, Newton Acquisition Merger Sub, Inc. (MergerSub), were formed and incorporated in the state of Delaware. The Company is asubsidiary of Newton Holding, LLC (Holding). Holding, the Company and Merger Sub were formed by investment fundsaffiliated with TPG Capital (formerly Texas Pacific Group) and Warburg PincusLLC (collectively, the Sponsors) for the purpose of acquiring The Neiman MarcusGroup, Inc. (NMG). The equity subscriptions were subsequently funded bythe Sponsors.

 

The acquisition of NMG wascompleted on October 6, 2005 through the merger of Merger Sub with andinto NMG, with NMG being the surviving entity (the Acquisition). Subsequent tothe Acquisition, NMG is a subsidiary of the Company, which is controlled byHolding. The Acquisition was recorded as of October 1, 2005, the beginningof our October accounting period. All references to “we” and “our” relate to the Company for periodssubsequent to the Acquisition and to NMG for periods prior to the Acquisition.

 

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 Acquisition, 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.

 

Our fiscal year ends on theSaturday closest to July 31.  Likemany other retailers, we follow a 4-5-4 reporting calendar which resulted in anextra week in fiscal year 2008 (the 53rd week). Allreferences to fiscal year 2008 relate to the 53 weeks ended August 2,2008; all references to fiscal year 2007 relate to the 52 weeks ended July 28,2007 and all references to fiscal year 2006 relate to the combined periodcomprised of forty-three weeks ended July 29, 2006 (Successor) and thenine weeks ended October 1, 2005 (Predecessor).

 

The accompanying consolidatedfinancial statements include the amounts of the Company and its subsidiaries.  All significant intercompany accounts andtransactions have been eliminated.

 

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**ESTIMATES AND CRITICAL ACCOUNTING POLICIES**

 

We makeestimates and assumptions about future events in preparing our financialstatements in conformity with generally accepted accounting principles. Theseestimates and assumptions affect the amounts of assets, liabilities, revenuesand expenses and the disclosure of gain and loss contingencies at the date ofthe consolidated financial statements.

 

While webelieve that our past estimates and assumptions have been materially accurate,the amounts currently estimated are subject to change if we make differentassumptions as to the outcome of future events. We evaluate our estimates andjudgments on an ongoing basis and predicate those estimates and judgments onhistorical experience and on various other factors that we believe to bereasonable under the circumstances. We make adjustments to our assumptions andjudgments when facts and circumstances dictate. Since future events and theireffects cannot be determined with absolute certainty, actual results may differfrom the estimates used in preparing the accompanying consolidated financialstatements.

 

***Cash and Cash Equivalents.***  Cash and cash equivalents primarily consistof cash on hand in the stores, deposits with banks and overnight investmentswith banks and financial institutions. Cash equivalents are stated at cost,which approximates fair value. Our cash management system provides for thereimbursement of all major bank disbursement accounts on a daily basis.Accounts payable includes $55.3 million of outstanding checks not yetpresented for payment at August 2, 2008 and $55.7 million at July 28,2007.

 

***Merchandise Inventories andCost Of Goods Sold.***  Weutilize the retail method of accounting. 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. 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. Earnings are negatively impacted when merchandise ismarked down. As we adjust theretail value of our inventories through the use of markdowns to reflect marketconditions, our merchandise inventories are stated at the lower of cost ormarket.

 

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 significantmanagement judgment related to the valuation of our inventories include1) setting the 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.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold. Theamounts of vendor allowances we received did not have a significant impact onthe year-over-year change in gross margin during fiscal years 2008, 2007 or2006. We received vendor allowances of $109.6 million, or 2.4% ofrevenues, in fiscal year 2008, $96.1 million, or 2.2% of revenues, infiscal year 2007 and $94.5 million, or 2.3% of revenues, in fiscal year 2006(including $2.4 million for the Predecessor prior to the Acquisition).

 

We obtain certain merchandise,primarily precious jewelry, on a consignment basis in order to expand ourproduct assortment. Consignment merchandise with a cost basis of $362.7 millionat August 2, 2008 and $307.6 million at July 28, 2007 is notreflected in our consolidated balance sheets.

 

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***Long-lived Assets.***  Property and equipment are stated at costless accumulated depreciation. For financial reporting purposes, we computedepreciation principally using the straight-line method over the estimateduseful lives of the assets. Buildings and improvements are depreciated overfive to 30 years while fixtures and equipment are depreciated over threeto 15 years. Leasehold improvements are amortized over the shorter of theasset life or the lease term (which mayinclude renewal periods when exercise of the renewal option is at ourdiscretion and considered reasonably assured at the inception of the lease).Costs incurred for the development of internal computer software arecapitalized and amortized using the straight-line method over three to tenyears.

 

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.

 

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 our October 2005accounting period. In connection with the purchase price allocation, werecorded 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.

 

***Goodwill and Intangible Assets.***  Goodwill and indefinite-lived intangibleassets, such as tradenames, are not subject to amortization. Rather,recoverability of goodwill and indefinite-lived intangible assets is assessedannually and upon the occurrence of certain events. The recoverabilityassessment requires us to make judgments and estimates regarding fair values.Fair values are determined using estimated future cash flows, including growthassumptions for future revenues, gross margin rates and other estimates. Inaddition, the fair values of our tradenames are based, in part, on ourestimates of royalties which could be derived from the licensing of suchtradenames to third parties.

 

To the extent that ourestimates are not realized, future assessments could result in impairmentcharges. In the fourth quarters of fiscal years 2008 and 2007, we recorded$31.3 million and $11.5 million pretax impairment charges related to thewritedown to fair value of the net carrying value of the Horchow tradenamebased upon lower revenues and royalty rate expectations with respect to theHorchow brand in light of current operating performance and future operatingexpectations.

 

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

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

 

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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 2 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 recognize contingent rentexpenses when it is probable that the sales thresholds will be reached duringthe year.

 

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 beginning withthe date the Company takes possession of the leased asset. We receivedconstruction allowances aggregating $36.8 million in fiscal year 2008, $24.6million in fiscal year 2007, $30.7 million for the forty-three weeks ended July 29,2006 and $2.0 million for the nine weeks ended October 1, 2005.

 

***Financial Instruments.***  We use derivative financial instruments tohelp manage our interest rate risk. Effective December 6, 2005, NMGentered into floating to fixed interest rate swap agreements for an aggregatenotional amount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness. The interestrate swap agreements terminate after five years.  At August 2, 2008, the fair value of NMG’sinterest rate swap agreements was a loss of approximately $34.4 million,which amount is included in other long-term liabilities.

 

As of the effective date, NMG designated the interest rate swaps ascash flow hedges. As a result, changes in the fair value of NMG’s swaps arerecorded as a component of other comprehensive (loss) income. At August 2,2008, we have $21.8 million of unrecognized losses, net of tax, on our interestrate swap agreements included in accumulated other comprehensive (loss) income.

 

As a result of the swapagreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.524% to 6.733% per quarter through 2010 and result in an average fixed rateof 6.608%.

 

***Benefit Plans.***  We sponsor a noncontributory defined benefitpension plan (Pension Plan) and an unfunded supplemental executive retirementplan (SERP Plan) which provides certain employees additional pension benefits.In calculating our obligations and related expense, we make various assumptionsand estimates, after consulting with outside actuaries and advisors. The annualdetermination of expense involves calculating the estimated total benefitsultimately payable to plan participants and allocating this cost to the periodsin which services are expected to be rendered. We use the projected unit creditmethod in recognizing pension liabilities. The Pension and SERP Plans arevalued annually as of the end of each fiscal year.

 

Significant assumptions relatedto the calculation of our obligations 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 andthe average rate of compensation increase by plan participants. We review theseassumptions annually based upon currently available information, includinginformation provided by our actuaries.

 

***Self-insurance and OtherEmployee Benefit Reserves.***  We use estimates in the determination of therequired accruals for general liability, workers’ compensation and healthinsurance as well as short-term disability and postretirement health carebenefits. We base these estimates upon an examination of historical trends,industry claims experience and independent actuarial estimates. Projectedclaims information may change in the future and may require us to revise thesereserves. Although we do not expectthat we will ultimately pay claims significantly different from our estimates,self-insurance reserves could be affected if future claims experience differsignificantly from our historical trends and assumptions.

 

***Other Long-term Liabilities.***  Other long-term liabilities consist primarilyof certain employee benefit obligations, postretirement health care benefitobligations and the liability for scheduled rent increases.

 

***Revenues.***  Revenues include sales of merchandise andservices and delivery and processing revenues related to merchandise sold.Revenues from our Specialty Retail stores are recognized at the later of thepoint of sale or the delivery of goods to the customer. Revenues from ourDirect Marketing operations are recognized when the merchandise is delivered tothe customer. Revenues associated withgift cards are recognized at the time of redemption by the customer. Revenuesexclude sales taxes collected from our customers.

 

We maintain reserves foranticipated sales returns primarily based on our historical trends related toreturns by our retail and direct marketing customers. Our reserves foranticipated sales returns aggregated $45.0 million at August 2, 2008and 

 

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$48.8 million at July 28, 2007. Asthe vast majority of merchandise returns are made in less than 30 days afterthe sales transaction, we believe the risk that differences between ourestimated and actual returns will have a material impact on our consolidatedfinancial statements is minimal.

 

***Buying and Occupancy Costs.***  Our buying costs consist primarily ofsalaries and expenses incurred by our merchandising and buying operations.Occupancy costs primarily include rent, property taxes and operating costs ofour retail, distribution and support facilities and exclude depreciationexpense.

 

***Selling, General andAdministrative 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 $71.6 million in fiscal year2008, $65.4 million in fiscal year 2007, $49.4 million for the forty-threeweeks ended July 29, 2006 and $10.1 million for the nine weeks ended October 1,2005.

 

We incur costs to advertise andpromote the merchandise assortment offered by both Specialty Retail stores andDirect Marketing. Advertising costs incurred by our Specialty Retail storesconsist primarily of print media costs related to promotional materials mailedto our customers. These costs are expensed at the time of mailing to thecustomer. Advertising costs incurred by Direct Marketing relate to theproduction, printing and distribution of our print catalogs and the productionof the photographic content on our websites. We amortize the costs of printcatalogs during the periods we expect to generate revenues from such catalogs,generally six months. We expense the costs incurred to produce the photographiccontent on our websites at the time the images are first loaded onto thewebsite. We expense website design and web marketing costs as incurred.

 

Deferred catalog costs includedin other current assets in the consolidated balance sheets were $7.5 million asof August 2, 2008 and $7.1 million as of July 28, 2007.  Net advertising expenses were $102.8 millionin fiscal year 2008, $100.2 million in fiscal year 2007, $95.3 million for theforty-three weeks ended July 29, 2006 and $13.1 million for the nine weeksended October 1, 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, theseallowances are recorded as a reduction of our advertising costs when earned.Vendor allowances earned and recorded as a reduction to selling, general andadministrative expenses aggregated approximately $75.7 million in fiscal year2008, $63.4 million in fiscal year 2007, $43.1 million for the forty-threeweeks ended July 29, 2006 and $18.6 million for nine weeks ended October 1,2005.

 

Preopening expenses primarilyconsist of payroll and related media costs incurred in connection with storeopenings and major renovations and are expensed when incurred.  We incurred preopening expenses of $7.7million in fiscal year 2008, $8.8 million in fiscal year 2007, $7.4 million forthe forty-three weeks ended July 29, 2006 and $3.9 million for the nineweeks ended October 1, 2005.

 

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

 

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

 

·                  increased or decreased based upon future changes toour historical credit card program related to, among other things, the interestrates applied to unpaid balances and the assessment of late fees; and

 

·                  decreased based upon the level of future services weprovide to HSBC.

 

***Gift Cards.***  We sell gift cards at our Specialty Retailstores and through our Direct Marketing operations. Unredeemed gift cardsaggregated $34.1 million at August 2, 2008 and $33.1 million at July 28,2007. The gift cards sold to our customers have no stated expiration dates andare subject to actual and/or potential escheatment rights in various of thejurisdictions in which we operate.

 

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In the fourth quarter of fiscalyear 2007, we recorded $6.0 million of other income for the breakage on giftcards we previously sold and issued.  Theincome was recognized based upon our analysis of the aging of these gift cards,our determination that the likelihood of future redemption is remote and ourdetermination that such balances are not subject to escheatment laws applicableto our operations.  Prior to the fourthquarter of fiscal year 2007, we had not recognized breakage on gift cardspending, among other things, our final determination of the applicableescheatment laws applicable to our operations.

 

Gift card breakage recognized during fiscalyear 2008 was not significant. We do not believe gift card breakage willhave a material impact on our future operations.

 

***Loyalty Programs.***  We maintain customer loyalty programs inwhich customers accumulate points for qualifying purchases. Upon reachingcertain levels, customers may redeem their points for gifts. Generally, pointsearned in a given year must be redeemed no later than 90 days subsequentto 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.*** In December 2004, the FASB issuedSFAS No. 123(R), “Share-Based Payment” (SFAS 123(R)). This standardrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fairvalues. We adopted SFAS 123(R) as of the beginning of our first quarter offiscal year 2006 using the modified prospective method, which required us torecord stock compensation for all unvested and new awards as of the adoptiondate.

 

In connection with the adoptionof the provisions of SFAS 123(R), we recorded non-cash charges for stockcompensation of approximately $19.0 million in the period from July 31,2005 to October 1, 2005 primarily as a result of the accelerated vestingof all Predecessor options and restricted stock in connection with theAcquisition.

 

***Income Taxes.***  We use the asset and liability method ofaccounting for income taxes.  Under thismethod, deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax basis of assets and liabilities and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse.  Weare routinely under audit by federal, state or local authorities in the area ofincome taxes. We regularly evaluate the likelihood of realization of taxbenefits derived from positions we have taken in various federal and statefilings after consideration of all relevant facts, circumstances and availableinformation. For those tax benefits we believe more likely than not will besustained, we recognize the benefit we believe is cumulatively greater than 50%likely to be realized. To the extent we were to prevail in matters for whichaccruals have been established or be required to pay amounts in excess ofrecorded reserves, our effective tax rate in a given financial statement periodcould be materially impacted.

 

***Recent AccountingPronouncements.*** In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157, “Fair Value Measurements” (SFAS 157), whichprovides guidance for using fair value to measure certain assets andliabilities.  SFAS 157 will applywhenever another standard requires or permits assets or liabilities to bemeasured at fair value.  The standarddoes not expand the use of fair value to any new circumstances.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, orour 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, the FASBissued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (SFAS 159).  SFAS 159 expands opportunities to use fair valuemeasurement in financial reporting and permits entities to choose to measuremany 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 theimpact, if any, of adopting SFAS 159 on our consolidated financial statements.

 

In December 2007, the FASBissued Statement of Financial Accounting Standards No. 141(R), “BusinessCombinations” (SFAS 141(R)), which addresses the recognition and accounting foridentifiable assets acquired, liabilities assumed and non-controlling interestsin business combinations.  In addition,SFAS 141(R) changes the accounting treatment for certainacquisition-related items, including requirements to expenseacquisition-related costs as incurred, expense 

 

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restructuring costs associated with anacquired business and recognize post-acquisition changes in tax uncertaintiesassociated with a business combination as a component of tax expense.  SFAS 141(R) is to be appliedprospectively to business combinations for which the acquisition date is on orafter December 15, 2008, or our fiscal year ending July 31,2010.  Generally, the effect of SFAS 141(R) willdepend on future acquisitions.  However,the accounting for the resolution of any tax uncertainties remaining as of August 1,2009 related to the Acquisition will be subject to the provisions of SFAS141(R).  We have not yet evaluated theimpact, if any, of adopting SFAS 141(R) on our consolidated financialstatements.

 

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

 

**NOTE 2. PURCHASE ACCOUNTING**

 

                We accounted for the Acquisition in accordance with the provisions ofStatement of Financial Accounting Standards No. 141 “Business Combinations”(SFAS 141), whereby the purchase price paid to effect the Acquisition wasallocated to state the acquired assets and liabilities at fair value. TheAcquisition and the allocation of the purchase price were recorded as of October 1,2005, the beginning of our October accounting period.

 

                In connection with the purchase price allocation, we made estimates ofthe fair values of our long-lived and intangible assets based upon assumptionsrelated to future cash flows, discount rates and asset lives and we recordedadjustments to increase the carrying values of our property and equipment andinventory, to establish intangible assets for our tradenames, customer listsand favorable lease commitments and to revalue our long-term benefit planobligations, among other things. The final purchase accounting adjustments, asreflected in our July 29, 2006 consolidated balance sheet, were as follows(in millions):

 
| 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 |   |
|                                                      |                                                                                     |        |          |         |         |  |  |  |

 

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**NOTE 3.  DISCONTINUED OPERATIONS**

 

***Gurwitch Products, L.L.C.***In July 2006, we sold our majority interest in Gurwitch Products, L.L.C.to Alticor Inc., for pretax net cash proceeds of approximately$40.8 million (Gurwitch Disposition). Gurwitch Products, L.L.C. designs and markets the Laura Merciercosmetics line and had revenues of approximately $59.0 million (afterintercompany eliminations) in fiscal year 2006. The net assets of GurwitchProducts, L.L.C. were sold for their net carrying value (after purchaseaccounting adjustments made in connection with the Acquisition to state suchassets at fair value).

 

***Kate Spade LLC.***In February 1999, NMG acquired a 56% controlling interest in Kate SpadeLLC, a designer and marketer of high-end accessories.  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, weentered into an agreement to settle the put option whereby we purchased theinterest held by the minority investor for approximately $59.4 million.

 

In November 2006, we entered into a definitive agreement to sell100% of the ownership interests in Kate Spade LLC to Liz Claiborne, Inc.(consisting of both our original 56% interest and the 44% minority interestsubsequently purchased by NMG) for pretax net cash proceeds of approximately$121.5 million. Both the purchase of the minority interest in Kate Spade LLCand the sale of Kate Spade LLC to Liz Claiborne, Inc. were consummated in December 2006.

 

The Company’s consolidated financial statements, accompanying notes andother information provided in this Annual Report on Form 10-K reflectGurwitch Products, L.L.C. and Kate Spade LLC as discontinued operations for allperiods presented.

 

***Results of Discontinued Operations.***  Summarized financial information with respectto the results of operations of Kate Spade LLC and Gurwitch Products L.L.C. isas follows:

 
| ** **                                                        | ** ** | **(Successor)**                              | ** ** | ** **                                         | **(Predecessor)** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------|-------------------|------------|
| **(in thousands)**                                           | ** ** | **Fiscal  year  ended  July 28,  2007** | ** ** | **Forty-three  weeks  ended  July 29,  2006** | ** **        | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** |
|                                                              |       |                                         |       |                                               |              |       |   |   |
| Revenues                                                          |       | $                                            | 29,612     |                                               | $                 | 115,225    |   |   | $ | 19,277 |   |
|                                                              |       |                                         |       |                                               |              |       |   |   |
| Earnings (loss) from discontinued  operations before income taxes |       | $                                            | 3,494      |                                               | $                 | (1,497     | ) |   | $ | (1,412 | ) |
| Income taxes                                                      |       | 1,967                                        |       | 12,496                                             |              |       | (619 | ) |
| Net earnings (loss) from discontinued  operations                 |       | 1,527                                        |       | (13,993                                            | )                 |       | (793 | ) |
|                                                              |       |                                         |       |                                               |              |       |   |   |
| Loss on disposition before income taxes                           |       | (13,398                                      | )          | —                                             |              |       | — |   |
| Income taxes                                                      |       | (10,900                                      | )          | —                                             |              |       | — |   |
| Net loss on disposition                                           |       | (24,298                                      | )          | —                                             |              |       | — |   |
|                                                              |       |                                         |       |                                               |              |       |   |   |
| Loss from discontinued operations, net of  taxes                  |       | $                                            | (22,771    | )                                                  | $                 | (13,993    | ) |   | $ | (793 | ) |

 

In the first quarter of fiscalyear 2007, we impaired the intangible assets of Kate Spade LLC by $12.5 millionin order to state the net assets of Kate Spade LLC at their estimated netrealizable value to NMG.

 

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**NOTE 4. TRANSACTIONS WITH SPONSORS**

 

                In connection with the Acquisition, we entered into a managementservices agreement with affiliates of the Sponsors pursuant to which affiliatesof one of the Sponsors received on the closing date a transaction fee of$25 million in cash. Affiliates of the other Sponsor waived any cashtransaction fee in connection with the Acquisition.

 

                In addition, pursuant to such agreement, and in exchange for on-going consultingand management advisory services that will be provided to us by the Sponsorsand their affiliates, affiliates of the Sponsors receive an aggregate annualmanagement fee equal to the lesser of (i) 0.25% of our consolidated annualrevenues or (ii) $10 million. Affiliates of the Sponsors 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. We recorded management feesof $10.0 million during fiscal years 2008 and 2007 and $8.7 million duringthe forty-three weeks ended July 29, 2006, which are included in selling,general and administrative expenses in the consolidated statements of earnings.

 

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

 

**NOTE 5.  INCOME FROM CREDIT CARD PROGRAM**

 

                Pursuant to a long-term marketing and servicing alliance with HSBC,HSBC offers credit card and non-card payment plans bearing our brands and wereceive ongoing payments from HSBC based on credit card sales and compensationfor marketing and servicing activities. We recognize HSBC Program Income when earned.

 

On April 21, 2008, we entered into an amendment to the ProgramAgreement, dated as of June 8, 2005, with HSBC. The amendment, among otherthings, provides for 1) the allocation between HSBC and NMG of additionalincome, if any, to be generated from the credit card program as a result ofcertain changes made to the Program Agreement and 2) the allocation of certaincredit card losses between HSBC and NMG (subject to a contractual limit on thelosses allocable to NMG). We do not expect that the amendment will have amaterial impact on the level of our future income under the Program Agreement.

 

**NOTE 6.  PROPERTY AND EQUIPMENT, NET**

 

The significant components ofour property and equipment, net are as follows:

 
| ** **                                      | ** ** | **(Successor)**          | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                         | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| Land, buildings and improvements                |       | $                        | 829,647    |   | $ | 756,100 |   |
| Fixtures and equipment                          |       | 560,537                  |       | 460,826 |   |
| Construction in progress                        |       | 77,320                   |       | 70,203 |   |
|                                            |       | 1,467,504                |       | 1,287,129 |   |
| Less accumulated depreciation and  amortization |       | 392,210                  |       | 243,418 |   |
|                                            |       |                     |       |   |   |
| Property and equipment, net                     |       | $                        | 1,075,294  |   | $ | 1,043,711 |   |

 

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**NOTE 7. GOODWILL AND INTANGIBLE ASSETS, NET**

 

The significant components ofour intangible assets and goodwill, by our operating segments, are as follows:

 
| **(in thousands)**                                   | ** ** | **Customer  lists** | ** ** | **Favorable  lease  commitments** | ** ** | **Tradenames  (indefinite  lives)** | ** ** | **Goodwill** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|-----------------------------------|------------|-------------------------------------|------------|--------------|------------|
| ** **                                                | ** ** | ** **          | ** ** | ** **                        | ** ** | ** **                          | ** ** | ** **   | ** ** |
| **Specialty Retail**                                      |       |                |       |                              |       |                                |       |         |       |
| 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 |   |
| Amortization                                              |       | (39,542             | )          | (17,878                           | )          |                                |       |         |       |
| Adjustments related to pre-acquisition tax  contingencies |       | —              |       | —                            |       | —                              |       | 4,805        |       |
| Balance at August 2, 2008                            |       | $                   | 378,516    |                              | $          | 429,441                             |       | $            | 1,406,030  |   | $ | 1,305,058 |   |
|                                                      |       |                |       |                              |       |                                |       |         |       |
| **Direct Marketing**                                      |       |                |       |                              |       |                                |       |         |       |
| 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 |   |
| Amortization                                              |       | (14,772             | )          | —                            |       |                                |       |         |       |
| Writedown of Horchow tradename                            |       | —              |       | —                            |       | (31,261                             | )          | —       |       |
| Adjustments related to pre-acquisition tax  contingencies |       |                |       |                              |       |                                |       | 1,246        |       |
| Balance at August 2, 2008                            |       | $                   | 44,415     |                              | $          | —                              |       | $            | 173,024    |   | $ | 306,133 |   |
|                                                      |       |                |       |                              |       |                                |       |         |       |
| **Total at August 2, 2008**                          |       | $                   | 422,931    |                              | $          | 429,441                             |       | $            | 1,579,054  |   | $ | 1,611,191 |   |

 

In the first quarter of fiscal year 2008, the cumulative effect ofadopting FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes” (FIN 48) resulted in a net increase to our accruals for uncertain taxpositions of $9.1 million for the derecognition of certain tax benefits.  This increase to our accruals was offset by acorresponding increase to goodwill as these uncertainties existed at the timeof the Acquisition. During the fourth quarter, we entered into a negotiatedsettlement with a state tax authority regarding a state non-filing positionwhich resulted in a reduction to our gross unrecognized tax benefits of $7.2million and a corresponding decrease to goodwill of $3.0 million related to theresolution of uncertainties that existed at the time of the Acquisition.

 

In the fourth quarters of fiscal years 2008and 2007, we recorded $31.3 million and $11.5 million pretax impairment chargesrelated to the writedown to fair value of the net carrying value of the Horchowtradename based upon lower revenues and royalty rate expectations with respectto the Horchow brand in light of current operating performance and futureoperating expectations.  At August 2,2008, the recorded fair value of the Horchow tradename is $16.6 million.

 

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**NOTE 8. ACCRUED LIABILITIES**

 

Thesignificant components of accrued liabilities are as follows:

 
| ** **                               | ** ** | **(Successor)**          | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                  | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                                     |       |                     |       |   |   |
| Accrued salaries and related liabilities |       | $                        | 51,857     |   | $ | 79,021 |   |
| Amounts due customers                    |       | 60,602                   |       | 51,750 |   |
| Self-insurance reserves                  |       | 44,132                   |       | 44,544 |   |
| Sales returns reserves                   |       | 45,042                   |       | 48,819 |   |
| Interest payable                         |       | 34,756                   |       | 35,146 |   |
| Income taxes payable                     |       | —                   |       | 30,052 |   |
| Sales tax                                |       | 24,047                   |       | 23,429 |   |
| Loyalty program liability                |       | 22,974                   |       | 20,477 |   |
| Other                                    |       | 75,989                   |       | 69,924 |   |
| Total                                    |       | $                        | 359,399    |   | $ | 403,162 |   |

 

**NOTE 9. LONG-TERM DEBT**

 

                The significant components of our long-termdebt are as follows:

 
| ** **                        | ** ** | ** **             | ** ** | **(Successor)**          | ** ** |
|-----------------------------------|------------|------------------------|------------|--------------------------|------------|
| **(in thousands)**           | ** ** | **Interest Rate** | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                              |       |                   |       |                     |       |   |   |
| Senior Secured Term Loan Facility |       | variable               |       | $                        | 1,625,000  |   | $ | 1,625,000 |   |
| 2028 Debentures                   |       | 7.125%                 |       | 121,102                  |       | 120,906 |   |
| Senior Notes                      |       | 9.0%/9.75%             |       | 700,000                  |       | 700,000 |   |
| Senior Subordinated Notes         |       | 10.375%                |       | 500,000                  |       | 500,000 |   |
| Long-term debt                    |       |                   |       | $                        | 2,946,102  |   | $ | 2,945,906 |   |

 

                ***SeniorSecured Asset-Based Revolving Credit Facility.***  On October 6, 2005, in connection withthe Acquisition, NMG entered into a credit agreement and related security andother agreements for a senior secured Asset-Based Revolving Credit Facilitywith Deutsche Bank Trust Company Americas as administrative agent andcollateral agent. The Asset-Based Revolving Credit Facility provides financingof up to $600.0 million, subject to a borrowing base equal to at any timethe lesser of 80% of eligible inventory (valued at the lower of cost or marketvalue) and 85% of net orderly liquidation value of the eligible inventory, lesscertain reserves. The Asset-Based Revolving Credit Facility includes borrowingcapacity available for letters of credit and for borrowings on same-day notice.

 

As of August 2, 2008, NMGhad $576.0 million of unused borrowing availability under the Asset-BasedRevolving Credit Facility based on a borrowing base of over $600.0 millionand after giving effect to $24.0 million used for letters of credit.

 

The Asset-Based RevolvingCredit Facility provides that NMG has the right at any time to request up to$200.0 million of additional commitments, but the lenders are under noobligation to provide any such additional commitments, and any increase incommitments will be subject to customary conditions precedent. If NMG were torequest any such additional commitments and the existing lenders or new lenderswere to agree to provide such commitments, the Asset-Based Revolving CreditFacility size could be increased to up to $800.0 million, but NMG’sability to borrow would still be limited by the amount of the borrowing base.

 

Borrowings under the Asset-BasedRevolving Credit Facility bear interest at a rate per annum equal to, at NMG’soption, 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 LIBORrate, subject to certain adjustments, in each case plus an applicable margin.The applicable margin is 0% with respect to base rate borrowings and up to1.75% with respect to LIBOR borrowings. The applicable margin is subject toadjustment based on the historical availability under the Asset-Based RevolvingCredit Facility. In addition, NMG is required to pay a commitment fee of 0.375%per annum in respect of the 

 

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unutilized commitments. If the averagerevolving loan utilization is 50% or more for any applicable period, thecommitment fee will be reduced to 0.250% for such period. NMG must also paycustomary letter of credit fees and agency fees.

 

If at any time the aggregateamount of outstanding loans, unreimbursed letter of credit drawings and undrawnletters of credit under the Asset-Based Revolving Credit Facility exceeds thelesser of (i) the commitment amount and (ii) the borrowing base, NMGwill be required to repay outstanding loans or cash collateralize letters ofcredit in an aggregate amount equal to such excess, with no reduction of thecommitment amount. If the amount available under the Asset-Based RevolvingCredit Facility is less than $60 million or an event of default hasoccurred, NMG will be required to repay outstanding loans and cashcollateralize letters of credit with the cash NMG would then be required todeposit daily in a collection account maintained with the agent under the Asset-BasedRevolving Credit Facility. NMG may voluntarily reduce the unutilized portion ofthe commitment amount and repay outstanding loans at any time without premiumor penalty other than customary “breakage” costs with respect to LIBOR loans.There is no scheduled amortization under the Asset-Based Revolving CreditFacility; the principal amount of the loans outstanding is due and payable infull on October 6, 2010.

 

All obligations under the Asset-BasedRevolving Credit Facility are guaranteed by the Company and certain of NMG’sexisting and future domestic subsidiaries. As of August 2, 2008, theliabilities of NMG’s non-guarantor subsidiaries totaled approximately$0.2 million and the assets of NMG’s non-guarantor subsidiaries aggregatedapproximately $1.2 million. All obligations under NMG’s Asset-BasedRevolving Credit Facility, and the guarantees of those obligations, aresecured, subject to certain significant exceptions, by substantially all of theassets of the Company, NMG and the subsidiaries that have guaranteed the Asset-BasedRevolving Credit Facility (subsidiary guarantors), including:

 

·                  a first-priority securityinterest in personal property consisting of inventory and related accounts,cash, deposit accounts, all payments received by NMG or the subsidiaryguarantors from credit card clearinghouses and processors or otherwise inrespect of all credit card charges for sales of inventory by NMG and thesubsidiary guarantors, certain related assets and proceeds of the foregoing;and

 

·                  a second-priority pledgeof 100% of NMG’s capital stock and certain of the capital stock held by NMG,the Company or any subsidiary guarantor (which pledge, in the case of anyforeign subsidiary is limited to 100% of the non-voting stock (if any) and 65%of the voting stock of such foreign subsidiary); and

 

·                  a second-priority securityinterest in, and mortgages on, substantially all other tangible and intangibleassets of NMG, the Company and each subsidiary guarantor, including asignificant portion of NMG’s owned and leased real property (which currentlyconsists of approximately half of NMG’s full-line retail stores) and equipment.

 

Capital stock and othersecurities of a subsidiary of NMG that are owned by NMG or any subsidiaryguarantor will not constitute collateral under NMG’s Asset-Based RevolvingCredit Facility to the extent that such securities cannot secure NMG’s 2028Debentures or other secured public debt obligations without requiring thepreparation and filing of separate financial statements of such subsidiary inaccordance with applicable Securities and Exchange Commission’s rules. As aresult, the collateral under NMG’s Asset-Based Revolving Credit 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 Asset-Based RevolvingCredit Facility contains a number of covenants that, among other things andsubject to certain significant exceptions, restrict its ability and the abilityof its subsidiaries to:

 

·                  incur additionalindebtedness;

 

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

 

·                  make investments, loans,advances and acquisitions;

 

·                  create restrictions on thepayment of dividends or other amounts to NMG from its subsidiaries that are notguarantors;

 

·                  engage in transactionswith NMG’s affiliates;

 

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

 

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·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and leaseback transactions.

 

The covenants limiting dividends and otherrestricted payments; investments, loans, advances and acquisitions; andprepayments or redemptions of other indebtedness, each permit the restrictedactions in an unlimited amount, subject to the satisfaction of certain paymentconditions, principally that NMG must have at least $75.0 million of proforma excess availability under the Asset-Based Revolving Credit Facility andthat NMG must be in pro forma compliance with the fixed charge coverage ratiodescribed below.

 

Although the credit agreement governing theAsset-Based Revolving Credit Facility does not require NMG to comply with anyfinancial ratio maintenance covenants, if less than $60.0 million wereavailable to be borrowed under the Asset-Based Revolving Credit Facility at anytime, NMG would not be permitted to borrow any additional amounts unless itspro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as suchterms are 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 LoanFacility.***  On October 6,2005, in connection with the Acquisition, 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. NMG voluntarily repaid $100.0 millionprincipal amount of the loans under its Senior Secured Term Loan Facility in fiscalyear 2006 and $250 million in fiscal year 2007.

 

At August 2, 2008,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and (2) thefederal funds effective rate plus 1/2 of1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus anapplicable margin. At August 2, 2008, the applicable margin with respect tobase rate borrowings was 0.75% and the applicable margin with respect to LIBORborrowings was 1.75%. The interest rate on the outstanding borrowings pursuantto the Senior Secured Term Loan Facility was 4.42% at August 2, 2008.

 

The credit agreement governing the Senior SecuredTerm Loan Facility requires NMG to prepay outstanding term loans with 50%(which percentage will be reduced to 25% if NMG’s total leverage ratio is lessthan a specified ratio and will be reduced to 0% if NMG’s total leverage ratiois less than a specified ratio) of its annual excess cash flow (as defined inthe credit agreement). For fiscal years 2008 and 2007, NMG was not required toprepay any outstanding term loans pursuant to the annual excess cash flowrequirements.  If a change of control (asdefined in the credit agreement) occurs, NMG will be required to offer toprepay all outstanding term loans, at a prepayment price equal to 101% of theprincipal amount 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 loansunder the Senior Secured Term Loan Facility at any time without premium orpenalty other than customary “breakage” costs with respect to LIBOR loans.There is no scheduled amortization under the Senior Secured Term Loan Facility.The principal amount of the loans outstanding is due and payable in full on April 6,2013.

 

All obligations under the Senior Secured TermLoan Facility 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 under theSenior Secured Term Loan Facility, and the guarantees of those obligations, aresecured, subject to certain significant exceptions, by substantially all of theassets of the Company, NMG and the subsidiary guarantors, including:

 

·                  a first-priority pledge of100% of NMG’s capital stock and certain of the capital stock held by NMG, theCompany or any subsidiary guarantor (which pledge, in the case of any foreignsubsidiary is limited to 100% of the non-voting stock (if any) and 65% of thevoting stock of such foreign subsidiary); and

 

·                  a first-priority securityinterest in, and mortgages on, substantially all other tangible and intangibleassets of NMG, the Company and each subsidiary guarantor, including asignificant portion of NMG’s owned and leased real property (which currentlyconsists of approximately half of NMG’s full-line retail stores) and equipment,but excluding, among other things, the collateral described in the followingbullet point; and

 

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·                  a second-priority securityinterest in personal property consisting of inventory and related accounts,cash, deposit accounts, all payments received by NMG or the subsidiaryguarantors from credit card clearinghouses and processors or otherwise inrespect of all credit card charges for sales of inventory by NMG and thesubsidiary guarantors, certain related assets and proceeds of the foregoing.

 

Capital stock and other securities of asubsidiary of NMG that are owned by NMG or any subsidiary guarantor will notconstitute collateral under NMG’s Senior Secured Term Loan Facility to theextent that such securities cannot secure the 2028 Debentures or other securedpublic 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 Senior Secured Term LoanFacility 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.

 

The credit agreement governing the SeniorSecured Term Loan Facility contains a number of negative covenants that aresubstantially similar to those governing the Senior Notes and additionalcovenants related to the security arrangements for the Senior Secured Term LoanFacility. The credit agreement also contains customary affirmative covenantsand events of default.

 

***2028 Debentures.***  In May 1998, NMG issued$125.0 million aggregate principal amount of its 7.125% 2028 Debentures.In connection with the Acquisition, NMG equally and ratably secured the 2028Debentures by a first lien security interest on certain collateral subject toliens granted under NMG’s Senior Secured Credit Facilities constituting (a) (i) 100%of the capital stock of certain of NMG’s existing and future domestic subsidiaries,and (ii) 100% of the non-voting stock and 65% of the voting stock ofcertain of NMG’s existing and future foreign subsidiaries and (b) certainof NMG’s principal properties that include approximately half of NMG’sfull-line stores, in each case, to the extent required by the terms of theindenture governing the 2028 Debentures. The 2028 Debentures contain covenantsthat restrict NMG’s ability to create liens and enter into sale and lease backtransactions. The collateral securing the 2028 Debentures will be released uponthe release of liens on such collateral under NMG’s Senior Secured CreditFacilities and any other debt (other than the 2028 Debentures) secured by suchcollateral. Capital stock and other securities of a subsidiary of NMG that areowned by NMG or any subsidiary will not constitute collateral under the 2028Debentures to the extent such property does not constitute collateral under NMG’sSenior Secured Credit Facilities as described above. The 2028 Debentures areguaranteed on an unsecured, senior basis by the Company.  NMG’s 2028 Debentures mature on June 1,2028.

 

The fair value of 2028 Debentures at August 2,2008 was approximately $112.5 million.

 

***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 Acquisition, as the surviving corporation in theAcquisition, 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 15and October 15, commencing on January 15, 2006.

 

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

 

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NMG is not required to make any mandatoryredemption or sinking fund payments with respect to the Senior Notes, but undercertain circumstances, 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 Notesare not redeemable at NMG’s option prior to October 15, 2010. From andafter October 15, 2010, NMG may redeem the Senior Notes, in whole or inpart, at a redemption price equal to 104.5% of principal amount, declining annuallyto 100% of the principal amount on October 15, 2013, plus accrued andunpaid interest, and Additional Interest (as defined in the Senior Indenture),if any, thereon to the applicable redemption date.

 

Prior to October 15, 2008, NMG may, atits option, subject to certain conditions, redeem up to 35% of the originalaggregate principal amount of Senior Notes at a redemption price equal to 109%of the aggregate principal amount thereof, plus accrued and unpaid interest,and Additional Interest, if any, thereon to the redemption date, with the netcash 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 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 in the Senior Indenture), each holder of the Senior Notes has theright to require NMG to repurchase some or all of such holder’s Senior Notes ata price in cash equal to 101% of the aggregate principal amount thereof plusaccrued and unpaid interest, and Additional Interest, if any, to the date ofpurchase.

 

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

 

·                  incur additionalindebtedness;

 

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

 

·                  make investments;

 

·                  create restrictions on thepayment of dividends or other amounts to NMG from its restricted subsidiariesthat are not guarantors of the notes;

 

·                  engage in transactionswith NMG’s affiliates;

 

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

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and leaseback transactions.

 

The Senior Indenture also provides for eventsof 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.

 

The fair value of NMG’s Senior Notes at August 2,2008 was approximately $686.0 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 Acquisition, as thesurviving 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.

 

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

 

NMG is not required to make any mandatoryredemption or sinking fund payments with respect to the Senior SubordinatedNotes, but, under certain circumstances, NMG may be required to offer topurchase Senior Subordinated Notes as described below. The Company may fromtime to time acquire Senior Subordinated Notes by means other than aredemption, whether by tender offer, in open market purchases, throughnegotiated transactions or otherwise, in accordance with applicable securitieslaws.

 

Except as described below, the SeniorSubordinated Notes are not redeemable at NMG’s option prior to October 15,2010. From and after October 15, 2010, NMG may redeem the SeniorSubordinated Notes, in whole or in part, at a redemption price equal to105.188% of principal amount, declining annually to 100% of principal amount onOctober 15, 2013, plus accrued and unpaid interest, and AdditionalInterest (as defined in the Senior Subordinated Indenture), if any, thereon tothe applicable redemption date.

 

Prior to October 15, 2008, NMG may, atits option, subject to certain conditions, redeem up to 35% of the originalaggregate principal amount of Senior Subordinated Notes at a redemption priceequal to 110.375% of the aggregate principal amount thereof, plus accrued andunpaid interest, and Additional Interest, if any, thereon to the redemptiondate, with the net cash proceeds of one or more equity offerings of NMG or anydirect or indirect parent of NMG to the extent such net proceeds arecontributed to NMG.

 

At any time prior to October 15, 2010,NMG also may redeem all or a part of the Senior Subordinated Notes at aredemption price equal to 100% of the principal amount of Senior SubordinatedNotes redeemed plus an applicable premium, as provided in the SeniorSubordinated Indenture, and accrued and unpaid interest and AdditionalInterest, if any, to the redemption date.

 

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

 

The indenture governing the SeniorSubordinated Notes contains covenants substantially similar to those applicableto NMG’s Senior Notes described above. The Senior Subordinated Indenture alsoprovides for events of default, which, if any of them occurs, would permit orrequire the principal, premium, if any, interest and any other monetaryobligations on all outstanding Senior Notes to be due and payable immediately,subject to certain exceptions.

 

Thefair value of NMG’s Senior Subordinated Notes at August 2, 2008 wasapproximately $490.0 million.

 

***Redemption of 2008 Notes.***  In May 1998, NMG issued$125.0 million aggregate principal amount of its 2008 Notes. Upon closingof the Acquisition, NMG called its 2008 Notes for redemption pursuant to theirterms. On November 7, 2005, NMG used $134.7 million of reserved cashto redeem its 2008 Notes, which included a call premium of $6.2 millionplus accrued interest of $3.5 million through the redemption date.

 

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***Maturities of Long-TermDebt.***  At August 2,2008, annual maturities of long-term debt during the next five fiscal years andthereafter are as follows (in millions):

 
| 2009       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2010       |   | —  |   |
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| 2013       |   | 1,625.0 |   |
| Thereafter |   | 1,321.1 |   |

 

The above table does not reflect futureexcess cash flow prepayments, if any, that may be required under the SeniorSecured Term Loan Facility.

 

***Interest Rate Swaps.***  NMG uses derivative financial instruments tohelp manage our interest rate risk. Effective December 6, 2005, NMGentered into floating to fixed interest rate swap agreements for an aggregatenotional amount of $1,000.0 million to limit our exposure to interest rateincreases related to a portion of our floating rate indebtedness. The interestrate swap agreements terminate after five years.  At August 2, 2008, the fair value of NMG’sinterest rate swap agreements was a loss of approximately $34.4 million,which amount is included in other long-term liabilities.

 

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 (loss) income. At August 2, 2008, we have$21.8 million of unrecognized losses, net of tax, on our interest rate swapagreements included in accumulated other comprehensive (loss) income.

 

As a result of the swapagreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.524% to 6.733% per quarter through 2010 and result in an average fixed rateof 6.608%.

 

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

 
| ** **                            | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                             |
|---------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|--------------------------------------------------------|
| **(in thousands)**               | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
|                                  |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Asset-Based Revolving Credit Facility |       | $                                                 | —     |                                             | $                 | —                                                 |   | $ | 1,332 |   |   | $ | — |   |
| Senior Secured Term Loan Facility     |       | 106,504                                           |       | 128,380                                          |              | 111,662                                                |   |   | — |   |
| 2028 Debentures                       |       | 8,903                                             |       | 8,915                                            |              | 7,266                                                  |   |   | 1,542 |   |
| Senior Notes                          |       | 63,000                                            |       | 63,000                                           |              | 51,421                                                 |   |   | — |   |
| Senior Subordinated Notes             |       | 51,875                                            |       | 51,875                                           |              | 42,339                                                 |   |   | — |   |
| 2008 Notes                            |       | —                                            |       | —                                           |              | 638                                                    |   |   | 1,439 |   |
| Amortization of debt issue costs      |       | 14,217                                            |       | 14,141                                           |              | 11,728                                                 |   |   | 96 |   |
| Other                                 |       | 3,275                                             |       | 3,689                                            |              | 111                                                    |   |   | 205 |   |
| Total interest expense                |       | 247,774                                           |       | 270,000                                          |              | 226,497                                                |   |   | 3,282 |   |
| Less:                                 |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Interest income                       |       | 4,933                                             |       | 7,370                                            |              | 5,386                                                  |   |   | 3,046 |   |
| Capitalized interest                  |       | 3,036                                             |       | 2,825                                            |              | 3,446                                                  |   |   | 1,146 |   |
| Interest expense (income), net        |       | $                                                 | 239,805    |                                             | $                 | 259,805                                                |   | $ | 217,665 |   |   | $ | (910 | ) |

 

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**NOTE 10.  OTHER (INCOME) EXPENSE, NET**

 

***Other Income.*** In the first quarter offiscal year 2008, we recorded a one-time pension curtailment gain of $32.5million, or 0.7% of revenues, as a result of our decision to freeze certainPension and SERP benefits as of December 31, 2007.

 

In the first quarter of fiscal year 2007, we received considerationaggregating $4.2 million, or 0.1% of revenues, in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot. Weaccounted for our investment in Wedding Channel.com under the cost method. Inprior years, we had previously reduced our carrying value of this investment tozero.

 

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.

 

***Other Expense.***In the fourth quarters offiscal years 2008 and 2007, we recorded $31.3 million and $11.5 million pretaximpairment charges related to the writedown to fair value of the net carryingvalue of the Horchow tradename based upon lower revenues and royalty rateexpectations with respect to the Horchow brand in light of current operatingperformance and future operating expectations.

 

For the nine weeks ended October 1, 2005, we recorded$23.5 million of transaction and other costs incurred in connection withthe Acquisition. These costs consist primarily of $4.5 million ofaccounting, investment banking, legal and other costs associated with theAcquisition and a $19.0 million non-cash charge for stock compensationresulting from the accelerated vesting of Predecessor stock options andrestricted stock in connection with the Acquisition.

 

**NOTE 11.  COMMON SHAREHOLDERS’ EQUITY**

 

**Successor**

 

***Carryover Basis Adjustment forManagement Shareholders.***  Executive management participants heldcertain equity interests, including stock options, in the Predecessor prior tothe Acquisition and continue to hold equity interests in the  Company, representing indirect equityinterests in the Successor after the Acquisition.  In accordance with the provisions of EmergingIssues Task Force No. 88-16, “Basis in Leveraged Buyout Acquisition,” thebasis of executive management’s indirect interests in the Successor after theAcquisition is carried over at the basis of their interests in the Predecessorprior to the Acquisition. 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 Acquisition.

 

***Successor Stock-BasedCompensation Accounting.***  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 overfour to five years and expire 10 years from the date of grant.

 

A summary of the status of our stock optionplan as of August 2, 2008, July 28, 2007 and July 29, 2006 andchanges during the periods ended on these dates is as follows:

 
| ** **                                | ** ** | **Fiscal year ended  August 2, 2008** | ** ** | **Fiscal year ended  July 28, 2007** | ** ** | **Fiscal year ended  July 29, 2006** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                | ** ** | **Shares**                                                | ** ** | **Weighted  Average  Exercise  Price**                   | ** ** | **Shares**                                               | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at beginning of fiscal year   |       | 83,634.3                                                  |       | $                                                        | 1,430      |                                                     | 81,716.3   |   | $ | 1,416 |   | — |   | $ | — |   |
| Granted                                   |       | 260.0                                                     |       | 2,684                                                    |       | 2,496.0                                                  |       | 1,942 |   | 81,716.3 |   | 1,416 |   |
| Exercised                                 |       | —                                                    |       | —                                                   |       | (578.0                                                   | )          | 1,590 |   | — |   | — |   |
| Forfeited                                 |       | (747.7                                                    | )          | 1,597                                                    |       | —                                                   |       | — |   | — |   | — |   |
| Outstanding at end of fiscal year         |       | 83,146.6                                                  |       | $                                                        | 1,553      |                                                     | 83,634.3   |   | $ | 1,430 |   | 81,716.3 |   | $ | 1,416 |   |
| Options exercisable at end of fiscal year |       | 46,684.4                                                  |       | $                                                        | 1,375      |                                                     | 29,764.1   |   | $ | 1,233 |   | 7,283.3 |   | $ | 359 |   |

 

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The exercise price of approximately 50% ofour options escalate at a 10% compound rate per year until the earlier to occurof (i) exercise, (ii) the fifth anniversary of the date of grant or (iii) theoccurrence of a change in control. However, in the event the Sponsors cause thesale of shares of the Company to an unaffiliated entity, the exercise pricewill cease to accrete at the time of the sale with respect to a pro rataportion of the accreting options.

 

All grants of stock options have an exercise price equal to the fairmarket value of our common stock on the date of grant.  Because we are privately held and there is nopublic market for our common stock, the fair market value of our common stockis determined by our Compensation Committee at the time option grants areawarded.  In determining the fair valueof our common stock, the Compensation Committee considers such factors as theCompany’s actual and projected financial results, the principal amount of theCompany’s indebtedness, valuations of the Company performed by third partiesand other factors it believes are material to the valuation process.

 

We use the Black-Scholes option-pricing modelto determine the fair value of our options as of the date of grant inaccordance with the provisions of SFAS 123(R). A summary of fiscal years 2008, 2007 and 2006 grants and fair valueassumptions is as follows:

 
| ** **                            | ** ** | **Fiscal Year 2008  Grants** | ** ** | **Fiscal Year 2007  Grants**  | ** ** | **Fiscal Year 2006  Grants** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **Fair Value  Options**           | ** ** | **Accreting  Exercise  Price  Options** | ** ** | **Fair Value  Options**           | ** ** | **Accreting  Exercise  Price  Options** | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise  Price  Options** | ** ** |
| Options Granted                       |       | 130.0                                  |       | 130.0                                   |       | 1,248.0                                |       | 1,248.0 |   | 43,594.6 |   | 38,121.7 |   |
| Exercise Price at August 2, 2008 |       | $                                      | 2,684      |                                    | $          | 2,684                                  |       | $ | 1,942 |   | $ | 2,136 |   | $ | 1,445 |   | $ | 1,749 |   |
| Term                                  |       | 5                                      |       | 5                                       |       | 5                                      |       | 5 |   | 5 |   | 5 |   |
| Volatility                            |       | 30.0                                   | %          | 30.0                                    | %          | 30.0                                   | %          | 30.0 | % | 29.7 | % | 29.7 | % |
| Risk-Free Rate                        |       | 3.5                                    | %          | 3.5                                     | %          | 4.5                                    | %          | 4.5 | % | 4.2 | % | 4.2 | % |
| Dividend Yield                        |       | —                                 |       | —                                  |       | —                                 |       | — |   | — |   | — |   |
| Fair Value                            |       | $                                      | 882        |                                    | $          | 433                                    |       | $ | 676 |   | $ | 341 |   | $ | 494 |   | $ | 247 |   |

 

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

 

We recognize compensation expense for stockoptions straight-line over the vesting period. We recognized non-cash stock compensation expense of $6.1 millionfor the fiscal year ended August 2, 2008, $5.9 million in fiscal year 2007and $4.0 million for the forty-three weeks ended July 29, 2006, which isincluded in selling, general and administrative expenses. At August 2,2008, unearned non-cash stock-based compensation that we expect to recognize asexpense over the next 5 years aggregates approximately $12.7 million.

 

**Predecessor**

 

***Common Stock Incentive Plans.***  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 of October 5,2005 were accelerated in connection with the Acquisition resulting in a$19.0 million non-cash charge for stock compensation.

 

Compensation cost forPredecessor restricted stock and purchased restricted stock awards wasrecognized in an amount equal to the difference between the exercise price ofthe award and fair value at the date of grant. The Predecessor recorded suchexpense on a straight-line basis over the expected life of the award with theoffsetting entry to additional paid-in capital. For performance acceleratedrestricted stock, the expected life was determined based on the best estimateof the number of years from the grant date to the date at which it was probablethat the 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.

 

Predecessor options of 3.1 million shares with aweighted-average exercise price of $38.12 exercised in the period ended October 1,2005 were cashed out in connection with the Acquisition, with the same economiceffect as an exercise and sale for the Acquisition consideration.

 

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**NOTE 12.  INCOME TAXES**

 

The significant componentsof income tax expense are as follows:

 
| ** **              | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                             |
|-------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|--------------------------------------------------------|
| **(in thousands)** | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
|                    |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Current:                |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Federal                 |       | $                                                 | 108,467    |                                             | $                 | 127,754                                                |   | $ | 71,807 |   |   | $ | 31,022 |   |
| State                   |       | 19,976                                            |       | 15,063                                           |              | 8,408                                                  |   |   | 2,522 |   |
|                    |       | 128,443                                           |       | 142,817                                          |              | 80,215                                                 |   |   | 33,544 |   |
| Deferred:               |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Federal                 |       | (37,693                                           | )          | (53,763                                          | )                 | (58,291                                                | ) |   | (6,501 | ) |
| State                   |       | (6,934                                            | )          | (6,759                                           | )                 | (7,329                                                 | ) |   | (817 | ) |
|                    |       | (44,627                                           | )          | (60,522                                          | )                 | (65,620                                                | ) |   | (7,318 | ) |
| Income tax expense      |       | $                                                 | 83,816     |                                             | $                 | 82,295                                                 |   | $ | 14,595 |   |   | $ | 26,226 |   |

 

A reconciliation of incometax expense to the amount calculated based on the federal and state statutoryrates is as follows:

 
| ** **                                                                             | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                             |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|--------------------------------------------------------|
| **(in thousands)**                                                                | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
|                                                                                   |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Income tax expense at statutory rate                                                   |       | $                                                 | 79,319     |                                             | $                 | 75,954                                                 |   | $ | 14,366 |   |   | $ | 24,910 |   |
| State income taxes, net of federal income tax benefit                                  |       | 5,821                                             |       | 6,989                                            |              | 1,411                                                  |   |   | 2,177 |   |
| Tax expense (benefit) related to tax settlements and other changes in  tax liabilities |       | 159                                               |       | 1,925                                            |              | (113                                                   | ) |   | (222 | ) |
| Impact of non-taxable income                                                           |       | (1,709                                            | )          | (2,422                                           | )                 | (1,378                                                 | ) |   | (1,058 | ) |
| Impact of non-deductible expenses                                                      |       | 226                                               |       | 326                                              |              | 256                                                    |   |   | 607 |   |
| Other                                                                                  |       | —                                            |       | (477                                             | )                 | 53                                                     |   |   | (188 | ) |
| Total                                                                                  |       | $                                                 | 83,816     |                                             | $                 | 82,295                                                 |   | $ | 14,595 |   |   | $ | 26,226 |   |
| Effective tax rate                                                                     |       | 37.0                                              | %          | 37.9                                             | %                 | 35.6                                                   | % |   | 36.8 | % |

 

Our effective tax rate forfiscal year 2008 was favorably impacted by a decrease in tax liabilities forsettlements with taxing authorities.  Oureffective tax rate for fiscal year 2007 was negatively impacted by increases intax liabilities for settlements with taxing authorities.  Our combined effective tax rate for fiscalyear 2006 of 36.4% was favorably impacted by a higher level of tax-exemptinterest income earned.

 

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Significant components of our net deferred income tax asset (liability)are as follows:

 
| **(in thousands)**                    | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | ** **               | ** ** | ** **              | ** ** |
| Deferred income tax assets:                |       |                     |       |                    |       |
| Accruals and reserves                      |       | $                        | 28,445     |                    | $          | 29,202 |   |
| Employee benefits                          |       | 89,113                   |       | 86,842                  |       |
| Other                                      |       | 28,021                   |       | 11,174                  |       |
| Total deferred tax assets                  |       | $                        | 145,579    |                    | $          | 127,218 |   |
|                                       |       |                     |       |                    |       |
| Deferred income tax liabilities:           |       |                     |       |                    |       |
| Inventory                                  |       | $                        | (4,685     | )                       | $          | (10,215 | ) |
| Depreciation and amortization              |       | (71,890                  | )          | (83,820                 | )          |
| Intangible assets                          |       | (950,141                 | )          | (990,745                | )          |
| Other                                      |       | (16,174                  | )          | (5,692                  | )          |
| Total deferred tax liabilities             |       | (1,042,890               | )          | (1,090,472              | )          |
| Net deferred income tax asset (liability)  |       | $                        | (897,311   | )                       | $          | (963,254 | ) |
|                                       |       |                     |       |                    |       |
| Net deferred income tax asset (liability): |       |                     |       |                    |       |
| Current                                    |       | $                        | 32,659     |                    | $          | 39,728 |   |
| Non-current                                |       | (929,970                 | )          | (1,002,982              | )          |
| Total                                      |       | $                        | (897,311   | )                       | $          | (963,254 | ) |

 

The net deferred tax liabilityof $897.3 million at August 2, 2008 decreased from a $963.3 million netdeferred liability at July 28, 2007. This decrease was comprised primarily of 1) a $44.6 million deferred taxbenefit for fiscal year 2008 (including $40.6 million related to theamortization of intangible assets recorded in connection with the Acquisition),and 2) a decrease in deferred tax liabilities of $16.7 million relatedprimarily to losses on interest rate swap agreements recorded, net of tax, asdecreases in other comprehensive income in the accompanying statements ofshareholders’ equity. We believe it is more likely than not that we willrealize the benefits of our recorded deferred tax assets.

 

We adopted the provisions of FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN48) in the first quarter of fiscal year 2008. FIN 48 prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return.

 

The cumulative effect of adopting FIN 48resulted in a net increase to our accruals for uncertain tax positions of $9.1million for the derecognition of certain tax benefits previously recorded. Thisincrease to our accruals was offset by a corresponding increase to goodwill asthese uncertainties existed at the time of the Acquisition.  At adoption, the gross amount of unrecognizedtax benefits was $26.7 million, of which $3.5 million of unrecognized taxbenefits would impact our effective tax rate, if recognized.  At August 2, 2008, the gross amount ofunrecognized tax benefits is $21.3 million, of which $1.7 million would impactour effective tax rate, if recognized. We classify interest and penalties as a component of income tax expenseand our liability for accrued interest and penalties is $9.5 million as of August 2,2008.  A reconciliation of the beginningand ending amounts of unrecognized tax benefits is as follows (in millions):

 
| Balance at July 28, 2007                                   |   | $    | 26.7   |   |
|-----------------------------------------------------------------|--------|------|--------|--------|
| Gross amount of increases for current year  tax positions       |   | 1.8  |   |
| Gross amount of decreases for settlements  with tax authorities |   | (7.2 | )      |
| Balance at August 2, 2008                                  |   | $    | 21.3   |   |

 

We file income tax returns in the U.S.federal jurisdiction and various state and local jurisdictions.  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 August 2, 2008 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 ourrecorded tax liabilities for potential audit assessments.  With respect to state and localjurisdictions, with limited exceptions, the Company and its subsidiaries are nolonger subject to income tax audits for fiscal years before 2003.  During the fourth quarter, we entered into anegotiated settlement with a state tax authority regarding a state non-filingposition which resulted in a reduction to our gross unrecognized tax benefitsof $7.2 million and a corresponding decrease to goodwill of $3.0 millionrelated to the resolution of uncertainties that existed at the time of theAcquisition. We believe it is reasonably possible that additional adjustmentsin the amounts of our unrecognized 

 

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tax benefits could occur within the next 12 months as a result ofnegotiated settlements with tax authorities. At this time, we do not believe such adjustments will have a materialimpact on our consolidated financial statements.

 

**NOTE 13.  EMPLOYEE BENEFIT PLANS**

 

***Description ofBenefit Plans.*** We sponsor a defined benefit pension plan (Pension Plan) and an unfundedsupplemental executive retirement plan (SERP Plan) which provides certainemployees additional pension benefits. Benefits under both plans are based onthe employees’ years of service and compensation over defined periods ofemployment.  As more fully describedbelow, we froze benefits offered under our Pension and SERP Plans effective January 1,2008.

 

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

 

We also maintain definedcontribution plans consisting of a 401(k) Plan and, in connection with theredesign of our long-term benefits effective January 1, 2008 as more fullydescribed below, a retirement savings plan (RSP) and defined contributionsupplemental executive retirement plan (Defined Contribution SERP Plan).  Employees make contributions to the 401(k) Planand RSP and we match an employee’s contribution up to a maximum of 6% of theemployee’s compensation subject to statutory limitations for a potentialmaximum of 50% of employee contributions to the 401(k) Plan and 75% ofemployee contributions to the RSP. We also sponsor an unfunded key employeedeferred compensation plan, which provides certain employees additionalbenefits. Our aggregate expense related to these plans was approximately $19.2million in fiscal year 2008, $11.0 million in fiscal year 2007, $8.7 millionfor the forty-three weeks ended July 29, 2006 and $1.8 million for thenine weeks ended October 1, 2005.

 

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

 

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

 

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

 

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

 

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

 

Concurrent with the implementation of the RSP and the DefinedContribution SERP Plan, we froze benefits offered under our Pension and SERPPlans for most employees.  Employees witha minimum of ten years of service and whose ages plus years of service equaledat least 65 (Rule of 65) as of December 31, 2007 were allowed either1) to continue participation in our 401(k) Plan and Pension Plan (and SERPPlan, if eligible) or 2) to freeze certain benefits earned under the PensionPlan (and SERP Plan, if eligible) and participate in the RSP. No employee whomet vesting requirements forfeited benefits earned prior to January 1,2008.

 

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

 

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

 
| ** **                                          | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                         |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|----------------------------------------------------|
| **(in thousands)**                             | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
| ** **                                          | ** ** | ** **                                        | ** ** | ** **                                       | ** **        | ** **                                         | ** ** | ** ** | ** ** | ** ** |
| Pension Plan:                                       |       |                                              |       |                                             |              |                                               |   |   |   |   |
| Service cost                                        |       | $                                                 | 10,815     |                                             | $                 | 14,886                                             |   | $ | 13,320 |   |   | $ | 2,823 |   |
| Interest cost                                       |       | 22,866                                            |       | 22,214                                           |              | 17,365                                             |   |   | 3,468 |   |
| Expected return on plan assets                      |       | (24,626                                           | )          | (23,458                                          | )                 | (18,802                                            | ) |   | (3,636 | ) |
| Net amortization of losses and prior  service costs |       | —                                            |       | —                                           |              | —                                             |   |   | 1,205 |   |
| Pension Plan expense                                |       | $                                                 | 9,055      |                                             | $                 | 13,642                                             |   | $ | 11,883 |   |   | $ | 3,860 |   |
|                                                |       |                                              |       |                                             |              |                                               |   |   |   |   |
| Curtailment gain                                    |       | $                                                 | 26,113     |                                             | $                 | —                                             |   | $ | — |   |   | $ | — |   |
|                                                |       |                                              |       |                                             |              |                                               |   |   |   |   |
| SERP Plan:                                          |       |                                              |       |                                             |              |                                               |   |   |   |   |
| Service cost                                        |       | $                                                 | 1,254      |                                             | $                 | 1,719                                              |   | $ | 1,570 |   |   | $ | 330 |   |
| Interest cost                                       |       | 4,960                                             |       | 4,928                                            |              | 3,685                                              |   |   | 730 |   |
| Net amortization of losses and prior  service costs |       | —                                            |       | —                                           |              | —                                             |   |   | 394 |   |
| SERP Plan expense                                   |       | $                                                 | 6,214      |                                             | $                 | 6,647                                              |   | $ | 5,255 |   |   | $ | 1,454 |   |
|                                                |       |                                              |       |                                             |              |                                               |   |   |   |   |
| Curtailment gain                                    |       | $                                                 | 6,337      |                                             | $                 | —                                             |   | $ | — |   |   | $ | — |   |
|                                                |       |                                              |       |                                             |              |                                               |   |   |   |   |
| Postretirement Plan:                                |       |                                              |       |                                             |              |                                               |   |   |   |   |
| Service cost                                        |       | $                                                 | 124        |                                             | $                 | 57                                                 |   | $ | 38 |   |   | $ | 8 |   |
| Interest cost                                       |       | 1,356                                             |       | 786                                              |              | 708                                                |   |   | 139 |   |
| Net amortization of losses (gains)                  |       | 547                                               |       | (64                                              | )                 | —                                             |   |   | (5 | ) |
| Postretirement Plan expense                         |       | $                                                 | 2,027      |                                             | $                 | 779                                                |   | $ | 746 |   |   | $ | 142 |   |

 

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***Benefit Obligations.***  Our obligations for the Pension Plan, SERPPlan and Postretirement Plan are valued annually as of the beginning of eachfiscal year. With respect to the Pension Plan and the SERP Plan, ourobligations consist of both a projected benefit obligation (PBO) and anaccumulated benefit obligation (ABO). The PBO represents the present value ofbenefits ultimately payable to plan participants for both past and futureservices expected to be provided by the plan participants. The ABO represents thepresent value of benefits payable to plan participants for only servicesrendered at the valuation date. Our obligations pursuant to our Pension Plan,SERP Plan and Postretirement Plan are as follows:

 
| ** **                       | ** ** | **Pension Plan** | ** ** | **SERP Plan**    | ** ** | **Postretirement Plan** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Fiscal years** | ** ** | **Fiscal years** | ** ** | **Fiscal years**        | ** ** |
| ** **                       | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2008**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(in thousands)**          | ** ** | **(Successor)**       | ** ** | **(Successor)**       | ** ** | **(Successor)**              | ** ** |
| Projected benefit obligations:   |       |                  |       |                  |       |                         |       |   |   |   |   |   |   |
| Beginning of year                |       | $                     | 380,235    |                  | $          | 364,720                      |       | $ | 86,146 |   | $ | 78,322 |   | $ | 22,091 |   | $ | 12,975 |   |
| Service cost                     |       | 10,815                |       | 14,886                |       | 1,254                        |       | 1,719 |   | 124 |   | 57 |   |
| Interest cost                    |       | 22,866                |       | 22,214                |       | 4,960                        |       | 4,928 |   | 1,356 |   | 786 |   |
| Actuarial (gain) loss            |       | (22,825               | )          | (9,695                | )          | (5,409                       | )          | 3,076 |   | (2,167 | ) | 9,104 |   |
| Curtailment                      |       | (26,113               | )          | —                |       | (7,091                       | )          | — |   | — |   | — |   |
| Benefits paid, net               |       | (10,749               | )          | (11,890               | )          | (2,294                       | )          | (1,899 | ) | (1,068 | ) | (831 | ) |
| End of year                      |       | $                     | 354,229    |                  | $          | 380,235                      |       | $ | 77,566 |   | $ | 86,146 |   | $ | 20,336 |   | $ | 22,091 |   |
|                             |       |                  |       |                  |       |                         |       |   |   |   |   |   |   |
| Accumulated benefit obligations: |       |                  |       |                  |       |                         |       |   |   |   |   |   |   |
| Beginning of year                |       | $                     | 337,047    |                  | $          | 308,255                      |       | $ | 68,105 |   | $ | 66,890 |   |   |   |   |   |
| End of year                      |       | $                     | 336,016    |                  | $          | 337,047                      |       | $ | 68,253 |   | $ | 68,105 |   |   |   |   |   |

 

A summary of expected benefitpayments related to our Pension Plan, SERP Plan and Postretirement Plan is asfollows:

 
| **(in thousands)** | ** ** | **Pension  Plan** | ** ** | **SERP  Plan** | ** ** | **Postretirement  Plan** | ** ** |
|-------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|
| ** **              | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** |
| Fiscal year 2009        |       | $                 | 12,301     |           | $          | 3,086                    |       | $ | 1,079 |   |
| Fiscal year 2010        |       | 13,684            |       | 3,452          |       | 1,171                    |       |
| Fiscal year 2011        |       | 15,078            |       | 3,789          |       | 1,260                    |       |
| Fiscal year 2012        |       | 16,723            |       | 4,144          |       | 1,340                    |       |
| Fiscal year 2013        |       | 18,526            |       | 4,615          |       | 1,409                    |       |
| Fiscal years 2014-2018  |       | $                 | 119,411    |           | $          | 29,189                   |       | $ | 7,551 |   |

 

***Funding Policy and Plan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law. We were not required to make contributionsto the Pension Plan during fiscal year 2008. However, in the third quarter offiscal year 2008, we made a voluntary $15.0 million contribution to our PensionPlan. In fiscal years 2007 and 2006, we made no contributions to our PensionPlan. Based upon currently available information, we will not be required tomake significant contributions to the Pension Plan during fiscal year 2009.

 

Assets held by the Pension Plan are investedin accordance with the provisions of our approved investment policy. The assetallocation for our Pension Plan at the end of fiscal years 2008 and 2007 andthe target allocation for fiscal year 2009, by asset category, are as follows:

 
| ** **                | ** ** | **Pension Plan**                       | ** ** |
|---------------------------|------------|---------------------------------------------|------------|
| ** **                | ** ** | **Allocation at  July 31,  2008** | ** ** | **Allocation at  July 31,  2007** | ** ** | **2009  Target  Allocation** | ** ** |
| Equity securities         |       | 76                                          | %          | 76 | % | 80 | % |
| Fixed income securities   |       | 24                                          | %          | 22 | % | 20 | % |
| Cash and cash equivalents |       | —                                      |       | 2 | % | — |   |
|                      |       |                                        |       |   |   |   |   |
| 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.

 

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Changes in the assets held by the Pension Plan in fiscal years 2008 and2007 are as follows:

 
| ** **                                | ** ** | **Fiscal years** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **(in thousands)**                   | ** ** | **(Successor)**       | ** ** |
| Fair value of assets at beginning of year |       | $                     | 324,632    |   | $ | 293,720 |   |
| Actual return on assets                   |       | (15,456               | )          | 42,802 |   |
| Contribution                              |       | 15,000                |       | — |   |
| Benefits paid                             |       | (10,749               | )          | (11,890 | ) |
| Fair value of assets at end of year       |       | $                     | 313,427    |   | $ | 324,632 |   |

 

***Funded Status.***  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**        | ** ** |
| ** **                   | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2008**                     | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(in thousands)**      | ** ** | **(Successor)**       | ** ** | **(Successor)**       | ** ** | **(Successor)**              | ** ** |
| Projected benefit obligation |       | $                     | 354,229    |                  | $          | 380,235                      |       | $ | 77,566 |   | $ | 86,146 |   | $ | 20,336 |   | $ | 22,091 |   |
| Fair value of plan assets    |       | 313,427               |       | 324,632               |       | —                       |       | — |   | — |   | — |   |
| Accrued obligation           |       | $                     | (40,802    | )                     | $          | (55,603                      | )          | $ | (77,566 | ) | $ | (86,146 | ) | $ | (20,336 | ) | $ | (22,091 | ) |

 

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

 
| ** **                               | ** ** | **(Successor)**          | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                  | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
| ** **                               | ** ** | ** **               | ** ** | ** ** | ** ** |
| Pension Plan                             |       | $                        | 40,802     |   | $ | 55,603 |   |
| SERP Plan                                |       | 77,566                   |       | 86,146 |   |
| Postretirement Plan                      |       | 20,336                   |       | 22,091 |   |
|                                     |       | 138,704                  |       | 163,840 |   |
| Less: current portion                    |       | (4,165                   | )          | (4,019 | ) |
| Long-term portion of benefit obligations |       | $                        | 134,539    |   | $ | 159,821 |   |

 

We adopted theprovisions of Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans”(SFAS 158), in the fourth quarter of fiscal year 2007 resulting in a netdecrease in the carrying values of our obligations of $28.7 million, whichamount was recorded (net of taxes of $11.3 million) as an increase inaccumulated other comprehensive (loss) income in our statements of shareholders’equity for fiscal year 2007.  In thefourth quarter of fiscal year 2008, we reduced the carrying value of ourrecorded obligations to equal their unfunded status at August 2, 2008 by$8.3 million, which amount was recorded (net of taxes of $3.2 million) as adecrease to accumulated other comprehensive (loss) income in our statements ofshareholders’ equity for fiscal year 2008.

 

In the first quarter of fiscalyear 2008, we reduced our recorded liability for projected benefit obligationspayable by the Pension Plan by $26.1 million and by the SERP Plan by $6.3million to reflect the impact of freezing benefits provided under these plansas of December 31, 2007.

 

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***Assumptions.***  Significant assumptions related to thecalculation of our obligations pursuant to our employee benefit plans includethe discount rate used to calculate the present value of benefit obligations tobe paid in the future, the expected long-term rate of return on assets held bythe Pension Plan, the average rate of compensation increase by Pension Plan andSERP Plan participants and the health care cost trend rate for the PostretirementPlan. 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:

 
| ** **                                        | ** ** | **July 31,  2008** | ** ** | **July 31,  2007** | ** ** | **July 31,  2006** | ** ** | **October 1,  2005** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|
| Pension Plan:                                     |       |                    |       |                    |       |                    |       |                      |       |
| Discount rate                                     |       | 6.75                    | %          | 6.25                    | %          | 6.25                    | %          | 5.75                      | %          |
| 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                                     |       | 6.75                    | %          | 6.25                    | %          | 6.25                    | %          | 5.75                      | %          |
| Rate of future compensation increase              |       | 4.50                    | %          | 4.50                    | %          | 4.50                    | %          | 4.50                      | %          |
| Postretirement Plan:                              |       |                    |       |                    |       |                    |       |                      |       |
| Discount rate                                     |       | 6.75                    | %          | 6.25                    | %          | 6.25                    | %          | 5.75                      | %          |
| Initial health care cost trend rate               |       | 8.00                    | %          | 8.00                    | %          | 8.00                    | %          | 8.00                      | %          |
| Ultimate health care cost trend rate              |       | 8.00                    | %          | 8.00                    | %          | 5.00                    | %          | 5.00                      | %          |

 

*Discount rate.*  The assumed discount rate utilized is basedon a broad sample of Moody’s high quality corporate bond yields as of themeasurement date. The projected benefit payments are matched with the yields onthese bonds to determine an appropriate discount rate for the plan. Thediscount rate is utilized principally in calculating the present value of ourpension obligation and net pension expense. As a result of the increase in thediscount rate from 6.25% at July 31, 2007 to 6.75% at July 31, 2008,the projected benefit obligations related to our employee benefit plansdecreased approximately $32.3 million.

 

The estimated effect of a 0.25%decrease in the discount rate would increase the Pension Plan obligation by$12.9 million, increase the SERP Plan obligation by $2.4 million andincrease the Postretirement Plan obligation by $0.7 million.  The estimated effect of a 0.25% decrease inthe discount rate would increase the annual Pension Plan expense by$0.2 million and increase the SERP Plan annual expense and thePostretirement Plan annual expense by an immaterial amount.

 

*Expectedlong-term rate of return on plan assets.*  The assumed expected long-term rate of returnon assets is the weighted average rate of earnings expected on the fundsinvested or to be invested to provide for the pension obligation. During fiscalyear 2008, we utilized 8.0% as the expected long-term rate of return on planassets. We periodically evaluate the allocation between investment categoriesof the assets held by the Pension Plan. We estimate the expected averagelong-term rate of return on assets based on our future asset performance expectationsusing currently available market and other data and the counsel of our outsideactuaries and advisors. This rate is utilized primarily in calculating theexpected return on plan assets component of the annual pension expense. To theextent the actual rate of return on assets realized over the course of a yearis greater than the assumed rate, that year’s annual pension expense is notaffected. Rather this gain reduces future pension expense over a period ofapproximately 10 to 16 years. To the extent the actual rate of return onassets is less than the assumed rate, that year’s annual pension expense islikewise not affected. Rather this loss increases pension expense overapproximately 10 to 16 years.

 

*Rate offuture compensation 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 fiscal year 2008. This rate is utilized principally in calculatingthe obligation and annual expense for the Pension and SERP Plans. The estimatedeffect of a 0.25% increase in the assumed rate of compensation increase wouldincrease the projected benefit obligation for the Pension Plan by$0.5 million and increase the SERP Plan projected benefit obligation by$0.4 million.  The estimated effectof a 0.25% increase in the assumed rate of compensation increase would increaseannual Pension Plan expense by $0.1 million and increase the SERP Plan annualexpense by an immaterial amount.

 

*Health carecost trend rate.* The assumed health care cost trend rate represents our estimate of theannual rates of change in the costs of the health care benefits currentlyprovided by the Postretirement Plan. The health care cost trend rate implicitlyconsiders estimates of health care inflation, changes in health careutilization and delivery patterns, technological advances and changes in thehealth status of the plan participants. We utilized a health care cost trendrate of 8% as of July 31, 2008, remaining constant over time to yield anultimate health care cost trend rate of 8%. If the assumed health care costtrend rate were increased one percentage point, Postretirement Plan costs forfiscal year 2008 would have been $0.2 million higher and the accumulatedpostretirement benefit obligation as of August 2, 2008 would have been$2.5 million higher. If the assumed health care trend rate were decreasedone percentage point, Postretirement Plan costs for 2008 would have been$0.2 million lower and the accumulated postretirement benefit obligationas of August 2, 2008 would have been $2.1 million lower.

 

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**NOTE 14.  COMMITMENTS AND CONTINGENCIES**

 

***Leases.***  We lease certain property and equipment undervarious non-cancelable capital and operating leases. The leases provide formonthly fixed rentals and/or contingent rentals based upon sales in excess ofstated amounts and normally require us to pay real estate taxes, insurance,common area maintenance costs and other occupancy costs. Generally, the leaseshave primary terms ranging from two to 99 years and include renewaloptions ranging from one to 80 years.

 

Rent expense and relatedoccupancy costs under operating leases is as follows:

 
| ** **                                   | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                         |
|----------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|----------------------------------------------------|
| **(in thousands)**                      | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks  ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
|                                         |       |                                              |       |                                             |              |                                               |   |   |   |   |
| Minimum rent                                 |       | $                                                 | 53,000     |                                             | $                 | 46,900                                             |   | $ | 36,200 |   |   | $ | 6,600 |   |
| Contingent rent                              |       | 29,700                                            |       | 28,600                                           |              | 22,900                                             |   |   | 4,700 |   |
| Other  occupancy costs                       |       | 13,600                                            |       | 13,700                                           |              | 10,400                                             |   |   | 2,000 |   |
| Amortization of deferred real estate credits |       | (3,700                                            | )          | (1,700                                           | )                 | (200                                               | ) |   | (800 | ) |
| Total rent expense                           |       | $                                                 | 92,600     |                                             | $                 | 87,500                                             |   | $ | 69,300 |   |   | $ | 12,500 |   |

 

Future minimum rentalcommitments, excluding renewal options, under non-cancelable leases are asfollows: fiscal year 2009—$56.3 million; fiscal year2010—$54.8 million; fiscal year 2011—$51.7 million; fiscal year2012—$47.7 million; fiscal year 2013—$45.7 million; all fiscal yearsthereafter—$682.5 million.

 

***Long-term Incentive Plan.***  The Company has a long-term incentive plan(Long-term Incentive Plan) that provides for a cash incentive payable upon achange of control, as defined, subject to the attainment of certain performanceobjectives to certain employees. Performance objectives and targets are based on cumulative EBITDApercentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performanceperiod will be credited to a book account and will earn interest at acontractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% oftotal outstanding common stock.  As of August 2,2008, the vested participant balance in the Long-Term Incentive Plan aggregated$3.7 million.

 

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

 

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

 

***Other.***  We had approximately $24.0 million ofoutstanding irrevocable letters of credit relating to purchase commitments andinsurance and other liabilities at August 2, 2008. We had approximately$4.0 million in surety bonds at August 2, 2008 relating primarily tomerchandise imports, state sales tax and utility requirements.

 

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**NOTE 15.  ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME**

 

The following table shows thecomponents of accumulated other comprehensive (loss) income (amounts arerecorded net of related income taxes):

 
| ** **                                           | ** ** | **(Successor)**          | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|
| **(in thousands)**                              | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** |
|                                                 |       |                     |       |   |   |
| Unrealized (loss) gain on financial  instruments     |       | $                        | (21,755    | ) | $ | 3,733 |   |
| Change in unfunded benefit obligations               |       | 12,302                   |       | 17,365 |   |
| Other                                                |       | 289                      |       | 131 |   |
| Total accumulated other comprehensive  (loss) income |       | $                        | (9,164     | ) | $ | 21,229 |   |

 

**NOTE 16.  SEGMENT REPORTING**

 

We have identified two reportable segments:Specialty Retail stores and Direct Marketing. The Specialty Retail storessegment includes all Neiman Marcus and Bergdorf Goodman retail stores,including Neiman Marcus clearance stores. The Direct Marketing segment conductsboth online and print catalog operations under the Neiman Marcus, BergdorfGoodman and Horchow brand names.  Boththe Specialty Retail stores and Direct Marketing segments derive their revenuesfrom the sales of high-end fashion apparel, accessories, cosmetics andfragrances from leading designers, precious and fashion jewelry and decorativehome accessories.

 

Operating earnings for the segments include 1) revenues, 2) cost ofsales, 3) direct selling, general, and administrative expenses, 4) other directoperating expenses, 5) income from credit card program and 6) depreciationexpense for the respective segment. Items not allocated to our operating segments include those items notconsidered by management in measuring the assets and profitability of oursegments. These amounts include 1) corporate expenses including, but notlimited to, treasury, investor relations, legal and finance support services,and general corporate management, 2) charges related to the application ofpurchase accounting adjustments made in connection with the Acquisitionincluding amortization of customer lists and favorable lease commitments andother non-cash items and 3) interest expense. These items, while often times related to the operations of a segment,are not considered by segment operating management, corporate operatingmanagement and the chief operating decision maker in assessing segmentoperating performance.  The accountingpolicies of the operating segments are the same as those described in thesummary of significant accounting policies (except with respect to purchaseaccounting adjustments not allocated to the operating segments).

 

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The following tables set forththe information for our reportable segments:

 
| ** **                                                                                     | ** ** | **(Successor)**                                   | ** ** | ** **                                       | **(Predecessor)** | ** **                                             |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|-------------------|--------------------------------------------------------|
| **(in thousands)**                                                                        | ** ** | **Fiscal year  ended  August 2,  2008** | ** ** | **Fiscal year  ended  July 28,  2007** | ** **        | **Forty-three  weeks ended  July 29,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** |
| ** **                                                                                     | ** ** | ** **                                        | ** ** | ** **                                       | ** **        | ** **                                             | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                                                       |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                 | 3,853,074  |                                             | $                 | 3,674,600                                              |   | $ | 2,829,967 |   |   | $ | 544,857 |   |
| Direct Marketing                                                                               |       | 747,462                                           |       | 715,476                                          |              | 567,771                                                |   |   | 87,515 |   |
| Total                                                                                          |       | $                                                 | 4,600,536  |                                             | $                 | 4,390,076                                              |   | $ | 3,397,738 |   |   | $ | 632,372 |   |
|                                                                                           |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| OPERATING EARNINGS                                                                             |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                 | 476,724    |                                             | $                 | 490,564                                                |   | $ | 312,296 |   |   | $ | 91,372 |   |
| Direct Marketing                                                                               |       | 117,657                                           |       | 116,042                                          |              | 89,967                                                 |   |   | 8,246 |   |
| Subtotal                                                                                       |       | 594,381                                           |       | 606,606                                          |              | 402,263                                                |   |   | 99,618 |   |
| Corporate expenses                                                                             |       | (56,944                                           | )          | (56,229                                          | )                 | (49,504                                                | ) |   | (5,811 | ) |
| Amortization of customer lists and  favorable lease commitments                                |       | (72,192                                           | )          | (72,265                                          | )                 | (59,640                                                | ) |   | — |   |
| Non-cash items related to other valuation  adjustments made in connection with the Acquisition |       | —                                            |       | —                                           |              | (34,411                                                | ) |   | — |   |
| Other income (expense), net (1)                                                                |       | 1,189                                             |       | (1,309                                           | )                 | —                                                 |   |   | (23,544 | ) |
| Total                                                                                          |       | $                                                 | 466,434    |                                             | $                 | 476,803                                                |   | $ | 258,708 |   |   | $ | 70,263 |   |
|                                                                                           |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| CAPITAL EXPENDITURES                                                                           |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                 | 164,640    |                                             | $                 | 124,402                                                |   | $ | 123,693 |   |   | $ | 22,784 |   |
| Direct Marketing                                                                               |       | 18,812                                            |       | 23,475                                           |              | 14,519                                                 |   |   | 2,791 |   |
| Total                                                                                          |       | $                                                 | 183,452    |                                             | $                 | 147,877                                                |   | $ | 138,212 |   |   | $ | 25,575 |   |
|                                                                                           |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| DEPRECIATION EXPENSE                                                                           |       |                                              |       |                                             |              |                                                   |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                                                 | 127,186    |                                             | $                 | 118,126                                                |   | $ | 93,599 |   |   | $ | 17,313 |   |
| Direct Marketing                                                                               |       | 16,801                                            |       | 13,671                                           |              | 9,580                                                  |   |   | 1,896 |   |
| Subtotal                                                                                       |       | 143,987                                           |       | 131,797                                          |              | 103,179                                                |   |   | 19,209 |   |
| Depreciation expense on step-up of fixed  assets made in connection with the Acquisition       |       | 4,424                                             |       | 4,671                                            |              | 3,771                                                  |   |   | — |   |
| Total                                                                                          |       | $                                                 | 148,411    |                                             | $                 | 136,468                                                |   | $ | 106,950 |   |   | $ | 19,209 |   |
|                                                                                                |            |                                                   |            |                                                  |                   |                                                        |  |  |  |  |  |  |  |  |  |

 
| ** **                                            | ** ** | **(Successor)**          | ** ** | ** **              | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                            | ** ** | **August 2,  2008** | ** ** | **July 28,  2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ASSETS                                                |       |                     |       |                    |       |       |       |   |   |
| Tangible assets of Specialty Retail stores            |       | $                        | 2,020,557  |                    | $          | 1,928,889  |       |   |   |   |   |
| Tangible assets of Direct Marketing                   |       | 173,265                  |       | 167,541                 |       |       |       |   |   |
| Corporate assets:                                     |       |                     |       |                    |       |       |       |   |   |
| Intangible assets related to Specialty  Retail stores |       | 3,519,045                |       | 3,571,660               |       |       |       |   |   |
| Intangible  assets related to Direct Marketing        |       | 523,572                  |       | 568,359                 |       |       |       |   |   |
| Other                                                 |       | 346,481                  |       | 264,550                 |       |       |       |   |   |
| Total                                                 |       | $                        | 6,582,920  |                    | $          | 6,500,999  |       |   |   |   |   |

 

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(1)           Forfiscal year 2008, other income (expense), net includes 1) a one-time pensioncurtailment gain of $32.5 million as a result of our decision to freeze certainPension and SERP benefits as of December 31, 2007, offset by 2) $31.3million pretax impairment charge related to the writedown to fair valueof the net carrying value of the Horchow tradename.

 

For fiscal year 2007, other income (expense),net includes 1) $11.5 million pretax impairment charge related to the writedownto fair value of the net carrying value of the Horchow tradename, offset by 2)$4.2 million of other income we received in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot and 3)$6.0M of other income related to aged, non-escheatable gift cards.

 

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For the nine weeks ended October 1,2005, other income (expense), net includes $23.5 million of transactionand other costs incurred in connection with the Acquisition. These costsconsist primarily of $4.5 million of accounting, investment banking, legaland other costs associated with the Acquisition 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.

 

**NOTE 17. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (with respect to NMG’sobligations under the****Senior Notesand the Senior Subordinated Notes)**

 

All of NMG’s obligations under the SeniorNotes and the Senior Subordinated Notes, as well as its obligations under theAsset-Based Revolving Credit Facility and the Senior Secured Term LoanFacility, are guaranteed by the Company and certain of NMG’s existing andfuture domestic subsidiaries (principally, Bergdorf Goodman, Inc. throughwhich NMG conducts the operations of its Bergdorf Goodman stores and NM NevadaTrust which holds legal title to certain real property and intangible assetsused by the Company in conducting its operations). The guarantees by theCompany and each subsidiary guarantor are full and unconditional and joint andseveral.  Currently, the Company’snon-guarantor subsidiaries consist principally of an operating subsidiarydomiciled in Canada providing support services to our Direct Marketingoperations. Previously, our non-guarantor subsidiaries also included Kate SpadeLLC (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 belowas discontinued operations.

 

The following condensed consolidatingfinancial information represents the financial information of Neiman Marcus, Inc.and its wholly-owned subsidiary guarantors, prepared on the equity basis ofaccounting. The information is presented in accordance with the requirements ofRule 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.

 
| ** **                                      | ** ** | **August 2, 2008 (Successor)** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                                   | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                                             | —     |   | $ | 238,204 |   | $ | 601 |   | $ | 375 |   | $ | — |   | $ | 239,180 |   |
| Merchandise inventories                         |       | —                                        |       | 884,808 |   | 93,236 |   | — |   | — |   | 978,044 |   |
| Other current assets                            |       | —                                        |       | 163,839 |   | 8,697 |   | — |   | — |   | 172,536 |   |
| Total current assets                            |       | —                                        |       | 1,286,851 |   | 102,534 |   | 375 |   | — |   | 1,389,760 |   |
| Property and equipment, net                     |       | —                                        |       | 939,522 |   | 134,940 |   | 832 |   | — |   | 1,075,294 |   |
| Goodwill and intangible assets, net             |       | —                                        |       | 1,889,445 |   | 2,153,172 |   | — |   | — |   | 4,042,617 |   |
| Other assets                                    |       | —                                        |       | 75,249 |   | — |   | — |   | — |   | 75,249 |   |
| Investments in subsidiaries                     |       | 1,676,519                                     |       | 2,288,802 |   | — |   | — |   | (3,965,321 | ) | — |   |
| Total assets                                    |       | $                                             | 1,676,519  |   | $ | 6,479,869 |   | $ | 2,390,646 |   | $ | 1,207 |   | $ | (3,965,321 | ) | $ | 6,582,920 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                                             | —     |   | $ | 338,095 |   | $ | 33,593 |   | $ | 53 |   | $ | — |   | $ | 371,741 |   |
| Accrued liabilities                             |       | —                                        |       | 289,352 |   | 69,930 |   | 117 |   | — |   | 359,399 |   |
| Other current liabilities                       |       | —                                        |       | 1,695 |   | — |   | — |   | — |   | 1,695 |   |
| Total current liabilities                       |       | —                                        |       | 629,142 |   | 103,523 |   | 170 |   | — |   | 732,835 |   |
| Long-term liabilities:                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                                        |       | 2,946,102 |   | — |   | — |   | — |   | 2,946,102 |   |
| Deferred income taxes                           |       | —                                        |       | 929,970 |   | — |   | — |   | — |   | 929,970 |   |
| Other long-term liabilities                     |       | —                                        |       | 298,136 |   | (642 | ) | — |   | — |   | 297,494 |   |
| Total long-term liabilities                     |       | —                                        |       | 4,174,208 |   | (642 | ) | — |   | — |   | 4,173,566 |   |
| Total shareholders’ equity                 |       | 1,676,519                                     |       | 1,676,519 |   | 2,287,765 |   | 1,037 |   | (3,965,321 | ) | 1,676,519 |   |
| Total liabilities and shareholders’ equity |       | $                                             | 1,676,519  |   | $ | 6,479,869 |   | $ | 2,390,646 |   | $ | 1,207 |   | $ | (3,965,321 | ) | $ | 6,582,920 |   |

 

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| ** **                                      | ** ** | **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 intangible assets, 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 |   |

 

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| ** **                                                                        | ** ** | **Fiscal year ended August 2, 2008 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                              | —     |   | $ | 3,854,429 |   | $ | 746,107 |   | $ | — |   | $ | — |   | $ | 4,600,536 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                                         |       | 2,460,441 |   | 473,729 |   | 798 |   | — |   | 2,934,968 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                                         |       | 906,014 |   | 140,086 |   | (653 | ) | — |   | 1,045,447 |   |
| Income from credit card program                                                   |       | —                                                                         |       | (59,131 | ) | (6,596 | ) | — |   | — |   | (65,727 | ) |
| Depreciation expense                                                              |       | —                                                                         |       | 129,812 |   | 17,678 |   | 921 |   | — |   | 148,411 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                                         |       | 60,360 |   | 11,832 |   | — |   | — |   | 72,192 |   |
| Other (income) expense, net                                                       |       | —                                                                         |       | (32,450 | ) | 31,261 |   | — |   | — |   | (1,189 | ) |
| Operating earnings (loss)                                                         |       | —                                                                         |       | 389,383 |   | 78,117 |   | (1,066 | ) | — |   | 466,434 |   |
| Interest expense, net                                                             |       | —                                                                         |       | 239,795 |   | 10 |   | — |   | — |   | 239,805 |   |
| Intercompany royalty charges (income)                                             |       | —                                                                         |       | 273,584 |   | (273,584 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (142,813                                                                       | )          | (350,625 | ) | — |   | — |   | 493,438 |   | — |   |
| Earnings (loss) from continuing operations  before income taxes                   |       | 142,813                                                                        |       | 226,629 |   | 351,691 |   | (1,066 | ) | (493,438 | ) | 226,629 |   |
| Income taxes                                                                      |       | —                                                                         |       | 83,816 |   | — |   | — |   | — |   | 83,816 |   |
| Net earnings (loss)                                                               |       | $                                                                              | 142,813    |   | $ | 142,813 |   | $ | 351,691 |   | $ | (1,066 | ) | $ | (493,438 | ) | $ | 142,813 |   |

 
| ** **                                                                        | ** ** | **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 |   |
|                                                                                   |            |                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                                                        | ** ** | **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 |   |
| Other expense, net                                                                |       | 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 |   |

 

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| ** **                                                                                   | ** ** | **Fiscal year ended August 2, 2008 (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                              | 142,813    |   | $ | 142,813 |   | $ | 351,691 |   | $ | (1,066 | ) | $ | (493,438 | ) | $ | 142,813 |   |
| Adjustments to reconcile net earnings to net  cash provided by operating activities:         |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                                                         |       | 204,389 |   | 29,510 |   | 921 |   | — |   | 234,820 |   |
| Deferred income taxes                                                                        |       | —                                                                         |       | (44,627 | ) | — |   | — |   | — |   | (44,627 | ) |
| Impairment of Horchow tradename                                                              |       | —                                                                         |       | — |   | 31,261 |   | — |   | — |   | 31,261 |   |
| Gain on curtailment of defined benefit  retirement obligations                               |       | —                                                                         |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | —                                                                         |       | 21,677 |   | 320 |   | — |   | — |   | 21,997 |   |
| Intercompany royalty income payable  (receivable)                                            |       | —                                                                         |       | 273,584 |   | (273,584 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (142,813                                                                       | )          | (350,625 | ) | — |   | — |   | 493,438 |   | — |   |
| Changes in operating assets and  liabilities, net                                            |       | —                                                                         |       | 60,247 |   | (128,006 | ) | (730 | ) | — |   | (68,489 | ) |
| Net cash provided by (used for) operating  activities                                        |       | —                                                                         |       | 275,008 |   | 11,192 |   | (875 | ) | — |   | 285,325 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                                         |       | (172,237 | ) | (11,787 | ) | 572 |   | — |   | (183,452 | ) |
| Purchases of short-term investments                                                          |       | —                                                                         |       | (10,000 | ) | — |   | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                                                         |       | 10,000 |   | — |   | — |   | — |   | 10,000 |   |
| Net cash (used for) provided by investing  activities                                        |       | —                                                                         |       | (172,237 | ) | (11,787 | ) | 572 |   | — |   | (183,452 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                                         |       | (3,900 | ) | — |   | — |   | — |   | (3,900 | ) |
| Net cash used for financing activities                                                       |       | —                                                                         |       | (3,900 | ) | — |   | — |   | — |   | (3,900 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                                                         |       | 98,871 |   | (595 | ) | (303 | ) | — |   | 97,973 |   |
| Beginning balance                                                                            |       | —                                                                         |       | 139,333 |   | 1,196 |   | 678 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                              | —     |   | $ | 238,204 |   | $ | 601 |   | $ | 375 |   | $ | — |   | $ | 239,180 |   |

 

F-44

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| ** **                                                                                   | ** ** | **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 and amortization expense                                                        |       | —                                                                        |       | 191,625 |   | 30,864 |   | 385 |   | — |   | 222,874 |   |
| 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 |       | —                                                                        |       | 27,701 |   | (7,170 | ) | — |   | — |   | 20,531 |   |
| 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 |   |

 

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| ** **                                                                                   | ** ** | **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 and amortization expense                                                        |       | —                                                                              |       | 151,153 |   | 26,788 |   | 377 |   | — |   | 178,318 |   |
| Deferred income taxes                                                                        |       | —                                                                              |       | (65,620 | ) | — |   | — |   | — |   | (65,620 | ) |
| Non-cash charges related to step-up in  carrying value of inventory                          |       | —                                                                              |       | 32,890 |   | 5,177 |   | — |   | — |   | 38,067 |   |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | —                                                                              |       | 18,696 |   | 1,590 |   | (1,256 | ) | — |   | 19,030 |   |
| 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 |   |

 

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| ** **                                                                                   | ** ** | **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 and amortization expense                                                        |       | 16,214                                                                           |       | 3,015 |   | 76 |   | — |   | 19,305 |   |
| Deferred income taxes                                                                        |       | (7,318                                                                           | )          | — |   | — |   | — |   | (7,318 | ) |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | 14,997                                                                           |       | 254 |   | 493 |   | — |   | 15,744 |   |
| 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 |   |

 

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**NOTE 18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (with respect to****NMG’s obligations under the 2028 Debentures)**

 

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’snon-guarantor subsidiaries consist principally of Bergdorf Goodman, Inc.through which NMG conducts the operations of its Bergdorf Goodman stores and NMNevada Trust which holds legal title to certain real property and intangibleassets used by NMG in conducting its operations. Previously, our non-guarantorsubsidiaries also included Kate Spade LLC (prior to its sale in December 2006)and Gurwitch Products, L.L.C. (prior to its sale in July 2006), which arereflected in the tables below as discontinued 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.

 
| ** **                                      | ** ** | **August 2, 2008 (Successor)** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                                   | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                                          |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                                          |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                                             | —     |   | $ | 238,204 |   | $ | 976 |   | $ | — |   | $ | 239,180 |   |
| Merchandise inventories                         |       | —                                        |       | 884,808 |   | 93,236 |   | — |   | 978,044 |   |
| Other current assets                            |       | —                                        |       | 163,839 |   | 8,697 |   | — |   | 172,536 |   |
| Total current assets                            |       | —                                        |       | 1,286,851 |   | 102,909 |   | — |   | 1,389,760 |   |
| Property and equipment, net                     |       | —                                        |       | 939,522 |   | 135,772 |   | — |   | 1,075,294 |   |
| Goodwill and intangible assets, net             |       | —                                        |       | 1,889,445 |   | 2,153,172 |   | — |   | 4,042,617 |   |
| Other assets                                    |       | —                                        |       | 75,249 |   | — |   | — |   | 75,249 |   |
| Investments in subsidiaries                     |       | 1,676,519                                     |       | 2,288,802 |   | — |   | (3,965,321 | ) | — |   |
| Total assets                                    |       | $                                             | 1,676,519  |   | $ | 6,479,869 |   | $ | 2,391,853 |   | $ | (3,965,321 | ) | $ | 6,582,920 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                                          |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                                             | —     |   | $ | 338,095 |   | $ | 33,646 |   | $ | — |   | $ | 371,741 |   |
| Accrued liabilities                             |       | —                                        |       | 289,352 |   | 70,047 |   | — |   | 359,399 |   |
| Other current liabilities                       |       | —                                        |       | 1,695 |   | — |   | — |   | 1,695 |   |
| Total current liabilities                       |       | —                                        |       | 629,142 |   | 103,693 |   | — |   | 732,835 |   |
| Long-term liabilities:                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                                        |       | 2,946,102 |   | — |   | — |   | 2,946,102 |   |
| Deferred income taxes                           |       | —                                        |       | 929,970 |   | — |   | — |   | 929,970 |   |
| Other long-term liabilities                     |       | —                                        |       | 298,136 |   | (642 | ) | — |   | 297,494 |   |
| Total long-term liabilities                     |       | —                                        |       | 4,174,208 |   | (642 | ) | — |   | 4,173,566 |   |
| Total shareholders’ equity                 |       | 1,676,519                                     |       | 1,676,519 |   | 2,288,802 |   | (3,965,321 | ) | 1,676,519 |   |
| Total liabilities and shareholders’ equity |       | $                                             | 1,676,519  |   | $ | 6,479,869 |   | $ | 2,391,853 |   | $ | (3,965,321 | ) | $ | 6,582,920 |   |

 

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| ** **                                      | ** ** | **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 intangible assets, 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 |   |

 

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| ** **                                                                        | ** ** | **Fiscal year ended August 2, 2008 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                              | —     |   | $ | 3,854,429 |   | $ | 746,107 |   | $ | — |   | $ | 4,600,536 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | —                                                                         |       | 2,460,441 |   | 474,527 |   | — |   | 2,934,968 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | —                                                                         |       | 906,014 |   | 139,433 |   | — |   | 1,045,447 |   |
| Income from credit card program                                                   |       | —                                                                         |       | (59,131 | ) | (6,596 | ) | — |   | (65,727 | ) |
| Depreciation expense                                                              |       | —                                                                         |       | 129,812 |   | 18,599 |   | — |   | 148,411 |   |
| Amortization of customer lists and  favorable lease commitments                   |       | —                                                                         |       | 60,360 |   | 11,832 |   | — |   | 72,192 |   |
| Other (income) expense, net                                                       |       | —                                                                         |       | (32,450 | ) | 31,261 |   | — |   | (1,189 | ) |
| Operating earnings                                                                |       | —                                                                         |       | 389,383 |   | 77,051 |   | — |   | 466,434 |   |
| Interest expense, net                                                             |       | —                                                                         |       | 239,795 |   | 10 |   | — |   | 239,805 |   |
| Intercompany royalty charges (income)                                             |       | —                                                                         |       | 273,584 |   | (273,584 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (142,813                                                                       | )          | (350,625 | ) | — |   | 493,438 |   | — |   |
| Earnings (loss) from continuing operations  before income taxes                   |       | 142,813                                                                        |       | 226,629 |   | 350,625 |   | (493,438 | ) | 226,629 |   |
| Income taxes                                                                      |       | —                                                                         |       | 83,816 |   | — |   | — |   | 83,816 |   |
| Net earnings (loss)                                                               |       | $                                                                              | 142,813    |   | $ | 142,813 |   | $ | 350,625 |   | $ | (493,438 | ) | $ | 142,813 |   |

 
| ** **                                                                        | ** ** | **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 |   |

 

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| ** **                                                                        | ** ** | **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 |   |
| Other expense, net                                                                |       | 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 |   |

 

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| ** **                                                                                   | ** ** | **Fiscal year ended August 2, 2008 (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                              | 142,813    |   | $ | 142,813 |   | $ | 350,625 |   | $ | (493,438 | ) | $ | 142,813 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities:         |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization expense                                                        |       | —                                                                         |       | 204,389 |   | 30,431 |   | — |   | 234,820 |   |
| Deferred income taxes                                                                        |       | —                                                                         |       | (44,627 | ) | — |   | — |   | (44,627 | ) |
| Impairment of Horchow tradename                                                              |       | —                                                                         |       | — |   | 31,261 |   | — |   | 31,261 |   |
| Gain on curtailment of defined benefit  retirement obligations                               |       | —                                                                         |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | —                                                                         |       | 21,677 |   | 320 |   | — |   | 21,997 |   |
| Intercompany royalty income payable  (receivable)                                            |       | —                                                                         |       | 273,584 |   | (273,584 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (142,813                                                                       | )          | (350,625 | ) | — |   | 493,438 |   | — |   |
| Changes in operating assets and  liabilities, net                                            |       | —                                                                         |       | 60,247 |   | (128,736 | ) | — |   | (68,489 | ) |
| Net cash provided by operating activities                                                    |       | —                                                                         |       | 275,008 |   | 10,317 |   | — |   | 285,325 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                                         |       | (172,237 | ) | (11,215 | ) | — |   | (183,452 | ) |
| Purchases of short-term investments                                                          |       | —                                                                         |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                                                         |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used for investing activities                                                       |       | —                                                                         |       | (172,237 | ) | (11,215 | ) | — |   | (183,452 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                                         |       | (3,900 | ) | — |   | — |   | (3,900 | ) |
| Net cash used for financing activities                                                       |       | —                                                                         |       | (3,900 | ) | — |   | — |   | (3,900 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                                                         |       | 98,871 |   | (898 | ) | — |   | 97,973 |   |
| Beginning balance                                                                            |       | —                                                                         |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                              | —     |   | $ | 238,204 |   | $ | 976 |   | $ | — |   | $ | 239,180 |   |

 

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| ** **                                                                                   | ** ** | **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 and amortization expense                                                        |       | —                                                                        |       | 191,625 |   | 31,249 |   | — |   | 222,874 |   |
| 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 |       | —                                                                        |       | 27,701 |   | (7,170 | ) | — |   | 20,531 |   |
| 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 |   |

 

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| ** **                                                                                   | ** ** | **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 and amortization expense                                                        |       | —                                                                              |       | 151,153 |   | 27,165 |   | — |   | 178,318 |   |
| Deferred income taxes                                                                        |       | —                                                                              |       | (65,620 | ) | — |   | — |   | (65,620 | ) |
| Non-cash charges related to step-up in  carrying value of inventory                          |       | —                                                                              |       | 32,890 |   | 5,177 |   | — |   | 38,067 |   |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | —                                                                              |       | 18,696 |   | 334 |   | — |   | 19,030 |   |
| 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 |   |

 

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| ** **                                                                                   | ** ** | **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 and amortization expense                                                        |       | 16,214                                                                           |       | 3,091 |   | — |   | 19,305 |   |
| Deferred income taxes                                                                        |       | (7,318                                                                           | )          | — |   | — |   | (7,318 | ) |
| Other, primarily costs related to defined  benefit pension and other long-term benefit plans |       | 14,997                                                                           |       | 747 |   | — |   | 15,744 |   |
| 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 |   |

 

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**NOTE 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**

 
| ** **              | ** ** | **Fiscal year 2008** | ** ** |
|-------------------------|------------|--------------------------------|------------|
| **(in millions)**  | ** ** | **First  Quarter**             | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total** | ** ** |
| ** **              | ** ** | ** **                     | ** ** | ** ** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                |       | $                              | 1,132.2    |   | $ | 1,373.8 |   | $ | 1,062.2 |   | $ | 1,032.3 |   | $ | 4,600.5 |   |
| Gross profit (1)        |       | $                              | 465.1      |   | $ | 460.6 |   | $ | 425.2 |   | $ | 314.7 |   | $ | 1,665.6 |   |
| Net earnings (loss) (2) |       | $                              | 78.8       |   | $ | 44.3 |   | $ | 55.4 |   | $ | (35.7 | ) | $ | 142.8 |   |

 
| ** **                                                 | ** ** | **Fiscal year 2007** | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|
| **(in millions)**                                     | ** ** | **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  (loss) from continuing operations (3)            |       | $                              | 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 (loss)                                        |       | $                              | 27.2       |   | $ | 41.0 |   | $ | 59.5 |   | $ | (15.9 | ) | $ | 111.9 |   |

 

----

| (1)    | Gross profit includes revenues less cost of  goods sold including buying and occupancy costs (excluding depreciation).                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    | For fiscal year 2008, net earnings include  1) $32.5 million of other income related to a one-time pension curtailment  gain in the first quarter as a result of our decision to freeze certain  Pension and SERP benefits as of December 31, 2007, offset by 2) $31.3  million pretax impairment charge related to the writedown to fair value of  the net carrying value of the Horchow tradename in the fourth quarter.                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    | For fiscal year 2007, earnings from  continuing operations includes 1) $11.5 million pretax impairment charge  related to the writedown to fair value of the net carrying value of the  Horchow tradename recorded in the fourth quarter, offset by 2) $4.2 million  of other 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 first quarter and 3) $6.0M of other income related to aged,  non-escheatable gift cards recorded in the fourth quarter. |

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf 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 24, 2008

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thefollowing capacities and on the dates indicated.

 
| **Signature**          | ** ** | **Title**                           | ** ** | **Date**                 |
|------------------------|------------|-------------------------------------|------------|--------------------------|
| ** **             | ** ** | ** **                          | ** ** | ** **               |
| /s/ BURTON  M. TANSKY  |       | President  and Chief Executive      |       | September 24,  2008 |
| Burton M.  Tansky      |       | Officer,  Director                  |       |                     |
|                   |       |                                |       |                     |
| /s/ JAMES E.  SKINNER  |       | Executive  Vice President and Chief |       |                     |
| James E.  Skinner      |       | Financial  Officer                  |       | September 24,  2008 |
|                   |       | (principal  financial officer)      |       |                     |
|                   |       |                                |       |                     |
| /s/ T. DALE  STAPLETON |       | Vice  President and Controller      |       | September 24,  2008 |
| T. Dale  Stapleton     |       | (principal  accounting officer)     |       |                     |
|                   |       |                                |       |                     |
| /s/ DAVID A.  BARR     |       | Director                            |       | September 24,  2008 |
| David A.  Barr         |       |                                |       |                     |
|                   |       |                                |       |                     |
| /s/ JONATHAN  COSLET   |       | Director                            |       | September 24,  2008 |
| Jonathan  Coslet       |       |                                |       |                     |
|                   |       |                                |       |                     |
| /s/ JAMES G.  COULTER  |       | Director                            |       | September 24,  2008 |
| James G.  Coulter      |       |                                |       |                     |
|                   |       |                                |       |                     |
| /s/ JOHN G.  DANHAKL   |       | Director                            |       | September 24,  2008 |
| John G.  Danhakl       |       |                                |       |                     |
|                   |       |                                |       |                     |
| /s/ SIDNEY  LAPIDUS    |       | Director                            |       | September 24,  2008 |
| Sidney  Lapidus        |       |                                |       |                     |
|                   |       |                                |       |                     |
| /s/ KEWSONG  LEE       |       | Director                            |       | September 24,  2008 |
| Kewsong Lee            |       |                                |       |                     |
|                   |       |                                |       |                     |
| /s/ CARRIE  WHEELER    |       | Director                            |       | September 24,  2008 |
| Carrie  Wheeler        |       |                                |       |                     |

 

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Table of Contents

 

**SCHEDULE II**

 

**NeimanMarcus, Inc.**

**Valuationand Qualifying Accounts and Reserves**

**(inthousands)**

 

**Threeyears ended August 2, 2008**

 
| **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 August 2, 2008 (Successor)(B)*               |       |                                           |       |                                          |       |                                 |       |              |       |   |   |
| Reserve for estimated sales returns                           |       | $                                              | 48,819     |                                          | $          | 645,095                              |       | $                 | —     |   | $ | (648,872 | )(A) | $ | 45,042 |   |
|                                                          |       |                                           |       |                                          |       |                                 |       |              |       |   |   |
| *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 |   |

 

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| (A)    |   | Gross margin on actual sales returns, net  of commissions.                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                 |
| (B)    |   | All periods presented have been adjusted to  exclude the operations of Gurwitch Products, L.L.C. and Kate Spade LLC. |

 

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