**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

** **

### **For the Quarterly Period Ended January 26, 2008**

### ** **

**OR**

 

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

 

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

 

**Neiman Marcus, Inc.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**(State or other jurisdiction of  incorporation or organization)      | ** ** | **20-3509435**(I.R.S. Employer  Identification No.) |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|
| ** **                                                                       | ** ** | ** **                                          |
| **1618 Main Street  Dallas, Texas**(Address of principal executive offices)      | ** ** | **75201**(Zip code)                                 |
| ** **                                                                       | ** ** | ** **                                          |
| Registrant’s telephone number, including area code: **(214) 743-7600** |

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No o

 

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

 
| Large accelerated filer o                                                                                                                         |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller reporting filer x |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|---------------------------|
|                                                                                                                                              |   |                |   |                    |   |                      |
| Indicate  by check mark whether the registrant is a shell company (as defined in Rule 12b-2  of the Exchange Act). Yes o No x |
|                                                                                                                                              |   |                |   |                    |   |                      |
| There were 1,012,919  shares of the registrant’s common stock, par value $.01 per share,  outstanding at January 26, 2008.              |

 

 

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**NEIMAN MARCUS, INC.**

 
|           | **INDEX**                                                                                                        |     |
|----------------|------------------------------------------------------------------------------------------------------------------|----------|
|           |                                                                                                             |     |
| Part I.   | Financial Information                                                                                            | **Page** |
|           |                                                                                                             |     |
|  Item 1.  | Condensed Consolidated Balance Sheets as of  January 26, 2008, July 28, 2007 and January 27, 2007 |     |
|           |                                                                                                             | 1        |
|           |                                                                                                             |     |
|           | Condensed  Consolidated Statements of Earnings for the Thirteen Weeks Ended                                      |     |
|           | January 26,  2008 and Thirteen Weeks Ended January 27, 2007                                            | 2        |
|           |                                                                                                             |     |
|           | Condensed  Consolidated Statements of Earnings for the Twenty-Six Weeks Ended                                    |     |
|           | January 26,  2008 and Twenty-Six Weeks Ended January 27, 2007                                          | 3        |
|           |                                                                                                             |     |
|           | Condensed  Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended                                  |     |
|           | January 26,  2008 and Twenty-Six Weeks Ended January 27, 2007                                          | 4        |
|           |                                                                                                             |     |
|           | Notes to Condensed  Consolidated Financial Statements                                                            | 5        |
|           |                                                                                                             |     |
|  Item 2.  | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                      |     |
|           |                                                                                                             | 32       |
|           |                                                                                                             |     |
|  Item 3.  | Quantitative  and Qualitative Disclosures About Market Risk                                                      | 49       |
|           |                                                                                                             |     |
|  Item 4.  | Controls and  Procedures                                                                                         | 49       |
|           |                                                                                                             |     |
| Part II.  | Other Information                                                                                                |     |
|           |                                                                                                             |     |
|  Item 1.  | Legal Proceedings                                                                                                | 50       |
|           |                                                                                                             |     |
|  Item 1A. | Risk Factors                                                                                                     | 50       |
|           |                                                                                                             |     |
|  Item 2.  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     | 56       |
|           |                                                                                                             |     |
|  Item 4.  | Submission of  Matters to a Vote of Security Holders                                                             | 57       |
|           |                                                                                                             |     |
|  Item 6.  | Exhibits                                                                                                         | 57       |
|           |                                                                                                             |     |
| Signatures     |                                                                                                             | 61       |

 

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** **

**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

** **
| **(in thousands, except shares)**                                                                                                                                   | ** ** | **January 26,  2008** | ** ** | **July 28,  2007** | ** ** | **January 27,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | ** **                 | ** ** | ** **              | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                       |       |                    |       |                       |       |
| Current assets:                                                                                                                                                                    |       |                       |       |                    |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                         |       | $                          | 235,747    |                    | $          | 141,207                    |       | $ | 188,547 |   |
| Merchandise  inventories                                                                                                                                                           |       | 885,210                    |       | 918,269                 |       | 812,291                    |       |
| Deferred income  taxes                                                                                                                                                             |       | 39,728                     |       | 39,728                  |       | 42,197                     |       |
| Other current  assets                                                                                                                                                              |       | 135,306                    |       | 115,765                 |       | 128,047                    |       |
| Total current  assets                                                                                                                                                              |       | 1,295,991                  |       | 1,214,969               |       | 1,171,082                  |       |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| Property and  equipment, net                                                                                                                                                       |       | 1,064,734                  |       | 1,043,711               |       | 1,035,014                  |       |
| Goodwill and  intangible assets, net                                                                                                                                               |       | 4,113,202                  |       | 4,140,019               |       | 4,187,693                  |       |
| Debt issuance  costs                                                                                                                                                               |       | 77,735                     |       | 84,844                  |       | 91,262                     |       |
| Other assets                                                                                                                                                                       |       | 14,161                     |       | 17,456                  |       | 24,102                     |       |
| Total assets                                                                                                                                                                       |       | $                          | 6,565,823  |                    | $          | 6,500,999                  |       | $ | 6,509,153 |   |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                     |       |                       |       |                    |       |                       |       |
| Current  liabilities:                                                                                                                                                              |       |                       |       |                    |       |                       |       |
| Accounts payable                                                                                                                                                                   |       | $                          | 281,165    |                    | $          | 361,299                    |       | $ | 300,485 |   |
| Accrued  liabilities                                                                                                                                                               |       | 409,393                    |       | 403,162                 |       | 426,985                    |       |
| Other current  liabilities                                                                                                                                                         |       | 2,946                      |       | 3,426                   |       | 3,425                      |       |
| Total current  liabilities                                                                                                                                                         |       | 693,504                    |       | 767,887                 |       | 730,895                    |       |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| Long-term  liabilities:                                                                                                                                                            |       |                       |       |                    |       |                       |       |
| Long-term debt                                                                                                                                                                     |       | 2,946,004                  |       | 2,945,906               |       | 3,020,809                  |       |
| Deferred income  taxes                                                                                                                                                             |       | 962,712                    |       | 1,002,982               |       | 1,033,067                  |       |
| Deferred real  estate credits, net                                                                                                                                                 |       | 75,381                     |       | 54,068                  |       | 32,196                     |       |
| Other long-term  liabilities                                                                                                                                                       |       | 240,388                    |       | 172,144                 |       | 197,573                    |       |
| Total long-term  liabilities                                                                                                                                                       |       | 4,224,485                  |       | 4,175,100               |       | 4,283,645                  |       |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| Common stock  (par value $0.01 per share, 1,012,919 shares issued at January 26, 2008,  1,012,919 shares issued at July 28, 2007 and 1,012,341 shares issued at  January 27, 2007) |       | 10                         |       | 10                      |       | 10                         |       |
| Additional  paid-in capital                                                                                                                                                        |       | 1,415,397                  |       | 1,412,386               |       | 1,408,373                  |       |
| Accumulated  other comprehensive (loss) income                                                                                                                                     |       | (15,021                    | )          | 21,229                  |       | 5,523                      |       |
| Retained  earnings                                                                                                                                                                 |       | 247,448                    |       | 124,387                 |       | 80,707                     |       |
| Total  shareholders’ equity                                                                                                                                                   |       | 1,647,834                  |       | 1,558,012               |       | 1,494,613                  |       |
| Total  liabilities and shareholders’ equity                                                                                                                                   |       | $                          | 6,565,823  |                    | $          | 6,500,999                  |       | $ | 6,509,153 |   |

* *

*See Notesto Condensed Consolidated Financial Statements.*

 

1

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**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(UNAUDITED)**

 
| **(in thousands)**                                                           | ** ** | **Thirteen  weeks ended  January 26,  2008** | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| Revenues                                                                          |       | $                                                      | 1,373,855  |                                                   | $          | 1,295,836 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 913,234                                                |       | 850,258                                                |       |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 292,572                                                |       | 283,581                                                |       |
| Income from  credit card program                                                  |       | (19,269                                                | )          | (17,930                                                | )          |
| Depreciation  expense                                                             |       | 35,086                                                 |       | 34,073                                                 |       |
| Amortization of  customer lists                                                   |       | 13,568                                                 |       | 13,581                                                 |       |
| Amortization of  favorable lease commitments                                      |       | 4,385                                                  |       | 4,469                                                  |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Operating  earnings                                                               |       | 134,279                                                |       | 127,804                                                |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Interest  expense, net                                                            |       | 60,397                                                 |       | 65,537                                                 |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Earnings from  continuing operations before income taxes                          |       | 73,882                                                 |       | 62,267                                                 |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Income taxes                                                                      |       | 29,579                                                 |       | 24,089                                                 |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Earnings from  continuing operations                                              |       | 44,303                                                 |       | 38,178                                                 |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Earnings from  discontinued operations, net of taxes                              |       | —                                                 |       | 2,845                                                  |       |
|                                                                              |       |                                                   |       |                                                   |       |
| Net earnings                                                                      |       | $                                                      | 44,303     |                                                   | $          | 41,023 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

2

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** **

**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(UNAUDITED)**

 
| **(in thousands)**                                                           | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
| Revenues                                                                          |       | $                                                        | 2,506,098  |                                                     | $          | 2,335,048 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 1,580,370                                                |       | 1,457,037                                                |       |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 564,548                                                  |       | 531,113                                                  |       |
| Income from  credit card program                                                  |       | (36,563                                                  | )          | (34,301                                                  | )          |
| Depreciation  expense                                                             |       | 70,221                                                   |       | 67,249                                                   |       |
| Amortization of  customer lists                                                   |       | 27,179                                                   |       | 27,143                                                   |       |
| Amortization of  favorable lease commitments                                      |       | 8,770                                                    |       | 8,939                                                    |       |
| Other income                                                                      |       | (32,450                                                  | )          | (4,210                                                   | )          |
|                                                                              |       |                                                     |       |                                                     |       |
| Operating  earnings                                                               |       | 324,023                                                  |       | 282,078                                                  |       |
|                                                                              |       |                                                     |       |                                                     |       |
| Interest  expense, net                                                            |       | 121,620                                                  |       | 134,354                                                  |       |
|                                                                              |       |                                                     |       |                                                     |       |
| Earnings from  continuing operations before income taxes                          |       | 202,403                                                  |       | 147,724                                                  |       |
|                                                                              |       |                                                     |       |                                                     |       |
| Income taxes                                                                      |       | 79,342                                                   |       | 58,091                                                   |       |
|                                                                              |       |                                                     |       |                                                     |       |
| Earnings from  continuing operations                                              |       | 123,061                                                  |       | 89,633                                                   |       |
|                                                                              |       |                                                     |       |                                                     |       |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                   |       | (21,381                                                  | )          |
|                                                                              |       |                                                     |       |                                                     |       |
| Net earnings                                                                      |       | $                                                        | 123,061    |                                                     | $          | 68,252 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

3

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** **

**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(UNAUDITED)**

 
| **(in thousands)**                                                              | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                           | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
| **CASH  FLOWS - OPERATING ACTIVITIES**                                               |       |                                                     |       |                                                     |       |
| Net earnings                                                                         |       | $                                                        | 123,061    |                                                     | $          | 68,252 |   |
| Loss from  discontinued operations                                                   |       | —                                                   |       | 21,381                                                   |       |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                                     |       |                                                     |       |
| Depreciation  expense                                                                |       | 70,221                                                   |       | 67,249                                                   |       |
| Amortization of  debt issue costs                                                    |       | 7,109                                                    |       | 7,033                                                    |       |
| Amortization of  customer lists and favorable lease commitments                      |       | 35,949                                                   |       | 36,082                                                   |       |
| Gain on  curtailment of defined benefit retirement obligations                       |       | (32,450                                                  | )          | —                                                   |       |
| Deferred income  taxes                                                               |       | (13,673                                                  | )          | (24,147                                                  | )          |
| Other, primarily  costs related to defined benefit pension plans                     |       | 14,568                                                   |       | 12,986                                                   |       |
|                                                                                 |       | 204,785                                                  |       | 188,836                                                  |       |
| Changes in  operating assets and liabilities:                                        |       |                                                     |       |                                                     |       |
| Decrease  (increase) in merchandise inventories                                      |       | 33,059                                                   |       | (18,670                                                  | )          |
| Increase in  other current assets                                                    |       | (19,541                                                  | )          | (32,640                                                  | )          |
| (Increase)  decrease in other assets                                                 |       | (5,616                                                   | )          | 365                                                      |       |
| (Decrease)  increase in accounts payable and accrued liabilities                     |       | (51,276                                                  | )          | 23,100                                                   |       |
| Increase in  deferred real estate credits                                            |       | 23,375                                                   |       | 1,025                                                    |       |
| Net cash  provided by operating activities – continuing operations              |       | 184,786                                                  |       | 162,016                                                  |       |
| Net cash used  for operating activities – discontinued operations               |       | —                                                   |       | (9,163                                                   | )          |
| **Net  cash provided by operating activities**                                       |       | 184,786                                                  |       | 152,853                                                  |       |
| **CASH  FLOWS – INVESTING ACTIVITIES**                                          |       |                                                     |       |                                                     |       |
| Capital  expenditures                                                                |       | (88,173                                                  | )          | (70,682                                                  | )          |
| Purchases of  short-term investments                                                 |       | (10,000                                                  | )          | —                                                   |       |
| Sales of short-term  investments                                                     |       | 10,000                                                   |       | —                                                   |       |
| Payment to  minority interest holder in Kate Spade                                   |       | —                                                   |       | (59,400                                                  | )          |
| Net proceeds  from sale of Kate Spade                                                |       | —                                                   |       | 121,469                                                  |       |
| Net cash used  for investing activities – continuing operations                 |       | (88,173                                                  | )          | (8,613                                                   | )          |
| Net cash used  for investing activities – discontinued operations               |       | —                                                   |       | (128                                                     | )          |
| **Net  cash used for investing activities**                                          |       | (88,173                                                  | )          | (8,741                                                   | )          |
| **CASH  FLOWS – FINANCING ACTIVITIES**                                          |       |                                                     |       |                                                     |       |
| Repayment of  borrowings                                                             |       | (2,073                                                   | )          | (3,045                                                   | )          |
| Repayment of  borrowings under senior term loan facility                             |       | —                                                   |       | (175,000                                                 | )          |
| Debt issuance  costs paid                                                            |       | —                                                   |       | (758                                                     | )          |
| Proceeds from  purchase of common stock                                              |       | —                                                   |       | 150                                                      |       |
| Net cash used  for financing activities – continuing operations                 |       | (2,073                                                   | )          | (178,653                                                 | )          |
| Net cash used  for financing activities – discontinued operations               |       | —                                                   |       | (1,675                                                   | )          |
| **Net  cash used for financing activities**                                          |       | (2,073                                                   | )          | (180,328                                                 | )          |
| **CASH  AND CASH EQUIVALENTS**                                                       |       |                                                     |       |                                                     |       |
| Increase (decrease)  during the period                                               |       | 94,540                                                   |       | (36,216                                                  | )          |
| Beginning  balance                                                                   |       | 141,207                                                  |       | 224,763                                                  |       |
| Ending balance -  continuing operations                                              |       | $                                                        | 235,747    |                                                     | $          | 188,547 |   |
|                                                                                 |       |                                                     |       |                                                     |       |
| **Supplemental  Schedule of Cash Flow Information**                                  |       |                                                     |       |                                                     |       |
|                                                                                 |       |                                                     |       |                                                     |       |
| Cash paid during  the period for:                                                    |       |                                                     |       |                                                     |       |
| Interest                                                                             |       | $                                                        | 122,992    |                                                     | $          | 137,029 |   |
| Income taxes                                                                         |       | $                                                        | 89,796     |                                                     | $          | 83,066 |   |
| Noncash  activities:                                                                 |       |                                                     |       |                                                     |       |
| Additions to  property and equipment                                                 |       | $                                                        | —     |                                                     | $          | 822 |   |
| Increase to  goodwill upon adoption of accounting standard                           |       | $                                                        | 9,133      |                                                     | $          | — |   |

* *

*See Notesto Condensed Consolidated Financial Statements.*

 

4

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** **

**NEIMANMARCUS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.**              Basis of Presentation

** **

Wehave prepared the accompanying unaudited condensed consolidated financialstatements in accordance with generally accepted accounting principles forinterim financial information and the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, thesefinancial statements do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements. Therefore, these financial statements should be read in conjunctionwith our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

Inour opinion, the accompanying unaudited condensed consolidated financialstatements contain all adjustments, consisting of normal recurring adjustments,necessary to present fairly our financial position, results of operations andcash flows for the applicable interim periods.

 

Thespecialty retail industry is seasonal in nature, with a higher level of salestypically generated in the fall and holiday selling seasons.  Due to seasonal and other factors, theresults of operations for the second quarter of fiscal year 2008 are notnecessarily comparable to, or indicative of, results of any other interimperiod or for the fiscal year as a whole.

 

NeimanMarcus, Inc. (the Company) is a wholly-owned subsidiary of and is controlled byNewton Holding, LLC (Holding).  Holdingis controlled by investment funds affiliated with TPG Capital and WarburgPincus (collectively, the Sponsors).  TheCompany was formed by Holding for the purpose of acquiring The Neiman MarcusGroup, Inc. (NMG), which acquisition was completed on October 6, 2005 (theAcquisition).  Prior to the Acquisition,the Company had no independent assets or operations. After the Acquisition, theCompany represents the successor to NMG since the Company’s sole asset is itsinvestment in NMG and its operations consist solely of the operating activitiesof NMG as well as costs incurred by the Company related to its investment inNMG.

 

  Our fiscal year endson the Saturday closest to July 31. All references to the second quarter of fiscal year 2008 relate to thethirteen weeks ended January 26, 2008. All references to the second quarter of fiscal year 2007 relate to thethirteen weeks ended January 27, 2007. All references to year-to-date fiscal 2008 relate to the twenty-sixweeks ended January 26, 2008.  Allreferences to year-to-date fiscal 2007 relate to the twenty-six weeks endedJanuary 27, 2007.

 

A detailed description ofour critical accounting policies is included in our Annual Report on Form 10-Kfor the fiscal year ended July 28, 2007.

 

Certainprior period balances have been reclassified to conform to the current periodpresentation.

 

***Use of Estimates.* **We are required to make estimates and assumptionsabout future events in preparing financial statements in conformity withgenerally accepted accounting principles. These estimates and assumptions affect the amounts of assets,liabilities, revenues and expenses and the disclosure of gain and losscontingencies at the date of the unaudited condensed consolidated financialstatements.  While we believe that ourpast estimates and assumptions have been materially accurate, our currentestimates are subject to change if different assumptions as to the outcome offuture events were made. We evaluate our estimates and judgments on an ongoingbasis and predicate those estimates and judgments on historical experience andon various other factors that we believe to be reasonable under thecircumstances.  We make adjustments toour assumptions and judgments when facts 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 unaudited condensed consolidatedfinancial statements.

** **

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

 

·                  Recognition ofrevenues;

 

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

 

·                  Determinationof impairment of long-lived assets;

 

·      Recognitionof advertising and catalog costs;

 

5

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·      Measurementof liabilities related to our loyalty programs;

 

·      Recognitionof income taxes; and

 

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

 

  ***RecentAccounting Pronouncements. ***In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, “Fair Value Measurements”(SFAS 157), which provides guidance for using fair value to measure certainassets and liabilities.  SFAS 157 willapply whenever 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, or ourfiscal year ending August 1, 2009.  Wehave not yet evaluated the impact, if any, of adopting SFAS 157 on ourconsolidated financial statements.

 

In February 2007, theFASB issued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (SFAS 159).  SFAS 159 expands opportunities to use fairvalue measurement in financial reporting and permits entities to choose tomeasure many financial instruments and certain other items at fair value.  This Statement is effective for fiscal yearsbeginning after November 15, 2007, or our fiscal year ending August 1,2009.  We have not yet evaluated theimpact, if any, of adopting SFAS 159 on our consolidated financial statements.

 

**2.**              Discontinued Operations

** **

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 minorityinterest in Kate Spade LLC and the sale of Kate Spade LLC to Liz Claiborne,Inc. were consummated in December 2006.

 

The Company’s unaudited condensed consolidatedfinancial statements, accompanying notes and other information provided in thisQuarterly Report on Form 10-Q reflect Kate Spade LLC as discontinued operationsfor all periods presented.

 

Summarized financial information with respect tothe results of operations of Kate Spade LLC is as follows:

 
| **(in thousands)**                                     | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                             | ** ** | ** **                                               | ** ** |
| Revenues                                                    |       | $                                                      | 10,704     |                                                     | $          | 29,612 |   |
|                                                        |       |                                                   |       |                                                     |       |
| Earnings from  discontinued operations before income taxes  |       | $                                                      | 2,345      |                                                     | $          | 3,494 |   |
| Income taxes                                                |       | 1,289                                                  |       | 1,967                                                    |       |
| Net earnings from discontinued operations                   |       | 1,056                                                  |       | 1,527                                                    |       |
|                                                        |       |                                                   |       |                                                     |       |
| Gain (loss) on  disposition before income taxes             |       | 3,467                                                  |       | (12,008                                                  | )          |
| Income taxes                                                |       | (1,678                                                 | )          | (10,900                                                  | )          |
| Net earnings (loss) on disposition                          |       | 1,789                                                  |       | (22,908                                                  | )          |
|                                                        |       |                                                   |       |                                                     |       |
| Earnings (loss) from discontinued operations, net of  taxes |       | $                                                      | 2,845      |                                                     | $          | (21,381 | ) |

 

Inthe first quarter of fiscal year 2007, we impaired the intangible assets ofKate Spade LLC by $12.5 million in order to state the net assets of Kate SpadeLLC at their estimated net realizable value to NMG.

 

6

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**3.**              Goodwill andIntangible Assets, Net

 
| **(in thousands)**              | ** ** | **January 26,  2008** | ** ** | **July 28,  2007** | ** ** | **January 27,  2007** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                 |       |                       |       |                    |       |                       |       |
| Goodwill                             |       | $                          | 1,614,273  |                    | $          | 1,605,140                  |       | $ | 1,605,140 |   |
| Tradenames                           |       | 1,610,315                  |       | 1,610,315               |       | 1,621,788                  |       |
| Customer lists,  net                 |       | 450,065                    |       | 477,245                 |       | 504,507                    |       |
| Favorable lease  commitments, net    |       | 438,549                    |       | 447,319                 |       | 456,258                    |       |
| Goodwill and  intangible assets, net |       | $                          | 4,113,202  |                    | $          | 4,140,019                  |       | $ | 4,187,693 |   |

 

In the first quarter offiscal year 2008, the cumulative effect of adopting FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes” (FIN 48) resulted in a netincrease to our accruals for uncertain tax positions of $9.1 million for thederecognition of certain tax benefits. This increase to our accruals was offset by a corresponding increase togoodwill as these uncertainties existed at the time of the Acquisition.

 

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

 

Customerlists are amortized using the straight-line method over their estimated usefullives, ranging from 5 to 24 years (weighted average life of 13 years).  Favorable lease commitments are amortizedstraight-line over the remaining lives of the leases, ranging from 6 to 49years (weighted average life of 33 years). Total estimated amortization of all acquisition-related intangibleassets is currently estimated as follows (in thousands):

 
| 2008 |   | $      | 72,278 |   |
|------|--------|--------|--------|--------|
| 2009 |   | 72,278 |   |
| 2010 |   | 72,278 |   |
| 2011 |   | 61,567 |   |
| 2012 |   | 48,922 |   |
| 2013 |   | 46,745 |   |

 

**4.**              Long-term Debt

** **

The significant components of our long-term debt areas follows:

 
| **(in thousands)**            | ** ** | **Interest  Rate** | ** ** | **January 26,  2008** | ** ** | **July 28,  2007** | ** ** | **January 27,  2007** | ** ** |
|------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                               |       |               |       |                       |       |                    |       |                       |       |
| Senior Secured  Term Loan Facility |       | variable           |       | $1,625,000                 |       | $1,625,000              |       | $1,700,000                 |       |
| 2028 Debentures                    |       | 7.125%             |       | 121,004                    |       | 120,906                 |       | 120,809                    |       |
| Senior Notes                       |       | 9.0%/9.75%         |       | 700,000                    |       | 700,000                 |       | 700,000                    |       |
| Senior  Subordinated Notes         |       | 10.375%            |       | 500,000                    |       | 500,000                 |       | 500,000                    |       |
| Long-term debt                     |       |               |       | $2,946,004                 |       | $2,945,906              |       | $3,020,809                 |       |

*** ***

***Senior Secured Asset-Based Revolving 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.

  The Asset-BasedRevolving Credit Facility provides that NMG has the right at any time torequest up to $200.0 million of additional commitments, but the lendersare under no obligation to provide any such additional commitments, and anyincrease in commitments will be subject to customary conditions precedent. NMG’sability to borrow under any increased commitments would still be limited by theamount of the borrowing base.

 

7

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Asof January 26, 2008, NMG had $576.1 million of unused borrowingavailability under the Asset-Based Revolving Credit Facility based on aborrowing base of over $600.0 million and after giving effect to$23.9 million used for letters of credit. The principal amount of the loans outstanding is due and payable in fullon October 6, 2010.

 

  Borrowings under theAsset-Based Revolving Credit Facility bear interest at a rate per annum equalto, at NMG’s option, either (a) a base rate determined by reference to thehigher of (1) the prime rate of Deutsche Bank Trust Company Americas and(2) the federal funds effective rate plus 1/2 of 1%or (b) a LIBOR rate, subject to certain adjustments, in each case plus anapplicable margin. The initial applicable margin is 0% with respect to baserate borrowings and 1.75% with respect to LIBOR borrowings, in each casesubject to adjustment based on the historical availability under the Asset-BasedRevolving Credit Facility. In addition, NMG is required to pay a commitment feeof 0.375% per annum in respect of the unutilized commitments, subject todownward adjustment if the average revolving loan utilization is 50% or morefor any applicable period. NMG must also pay customary letter of credit feesand agency fees.

 

  All obligationsunder the Asset-Based Revolving Credit Facility are guaranteed by the Companyand certain of NMG’s existing and future domestic subsidiaries (subsidiaryguarantors). As of January 26, 2008, the liabilities of NMG’s non-guarantorsubsidiaries totaled approximately $4.4 million, or 0.1% of consolidatedliabilities, and the assets of NMG’s non-guarantor subsidiaries aggregatedapproximately $6.3 million, or 0.1% of consolidated total assets. Allobligations under NMG’s Asset-Based Revolving Credit Facility, and theguarantees of those obligations, are secured, subject to certain significantexceptions, by substantially all of the assets of the Company, NMG and thesubsidiary guarantors.

 

TheAsset-Based Revolving Credit Facility contains a number of customary negativecovenants and restrictions, but does not require NMG to comply with anyfinancial ratio maintenance covenants. For a more detaileddescription of NMG’s Asset-Based Revolving Credit Facility, refer to our AnnualReport on Form 10-K for the fiscal year ended July 28, 2007.

 

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

 

  At January 26, 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 thehigher of (1) the prime rate of Credit Suisse 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.At January 26, 2008, the applicable margin with respect to base rate borrowingswas 0.75% and the applicable margin with respect to LIBOR borrowings was 1.75%.The interest rate on the outstanding borrowings pursuant to the Senior SecuredTerm Loan Facility was 6.69% at January 26, 2008.

 

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

 

  NMG may voluntarilyprepay outstanding loans under the Senior Secured Term Loan Facility at anytime without premium or penalty other than customary “breakage” costs withrespect to LIBOR loans. There is no scheduled amortization under the SeniorSecured Term Loan Facility. The principal amount of the loans outstanding isdue and payable in full on April 6, 2013.

 

Allobligations under the Senior Secured Term Loan Facility are unconditionallyguaranteed by the Company and each direct and indirect domestic subsidiary ofNMG that guarantees the obligations of NMG under its Asset-Based RevolvingCredit Facility. All obligations under the Senior Secured Term Loan Facility,and the guarantees of those obligations, are secured, subject to certainsignificant exceptions, by substantially all of the assets of the Company, NMGand the subsidiary guarantors.

 

Thecredit agreement governing the Senior Secured Term Loan Facility contains anumber of customary negative covenants and additional covenants related to thesecurity arrangements for the Senior Secured Term Loan Facility. The creditagreement also contains customary affirmative covenants and events ofdefault.  For a more detailed description of the Senior SecuredTerm Loan Facility, refer to our Annual Report on Form 10-K for the fiscal yearended July 28, 2007.

 

8

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***2028 Debentures.*** In May 1998, NMG issued $125.0 million aggregate principalamount of its 7.125% 2028 Debentures. NMG equally and ratably secures its 2028Debentures by a first lien security interest on certain collateral subject toliens granted under NMG’s Senior Secured Credit Facilities. The 2028 Debenturesare guaranteed on an unsecured, senior basis by the Company. For a more detailed description of the 2028Debentures, refer to our Annual Report on Form 10-K for the fiscal year endedJuly 28, 2007.

 

The fair value of the2028 Debentures at January 26, 2008 was approximately $115.0 million.

 

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

 

  For any interestpayment period through October 15, 2010, NMG may, at its option, elect topay interest on the Senior Notes entirely in cash (Cash Interest) or entirelyby increasing the principal amount of the outstanding Senior Notes or byissuing additional Senior Notes (PIK Interest). Cash Interest on the Senior Notesaccrues at the rate of 9% per annum. PIK Interest on the Senior Notes accruesat the rate of 9.75% per annum. To date, NMG has paid all interest obligationsin cash. After October 15, 2010, NMG will make all interest payments onthe Senior Notes entirely in cash. All Senior Notes mature on October 15,2015. Interest on the Senior Notes is payable quarterly in arrears on eachJanuary 15, April 15, July 15 and October 15, commencing onJanuary 15, 2006.

 

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

 

  NMG is not requiredto make any mandatory redemption or sinking fund payments with respect to theSenior Notes.  The indenture governingthe Senior Notes contains a number of customary negative covenants and eventsof default.  For a more detailed description of NMG’s SeniorNotes, refer to our Annual Report on Form 10-K for the fiscal year ended July28, 2007.

 

  The fairvalue of NMG’s Senior Notes at January 26, 2008 was approximately $694.8million.

*** ***

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

 

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

 

NMGis not required to make any mandatory redemption or sinking fund payments withrespect to the Senior Subordinated Notes. The indenture governing the SeniorSubordinated Notes contains a number of customary negative covenants and eventsof defaults.  For a more detailed description of NMG’s SeniorSubordinated Notes, refer to our Annual Report on Form 10-K for the fiscal yearended July 28, 2007.

 

The fair value of NMG’s Senior Subordinated Notes at January 26, 2008was approximately $498.8 million.

 

9

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  ***Maturitiesof Long-Term Debt.***  At January26, 2008, annual maturities of long-term debt during the next five fiscal yearsand thereafter are as follows (in millions):

 
| 2009       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2010       |   | —  |   |
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| 2013       |   | 1,625.0 |   |
| Thereafter |   | 1,321.0 |   |

 

  The above table doesnot reflect future excess cash flow prepayments, if any, that may be requiredunder the Senior Secured Term Loan Facility.

 

***Interest Rate Swaps***.  The Company uses derivative financialinstruments to help manage its interest rate risk. 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 its exposure tointerest rate increases related to a portion of its floating rate indebtedness.The interest rate swap agreements terminate after five years.  At January 26, 2008, the fair value of NMG’sinterest rate swap agreements was a loss of approximately $49.5 million,which amount is included in other long-term liabilities.

 

As of the effective date, NMG designated theinterest rate swaps as cash flow hedges. As a result, changes in the fair valueof NMG’s swaps are recorded as a component of other comprehensive income. At January 26, 2008, we have $31.1million of unrecognized losses, net of tax, on our interest rate swapagreements included in other comprehensive income.

 

  As a result of theswap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.508% to 6.733% per quarter through 2010 and result in an average fixed rateof 6.592%.

 

*** ******Interestexpense.***  The significantcomponents of interest expense are as follows:

 
| ** **                         | ** ** | **Quarter-to-Date**                                | ** ** | **Year-to-Date**                                   | ** ** |
|------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Thirteen  weeks  ended  January 26,  2008** | ** ** | **Thirteen  weeks  ended  January 27,  2007** | ** ** | **Twenty-Six  weeks  ended  January 26,  2008** | ** ** | **Twenty-Six  weeks  ended  January 27,  2007** | ** ** |
|                               |       |                                               |       |                                               |       |   |   |   |   |
| Senior Secured  Term Loan Facility |       | $                                                  | 27,806     |                                               | $          | 33,068 |   | $ | 55,782 |   | $ | 68,771 |   |
| 2028 Debentures                    |       | 2,181                                              |       | 2,236                                              |       | 4,365 |   | 4,462 |   |
| Senior Notes                       |       | 15,453                                             |       | 15,750                                             |       | 30,906 |   | 31,500 |   |
| Senior  Subordinated Notes         |       | 12,724                                             |       | 12,969                                             |       | 25,448 |   | 25,937 |   |
| Amortization of  debt issue costs  |       | 3,554                                              |       | 3,535                                              |       | 7,109 |   | 7,033 |   |
| Other                              |       | 842                                                |       | 941                                                |       | 1,674 |   | 1,980 |   |
| Total interest  expense            |       | 62,560                                             |       | 68,499                                             |       | 125,284 |   | 139,683 |   |
| Less:                              |       |                                               |       |                                               |       |   |   |   |   |
| Interest income                    |       | 1,433                                              |       | 2,109                                              |       | 2,288 |   | 3,751 |   |
| Capitalized  interest              |       | 730                                                |       | 853                                                |       | 1,376 |   | 1,578 |   |
| Interest  expense, net             |       | $                                                  | 60,397     |                                               | $          | 65,537 |   | $ | 121,620 |   | $ | 134,354 |   |

 

10

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**5.**              Employee BenefitPlans

** **

***Description of Benefit Plans.*** We sponsor a defined benefit pension plan (Pension Plan) coveringsubstantially all full-time employees. We also sponsor an unfunded supplementalexecutive retirement plan (SERP Plan) which provides certain employeesadditional pension benefits. Benefits under both plans are based on theemployees’ years of service and compensation over defined periods ofemployment.

 

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

 

We have a qualified defined contribution 401(k)Plan.  Employees make contributions tothe 401(k) Plan and we match an employee’s contribution up to a maximum of 6%of the employee’s compensation subject to statutory limitations.

 

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

 

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

 

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

 

·                  Our matchingcontributions vest to employees in two years as compared to the three yearvesting under the 401(k) Plan.

 

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

 

Effective January 1, 2008, we also offered a newdefined contribution supplemental executive retirement plan (DefinedContribution SERP Plan).

 

Concurrent with the implementation of the RSP andthe new supplemental executive retirement plan, we froze benefits offered underour Pension and SERP Plans for most employees. Employees with a minimum of ten years of service and whose ages plusyears of service equaled at least 65 (“Rule of 65”) as of December 31, 2007were allowed either 1) to continue participation in our 401(k) Plan and PensionPlan (and SERP Plan, if eligible) or 2) to freeze the benefits earned under thePension Plan (and SERP Plan, if eligible) and participate in the RSP. Noemployee who met vesting requirements forfeited benefits earned prior toJanuary 1, 2008.

 

In connection with the redesign of our long-termbenefits program, we recorded a one-timepension curtailment gain of $32.5 million (recorded as other income in ourcondensed consolidated statements of earnings) in the first quarter of fiscalyear 2008 to reflect the impact of freezing benefits provided under the Pensionand SERP Plans as of December 31, 2007.

 

11

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*** ***

***Costsof Benefits.***  The components of the expenses incurred underour Pension Plan, SERP Plan and Postretirement Plan are as follows:

 
| ** **                      | ** ** | **Quarter–to–Date**                     | ** ** | **Year–to–Date**                        | ** ** |
|---------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**         | ** ** | **Thirteen  weeks ended  January 26,  2008** | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** |
| Pension Plan:                   |       |                                              |       |                                              |       |   |   |   |   |
| Service cost                    |       | $                                                 | 3,409      |                                              | $          | 3,922 |   | $ | 7,803 |   | $ | 7,844 |   |
| Interest cost                   |       | 5,549                                             |       | 5,863                                             |       | 11,390 |   | 11,726 |   |
| Expected return  on plan assets |       | (6,019                                            | )          | (5,876                                            | )          | (12,178 | ) | (11,752 | ) |
| Net amortization  of gains      |       | 188                                               |       | —                                            |       | — |   | — |   |
| Pension Plan  expense           |       | $                                                 | 3,127      |                                              | $          | 3,909 |   | $ | 7,015 |   | $ | 7,818 |   |
|                            |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Curtailment gain                |       | $                                                 | —     |                                              | $          | — |   | $ | 26,113 |   | $ | — |   |
|                            |       |                                              |       |                                              |       |   |   |   |   |
| SERP Plan:                      |       |                                              |       |                                              |       |   |   |   |   |
| Service cost                    |       | $                                                 | 378        |                                              | $          | 469 |   | $ | 846 |   | $ | 938 |   |
| Interest cost                   |       | 1,203                                             |       | 1,232                                             |       | 2,473 |   | 2,464 |   |
| SERP Plan  expense              |       | $                                                 | 1,581      |                                              | $          | 1,701 |   | $ | 3,319 |   | $ | 3,402 |   |
|                            |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |
| Curtailment gain                |       | $                                                 | —     |                                              | $          | — |   | $ | 6,337 |   | $ | — |   |
|                            |       |                                              |       |                                              |       |   |   |   |   |
| Defined  Contribution SERP Plan |       | $                                                 | 147        |                                              | $          | — |   | $ | 147 |   | $ | — |   |
|                            |       |                                              |       |                                              |       |   |   |   |   |
| Postretirement  Plan:           |       |                                              |       |                                              |       |   |   |   |   |
| Service cost                    |       | $                                                 | 31         |                                              | $          | 14 |   | $ | 62 |   | $ | 28 |   |
| Interest cost                   |       | 339                                               |       | 227                                               |       | 678 |   | 454 |   |
| Net amortization  of losses     |       | 137                                               |       | —                                            |       | 274 |   | — |   |
| Postretirement  Plan expense    |       | $                                                 | 507        |                                              | $          | 241 |   | $ | 1,014 |   | $ | 482 |   |

 

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

 
| **(in thousands)**                   | ** ** | **January 26,  2008** | ** ** | **July 28,  2007** | ** ** | **January 27,  2007** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | ** **                 | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Pension Plan                              |       | $                          | 40,228     |                    | $          | 55,603                     |       | $ | 86,638 |   |
| SERP Plan                                 |       | 81,177                     |       | 86,146                  |       | 82,897                     |       |
| Defined  Contribution SERP Plan           |       | 147                        |       | —                  |       | —                     |       |
| Postretirement  Plan                      |       | 22,855                     |       | 22,091                  |       | 15,229                     |       |
|                                      |       | 144,407                    |       | 163,840                 |       | 184,764                    |       |
| Less: current  portion                    |       | (4,019                     | )          | (4,019                  | )          | —                     |       |
| Long-term  portion of benefit obligations |       | $                          | 140,388    |                    | $          | 159,821                    |       | $ | 184,764 |   |

 

We adopted the provisions of Statement of Financial Accounting Standards No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementBenefit Plans” (SFAS 158), in the fourth quarter of fiscal year 2007.  Inconnection with the adoption of SFAS 158, we adjusted the carrying values ofour previously recorded obligations to equal their unfunded status at July 28,2007.  These aggregate adjustmentsresulted in a net decrease in the carrying values of our obligations byapproximately $28.7 million, which amount was recorded (net of taxes of $11.3million) as an increase in accumulated other comprehensive income in ourstatement of shareholders’ equity for fiscal year 2007.

 

In the first quarter of fiscal year 2008, we reduced our recordedliability for projected benefit obligations payable by the Pension Plan by$26.1 million and by the SERP Plan by $6.3 million to reflect the impact offreezing benefits provided under these plans as of December 31, 2007.

 

12

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***Funding Policy and Plan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law. Based upon currently available information, we willnot be required to make contributions to the Pension Plan during fiscal year2008. In fiscal year 2007, we made nocontributions to our Pension Plan.

 

**6.**              Income Taxes

** **

We adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year2008.  FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.

 

The cumulative effect of adopting FIN 48 resulted in a net increase 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.  At adoption, thegross amount of unrecognized tax benefits was $26.7 million, of which $3.5million of unrecognized tax benefits would impact our effective tax rate, ifrecognized.  We classify interest andpenalties as a component of income tax expense and our liability for accruedinterest and penalties was $8.5 million upon adoption of FIN 48.

 

Wefile income tax returns in the U.S. federal jurisdiction and various state andlocal jurisdictions. We closed the Internal Revenue Service (IRS) examinationsof federal tax returns for fiscal years 2004 and 2003 during the first quarterof fiscal year 2007 and paid the related tax liability during the secondquarter of fiscal year 2007.   The IRS isnow examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofJanuary 26, 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 respectto state and local jurisdictions, with limited exceptions, the Company and itssubsidiaries are no longer subject to income tax audits for fiscal years before2003.  We believe it is reasonablypossible that a significant increase or decrease in the amounts of ourunrecognized tax benefits could occur within the next 12 months as a result ofnegotiated settlements with tax authorities. However, at this time, an estimate of the range of adjustment cannot be made.

 

13

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**7.**              Stock-BasedCompensation

** **

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

 

Asummary of the status of our stock option plan as of January 26, 2008, July 28,2007 and January 27, 2007 and changes during the periods ended on these datesis as follows:

 
| ** **                            | ** ** | **January 26, 2008** | ** ** | **July 28, 2007**            | ** ** | **January 27, 2007** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **Shares**                     | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares**                     | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of period   |       | 83,634.3                       |       | $                                      | 1,430      |                           | 81,716.3   |   | $ | 1,416 |   | 81,716.3 |   | $ | 1,416 |   |
| Granted                               |       | 260.0                          |       | 2,684                                  |       | 2,496.0                        |       | 1,942 |   | 2,496.0 |   | 1,942 |   |
| Exercised                             |       | —                         |       | —                                 |       | (578.0                         | )          | 1,590 |   | — |   | — |   |
| Outstanding at  end of period         |       | 83,894.3                       |       | $                                      | 1,434      |                           | 83,634.3   |   | $ | 1,430 |   | 84,212.3 |   | $ | 1,432 |   |
| Options  exercisable at end of period |       | 40,653.1                       |       | $                                      | 1,385      |                           | 29,764.1   |   | $ | 1,233 |   | 24,533.7 |   | $ | 1,179 |   |

 

Theexercise price of approximately 50% of such options escalate at a 10% compoundrate per year until the earlier to occur of (i) exercise, (ii) thefifth anniversary of the date of grant or (iii) the occurrence of a changein control. However, in the event the Sponsors cause the sale of shares of theCompany to an unaffiliated entity, the exercise price will cease to accrete atthe time of the sale with respect to a pro rata portion of the accretingoptions.

 

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

 

Weuse the Black-Scholes option-pricing model to determine the fair value of ouroptions as of the date of grant in accordance with the provisions of SFAS123(R).  A summary of fiscal years 2008,2007 and 2006 grants and fair value assumptions 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  outstanding at January 26, 2008 |       | 130.0                                  |       | 130.0                                   |       | 1,248.0                                |       | 1,248.0 |   | 43,594.6 |   | 37,543.7 | ** ** |
| Exercise price  at January 26, 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 | ** ** |

 

Expectedvolatility is based on a combination of NMG’s historical volatility adjustedfor our new leverage and estimates of implied volatility of ourpeer group.

 

 We recognized non-cash stock compensationexpense of $3.0 million for the twenty-six weeks ended January 26, 2008and $2.9 million for the twenty-six weeks ended January 27, 2007, which isincluded in selling, general and administrative expenses. At January 28, 2006,unearned non-cash stock-based compensation that we expect to recognize asexpense over the next 5 years aggregates approximately $16.0 million.

 

14

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** **

**8.**              Transactions withSponsors

** **

 Pursuant to a management services agreementwith affiliates of the Sponsors, and in exchange for on-going consulting andmanagement advisory services that are provided to us by the Sponsors and theiraffiliates, affiliates of the Sponsors receive an aggregate annual managementfee equal to the lesser of (i) 0.25% of our consolidated annual revenuesor (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 fees of $6.3 millionduring the twenty-six weeks ended January 26, 2008 and $5.9 million during thetwenty-six weeks ended January 27, 2007, which are included in selling, generaland administrative expenses in the condensed consolidated statements ofearnings.

 

 The management services agreement also providesthat affiliates of the Sponsors may receive future fees in connection withcertain subsequent financing and acquisition or disposition transactions. Themanagement services agreement includes customary exculpation and indemnificationprovisions in favor of the Sponsors and their affiliates.

 

**9.**              Income fromCredit Card Program

** **

Pursuantto a long-term marketing and servicing alliance with HSBC, HSBC offers creditcard and non-card payment plans bearing our brands and we receive ongoingpayments from HSBC based on credit card sales and compensation for marketingand servicing activities (HSBC Program Income). We recognize HSBC Program Income when earned.

 

On February 14, 2008, we filed a lawsuit against HSBC Bank Nevada, N.A.and HSBC Private Label Corporation (collectively, HSBC) alleging a breach byHSBC of our existing Credit Card Program Agreement (the Program Agreement) aswell as other claims, and we asked for a temporary restraining order and otherinjunctive relief. Subsequent to the granting of the temporary restrainingorder by the Court, we have negotiated and executed a letter of intent withHSBC related to certain proposed amendments to the Program Agreement. Theseproposed amendments will, among other things, provide for 1) the allocationbetween HSBC and the Company of additional income, if any, to be generated fromour credit card program as a result of certain changes made to the ProgramAgreement, and 2) the allocation of certain credit losses between HSBC and theCompany. We expect to execute the proposed amendments in the third quarter offiscal year 2008. We do not currently believe either the filing of this lawsuitor the proposed amendments to the Program Agreement will have a material impacton the level of future program income we will earn under the Program Agreement.

 

**10.**       Other Income

** **

In the first quarter of fiscal year 2008, we recordeda one-time pension curtailment gain of $32.5 million, or 1.3% of revenues, as aresult of our decision to freeze Pension andSERP benefits as of December 31, 2007. See Note 5 for more information.

 

In the first quarter of fiscal year 2007, we receivedconsideration aggregating $4.2 million, or 0.2% of revenues, in connection withthe merger of Wedding Channel.com, in which we held a minority interest, andThe Knot. We accounted for our investment in Wedding Channel.com under the costmethod. In prior years, we had previously reduced our carrying value of thisinvestment to zero.

 

**11.**       Commitments andContingencies

** **

***Long-term Incentive Plan.***  The Companyhas a long-term incentive plan (Long-term Incentive Plan) that provides for acash incentive payable upon a change of control, as defined, subject to theattainment of certain performance objectives to employees who had historicallybeen eligible for stock-based compensation programs of the Predecessor.  Performance objectives and targets are basedon cumulative EBITDA percentages for three year periods beginning in fiscalyear 2006.  Earned awards for eachcompleted performance period will be credited to a book account and will earninterest at a contractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% oftotal outstanding common stock.

 

15

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***Cash Incentive Plan.***  The Companyalso has 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.

 

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

** **

 The following table shows thecomponents of accumulated other comprehensive (loss) income:

 
| **(in thousands)**                              | ** ** | **January 26,  2008** | ** ** | **July 28,  2007** | ** ** | **January 27,  2007** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | ** **                 | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Unrealized  (loss) gain on financial instruments     |       | $                          | (31,052    | )                       | $          | 3,733                      |       | $ | 6,843 |   |
| Unfunded benefit  obligations                        |       | 15,709                     |       | 17,365                  |       | —                     |       |
| Other                                                |       | 322                        |       | 131                     |       | (1,320                     | )          |
| Total  accumulated other comprehensive (loss) income |       | $                          | (15,021    | )                       | $          | 21,229                     |       | $ | 5,523 |   |

 
| **(in thousands)**                                          | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended****July 28,  2007** | ** ** | **Twenty-Six  weeks ended****January 27,  2007** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                       | ** ** | ** **                                     | ** ** | ** **                                         | ** ** | ** **                                            | ** ** |
| Net earnings  from condensed consolidated statements of earnings |       | $                                              | 123,061    |                                               | $          | 43,682                                                |       | $ | 68,252 |   |
| Change in  unrealized loss on financial instruments              |       | (34,785                                        | )          | (3,110                                             | )          | (3,794                                                | )          |
| Other                                                            |       | (1,465                                         | )          | 1,451                                              |       | (512                                                  | )          |
| Total  comprehensive income for the period                       |       | $                                              | 86,811     |                                               | $          | 42,023                                                |       | $ | 63,946 |   |

 

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

 

16

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Thefollowing tables set forth the information for our reportable segments:

 
| ** **                                                                               | ** ** | **Quarter–to–Date**                     | ** ** | **Year–to–Date**                        | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                                  | ** ** | **Thirteen  weeks ended  January 26,  2008** | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** |
|                                                                                     |       |                                              |       |                                              |       |   |   |   |   |
| REVENUES                                                                                 |       |                                              |       |                                              |       |   |   |   |   |
| Specialty Retail  stores                                                                 |       | $                                                 | 1,136,324  |                                              | $          | 1,069,946 |   | $ | 2,097,921 |   | $ | 1,949,879 |   |
| Direct Marketing                                                                         |       | 237,531                                           |       | 225,890                                           |       | 408,177 |   | 385,169 |   |
| Total                                                                                    |       | $                                                 | 1,373,855  |                                              | $          | 1,295,836 |   | $ | 2,506,098 |   | $ | 2,335,048 |   |
|                                                                                     |       |                                              |       |                                              |       |   |   |   |   |
| OPERATING  EARNINGS                                                                      |       |                                              |       |                                              |       |   |   |   |   |
| Specialty Retail  stores                                                                 |       | $                                                 | 127,917    |                                              | $          | 121,515 |   | $ | 293,499 |   | $ | 278,090 |   |
| Direct Marketing                                                                         |       | 41,968                                            |       | 39,131                                            |       | 65,230 |   | 59,930 |   |
| Subtotal                                                                                 |       | 169,885                                           |       | 160,646                                           |       | 358,729 |   | 338,020 |   |
| Corporate                                                                                |       | (17,653                                           | )          | (14,792                                           | )          | (31,207 | ) | (24,070 | ) |
| Amortization of  customer lists and favorable lease commitments                          |       | (17,953                                           | )          | (18,050                                           | )          | (35,949 | ) | (36,082 | ) |
| Other income (1)                                                                         |       | —                                            |       | —                                            |       | 32,450 |   | 4,210 |   |
| Total                                                                                    |       | $                                                 | 134,279    |                                              | $          | 127,804 |   | $ | 324,023 |   | $ | 282,078 |   |
|                                                                                     |       |                                              |       |                                              |       |   |   |   |   |
| CAPITAL  EXPENDITURES                                                                    |       |                                              |       |                                              |       |   |   |   |   |
| Specialty Retail  stores                                                                 |       | $                                                 | 36,421     |                                              | $          | 23,274 |   | $ | 76,610 |   | $ | 61,491 |   |
| Direct Marketing                                                                         |       | 5,714                                             |       | 5,989                                             |       | 11,563 |   | 9,191 |   |
| Total                                                                                    |       | $                                                 | 42,135     |                                              | $          | 29,263 |   | $ | 88,173 |   | $ | 70,682 |   |
|                                                                                     |       |                                              |       |                                              |       |   |   |   |   |
| DEPRECIATION  EXPENSE                                                                    |       |                                              |       |                                              |       |   |   |   |   |
| Specialty Retail  stores                                                                 |       | $                                                 | 30,331     |                                              | $          | 29,493 |   | $ | 60,262 |   | $ | 58,434 |   |
| Direct Marketing                                                                         |       | 3,776                                             |       | 3,410                                             |       | 7,821 |   | 6,480 |   |
| Subtotal                                                                                 |       | 34,107                                            |       | 32,903                                            |       | 68,083 |   | 64,914 |   |
| Depreciation  expense on step-up of fixed assets made in connection with the Acquisition |       | 979                                               |       | 1,170                                             |       | 2,138 |   | 2,335 |   |
| Total                                                                                    |       | $                                                 | 35,086     |                                              | $          | 34,073 |   | $ | 70,221 |   | $ | 67,249 |   |

 
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | **January  26,  2008** | ** ** | **January  27,  2007** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|------------------------|------------|------------------------|------------|
| ASSETS                                                |       |       |       |       |       |                   |       |                   |       |
| Tangible assets  of Specialty Retail stores           |       |       |       |       |       | $                      | 1,934,006  |                   | $          | 1,800,656 |   |
| Tangible assets  of Direct Marketing                  |       |       |       |       |       | 175,161                |       | 157,400                |       |
| Corporate assets:                                     |       |       |       |       |       |                   |       |                   |       |
| Intangible  assets related to Specialty Retail stores |       |       |       |       |       | 3,550,983              |       | 3,600,475              |       |
| Intangible  assets related to Direct Marketing        |       |       |       |       |       | 562,219                |       | 587,218                |       |
| Other                                                 |       |       |       |       |       | 343,454                |       | 363,404                |       |
| Total                                                 |       |       |       |       |       | $                      | 6,565,823  |                   | $          | 6,509,153 |   |

 

----

(1) For the twenty-six weeks ended January 26, 2008,other income represents a one-time pension curtailment gain of $32.5 million asa result of our decision to freeze Pensionand SERP benefits as of December 31, 2007.  For thetwenty-six weeks ended January 27, 2007, other income represents theproceeds we received in connection with themerger of Wedding Channel.com, in which we held a minority interest, and TheKnot. We had previously reduced our carrying value in this investment tozero.

 

17

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**14.**       Condensed ConsolidatingFinancial Information (with respect to NMG’s obligations under the Senior Notesand theSenior Subordinated Notes)

** **

Allof NMG's obligations under the Senior Notes and the Senior Subordinated Notes,as well as its obligations under the Asset-Based Revolving Credit Facility andthe Senior Secured Term Loan Facility, are guaranteed by the Company andcertain of NMG’s existing and future domestic subsidiaries (principally,Bergdorf Goodman, Inc. through which NMG conducts the operations of itsBergdorf Goodman stores and NM Nevada Trust which holds legal title to certainreal property and intangible assets used by the Company in conducting itsoperations). The guarantees by the Company and each subsidiary guarantor arefull and unconditional and joint and several. Currently, the Company’s non-guarantor subsidiaries consist principallyof an operating subsidiary domiciled in Canada providing support services toour Direct Marketing operations. Previously, our non-guarantor subsidiariesalso included Kate Spade LLC (prior to its sale in December 2006), which isreflected in the tables below as discontinued operations.

 

 The following condensed consolidating financialinformation 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's Regulation S-X.The financial information may not necessarily be indicative of results ofoperations, cash flows or financial position had the subsidiary guarantorsoperated as independent entities.

 
| ** **                                       | ** ** | **January 26, 2008** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                              | —     |   | $ | 234,321 |   | $ | 881 |   | $ | 545 |   | $ | — |   | $ | 235,747 |   |
| Merchandise  inventories                         |       | —                         |       | 784,541 |   | 100,662 |   | 7 |   | — |   | 885,210 |   |
| Other current  assets                            |       | —                         |       | 161,238 |   | 9,571 |   | 3,681 |   | 544 |   | 175,034 |   |
| Total current  assets                            |       | —                         |       | 1,180,100 |   | 111,114 |   | 4,233 |   | 544 |   | 1,295,991 |   |
| Property and  equipment, net                     |       | —                         |       | 925,987 |   | 136,681 |   | 2,066 |   | — |   | 1,064,734 |   |
| Goodwill and intangible  assets, net             |       | —                         |       | 1,922,766 |   | 2,190,436 |   | — |   | — |   | 4,113,202 |   |
| Other assets                                     |       | —                         |       | 91,808 |   | 88 |   | — |   | — |   | 91,896 |   |
| Investments in  subsidiaries                     |       | 1,647,834                      |       | 2,320,138 |   | — |   | — |   | (3,967,972 | ) | — |   |
| Total assets                                     |       | $                              | 1,647,834  |   | $ | 6,440,799 |   | $ | 2,438,319 |   | $ | 6,299 |   | $ | (3,967,428 | ) | $ | 6,565,823 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                              | —     |   | $ | 235,147 |   | $ | 41,145 |   | $ | 4,329 |   | $ | 544 |   | $ | 281,165 |   |
| Accrued  liabilities                             |       | —                         |       | 329,710 |   | 79,626 |   | 57 |   | — |   | 409,393 |   |
| Other current  liabilities                       |       | —                         |       | 2,946 |   | — |   | — |   | — |   | 2,946 |   |
| Total current  liabilities                       |       | —                         |       | 567,803 |   | 120,771 |   | 4,386 |   | 544 |   | 693,504 |   |
| Long-term  liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                         |       | 2,946,004 |   | — |   | — |   | — |   | 2,946,004 |   |
| Deferred income  taxes                           |       | —                         |       | 962,712 |   | — |   | — |   | — |   | 962,712 |   |
| Other long-term  liabilities                     |       | —                         |       | 316,446 |   | (677 | ) | — |   | — |   | 315,769 |   |
| Total long-term  liabilities                     |       | —                         |       | 4,225,162 |   | (677 | ) | — |   | — |   | 4,224,485 |   |
| Total  shareholders’ equity                 |       | 1,647,834                      |       | 1,647,834 |   | 2,318,225 |   | 1,913 |   | (3,967,972 | ) | 1,647,834 |   |
| Total  liabilities and shareholders’ equity |       | $                              | 1,647,834  |   | $ | 6,440,799 |   | $ | 2,438,319 |   | $ | 6,299 |   | $ | (3,967,428 | ) | $ | 6,565,823 |   |

 

18

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| ** **                                       | ** ** | **July 28, 2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| **(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 |   |

 

19

----

 
| ** **                                       | ** ** | **January 27, 2007** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** |   |
| **ASSETS**                                       |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                              | —     |   | $ | 187,772 |   | $ | 767 |   | $ | 8 |   | $ | — |   | $ | 188,547 |   |
| Merchandise  inventories                         |       | —                         |       | 731,482 |   | 81,263 |   | 7 |   | (461 | ) | 812,291 |   |
| Other current  assets                            |       | —                         |       | 154,994 |   | 11,025 |   | 3,681 |   | 544 |   | 170,244 |   |
| Total current  assets                            |       | —                         |       | 1,074,248 |   | 93,055 |   | 3,696 |   | 83 |   | 1,171,082 |   |
| Property and  equipment, net                     |       | —                         |       | 884,173 |   | 148,662 |   | 2,179 |   | — |   | 1,035,014 |   |
| Goodwill and  intangible assets, net             |       | —                         |       | 1,975,358 |   | 2,212,335 |   | — |   | — |   | 4,187,693 |   |
| Other assets                                     |       | —                         |       | 115,069 |   | 295 |   | — |   | — |   | 115,364 |   |
| Investments in  subsidiaries                     |       | 1,494,613                      |       | 2,336,705 |   | — |   | — |   | (3,831,318 | ) | — |   |
| Total assets                                     |       | $                              | 1,494,613  |   | $ | 6,385,553 |   | $ | 2,454,347 |   | $ | 5,875 |   | $ | (3,831,235 | ) | $ | 6,509,153 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                              | —     |   | $ | 267,444 |   | $ | 27,725 |   | $ | 4,772 |   | $ | 544 |   | $ | 300,485 |   |
| Accrued  liabilities                             |       | —                         |       | 344,536 |   | 82,367 |   | 82 |   | — |   | 426,985 |   |
| Other current  liabilities                       |       | —                         |       | 3,425 |   | — |   | — |   | — |   | 3,425 |   |
| Total current  liabilities                       |       | —                         |       | 615,405 |   | 110,092 |   | 4,854 |   | 544 |   | 730,895 |   |
| Long-term  liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                         |       | 3,020,809 |   | — |   | — |   | — |   | 3,020,809 |   |
| Deferred income  taxes                           |       | —                         |       | 1,033,067 |   | — |   | — |   | — |   | 1,033,067 |   |
| Other long-term  liabilities                     |       | —                         |       | 221,659 |   | 8,110 |   | — |   | — |   | 229,769 |   |
| Total long-term  liabilities                     |       | —                         |       | 4,275,535 |   | 8,110 |   | — |   | — |   | 4,283,645 |   |
| Total  shareholders’ equity                 |       | 1,494,613                      |       | 1,494,613 |   | 2,336,145 |   | 1,021 |   | (3,831,779 | ) | 1,494,613 |   |
| Total  liabilities and shareholders’ equity |       | $                              | 1,494,613  |   | $ | 6,385,553 |   | $ | 2,454,347 |   | $ | 5,875 |   | $ | (3,831,235 | ) | $ | 6,509,153 |   |

 

20

----

 
| ** **                                                                        | ** ** | **Thirteen weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** |   |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 1,167,217 |   | $ | 206,638 |   | $ | — |   | $ | — |   | $ | 1,373,855 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                             |       | 772,879 |   | 140,169 |   | 186 |   | — |   | 913,234 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                             |       | 255,531 |   | 37,487 |   | (446 | ) | — |   | 292,572 |   |
| Income from  credit card program                                                  |       | —                                                             |       | (17,506 | ) | (1,763 | ) | — |   | — |   | (19,269 | ) |
| Depreciation  expense                                                             |       | —                                                             |       | 30,679 |   | 4,300 |   | 107 |   | — |   | 35,086 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                             |       | 15,060 |   | 2,893 |   | — |   | — |   | 17,953 |   |
| Operating  earnings                                                               |       | —                                                             |       | 110,574 |   | 23,552 |   | 153 |   | — |   | 134,279 |   |
| Interest  expense, net                                                            |       | —                                                             |       | 60,394 |   | 3 |   | — |   | — |   | 60,397 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                             |       | 83,143 |   | (83,143 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (44,303                                                            | )          | (106,845 | ) | — |   | — |   | 151,148 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 44,303                                                             |       | 73,882 |   | 106,692 |   | 153 |   | (151,148 | ) | 73,882 |   |
| Income taxes                                                                      |       | —                                                             |       | 29,579 |   | — |   | — |   | — |   | 29,579 |   |
| Net earnings  (loss)                                                              |       | $                                                                  | 44,303     |   | $ | 44,303 |   | $ | 106,692 |   | $ | 153 |   | $ | (151,148 | ) | $ | 44,303 |   |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended January 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** |   |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 1,103,406 |   | $ | 192,430 |   | $ | — |   | $ | — |   | $ | 1,295,836 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                             |       | 720,233 |   | 129,831 |   | 194 |   | — |   | 850,258 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                             |       | 247,458 |   | 36,553 |   | (430 | ) | — |   | 283,581 |   |
| Income from  credit card program                                                  |       | —                                                             |       | (16,175 | ) | (1,755 | ) | — |   | — |   | (17,930 | ) |
| Depreciation  expense                                                             |       | —                                                             |       | 29,127 |   | 4,850 |   | 96 |   | — |   | 34,073 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                             |       | 15,109 |   | 2,941 |   | — |   | — |   | 18,050 |   |
| Operating  earnings                                                               |       | —                                                             |       | 107,654 |   | 20,010 |   | 140 |   | — |   | 127,804 |   |
| Interest  expense, net                                                            |       | —                                                             |       | 65,537 |   | — |   | — |   | — |   | 65,537 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                             |       | 77,565 |   | (77,565 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (41,023                                                            | )          | (100,560 | ) | — |   | — |   | 141,583 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 41,023                                                             |       | 65,112 |   | 97,575 |   | 140 |   | (141,583 | ) | 62,267 |   |
| Income taxes                                                                      |       | —                                                             |       | 24,089 |   | — |   | — |   | — |   | 24,089 |   |
| Earnings (loss)  from continuing operations                                       |       | 41,023                                                             |       | 41,023 |   | 97,575 |   | 140 |   | (141,583 | ) | 38,178 |   |
| Earnings (loss)  from discontinued operations, net of taxes                       |       | —                                                             |       | — |   | — |   | 3,765 |   | (920 | ) | 2,845 |   |
| Net earnings  (loss)                                                              |       | $                                                                  | 41,023     |   | $ | 41,023 |   | $ | 97,575 |   | $ | 3,905 |   | $ | (142,503 | ) | $ | 41,023 |   |

 

21

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| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** |   |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 2,108,676 |   | $ | 397,422 |   | $ | — |   | $ | — |   | $ | 2,506,098 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                               |       | 1,330,577 |   | 249,414 |   | 379 |   | — |   | 1,580,370 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                               |       | 492,555 |   | 72,951 |   | (958 | ) | — |   | 564,548 |   |
| Income from  credit card program                                                  |       | —                                                               |       | (32,941 | ) | (3,622 | ) | — |   | — |   | (36,563 | ) |
| Depreciation  expense                                                             |       | —                                                               |       | 60,961 |   | 9,050 |   | 210 |   | — |   | 70,221 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                               |       | 30,119 |   | 5,830 |   | — |   | — |   | 35,949 |   |
| Other income                                                                      |       | —                                                               |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Operating  earnings                                                               |       | —                                                               |       | 259,855 |   | 63,799 |   | 369 |   | — |   | 324,023 |   |
| Interest  expense, net                                                            |       | —                                                               |       | 121,614 |   | 6 |   | — |   | — |   | 121,620 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (123,061                                                             | )          | (220,124 | ) | — |   | — |   | 343,185 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 123,061                                                              |       | 202,403 |   | 219,755 |   | 369 |   | (343,185 | ) | 202,403 |   |
| Income taxes                                                                      |       | —                                                               |       | 79,342 |   | — |   | — |   | — |   | 79,342 |   |
| Net earnings  (loss)                                                              |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 219,755 |   | $ | 369 |   | $ | (343,185 | ) | $ | 123,061 |   |

 
| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** |   |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 1,973,882 |   | $ | 361,166 |   | $ | — |   | $ | — |   | $ | 2,335,048 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                               |       | 1,229,552 |   | 227,099 |   | 386 |   | — |   | 1,457,037 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                               |       | 462,447 |   | 69,301 |   | (635 | ) | — |   | 531,113 |   |
| Income from  credit card program                                                  |       | —                                                               |       | (30,803 | ) | (3,498 | ) | — |   | — |   | (34,301 | ) |
| Depreciation  expense                                                             |       | —                                                               |       | 57,555 |   | 9,503 |   | 191 |   | — |   | 67,249 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                               |       | 30,199 |   | 5,883 |   | — |   | — |   | 36,082 |   |
| Other income                                                                      |       | —                                                               |       | (4,210 | ) | — |   | — |   | — |   | (4,210 | ) |
| Operating  earnings                                                               |       | —                                                               |       | 229,142 |   | 52,878 |   | 58 |   | — |   | 282,078 |   |
| Interest  expense, net                                                            |       | —                                                               |       | 134,354 |   | — |   | — |   | — |   | 134,354 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                               |       | 143,643 |   | (143,643 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (68,252                                                              | )          | (175,198 | ) | — |   | — |   | 243,450 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 68,252                                                               |       | 126,343 |   | 196,521 |   | 58 |   | (243,450 | ) | 147,724 |   |
| Income taxes                                                                      |       | —                                                               |       | 58,091 |   | — |   | — |   | — |   | 58,091 |   |
| Earnings (loss)  from continuing operations                                       |       | 68,252                                                               |       | 68,252 |   | 196,521 |   | 58 |   | (243,450 | ) | 89,633 |   |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                               |       | — |   | — |   | (19,892 | ) | (1,489 | ) | (21,381 | ) |
| Net earnings  (loss)                                                              |       | $                                                                    | 68,252     |   | $ | 68,252 |   | $ | 196,521 |   | $ | (19,834 | ) | $ | (244,939 | ) | $ | 68,252 |   |

 

22

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|                                                                                         |       | **Twenty-Six weeks ended January 26, 2008** |       |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 219,755 |   | $ | 369 |   | $ | (343,185 | ) | $ | 123,061 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities:         |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                               |       | 60,961 |   | 9,050 |   | 210 |   | — |   | 70,221 |   |
| Amortization of debt issue costs                                                             |       | —                                                               |       | 7,109 |   | — |   | — |   | — |   | 7,109 |   |
| Amortization of customer lists and favorable lease commitments                               |       | —                                                               |       | 30,119 |   | 5,830 |   | — |   | — |   | 35,949 |   |
| Deferred income taxes                                                                        |       | —                                                               |       | (13,673 | ) | — |   | — |   | — |   | (13,673 | ) |
| 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 |       | —                                                               |       | 14,605 |   | (37 | ) | — |   | — |   | 14,568 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (123,061                                                             | )          | (220,124 | ) | — |   | — |   | 343,185 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                                               |       | 55,281 |   | (74,488 | ) | (792 | ) | — |   | (19,999 | ) |
| Net cash provided by (used for) operating activities                                         |       | —                                                               |       | 180,851 |   | 4,148 |   | (213 | ) | — |   | 184,786 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                               |       | (83,790 | ) | (4,463 | ) | 80 |   | — |   | (88,173 | ) |
| 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                                         |       | —                                                               |       | (83,790 | ) | (4,463 | ) | 80 |   | — |   | (88,173 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                               |       | (2,073 | ) | — |   | — |   | — |   | (2,073 | ) |
| Net cash used for financing activities                                                       |       | —                                                               |       | (2,073 | ) | — |   | — |   | — |   | (2,073 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                                               |       | 94,988 |   | (315 | ) | (133 | ) | — |   | 94,540 |   |
| Beginning balance                                                                            |       | —                                                               |       | 139,333 |   | 1,196 |   | 678 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 234,321 |   | $ | 881 |   | $ | 545 |   | $ | — |   | $ | 235,747 |   |

 

23

----

 
| ** **                                                                                   | ** ** | **Twenty-Six weeks ended January 27, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                    | 68,252     |   | $ | 68,252 |   | $ | 196,521 |   | $ | (19,834 | ) | $ | (244,939 | ) | $ | 68,252 |   |
| Loss from discontinued operations                                                            |       | —                                                               |       | — |   | — |   | 19,892 |   | 1,489 |   | 21,381 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities:         |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                               |       | 57,555 |   | 9,503 |   | 191 |   | — |   | 67,249 |   |
| Amortization of debt issue costs                                                             |       | —                                                               |       | 7,033 |   | — |   | — |   | — |   | 7,033 |   |
| Amortization of customer lists and favorable lease commitments                               |       | —                                                               |       | 30,199 |   | 5,883 |   | — |   | — |   | 36,082 |   |
| Deferred income taxes                                                                        |       | —                                                               |       | (24,147 | ) | — |   | — |   | — |   | (24,147 | ) |
| Other, primarily costs related to defined benefit pension and other  long-term benefit plans |       | —                                                               |       | 11,380 |   | 1,606 |   | — |   | — |   | 12,986 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                                               |       | 143,643 |   | (143,643 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (68,252                                                              | )          | (175,198 | ) | — |   | — |   | 243,450 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                                               |       | 25,776 |   | (62,936 | ) | 10,340 |   | — |   | (26,820 | ) |
| Net cash provided by continuing operating activities                                         |       | —                                                               |       | 144,493 |   | 6,934 |   | 10,589 |   | — |   | 162,016 |   |
| Net cash used for discontinued operations                                                    |       | —                                                               |       | — |   | — |   | (9,163 | ) | — |   | (9,163 | ) |
| Net cash provided by operating activities                                                    |       | —                                                               |       | 144,493 |   | 6,934 |   | 1,426 |   | — |   | 152,853 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                               |       | (62,445 | ) | (7,153 | ) | (1,084 | ) | — |   | (70,682 | ) |
| 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                                            |       | —                                                               |       | (376 | ) | (7,153 | ) | (1,084 | ) | — |   | (8,613 | ) |
| Net cash used for discontinued operations                                                    |       | —                                                               |       | — |   | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for investing activities                                                       |       | —                                                               |       | (376 | ) | (7,153 | ) | (1,212 | ) | — |   | (8,741 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                               |       | (178,045 | ) | — |   | — |   | — |   | (178,045 | ) |
| Debt issuance costs paid                                                                     |       | —                                                               |       | (758 | ) | — |   | — |   | — |   | (758 | ) |
| Proceeds from purchase of common stock                                                       |       | —                                                               |       | 150 |   | — |   | — |   | — |   | 150 |   |
| Net cash used for continuing financing activities                                            |       | —                                                               |       | (178,653 | ) | — |   | — |   | — |   | (178,653 | ) |
| Net cash used for discontinued operations                                                    |       | —                                                               |       | — |   | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for financing activities                                                       |       | —                                                               |       | (178,653 | ) | — |   | (1,675 | ) | — |   | (180,328 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Decrease during the period                                                                   |       | —                                                               |       | (34,536 | ) | (219 | ) | (1,461 | ) | — |   | (36,216 | ) |
| Beginning balance                                                                            |       | —                                                               |       | 222,308 |   | 986 |   | 1,469 |   | — |   | 224,763 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 187,772 |   | $ | 767 |   | $ | 8 |   | $ | — |   | $ | 188,547 |   |

** **

**24**

----

** **

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

** **

All of NMG’s obligations under the 2028 Debentures areguaranteed by the Company. The guarantee by the Company is full andunconditional and joint and several. Currently, the Company’s non-guarantorsubsidiaries consist principally of Bergdorf Goodman, Inc. through whichNMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trustwhich holds legal title to certain real property and intangible assets used byNMG in conducting its operations. Previously, our non-guarantor subsidiariesalso included Kate Spade LLC (prior to its sale in December 2006), whichis reflected in the tables below as discontinued operations.

 

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

 
| ** **                                      | ** ** | **January 26, 2008** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 234,321 |   | $ | 1,426 |   | $ | — |   | $ | 235,747 |   |
| Merchandise inventories                         |       | —                         |       | 784,541 |   | 100,669 |   | — |   | 885,210 |   |
| Other current assets                            |       | —                         |       | 161,238 |   | 13,252 |   | 544 |   | 175,034 |   |
| Total current assets                            |       | —                         |       | 1,180,100 |   | 115,347 |   | 544 |   | 1,295,991 |   |
| Property and equipment, net                     |       | —                         |       | 925,987 |   | 138,747 |   | — |   | 1,064,734 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,922,766 |   | 2,190,436 |   | — |   | 4,113,202 |   |
| Other assets                                    |       | —                         |       | 91,808 |   | 88 |   | — |   | 91,896 |   |
| Investments in subsidiaries                     |       | 1,647,834                      |       | 2,320,138 |   | — |   | (3,967,972 | ) | — |   |
| Total assets                                    |       | $                              | 1,647,834  |   | $ | 6,440,799 |   | $ | 2,444,618 |   | $ | (3,967,428 | ) | $ | 6,565,823 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 235,147 |   | $ | 45,474 |   | $ | 544 |   | $ | 281,165 |   |
| Accrued liabilities                             |       | —                         |       | 329,710 |   | 79,683 |   | — |   | 409,393 |   |
| Other current liabilities                       |       | —                         |       | 2,946 |   | — |   | — |   | 2,946 |   |
| Total current liabilities                       |       | —                         |       | 567,803 |   | 125,157 |   | 544 |   | 693,504 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 2,946,004 |   | — |   | — |   | 2,946,004 |   |
| Deferred income taxes                           |       | —                         |       | 962,712 |   | — |   | — |   | 962,712 |   |
| Other long-term liabilities                     |       | —                         |       | 316,446 |   | (677 | ) | — |   | 315,769 |   |
| Total long-term liabilities                     |       | —                         |       | 4,225,162 |   | (677 | ) | — |   | 4,224,485 |   |
| Total shareholders’ equity                 |       | 1,647,834                      |       | 1,647,834 |   | 2,320,138 |   | (3,967,972 | ) | 1,647,834 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,647,834  |   | $ | 6,440,799 |   | $ | 2,444,618 |   | $ | (3,967,428 | ) | $ | 6,565,823 |   |

 

25

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| ** **                                      | ** ** | **July 28, 2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| **(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 |   |

 

26

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| ** **                                      | ** ** | **January 27, 2007** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                              | —     |   | $ | 187,772 |   | $ | 775 |   | $ | — |   | $ | 188,547 |   |
| Merchandise inventories                         |       | —                         |       | 731,482 |   | 81,270 |   | (461 | ) | 812,291 |   |
| Other current assets                            |       | —                         |       | 154,994 |   | 14,706 |   | 544 |   | 170,244 |   |
| Total current assets                            |       | —                         |       | 1,074,248 |   | 96,751 |   | 83 |   | 1,171,082 |   |
| Property and equipment, net                     |       | —                         |       | 884,173 |   | 150,841 |   | — |   | 1,035,014 |   |
| Goodwill and intangible assets, net             |       | —                         |       | 1,975,358 |   | 2,212,335 |   | — |   | 4,187,693 |   |
| Other assets                                    |       | —                         |       | 115,069 |   | 295 |   | — |   | 115,364 |   |
| Investments in subsidiaries                     |       | 1,494,613                      |       | 2,336,705 |   | — |   | (3,831,318 | ) | — |   |
| Total assets                                    |       | $                              | 1,494,613  |   | $ | 6,385,553 |   | $ | 2,460,222 |   | $ | (3,831,235 | ) | $ | 6,509,153 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                              | —     |   | $ | 267,444 |   | $ | 32,497 |   | $ | 544 |   | $ | 300,485 |   |
| Accrued liabilities                             |       | —                         |       | 344,536 |   | 82,449 |   |   |   | 426,985 |   |
| Other current liabilities                       |       | —                         |       | 3,425 |   | — |   | — |   | 3,425 |   |
| Total current liabilities                       |       | —                         |       | 615,405 |   | 114,946 |   | 544 |   | 730,895 |   |
| Long-term liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                         |       | 3,020,809 |   | — |   | — |   | 3,020,809 |   |
| Deferred income taxes                           |       | —                         |       | 1,033,067 |   | — |   | — |   | 1,033,067 |   |
| Other long-term liabilities                     |       | —                         |       | 221,659 |   | 8,110 |   | — |   | 229,769 |   |
| Total long-term liabilities                     |       | —                         |       | 4,275,535 |   | 8,110 |   | — |   | 4,283,645 |   |
| Total shareholders’ equity                 |       | 1,494,613                      |       | 1,494,613 |   | 2,337,166 |   | (3,831,779 | ) | 1,494,613 |   |
| Total liabilities and shareholders’ equity |       | $                              | 1,494,613  |   | $ | 6,385,553 |   | $ | 2,460,222 |   | $ | (3,831,235 | ) | $ | 6,509,153 |   |

 

27

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| ** **                                                                        | ** ** | **Thirteen weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 1,167,217 |   | $ | 206,638 |   | $ | — |   | $ | 1,373,855 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                                             |       | 772,879 |   | 140,355 |   | — |   | 913,234 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                                             |       | 255,531 |   | 37,041 |   | — |   | 292,572 |   |
| Income from credit card program                                                   |       | —                                                             |       | (17,506 | ) | (1,763 | ) | — |   | (19,269 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 30,679 |   | 4,407 |   | — |   | 35,086 |   |
| Amortization of customer lists and favorable lease commitments                    |       | —                                                             |       | 15,060 |   | 2,893 |   | — |   | 17,953 |   |
| Operating earnings                                                                |       | —                                                             |       | 110,574 |   | 23,705 |   | — |   | 134,279 |   |
| Interest expense, net                                                             |       | —                                                             |       | 60,394 |   | 3 |   | — |   | 60,397 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 83,143 |   | (83,143 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (44,303                                                            | )          | (106,845 | ) | — |   | 151,148 |   | — |   |
| Earnings (loss) from continuing operations before income taxes                    |       | 44,303                                                             |       | 73,882 |   | 106,845 |   | (151,148 | ) | 73,882 |   |
| Income taxes                                                                      |       | —                                                             |       | 29,579 |   | — |   | — |   | 29,579 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 44,303     |   | $ | 44,303 |   | $ | 106,845 |   | $ | (151,148 | ) | $ | 44,303 |   |

** **
| ** **                                                                        | ** ** | **Thirteen weeks ended January 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 1,103,406 |   | $ | 192,430 |   | $ | — |   | $ | 1,295,836 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                                             |       | 720,233 |   | 130,025 |   | — |   | 850,258 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                                             |       | 247,458 |   | 36,123 |   | — |   | 283,581 |   |
| Income from credit card program                                                   |       | —                                                             |       | (16,175 | ) | (1,755 | ) | — |   | (17,930 | ) |
| Depreciation expense                                                              |       | —                                                             |       | 29,127 |   | 4,946 |   | — |   | 34,073 |   |
| Amortization of customer lists and favorable lease commitments                    |       | —                                                             |       | 15,109 |   | 2,941 |   | — |   | 18,050 |   |
| Operating earnings                                                                |       | —                                                             |       | 107,654 |   | 20,150 |   | — |   | 127,804 |   |
| Interest expense, net                                                             |       | —                                                             |       | 65,537 |   | — |   | — |   | 65,537 |   |
| Intercompany royalty charges (income)                                             |       | —                                                             |       | 77,565 |   | (77,565 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (41,023                                                            | )          | (100,560 | ) | — |   | 141,583 |   | — |   |
| Earnings (loss) from continuing operations before income taxes                    |       | 41,023                                                             |       | 65,112 |   | 97,715 |   | (141,583 | ) | 62,267 |   |
| Income taxes                                                                      |       | —                                                             |       | 24,089 |   | — |   | — |   | 24,089 |   |
| Earnings (loss) from continuing operations                                        |       | 41,023                                                             |       | 41,023 |   | 97,715 |   | (141,583 | ) | 38,178 |   |
| Earnings (loss) from discontinued operations, net of taxes                        |       | —                                                             |       | — |   | 3,765 |   | (920 | ) | 2,845 |   |
| Net earnings (loss)                                                               |       | $                                                                  | 41,023     |   | $ | 41,023 |   | $ | 101,480 |   | $ | (142,503 | ) | $ | 41,023 |   |

 

28

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| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 26, 2008** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 2,108,676 |   | $ | 397,422 |   | $ | — |   | $ | 2,506,098 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                                               |       | 1,330,577 |   | 249,793 |   | — |   | 1,580,370 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                                               |       | 492,555 |   | 71,993 |   | — |   | 564,548 |   |
| Income from credit card program                                                   |       | —                                                               |       | (32,941 | ) | (3,622 | ) | — |   | (36,563 | ) |
| Depreciation expense                                                              |       | —                                                               |       | 60,961 |   | 9,260 |   | — |   | 70,221 |   |
| Amortization of customer lists and favorable lease commitments                    |       | —                                                               |       | 30,119 |   | 5,830 |   | — |   | 35,949 |   |
| Other income                                                                      |       | —                                                               |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Operating earnings                                                                |       | —                                                               |       | 259,855 |   | 64,168 |   | — |   | 324,023 |   |
| Interest expense, net                                                             |       | —                                                               |       | 121,614 |   | 6 |   | — |   | 121,620 |   |
| Intercompany royalty charges (income)                                             |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (123,061                                                             | )          | (220,124 | ) | — |   | 343,185 |   | — |   |
| Earnings (loss) from continuing operations before income taxes                    |       | 123,061                                                              |       | 202,403 |   | 220,124 |   | (343,185 | ) | 202,403 |   |
| Income taxes                                                                      |       | —                                                               |       | 79,342 |   | — |   | — |   | 79,342 |   |
| Net earnings (loss)                                                               |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 220,124 |   | $ | (343,185 | ) | $ | 123,061 |   |

 
| ** **                                                                        | ** ** | **Twenty-Six weeks ended January 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                    | —     |   | $ | 1,973,882 |   | $ | 361,166 |   | $ | — |   | $ | 2,335,048 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                                               |       | 1,229,552 |   | 227,485 |   | — |   | 1,457,037 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                                               |       | 462,447 |   | 68,666 |   | — |   | 531,113 |   |
| Income from credit card program                                                   |       | —                                                               |       | (30,803 | ) | (3,498 | ) | — |   | (34,301 | ) |
| Depreciation expense                                                              |       | —                                                               |       | 57,555 |   | 9,694 |   | — |   | 67,249 |   |
| Amortization of customer lists and favorable lease commitments                    |       | —                                                               |       | 30,199 |   | 5,883 |   | — |   | 36,082 |   |
| Other income                                                                      |       | —                                                               |       | (4,210 | ) | — |   | — |   | (4,210 | ) |
| Operating earnings                                                                |       | —                                                               |       | 229,142 |   | 52,936 |   | — |   | 282,078 |   |
| Interest expense, net                                                             |       | —                                                               |       | 134,354 |   | — |   | — |   | 134,354 |   |
| Intercompany royalty charges (income)                                             |       | —                                                               |       | 143,643 |   | (143,643 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (68,252                                                              | )          | (175,198 | ) | — |   | 243,450 |   | — |   |
| Earnings (loss) from continuing operations before income taxes                    |       | 68,252                                                               |       | 126,343 |   | 196,579 |   | (243,450 | ) | 147,724 |   |
| Income taxes                                                                      |       | —                                                               |       | 58,091 |   | — |   | — |   | 58,091 |   |
| Earnings (loss) from continuing operations                                        |       | 68,252                                                               |       | 68,252 |   | 196,579 |   | (243,450 | ) | 89,633 |   |
| Loss from discontinued operations, net of taxes                                   |       | —                                                               |       | — |   | (19,892 | ) | (1,489 | ) | (21,381 | ) |
| Net earnings (loss)                                                               |       | $                                                                    | 68,252     |   | $ | 68,252 |   | $ | 176,687 |   | $ | (244,939 | ) | $ | 68,252 |   |

 

29

----

 
| ** **                                                                                   | ** ** | **Twenty-Six weeks ended January 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                    | 123,061    |   | $ | 123,061 |   | $ | 220,124 |   | $ | (343,185 | ) | $ | 123,061 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities:         |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                               |       | 60,961 |   | 9,260 |   | — |   | 70,221 |   |
| Amortization of debt issue costs                                                             |       | —                                                               |       | 7,109 |   | — |   | — |   | 7,109 |   |
| Amortization of customer lists and favorable lease commitments                               |       | —                                                               |       | 30,119 |   | 5,830 |   | — |   | 35,949 |   |
| Deferred income taxes                                                                        |       | —                                                               |       | (13,673 | ) | — |   | — |   | (13,673 | ) |
| 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 |       | —                                                               |       | 14,605 |   | (37 | ) | — |   | 14,568 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                                               |       | 155,962 |   | (155,962 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (123,061                                                             | )          | (220,124 | ) | — |   | 343,185 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                                               |       | 55,281 |   | (75,280 | ) | — |   | (19,999 | ) |
| Net cash provided by operating activities                                                    |       | —                                                               |       | 180,851 |   | 3,935 |   | — |   | 184,786 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                               |       | (83,790 | ) | (4,383 | ) | — |   | (88,173 | ) |
| Purchases of short-term investments                                                          |       | —                                                               |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                                               |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used for investing activities                                                       |       | —                                                               |       | (83,790 | ) | (4,383 | ) | — |   | (88,173 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                               |       | (2,073 | ) | — |   | — |   | (2,073 | ) |
| Net cash used for financing activities                                                       |       | —                                                               |       | (2,073 | ) | — |   | — |   | (2,073 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                                               |       | 94,988 |   | (448 | ) | — |   | 94,540 |   |
| Beginning balance                                                                            |       | —                                                               |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 234,321 |   | $ | 1,426 |   | $ | — |   | $ | 235,747 |   |

 

30

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| ** **                                                                                   | ** ** | **Twenty-Six weeks ended January 27, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                    | 68,252     |   | $ | 68,252 |   | $ | 176,687 |   | $ | (244,939 | ) | $ | 68,252 |   |
| Loss from discontinued operations                                                            |       | —                                                               |       | — |   | 19,892 |   | 1,489 |   | 21,381 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities:         |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                               |       | 57,555 |   | 9,694 |   | — |   | 67,249 |   |
| Amortization of debt issue costs                                                             |       | —                                                               |       | 7,033 |   | — |   | — |   | 7,033 |   |
| Amortization of customer lists and favorable lease commitments                               |       | —                                                               |       | 30,199 |   | 5,883 |   | — |   | 36,082 |   |
| Deferred income taxes                                                                        |       | —                                                               |       | (24,147 | ) | — |   | — |   | (24,147 | ) |
| Other, primarily costs related to defined benefit pension and other  long-term benefit plans |       | —                                                               |       | 11,380 |   | 1,606 |   | — |   | 12,986 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                                               |       | 143,643 |   | (143,643 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (68,252                                                              | )          | (175,198 | ) | — |   | 243,450 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                                               |       | 25,776 |   | (52,596 | ) | — |   | (26,820 | ) |
| Net cash provided by continuing operating activities                                         |       | —                                                               |       | 144,493 |   | 17,523 |   | — |   | 162,016 |   |
| Net cash used for discontinued operations                                                    |       | —                                                               |       | — |   | (9,163 | ) | — |   | (9,163 | ) |
| Net cash provided by operating activities                                                    |       | —                                                               |       | 144,493 |   | 8,360 |   | — |   | 152,853 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                               |       | (62,445 | ) | (8,237 | ) | — |   | (70,682 | ) |
| 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                                            |       | —                                                               |       | (376 | ) | (8,237 | ) | — |   | (8,613 | ) |
| Net cash used for discontinued operations                                                    |       | —                                                               |       | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for investing activities                                                       |       | —                                                               |       | (376 | ) | (8,365 | ) | — |   | (8,741 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                               |       | (178,045 | ) | — |   | — |   | (178,045 | ) |
| Debt issuance costs paid                                                                     |       | —                                                               |       | (758 | ) | — |   | — |   | (758 | ) |
| Proceeds from purchase of common stock                                                       |       | —                                                               |       | 150 |   | — |   | — |   | 150 |   |
| Net cash used for continuing financing activities                                            |       | —                                                               |       | (178,653 | ) | — |   | — |   | (178,653 | ) |
| Net cash used for discontinued operations                                                    |       | —                                                               |       | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for financing activities                                                       |       | —                                                               |       | (178,653 | ) | (1,675 | ) | — |   | (180,328 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Decrease during the period                                                                   |       | —                                                               |       | (34,536 | ) | (1,680 | ) | — |   | (36,216 | ) |
| Beginning balance                                                                            |       | —                                                               |       | 222,308 |   | 2,455 |   | — |   | 224,763 |   |
| Ending balance                                                                               |       | $                                                                    | —     |   | $ | 187,772 |   | $ | 775 |   | $ | — |   | $ | 188,547 |   |

** **

**31**

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** **

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

** **

**EXECUTIVE OVERVIEW**

 

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourAnnual Report on Form 10-K for the fiscal year ended July 28, 2007.  Unlessotherwise specified, the meanings of all defined terms in Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) are consistent with the meanings of such terms as defined in theNotes to the Condensed Consolidated Financial Statements. This discussioncontains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the risks,uncertainties and assumptions relating to our forward-looking statements.

 

**Overview**

 

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

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter offiscal year 2008 relate to the thirteen weeks ended January 26, 2008.  All references to the second quarter offiscal year 2007 relate to the thirteen weeks ended January 27, 2007.  All references to year-to-date fiscal 2008relate to the twenty-six weeks ended January 26, 2008.  All references to year-to-date fiscal 2007relate to the twenty-six weeks ended January 27, 2007.

 

**Factors Affecting Our Results**

 

***Revenues.***  We generate our revenues from the sale ofhigh-end merchandise through our Specialty Retail stores and Direct Marketingoperation. Components of our revenues include:

 

·                  Sales of merchandise—Revenues from ourSpecialty Retail stores are recognized at the later of the point of sale or thedelivery of goods to the customer. Revenues from our Direct Marketing operationare recognized when the merchandise is delivered to the customer. We maintainreserves for anticipated sales returns primarily based on our historical trendsrelated to returns by both our retail and direct marketing customers. Revenuesexclude sales taxes collected from our customers.

 

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

 

Our revenues can be affected by the following factors:

 

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

 

·                  changes in the level of full-price sales;

 

·                  changes in the level of promotional eventsconducted by our Specialty Retail stores and Direct Marketing operation;

 

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

 

·                  the rate of growth in internet revenues byour Direct Marketing operation; and

 

·                  general economic conditions.

 

In addition, our revenues are seasonal. For a descriptionof the seasonality of our business, see “Seasonality.”

 

32

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***Cost of goods sold including buying and occupancycosts (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. Merchandiseinventories are stated at the lower of cost or market. The cost of theinventory reflected on the consolidated balance sheet is decreased by chargesto cost of goods sold at the time the retail value of the inventory is loweredthrough the use of markdowns. Hence, earnings are negatively impacted whenmerchandise is marked down. With the introduction of new fashions in the firstand third fiscal quarters and our emphasis on full-price selling in thesequarters, a lower level of markdowns and higher margins are characteristic ofthese quarters.

 

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

 

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

 

·                  Delivery and processing costs—Delivery andprocessing costs consist primarily of delivery charges we pay to third-partycarriers and other costs related to the fulfillment of customer orders notdelivered at the point-of-sale.

 

Consistent with industry business practice, we receiveallowances from certain of our vendors in support of the merchandise wepurchase for resale. Certain allowances are received to reimburse us formarkdowns taken or to support the gross margins that we earn in connection withthe sales of the vendor’s merchandise. These allowances result in an increaseto gross margin when we earn the allowances and they are approved by thevendor. Other allowances we receive represent reductions to the amounts we payto acquire the merchandise. These allowances reduce the cost of the acquiredmerchandise and are recognized at the time the goods are sold.  We received vendor allowances of $55.0 million, or 2.2%of revenues, in year-to-date fiscal 2008 and $49.0 million, or 2.1% ofrevenues, in year-to-date fiscal 2007.

 

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

 

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

 

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

 

·                  factors affecting revenues generally;

 

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

 

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

 

33

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*** ***

***Selling, general and administrative expenses (excluding depreciation)(SG&A).***  SG&Aprincipally consists of costs related to employee compensation and benefits inthe selling and administrative support areas, advertising and catalog costs andinsurance expense. A significant portion of our selling, general andadministrative expenses are variable in nature and are dependent on the saleswe generate.

 

Advertising costs incurred by our Specialty Retailsegment consist primarily of print media costs related to promotional materialsmailed to our customers, while advertising costs incurred by our DirectMarketing operation relate to the production, printing and distribution of ourprint catalogs and the production of the photographic content on our websites, aswell as online marketing costs. We receive advertising allowances from certainof our merchandise vendors. Substantially all the advertising allowances wereceive represent reimbursements of direct, specific and incremental costs thatwe incur to promote the vendor’s merchandise in connection with our variousadvertising programs, primarily catalogs and other print media. As a result,these allowances are recorded as a reduction of our advertising costs whenearned. Vendor allowances earned and recorded as a reduction to selling,general and administrative expenses aggregated approximately $43.9 million, or1.7% of revenues, in year-to-date fiscal 2008 and $33.0 million, or 1.4% ofrevenues, in year-to-date fiscal 2007.

 

We also receive allowances from certain merchandisevendors in conjunction with compensation programs for employees who sell thevendor’s merchandise. These allowances are netted against the relatedcompensation expense that we incur. Amounts received from vendors related tocompensation programs were $36.1 million, or 1.4% of revenues, for thetwenty-six weeks ended January 26, 2008 and $33.1 million, or 1.4% ofrevenues, for the twenty-six weeks ended January 27, 2007.

 

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

 

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

 

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

 

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

 

***Income from credit card program***.  Pursuant to a long-term marketingand servicing 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:

 

·                  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.

 

34

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**Seasonality**

 

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

 

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

 

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

 

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

 

We monitor the sales performance of our inventoriesthroughout each season. We seek to order additional goods to supplement ouroriginal purchasing decisions when the level of customer demand is higher thanoriginally anticipated. However, in certain merchandise categories,particularly fashion apparel, our ability to purchase additional goods can belimited. This can result in lost sales in the event of higher than anticipateddemand of the fashion goods we offer or a higher than anticipated level ofconsumer spending. Conversely, in the event we buy fashion goods that are notaccepted by the customer or the level of consumer spending is less than weanticipated, we typically incur a higher than anticipated level of markdowns,net of vendor allowances, to sell the goods that remain at the end of theseason, resulting in lower operating profits. We believe that the experience ofour merchandising and selling organizations helps to minimize the inherent riskin predicting fashion trends.

 

35

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**OPERATING RESULTS**

 

**Performance Summary**

 

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

 
| ** **                                                                        | ** ** | **Quarter-to-Date**                                    | ** ** | **Year-to-Date**                                       | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Thirteen  weeks ended  January 26,  2008** | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** | **Twenty-Six  weeks ended  January 26,  2008** | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** |
| ** **                                                                        | ** ** | ** **                                             | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                                                  | %          | 100.0                                                  | %          | 100.0 | % | 100.0 | % |
|                                                                              |       |                                                   |       |                                                   |       |   |   |   |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | 66.5                                                   |       | 65.6                                                   |       | 63.1 |   | 62.4 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | 21.3                                                   |       | 21.9                                                   |       | 22.5 |   | 22.7 |   |
| Income from credit card program                                                   |       | (1.4                                                   | )          | (1.4                                                   | )          | (1.5 | ) | (1.5 | ) |
| Depreciation expense                                                              |       | 2.6                                                    |       | 2.6                                                    |       | 2.8 |   | 2.9 |   |
| Amortization of customer lists                                                    |       | 1.0                                                    |       | 1.0                                                    |       | 1.1 |   | 1.2 |   |
| Amortization of favorable lease commitments                                       |       | 0.3                                                    |       | 0.3                                                    |       | 0.3 |   | 0.4 |   |
| Other income                                                                      |       | —                                                 |       | —                                                 |       | (1.3 | ) | (0.2 | ) |
| Operating earnings                                                                |       | 9.8                                                    |       | 9.9                                                    |       | 12.9 |   | 12.1 |   |
| Interest expense, net                                                             |       | 4.4                                                    |       | 5.1                                                    |       | 4.9 |   | 5.8 |   |
|                                                                              |       |                                                   |       |                                                   |       |   |   |   |   |
| Earnings from continuing operations before income taxes                           |       | 5.4                                                    |       | 4.8                                                    |       | 8.1 |   | 6.3 |   |
| Income taxes                                                                      |       | 2.2                                                    |       | 1.9                                                    |       | 3.2 |   | 2.5 |   |
| Earnings from continuing operations                                               |       | 3.2                                                    |       | 2.9                                                    |       | 4.9 |   | 3.8 |   |
| Earnings (loss) from discontinued operations, net of taxes                        |       | —                                                 |       | 0.2                                                    |       | — |   | (0.9 | ) |
| Net earnings                                                                      |       | 3.2                                                    | %          | 3.2                                                    | %          | 4.9 | % | 2.9 | % |

 

36

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Setforth in the following table is certain summary information with respect to ouroperations for the periods indicated.

** **
| ** **                                                                                 | ** ** | **Quarter-to-Date**                                | ** ** | **Year-to-Date**                                   | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **(dollars in millions, except sales per square foot)** | ** ** | **Thirteen  weeks  ended  January 26,  2008** | ** ** | **Thirteen  weeks  ended  January 27,  2007** | ** ** | **Twenty-Six  weeks  ended  January 26,  2008** | ** ** | **Twenty-Six  weeks  ended  January 27,  2007** | ** ** |
| REVENUES                                                                                   |       |                                               |       |                                               |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                  | 1,136.3    |                                               | $          | 1,069.9 |   | $ | 2,097.9 |   | $ | 1,949.9 |   |
| Direct Marketing                                                                           |       | 237.5                                              |       | 225.9                                              |       | 408.2 |   | 385.1 |   |
| Total                                                                                      |       | $                                                  | 1,373.8    |                                               | $          | 1,295.8 |   | $ | 2,506.1 |   | $ | 2,335.0 |   |
|                                                                                       |       |                                               |       |                                               |       |   |   |   |   |
| OPERATING EARNINGS                                                                         |       |                                               |       |                                               |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                  | 127.9      |                                               | $          | 121.5 |   | $ | 293.5 |   | $ | 278.1 |   |
| Direct Marketing                                                                           |       | 42.0                                               |       | 39.1                                               |       | 65.2 |   | 59.9 |   |
| Subtotal                                                                                   |       | 169.9                                              |       | 160.6                                              |       | 358.7 |   | 338.0 |   |
| Corporate                                                                                  |       | (17.6                                              | )          | (14.7                                              | )          | (31.2 | ) | (24.0 | ) |
| Amortization of customer lists and favorable lease commitments                             |       | (18.0                                              | )          | (18.1                                              | )          | (36.0 | ) | (36.1 | ) |
| Other income (1)                                                                           |       | —                                             |       | —                                             |       | 32.5 |   | 4.2 |   |
| Total                                                                                      |       | $                                                  | 134.3      |                                               | $          | 127.8 |   | $ | 324.0 |   | $ | 282.1 |   |
|                                                                                       |       |                                               |       |                                               |       |   |   |   |   |
| OPERATING PROFIT MARGIN                                                                    |       |                                               |       |                                               |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | 11.3                                               | %          | 11.4                                               | %          | 14.0 | % | 14.3 | % |
| Direct Marketing                                                                           |       | 17.7                                               | %          | 17.3                                               | %          | 16.0 | % | 15.6 | % |
| Total                                                                                      |       | 9.8                                                | %          | 9.9                                                | %          | 12.9 | % | 12.1 | % |
|                                                                                       |       |                                               |       |                                               |       |   |   |   |   |
| CHANGE IN COMPARABLE REVENUES (2)                                                          |       |                                               |       |                                               |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | 3.4                                                | %          | 7.0                                                | %          | 4.7 | % | 6.3 | % |
| Direct Marketing                                                                           |       | 5.2                                                | %          | 6.1                                                | %          | 6.0 | % | 9.5 | % |
| Total                                                                                      |       | 3.7                                                | %          | 6.8                                                | %          | 4.9 | % | 6.8 | % |
|                                                                                       |       |                                               |       |                                               |       |   |   |   |   |
| SALES PER SQUARE FOOT                                                                      |       |                                               |       |                                               |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                  | 190        |                                               | $          | 187 |   | $ | 353 |   | $ | 342 |   |
|                                                                                       |       |                                               |       |                                               |       |   |   |   |   |
| STORE COUNT                                                                                |       |                                               |       |                                               |       |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores:                                                 |       |                                               |       |                                               |       |   |   |   |   |
| Open at beginning of period                                                                |       | 41                                                 |       | 39                                                 |       | 40 |   | 38 |   |
| Opened during the period                                                                   |       | —                                             |       | —                                             |       | 1 |   | 1 |   |
| Open at end of period                                                                      |       | 41                                                 |       | 39                                                 |       | 41 |   | 39 |   |
| Clearance centers:                                                                         |       |                                               |       |                                               |       |   |   |   |   |
| Open at beginning of period                                                                |       | 21                                                 |       | 18                                                 |       | 20 |   | 18 |   |
| Opened during the period                                                                   |       | 1                                                  |       | 1                                                  |       | 2 |   | 1 |   |
| Open at end of period                                                                      |       | 22                                                 |       | 19                                                 |       | 22 |   | 19 |   |
|                                                                                       |       |                                               |       |                                               |       |   |   |   |   |
| NON-GAAP FINANCIAL DATA  EBITDA (3)                                                        |       | $                                                  | 187.3      |                                               | $          | 180.0 |   | $ | 430.2 |   | $ | 385.4 |   |
| Adjusted EBITDA (3)                                                                        |       | $                                                  | 187.3      |                                               | $          | 180.0 |   | $ | 397.7 |   | $ | 385.4 |   |

** **

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**(1) In year-to-date fiscal 2008, other incomerepresents a one-time pension curtailment gain of $32.5 million as a result ofour decision to freeze Pension and SERPbenefits as of December 31, 2007. In year-to-date fiscal 2007, otherincome represents the proceeds we received in connection with the merger of Wedding Channel.com, in which we held aminority interest, and The Knot. We had previously reduced our carryingvalue in this investment to zero.**

** **

(2)  Comparable revenues include 1) revenues derived from ourretail stores open for more than 52 weeks, including stores that have beenrelocated or expanded and 2) revenues from our Direct Marketing operation.Comparable revenues exclude revenues from our discontinued operations (KateSpade LLC).

 

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

 

37

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**Fiscal Year 2008 Highlights**

 

Highlights from the second quarter of fiscal year 2008include:

 

·                  **Revenues**—Our revenues for the second quarter of fiscal year2008 were $1,373.8 million, an increase of 6.0% as compared to the secondquarter of fiscal year 2007. Our revenues for the year-to-date fiscal 2008period were $2,506.1 million, an increase of 7.3% as compared to theyear-to-date fiscal 2007 period. This increase was attributable to 1) increasesin comparable revenues, 2) revenues from new stores and 3) higher internetrevenues.

 

Comparable revenues increased 3.7% in the secondquarter of fiscal year 2008 and 4.9% in the year-to-date fiscal 2008period.  This increase in comparablerevenues was achieved on top of an increase in comparable revenues of 6.8% inboth the second quarter of fiscal year 2007 and the 2007 year-to-date fiscalperiod.

 

For Specialty Retail stores, our sales per square foot for the lasttwelve trailing months increased by 4.2% to $650 as of January 2008compared to $624 as of January 2007.

 

·                  **Cost of goods sold including buying and occupancy costs (excludingdepreciation)**—COGS represented 66.5% of revenues in the secondquarter of fiscal year 2008 and 65.6% of revenues in the second quarter offiscal year 2007.  COGS represented 63.1%of revenues in year-to-date fiscal 2008 and 62.4% of revenues in the prioryear-to-date fiscal period.  Theseincreases in COGS were due primarily to a higher level of markdowns incurred byour Specialty Retail stores due to a lower than anticipated level of demand weexperienced in the Fall season.

 

·                  **Selling, general and administrative expenses (excluding depreciation)**—SG&Adecreased in the second quarter of fiscal year 2008 to 21.3% of revenues from21.9% of revenues in the second quarter of fiscal year 2007. SG&Arepresented 22.5% of revenues in the year-to-date fiscal 2008 period and 22.7%of revenues in the prior year-to-date fiscal period. These decreases inSG&A as a percentage of revenues are primarily due to 1) a lower level ofmarketing and advertising costs incurred in our Direct Marketing operation dueto higher internet revenues and 2) lower estimated annual incentivecompensation costs to be incurred in fiscal year 2008, slightly offset by 3)higher employee benefit costs.

 

·                  **Operating earnings—**For the second quarter of fiscal year2008, our operating earnings were $134.3 million, or 9.8% of revenues,compared to $127.8 million, or 9.9% of revenues, in the prior year fiscalquarter.  The decrease in operatingearnings of 0.1% of revenues in the second quarter of fiscal year 2008 wasprimarily due to the increase in COGS by 0.9% of revenues, offset by thedecrease in SG&A expenses by 0.6% of revenues described above.

 

Total operating earnings in year-to-date fiscal2008 were $324.0 million, or 12.9% of revenues, which included a curtailmentgain of $32.5 million, or 1.3% of revenues. Total operating earnings in year-to-date fiscal 2007 were $282.1million, or 12.1% of revenues.  Excludingthe curtailment gain, operating earnings margin decreased in year-to-datefiscal 2008 by 0.5% of revenues as a result of an increase in COGS by 0.7% ofrevenues, offset by a decrease in SG&A expenses by 0.2% of revenues.

** **

**38**

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** **

**Thirteen Weeks Ended January 26, 2008 Compared toThirteen Weeks Ended January 27, 2007**

** **

***Revenues.**** *Our revenues for the second quarter of fiscal year 2008 of $1,373.8million increased $78.0 million, or 6.0%, from $1,295.8 million in the secondquarter of fiscal year 2007.  Theincrease in revenues was due to increases in comparable revenues, revenues fromnew stores and higher internet revenues. Revenues increased in the second quarter of fiscal year 2008 compared tothe prior year period at all our operating companies.

 

Comparable revenues for the second quarter of fiscal year 2008 were$1,343.7 million compared to $1,295.8 million in the prior year fiscal quarter,representing an increase of 3.7%. Comparable revenues increased in the second quarter of fiscal year 2008by 3.4% for Specialty Retail stores and 5.2% for Direct Marketing compared tothe second quarter of fiscal year 2007. We shifted the timing of our end-of-season clearance sale for certainSpecialty Retail store locations into January from February.  With the shift of the end-of-season clearancesales at certain stores into January, revenues from end-of-season clearancesales increased approximately $18 million in the second quarter of fiscal year2008 compared to the prior year period.

 

New stores generated sales of $30.1 million in the second quarter offiscal year 2008. In the second quarter of fiscal year 2008, internet revenuesby Direct Marketing were $180.6 million, an increase of 15.9% compared to thesecond quarter of fiscal year 2007. The increase in internet revenues waspartially offset by decreases in catalog revenues as well as a decrease inrevenues from the home décor category, primarily offered by our Horchow brand.

 

***Cost of goods sold including buying and occupancycosts (excluding depreciation).***  COGS for the second quarter of fiscal year2008 were 66.5% of revenues compared to 65.6% of revenues in the second quarterof fiscal year 2007.

 

The net increase in COGS as a percentage of revenues in the secondquarter of fiscal year 2008 was primarily due to:

 

·                 decreased margins generated by our SpecialtyRetail stores of approximately 0.7% of revenues due primarily to highermarkdowns and a lower level of full-price sales in the second quarter of fiscalyear 2008; and

 

·                 decreased margins generated by our DirectMarketing segment of approximately 0.2% of revenues due primarily to lowermargins realized on delivery and processing revenues.

 

The higher level of markdowns incurred by our Specialty Retail storesin the second quarter of fiscal year 2008 is due to a lower than anticipatedlevel of demand we experienced during the Fall season.  As a result, we conducted various promotionsin the first and second quarters to liquidate on-hand inventories held inexcess of sales trends.

 

Our Direct Marketing operation continues to use discounted and/or freeshipping promotions to customers consistent with promotional activities byother direct marketing retailers.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses were 21.3% of revenues inthe second quarter of fiscal year 2008 compared to 21.9% of revenues in theprior year fiscal period.

 

The net decrease in SG&A expenses as a percentage of revenues inthe second quarter of fiscal year 2008 was primarily due to:

 

·                  a decrease inmarketing and advertising costs of approximately 0.4% of revenues incurred byDirect Marketing primarily due to higher internet revenues, which have a lowerexpense to revenue ratio than catalog revenues; and

 

·                  lower estimatedannual incentive compensation costs of approximately 0.2% of revenues.

 

***Income from credit cardprogram. ***We received HSBC Program Income of $19.3 million, or 1.4% of revenues,in the second quarter of fiscal year 2008 compared to $17.9 million, or 1.4% ofrevenues, in the second quarter of fiscal year 2007.

 

***Depreciation expense. ***Depreciation expense was$35.1 million, or 2.6% of revenues, in the second quarter of fiscal year 2008compared to $34.1 million, or 2.6% of revenues, in the prior year fiscalperiod.

 

***Amortization expense. ***Amortization of intangibleassets (customer lists and favorable lease commitments) aggregated $18.0million, or 1.3% of revenues, in the second quarter of fiscal year 2008compared to $18.1 million, or 1.3% of revenues, in the second quarter of fiscalyear 2007.

 

39

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***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.  See Note 13 to ourunaudited condensed consolidated financial statements.

 

Operating earnings for our Specialty Retail stores segment were $127.9million, or 11.3% of Specialty Retail stores revenues, for the second quarterof fiscal year 2008 compared to $121.5 million, or 11.4% of Specialty Retailstores revenues, for the prior year fiscal period.  The decrease in operating margin as apercentage of revenues was primarily due to 1) higher markdowns and a lowerlevel of full-price sales as a result of lower than anticipated demand, offsetby 2) lower estimated annual incentive compensation costs.

 

Operating earnings for Direct Marketing increased to $42.0 million, or17.7% of Direct Marketing revenues, in the second quarter of fiscal year 2008from $39.1 million, or 17.3% of Direct Marketing revenues, for the prior yearperiod.  The increases in operatingearnings and operating margin for Direct Marketing were primarily the result of1) a decrease in advertising and marketing costs, as a percentage of revenues,due to the continued growth in internet revenues, partially offset by 2) adecrease in margins realized on delivery and processing revenues.

 

Total operating earnings in the second quarter of fiscal year 2008 were$134.3 million, or 9.8% of revenues compared to $127.8 million, or 9.9% ofrevenues in the prior year fiscal period. The decrease in operating earnings in the second quarter of fiscal year2008 was primarily due to 1) the decrease in margins related to highermarkdowns incurred by our Specialty Retail stores and 2) the continued use ofdiscounted and/or free shipping promotions at Direct Marketing, partiallyoffset by 3) decreases in SG&A expenses (primarily advertising and incentivecompensation) as a percentage of revenues.

 

***Interest expense, net*****.**  Net interest expense was $60.4 million, or4.4% of revenues, in the second quarter of fiscal year 2008 and $65.5 million,or 5.1% of revenues, for the prior year period.   The decrease in interest expense isprimarily due to the repricing of our term loan in the first and third quartersof fiscal year 2007 as well as the paydown of $250 million of debt duringfiscal year 2007.  The significant components of interest expense areas follows:

 
| **(in thousands)**           | ** ** | **Thirteen  weeks  ended  January 26,  2008** | ** ** | **Thirteen  weeks  ended  January 27,  2007** | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
|                              |       |                                               |       |                                               |       |
| Senior Secured Term Loan Facility |       | $                                                  | 27,806     |                                               | $          | 33,068 |   |
| 2028 Debentures                   |       | 2,181                                              |       | 2,236                                              |       |
| Senior Notes                      |       | 15,453                                             |       | 15,750                                             |       |
| Senior Subordinated Notes         |       | 12,724                                             |       | 12,969                                             |       |
| Amortization of debt issue costs  |       | 3,554                                              |       | 3,535                                              |       |
| Other                             |       | 842                                                |       | 941                                                |       |
| Total interest expense            |       | 62,560                                             |       | 68,499                                             |       |
| Less:                             |       |                                               |       |                                               |       |
| Interest income                   |       | 1,433                                              |       | 2,109                                              |       |
| Capitalized interest              |       | 730                                                |       | 853                                                |       |
| Interest expense, net             |       | $                                                  | 60,397     |                                               | $          | 65,537 |   |

 

***Income taxes.***  Our effective income tax rate for thethirteen weeks ended January 26, 2008 was 40.0% compared to 38.7% for thethirteen weeks ended January 27, 2007. Our effective income tax rate for the second quarter of fiscal year 2008was unfavorably impacted by a decrease in the amount of tax-exempt interestearned and increase in reserves required for uncertain tax positions.

 

We closed the Internal Revenue Service (IRS) examinationsof federal tax returns for fiscal years 2004 and 2003 during the first quarterof fiscal year 2007 and paid the related tax liability during the secondquarter of fiscal year 2007.   The IRS isnow examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofJanuary 26, 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.  We believe itis reasonably possible that a significant increase or decrease in the amountsof our unrecognized tax benefits could occur within the next 12 months as aresult of negotiated settlements with tax authorities.  However, at this time, an estimate of therange of adjustment cannot be made.

** **

**40**

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** **

**Twenty-Six Weeks Ended January 26, 2008 Comparedto Twenty-Six Weeks Ended January 27, 2007**

** **

***Revenues.**** *Our revenues for year-to-date fiscal 2008 of $2,506.1 million increased$171.1 million, or 7.3%, from $2,335.0 million in year-to-date fiscal2007.  The increase in revenues was dueto increases in comparable revenues, revenues from new stores and higherinternet revenues.  Revenues increased inyear-to-date fiscal 2008 compared to the prior year period at all our operatingcompanies.

 

Comparable revenues for the twenty-six weeks ended January 26,2008 were $2,450.2 million compared to $2,335.0 million in the prior yearfiscal period, representing an increase of 4.9%.  Comparable revenues increased in theyear-to-date fiscal 2008 period by 4.7% for Specialty Retail stores and 6.0%for Direct Marketing compared to the same fiscal period of 2007.  We shifted the timing of our end-of-seasonclearance sale for certain Specialty Retail store locations into January fromFebruary.  With the shift of theend-of-season clearance sales at certain stores into January, revenues fromend-of-season clearance sales increased approximately $18 million inyear-to-date fiscal 2008 compared to the prior year.

 

New stores generated sales of $55.9 million in year-to-date fiscal 2008and internet revenues by Direct Marketing were $304.7 million, an increase of18.6% compared to the prior year fiscal period. The increase in internetrevenues was partially offset by decreases in catalog revenues as well as adecrease in revenues from the home décor category.

 

***Cost of goods sold including buying and occupancycosts (excluding depreciation).***  COGS for year-to-date fiscal 2008 were 63.1%of revenues compared to 62.4% of revenues for year-to-date fiscal 2007.

 

The net increase in COGS as a percentage of revenues in year-to-datefiscal 2008 was primarily due to:

 

·                 decreased margins generated by our SpecialtyRetail stores of approximately 0.5% of revenues due primarily to highermarkdowns and a lower level of full-price sales in year-to-date fiscal 2008;and

 

·                 decreased margins generated by our DirectMarketing segment of approximately 0.2% of revenues due primarily to lowermargins realized on delivery and processing revenues.

 

The higher level of markdowns incurred by our Specialty Retail storesin year-to-date fiscal 2008 is due to a lower than anticipated level of demandwe experienced during the Fall season. As a result, we conducted various promotions in the first and secondquarters to liquidate on-hand inventories held in excess of sales trends.

 

Our Direct Marketing operation continues to use discounted and/or freeshipping promotions to customers consistent with promotional activities byother direct marketing retailers.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses were 22.5% of revenues inyear-to-date fiscal 2008 compared to 22.7% of revenues in the prior year fiscalperiod.

 

The net decrease in SG&A expenses as a percentage of revenues inyear-to-date fiscal 2008 was primarily due to:

 

·                  a decrease in marketing and advertising costsof approximately 0.3% of revenues incurred by Direct Marketing primarily due tohigher internet revenues, which have a lower expense to revenue ratio thancatalog revenues; and

 

·                  lower estimated annual incentive compensationcosts of approximately 0.3% of revenues.

 

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

 

·                  a higher level of advertising and promotionscosts of approximately 0.2% of revenues incurred by our Specialty Retail storesduring fiscal year 2008 in connection with 1) the celebration of the 100thanniversary of Neiman Marcus in October 2007 and 2) promotional events andactivities conducted to facilitate the sell-through of on-hand inventories heldin excess of sales trends; and

 

·                  higher employee benefit costs ofapproximately 0.2% of revenues.

 

***Income from credit cardprogram. ***We received HSBC Program Income of $36.6 million, or 1.5% of revenues,in the year-to-date fiscal 2008 compared to $34.3 million, or 1.5% of revenues,in year-to-date fiscal 2007.

 

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***Depreciation expense. ***Depreciation expense was$70.2 million, or 2.8% of revenues, in year-to-date fiscal 2008 compared to$67.2 million, or 2.9% of revenues, in the prior year fiscal period.

 

***Amortization expense. ***Amortization of intangibleassets (customer lists and favorable lease commitments) aggregated $36.0million, or 1.4% of revenues, in year-to-date fiscal 2008 compared to $36.1million, or 1.6% of revenues, in year-to-date fiscal 2007.

 

***Other income.***In the first quarter offiscal year 2008,we recorded aone-time pension curtailment gain of $32.5 million, or 1.3% of revenues, as aresult of our decision to freeze Pension andSERP benefits as of December 31, 2007.

 

In the first quarter of fiscal year 2007, we received considerationaggregating $4.2 million, or 0.2% 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.

 

***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.  See Note 13 to ourunaudited condensed consolidated financial statements.

 

Operating earnings for our Specialty Retail stores segment were $293.5million, or 14.0% of Specialty Retail stores revenues, for the twenty-six weeksended January 26, 2008 compared to $278.1 million, or 14.3% of SpecialtyRetail stores revenues, for the prior year fiscal period.  The decrease in operating margin as apercentage of revenues was primarily due to 1) higher markdowns and a lowerlevel of full-price sales as a result of lower than anticipated demand and 2)net increases in advertising and promotion costs, offset by 3) lower estimatedannual incentive compensation costs.

 

Operating earnings for Direct Marketing increased to $65.2 million, or16.0% of Direct Marketing revenues, in year-to-date fiscal 2008 from $59.9million, or 15.6% of Direct Marketing revenues, for the prior year fiscalperiod.  The increases in operatingearnings and operating margin for Direct Marketing were primarily the result of1) a decrease in advertising and marketing costs, as a percentage of revenues,due to the continued growth in internet revenues, partially offset by 2) a decreasein margins realized on delivery and processing revenues.

 

Total operating earnings in year-to-date fiscal 2008 were $324.0million, or 12.9% of revenues, which included a curtailment gain of $32.5million, or 1.3% of revenues.  Totaloperating earnings in year-to-date fiscal 2007 were $282.1 million, or 12.1% ofrevenues.  Excluding the curtailmentgain, operating earnings margin decreased in year-to-date fiscal 2008 by 0.5%of revenues as a result of 1) an increase in COGS by 0.7% of revenues due primarilyto higher markdowns at Specialty Retail stores and the continued use ofdiscounted and/or free shipping promotions at Direct Marketing, offset by 2) adecrease in SG&A expenses by 0.2% of revenues (primarily advertising andmarketing and incentive compensation).

 

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***Interest expense, net*****.**  Net interest expense was $121.6 million, or4.9% of revenues, in year-to-date fiscal 2008 and $134.4 million, or 5.8% ofrevenues, for the prior year fiscal period.  The decrease in interest expense is primarily due to the repricing ofour term loan as well as the paydown of $250 million of debt during fiscal year2007.  Thesignificant components of interest expense are as follows:

 
| **(in thousands)**           | ** ** | **Twenty-Six  weeks  ended  January 26,  2008** | ** ** | **Twenty-Six  weeks  ended  January 27,  2007** | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
|                              |       |                                                 |       |                                                 |       |
| Senior Secured Term Loan Facility |       | $                                                    | 55,782     |                                                 | $          | 68,771 |   |
| 2028 Debentures                   |       | 4,365                                                |       | 4,462                                                |       |
| Senior Notes                      |       | 30,906                                               |       | 31,500                                               |       |
| Senior Subordinated Notes         |       | 25,448                                               |       | 25,937                                               |       |
| Amortization of debt issue costs  |       | 7,109                                                |       | 7,033                                                |       |
| Other                             |       | 1,674                                                |       | 1,980                                                |       |
| Total interest expense            |       | 125,284                                              |       | 139,683                                              |       |
| Less:                             |       |                                                 |       |                                                 |       |
| Interest income                   |       | 2,288                                                |       | 3,751                                                |       |
| Capitalized interest              |       | 1,376                                                |       | 1,578                                                |       |
| Interest expense, net             |       | $                                                    | 121,620    |                                                 | $          | 134,354 |   |

 

***Income taxes.***  Our effective income tax rate for thetwenty-six weeks ended January 26, 2008 was 39.2% compared to 39.3% forthe twenty-six weeks ended January 27, 2007.

 

We closed the Internal Revenue Service (IRS) examinationsof federal tax returns for fiscal years 2004 and 2003 during the first quarterof fiscal year 2007 and paid the related tax liability during the secondquarter of fiscal year 2007.   The IRS isnow examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofJanuary 26, 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.  We believe itis reasonably possible that a significant increase or decrease in the amountsof our unrecognized tax benefits could occur within the next 12 months as aresult of negotiated settlements with tax authorities.  However, at this time, an estimate of therange of adjustment cannot be made.

 

Weadopted the provisions of FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year2008.  The cumulative effect of adoptingFIN 48 resulted in a net increase to our accruals for uncertain tax positionsof $9.1 million for the derecognition of certain tax benefits. This increase toour accruals was offset by a corresponding increase to goodwill as theseuncertainties existed at the time of the Acquisition.

 

**Non-GAAP Financial Measure – EBITDA and Adjusted EBITDA**

 

We present the non-GAAP financial measure EBITDA andadjusted EBITDA because we use these measures to monitor and evaluate theperformance of our business and believe the presentation of these measures willenhance investors’ ability to analyze trends in our business, evaluate ourperformance relative to other companies in our industry and evaluate ourability to service our debt.  Inaddition, we use EBITDA and Adjusted EBITDA as components of the measurement ofincentive compensation.

 

EBITDA and Adjusted EBITDA are not presentations made inaccordance with GAAP and our computation of EBITDA and Adjusted EBITDA may varyfrom others in our industry.  Inaddition, EBITDA and Adjusted EBITDA contain some, but not all, adjustmentsthat are taken into account in the calculation of the components of variouscovenants in the indentures governing NMG’s senior secured Asset-BasedRevolving Credit Facility, Senior Secured Term Loan Facility, Senior Notes andSenior Subordinated Notes.  EBITDA andAdjusted EBITDA should not be considered as alternatives to operating earningsor net earnings as measures of operating performance or cash flows as measuresof liquidity.  EBITDA and Adjusted EBITDAhave important limitations as analytical tools and should not be considered inisolation, or as a substitute for analysis of our results as reported underGAAP.  For example, EBITDA and AdjustedEBITDA:

 

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

 

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

 

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

 

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

 

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

 

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

 
| ** **                                                                  | ** ** | **Quarter-to-Date**                                | ** ** | **Year-to-Date**                                   | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **(dollars in millions)**                                         | ** ** | **Thirteen  weeks  ended  January 26,  2008** | ** ** | **Thirteen  weeks  ended  January 27,  2007** | ** ** | **Twenty-Six  weeks  ended  January 26,  2008** | ** ** | **Twenty-Six  weeks  ended  January 27,  2007** | ** ** |
|                                                                        |       |                                               |       |                                               |       |   |   |   |   |
| Earnings from continuing operations                                         |       | $                                                  | 44.3       |                                               | $          | 38.2 |   | $ | 123.1 |   | $ | 89.6 |   |
| Income taxes                                                                |       | 29.5                                               |       | 24.1                                               |       | 79.3 |   | 58.1 |   |
| Interest expense, net                                                       |       | 60.4                                               |       | 65.5                                               |       | 121.6 |   | 134.4 |   |
| Depreciation                                                                |       | 35.1                                               |       | 34.1                                               |       | 70.2 |   | 67.2 |   |
| Amortization of customer lists and favorable lease commitments              |       | 18.0                                               |       | 18.1                                               |       | 36.0 |   | 36.1 |   |
| EBITDA (1)                                                                  |       | 187.3                                              |       | 180.0                                              |       | 430.2 |   | 385.4 |   |
| Non-cash gain on curtailment of defined benefit retirement  obligations (1) |       | —                                             |       | —                                             |       | (32.5 | ) | — |   |
| Adjusted EBITDA                                                             |       | $                                                  | 187.3      |                                               | $          | 180.0 |   | $ | 397.7 |   | $ | 385.4 |   |

 

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(1)          For year-to-date fiscal2008, operating earnings and EBITDA include a one-time pension curtailment gainof $32.5 million as a result of our decision to freeze Pension and SERP benefits.

 

**Inflation and Deflation**

** **

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

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirements consist principally of:

 

·                  thefunding of our merchandise purchases;

 

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

 

·                  debtservice requirements;

 

·                  incometax payments; and

 

·                  obligationsrelated to our Pension Plan.

 

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

 

Our working capital requirements fluctuate during thefiscal year, increasing substantially during the first and second quarters ofeach fiscal year as a result of higher seasonal levels of inventories.  We have typically financed the increases inworking capital needs during the first and second fiscal quarters with cashflows from operations and, to a lesser extent, with cash provided fromborrowings under our credit facilities. In the year-to-date periods of bothfiscal 2008 and 2007, we have made no borrowings under our Asset-BasedRevolving Credit Facility.

 

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

 

At January 26, 2008, cash and cash equivalents were$235.7 million compared to $188.5 million at January 27, 2007.Net cash provided by operating activities was $184.8 million year-to-datefiscal 2008 compared to net cash provided by operating activities of$152.9 million year-to-date fiscal 2007. Cash flows provided by operatingactivities were higher year-to-date fiscal 2008 than in the prior year fiscalperiod primarily due to 1) a $14.0 million decrease in pretax cash interestrequirements on indebtedness incurred in connection with the Acquisition and 2)$16.4 million increase in developer construction allowances received.

 

Net cash used for investing activities, representingcapital expenditures, was $88.2 million year-to-date fiscal 2008.  Net cash used for investing activities was$8.7 million year-to-date fiscal 2007 which consisted of 1) capitalexpenditures of $70.7 million, 2) $121.5 million received from Liz Claiborne, Inc.for the sale of Kate Spade and 3) the purchase of the minority interest held inKate Spade for $59.4 million.

 

We incurred capital expenditures in fiscal 2008 relatedto the construction of new stores in Natick and Topanga (the greater LosAngeles area) and the remodel of our Atlanta store. We incurred capitalexpenditures in fiscal 2007 related to the construction of new stores inCharlotte, Austin and Natick and the remodels of our Houston, San Francisco andAtlanta stores. We opened our Charlotte store in September 2006, ourAustin store in March 2007 and our Natick store in September 2007.  We expect to open the Topanga store in Fall2008. We currently project capital expenditures for fiscal year 2008 to beapproximately $185 to $195 million.

 

Net cash used for financing activities was $2.1 millionyear-to-date fiscal 2008 as compared to net cash used for financing activitiesof $180.3 million year-to-date fiscal 2007.  In year-to-date fiscal 2007, we voluntarilyrepaid $175.0 million principal amount of the loans under the Senior SecuredTerm Loan Facility.

 

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**Financing Structure at January 26,2008**

 

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

 

***Senior Secured Asset-Based Revolving CreditFacility.***  NMG’s senior secured Asset-Based RevolvingCredit Facility provides financing of up to $600.0 million, subject to aborrowing base equal to at any time the lesser of 80% of eligible inventory(valued at the lower of cost or market value) and 85% of net orderlyliquidation value of the eligible inventory, less certain reserves. As of January 26,2008, NMG had $576.1 million of unused borrowing availability under theAsset-Based Revolving Credit Facility based on a borrowing base of over$600.0 million and after giving effect to $23.9 million used forletters of credit.

 

See Note 4 of our Notes to Condensed ConsolidatedFinancial Statements in Item 1 for a further description of the terms of theAsset-Based Revolving Credit Facility.

 

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

 

At January 26,2008, borrowings under the Senior Secured Term Loan Facility bore interest at arate per annum equal to, at NMG’s option, either (a) a base ratedetermined by reference to the higher of (1) the prime rate of CreditSuisse and (2) the federal funds effective rate plus 1/2of 1% or (b) a LIBOR rate, subject to certain adjustments, in each caseplus an applicable margin. At January 26, 2008, the applicable margin withrespect to base rate borrowings was 0.75% and the applicable margin withrespect to LIBOR borrowings was 1.75%. The interest rate on the outstandingborrowings pursuant to the Senior Secured Term Loan Facility was 6.69% at January 26,2008.

 

See Note 4 of our Notes to Condensed Consolidated FinancialStatements in Item 1 for a further description of the terms of the SeniorSecured Term Loan Facility.

 

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

 

See Note 4 of our Notes to Condensed ConsolidatedFinancial Statements in Item 1 for a further description of the terms of the2028 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 4 of our Notes to Condensed ConsolidatedFinancial Statements in Item 1 for a further description of the terms of theSenior 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 4 of our Notes to Condensed ConsolidatedFinancial Statements in Item 1 for a further description of the terms of theSenior Subordinated Notes.

 

***Interest Rate Swaps.***  NMG uses derivative financialinstruments to help manage its interest rate risk. 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 its exposure tointerest rate increases related to a portion of its floating rate indebtedness.The interest rate swap agreements terminate after five years.  At January 26, 2008, the fair value ofNMG’s interest rate swap agreements was a loss of approximately$49.5 million, which amount is included in other long-term liabilities.

 

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

 

As a result of the swap agreements, NMG’s effective fixedinterest rates as to the $1,000.0 million in floating rate indebtednesswill currently range from 6.508% to 6.733% per quarter through 2010 and resultin an average fixed rate of 6.592%.

 

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**OTHER MATTERS**

 

**Factors That May Affect FutureResults**

 

Matters discussed in MD&A include forward-lookingstatements. Forward-looking statements generally can be identified by the useof forward-looking terminology such as “may,” “plan,” “predict,” “expect,”“estimate,” “intend,” “would,” “could,” “should,” “anticipate,” “believe,”“project” or “continue.” We make these forward-looking statements based on ourexpectations and beliefs concerning future events, as well as currentlyavailable data. These forward-looking statements involve a number of risks anduncertainties and, therefore, are not guarantees of future performance. Avariety of factors could cause our actual results to differ materially from theanticipated or expected results expressed in our forward-looking statements.Factors that could affect future performance include, but are not limited, to:

 

*Political and General EconomicConditions*

 

·                  currentpolitical and general economic conditions or changes in such conditionsincluding relationships between the United States and the countries from whichwe source our merchandise;

 

·                  terroristactivities in the United States and elsewhere;

 

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

 

*Customer Demographic Issues*

 

·                  changesin the demographic or retail environment;

 

·                  changesin consumer confidence resulting in a reduction of discretionary spending ongoods;

 

·                  changesin consumer preferences or fashion trends;

 

·                  changesin our relationships with key customers;

 

·                  changesin our proprietary credit card arrangement that adversely impact the ability toprovide credit to our customers;

 

*Merchandise Procurement and SupplyChain Considerations*

 

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

 

·                  delaysin receipt of merchandise ordered due to work stoppages or other causes ofdelay in connection with either the manufacture or shipment of suchmerchandise;

 

·                  changesin foreign currency exchange or inflation rates;

 

·                  significantincreases in paper, printing and postage costs;

 

*Industry and Competitive Factors*

 

·                  competitiveresponses to our loyalty programs, marketing, merchandising and promotionalefforts or inventory liquidations by vendors or other retailers;

 

·                  seasonalityof the retail business;

 

·                  adverseweather conditions or natural disasters, particularly during peak sellingseasons;

 

·                  delaysin anticipated store openings and renovations;

 

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·                  oursuccess in enforcing our intellectual property rights;

 

*Employee Considerations*

 

·                  changesin key management personnel and our ability to retain key management personnel;

 

·                  changesin our relationships with certain of our key sales associates and our abilityto retain our key sales associates;

 

*Legal and Regulatory Issues*

 

·                  changesin government or regulatory requirements increasing our costs of operations;

 

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

 

*Leverage Considerations*

 

·                  theeffects of incurring a substantial amount of indebtedness under our seniorsecured credit facilities and our senior notes and senior subordinated notes;

 

·                  theeffects upon us of complying with the covenants contained in our senior securedcredit facilities and the indentures governing our senior notes and seniorsubordinated notes; and

 

·                  restrictionsthe terms and conditions of the indebtedness under our senior secured creditfacilities may place on our ability to respond to changes in our business or totake certain actions.

 

*Other Factors*

 

·                  impactof funding requirements related to our noncontributory defined benefit pensionplan;

 

·                  thedesign and implementation of new information systems as well as enhancements ofexisting systems; and

 

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

 

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

 

**Critical Accounting Policies**

** **

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

 

**SeeNote 1 of the Notes to Condensed Consolidated Financial Statements in Item 1for a summary of our critical accounting policies.  A complete description of our criticalaccounting policies is included in our Annual Report to Shareholders on Form 10-Kfor the fiscal year ended July 28, 2007.**

** **

***Recent Accounting 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

 

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value.  The standard does not expand the use of fairvalue to any new circumstances.  SFAS 157is effective for financial statements issued for fiscal years beginning 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.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (SFAS 159).  SFAS 159expands opportunities to use fair value measurement in financial reporting andpermits entities to choose to measure many financial instruments and certainother items at fair value.  ThisStatement is effective 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 159 onour consolidated financial statements.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in the Company’s financialinstruments represents the potential loss arising from adverse changes ininterest rates. The Company does not enter into derivative financialinstruments for trading purposes. The Company seeks to manage exposure toadverse interest rate changes through its normal operating and financingactivities. The Company is exposed to interest rate risk through its borrowingactivities, which are described in Note 4 to the condensed consolidatedfinancial statements.

 

As of January 26, 2008, NMG had no borrowingsoutstanding under its Asset-Based Revolving Credit Facility that bears interestat floating rates. Future borrowings under NMG’s Asset-Based RevolvingFacility, to the extent of outstanding borrowings, would be affected byinterest rate changes.

 

At January 26, 2008, NMG had $1,625.0 millionof debt under its Senior Secured Term Loan Facility issued in connection withthe Acquisition that bears interest at floating rates.

 

NMG uses derivative financial instruments to help manageits interest rate risk.  Effective December 6,2005, NMG  entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit its exposure to interest rate increases relatedto a portion of its floating rate indebtedness. The interest rate swapagreements terminate after five years. As a result of the swap agreements, NMG’s effective fixed interest ratesas to the $1,000.0 million in floating rate indebtedness will currentlyrange from 6.508% to 6.733% per quarter through 2010 and result in an averagefixed rate of 6.592%. With respect to outstanding borrowings in excess of$1,000.0 million on the Senior Secured Term Loan Facility, such borrowings areat floating rates.  A 1% increase inthese floating rates would increase annual interest expense by approximately$6.3 million.

 

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

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

**a.  Disclosure Controls andProcedures.**

 

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation as of January 26, 2008, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, as well as other key members of our management, of theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) andRule 15d-15(e) under the Exchange Act). Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, accumulated, processed,summarized, reported and communicated on a timely basis within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

**b.  Changes in InternalControl over Financial Reporting.**

 

In the ordinary course of business, we routinely enhanceour information systems by either upgrading our current systems or implementingnew systems. No change occurred in our internal controls over financialreporting during the quarter ended January 26, 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

 

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**NEIMAN MARCUS, INC.**

 

**PART II**

 

**ITEM 1.           LEGALPROCEEDINGS**

 

OnFebruary 14, 2008, we filed a lawsuit in the 160th DistrictCourt of Dallas County, Texas against HSBC Bank Nevada, N.A. and HSBC PrivateLabel Corporation (collectively, “HSBC”) alleging a breach by HSBC of ourexisting Credit Card Program Agreement (the “Program Agreement”) as well asother claims, and we asked for a temporary restraining order and otherinjunctive relief. Subsequent to the granting of the temporary restrainingorder by the Court, we have negotiated and executed a letter of intent withHSBC related to certain proposed amendments to the Program Agreement. Theseproposed amendments will, among other things, provide for 1) the allocationbetween HSBC and the Company of additional income, if any, to be generated fromour credit card program as a result of certain changes made to the ProgramAgreement, and 2) the allocation of certain credit losses between HSBC and theCompany. We expect to execute the proposed amendments in the third quarter offiscal year 2008. We do not currently believe either the filing of this lawsuitor the proposed amendments to the Program Agreement will have a material impacton the level of future program income we will earn under the Program Agreement.

 

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

 

**ITEM 1A.        RISK FACTORS**

 

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

 

**Because our ownership of NMG accountsfor substantially 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 ofindebtedness, which may adversely affect NMG’s cash flow and its ability tooperate the business, to comply with debt covenants and make payments on itsindebtedness.**

 

We are highly leveraged. As of January 26, 2008, the principal amount of NMG’s totalindebtedness was approximately $2,953.7 million and the unused borrowingavailability under the $600 million Asset-Based Revolving Credit Facility wasapproximately $576.1 million after giving effect to $23.9 million of letters ofcredit outstanding thereunder.  NMG’ssubstantial indebtedness, combined with its lease and other financialobligations and contractual commitments, could have other importantconsequences. For example, it could:

 

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

 

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

 

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

 

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

 

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·                  placeNMG at a competitive disadvantage compared to its competitors that are lesshighly leveraged and therefore may be able to take advantage of opportunitiesthat its leverage prevents it from exploiting; and

 

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

 

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

 

In addition, NMG’s interest expense could increase ifinterest rates increase because the entire amount of the indebtedness under thesenior secured credit facilities bears interest at floating rates.   As of January 26, 2008, NMG hadapproximately $1,625.0 million principal amount of floating rate debt,consisting of outstanding borrowings under Senior Secured Term LoanFacility.  NMG also had at that dateapproximately $576.1 million of unused floating rate debt borrowing capacityavailable under the Asset-Based Revolving Credit Facility based on a borrowingbase of over $600.0 million at that date and after giving effect to $23.9million used for letters of credit. Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of $1,000.0million to limit its exposure to interest rate increases related to a portionof its floating rate indebtedness.

 

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

 

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

 

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

 

Contractual limitations on NMG’s ability to execute anynecessary alternative financing plans could exacerbate the effects of anyfailure to generate sufficient cash flow to satisfy its debt serviceobligations.  The Asset-Based RevolvingCredit Facility permits NMG to borrow up to $600.0 million; however, NMG’sability to borrow thereunder is limited by a borrowing base, which at any timewill equal the lesser of 80% of eligible inventory valued at the lower of costor market value and 85% of the net orderly liquidation value of the eligibleinventory, less certain reserves.  Inaddition, our ability to borrow under this facility is limited by a minimumliquidity condition, providing that, if less than $60.0 million isavailable at any time, NMG is not permitted to borrow any additional amountsunder the Asset-Based Revolving Credit Facility unless NMG’s pro forma ratio ofconsolidated EBITDA to consolidated Fixed Charges (as such terms are defined inthe credit agreement for the senior secured asset-based revolving creditfacility) is at least 1.1 to 1.0.  Ourability to meet this financial ratio may be affected by events beyond ourcontrol which may prevent us from meeting this ratio.

 

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

 

**The terms of NMG’s****Asset-Based Revolving Credit Facility and Senior Secured Term LoanFacility****and theindentures governing the Senior Notes, the Senior Subordinated Notes and the2028 Debentures may restrict NMG’s current and future operations, particularlyits ability to respond to changes in its business or to take certain actions.**

 

The credit agreements governing NMG’s Asset-BasedRevolving Credit Facility and Senior Secured Term Loan Facility creditfacilities and the indentures governing the Senior Notes, the SeniorSubordinated Notes and the 2028 Debentures contain, and any future indebtednessof NMG would likely contain, a number of restrictive covenants that imposesignificant operating and financial restrictions, including restrictions onNMG’s ability to engage in acts that may be in its best long-term interests.The indentures governing the Senior Notes, the Senior Subordinated Notes andthe 2028 Debentures and the credit agreements governing the senior securedcredit facilities include covenants that, among other things, restrict NMG’sability to:

 

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·                  incuradditional indebtedness;

 

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

 

·                  makeinvestments;

 

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

 

·                  engagein transactions with its affiliates;

 

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

 

·                  consolidateor merge;

 

·                  createliens; and

 

·                  enterinto sale and lease back transactions.

 

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

 

Moreover, NMG’s Asset-Based Revolving Credit Facilityprovides discretion to the agent bank acting on behalf of the lenders to imposeadditional availability and other reserves, which could materially impair theamount of borrowings that would otherwise be available to us. There can be noassurance that the agent bank will not impose such reserves or, were it to doso, that the resulting impact of this action would not materially and adverselyimpair NMG’s liquidity.

 

A breach of any of the restrictive covenants would resultin a default under the Asset-Based Revolving Credit Facility and Senior SecuredTerm Loan Facility.  If any such defaultoccurs, the lenders under the Asset-Based Revolving Credit Facility and SeniorSecured Term Loan Facility may elect to declare all outstanding borrowingsunder such facilities, together with accrued interest and other fees, to beimmediately due and payable, or enforce their security interest, any of whichwould result in an event of default under NMG’s Senior Notes and SeniorSubordinated Notes and 2028 Debentures. The lenders would also have the rightin these circumstances to terminate any commitments they have to providefurther borrowings.

 

The operating and financial restrictions and covenants inthese debt agreements and any future financing agreements may adversely affectNMG’s ability to finance future operations or capital needs or to engage inother business activities.

 

**Risks Related to Our Business andIndustry**

 

**The specialty retail industry is highlycompetitive.**

 

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

 

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

 

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

 

Our relationships with established and emerging designersare a key factor in our position as a retailer of high-fashion merchandise, anda substantial portion of our revenues is attributable to our sales of designermerchandise. Many of our key vendors limit the number of retail channels theyuse to sell their merchandise and competition among luxury retailers to obtainand sell these goods is intense. Our relationships with our designers have beena significant contributor to our past success. We have no guaranteed supplyarrangements with our principal merchandising sources. Accordingly, there canbe no assurance that

 

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such sources will continue to meet our quality, style andvolume requirements. Moreover, nearly all of the brands of our top designersare sold by competing retailers, and many of our top designers also have theirown dedicated retail stores. If one or more of our top designers were to ceaseproviding us with adequate supplies of merchandise or, conversely, were toincrease sales of merchandise through its 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 ourfuture sales, our profitability may be adversely affected.**

 

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

 

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

 

Our success depends in large part on our ability toidentify fashion trends as well as to anticipate, gauge and react to changingconsumer demands in a timely manner. If we fail to adequately match our productmix to prevailing customer tastes, we may be required to sell our merchandiseat higher average markdown levels and lower average margins. Furthermore, theproducts we sell often require long lead times to order and must appeal toconsumers whose preferences cannot be predicted with certainty and often changerapidly. Consequently, we must stay abreast of emerging lifestyle and consumertrends and anticipate trends and fashions that will appeal to our consumerbase. Any failure on our part to anticipate, identify and respond effectivelyto changing consumer demands and fashion trends could adversely affect ourbusiness.

 

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

 

Based upon our expansion strategy, we expect that plannednew stores will add over 565,000 square feet of new store space overapproximately the next three fiscal years, representing an increase ofapproximately 10% above the current aggregate square footage of our full-lineNeiman Marcus and Bergdorf Goodman stores, and that our store remodelingprogram will add additional new store space from remodels that are alreadyunderway.  New store openings involvecertain risks, including constructing, furnishing and supplying a store in atimely and cost effective manner, accurately assessing the demographic orretail environment at a given location, hiring and training quality staff,obtaining necessary permits and zoning approvals, obtaining commitments from acore group of vendors to supply the new store, integrating the new store intoour distribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, costeffective manner, minimize disruptions to our existing operations, and succeedin creating an improved shopping environment. If we fail to execute on these orother aspects of our store expansion and remodeling strategy, we could sufferharm to our sales, an increase in costs and expenses and an adverse effect onour business.

 

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

 

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

 

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

 

The merchandise we sell consists in large part of luxuryretail goods. The purchase of these goods by customers is discretionary, andtherefore highly dependent upon the level of consumer spending, particularlyamong affluent customers. Accordingly, sales of

 

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these products may be adversely affected by an economicdownturn, increases in consumer debt levels, uncertainties regarding futureeconomic prospects or a decline in consumer confidence. An economic downturn inthe United 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.

 

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

 

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

 

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

 

In recent years, we have experienced certain inflationaryconditions in our cost base due primarily to (1) changes in foreigncurrency exchange rates that have reduced the purchasing power of the U.S.dollar and (2) increases in selling, general and administrative expenses,particularly with regard to employee benefits. Inflation can harm our marginsand profitability if we are unable to increase prices or cut costs enough tooffset the effects of inflation in our cost base. If inflation in these or othercosts worsens, 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 termsunder our loyalty programs could adversely affect our business.**

 

We maintain loyalty programs that are designed tocultivate long-term relationships with our customers and enhance the quality ofservice we provide to our customers. We must constantly monitor and update theterms of our loyalty programs so that they continue to meet the demands andneeds of our customers and remain competitive with loyalty programs offered byother high-end specialty retailers. Given that over 50% of our revenues atNeiman Marcus stores during each of the last two calendar years were generatedby our InCircle loyalty program members, our failure to continue to providequality service and competitive loyalty programs 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 proprietary credit card program throughwhich credit is extended to customers under the “Neiman Marcus” and “BergdorfGoodman” names. Because a majority of our revenues were transacted through ourproprietary credit cards, changes in our proprietary credit card arrangementthat adversely impact our ability to facilitate the provision of consumercredit may adversely affect our performance.

 

In July 2005, we sold our approximately threemillion private label credit card accounts and related assets, as well as theoutstanding balances associated with such accounts and we entered into along-term marketing and servicing alliance with HSBC that expires in June 2010.  Under the terms of this alliance, HSBC offerscredit cards and non-card payment plans and bears all credit risk with respectto sales transacted on the cards bearing our brands. We receive on-goingpayments from HSBC related to credit card sales.  In addition, we continue to handle key customerservice functions, including new account processing, most transactionauthorization, billing adjustments, collection services and customer inquiriesfor which we receive additional compensation from HSBC.  As part of this transaction, we have changed,and will continue to change, the terms of credit offered to our customersfollowing the Credit Card Sale.

 

The purchaser of our credit card business has discretionover certain policies and arrangements with our credit card customers and maychange these policies and arrangements in ways that affect our relationshipwith these customers. In addition, there can be no assurance that, uponexpiration of the current alliance with HSBC, that we will be able to enterinto a replacement arrangement on terms comparable to the current arrangement.Any changes in our credit card arrangements may adversely affect our creditcard program and ultimately, our business.

 

54

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Credit card operations are subject to numerous federaland state laws that impose disclosure and other requirements upon theorigination, servicing and enforcement of credit accounts and limitations onthe maximum amount of finance charges that may be charged by a credit provider.The purchaser of our credit card business is subject to regulations to which wewere not subject prior to the Credit Card Sale. Any effect of these regulationsor change in the regulation of credit arrangements that would materially limitthe availability of credit to our customer base could adversely affect ourbusiness. In addition, changes in credit card use, payment patterns, anddefault rates may result from a variety of economic, legal, social, and otherfactors that we cannot control or predict with certainty.

 

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

 

Extreme weather conditions in the areas in which ourstores are located could adversely affect our business. For example, heavysnowfall, rainfall or other extreme weather conditions over a prolonged periodmight make it difficult for our customers to travel to our stores and therebyreduce our sales and profitability. Our business is also susceptible tounseasonable weather conditions. For example, extended periods of unseasonablywarm temperatures during the winter season or cool weather during the summerseason could render a portion of our inventory incompatible with thoseunseasonable conditions. Reduced sales from extreme or prolonged unseasonableweather conditions would adversely affect our business.

 

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

 

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

 

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

 

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

 

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

 

We purchase a substantial portion of our inventory fromforeign suppliers whose cost to us is affected by the fluctuation of theirlocal currency against the dollar or who price their merchandise in currenciesother than the dollar. Fluctuations in the Euro-U.S. dollar exchange rateaffect us most significantly; however, we source goods from numerous countriesand thus are affected by changes in numerous currencies and, generally, byfluctuations in the U.S. dollar relative to such currencies.  Accordingly, changes in the value of thedollar relative to foreign currencies may increase our cost of goods sold andif we are unable to pass such cost increases on to our customers, our grossmargins, and ultimately our earnings, would decrease. Foreign currency fluctuationscould have a material adverse effect on our business, financial condition andresults of operations in the future.

 

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

 

A substantial majority of our merchandise is manufacturedoverseas, mostly in Europe. As a result, political instability or other eventsresulting in the disruption of trade from other countries or the imposition ofadditional regulations relating to or duties upon imports could causesignificant delays or interruptions in the supply of our merchandise orincrease our costs, either of which could have a material adverse effect on ourbusiness. If we are forced to source merchandise from other countries, those goodsmay be more expensive or of a different or inferior quality from the ones wenow sell. The importance to us of our existing designer relationships couldpresent additional difficulties, as it may not be possible to sourcemerchandise from a given designer from alternative jurisdictions. If we wereunable to adequately replace the merchandise we currently source withmerchandise produced elsewhere, our business could be adversely affected.

 

55

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

 

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

 

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

** **

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

 

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

 

We and our subsidiaries currently own our tradenames andservice marks, including the “Neiman Marcus” and “Bergdorf Goodman” marks. Ourtradenames and service marks are registered in the United States and in variousforeign countries, primarily in Europe. The laws of some foreign countries donot protect proprietary rights to the same extent as do the laws of the UnitedStates. Moreover, we are unable to predict the effect that any future foreignor domestic intellectual property legislation or regulation may have on ourexisting or future business. The loss or reduction of any of our significantproprietary rights could have an adverse effect on our business.

 

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

 

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

 

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

 

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

 

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

 

###### **ITEM2.**               UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

###### ** **

None.

 

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

 

None.

 

**ITEM 6.           EXHIBITS**

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

 

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| 10.1*  |   | Employment Agreement dated as of October 6,  2005 by and among The Neiman Marcus Group, Inc., Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., and Burton M. Tansky,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2*  |   | First Amendment to Employment Agreement by and  between The Neiman Marcus Group, Inc., a Delaware corporation, Neiman  Marcus, Inc., a Delaware corporation, and Burton M. Tansky effective  December 21, 2007 incorporated herein by reference to the Neiman  Marcus, Inc.’s Current Report on Form 8-K dated December 21,  2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3*  |   | Rollover Agreement dated as of October 4,  2005 by and among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., and Burton M. Tansky, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4*  |   | Form of Rollover Agreement by and among The  Neiman Marcus Group, Inc., Newton Acquisition, Inc., and certain  members of management, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Credit Agreement dated as of October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger  Sub, Inc., The Neiman Marcus Group, Inc., the Subsidiary  Guarantors, Deutsche Bank Trust Company Americas, as administrative agent and  collateral agent, Credit Suisse and Deutsche Bank Securities Inc., as joint  lead arrangers, Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P., as co-arrangers, Credit Suisse, Deutsche Bank Securities Inc.,  Banc of America Securities LLC and Goldman Sachs Credit Partners L.P., as  joint bookrunners, and Credit Suisse, Banc of America Securities LLC and  Goldman Sachs Credit Partners L.P., as co-syndication agents, General  Electric Capital Corporation as documentation agent and the lenders  thereunder, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6   |   | Credit Agreement dated as of October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger  Sub, Inc., The Neiman Marcus Group, Inc., the Subsidiary  Guarantors, Credit Suisse, as administrative agent and collateral agent,  Credit Suisse and Deutsche Bank Securities Inc. as joint lead arrangers, Banc  of America Securities LLC and Goldman Sachs Credit Partners L.P. as  co-arrangers, Credit Suisse, Deutsche Bank Securities Inc., Banc of America  Securities LLC and Goldman Sachs Credit Partners L.P. as joint bookrunners,  Deutsche Bank Securities Inc., Banc of America Securities LLC and Goldman  Sachs Credit Partners L.P. as co-syndication agents and the lenders  thereunder, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7   |   | Pledge and Security Agreement dated as of  October 6, 2005 among Newton Acquisition Merger Sub, Inc., The  Neiman Marcus Group, Inc., Newton Acquisition, Inc., the Subsidiary  Guarantors and Deutsche Bank Trust Company Americas, as administrative agent  and collateral agent, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.8   |   | Pledge and Security and Intercreditor Agreement  dated as of October 6, 2005, among Newton Acquisition Merger  Sub, Inc., The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., the Subsidiary Guarantors and Credit Suisse, as  administrative agent and collateral agent, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.9   |   | Lien Subordination and Intercreditor Agreement  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Subsidiary Guarantors, Deutsche Bank  Trust Company Americas, as revolving facility agent, and Credit Suisse, as  term loan agent, incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.10  |   | Form of First Priority Mortgage, Assignment  of Leases and Rents, Security Agreement and Financing Statement from The  Neiman Marcus Group, Inc. to Credit Suisse, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.11  |   | Form of First Priority Leasehold Mortgage,  Assignment of Leases and Rents, Security Agreement and Financing Statement  from The Neiman Marcus Group, Inc. to Credit Suisse, incorporated herein  by reference to The Neiman Marcus Group, Inc.’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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| 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.                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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.                                                                                                                                                                                                                                                                                       |

 

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| 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* |   | Confidentiality, Non-Competition and Termination  Benefits Agreement between The Neiman Marcus Group, Inc. and Steven P.  Dennis dated September 9, 2004, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated September 9,  2004.                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.28* |   | Newton Acquisition, Inc. Cash Incentive Plan  effective as of November 29, 2005, incorporated herein by reference to  the Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal  year ended July 29, 2006.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.29  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.30* |   | The Neiman Marcus Group, Inc. Key Employee  Deferred Compensation Plan effective as of January 1, 2006, incorporated  herein by reference to the Neiman Marcus, Inc. Annual Report on  Form 10-K for the fiscal year ended July 29, 2006.                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.31  |   | Amendment No. 3 dated as of October 12,  2006 to the Credit Agreement dated as of October 6, 2005 among The  Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of  The Neiman Marcus Group, Inc. from time to time party thereto, the  Lenders thereunder and Credit Suisse, as administrative agent and collateral  agent for the Lenders, incorporated by reference to Neiman  Marcus, Inc.’s Current Report on Form 8-K dated October 17,  2006.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.32  |   | Amendment No. 4 dated as of February 8,  2007 to the Credit Agreement dated as of October 6, 2005, among The  Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of  The Neiman Marcus Group, Inc. from time to time party thereto, the  lenders thereunder, and Credit Suisse, as administrative agent and collateral  agent for the lenders incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated February 14,  2007.                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.33  |   | Amendment to the Newton Acquisition, Inc.  Cash Incentive Plan effective as of January 21, 2008. (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)                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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

 

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**SIGNATURES**

 

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

 
|                  |       | NEIMAN  MARCUS, INC.                                                                 |       |               |
|-----------------------|------------|--------------------------------------------------------------------------------------|------------|--------------------|
|                  |       |             (Registrant) |       |               |
|                  |       |                                                                                 |       |               |
|                  |       |                                                                                 |       |               |
| **Signature**         | ** ** | **Title**                                                                            | ** ** | **Date**           |
|                  |       |                                                                                 |       |               |
| /s/ T. Dale Stapleton |       | Vice President and  Controller                                                       |       | March 5, 2008 |
| T. Dale Stapleton     |       | and Duly Authorized  Officer                                                         |       |               |
|                  |       | (principal accounting  officer)                                                      |       |               |

 

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