**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**x****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

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

 

**OR**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

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

 

**NeimanMarcus, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**(State or other jurisdiction ofincorporation or organization) | ** ** | **20-3509435**(I.R.S. EmployerIdentification No.) |
|---------------------------------------------------------------------------|------------|---------------------------------------------------|

 
| **1618 Main Street**

**Dallas, Texas**

(Address of principal executive offices) | ** **

**75201**

(Zip code) |
|-----------------------------------------------------------------------------------|-----------------------------------|

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

 

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

 

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

 

There were 1,012,919 shares of the registrant’s common stock, par value$.01 per share, outstanding at April 26, 2008.

 

 

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**NEIMAN MARCUS, INC.**

** **

**INDEX**

 
| ** **    | ** **                                                                       | **Page** |
|---------------|----------------------------------------------------------------------------------|----------|
| Part I.  | Financial Information                                                            |     |
|          |                                                                             |     |
| Item 1.       | Condensed Consolidated Balance Sheets as of April 26, 2008,                 |     |
|          | July 28, 2007 and April 28, 2007                                       | 1        |
|          |                                                                             |     |
|          | Condensed Consolidated Statements of Earnings for the Thirteen Weeks  Ended      |     |
|          | April 26, 2008 and April 28, 2007                                      | 2        |
|          |                                                                             |     |
|          | Condensed Consolidated Statements of Earnings for the Thirty-Nine  Weeks Ended   |     |
|          | April 26, 2008 and April 28, 2007                                      | 3        |
|          |                                                                             |     |
|          | Condensed Consolidated Statements of Cash Flows for the Thirty-Nine  Weeks Ended |     |
|          | April 26, 2008 and April 28, 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                      | 50       |
|          |                                                                             |     |
| Item 4.       | Controls and Procedures                                                          | 51       |
|          |                                                                             |     |
| Part II. | Other  Information                                                               |     |
|          |                                                                             |     |
| Item 1.       | Legal Proceedings                                                                | 51       |
|          |                                                                             |     |
| Item 1A.      | Risk Factors                                                                     | 51       |
|          |                                                                             |     |
| Item 2.       | Unregistered Sales of Equity Securities and  Use of Proceeds                     | 58       |
|          |                                                                             |     |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                             | 58       |
|          |                                                                             |     |
| Item 6.       | Exhibits                                                                         | 58       |
|          |                                                                             |     |
| Signatures    |                                                                             | 63       |

 

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| **(in thousands, except shares)**                                                                                                                     | ** ** | **April 26,   2008** | ** ** | **July 28,   2007** | ** ** | **April 28,   2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** **                     | ** ** |
| **ASSETS**                                                                                                                                                           |       |                           |       |                          |       |                           |       |
| Current assets:                                                                                                                                                      |       |                           |       |                          |       |                           |       |
| Cash and cash equivalents                                                                                                                                            |       | $                              | 206,104    |                          | $          | 141,207                        |       | $ | 176,803 |   |
| Merchandise inventories                                                                                                                                              |       | 958,895                        |       | 918,269                       |       | 908,060                        |       |
| Deferred income taxes                                                                                                                                                |       | 39,728                         |       | 39,728                        |       | 34,551                         |       |
| Other current assets                                                                                                                                                 |       | 137,156                        |       | 115,765                       |       | 116,064                        |       |
| Total current assets                                                                                                                                                 |       | 1,341,883                      |       | 1,214,969                     |       | 1,235,478                      |       |
|                                                                                                                                                                 |       |                           |       |                          |       |                           |       |
| Property and equipment, net                                                                                                                                          |       | 1,071,875                      |       | 1,043,711                     |       | 1,034,228                      |       |
| Goodwill and intangible assets, net                                                                                                                                  |       | 4,095,249                      |       | 4,140,019                     |       | 4,169,661                      |       |
| Debt issuance costs                                                                                                                                                  |       | 74,181                         |       | 84,844                        |       | 88,398                         |       |
| Other assets                                                                                                                                                         |       | 9,536                          |       | 17,456                        |       | 23,219                         |       |
| Total assets                                                                                                                                                         |       | $                              | 6,592,724  |                          | $          | 6,500,999                      |       | $ | 6,550,984 |   |
|                                                                                                                                                                 |       |                           |       |                          |       |                           |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                        |       |                           |       |                          |       |                           |       |
| Current liabilities:                                                                                                                                                 |       |                           |       |                          |       |                           |       |
| Accounts payable                                                                                                                                                     |       | $                              | 266,598    |                          | $          | 361,299                        |       | $ | 297,841 |   |
| Accrued liabilities                                                                                                                                                  |       | 400,214                        |       | 403,162                       |       | 416,077                        |       |
| Other current liabilities                                                                                                                                            |       | 1,973                          |       | 3,426                         |       | 3,686                          |       |
| Total current liabilities                                                                                                                                            |       | 668,785                        |       | 767,887                       |       | 717,604                        |       |
|                                                                                                                                                                 |       |                           |       |                          |       |                           |       |
| Long-term liabilities:                                                                                                                                               |       |                           |       |                          |       |                           |       |
| Long-term debt                                                                                                                                                       |       | 2,946,053                      |       | 2,945,906                     |       | 3,020,858                      |       |
| Deferred income taxes                                                                                                                                                |       | 966,844                        |       | 1,002,982                     |       | 1,021,524                      |       |
| Deferred real estate credits, net                                                                                                                                    |       | 80,662                         |       | 54,068                        |       | 40,474                         |       |
| Other long-term liabilities                                                                                                                                          |       | 219,399                        |       | 172,144                       |       | 199,090                        |       |
| Total long-term liabilities                                                                                                                                          |       | 4,212,958                      |       | 4,175,100                     |       | 4,281,946                      |       |
|                                                                                                                                                                 |       |                           |       |                          |       |                           |       |
| Common stock (par value $0.01 per share,  1,012,919 shares issued at April 26, 2008 and July 28, 2007 and 1,012,341  shares issued at April 28, 2007) |       | 10                             |       | 10                            |       | 10                             |       |
| Additional paid-in capital                                                                                                                                           |       | 1,416,971                      |       | 1,412,386                     |       | 1,409,882                      |       |
| Accumulated other comprehensive (loss)  income                                                                                                                       |       | (8,843                         | )          | 21,229                        |       | 1,289                          |       |
| Retained earnings                                                                                                                                                    |       | 302,843                        |       | 124,387                       |       | 140,253                        |       |
| Total shareholders’ equity                                                                                                                                      |       | 1,710,981                      |       | 1,558,012                     |       | 1,551,434                      |       |
| Total liabilities and shareholders’ equity                                                                                                                      |       | $                              | 6,592,724  |                          | $          | 6,500,999                      |       | $ | 6,550,984 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

1

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(UNAUDITED)**

 
| **(in thousands)**                                                           | ** ** | **Thirteen   weeks ended   April 26,   2008** | ** ** | **Thirteen   weeks ended   April 28,   2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                                             | ** ** | ** **                                                             | ** ** |
| Revenues                                                                          |       | $                                                                      | 1,062,161  |                                                                   | $          | 1,073,374 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 636,987                                                                |       | 627,879                                                                |       |
| Selling, general and administrative  expenses (excluding depreciation)            |       | 238,855                                                                |       | 247,652                                                                |       |
| Income from credit card program                                                   |       | (15,704                                                                | )          | (17,069                                                                | )          |
| Depreciation expense                                                              |       | 35,474                                                                 |       | 34,255                                                                 |       |
| Amortization of customer lists                                                    |       | 13,568                                                                 |       | 13,621                                                                 |       |
| Amortization of favorable lease commitments                                       |       | 4,385                                                                  |       | 4,469                                                                  |       |
|                                                                              |       |                                                                   |       |                                                                   |       |
| Operating earnings                                                                |       | 148,596                                                                |       | 162,567                                                                |       |
|                                                                              |       |                                                                   |       |                                                                   |       |
| Interest expense, net                                                             |       | 57,303                                                                 |       | 63,787                                                                 |       |
|                                                                              |       |                                                                   |       |                                                                   |       |
| Earnings from continuing operations before  income taxes                          |       | 91,293                                                                 |       | 98,780                                                                 |       |
|                                                                              |       |                                                                   |       |                                                                   |       |
| Income taxes                                                                      |       | 35,898                                                                 |       | 37,842                                                                 |       |
|                                                                              |       |                                                                   |       |                                                                   |       |
| Earnings from continuing operations                                               |       | 55,395                                                                 |       | 60,938                                                                 |       |
|                                                                              |       |                                                                   |       |                                                                   |       |
| Loss from discontinued operations, net of  taxes                                  |       | —                                                                 |       | (1,390                                                                 | )          |
|                                                                              |       |                                                                   |       |                                                                   |       |
| Net earnings                                                                      |       | $                                                                      | 55,395     |                                                                   | $          | 59,548 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

2

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(UNAUDITED)**

 
| **(in thousands)**                                                           | ** ** | **Thirty-Nine   weeks ended   April 26,   2008** | ** ** | **Thirty-Nine   weeks ended   April 28,   2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                                                | ** ** | ** **                                                                | ** ** |
| Revenues                                                                          |       | $                                                                         | 3,568,259  |                                                                      | $          | 3,408,421 |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 2,217,357                                                                 |       | 2,084,916                                                                 |       |
| Selling, general and administrative  expenses (excluding depreciation)            |       | 803,404                                                                   |       | 778,767                                                                   |       |
| Income from credit card program                                                   |       | (52,267                                                                   | )          | (51,370                                                                   | )          |
| Depreciation expense                                                              |       | 105,695                                                                   |       | 101,503                                                                   |       |
| Amortization of customer lists                                                    |       | 40,747                                                                    |       | 40,764                                                                    |       |
| Amortization of favorable lease commitments                                       |       | 13,155                                                                    |       | 13,408                                                                    |       |
| Other income                                                                      |       | (32,450                                                                   | )          | (4,210                                                                    | )          |
|                                                                              |       |                                                                      |       |                                                                      |       |
| Operating earnings                                                                |       | 472,618                                                                   |       | 444,643                                                                   |       |
|                                                                              |       |                                                                      |       |                                                                      |       |
| Interest expense, net                                                             |       | 178,923                                                                   |       | 198,142                                                                   |       |
|                                                                              |       |                                                                      |       |                                                                      |       |
| Earnings from continuing operations before  income taxes                          |       | 293,695                                                                   |       | 246,501                                                                   |       |
|                                                                              |       |                                                                      |       |                                                                      |       |
| Income taxes                                                                      |       | 115,239                                                                   |       | 95,932                                                                    |       |
|                                                                              |       |                                                                      |       |                                                                      |       |
| Earnings from continuing operations                                               |       | 178,456                                                                   |       | 150,569                                                                   |       |
|                                                                              |       |                                                                      |       |                                                                      |       |
| Loss from discontinued operations, net of  taxes                                  |       | —                                                                    |       | (22,771                                                                   | )          |
|                                                                              |       |                                                                      |       |                                                                      |       |
| Net earnings                                                                      |       | $                                                                         | 178,456    |                                                                      | $          | 127,798 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

3

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**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(UNAUDITED)**

 
| **(in thousands)**                                                              | ** ** | **Thirty-Nine   weeks ended   April 26,   2008** | ** ** | **Thirty-Nine   weeks ended   April 28,   2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | ** **                                                                | ** ** | ** **                                                                | ** ** |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                |       |                                                                      |       |                                                                      |       |
| Net earnings                                                                         |       | $                                                                         | 178,456    |                                                                      | $          | 127,798 |   |
| Loss from discontinued operations                                                    |       | —                                                                    |       | 22,771                                                                    |       |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |       |                                                                      |       |                                                                      |       |
| Depreciation expense                                                                 |       | 105,695                                                                   |       | 101,503                                                                   |       |
| Amortization of debt issue costs                                                     |       | 10,663                                                                    |       | 10,588                                                                    |       |
| Amortization of customer lists and  favorable lease commitments                      |       | 53,902                                                                    |       | 54,172                                                                    |       |
| Gain on curtailment of defined benefit  retirement obligations                       |       | (32,450                                                                   | )          | —                                                                    |       |
| Deferred income taxes                                                                |       | (13,569                                                                   | )          | (26,271                                                                   | )          |
| Other, primarily costs related to defined  benefit pension plans                     |       | 18,631                                                                    |       | 17,468                                                                    |       |
|                                                                                 |       | 321,328                                                                   |       | 308,029                                                                   |       |
| Changes in operating assets and  liabilities:                                        |       |                                                                      |       |                                                                      |       |
| Increase in merchandise inventories                                                  |       | (40,626                                                                   | )          | (114,439                                                                  | )          |
| Increase in other current assets                                                     |       | (21,391                                                                   | )          | (45,689                                                                   | )          |
| (Increase) decrease in other assets                                                  |       | (1,325                                                                    | )          | 329                                                                       |       |
| (Decrease) increase in accounts payable and  accrued liabilities                     |       | (71,281                                                                   | )          | 38,356                                                                    |       |
| Increase in deferred real estate credits                                             |       | 29,768                                                                    |       | 757                                                                       |       |
| Funding of defined benefit pension plan                                              |       | (15,000                                                                   | )          | —                                                                    |       |
| Net cash provided by operating activities –  continuing operations              |       | 201,473                                                                   |       | 187,343                                                                   |       |
| Net cash used for operating activities –  discontinued operations               |       | —                                                                    |       | (10,553                                                                   | )          |
| **Net cash provided by operating activities**                                        |       | 201,473                                                                   |       | 176,790                                                                   |       |
| **CASH FLOWS – INVESTING ACTIVITIES**                                           |       |                                                                      |       |                                                                      |       |
| Capital expenditures                                                                 |       | (133,130                                                                  | )          | (104,163                                                                  | )          |
| 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                 |       | (133,130                                                                  | )          | (42,094                                                                   | )          |
| Net cash used for investing activities –  discontinued operations               |       | —                                                                    |       | (128                                                                      | )          |
| **Net cash used for investing activities**                                           |       | (133,130                                                                  | )          | (42,222                                                                   | )          |
| **CASH FLOWS – FINANCING ACTIVITIES**                                           |       |                                                                      |       |                                                                      |       |
| Repayment of borrowings                                                              |       | (3,446                                                                    | )          | (4,554                                                                    | )          |
| Repayment of borrowings under senior term  loan facility                             |       | —                                                                    |       | (175,000                                                                  | )          |
| Debt issuance costs paid                                                             |       | —                                                                    |       | (1,449                                                                    | )          |
| Proceeds from purchase of common stock                                               |       | —                                                                    |       | 150                                                                       |       |
| Net cash used for financing activities –  continuing operations                 |       | (3,446                                                                    | )          | (180,853                                                                  | )          |
| Net cash used for financing activities –  discontinued operations               |       | —                                                                    |       | (1,675                                                                    | )          |
| **Net cash used for financing activities**                                           |       | (3,446                                                                    | )          | (182,528                                                                  | )          |
| **CASH AND CASH EQUIVALENTS**                                                        |       |                                                                      |       |                                                                      |       |
| Increase (decrease) during the period                                                |       | 64,897                                                                    |       | (47,960                                                                   | )          |
| Beginning balance                                                                    |       | 141,207                                                                   |       | 224,763                                                                   |       |
| Ending balance - continuing operations                                               |       | $                                                                         | 206,104    |                                                                      | $          | 176,803 |   |
|                                                                                 |       |                                                                      |       |                                                                      |       |
| **Supplemental Schedule of Cash Flow  Information**                                  |       |                                                                      |       |                                                                      |       |
|                                                                                 |       |                                                                      |       |                                                                      |       |
| Cash paid during the period for:                                                     |       |                                                                      |       |                                                                      |       |
| Interest                                                                             |       | $                                                                         | 188,065    |                                                                      | $          | 208,068 |   |
| Income taxes                                                                         |       | $                                                                         | 109,893    |                                                                      | $          | 117,469 |   |
| Noncash activities:                                                                  |       |                                                                      |       |                                                                      |       |
| Additions to property and equipment                                                  |       | $                                                                         | —     |                                                                      | $          | 1,607 |   |
| Increase in goodwill upon adoption of  accounting standard                           |       | $                                                                         | 9,133      |                                                                      | $          | — |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

4

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**NEIMAN MARCUS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.**              Basis of Presentation

** **

We have prepared the accompanying unaudited condensedconsolidated financial statements in accordance with generally acceptedaccounting principles for interim financial information and the instructions toForm 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements. Therefore, thesefinancial statements should be read in conjunction with our Annual Report on Form 10-Kfor the fiscal year ended July 28, 2007.

 

In our opinion, the accompanying unaudited condensedconsolidated financial statements contain all adjustments, consisting of normalrecurring adjustments, necessary to present fairly our financial position,results of operations and cash flows for the applicable interim periods.

 

The specialty retail industry is seasonal in nature, witha higher level of sales typically generated in the fall and holiday sellingseasons.  Due to seasonal and otherfactors, the results of operations for the third quarter of fiscal year 2008are not necessarily comparable to, or indicative of, results of any otherinterim period or for the fiscal year as a whole.

 

Neiman Marcus, Inc. (the Company) is a wholly-ownedsubsidiary of and is controlled by Newton Holding, LLC (Holding).  Holding is controlled by investment fundsaffiliated with TPG Capital and Warburg Pincus (collectively, theSponsors).  The Company was formed byHolding for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG),which acquisition was completed on October 6, 2005 (the Acquisition).  Prior to the Acquisition, the Company had noindependent assets or operations. After the Acquisition, the Company representsthe successor to NMG since the Company’s sole asset is its investment in NMGand its operations consist solely of the operating activities of NMG as well ascosts incurred by the Company related to its investment in NMG.

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the third quarter of fiscalyear 2008 relate to the thirteen weeks ended April 26, 2008.  All references to the third quarter of fiscalyear 2007 relate to the thirteen weeks ended April 28, 2007.  All references to year-to-date fiscal 2008relate to the thirty-nine weeks ended April 26, 2008.  All references to year-to-date fiscal 2007relate to the thirty-nine weeks ended April 28, 2007.

 

Adetailed description of our critical accounting policies is included in ourAnnual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

***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;

 

·                  Determination of impairmentof long-lived assets;

 

·                  Recognitionof advertising and catalog costs;

 

·                  Measurementof liabilities related to our loyalty programs;

 

5

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·                  Recognitionof income taxes; and

 

·                  Measurement ofaccruals for general liability, workers’ compensation and health insuranceclaims and pension and postretirement health care benefits.

 

***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 value. The standard does not expand the use of fair value to any newcircumstances.  SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, or our fiscal year ending August 1, 2009.  We have not yet evaluated the impact, if any,of adopting SFAS 157 on our consolidated financial statements.

 

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.

 

InMarch 2008, the FASB issued Statement of Financial Accounting Standards No. 161,“Disclosures about Derivative Instruments and Hedging Activities” (SFAS161).  SFAS 161 enhances currentdisclosures related to derivative instruments and hedging activities to provideadequate information about how derivative and hedging activities affect anentity’s financial position, financial performance and cash flows.  SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, or our second fiscal quarter ending January 31, 2009. We have not yetevaluated the impact, if any, of adopting SFAS 161 on our consolidatedfinancial statements.

 

**2.**              Discontinued Operations

** **

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

 

InNovember 2006, we entered into a definitive agreement to sell 100% of theownership interests in Kate Spade LLC to Liz Claiborne, Inc. (consistingof both our original 56% interest and the 44% minority interest subsequentlypurchased by NMG) for pretax net cash proceeds of approximately $121.5 million.Both the purchase of the minority interestin Kate Spade LLC and the sale of Kate Spade LLC to Liz Claiborne, Inc.were consummated in December 2006.

 

The Company’s unaudited condensed consolidated financialstatements, accompanying notes and other information provided in this QuarterlyReport on Form 10-Q reflect Kate Spade LLC as discontinued operations forall periods presented.

 

Summarized financial information with respect to theresults of operations of Kate Spade LLC is as follows:

 
| **(in thousands)**                                   | ** ** | **Thirteen   weeks ended   April 28,   2007** | ** ** | **Thirty-Nine   weeks ended   April 28,   2007** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | ** **                                                             | ** ** | ** **                                                                | ** ** |
| Revenues                                                  |       | $                                                                      | —     |                                                                      | $          | 29,612 |   |
|                                                      |       |                                                                   |       |                                                                      |       |
| Earnings from discontinued operations before income taxes |       | $                                                                      | —     |                                                                      | $          | 3,494 |   |
| Income taxes                                              |       | —                                                                 |       | 1,967                                                                     |       |
| Net earnings from  discontinued operations                |       | —                                                                 |       | 1,527                                                                     |       |
|                                                      |       |                                                                   |       |                                                                      |       |
| Loss on disposition before income taxes                   |       | (1,390                                                                 | )          | (13,398                                                                   | )          |
| Income taxes                                              |       | —                                                                 |       | (10,900                                                                   | )          |
| Net loss on disposition                                   |       | (1,390                                                                 | )          | (24,298                                                                   | )          |
|                                                      |       |                                                                   |       |                                                                      |       |
| Loss from discontinued  operations, net of taxes          |       | $                                                                      | (1,390     | )                                                                         | $          | (22,771 | ) |

 

6

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

 

**3.**              Goodwill and Intangible Assets, Net

 
| **(in thousands)**             | ** ** | **April 26,   2008** | ** ** | **July 28,   2007** | ** ** | **April 28,   2007** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
|                                |       |                           |       |                          |       |                           |       |
| Goodwill                            |       | $                              | 1,614,273  |                          | $          | 1,605,140                      |       | $ | 1,605,140 |   |
| Tradenames                          |       | 1,610,315                      |       | 1,610,315                     |       | 1,621,788                      |       |
| Customer lists, net                 |       | 436,497                        |       | 477,245                       |       | 490,945                        |       |
| Favorable lease commitments, net    |       | 434,164                        |       | 447,319                       |       | 451,788                        |       |
| Goodwill and intangible assets, net |       | $                              | 4,095,249  |                          | $          | 4,140,019                      |       | $ | 4,169,661 |   |

 

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

 

Goodwill and indefinite-lived intangible assets, such astradenames, are not subject to amortization. Rather, recoverability of goodwilland indefinite-lived intangible assets is assessed annually and upon theoccurrence of certain events. The recoverability assessment requires us to makejudgments and estimates regarding fair values. Fair values are determined usingestimated future cash flows, including growth assumptions for future revenues,gross margin rates and other estimates. To the extent that our estimates arenot realized, future assessments could result in impairment charges. In thefourth quarter of fiscal year 2007, we recorded a $11.5 million pretaximpairment charge related to the writedown to fair value in the net carryingvalue of the Horchow tradename based upon lower anticipated future revenuesassociated with the brand.

 

Customer lists are amortized using the straight-linemethod over their estimated useful lives, ranging from 5 to 24 years (weightedaverage life of 13 years).  Favorablelease commitments are amortized straight-line over the remaining lives of theleases, ranging from 6 to 49 years (weighted average life of 33 years).  Total estimated amortization of allacquisition-related intangible assets is currently estimated as follows (inthousands):

 
| 2008 |   | $      | 72,149 |   |
|------|--------|--------|--------|--------|
| 2009 |   | 72,149 |   |
| 2010 |   | 72,149 |   |
| 2011 |   | 61,438 |   |
| 2012 |   | 49,013 |   |
| 2013 |   | 46,881 |   |

 

**4.**              Long-term Debt

** **

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

 
| **(in thousands)**           | ** ** | **Interest   Rate** | ** ** | **April 26,   2008** | ** ** | **July 28,   2007** | ** ** | **April 28,   2007** | ** ** |
|-----------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
|                              |       |                     |       |                           |       |                          |       |                           |       |
| Senior Secured Term Loan Facility |       | variable                 |       | $                              | 1,625,000  |                          | $          | 1,625,000                      |       | $ | 1,700,000 |   |
| 2028 Debentures                   |       | 7.125%                   |       | 121,053                        |       | 120,906                       |       | 120,858                        |       |
| 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                    |       |                     |       | $                              | 2,946,053  |                          | $          | 2,945,906                      |       | $ | 3,020,858 |   |

 

***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.

 

7

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The Asset-Based Revolving Credit Facility provides thatNMG has the right at any time to request up to $200.0 million ofadditional commitments, but the lenders are under no obligation to provide anysuch additional commitments, and any increase in commitments will be subject tocustomary conditions precedent. NMG’s ability to borrow under any increasedcommitments would still be limited by the amount of the borrowing base.

 

As of April 26, 2008, NMG had $575.6 million ofunused borrowing availability under the Asset-Based Revolving Credit Facilitybased on a borrowing base of over $600.0 million and after giving effectto $24.4 million used for letters of credit.  The principal amount of the loans outstandingis due and payable in full on October 6, 2010.

 

Borrowings under the Asset-Based Revolving CreditFacility bear interest at a rate per annum equal to, at NMG’s option, either (a) abase rate determined by reference to the higher of (1) the prime rate ofDeutsche Bank Trust Company Americas and (2) the federal funds effectiverate plus 1¤2 of 1% or (b) aLIBOR rate, subject to certain adjustments, in each case plus an applicablemargin. The initial applicable margin is 0% with respect to base rateborrowings and 1.75% with respect to LIBOR borrowings, in each case subject toadjustment based on the historical availability under the Asset-Based RevolvingCredit Facility. In addition, NMG is required to pay a commitment fee of 0.375%per annum in respect of the unutilized commitments, subject to downwardadjustment if the average revolving loan utilization is 50% or more for anyapplicable period. NMG must also pay customary letter of credit fees and agencyfees.

 

All obligations under the Asset-Based Revolving CreditFacility are guaranteed by the Company and certain of NMG’s existing and futuredomestic subsidiaries (subsidiary guarantors). As of April 26, 2008, theliabilities of NMG’s non-guarantor subsidiaries totaled approximately$4.4 million, or 0.1% of consolidated liabilities, and the assets of NMG’snon-guarantor subsidiaries aggregated approximately $6.4 million, or 0.1%of consolidated total assets. All obligations under NMG’s Asset-Based RevolvingCredit Facility, and the guarantees of those obligations, are secured, subjectto certain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiary guarantors.

 

The Asset-Based Revolving Credit Facility contains anumber of customary negative covenants and restrictions, but does not requireNMG to comply with any financial ratio maintenance covenants.  For a more detailed description of NMG’sAsset-Based Revolving Credit Facility, refer to our Annual Report on Form 10-Kfor the fiscal year ended July 28, 2007.

 

***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 the loans under its Senior Secured Term Loan Facility infiscal year 2006 and $250 million in fiscal year 2007.

 

At April 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¤2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. At April 26,2008, the applicable margin with respect to base rate borrowings was 0.75% andthe applicable margin with respect to LIBOR borrowings was 1.75%. The interestrate on the outstanding borrowings pursuant to the Senior Secured Term LoanFacility was 4.76% at April 26, 2008.

 

The credit agreement governing the Senior Secured TermLoan Facility requires NMG to prepay outstanding term loans with 50% (whichpercentage will be reduced to 25% if NMG’s total leverage ratio is less than aspecified ratio and will be reduced to 0% if NMG’s total leverage ratio is lessthan a specified ratio) of its annual excess cash flow (as defined in thecredit agreement). For fiscal year 2007, NMG was not required to prepay anyoutstanding term loans pursuant to the annual excess cash flow requirements.  If a change of control (as defined in thecredit agreement) occurs, NMG will be required to offer to prepay alloutstanding term loans, at a prepayment price equal to 101% of the principalamount to be prepaid, plus accrued and unpaid interest to the date ofprepayment. NMG also must offer to prepay outstanding term loans at 100% of theprincipal amount to be prepaid, plus accrued and unpaid interest, with theproceeds of certain asset sales under certain circumstances.

 

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

 

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

 

8

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The credit agreement governing the Senior Secured TermLoan Facility contains a number of customary negative covenants and additionalcovenants related to the security arrangements for the Senior Secured Term LoanFacility. The credit agreement also contains customary affirmative covenantsand events of default.  For a more detaileddescription of the Senior Secured Term Loan Facility, refer to our AnnualReport on Form 10-K for the fiscal year ended July 28, 2007.

 

***2028 Debentures.***  In May 1998, NMG issued$125.0 million aggregate principal amount of its 7.125% 2028 Debentures.NMG equally and ratably secures its 2028 Debentures by a first lien securityinterest on certain collateral subject to liens granted under NMG’s SeniorSecured Credit Facilities. The 2028 Debentures are guaranteed on an unsecured,senior basis by the Company. For a more detailed description of the2028 Debentures, refer to our Annual Report on Form 10-K for the fiscalyear ended July 28, 2007.

 

Thefair value of the 2028 Debentures at April 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 interest payment period through October 15,2010, NMG may, at its option, elect to pay interest on the Senior Notesentirely in cash (Cash Interest) or entirely by increasing the principal amountof the outstanding Senior Notes or by issuing additional Senior Notes (PIKInterest). Cash Interest on the Senior Notes accrues at the rate of 9% perannum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum.To date, NMG has paid all interest obligations in cash. After October 15,2010, NMG will make all interest payments on the Senior Notes entirely in cash.All Senior Notes mature on October 15, 2015. Interest on the Senior Notesis payable quarterly in arrears on each January 15, April 15, July 15and October 15, commencing on January 15, 2006.

 

The Senior Notes are fully and unconditionallyguaranteed, on a joint and several unsecured, senior basis, by each of NMG’swholly-owned domestic subsidiaries that guarantee NMG’s obligations under itsSenior Secured Credit Facilities and by the Company. The Senior Notes and theguarantees thereof are NMG’s and the guarantors’ unsecured, senior obligationsand rank (i) equal in the right of payment with all of NMG’s and the guarantors’existing and future senior indebtedness, including any borrowings under NMG’sSenior Secured Credit Facilities and the guarantees thereof and NMG’s 2028Debentures; and (ii) senior to all of NMG’s and its guarantors’ existingand future subordinated indebtedness, including the Senior Subordinated Notesdue 2015 and the guarantees thereof. The Senior Notes also are effectivelyjunior in priority to NMG’s and its guarantors’ obligations under all securedindebtedness, including NMG’s Senior Secured Credit Facilities, the 2028Debentures, and any other secured obligations of NMG, in each case, to theextent of the value of the assets securing such obligations. In addition, theSenior Notes are structurally subordinated to all existing and future liabilities,including trade payables, of NMG’s subsidiaries that are not providingguarantees.

 

NMG is not required to make any mandatory redemption orsinking fund payments with respect to the Senior Notes.  The indenture governing the Senior Notescontains a number of customary negative covenants and events of default.  For a more detailed description of NMG’sSenior Notes, refer to our Annual Report on Form 10-K for the fiscal yearended July 28, 2007.

 

Thefair value of NMG’s Senior Notes at April 26, 2008 was approximately$724.5 million.

 

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

 

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

 

9

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NMG is not required to make any mandatory redemption orsinking fund payments with respect to the Senior Subordinated Notes. Theindenture governing the Senior Subordinated Notes contains a number ofcustomary negative covenants and events of defaults.  For a more detailed description of NMG’sSenior Subordinated Notes, refer to our Annual Report on Form 10-K for thefiscal year ended July 28, 2007.

 

Thefair value of NMG’s Senior Subordinated Notes at April 26, 2008 wasapproximately $522.5 million.

 

***Maturities of Long-Term Debt.***  At April 26, 2008, annualmaturities of long-term debt during the next five fiscal years and thereafterare as follows (in millions):

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

 

The above table does not reflect future excess cash flowprepayments, if any, that may be required under the Senior Secured Term LoanFacility.

 

***Interest Rate Swaps.***  The Company uses derivativefinancial instruments 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 April 26, 2008, the fair value of NMG’sinterest rate swap agreements was a loss of approximately $39.4 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 as a component of other comprehensive (loss) income. At April 26,2008, we have $24.9 million of unrecognized losses, net of tax, on our interestrate swap agreements included in accumulated other comprehensive (loss) 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 6.511% to 6.733% per quarter through 2010 and resultin an average fixed rate of 6.599%.

 

***Interest expense.***  The significant components ofinterest expense are as follows:

 
| ** **                        | ** ** | **Quarter-to-Date**                                                      | ** ** | **Year-to-Date**                                                         | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(in thousands)**           | ** ** | **Thirteen   weeks   ended   April 26,   2008** | ** ** | **Thirteen   weeks   ended   April 28,   2007** | ** ** | **Thirty-Nine   weeks   ended   April 26,   2008** | ** ** | **Thirty-Nine   weeks   ended   April 28,   2007** | ** ** |
|                              |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Senior Secured Term Loan Facility |       | $                                                                        | 24,289     |                                                                     | $          | 30,648 |   | $ | 80,071 |   | $ | 99,419 |   |
| 2028 Debentures                   |       | 2,185                                                                    |       | 2,227                                                                    |       | 6,550 |   | 6,689 |   |
| Senior Notes                      |       | 15,786                                                                   |       | 15,750                                                                   |       | 46,691 |   | 47,250 |   |
| Senior Subordinated Notes         |       | 12,998                                                                   |       | 12,969                                                                   |       | 38,446 |   | 38,906 |   |
| Amortization of debt issue costs  |       | 3,554                                                                    |       | 3,554                                                                    |       | 10,663 |   | 10,588 |   |
| Other                             |       | 763                                                                      |       | 867                                                                      |       | 2,439 |   | 2,847 |   |
| Total interest expense            |       | 59,575                                                                   |       | 66,015                                                                   |       | 184,860 |   | 205,699 |   |
| Less:                             |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Interest income                   |       | 1,304                                                                    |       | 1,665                                                                    |       | 3,592 |   | 5,416 |   |
| Capitalized interest              |       | 968                                                                      |       | 563                                                                      |       | 2,345 |   | 2,141 |   |
| Interest expense, net             |       | $                                                                        | 57,303     |                                                                     | $          | 63,787 |   | $ | 178,923 |   | $ | 198,142 |   |

 

10

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**5.**              Employee Benefit Plans

** **

***Description of Benefit Plans.***  We sponsora defined benefit pension plan (Pension Plan) covering substantially allfull-time employees. We also sponsor an unfunded supplemental executiveretirement plan (SERP Plan) which provides certain employees additional pensionbenefits. Benefits under both plans are based on the employees’ years ofservice and compensation over defined periods of employment.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Concurrent with the implementation of the RSP and theDefined Contribution SERP Plan, we froze benefits offered under our Pension andSERP Plans for most employees.  Employeeswith a minimum of ten years of service and whose ages plus years of serviceequaled at least 65 (Rule of 65) as of December 31, 2007 were allowedeither 1) to continue participation in our 401(k) Plan and Pension Plan(and SERP Plan, if eligible) or 2) to freeze the benefits earned under thePension Plan (and SERP Plan, if eligible) and participate in the RSP. Noemployee who met vesting requirements forfeited benefits earned prior to January 1,2008.

 

Inconnection with the redesign of our long-term benefits program, we recorded a one-time pensioncurtailment gain of $32.5 million (recorded as other income in our condensedconsolidated statements of earnings) in the first quarter of fiscal year 2008to reflect the impact of freezing benefits provided under the Pension and SERPPlans as of December 31, 2007.

 

11

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

 
| ** **                         | ** ** | **Quarter-to-Date**                                                    | ** ** | **Year-to-Date**                                                       | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Thirteen   weeks ended   April 26,   2008** | ** ** | **Thirteen   weeks ended   April 28,   2007** | ** ** | **Thirty-Nine   weeks ended   April 26,   2008** | ** ** | **Thirty-Nine   weeks ended   April 28,   2007** | ** ** |
| Pension Plan:                      |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Service cost                       |       | $                                                                      | 1,506      |                                                                   | $          | 3,321 |   | $ | 9,309 |   | $ | 11,165 |   |
| Interest cost                      |       | 5,738                                                                  |       | 4,935                                                                  |       | 17,128 |   | 16,661 |   |
| Expected return on plan assets     |       | (6,224                                                                 | )          | (5,842                                                                 | )          | (18,402 | ) | (17,594 | ) |
| Net amortization of gains          |       | —                                                                 |       | —                                                                 |       | — |   | — |   |
| Pension Plan expense               |       | $                                                                      | 1,020      |                                                                   | $          | 2,414 |   | $ | 8,035 |   | $ | 10,232 |   |
|                               |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Curtailment gain                   |       | $                                                                      | —     |                                                                   | $          | — |   | $ | 26,113 |   | $ | — |   |
|                               |       |                                                                   |       |                                                                   |       |   |   |   |   |
| SERP Plan:                         |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Service cost                       |       | $                                                                      | 204        |                                                                   | $          | 351 |   | $ | 1,050 |   | $ | 1,289 |   |
| Interest cost                      |       | 1,244                                                                  |       | 1,232                                                                  |       | 3,716 |   | 3,696 |   |
| SERP Plan expense                  |       | $                                                                      | 1,448      |                                                                   | $          | 1,583 |   | $ | 4,766 |   | $ | 4,985 |   |
|                               |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Curtailment gain                   |       | $                                                                      | —     |                                                                   | $          | — |   | $ | 6,337 |   | $ | — |   |
|                               |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Defined Contribution SERP Plan     |       | $                                                                      | 219        |                                                                   | $          | — |   | $ | 366 |   | $ | — |   |
|                               |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Postretirement Plan:               |       |                                                                   |       |                                                                   |       |   |   |   |   |
| Service cost                       |       | $                                                                      | 31         |                                                                   | $          | 15 |   | $ | 93 |   | $ | 43 |   |
| Interest cost                      |       | 339                                                                    |       | 136                                                                    |       | 1,017 |   | 590 |   |
| Net amortization of losses (gains) |       | 137                                                                    |       | (48                                                                    | )          | 411 |   | (48 | ) |
| Postretirement Plan expense        |       | $                                                                      | 507        |                                                                   | $          | 103 |   | $ | 1,521 |   | $ | 585 |   |

 

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

 
| **(in thousands)**                  | ** ** | **April 26,   2008** | ** ** | **July 28,   2007** | ** ** | **April 28,   2007** | ** ** |
|------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | ** **                     | ** ** | ** **                    | ** ** | ** **                     | ** ** |
| Pension Plan                             |       | $                              | 26,248     |                          | $          | 55,603                         |       | $ | 89,044 |   |
| SERP Plan                                |       | 81,875                         |       | 86,146                        |       | 83,962                         |       |
| Defined Contribution SERP Plan           |       | 366                            |       | —                        |       | —                         |       |
| Postretirement Plan                      |       | 22,924                         |       | 22,091                        |       | 14,984                         |       |
|                                     |       | 131,413                        |       | 163,840                       |       | 187,990                        |       |
| Less: current portion                    |       | (4,019                         | )          | (4,019                        | )          | —                         |       |
| Long-term portion of benefit obligations |       | $                              | 127,394    |                          | $          | 159,821                        |       | $ | 187,990 |   |

 

We adopted the provisions of Statement of FinancialAccounting Standards No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Benefit Plans” (SFAS 158), in the fourthquarter of fiscal year 2007.  In connection with the adoption of SFAS 158, weadjusted the carrying values of our previously recorded obligations to equaltheir unfunded status at July 28, 2007. These aggregate adjustments resulted in a net decrease in the carryingvalues of our obligations by approximately $28.7 million, which amount wasrecorded (net of taxes of $11.3 million) as an increase in accumulated othercomprehensive (loss) income in our statement of shareholders’ equity for fiscalyear 2007.

 

In the first quarter of fiscal year 2008, we reduced ourrecorded liability for projected benefit obligations payable by the PensionPlan by $26.1 million and by the SERP Plan by $6.3 million to reflect theimpact of freezing benefits provided under these plans as of December 31,2007.

 

12

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***Funding Policyand Plan Assets.***  Our policy is to fund the Pension Plan at orabove the minimum required by law. We were not required to makecontributions to the Pension Plan during fiscal year 2008.  In the third quarter of fiscal year 2008, wemade a voluntary $15.0 million contribution to our Pension Plan.  In fiscalyear 2007, we made no contributions to our Pension Plan.

 

**6.**              Income Taxes

** **

Weadopted the provisions of FASB Interpretation No. 48, “Accounting forUncertainty 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.

 

Thecumulative effect of adopting FIN 48 resulted in a net increase to our accrualsfor uncertain tax positions of $9.1 million for the derecognition of certaintax benefits. This increase to our accruals was offset by a correspondingincrease to goodwill as these uncertainties existed at the time of theAcquisition.  At adoption, the grossamount of unrecognized tax benefits was $26.7 million, of which $3.5 million ofunrecognized tax benefits would impact our effective tax rate, if recognized.  We classify interest and penalties as acomponent of income tax expense and our liability for accrued interest andpenalties was $8.5 million upon adoption of FIN 48.

 

We file income tax returns in the U.S. federaljurisdiction and various state and local jurisdictions. We closed the InternalRevenue Service (IRS) examinations of federal tax returns for fiscal years 2004and 2003 during the first quarter of fiscal year 2007 and paid the related taxliability during the second quarter of fiscal year 2007.   The IRS is now examining our federal taxreturns for fiscal years 2005 and 2006. We believe our recorded tax liabilities as of April 26, 2008 aresufficient to cover any potential assessments to be made by the IRS upon thecompletion of their examinations. We will continue to monitor the progress ofthe IRS examinations and review our recorded tax liabilities for potentialaudit assessments.  With respect tostate 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 adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 12 months as a result of negotiated settlements with taxauthorities.  At this time, we do notbelieve such adjustments will have a material impact on our consolidatedfinancial statements.

 

13

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**7.**              Stock-Based Compensation

 

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

 

A summary of the status of our stock option plan as of April 26,2008, July 28, 2007 and April 28, 2007 and changes during the periodsended on these dates is as follows:

 
| ** **                           | ** ** | **Thirty-Nine weeks  ended April 26, 2008** | ** ** | **Fiscal year ended  July 28, 2007** | ** ** | **Thirty-Nine weeks  ended April 28, 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 |       | 43,682.1                                                        |       | $                                                        | 1,401      |                                                            | 29,764.1   |   | $ | 1,233 |   | 27,437.9 |   | $ | 1,215 |   |

 

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

 

All grants of 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.

 

We use the Black-Scholes option-pricing model todetermine the fair value of our options as of the date of grant in accordancewith the provisions of SFAS 123(R).  Asummary of fiscal years 2008, 2007 and 2006 grants and fair value assumptionsis 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 April 26, 2008 |       | 130.0                                  |       | 130.0                                   |       | 1,248.0                                |       | 1,248.0 |   | 43,594.6 |   | 37,543.7 |   |
| Exercise price at April 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 |   |

 

Expected volatility is based on a combination of NMG’shistorical volatility adjusted for our leverage and estimates of impliedvolatility of our peer group.

 

We recognized non-cash stock compensation expense of$4.5 million for the thirty-nine weeks ended April 26, 2008 and $4.4million for the thirty-nine weeks ended April 28, 2007, which is includedin selling, general and administrative expenses. At April 26, 2008,unearned non-cash stock-based compensation that we expect to recognize asexpense over the next 5 years aggregates approximately $14.5 million.

** **

**14**

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** **

**8.**              Transactions with Sponsors

** **

Pursuant to a management services agreement withaffiliates 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 $8.9 millionduring the thirty-nine weeks ended April 26, 2008 and $8.6 million duringthe thirty-nine weeks ended April 28, 2007, which are included in selling,general and administrative expenses in the condensed consolidated statements ofearnings.

 

The management services agreement also provides thataffiliates of the Sponsors may receive future fees in connection with certainsubsequent financing and acquisition or disposition transactions. Themanagement services agreement includes customary exculpation andindemnification provisions in favor of the Sponsors and their affiliates.

 

**9.**              Income from Credit Card Program

 

Pursuant to a long-term marketing and servicing alliancewith HSBC Private Label Corporation (formerly known as HouseholdCorporation) and HSBC Bank Nevada, N.A. (collectively referred to as HSBC), HSBC offers credit card and non-card paymentplans bearing our brands and we receive ongoing payments from HSBC based oncredit card sales and compensation for marketing and servicing activities (HSBCProgram Income).  We recognize HSBCProgram Income when earned.

 

OnApril 21, 2008, we entered into an amendment to our Credit Card ProgramAgreement (the Program Agreement), dated as of June 8, 2005, with HSBC. The amendment was entered intosubsequent to the filing of a lawsuit by the Company against HSBC alleging abreach of the Program Agreement, as well as other claims, including applicationfor the granting of a temporary restraining order and other injunctive relief.The amendment, among other things, provides for 1) the allocation between HSBCand NMG of additional income, if any, to be generated from the credit cardprogram as a result of certain changes made to the Program Agreement, 2) theallocation of certain credit card losses between HSBC and NMG and 3) thedismissal of the lawsuit and temporary restraining order without prejudice. We donot expect that the amendment will have a material impact on the level of ourfuture income under the Program Agreement.

 

**10.**       OtherIncome

 

Inthe first quarter of fiscal year 2008, we recorded a one-time pensioncurtailment gain of $32.5 million, or 0.9% of revenues, as a result of ourdecision to freeze Pension and SERP benefitsas of December 31, 2007.  See Note 5 for more information.

 

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

 

**11.**       Commitmentsand Contingencies

** **

***Long-term Incentive Plan.***  The Company has a long-term incentive plan(Long-term Incentive Plan) that provides for a cash incentive payable upon achange of control, as defined, subject to the attainment of certain performanceobjectives to certain employees. Performance objectives and targets are based on cumulative EBITDApercentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performanceperiod will be credited to a book account and will earn interest at acontractually defined annual rate until the award is paid.  Awards will be paid within 30 days of achange of control or the first day there is a public market of at least 20% oftotal outstanding common stock.

 

***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.

 

15

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

** **

**12.**       AccumulatedOther Comprehensive (Loss) Income

 

The following table shows the components of accumulatedother comprehensive (loss) income:

 
| **(in thousands)**                             | ** ** | **April 26,  2008** | ** ** | **July 28,  2007** | ** ** | **April 28,  2007** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                                |       |                     |       |                    |       |                     |       |
| Unrealized (loss) gain on financial instruments     |       | $                        | (24,859    | )                       | $          | 3,733                    |       | $ | 1,399 |   |
| Change in unfunded benefit obligations              |       | 15,709                   |       | 17,365                  |       | —                   |       |
| Other                                               |       | 307                      |       | 131                     |       | (110                     | )          |
| Total accumulated other comprehensive (loss) income |       | $                        | (8,843     | )                       | $          | 21,229                   |       | $ | 1,289 |   |

 
| ** **                                                      | ** ** | **Thirty-Nine  weeks ended  April 26,  2008** | ** ** | **Thirty-Nine  weeks ended  July 28,  2007** | ** ** | **Thirty-Nine  weeks ended  April 28,  2007** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Net earnings from condensed consolidated statements of earnings |       | $                                                       | 178,456    |                                                   | $          | 84,703                                                  |       | $ | 127,798 |   |
| Change in unrealized (loss) gain on financial instruments       |       | (28,592                                                 | )          | 839                                                    |       | (9,238                                                  | )          |
| Other                                                           |       | (1,480                                                  | )          | 253                                                    |       | 698                                                     |       |
| Total comprehensive income for the period                       |       | $                                                       | 148,384    |                                                   | $          | 85,795                                                  |       | $ | 119,258 |   |

** **

**13.**       SegmentReporting

 

We have identified two reportable segments: SpecialtyRetail stores and Direct Marketing. The Specialty Retail stores segmentincludes all Neiman Marcus and Bergdorf Goodman retail stores, including NeimanMarcus clearance stores. The Direct Marketing segment conducts both online andprint catalog operations under the Neiman Marcus, Bergdorf Goodman and Horchowbrand names.  Both the Specialty Retailstores and Direct Marketing segments derive their revenues from the sales ofhigh-end fashion apparel, accessories, cosmetics and fragrances from leadingdesigners, precious and fashion jewelry and decorative home accessories.

 

Operatingearnings for the segments include 1) revenues, 2) cost of sales, 3) directselling, general, and administrative expenses, 4) other direct operatingexpenses, 5) income from credit card program and 6) depreciation expense forthe respective segment.  Items notallocated to our operating segments include those items not considered bymanagement in measuring the assets and profitability of our segments. Theseamounts include 1) corporate expenses including, but not limited to, treasury,investor relations, 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  April 26,  2008** | ** ** | **Thirteen  weeks ended  April 28,  2007** | ** ** | **Thirty-Nine  weeks ended  April 26,  2008** | ** ** | **Thirty-Nine  weeks ended  April 28,  2007** | ** ** |
| ** **                                                                               | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                                                                 |       |                                                 |       |                                                 |       |   |   |   |   |
| Specialty Retail stores                                                                  |       | $                                                    | 893,556    |                                                 | $          | 908,010 |   | $ | 2,991,477 |   | $ | 2,857,889 |   |
| Direct Marketing                                                                         |       | 168,605                                              |       | 165,364                                              |       | 576,782 |   | 550,532 |   |
| Total                                                                                    |       | $                                                    | 1,062,161  |                                                 | $          | 1,073,374 |   | $ | 3,568,259 |   | $ | 3,408,421 |   |
|                                                                                     |       |                                                 |       |                                                 |       |   |   |   |   |
| OPERATING EARNINGS                                                                       |       |                                                 |       |                                                 |       |   |   |   |   |
| Specialty Retail stores                                                                  |       | $                                                    | 151,291    |                                                 | $          | 168,119 |   | $ | 444,788 |   | $ | 446,209 |   |
| Direct Marketing                                                                         |       | 28,025                                               |       | 29,805                                               |       | 93,256 |   | 89,735 |   |
| Subtotal                                                                                 |       | 179,316                                              |       | 197,924                                              |       | 538,044 |   | 535,944 |   |
| Corporate                                                                                |       | (12,767                                              | )          | (17,267                                              | )          | (43,974 | ) | (41,339 | ) |
| Amortization of customer lists and favorable lease commitments                           |       | (17,953                                              | )          | (18,090                                              | )          | (53,902 | ) | (54,172 | ) |
| Other income (1)                                                                         |       | —                                               |       | —                                               |       | 32,450 |   | 4,210 |   |
| Total                                                                                    |       | $                                                    | 148,596    |                                                 | $          | 162,567 |   | $ | 472,618 |   | $ | 444,643 |   |
|                                                                                     |       |                                                 |       |                                                 |       |   |   |   |   |
| CAPITAL EXPENDITURES                                                                     |       |                                                 |       |                                                 |       |   |   |   |   |
| Specialty Retail stores                                                                  |       | $                                                    | 40,326     |                                                 | $          | 28,275 |   | $ | 116,936 |   | $ | 89,766 |   |
| Direct Marketing                                                                         |       | 4,631                                                |       | 5,206                                                |       | 16,194 |   | 14,397 |   |
| Total                                                                                    |       | $                                                    | 44,957     |                                                 | $          | 33,481 |   | $ | 133,130 |   | $ | 104,163 |   |
|                                                                                     |       |                                                 |       |                                                 |       |   |   |   |   |
| DEPRECIATION EXPENSE                                                                     |       |                                                 |       |                                                 |       |   |   |   |   |
| Specialty Retail stores                                                                  |       | $                                                    | 30,502     |                                                 | $          | 29,629 |   | $ | 90,765 |   | $ | 88,063 |   |
| Direct Marketing                                                                         |       | 4,128                                                |       | 3,461                                                |       | 11,948 |   | 9,941 |   |
| Subtotal                                                                                 |       | 34,630                                               |       | 33,090                                               |       | 102,713 |   | 98,004 |   |
| Depreciation expense on step-up of fixed assets made in connection  with the Acquisition |       | 844                                                  |       | 1,165                                                |       | 2,982 |   | 3,499 |   |
| Total                                                                                    |       | $                                                    | 35,474     |                                                 | $          | 34,255 |   | $ | 105,695 |   | $ | 101,503 |   |

 
| ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **April 26,  2008** | ** ** | **April 28,  2007** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|--------------------------|------------|--------------------------|------------|
| ASSETS                                               |       |       |       |       |       |                     |       |                     |       |
| Tangible assets of Specialty Retail stores           |       |       |       |       |       | $                        | 2,001,474  |                     | $          | 1,918,284 |   |
| Tangible assets of Direct Marketing                  |       |       |       |       |       | 182,624                  |       | 165,899                  |       |
| Corporate assets:                                    |       |       |       |       |       |                     |       |                     |       |
| Intangible assets related to Specialty Retail stores |       |       |       |       |       | 3,536,723                |       | 3,586,137                |       |
| Intangible assets related to Direct Marketing        |       |       |       |       |       | 558,526                  |       | 583,524                  |       |
| Other                                                |       |       |       |       |       | 313,377                  |       | 297,140                  |       |
| Total                                                |       |       |       |       |       | $                        | 6,592,724  |                     | $          | 6,550,984 |   |

** **

----

(1) Forthe thirty-nine weeks ended April 26, 2008, other income represents aone-time pension curtailment gain of $32.5 million as a result of our decisionto freeze Pension and SERP benefits as of December 31,2007.  For the thirty-nine weeks ended April 28, 2007, other income representsthe proceeds we received in connectionwith the merger of Wedding Channel.com, in which we held a minority interest,and The Knot. We had previously reduced our carrying value in thisinvestment to zero.

 

17

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**14.**       CondensedConsolidating Financial Information (with respect to NMG’s obligations underthe Senior Notes and theSenior Subordinated Notes)

** **

All of NMG’s obligations under the Senior Notes and theSenior Subordinated Notes, as well as its obligations under the Asset-BasedRevolving Credit Facility and the Senior Secured Term Loan Facility, areguaranteed by the Company and certain of NMG’s existing and future domesticsubsidiaries (principally, Bergdorf Goodman, Inc. through which NMGconducts the operations of its Bergdorf Goodman stores and NM Nevada Trustwhich holds legal title to certain real property and intangible assets used bythe Company in conducting its operations). The guarantees by the Company andeach subsidiary guarantor are full and unconditional and joint andseveral.  Currently, the Company’snon-guarantor subsidiaries consist principally of an operating subsidiarydomiciled in Canada providing support services to our Direct Marketing operations.Previously, our non-guarantor subsidiaries also included Kate Spade LLC (priorto its sale in December 2006), which is reflected in the tables below asdiscontinued 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’sRegulation S-X. The financial information may not necessarily beindicative of results of operations, cash flows or financial position had thesubsidiary guarantors operated as independent entities.

 
| ** **                                       | ** ** | **April 26, 2008** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                            | —     |   | $ | 204,508 |   | $ | 631 |   | $ | 965 |   | $ | — |   | $ | 206,104 |   |
| Merchandise  inventories                         |       | —                       |       | 849,409 |   | 109,479 |   | 7 |   | — |   | 958,895 |   |
| Other current  assets                            |       | —                       |       | 162,174 |   | 10,485 |   | 3,681 |   | 544 |   | 176,884 |   |
| Total current  assets                            |       | —                       |       | 1,216,091 |   | 120,595 |   | 4,653 |   | 544 |   | 1,341,883 |   |
| Property and  equipment, net                     |       | —                       |       | 936,047 |   | 134,088 |   | 1,740 |   | — |   | 1,071,875 |   |
| Goodwill and  intangible assets, net             |       | —                       |       | 1,907,706 |   | 2,187,543 |   | — |   | — |   | 4,095,249 |   |
| Other assets                                     |       | —                       |       | 83,673 |   | 44 |   | — |   | — |   | 83,717 |   |
| Investments in  subsidiaries                     |       | 1,710,981                    |       | 2,325,361 |   | — |   | — |   | (4,036,342 | ) | — |   |
| Total assets                                     |       | $                            | 1,710,981  |   | $ | 6,468,878 |   | $ | 2,442,270 |   | $ | 6,393 |   | $ | (4,035,798 | ) | $ | 6,592,724 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                            | —     |   | $ | 227,705 |   | $ | 34,042 |   | $ | 4,307 |   | $ | 544 |   | $ | 266,598 |   |
| Accrued  liabilities                             |       | —                       |       | 314,632 |   | 85,470 |   | 112 |   | — |   | 400,214 |   |
| Other current  liabilities                       |       | —                       |       | 1,973 |   | — |   | — |   | — |   | 1,973 |   |
| Total current  liabilities                       |       | —                       |       | 544,310 |   | 119,512 |   | 4,419 |   | 544 |   | 668,785 |   |
| Long-term  liabilities:                          |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                       |       | 2,946,053 |   | — |   | — |   | — |   | 2,946,053 |   |
| Deferred income taxes                            |       | —                       |       | 966,844 |   | — |   | — |   | — |   | 966,844 |   |
| Other long-term  liabilities                     |       | —                       |       | 300,690 |   | (629 | ) | — |   | — |   | 300,061 |   |
| Total long-term  liabilities                     |       | —                       |       | 4,213,587 |   | (629 | ) | — |   | — |   | 4,212,958 |   |
| Total  shareholders’ equity                 |       | 1,710,981                    |       | 1,710,981 |   | 2,323,387 |   | 1,974 |   | (4,036,342 | ) | 1,710,981 |   |
| Total liabilities  and shareholders’ equity |       | $                            | 1,710,981  |   | $ | 6,468,878 |   | $ | 2,442,270 |   | $ | 6,393 |   | $ | (4,035,798 | ) | $ | 6,592,724 |   |

 

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

----

 
| ** **                                       | ** ** | **April 28, 2007** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                            | —     |   | $ | 174,993 |   | $ | 1,039 |   | $ | 771 |   | $ | — |   | $ | 176,803 |   |
| Merchandise  inventories                         |       | —                       |       | 809,065 |   | 98,988 |   | 7 |   | — |   | 908,060 |   |
| Other current  assets                            |       | —                       |       | 136,073 |   | 10,317 |   | 3,681 |   | 544 |   | 150,615 |   |
| Total current  assets                            |       | —                       |       | 1,120,131 |   | 110,344 |   | 4,459 |   | 544 |   | 1,235,478 |   |
| Property and  equipment, net                     |       | —                       |       | 888,141 |   | 143,949 |   | 2,138 |   | — |   | 1,034,228 |   |
| Goodwill and  intangible assets, net             |       | —                       |       | 1,960,267 |   | 2,209,394 |   | — |   | — |   | 4,169,661 |   |
| Other assets                                     |       | —                       |       | 111,369 |   | 248 |   | — |   | — |   | 111,617 |   |
| Investments in  subsidiaries                     |       | 1,551,434                    |       | 2,339,885 |   | — |   | — |   | (3,891,319 | ) | — |   |
| Total assets                                     |       | $                            | 1,551,434  |   | $ | 6,419,793 |   | $ | 2,463,935 |   | $ | 6,597 |   | $ | (3,890,775 | ) | $ | 6,550,984 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                            | —     |   | $ | 261,871 |   | $ | 31,182 |   | $ | 4,244 |   | $ | 544 |   | $ | 297,841 |   |
| Accrued  liabilities                             |       | —                       |       | 329,628 |   | 86,254 |   | 195 |   | — |   | 416,077 |   |
| Other current  liabilities                       |       | —                       |       | 3,686 |   | — |   | — |   | — |   | 3,686 |   |
| Total current  liabilities                       |       | —                       |       | 595,185 |   | 117,436 |   | 4,439 |   | 544 |   | 717,604 |   |
| Long-term  liabilities:                          |       |                         |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                       |       | 3,020,858 |   | — |   | — |   | — |   | 3,020,858 |   |
| Deferred income  taxes                           |       | —                       |       | 1,021,524 |   | — |   | — |   | — |   | 1,021,524 |   |
| Other long-term  liabilities                     |       | —                       |       | 230,792 |   | 8,772 |   | — |   | — |   | 239,564 |   |
| Total long-term  liabilities                     |       | —                       |       | 4,273,174 |   | 8,772 |   | — |   | — |   | 4,281,946 |   |
| Total  shareholders’ equity                 |       | 1,551,434                    |       | 1,551,434 |   | 2,337,727 |   | 2,158 |   | (3,891,319 | ) | 1,551,434 |   |
| Total liabilities  and shareholders’ equity |       | $                            | 1,551,434  |   | $ | 6,419,793 |   | $ | 2,463,935 |   | $ | 6,597 |   | $ | (3,890,775 | ) | $ | 6,550,984 |   |

 

20

----

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

 
| ** **                                                                        | ** ** | **Thirteen weeks ended April 28, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                      | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                | —     |   | $ | 906,178 |   | $ | 167,196 |   | $ | — |   | $ | — |   | $ | 1,073,374 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                           |       | 530,182 |   | 97,503 |   | 194 |   | — |   | 627,879 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                           |       | 214,805 |   | 33,243 |   | (396 | ) | — |   | 247,652 |   |
| Income from  credit card program                                                  |       | —                                                           |       | (15,397 | ) | (1,672 | ) | — |   | — |   | (17,069 | ) |
| Depreciation  expense                                                             |       | —                                                           |       | 29,435 |   | 4,727 |   | 93 |   | — |   | 34,255 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                           |       | 15,149 |   | 2,941 |   | — |   | — |   | 18,090 |   |
| Operating  earnings                                                               |       | —                                                           |       | 132,004 |   | 30,454 |   | 109 |   | — |   | 162,567 |   |
| Interest expense,  net                                                            |       | —                                                           |       | 63,787 |   | — |   | — |   | — |   | 63,787 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                           |       | 68,102 |   | (68,102 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (59,548                                                          | )          | (97,275 | ) | — |   | — |   | 156,823 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 59,548                                                           |       | 97,390 |   | 98,556 |   | 109 |   | (156,823 | ) | 98,780 |   |
| Income taxes                                                                      |       | —                                                           |       | 37,842 |   | — |   | — |   | — |   | 37,842 |   |
| Earnings (loss)  from continuing operations                                       |       | 59,548                                                           |       | 59,548 |   | 98,556 |   | 109 |   | (156,823 | ) | 60,938 |   |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                           |       | — |   | — |   | (1,390 | ) | — |   | (1,390 | ) |
| Net earnings  (loss)                                                              |       | $                                                                | 59,548     |   | $ | 59,548 |   | $ | 98,556 |   | $ | (1,281 | ) | $ | (156,823 | ) | $ | 59,548 |   |

 

21

----

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

 
| ** **                                                                        | ** ** | **Thirty-Nine weeks ended April 28, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                         | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                   | —     |   | $ | 2,880,059 |   | $ | 528,362 |   | $ | — |   | $ | — |   | $ | 3,408,421 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                              |       | 1,759,733 |   | 324,602 |   | 581 |   | — |   | 2,084,916 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                              |       | 677,255 |   | 102,543 |   | (1,031 | ) | — |   | 778,767 |   |
| Income from  credit card program                                                  |       | —                                                              |       | (46,200 | ) | (5,170 | ) | — |   | — |   | (51,370 | ) |
| Depreciation  expense                                                             |       | —                                                              |       | 86,986 |   | 14,233 |   | 284 |   | — |   | 101,503 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                              |       | 45,348 |   | 8,824 |   | — |   | — |   | 54,172 |   |
| Other income                                                                      |       | —                                                              |       | (4,210 | ) | — |   | — |   | — |   | (4,210 | ) |
| Operating  earnings                                                               |       | —                                                              |       | 361,147 |   | 83,330 |   | 166 |   | — |   | 444,643 |   |
| Interest expense,  net                                                            |       | —                                                              |       | 198,142 |   | — |   | — |   | — |   | 198,142 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                              |       | 211,745 |   | (211,745 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (127,798                                                            | )          | (272,470 | ) | — |   | — |   | 400,268 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 127,798                                                             |       | 223,730 |   | 295,075 |   | 166 |   | (400,268 | ) | 246,501 |   |
| Income taxes                                                                      |       | —                                                              |       | 95,932 |   | — |   | — |   | — |   | 95,932 |   |
| Earnings (loss)  from continuing operations                                       |       | 127,798                                                             |       | 127,798 |   | 295,075 |   | 166 |   | (400,268 | ) | 150,569 |   |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                              |       | — |   | — |   | (21,282 | ) | (1,489 | ) | (22,771 | ) |
| Net earnings  (loss)                                                              |       | $                                                                   | 127,798    |   | $ | 127,798 |   | $ | 295,075 |   | $ | (21,116 | ) | $ | (401,757 | ) | $ | 127,798 |   |

 

22

----

 
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended April 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                         | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                   | 178,456    |   | $ | 178,456 |   | $ | 314,313 |   | $ | (309 | ) | $ | (492,460 | ) | $ | 178,456 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                              |       | 92,011 |   | 13,170 |   | 514 |   | — |   | 105,695 |   |
| Amortization of  debt issue costs                                                            |       | —                                                              |       | 10,663 |   | — |   | — |   | — |   | 10,663 |   |
| Amortization of  customer lists and favorable lease commitments                              |       | —                                                              |       | 45,179 |   | 8,723 |   | — |   | — |   | 53,902 |   |
| Deferred income  taxes                                                                       |       | —                                                              |       | (13,569 | ) | — |   | — |   | — |   | (13,569 | ) |
| Gain on  curtailment of defined benefit retirement obligations                               |       | —                                                              |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | —                                                              |       | 18,690 |   | (59 | ) | — |   | — |   | 18,631 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                              |       | 218,452 |   | (218,452 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                          |       | (178,456                                                            | )          | (314,004 | ) | — |   | — |   | 492,460 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                              |       | (8,179 | ) | (111,669 | ) | (7 | ) | — |   | (119,855 | ) |
| Net cash provided  by operating activities                                                   |       | —                                                              |       | 195,249 |   | 6,026 |   | 198 |   | — |   | 201,473 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | —                                                              |       | (126,628 | ) | (6,591 | ) | 89 |   | — |   | (133,130 | ) |
| Purchases of  short-term investments                                                         |       | —                                                              |       | (10,000 | ) | — |   | — |   | — |   | (10,000 | ) |
| Sales of  short-term investments                                                             |       | —                                                              |       | 10,000 |   | — |   | — |   | — |   | 10,000 |   |
| Net cash (used  for) provided by investing activities                                        |       | —                                                              |       | (126,628 | ) | (6,591 | ) | 89 |   | — |   | (133,130 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                              |       | (3,446 | ) | — |   | — |   | — |   | (3,446 | ) |
| Net cash used for  financing activities                                                      |       | —                                                              |       | (3,446 | ) | — |   | — |   | — |   | (3,446 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Increase  (decrease) during the period                                                       |       | —                                                              |       | 65,175 |   | (565 | ) | 287 |   | — |   | 64,897 |   |
| Beginning balance                                                                            |       | —                                                              |       | 139,333 |   | 1,196 |   | 678 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                   | —     |   | $ | 204,508 |   | $ | 631 |   | $ | 965 |   | $ | — |   | $ | 206,104 |   |

 

23

----

 
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended April 28, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                         | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                   | 127,798    |   | $ | 127,798 |   | $ | 295,075 |   | $ | (21,116 | ) | $ | (401,757 | ) | $ | 127,798 |   |
| Loss from  discontinued operations                                                           |       | —                                                              |       | — |   | — |   | 21,282 |   | 1,489 |   | 22,771 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                              |       | 86,986 |   | 14,233 |   | 284 |   | — |   | 101,503 |   |
| Amortization of  debt issue costs                                                            |       | —                                                              |       | 10,588 |   | — |   | — |   | — |   | 10,588 |   |
| Amortization of  customer lists and favorable lease commitments                              |       | —                                                              |       | 45,348 |   | 8,824 |   | — |   | — |   | 54,172 |   |
| Deferred income  taxes                                                                       |       | —                                                              |       | (26,271 | ) | — |   | — |   | — |   | (26,271 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | —                                                              |       | 15,153 |   | 2,315 |   | — |   | — |   | 17,468 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                              |       | 211,745 |   | (211,745 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                          |       | (127,798                                                            | )          | (272,470 | ) | — |   | — |   | 400,268 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                              |       | (30,294 | ) | (101,526 | ) | 11,134 |   | — |   | (120,686 | ) |
| Net cash provided  by continuing operating activities                                        |       | —                                                              |       | 168,583 |   | 7,176 |   | 11,584 |   | — |   | 187,343 |   |
| Net cash used for  discontinued operations                                                   |       | —                                                              |       | — |   | — |   | (10,553 | ) | — |   | (10,553 | ) |
| Net cash provided  by operating activities                                                   |       | —                                                              |       | 168,583 |   | 7,176 |   | 1,031 |   | — |   | 176,790 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                              |       | (97,114 | ) | (7,123 | ) | 74 |   | — |   | (104,163 | ) |
| 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  (provided by) continuing investing activities                             |       | —                                                              |       | (35,045 | ) | (7,123 | ) | 74 |   | — |   | (42,094 | ) |
| Net cash used for  discontinued operations                                                   |       | —                                                              |       | — |   | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for  investing activities                                                      |       | —                                                              |       | (35,045 | ) | (7,123 | ) | (54 | ) | — |   | (42,222 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                              |       | (179,554 | ) | — |   | — |   | — |   | (179,554 | ) |
| Debt issuance  costs paid                                                                    |       | —                                                              |       | (1,449 | ) | — |   | — |   | — |   | (1,449 | ) |
| Proceeds from  purchase of common stock                                                      |       | —                                                              |       | 150 |   | — |   | — |   | — |   | 150 |   |
| Net cash used for  continuing financing activities                                           |       | —                                                              |       | (180,853 | ) | — |   | — |   | — |   | (180,853 | ) |
| Net cash used for  discontinued operations                                                   |       | —                                                              |       | — |   | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for  financing activities                                                      |       | —                                                              |       | (180,853 | ) | — |   | (1,675 | ) | — |   | (182,528 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                               |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease)  increase during the period                                                       |       | —                                                              |       | (47,315 | ) | 53 |   | (698 | ) | — |   | (47,960 | ) |
| Beginning balance                                                                            |       | —                                                              |       | 222,308 |   | 986 |   | 1,469 |   | — |   | 224,763 |   |
| Ending balance                                                                               |       | $                                                                   | —     |   | $ | 174,993 |   | $ | 1,039 |   | $ | 771 |   | $ | — |   | $ | 176,803 |   |

 

24

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**15.**       Condensed Consolidating Financial Information(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 and unconditionaland joint and several. Currently, the Company’s non-guarantor subsidiariesconsist principally of Bergdorf Goodman, Inc. through which NMG conductsthe operations of its Bergdorf Goodman stores and NM Nevada Trust which holdslegal title to certain real property and intangible assets used by NMG inconducting its operations. Previously, our non-guarantor subsidiaries alsoincluded 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 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.

 
| ** **                                      | ** ** | **April 26, 2008** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                  | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                         |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                         |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                            | —     |   | $ | 204,508 |   | $ | 1,596 |   | $ | — |   | $ | 206,104 |   |
| Merchandise inventories                         |       | —                       |       | 849,409 |   | 109,486 |   | — |   | 958,895 |   |
| Other current assets                            |       | —                       |       | 162,174 |   | 14,166 |   | 544 |   | 176,884 |   |
| Total current assets                            |       | —                       |       | 1,216,091 |   | 125,248 |   | 544 |   | 1,341,883 |   |
| Property and equipment, net                     |       | —                       |       | 936,047 |   | 135,828 |   | — |   | 1,071,875 |   |
| Goodwill and intangible assets, net             |       | —                       |       | 1,907,706 |   | 2,187,543 |   | — |   | 4,095,249 |   |
| Other assets                                    |       | —                       |       | 83,673 |   | 44 |   | — |   | 83,717 |   |
| Investments in subsidiaries                     |       | 1,710,981                    |       | 2,325,361 |   | — |   | (4,036,342 | ) | — |   |
| Total assets                                    |       | $                            | 1,710,981  |   | $ | 6,468,878 |   | $ | 2,448,663 |   | $ | (4,035,798 | ) | $ | 6,592,724 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                         |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                            | —     |   | $ | 227,705 |   | $ | 38,349 |   | $ | 544 |   | $ | 266,598 |   |
| Accrued liabilities                             |       | —                       |       | 314,632 |   | 85,582 |   | — |   | 400,214 |   |
| Other current liabilities                       |       | —                       |       | 1,973 |   | — |   | — |   | 1,973 |   |
| Total current liabilities                       |       | —                       |       | 544,310 |   | 123,931 |   | 544 |   | 668,785 |   |
| Long-term liabilities:                          |       |                         |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                       |       | 2,946,053 |   | — |   | — |   | 2,946,053 |   |
| Deferred income taxes                           |       | —                       |       | 966,844 |   | — |   | — |   | 966,844 |   |
| Other long-term liabilities                     |       | —                       |       | 300,690 |   | (629 | ) | — |   | 300,061 |   |
| Total long-term liabilities                     |       | —                       |       | 4,213,587 |   | (629 | ) | — |   | 4,212,958 |   |
| Total shareholders’ equity                 |       | 1,710,981                    |       | 1,710,981 |   | 2,325,361 |   | (4,036,342 | ) | 1,710,981 |   |
| Total liabilities and shareholders’ equity |       | $                            | 1,710,981  |   | $ | 6,468,878 |   | $ | 2,448,663 |   | $ | (4,035,798 | ) | $ | 6,592,724 |   |

** **

**25**

----

 
| ** **                                      | ** ** | **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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| ** **                                      | ** ** | **April 28, 2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| **(in thousands)**                         | ** ** | **Company**                  | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      |       |                         |       |   |   |   |   |   |   |   |   |
| Current assets:                                 |       |                         |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                            | —     |   | $ | 174,993 |   | $ | 1,810 |   | $ | — |   | $ | 176,803 |   |
| Merchandise inventories                         |       | —                       |       | 809,065 |   | 98,995 |   | — |   | 908,060 |   |
| Other current assets                            |       | —                       |       | 136,073 |   | 13,998 |   | 544 |   | 150,615 |   |
| Total current assets                            |       | —                       |       | 1,120,131 |   | 114,803 |   | 544 |   | 1,235,478 |   |
| Property and equipment, net                     |       | —                       |       | 888,141 |   | 146,087 |   | — |   | 1,034,228 |   |
| Goodwill and intangible assets, net             |       | —                       |       | 1,960,267 |   | 2,209,394 |   | — |   | 4,169,661 |   |
| Other assets                                    |       | —                       |       | 111,369 |   | 248 |   | — |   | 111,617 |   |
| Investments in subsidiaries                     |       | 1,551,434                    |       | 2,339,885 |   | — |   | (3,891,319 | ) | — |   |
| Total assets                                    |       | $                            | 1,551,434  |   | $ | 6,419,793 |   | $ | 2,470,532 |   | $ | (3,890,775 | ) | $ | 6,550,984 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**   |       |                         |       |   |   |   |   |   |   |   |   |
| Current liabilities:                            |       |                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                |       | $                            | —     |   | $ | 261,871 |   | $ | 35,426 |   | $ | 544 |   | $ | 297,841 |   |
| Accrued liabilities                             |       | —                       |       | 329,628 |   | 86,449 |   | — |   | 416,077 |   |
| Other current liabilities                       |       | —                       |       | 3,686 |   | — |   | — |   | 3,686 |   |
| Total current liabilities                       |       | —                       |       | 595,185 |   | 121,875 |   | 544 |   | 717,604 |   |
| Long-term liabilities:                          |       |                         |       |   |   |   |   |   |   |   |   |
| Long-term debt                                  |       | —                       |       | 3,020,858 |   | — |   | — |   | 3,020,858 |   |
| Deferred income taxes                           |       | —                       |       | 1,021,524 |   | — |   | — |   | 1,021,524 |   |
| Other long-term liabilities                     |       | —                       |       | 230,792 |   | 8,772 |   | — |   | 239,564 |   |
| Total long-term liabilities                     |       | —                       |       | 4,273,174 |   | 8,772 |   | — |   | 4,281,946 |   |
| Total shareholders’ equity                 |       | 1,551,434                    |       | 1,551,434 |   | 2,339,885 |   | (3,891,319 | ) | 1,551,434 |   |
| Total liabilities and shareholders’ equity |       | $                            | 1,551,434  |   | $ | 6,419,793 |   | $ | 2,470,532 |   | $ | (3,890,775 | ) | $ | 6,550,984 |   |

** **

**27**

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

** **
| ** **                                                                        | ** ** | **Thirteen weeks ended April 28, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                      | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                | —     |   | $ | 906,178 |   | $ | 167,196 |   | $ | — |   | $ | 1,073,374 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                                           |       | 530,182 |   | 97,697 |   | — |   | 627,879 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                                           |       | 214,805 |   | 32,847 |   | — |   | 247,652 |   |
| Income from credit card program                                                   |       | —                                                           |       | (15,397 | ) | (1,672 | ) | — |   | (17,069 | ) |
| Depreciation expense                                                              |       | —                                                           |       | 29,435 |   | 4,820 |   | — |   | 34,255 |   |
| Amortization of customer lists and favorable lease commitments                    |       | —                                                           |       | 15,149 |   | 2,941 |   | — |   | 18,090 |   |
| Operating earnings                                                                |       | —                                                           |       | 132,004 |   | 30,563 |   | — |   | 162,567 |   |
| Interest expense, net                                                             |       | —                                                           |       | 63,787 |   | — |   | — |   | 63,787 |   |
| Intercompany royalty charges (income)                                             |       | —                                                           |       | 68,102 |   | (68,102 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (59,548                                                          | )          | (97,275 | ) | — |   | 156,823 |   | — |   |
| Earnings (loss) from continuing operations before income taxes                    |       | 59,548                                                           |       | 97,390 |   | 98,665 |   | (156,823 | ) | 98,780 |   |
| Income taxes                                                                      |       | —                                                           |       | 37,842 |   | — |   | — |   | 37,842 |   |
| Earnings (loss) from continuing operations                                        |       | 59,548                                                           |       | 59,548 |   | 98,665 |   | (156,823 | ) | 60,938 |   |
| Loss from discontinued operations, net of taxes                                   |       | —                                                           |       | — |   | (1,390 | ) | — |   | (1,390 | ) |
| Net earnings (loss)                                                               |       | $                                                                | 59,548     |   | $ | 59,548 |   | $ | 97,275 |   | $ | (156,823 | ) | $ | 59,548 |   |

 

28

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

 
| ** **                                                                        | ** ** | **Thirty-Nine weeks ended April 28, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                         | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                   | —     |   | $ | 2,880,059 |   | $ | 528,362 |   | $ | — |   | $ | 3,408,421 |   |
| Cost of goods sold including buying and occupancy costs (excluding  depreciation) |       | —                                                              |       | 1,759,733 |   | 325,183 |   | — |   | 2,084,916 |   |
| Selling, general and administrative expenses (excluding depreciation)             |       | —                                                              |       | 677,255 |   | 101,512 |   | — |   | 778,767 |   |
| Income from credit card program                                                   |       | —                                                              |       | (46,200 | ) | (5,170 | ) | — |   | (51,370 | ) |
| Depreciation expense                                                              |       | —                                                              |       | 86,986 |   | 14,517 |   | — |   | 101,503 |   |
| Amortization of customer lists and favorable lease commitments                    |       | —                                                              |       | 45,348 |   | 8,824 |   | — |   | 54,172 |   |
| Other income                                                                      |       | —                                                              |       | (4,210 | ) | — |   | — |   | (4,210 | ) |
| Operating earnings                                                                |       | —                                                              |       | 361,147 |   | 83,496 |   | — |   | 444,643 |   |
| Interest expense, net                                                             |       | —                                                              |       | 198,142 |   | — |   | — |   | 198,142 |   |
| Intercompany royalty charges (income)                                             |       | —                                                              |       | 211,745 |   | (211,745 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (127,798                                                            | )          | (272,470 | ) | — |   | 400,268 |   | — |   |
| Earnings (loss) from continuing operations before income taxes                    |       | 127,798                                                             |       | 223,730 |   | 295,241 |   | (400,268 | ) | 246,501 |   |
| Income taxes                                                                      |       | —                                                              |       | 95,932 |   | — |   | — |   | 95,932 |   |
| Earnings (loss) from continuing operations                                        |       | 127,798                                                             |       | 127,798 |   | 295,241 |   | (400,268 | ) | 150,569 |   |
| Loss from discontinued operations, net of taxes                                   |       | —                                                              |       | — |   | (21,282 | ) | (1,489 | ) | (22,771 | ) |
| Net earnings (loss)                                                               |       | $                                                                   | 127,798    |   | $ | 127,798 |   | $ | 273,959 |   | $ | (401,757 | ) | $ | 127,798 |   |

 

29

----

 
| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended April 26, 2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                         | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                   | 178,456    |   | $ | 178,456 |   | $ | 314,004 |   | $ | (492,460 | ) | $ | 178,456 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities:         |       |                                                                |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                              |       | 92,011 |   | 13,684 |   | — |   | 105,695 |   |
| Amortization of debt issue costs                                                             |       | —                                                              |       | 10,663 |   | — |   | — |   | 10,663 |   |
| Amortization of customer lists and favorable lease commitments                               |       | —                                                              |       | 45,179 |   | 8,723 |   | — |   | 53,902 |   |
| Deferred income taxes                                                                        |       | —                                                              |       | (13,569 | ) | — |   | — |   | (13,569 | ) |
| Gain on curtailment of defined benefit retirement obligations                                |       | —                                                              |       | (32,450 | ) |   |   | — |   | (32,450 | ) |
| Other, primarily costs related to defined benefit pension and other  long-term benefit plans |       | —                                                              |       | 18,690 |   | (59 | ) | — |   | 18,631 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                                              |       | 218,452 |   | (218,452 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (178,456                                                            | )          | (314,004 | ) | — |   | 492,460 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                                              |       | (8,179 | ) | (111,676 | ) | — |   | (119,855 | ) |
| Net cash provided by operating activities                                                    |       | —                                                              |       | 195,249 |   | 6,224 |   | — |   | 201,473 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                              |       | (126,628 | ) | (6,502 | ) | — |   | (133,130 | ) |
| Purchases of short-term investments                                                          |       | —                                                              |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of short-term investments                                                              |       | —                                                              |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used for investing activities                                                       |       | —                                                              |       | (126,628 | ) | (6,502 | ) | — |   | (133,130 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                              |       | (3,446 | ) | — |   | — |   | (3,446 | ) |
| Net cash used for financing activities                                                       |       | —                                                              |       | (3,446 | ) | — |   | — |   | (3,446 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | —                                                              |       | 65,175 |   | (278 | ) | — |   | 64,897 |   |
| Beginning balance                                                                            |       | —                                                              |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                   | —     |   | $ | 204,508 |   | $ | 1,596 |   | $ | — |   | $ | 206,104 |   |

** **

**30**

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| ** **                                                                                   | ** ** | **Thirty-Nine weeks ended April 28, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                         | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                   | 127,798    |   | $ | 127,798 |   | $ | 273,959 |   | $ | (401,757 | ) | $ | 127,798 |   |
| Loss from discontinued operations                                                            |       | —                                                              |       | — |   | 21,282 |   | 1,489 |   | 22,771 |   |
| Adjustments to reconcile net earnings to net cash provided by  operating activities:         |       |                                                                |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                              |       | 86,986 |   | 14,517 |   | — |   | 101,503 |   |
| Amortization of debt issue costs                                                             |       | —                                                              |       | 10,588 |   | — |   | — |   | 10,588 |   |
| Amortization of customer lists and favorable lease commitments                               |       | —                                                              |       | 45,348 |   | 8,824 |   | — |   | 54,172 |   |
| Deferred income taxes                                                                        |       | —                                                              |       | (26,271 | ) | — |   | — |   | (26,271 | ) |
| Other, primarily costs related to defined benefit pension and other  long-term benefit plans |       | —                                                              |       | 15,153 |   | 2,315 |   | — |   | 17,468 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                                              |       | 211,745 |   | (211,745 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (127,798                                                            | )          | (272,470 | ) | — |   | 400,268 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                                              |       | (30,294 | ) | (90,392 | ) | — |   | (120,686 | ) |
| Net cash provided by continuing operating activities                                         |       | —                                                              |       | 168,583 |   | 18,760 |   | — |   | 187,343 |   |
| Net cash used for discontinued operations                                                    |       | —                                                              |       | — |   | (10,553 | ) | — |   | (10,553 | ) |
| Net cash provided by operating activities                                                    |       | —                                                              |       | 168,583 |   | 8,207 |   | — |   | 176,790 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                              |       | (97,114 | ) | (7,049 | ) | — |   | (104,163 | ) |
| 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                                            |       | —                                                              |       | (35,045 | ) | (7,049 | ) | — |   | (42,094 | ) |
| Net cash used for discontinued operations                                                    |       | —                                                              |       | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for investing activities                                                       |       | —                                                              |       | (35,045 | ) | (7,177 | ) | — |   | (42,222 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                      |       | —                                                              |       | (179,554 | ) | — |   | — |   | (179,554 | ) |
| Debt issuance costs paid                                                                     |       | —                                                              |       | (1,449 | ) | — |   | — |   | (1,449 | ) |
| Proceeds from purchase of common stock                                                       |       | —                                                              |       | 150 |   | — |   | — |   | 150 |   |
| Net cash used for continuing financing activities                                            |       | —                                                              |       | (180,853 | ) | — |   | — |   | (180,853 | ) |
| Net cash used for discontinued operations                                                    |       | —                                                              |       | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for financing activities                                                       |       | —                                                              |       | (180,853 | ) | (1,675 | ) | — |   | (182,528 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                |       |   |   |   |   |   |   |   |   |
| Decrease during the period                                                                   |       | —                                                              |       | (47,315 | ) | (645 | ) | — |   | (47,960 | ) |
| Beginning balance                                                                            |       | —                                                              |       | 222,308 |   | 2,455 |   | — |   | 224,763 |   |
| Ending balance                                                                               |       | $                                                                   | —     |   | $ | 174,993 |   | $ | 1,810 |   | $ | — |   | $ | 176,803 |   |

** **

**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 ourfinancial condition and results of operations should be read inconjunction with our Annual Report on Form 10-K for the fiscal year ended July 28,2007.  Unless otherwise specified, the meanings ofall defined terms in Management’s Discussion and Analysis of FinancialCondition and Results of Operations (MD&A) are consistent with the meaningsof such terms as defined in the Notes to the Condensed Consolidated FinancialStatements. This discussion contains forward-looking statements.  Please see “Forward-Looking Statements” for adiscussion of the risks, uncertainties and assumptions relating to ourforward-looking statements.

 

**Overview**

 

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

 

Our fiscal year ends on the Saturday closestto July 31.  All references to thethird quarter of fiscal year 2008 relate to the thirteen weeks ended April 26,2008.  All references to the thirdquarter of fiscal year 2007 relate to the thirteen weeks ended April 28,2007.  All references to year-to-datefiscal 2008 relate to the thirty-nine weeks ended April 26, 2008.  All references to year-to-date fiscal 2007relate to the thirty-nine weeks ended April 28, 2007.

 

**Factors Affecting OurResults**

 

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

 

·                  Salesof merchandise—Revenues from our Specialty Retail stores are recognized at thelater of the point of sale or the delivery of goods to the customer. Revenuesfrom our Direct Marketing operations are recognized when the merchandise isdelivered to the customer. We maintain reserves for anticipated sales returnsprimarily based on our historical trends related to returns by both our retailand direct marketing customers. Revenues exclude sales taxes collected from ourcustomers.

 

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

 

Our revenues can be affected by the followingfactors:

 

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

 

·                  changesin the level of full-price sales;

 

·                  changesin the level of promotional events conducted by our Specialty Retail stores andDirect Marketing operations;

 

·                  ourability to successfully implement our store expansion and remodelingstrategies;

 

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

 

·                  generaleconomic conditions.

 

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

 

32

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

 

·                  Inventorycosts—We utilize the retail method of accounting. Under the retail inventorymethod, the valuation of inventories at cost and the resulting gross marginsare determined by applying a calculated cost-to-retail ratio, for variousgroupings of similar items, to the retail value of our inventories. 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 lowered throughthe use of markdowns. Hence, earnings are negatively impacted when merchandiseis marked down. With the introduction of new fashions in the first and thirdfiscal quarters and our emphasis on full-price selling in these quarters, alower level of markdowns and higher margins are characteristic of thesequarters.

 

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

 

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

 

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

 

Consistent with industry business practice,we receive allowances from certain of our vendors in support of the merchandisewe purchase 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 $66.0 million, or 1.9%of revenues, in year-to-date fiscal 2008 and $58.9 million, or 1.7% ofrevenues, in year-to-date fiscal 2007.

 

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

 

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

 

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

 

·                  factorsaffecting revenues generally;

 

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

 

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

 

33

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***Selling, general and administrative expenses(excluding depreciation) (SG&A).***  SG&A principally consists of costsrelated to employee compensation and benefits in the selling and administrativesupport areas, advertising and catalog costs and insurance expense. Asignificant portion of our selling, general and administrative expenses arevariable in nature and are dependent on the sales we generate.

 

Advertising costs incurred by our SpecialtyRetail segment consist primarily of print media costs related to promotionalmaterials mailed to our customers, while advertising costs incurred by ourDirect Marketing operations relate to the production, printing and distributionof our print catalogs and the production of the photographic content on ourwebsites, as well as online marketing costs. We receive advertising allowancesfrom certain of our merchandise vendors. Substantially all the advertisingallowances we receive represent reimbursements of direct, specific andincremental costs that we incur to promote the vendor’s merchandise inconnection with our various advertising programs, primarily catalogs and otherprint media. As a result, these allowances are recorded as a reduction of ouradvertising costs when earned. Vendor allowances earned and recorded as areduction to selling, general and administrative expenses aggregatedapproximately $68.8 million, or 1.9% of revenues, in year-to-date fiscal 2008and $56.8 million, or 1.7% of revenues, in year-to-date fiscal 2007.

 

We also receive allowances from certainmerchandise vendors in conjunction with compensation programs for employees whosell the vendor’s merchandise. These allowances are netted against the relatedcompensation expense that we incur. Amounts received from vendors related tocompensation programs were $54.3 million, or 1.5% of revenues, for thethirty-nine weeks ended April 26, 2008 and $49.9 million, or 1.5% ofrevenues, for the thirty-nine weeks ended April 28, 2007.

 

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

 

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

 

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

 

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

 

***Income from credit 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 net credit card sales and compensation formarketing and servicing activities (HSBC Program Income). We recognize HSBCProgram Income when earned. In the future, the HSBC Program Income may be:

 

·                  increased ordecreased 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

 

·                  decreased basedupon the level of future services we provide to HSBC.

 

34

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**Seasonality**

 

We conduct our selling activities in twoprimary selling seasons—Fall and Spring. The Fall season is comprised of ourfirst and second fiscal quarters and the Spring season is comprised of ourthird and fourth fiscal quarters.

 

Our first fiscal quarter is generallycharacterized by a higher level of full-price sales with a focus on the initialintroduction of Fall season fashions. Aggressive in-store marketing activities designedto stimulate 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 isgenerally characterized by a higher level of full-price sales with a focus onthe initial introduction of Spring season fashions. Aggressive in-storemarketing activities designed to stimulate customer buying, a lower level ofmarkdowns and higher margins are again characteristic of this quarter. Revenuesare generally the lowest in the fourth fiscal quarter with a focus onpromotional activities offering Spring season goods to the customer on a markeddown basis, resulting in lower margins during the quarter. Our working capitalrequirements are typically lower in the third and fourth fiscal quarters thanin the other quarters.

 

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’s apparel, men’s apparel and shoes are typically ordered six to ninemonths in advance of the products being offered for sale while handbags,jewelry and other categories are typically ordered three to six months inadvance. As a result, inherent in the successful execution of our businessplans is our ability both to predict the fashion trends that will be ofinterest to our customers and to anticipate future spending patterns of ourcustomer base.

 

We monitor the sales performance of ourinventories throughout each season. We seek to order additional goods tosupplement our original purchasing decisions when the level of customer demandis higher than originally anticipated. However, in certain merchandisecategories, particularly fashion apparel, our ability to purchase additionalgoods can be limited. This can result in lost sales in the event of higher thananticipated demand of the fashion goods we offer or a higher than anticipatedlevel of consumer spending. Conversely, in the event we buy fashion goods thatare not accepted by the customer or the level of consumer spending is less thanwe anticipated, we typically incur a higher than anticipated level ofmarkdowns, net of vendor allowances, to sell the goods that remain at the endof the season, resulting in lower operating profits. We believe that theexperience of our merchandising and selling organizations helps to minimize theinherent risk in predicting fashion trends.

 

35

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**OPERATING RESULTS**

 

**Performance Summary**

 

Thefollowing table sets forth certain items expressed as percentages of net revenuesfor the periods indicated.

 
| ** **                                                                        | ** ** | **Quarter-to-Date**                                  | ** ** | **Year-to-Date**                                     | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Thirteen  weeks ended  April 26,  2008** | ** ** | **Thirteen  weeks ended  April 28,  2007** | ** ** | **Thirty-Nine  weeks ended  April 26,  2008** | ** ** | **Thirty-Nine  weeks ended  April 28,  2007** | ** ** |
| ** **                                                                        | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | 100.0                                                | %          | 100.0                                                | %          | 100.0 | % | 100.0 | % |
|                                                                              |       |                                                 |       |                                                 |       |   |   |   |   |
| Cost of goods sold including buying and  occupancy costs (excluding depreciation) |       | 60.0                                                 |       | 58.5                                                 |       | 62.1 |   | 61.2 |   |
| Selling, general and administrative  expenses (excluding depreciation)            |       | 22.5                                                 |       | 23.1                                                 |       | 22.5 |   | 22.8 |   |
| Income from credit card program                                                   |       | (1.5                                                 | )          | (1.6                                                 | )          | (1.5 | ) | (1.5 | ) |
| Depreciation expense                                                              |       | 3.3                                                  |       | 3.2                                                  |       | 3.0 |   | 3.0 |   |
| Amortization of customer lists                                                    |       | 1.3                                                  |       | 1.3                                                  |       | 1.1 |   | 1.2 |   |
| Amortization of favorable lease commitments                                       |       | 0.4                                                  |       | 0.4                                                  |       | 0.4 |   | 0.4 |   |
| Other income                                                                      |       | —                                               |       | —                                               |       | (0.9 | ) | (0.1 | ) |
| Operating earnings                                                                |       | 14.0                                                 |       | 15.1                                                 |       | 13.2 |   | 13.0 |   |
| Interest expense, net                                                             |       | 5.4                                                  |       | 5.9                                                  |       | 5.0 |   | 5.8 |   |
|                                                                              |       |                                                 |       |                                                 |       |   |   |   |   |
| Earnings from continuing operations before  income taxes                          |       | 8.6                                                  |       | 9.2                                                  |       | 8.2 |   | 7.2 |   |
| Income taxes                                                                      |       | 3.4                                                  |       | 3.5                                                  |       | 3.2 |   | 2.8 |   |
| Earnings from continuing operations                                               |       | 5.2                                                  |       | 5.7                                                  |       | 5.0 |   | 4.4 |   |
| Loss from discontinued operations, net of  taxes                                  |       | —                                               |       | (0.1                                                 | )          | — |   | (0.7 | ) |
| Net earnings                                                                      |       | 5.2                                                  | %          | 5.5                                                  | %          | 5.0 | % | 3.7 | % |

 

36

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

** **
| ** **                                                                                 | ** ** | **Quarter-to-Date**                              | ** ** | **Year-to-Date**                                 | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **(dollars in millions, except sales per square foot)** | ** ** | **Thirteen  weeks  ended  April 26,  2008** | ** ** | **Thirteen  weeks  ended  April 28,  2007** | ** ** | **Thirty-Nine  weeks  ended  April 26,  2008** | ** ** | **Thirty-Nine  weeks  ended  April 28,  2007** | ** ** |
| REVENUES                                                                                   |       |                                             |       |                                             |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                | 893.6      |                                             | $          | 908.0 |   | $ | 2,991.5 |   | $ | 2,857.9 |   |
| Direct Marketing                                                                           |       | 168.6                                            |       | 165.4                                            |       | 576.8 |   | 550.5 |   |
| Total                                                                                      |       | $                                                | 1,062.2    |                                             | $          | 1,073.4 |   | $ | 3,568.3 |   | $ | 3,408.4 |   |
|                                                                                       |       |                                             |       |                                             |       |   |   |   |   |
| OPERATING EARNINGS                                                                         |       |                                             |       |                                             |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                | 151.3      |                                             | $          | 168.1 |   | $ | 444.8 |   | $ | 446.2 |   |
| Direct Marketing                                                                           |       | 28.0                                             |       | 29.8                                             |       | 93.2 |   | 89.7 |   |
| Subtotal                                                                                   |       | 179.3                                            |       | 197.9                                            |       | 538.0 |   | 535.9 |   |
| Corporate                                                                                  |       | (12.8                                            | )          | (17.3                                            | )          | (44.0 | ) | (41.3 | ) |
| Amortization of customer lists and  favorable lease commitments                            |       | (17.9                                            | )          | (18.1                                            | )          | (53.9 | ) | (54.2 | ) |
| Other income (1)                                                                           |       | —                                           |       | —                                           |       | 32.5 |   | 4.2 |   |
| Total                                                                                      |       | $                                                | 148.6      |                                             | $          | 162.6 |   | $ | 472.6 |   | $ | 444.6 |   |
|                                                                                       |       |                                             |       |                                             |       |   |   |   |   |
| OPERATING PROFIT MARGIN                                                                    |       |                                             |       |                                             |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | 16.9                                             | %          | 18.5                                             | %          | 14.9 | % | 15.6 | % |
| Direct Marketing                                                                           |       | 16.6                                             | %          | 18.0                                             | %          | 16.2 | % | 16.3 | % |
| Total                                                                                      |       | 14.0                                             | %          | 15.1                                             | %          | 13.2 | % | 13.0 | % |
|                                                                                       |       |                                             |       |                                             |       |   |   |   |   |
| CHANGE IN COMPARABLE REVENUES (2)                                                          |       |                                             |       |                                             |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | (3.4                                             | )%         | 5.6                                              | %          | 2.2 | % | 6.1 | % |
| Direct Marketing                                                                           |       | 2.0                                              | %          | 8.7                                              | %          | 4.8 | % | 9.2 | % |
| Total                                                                                      |       | (2.5                                             | )%         | 6.1                                              | %          | 2.6 | % | 6.6 | % |
|                                                                                       |       |                                             |       |                                             |       |   |   |   |   |
| SALES PER SQUARE FOOT                                                                      |       |                                             |       |                                             |       |   |   |   |   |
| Specialty Retail stores                                                                    |       | $                                                | 148        |                                             | $          | 157 |   | $ | 499 |   | $ | 499 |   |
|                                                                                       |       |                                             |       |                                             |       |   |   |   |   |
| STORE COUNT                                                                                |       |                                             |       |                                             |       |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores:                                                 |       |                                             |       |                                             |       |   |   |   |   |
| Open at beginning of period                                                                |       | 41                                               |       | 39                                               |       | 40 |   | 38 |   |
| Opened during the period                                                                   |       | —                                           |       | 1                                                |       | 1 |   | 2 |   |
| Open at end of period                                                                      |       | 41                                               |       | 40                                               |       | 41 |   | 40 |   |
| Clearance centers:                                                                         |       |                                             |       |                                             |       |   |   |   |   |
| Open at beginning of period                                                                |       | 22                                               |       | 19                                               |       | 20 |   | 18 |   |
| Opened during the period                                                                   |       | 1                                                |       | —                                           |       | 3 |   | 1 |   |
| Open at end of period                                                                      |       | 23                                               |       | 19                                               |       | 23 |   | 19 |   |
|                                                                                       |       |                                             |       |                                             |       |   |   |   |   |
| NON-GAAP FINANCIAL DATA                                                                    |       |                                             |       |                                             |       |   |   |   |   |
| EBITDA (3)                                                                                 |       | $                                                | 202.0      |                                             | $          | 214.9 |   | $ | 632.2 |   | $ | 600.3 |   |
| Adjusted EBITDA (3)                                                                        |       | $                                                | 202.0      |                                             | $          | 214.9 |   | $ | 599.7 |   | $ | 600.3 |   |

 

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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 include1) revenues derived from our retail stores open for more than52 weeks, including stores that have been relocated or expanded and2) revenues from our Direct Marketing operations. Comparable revenuesexclude revenues from our discontinued operations (Kate Spade 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**

 

Consistent with the trends we began toexperience in the second quarter of fiscal year 2008, we experienced a lowerlevel of customer spending in the third quarter of fiscal year 2008.  In periods of lower than anticipated demandand revenues, a higher level of markdowns is required to reduce inventorylevels and both buying and occupancy costs and selling, general andadministrative expenses tend to increase as percentages of revenues.  In response to current economic conditions,we have taken the following actions:

 

·                  stimulated sales through promotional and otherevents resulting in higher markdowns and promotional costs;

 

·                  reduced inventory purchases; and

 

·                  implemented expense control initiatives.

 

We expect current economic conditions willcontinue throughout the remainder of fiscal year 2008.  As a result, we expect a higher level ofmarkdowns in the fourth quarter of fiscal year 2008 than the fourth quarter offiscal year 2007.  In addition, inpreparing our financial plans for fiscal year 2009, we expect the currenteconomic conditions to continue.

 

Highlights from the third quarter of fiscalyear 2008 include:

 

·                  **Revenues**—Our revenues for the third quarter of fiscal year2008 were $1,062.2 million, a decrease of 1.0% as compared to the third quarterof fiscal year 2007. Comparable revenues decreased 2.5% in the third quarter offiscal year 2008 as a result of the lower level of customer spending weexperienced.

 

Our revenues for theyear-to-date fiscal 2008 period were $3,568.3 million, an increase of 4.7% ascompared to the year-to-date fiscal 2007 period. The year-to-date increase wasattributable to 1) increases in comparable revenues of 2.6%, 2) revenues fromnew stores and 3) higher internet revenues.

 

For Specialty Retail stores, our sales persquare foot for the last twelve trailing months were $639 as of April 2008,$631 as of April 2007 and $650 as of January 2008.

 

·                  **Cost of goods sold including buying and occupancy costs (excludingdepreciation)**—COGS represented 60.0% of revenues in the thirdquarter of fiscal year 2008 and 58.5% of revenues in the third quarter offiscal year 2007.  COGS represented 62.1%of revenues in year-to-date fiscal 2008 and 61.2% of revenues in the prioryear-to-date fiscal period.  Theseincreases in COGS were due primarily to higher levels of markdowns incurred byour Specialty Retail stores due to a lower than anticipated level of demand.

 

·                  **Selling, general and administrative expenses (excluding depreciation)**—SG&Adecreased in the third quarter of fiscal year 2008 to 22.5% of revenues from23.1% of revenues in the third quarter of fiscal year 2007. SG&Arepresented 22.5% of revenues in the year-to-date fiscal 2008 period and 22.8%of revenues in the prior year-to-date fiscal period. These decreases inSG&A as a percentage of revenues are primarily due to lower estimatedannual incentive compensation costs to be incurred in fiscal year 2008partially offset by increases in certain components of SG&A (primarilybenefits and marketing and advertising).

 

·                  **Operating earnings—**For the third quarter of fiscal year2008, our operating earnings were $148.6 million, or 14.0% of revenues,compared to $162.6 million, or 15.1% of revenues, in the prior year fiscalquarter.  The decrease in operatingearnings of 1.1% of revenues in the third quarter of fiscal year 2008 wasprimarily due to the increase in COGS by 1.5% of revenues, offset by thedecrease in SG&A expenses by 0.6% of revenues.

 

Total operating earnings inyear-to-date fiscal 2008 were $472.6 million, or 13.2% of revenues, which includeda curtailment gain of $32.5 million, or 0.9% of revenues.  Total operating earnings in year-to-datefiscal 2007 were $444.6 million, or 13.0% of revenues.  Excluding the curtailment gain, operatingearnings margin decreased in year-to-date fiscal 2008 by 0.7% of revenuesprimarily as a result of an increase in COGS by 0.9% of revenues, offset by adecrease in SG&A expenses by 0.3% of revenues.

 

38

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** **

**ThirteenWeeks Ended April 26, 2008 Compared to Thirteen Weeks Ended April 28,2007**

** **

***Revenues.**** *Our revenues for the third quarter of fiscal year 2008 of $1,062.2million decreased $11.2 million, or 1.0%, from $1,073.4 million in the thirdquarter of fiscal year 2007.  Thedecrease in revenues was primarily due to decreases in comparable revenues.

 

Comparable revenues for the third quarter of fiscal year 2008 were$1,046.2 million compared to $1,073.4 million in the prior year fiscal quarter,representing a decrease of 2.5%. Comparable revenues decreased in the third quarter of fiscal year 2008by 3.4% for Specialty Retail stores and increased 2.0% for Direct Marketingcompared to the third quarter of fiscal year 2007. We shifted the timing of ourend-of-season clearance sale for certain Specialty Retail store locations into January fromFebruary.

 

New stores generated sales of $16.0 million in the third quarter offiscal year 2008. In the third quarter of fiscal year 2008, internet revenuesby Direct Marketing were $129.5 million, an increase of 6.8% compared to thethird 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 third quarter of fiscal year2008 was 60.0% of revenues compared to 58.5% of revenues in the third quarterof fiscal year 2007.

 

The net increase in COGS as a percentage of revenues in the thirdquarter of fiscal year 2008 was primarily due to decreased margins generated byboth our Specialty Retail stores and Direct Marketing operations due primarilyto:

 

·                  additionalpromotional and other events at Specialty Retail stores resulting in highermarkdowns and a lower level of full-price sales in the third quarter of fiscalyear 2008;

 

·                  additionaldiscounted and/or free shipping promotions at Direct Marketing; and

 

·                  an increase in buyingand occupancy costs as a percentage of revenues due primarily to higher costsfor rent and utilities and the deleveraging of fixed expenses on lowerrevenues.

 

The higher level of markdowns incurred in the third quarter of fiscalyear 2008 is due to a lower than anticipated level of demand.  As a result, we conducted various promotionsin the third quarter to liquidate on-hand inventories held in excess of salestrends.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses were 22.5% of revenues inthe third quarter of fiscal year 2008 compared to 23.1% of revenues in theprior year fiscal period.

 

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

 

·            lower estimatedannual incentive compensation costs of approximately 1.2% of revenues; and

 

·            lowerpre-opening expenses of approximately 0.2% of revenues.

 

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

 

·            higher benefitsexpenses of approximately 0.3% of revenues reflecting increases in both medicaland long-term benefits;

 

·            higher payrollexpenses of approximately 0.3% of revenues due primarily to new store additionsand additional payroll required to support our Direct Marketing operations; and

 

·            highermarketing and advertising costs of approximately 0.2% of revenues due primarilyto higher costs incurred by our Direct Marketing operations to support ouron-line operations.

 

39

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***Income from credit cardprogram. ***We earned HSBC Program Income of $15.7 million, or 1.5% of revenues, inthe third quarter of fiscal year 2008 compared to $17.1 million, or 1.6% ofrevenues, in the third quarter of fiscal year 2007.

 

***Depreciation expense. ***Depreciation expense was$35.5 million, or 3.3% of revenues, in the third quarter of fiscal year 2008compared to $34.3 million, or 3.2% of revenues, in the prior year fiscalperiod.

 

***Amortization expense. ***Amortization of intangibleassets (customer lists and favorable lease commitments) aggregated $17.9million, or 1.7% of revenues, in the third quarter of fiscal year 2008 comparedto $18.1 million, or 1.7% of revenues, in the third quarter of fiscal year2007.

 

***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 $151.3million, or 16.9% of Specialty Retail stores revenues, for the third quarter offiscal year 2008 compared to $168.1 million, or 18.5% of Specialty Retailstores revenues, for the prior year fiscal period.  These decreases in operating earnings andoperating margin as a percentage of revenues were primarily due to:

 

·                  highermarkdowns and a lower level of full-price sales as a result of lower thananticipated demand; and

 

·                  an increase inbuying and occupancy costs as a percentage of revenues due primarily to highercosts for rent and utilities and the deleveraging of fixed expenses on lowerrevenues; partially offset by

 

·                  lower estimatedannual incentive compensation costs and lower pre-opening expenses.

 

Operating earnings for Direct Marketing were $28.0 million, or 16.6% ofDirect Marketing revenues, in the third quarter of fiscal year 2008 compared to$29.8 million, or 18.0% of Direct Marketing revenues, for the prior yearperiod.  These decreases in operatingearnings and operating margin for Direct Marketing were primarily the result of1) a decrease in margins realized on delivery and processing revenues and 2)increases in selling, general and administrative expenses (primarilyadvertising and marketing costs) incurred to support our on-line operations.

 

Total operating earnings in the third quarter of fiscal year 2008 were$148.6 million, or 14.0% of revenues compared to $162.6 million, or 15.1% ofrevenues in the prior year fiscal period. The decreases in operating earnings and operating margin in the thirdquarter of fiscal year 2008 were primarily due to:

 

·                  the decrease inmargins of approximately 1.5% of revenues related to higher markdowns and salespromotions costs and higher buying and occupancy costs for rent and utilitiesand the deleveraging of fixed expenses on lower revenues; and

 

·                  higher selling,general and administrative expenses by approximately 0.6% of revenues due toincreases in benefits and marketing and advertising costs; partially offset by

 

·                  lower estimatedannual incentive compensation costs of approximately 1.2% of revenues.

 

40

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***Interest expense, net*****.**  Net interest expense was $57.3 million, or5.4% of revenues, in the third quarter of fiscal year 2008 and $63.8 million,or 5.9% 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:

 
| ** **                        | ** ** | **Quarter-to-Date**                                                      | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(in thousands)**           | ** ** | **Thirteen   weeks   ended   April 26,   2008** | ** ** | **Thirteen   weeks   ended   April 28,   2007** | ** ** |
|                              |       |                                                                     |       |   |   |
| Senior Secured Term Loan Facility |       | $                                                                        | 24,289     |   | $ | 30,648 |   |
| 2028 Debentures                   |       | 2,185                                                                    |       | 2,227 |   |
| Senior Notes                      |       | 15,786                                                                   |       | 15,750 |   |
| Senior Subordinated Notes         |       | 12,998                                                                   |       | 12,969 |   |
| Amortization of debt issue costs  |       | 3,554                                                                    |       | 3,554 |   |
| Other                             |       | 763                                                                      |       | 867 |   |
| Total interest expense            |       | 59,575                                                                   |       | 66,015 |   |
| Less:                             |       |                                                                     |       |   |   |
| Interest income                   |       | 1,304                                                                    |       | 1,665 |   |
| Capitalized interest              |       | 968                                                                      |       | 563 |   |
| Interest expense, net             |       | $                                                                        | 57,303     |   | $ | 63,787 |   |

 

***Income taxes.***  Our effective income tax rate for thethirteen weeks ended April 26, 2008 was 39.3% compared to 38.3% for thethirteen weeks ended April 28, 2007. Our effective income tax rate for the third quarter of fiscal year 2008was unfavorably impacted by an increase in reserves required for uncertain taxpositions and a decrease in the amount of tax-exempt interest earned.

 

We file income tax returns in the U.S. federaljurisdiction and various state and local jurisdictions.  We closed the Internal Revenue Service (IRS)examinations of federal tax returns for fiscal years 2004 and 2003 during thefirst quarter of fiscal year 2007 and paid the related tax liability during thesecond quarter of fiscal year 2007.   TheIRS is now examining our federal tax returns for fiscal years 2005 and2006.  We believe our recorded taxliabilities as of April 26, 2008 are sufficient to cover any potentialassessments to be made by the IRS upon the completion of their examinations. Wewill continue to monitor the progress of the IRS examinations and review ourrecorded tax liabilities for potential audit assessments.  With respect to state andlocal jurisdictions, with limited exceptions, the Company and its subsidiariesare no longer subject to income tax audits for fiscal years before 2003.  We believe it is reasonably possible thatadjustments in the amounts of our unrecognized tax benefits could occur withinthe next 12 months as a result of negotiated settlements with tax authorities.  At this time, we do not believe suchadjustments will have a material impact on our consolidated financialstatements.

 

**Thirty-NineWeeks Ended April 26, 2008 Compared to Thirty-Nine Weeks Ended April 28,2007**

** **

***Revenues.**** *Our revenues for year-to-date fiscal 2008 of $3,568.3 million increased$159.9 million, or 4.7%, from $3,408.4 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 thirty-nine weeks ended April 26, 2008were $3,496.4 million compared to $3,408.4 million in the prior year fiscalperiod, representing an increase of 2.6%. Comparable revenues increased in the year-to-date fiscal 2008 period by2.2% for Specialty Retail stores and 4.8% for Direct Marketing compared to thesame fiscal period of 2007.  Ourcomparable sales trends were stronger in the first part of fiscal 2008.  We began to experience a lower level ofcustomer spending in the second quarter of fiscal year 2008 which continuedinto the third quarter of fiscal year 2008. Comparable sales by quarter for fiscal year 2008 are as follows:

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

 

New stores generated sales of $71.9 million in year-to-date fiscal 2008and internet revenues by Direct Marketing were 

 

41

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$434.2 million, an increase of 14.8% compared to the prior year fiscalperiod. The increase in internet revenues was partially offset by decreases incatalog revenues as well as a decrease in revenues from the home décorcategory, primarily offered by our Horchow brand.

 

***Cost of goods sold including buying and occupancycosts (excluding depreciation).***  COGS for year-to-date fiscal 2008 was 62.1%of revenues compared to 61.2% 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 decreased margins generated by both our SpecialtyRetail stores and Direct Marketing operations of approximately 0.9% of revenuesdue primarily to 1) higher markdowns and sales promotions costs and 2) a lowerlevel of full-price sales in year-to-date fiscal 2008.

 

The higher level of markdowns incurred by our Specialty Retail storesin year-to-date fiscal 2008 is due to a lower than anticipated level ofdemand.  As a result, we have experienceda decline in the level of full-price sales and have conducted variouspromotions in fiscal year 2008 to liquidate on-hand inventories held in excessof sales trends.  In addition, our DirectMarketing operations continue to realize decreased margins on delivery andprocessing revenues as a result of discounted and/or free shipping promotions.

 

***Selling, general and administrative expenses(excluding depreciation)*****.**  SG&A expenses were 22.5% of revenues inyear-to-date fiscal 2008 compared to 22.8% 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:

 

·                  lower estimatedannual incentive compensation costs of approximately 0.5% of revenues; and

 

·                  a decrease inmarketing and advertising costs of approximately 0.2% of revenues incurred byDirect Marketing primarily due to higher internet revenues, which have a lowerexpense to revenue ratio than catalog revenues.

 

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

 

·                  higher benefitsexpenses of approximately 0.2% of revenues reflecting increases in both medicaland long-term benefits; and

 

·                  a higher levelof advertising and promotions costs of approximately 0.2% of revenues incurredby our Specialty Retail stores during fiscal year 2008 in connection with 1)the celebration of the 100th anniversary of Neiman Marcus in October 2007and 2) promotional events and activities conducted to facilitate thesell-through of on-hand inventories held in excess of sales trends.

 

***Income from credit cardprogram. ***We earned HSBC Program Income of $52.3 million, or 1.5% of revenues, inthe year-to-date fiscal 2008 compared to $51.4 million, or 1.5% of revenues, inyear-to-date fiscal 2007.

 

***Depreciation expense. ***Depreciation expense was$105.7 million, or 3.0% of revenues, in year-to-date fiscal 2008 compared to$101.5 million, or 3.0% of revenues, in the prior year fiscal period.

 

***Amortization expense. ***Amortization of intangibleassets (customer lists and favorable lease commitments) aggregated $53.9million, or 1.5% of revenues, in year-to-date fiscal 2008 compared to $54.2million, 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 0.9% 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 0.1% of revenues, in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot. Weaccounted for our investment in Wedding Channel.com under the cost method. Inprior years, we had previously reduced our carrying value of this investment tozero.

 

42

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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 $444.8million, or 14.9% of Specialty Retail stores revenues, for the thirty-nineweeks ended April 26, 2008 compared to $446.2 million, or 15.6% ofSpecialty Retail stores revenues, for the prior year fiscal period.  The decrease in operating margin as apercentage of revenues was primarily due to:

 

·                  highermarkdowns and a lower level of full-price sales as a result of lower thananticipated demand; and

 

·                  net increasesin advertising and promotion costs; partially offset by

 

·                  lower estimatedannual incentive compensation costs.

 

Operating earnings for Direct Marketing were $93.2 million, or 16.2% ofDirect Marketing revenues, in year-to-date fiscal 2008 compared to $89.7million, or 16.3% of Direct Marketing revenues, for the prior year fiscalperiod.  The decrease in operating marginas a percentage of revenues for Direct Marketing was primarily the result of 1)a decrease in margins realized on delivery and processing revenues, partiallyoffset by 2) a decrease in advertising and marketing costs, as a percentage ofrevenues, due to the continued growth in internet revenues.

 

Total operating earnings in year-to-date fiscal 2008 were $472.6million, or 13.2% of revenues, which included a curtailment gain of $32.5million, or 0.9% of revenues.  Totaloperating earnings in year-to-date fiscal 2007 were $444.6 million, or 13.0% ofrevenues.  Excluding the curtailmentgain, operating earnings margin decreased in year-to-date fiscal 2008 by 0.7%of revenues as a result of 1) an increase in COGS by 0.9% of revenues dueprimarily to lower margins at both Specialty Retail stores and DirectMarketing, partially offset by 2) a decrease in SG&A expenses by 0.3% ofrevenues (primarily incentive compensation).

 

***Interest expense, net*****.**  Net interest expense was $178.9 million, or5.0% of revenues, in year-to-date fiscal 2008 and $198.1 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 in the first and third quarters of fiscal year 2007 as well as thepaydown of $250 million of debt during fiscal year 2007.  Thesignificant components of interest expense are as follows:

 
| ** **                        | ** ** | **Year-to-Date**                                    | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**           | ** ** | **Thirty-Nine  weeks  ended  April 26,  2008** | ** ** | **Thirty-Nine  weeks  ended  April 28,  2007** | ** ** |
|                              |       |                                                |       |   |   |
| Senior Secured Term Loan Facility |       | $                                                   | 80,071     |   | $ | 99,419 |   |
| 2028 Debentures                   |       | 6,550                                               |       | 6,689 |   |
| Senior Notes                      |       | 46,691                                              |       | 47,250 |   |
| Senior Subordinated Notes         |       | 38,446                                              |       | 38,906 |   |
| Amortization of debt issue costs  |       | 10,663                                              |       | 10,588 |   |
| Other                             |       | 2,439                                               |       | 2,847 |   |
| Total interest expense            |       | 184,860                                             |       | 205,699 |   |
| Less:                             |       |                                                |       |   |   |
| Interest income                   |       | 3,592                                               |       | 5,416 |   |
| Capitalized interest              |       | 2,345                                               |       | 2,141 |   |
| Interest expense, net             |       | $                                                   | 178,923    |   | $ | 198,142 |   |

 

***Income taxes.***  Our effective income tax rate for thethirty-nine weeks ended April 26, 2008 was 39.2% compared to 38.9% for thethirty-nine weeks ended April 28, 2007.

 

We file income tax returns in the U.S. federaljurisdiction and various state and local jurisdictions.  We closed the Internal Revenue Service (IRS)examinations of federal tax returns for fiscal years 2004 and 2003 during thefirst quarter of fiscal year 2007 and paid the related tax liability during thesecond quarter of fiscal year 2007.   TheIRS is now examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as ofApril 26, 2008 are sufficient to cover any 

 

43

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potential assessments to be made by the IRS upon thecompletion of their examinations. We will continue to monitor the progress ofthe IRS examinations and review our recorded tax liabilities for potentialaudit assessments.  With respect tostate 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 adjustments in the amounts of our unrecognized tax benefits couldoccur within the next 12 months as a result of negotiated settlements with taxauthorities.  At this time, we do not believesuch adjustments will have a material impact on our consolidated financialstatements.

 

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 presentationsmade in accordance with GAAP and our computation of EBITDA and Adjusted EBITDAmay vary from 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:

 

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

 

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

 

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

 

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

 

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

 

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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   April 26,   2008** | ** ** | **Thirteen   weeks   ended   April 28,   2007** | ** ** | **Thirty-Nine   weeks   ended   April 26,   2008** | ** ** | **Thirty-Nine   weeks   ended   April 28,   2007** | ** ** |
|                                                                        |       |                                                                     |       |                                                                     |       |   |   |   |   |
| Earnings from continuing operations                                         |       | $                                                                        | 55.4       |                                                                     | $          | 60.9 |   | $ | 178.5 |   | $ | 150.6 |   |
| Income taxes                                                                |       | 35.9                                                                     |       | 37.8                                                                     |       | 115.2 |   | 95.9 |   |
| Interest expense, net                                                       |       | 57.3                                                                     |       | 63.8                                                                     |       | 178.9 |   | 198.1 |   |
| Depreciation                                                                |       | 35.5                                                                     |       | 34.3                                                                     |       | 105.7 |   | 101.5 |   |
| Amortization of customer lists and favorable lease commitments              |       | 17.9                                                                     |       | 18.1                                                                     |       | 53.9 |   | 54.2 |   |
| EBITDA (1)                                                                  |       | 202.0                                                                    |       | 214.9                                                                    |       | 632.2 |   | 600.3 |   |
| Non-cash gain on curtailment of defined benefit retirement  obligations (1) |       | —                                                                   |       | —                                                                   |       | (32.5 | ) | — |   |
| Adjusted EBITDA                                                             |       | $                                                                        | 202.0      |                                                                     | $          | 214.9 |   | $ | 599.7 |   | $ | 600.3 |   |

 

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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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**LIQUIDITYAND CAPITAL RESOURCES**

 

Our cash requirements consist principally of:

 

·                  the funding of ourmerchandise purchases;

 

·                  capital expenditures fornew store construction, store renovations and upgrades of our managementinformation systems;

 

·                  debt service requirements;

 

·                  income tax payments; and

 

·                  obligations related to ourPension Plan.

 

Our primary sources of short-term liquidityare comprised of cash on hand and availability under our Asset-Based RevolvingCredit Facility. The amounts of cash on hand and borrowings under theAsset-Based Revolving Credit Facility are influenced by a number of factors,including revenues, 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 fluctuateduring the fiscal year, increasing substantially during the first and secondquarters of each fiscal year as a result of higher seasonal levels ofinventories.  We have typically financedthe increases in working capital needs during the first and second fiscalquarters with cash flows from operations and, to a lesser extent, with cashprovided from borrowings under our credit facilities. In the year-to-dateperiods of both fiscal 2008 and 2007, we have made no borrowings under ourAsset-Based Revolving Credit Facility.

 

We believe that operating cash flows,available vendor financing and amounts available pursuant to our senior securedAsset-Based Revolving Credit Facility will be sufficient to fund ouroperations, anticipated capital expenditure requirements, debt serviceobligations, contractual obligations and commitments and Pension Plan fundingrequirements through the end of fiscal year 2008.

 

At April 26, 2008, cash and cashequivalents were $206.1 million compared to $176.8 million at April 28,2007. Net cash provided by operating activities was $201.5 millionyear-to-date fiscal 2008 compared to $176.8 million year-to-date fiscal2007. Cash flows provided by operating activities were higher year-to-datefiscal 2008 than in the prior year fiscal period primarily due to:

 

·                  a $20.0 million decrease in pretax cashinterest requirements on indebtedness incurred in connection with theAcquisition;

 

·                  a $7.6 million decrease in cash requirementsfor income taxes; and

 

·                  a $27.4 million increase in developerconstruction allowances received; partially offset by

 

·                  $15.0 million funding of defined benefitpension plan.

 

Net cash used for investing activities,representing capital expenditures, was $133.1 million year-to-date fiscal2008.  Net cash used for investingactivities was $42.2 million year-to-date fiscal 2007 which consisted of:

 

·                  capital expenditures of $104.2 million; and

 

·                  the purchase of the minority interest held inKate Spade for $59.4 million; partially offset by

 

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

 

We incurred significant capital expendituresin fiscal 2008 related to the construction of new stores in Natick and Topanga(the greater Los Angeles area) and the remodel of our Atlanta and Westchesterstores. We incurred significant capital expenditures in fiscal 2007 related tothe construction of new stores in Charlotte, Austin and Natick and the remodelof our Atlanta store. 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 $180 to $190 million.

 

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Net cash used for financing activities was$3.4 million year-to-date fiscal 2008 as compared to $182.5 millionyear-to-date fiscal 2007.  Inyear-to-date fiscal 2007, we voluntarily repaid $175.0 million principal amountof the loans under the Senior Secured Term Loan Facility.

 

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

As of April 26, 2008, NMG had$575.6 million of unused borrowing availability under the Asset-BasedRevolving Credit Facility based on a borrowing base of over $600.0 millionand after giving effect to $24.4 million used for letters of credit.

 

See Note 4 of our Notes to CondensedConsolidated Financial Statements in Item 1 for a further description of theterms of the Asset-Based Revolving Credit Facility.

 

***Senior Secured Term LoanFacility.***  In October 2005,NMG entered into a credit agreement and related security and other agreementsfor 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 April 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 1/2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. At April 26,2008, the applicable margin with respect to base rate borrowings was 0.75% andthe applicable margin with respect to LIBOR borrowings was 1.75%. The interestrate on the outstanding borrowings pursuant to the Senior Secured Term LoanFacility was 4.76% at April 26, 2008.

 

See Note 4 of our Notes to CondensedConsolidated Financial Statements in Item 1 for a further description of theterms of the Senior Secured Term Loan Facility.

 

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

 

See Note 4 of our Notes to CondensedConsolidated Financial Statements in Item 1 for a further description of theterms of the 2028 Debentures.

 

***Senior Notes.**** *NMG has $700.0 millionaggregate original principal amount of 9.0% / 9.75% Senior Notes under a seniorindenture (Senior Indenture).  NMG’sSenior Notes mature on October 15, 2015.

 

See Note 4 of our Notes to CondensedConsolidated Financial Statements in Item 1 for a further description of theterms of the Senior Notes.

 

***Senior Subordinated Notes.**** *NMG has $500.0 millionaggregate principal amount of 10.375% Senior Subordinated Notes under a seniorsubordinated indenture (Senior Subordinated Indenture).  NMG’s Senior Subordinated Notes mature on October 15,2015.

 

See Note 4 of our Notes to CondensedConsolidated Financial Statements in Item 1 for a further description of theterms of the Senior Subordinated Notes.

 

***Interest Rate Swaps.***  NMG uses derivative financial instruments tohelp manage its interest rate risk. Effective December 6, 2005, NMGentered into floating to fixed interest rate swap agreements for an aggregatenotional amount of $1,000.0 million to limit its exposure to interest rateincreases related to a portion of its floating rate indebtedness. The interestrate swap agreements terminate after five years.  At April 26, 2008, the fair value of NMG’sinterest rate swap agreements was a loss of approximately $39.4 million,which amount is included in other long-term liabilities.

 

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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 subsequent to the effective date as a component ofaccumulated other comprehensive (loss) income.

 

As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.511% to 6.733% per quarter through2010 and result in an average fixed rate of 6.599%.

 

**OTHERMATTERS**

 

**Factors That May Affect Future Results**

 

Matters discussed inMD&A include forward-looking statements. Forward-looking statementsgenerally can be identified by the use of forward-looking terminology such as “may,”“plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,” “should,” “anticipate,”“believe,” “project” or “continue.” We make these forward-looking statementsbased on our expectations and beliefs concerning future events, as well ascurrently available data. These forward-looking statements involve a number ofrisks and uncertainties and, therefore, are not guarantees of futureperformance. A variety of factors could cause our actual results to differmaterially from the anticipated or expected results expressed in ourforward-looking statements. Factors that could affect future performanceinclude, but are not limited, to:

 

*Political and General Economic Conditions*

 

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

 

·                  terrorist activities inthe United States and elsewhere;

 

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

 

*Customer Demographic Issues*

 

·                  changes in the demographicor retail environment;

 

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

 

·                  changes in consumerpreferences or fashion trends;

 

·                  changes in ourrelationships with key customers;

 

·                  changes in our proprietarycredit card arrangement that adversely impact the ability to provide credit toour customers;

 

*Merchandise Procurement and Supply Chain Considerations*

 

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

 

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

 

·                  changes in foreigncurrency exchange or inflation rates;

 

·                  significant increases inpaper, printing and postage costs;

 

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*Industry and Competitive Factors*

 

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

 

·                  seasonality of the retailbusiness;

 

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

 

·                  delays in anticipatedstore openings and renovations;

 

·                  our success in enforcingour intellectual property rights;

 

*Employee Considerations*

 

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

 

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

 

*Legal and Regulatory Issues*

 

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

 

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

 

* LeverageConsiderations*

 

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

 

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

 

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

 

*Other Factors*

 

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

 

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

 

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

 

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

 

**CriticalAccounting Policies**

 

The preparation of condensed consolidatedfinancial statements in conformity with generally accepted accountingprinciples requires us to make estimates and assumptions about futureevents.  These estimates and assumptionsaffect amounts of assets, liabilities, revenues and expenses and the disclosureof gain and loss contingencies at the date of the Condensed ConsolidatedFinancial Statements.  Our currentestimates are subject to change if different assumptions as to the outcome offuture events were made.  We evaluate ourestimates and judgments on an ongoing basis and predicate those estimates andjudgments on historical experience and on various other factors that we believeare reasonable under the circumstances. We make

 

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adjustments to our assumptions and judgmentswhen 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 AccountingPronouncements. ***In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (SFAS 157), which provides guidance for using fair value tomeasure certain assets and liabilities. SFAS 157 will apply whenever another standard requires or permits assetsor liabilities to be measured at fair value. The standard does not expand the use of fair value to any newcircumstances.  SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, or our fiscal year ending August 1, 2009.  We have not yet evaluated the impact, if any,of adopting SFAS 157 on our consolidated financial statements.

 

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

 

In March 2008, the FASB issued Statement of Financial AccountingStandards No. 161, “Disclosures about Derivative Instruments and HedgingActivities” (SFAS 161).  SFAS 161enhances current disclosures related to derivative instruments and hedgingactivities to provide adequate information about how derivative and hedgingactivities affect an entity’s financial position, financial performance andcash flows.  SFAS 161 is effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008, or our second fiscal quarter endingJanuary 31, 2009. We have not yet evaluated the impact, if any, ofadopting SFAS 161 on our consolidated financial statements.

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in the Company’sfinancial instruments represents the potential loss arising from adversechanges in interest 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 April 26, 2008, NMG had noborrowings outstanding under its Asset-Based Revolving Credit Facility thatbears interest at floating rates. Future borrowings under NMG’s Asset-BasedRevolving Facility, to the extent of outstanding borrowings, would be affectedby interest rate changes.

 

At April 26, 2008, NMG had$1,625.0 million of debt under its Senior Secured Term Loan Facilityissued in connection with the Acquisition that bears interest at floatingrates.

 

NMG uses derivative financial instruments tohelp manage its 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 6.511% to 6.733% per quarter through 2010 and result in an averagefixed rate of 6.599%. 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 inthe U.S. equity and bond markets serve to increase or decrease the value ofpension plan assets, resulting in increased or decreased cash funding by theCompany. The Company seeks to manage exposure to adverse equity and bondreturns by maintaining diversified investment portfolios and utilizingprofessional investment managers.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

**a.     DisclosureControls and Procedures.**

 

In accordance with ExchangeAct Rules 13a-15 and 15d-15, we carried out an evaluation as of April 26,2008, under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, as well as other key members of ourmanagement, of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and Rule 15d-15(e) under theExchange Act). Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,accumulated, processed, summarized, reported and communicated on a timely basiswithin the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**b.     Changes inInternal Control over Financial Reporting.**

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter ended

April 26, 2008 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrols over financial reporting.

 

**NEIMAN MARCUS, INC.**

 

**PART II**

 

**ITEM 1.           LEGALPROCEEDINGS**

 

On April 21, 2008, we entered into anamendment to the Credit Card Program Agreement (the Program Agreement), datedas of June 8, 2005, by and among NMG, Bergdorf Goodman, Inc., (awholly owned subsidiary of NMG), HSBC Bank Nevada, N.A. and HSBC Private LabelCorporation (formerly known as Household Corporation) (collectively referred toas HSBC). The amendment was entered into subsequent to the filing of a lawsuitby the Company against HSBC alleging a breach of the Program Agreement, as wellas other claims, including application for the granting of a temporary restrainingorder and other injunctive relief. The amendment, among other things, providesfor 1) the allocation between HSBC and NMG of additional income, if any, to begenerated from the credit card program as a result of certain changes made tothe Program Agreement, 2) the allocation of certain credit card losses betweenHSBC and NMG and 3) the dismissal of the lawsuit and temporary restrainingorder without prejudice. We do not expect that the amendment will have amaterial impact on the level of our future income 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**

 

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

 

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

 

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

 

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

 

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We are highlyleveraged.  As of April 26, 2008,the principal amount of NMG’s total indebtedness was approximately $2,952.3million and the unused borrowing availability under the $600 millionAsset-Based Revolving Credit Facility was approximately $575.6 million aftergiving effect to $24.4 million of letters of credit outstandingthereunder.  NMG’s substantialindebtedness, combined with its lease and other financial obligations andcontractual commitments, could have other important consequences. For example,it could:

 

·                  make it more difficult forNMG to satisfy its obligations with respect to its indebtedness and any failureto comply with the obligations of any of its debt instruments, includingrestrictive covenants and borrowing conditions, could result in an event ofdefault under the agreements governing NMG’s indebtedness;

 

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

 

·                  require NMG to dedicate asubstantial portion of its cash flow from operations to payments on itsindebtedness, thereby reducing the availability of cash flows to fund workingcapital, capital expenditures, acquisitions and other general corporatepurposes;

 

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

 

·                  place NMG at a competitivedisadvantage compared to its competitors that are less highly leveraged andtherefore may be able to take advantage of opportunities that its leverageprevents it from exploiting; and

 

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

 

Any of the above listedfactors could materially adversely affect NMG’s business, financial conditionand results of operations.

 

In addition, NMG’s interestexpense could increase if interest rates increase because the entire amount ofthe indebtedness under the senior secured credit facilities bears interest atfloating rates.   As of April 26,2008, NMG had approximately $1,625.0 million principal amount of floatingrate debt, consisting of outstanding borrowings under Senior Secured Term LoanFacility.  NMG also had at that dateapproximately $575.6 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 $24.4million 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 will require a significantamount of cash. NMG’s ability to generate cash depends on many factors beyondits control, and any failure to meet the its debt service obligations couldharm its business, financial condition and results of operations.**

 

NMG’s ability to payinterest on and principal of the debt obligations will primarily depend uponNMG’s future operating performance. As a result, prevailing economic conditionsand financial, business and other factors, many of which are beyond ourcontrol, will affect its ability to make these payments.

 

If NMG does not generate sufficientcash flow from operations to satisfy the debt service obligations, NMG may haveto undertake alternative financing plans, such as refinancing or restructuringits indebtedness, selling assets, reducing or delaying capital investments orseeking to raise additional capital.  Ourability to restructure or refinance its debt will depend on the condition ofthe capital markets and our financial condition at such time.  Any refinancing of NMG’s debt could be athigher interest rates and may require it to comply with more onerous covenants,which could further restrict its business operations.  The terms of existing or future debtinstruments may restrict NMG from adopting some of these alternatives.  In addition, 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 onNMG’s ability to execute any necessary alternative financing plans couldexacerbate the effects of any failure to generate sufficient cash flow tosatisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits NMG to borrow up to$600.0 million; however, NMG’s ability to borrow thereunder is limited bya borrowing base, which at any time will equal the lesser of 80% of eligibleinventory valued at the lower of cost or market value and 85% of the netorderly

 

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liquidation value of theeligible inventory, less certain reserves. In addition, our ability to borrow under this facility is limited by aminimum liquidity 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 generatesufficient cash flow to satisfy its debt service obligations, or to refinanceits obligations at all or on commercially reasonable terms, would have anadverse effect, which could be material, on NMG’s business, financial conditionand results of operations.

 

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

 

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

 

·                  incur additionalindebtedness;

 

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

 

·                  make investments;

 

·                  create restrictions on thepayment of dividends or other amounts to NMG from NMG’s restrictedsubsidiaries;

 

·                  engage in transactionswith its affiliates;

 

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

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and leaseback transactions.

 

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

 

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

 

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

 

The operating and financialrestrictions and covenants in these debt agreements and any future financingagreements may adversely affect NMG’s ability to finance future operations orcapital needs or to engage in other business activities.

 

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**RisksRelated to Our Business and Industry**

 

**The specialty retail industry is highly competitive.**

 

The specialty retailindustry is highly competitive and fragmented. Competition is strong both toattract and sell to customers and to establish relationships with, and obtainmerchandise from, key vendors.

 

We compete for customerswith specialty retailers, traditional and high-end department stores, nationalapparel chains, vendor-owned proprietary boutiques, individual specialtyapparel stores and direct marketing firms. We compete for customers principallyon the basis of quality and fashion, customer service, value, assortment andpresentation of merchandise, marketing and customer loyalty programs and, inthe case of Neiman Marcus and Bergdorf Goodman, store ambiance. In ourSpecialty Retail business, merchandise assortment is a critical competitivefactor, and retail stores compete for exclusive, preferred and limiteddistribution arrangements with key designers. Many of our competitors arelarger than we are and have greater financial resources than we do. Inaddition, certain designers from whom we source merchandise have establishedcompeting free-standing retail stores in the same vicinity as our stores. If wefail to successfully compete for customers or merchandise, our business willsuffer.

 

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

 

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

 

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

 

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

 

**Our failure to identify changes in consumer preferences orfashion trends may adversely affect our performance.**

 

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

 

**Our business and performance may be affected by our abilityto implement our store expansion and remodeling strategies.**

 

Based upon our expansionstrategy, we expect that planned new stores will add over 672,000 square feetof new store space over approximately the next three fiscal years, representingan increase of approximately 12% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores, and that ourstore remodeling program will add additional

 

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new store space fromremodels that are already underway.  Newstore openings involve certain risks, including constructing, furnishing andsupplying a store in a timely and cost effective manner, accurately assessingthe demographic or retail environment at a given location, hiring and trainingquality staff, obtaining necessary permits and zoning approvals, obtainingcommitments from a core group of vendors to supply the new store, integratingthe new store into our distribution network and building customer awareness andloyalty. In undertaking store remodels, we must complete the remodel in atimely, cost effective manner, minimize disruptions to our existing operations,and succeed in creating an improved shopping environment. If we fail to executeon these or other aspects of our store expansion and remodeling strategy, wecould suffer harm to our sales, an increase in costs and expenses and anadverse effect on our business.

 

**Acts of terrorism could adversely affect our business.**

 

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

 

**Deterioration in economic conditions could adversely affectour business.**

 

The merchandise we sellconsists in large part of luxury retail goods. The purchase of these goods bycustomers is discretionary, and therefore highly dependent upon the level ofconsumer spending, particularly among affluent customers. Accordingly, sales ofthese products may be adversely affected by an economic downturn, increases inconsumer debt levels, uncertainties regarding future economic prospects or adecline in consumer confidence. An economic downturn in the United Statesgenerally or in any of the geographic areas in which we have stores,particularly in Texas, California, Florida and the New York City metropolitanarea, from which we derive a significant portion of our revenues, could have amaterial adverse effect on our business and results of operations.

 

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

 

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

 

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

 

In recent years, we haveexperienced certain inflationary conditions in our cost base due primarily to (1) changesin foreign currency exchange rates that have reduced the purchasing power ofthe U.S. dollar and (2) increases in selling, general and administrativeexpenses, particularly with regard to employee benefits. Inflation can harm ourmargins and profitability if we are unable to increase prices or cut costsenough to offset the effects of inflation in our cost base. If inflation inthese or other costs worsens, we may not be able to offset the effects ofinflation and cost increases through control of expenses, passing costincreases on to customers or any other method. Any future inflation could adversely affect our profitability and ourbusiness.

 

**Failure to maintain competitive terms under our loyaltyprograms could adversely affect our business.**

 

We maintain loyalty programsthat are designed to cultivate long-term relationships with our customers andenhance the quality of service we provide to our customers. We must constantlymonitor and update the terms of our loyalty programs so that they continue tomeet the demands and needs of our customers and remain competitive with loyaltyprograms offered by other high-end specialty retailers. Given that over 50% ofour revenues at Neiman Marcus stores during each of the last two calendar yearswere generated by our InCircle loyalty program members, our failure to continueto provide quality service and competitive loyalty programs to our customersthrough the InCircle loyalty program could adversely affect our business.

 

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**Changes in our credit card arrangements, applicableregulations and consumer credit patterns could adversely impact our ability tofacilitate the provision of consumer credit to our customers and adverselyaffect our business.**

 

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

 

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

 

The purchaser of our creditcard business has discretion over certain policies and arrangements with ourcredit card customers and may change these policies and arrangements in waysthat affect our relationship with these customers. In addition, there can be noassurance that, upon expiration of the current alliance with HSBC, that we willbe able to enter into a replacement arrangement on terms comparable to thecurrent arrangement. Any changes in our credit card arrangements may adverselyaffect our credit card program and ultimately, our business.

 

Credit card operations aresubject to numerous federal and state laws that impose disclosure and otherrequirements upon the origination, servicing and enforcement of credit accountsand limitations on the maximum amount of finance charges that may be charged bya credit provider. The purchaser of our credit card business is subject toregulations to which we were not subject prior to the Credit Card Sale. Anyeffect of these regulations or change in the regulation of credit arrangementsthat would materially limit the availability of credit to our customer basecould adversely affect our business. In addition, changes in credit card use,payment patterns, and default rates may result from a variety of economic,legal, social, and other factors that we cannot control or predict withcertainty.

 

**Our business can be affected by extreme or unseasonableweather conditions.**

 

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

 

**We are subject to numerous regulations that could affect ouroperations.**

 

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

 

**Our revenues and cash requirements are affected by theseasonal nature of our business.**

 

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

 

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** **

**Our business isaffected by foreign currency fluctuations.**

 

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

 

**Conditions in, andthe United States’ relationship with, the countries where we source ourmerchandise could affect our sales.**

 

A substantial majority of our merchandise ismanufactured overseas, mostly in Europe. As a result, political instability orother events resulting in the disruption of trade from other countries or theimposition of additional regulations relating to or duties upon imports couldcause significant 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, thosegoods may be more expensive or of a different or inferior quality from the oneswe now 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.

 

**Significant increasesin costs associated with the production of catalogs and other promotionalmaterials may adversely affect our operating income.**

 

We advertise and promote in-store events, newmerchandise and fashion trends through print catalogs and other promotionalmaterials mailed on a targeted basis to our customers. Significant increases inpaper, printing and postage costs could affect the cost of producing thesematerials and 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 theSponsors and certain other equity investors, and the Sponsors have the abilityto control our policies and operations. The interests of the Sponsors may notin all cases be aligned with those of our creditors. For example, if weencounter financial difficulties or are unable to pay our debts as they mature,the interests of our equity holders might conflict with our creditors’interests. In addition, our equity holders may have an interest in pursuingacquisitions, divestitures, financings or other transactions that, in theirjudgment, could enhance their equity investments, even though such transactionsmight involve risks to holders of our indebtedness. Furthermore, the Sponsorsmay in the future own businesses that directly or indirectly compete with us.One or more of the Sponsors also may pursue acquisition opportunities that maybe complementary to our business, and as a result, those acquisitionopportunities may not be available to us.

 

**If we are unable toenforce our intellectual property rights, or if we are accused of infringing ona third party’s intellectual property rights, our net income may decline.**

** **

We and our subsidiaries currently own ourtradenames and service marks, including the "Neiman Marcus" and"Bergdorf Goodman" marks. Our tradenames and service marks areregistered in the United States and in various foreign countries, primarily inEurope. The laws of some foreign countries do not protect proprietary rights tothe same extent as do the laws of the United States. Moreover, we are unable topredict the effect that any future foreign or domestic intellectual property legislationor regulation may have on our existing or future business. The loss orreduction of any of our significant proprietary rights could have an adverseeffect on our business.

 

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

 

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** **

**Failure to successfullymaintain and update information technology systems and enhance existing systemsmay adversely affect our business.**

 

To keep pace with changing technology, wemust continuously 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 ofmerchandise in connection with either the manufacturing or shipment of suchmerchandise can affect our performance.**

 

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

 

**ITEM 2.****            UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 4.****            SUBMISSIONOF 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. |

 

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

 

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

 

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| 10.19* |   | Employment  Agreement between The Neiman Marcus Group, Inc. and Karen Katz, dated  February 1, 2006, effective as of October 6, 2005, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  February 1, 2006.                                                                                                                                                                                                                                                                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.20  |   | Management  Services Agreement, dated as of October 6, 2005 among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P., TPG GenPar  III, L.P. and Warburg Pincus LLC incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the quarter  ended January 28, 2006.                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.21  |   | Registration  Rights Agreement, dated as of October 6, 2005, among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and the  “Holders” identified therein as parties thereto incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended January 28, 2006.                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.22  |   | Amendment  No. 1, dated as of March 28, 2006, to the Pledge and Security Intercreditor  Agreement dated as of October 6, 2005, among Neiman Marcus, Inc., The Neiman  Marcus Group, Inc., the Subsidiaries party thereto and Credit Suisse, as  administrative agent and collateral agent, incorporated herein by reference  to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated March 29,  2006.                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.23  |   | Credit Card  Program Agreement, dated as of June 8, 2005, by and among The Neiman Marcus  Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A. and Household  Corporation, incorporated herein by reference to The Neiman Marcus Group,  Inc.’s Current Report on Form 8-K dated June 8, 2005.                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.24  |   | Form of  Servicing Agreement, by and between The Neiman Marcus Group, Inc. and HSBC  Bank Nevada, N.A., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated June 8, 2005.                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.25* |   | Confidentiality,  Non-Competition and Termination Benefits Agreement between Bergdorf Goodman,  Inc. and James J. Gold dated May 3, 2004, incorporated herein by reference to  The Neiman Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal  year ended July 31, 2004.                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.26  |   | Stockholder  Agreement, dated as of May 1, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc. and the other parties signatory thereto,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated May 4, 2005.                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.27* |   | 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* |   | Neiman  Marcus, Inc. Cash Incentive Plan amended as of January 21, 2008. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 amended and  restated effective January 1, 2008. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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.                                                                                      |

 

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| 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. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 32     |   | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to Section  906 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                    |

 

----

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

 

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SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 

 

NEIMAN MARCUS, INC.

(Registrant)

 
| **Signature**         | ** ** | **Title**                      | ** ** | **Date**     |
|-----------------------|------------|--------------------------------|------------|--------------|
|                  |       |                           |       |         |
| /s/ T. Dale Stapleton |       | Vice President and Controller  |       | June 4, 2008 |
| T. Dale Stapleton     |       | and Duly Authorized Officer    |       |         |
|                  |       | (principal accounting officer) |       |         |

 

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