**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

 

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the Quarterly PeriodEnded April 28, 2007**

 

**OR**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

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

 

**Neiman Marcus, Inc.**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

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

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

 

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

Therewere 1,012,341 shares of the registrant’s common stock, par value $.01 pershare, outstanding at April 28, 2007.

 

----

**NEIMAN MARCUS,INC.**

**INDEX**
|            | ** ** |                                                                                                                                                                                                                | ** ** | **Page** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Part I.    |       | Financial Information                                                                                                                                                                                          |       |     |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 1.    |       | Condensed Consolidated Balance Sheets as of April 28,  2007 (Successor), July 29, 2006 (Successor) and April 29, 2006 (Successor)                                                                              |       | 1        |
|       |       |                                                                                                                                                                                                           |       |     |
|       |       | Condensed Consolidated Statements of Earnings for the  Thirteen Weeks Ended April 28, 2007 (Successor) and Thirteen Weeks Ended  April 29, 2006 (Successor)                                                    |       | 2        |
|       |       |                                                                                                                                                                                                           |       |     |
|       |       | Condensed Consolidated Statements of Earnings for the  Thirty-Nine Weeks Ended April 28, 2007 (Successor), Thirty Weeks Ended April  29, 2006 (Successor) and Nine Weeks Ended October 1, 2005 (Predecessor)   |       | 3        |
|       |       |                                                                                                                                                                                                           |       |     |
|       |       | Condensed Consolidated Statements of Cash Flows for  the Thirty-Nine Weeks Ended April 28, 2007 (Successor), Thirty Weeks Ended  April 29, 2006 (Successor) and Nine Weeks Ended October 1, 2005 (Predecessor) |       | 4        |
|       |       |                                                                                                                                                                                                           |       |     |
|       |       | Notes to Condensed Consolidated Financial Statements                                                                                                                                                           |       | 6        |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 2.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                    |       | 42       |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                    |       | 63       |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 4.    |       | Controls and  Procedures                                                                                                                                                                                       |       | 64       |
|       |       |                                                                                                                                                                                                           |       |     |
|       |       |                                                                                                                                                                                                           |       |     |
| Part II.   |       | Other  Information                                                                                                                                                                                             |       |     |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 1.    |       | Legal Proceedings                                                                                                                                                                                              |       | 65       |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 1A.   |       | Risk  Factors                                                                                                                                                                                                  |       | 65       |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                   |       | 71       |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 4.    |       | Submission of  Matters to a Vote of Security Holders                                                                                                                                                           |       | 71       |
|       |       |                                                                                                                                                                                                           |       |     |
| Item 6.    |       | Exhibits                                                                                                                                                                                                       |       | 71       |
|       |       |                                                                                                                                                                                                           |       |     |
| Signatures |       | 76                                                                                                                                                                                                             |

 

----

**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**
| **(in thousands, except shares)**                                                                                                                                   | ** ** | **April 28,  2007** | ** ** | **July 29,  2006** | ** ** | **April 29,   2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **(Successor)**          | ** ** | **(Successor)**         | ** ** | **(Successor)**                | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                     |       |                    |       |                           |       |
| Current assets:                                                                                                                                                                    |       |                     |       |                    |       |                           |       |
| Cash and cash  equivalents                                                                                                                                                         |       | $                        | 176,803    |                    | $          | 223,740                        |       | $ | 107,443 |   |
| Merchandise  inventories                                                                                                                                                           |       | 908,060                  |       | 793,621                 |       | 833,881                        |       |
| Deferred income  taxes                                                                                                                                                             |       | 34,551                   |       | 31,503                  |       | 23,045                         |       |
| Other current  assets                                                                                                                                                              |       | 116,064                  |       | 70,375                  |       | 81,002                         |       |
| Current assets  of discontinued operations                                                                                                                                         |       | —                   |       | 16,617                  |       | 40,034                         |       |
| Total current  assets                                                                                                                                                              |       | 1,235,478                |       | 1,135,856               |       | 1,085,405                      |       |
|                                                                                                                                                                               |       |                     |       |                    |       |                           |       |
| Property and equipment,  net                                                                                                                                                       |       | 1,034,228                |       | 1,030,279               |       | 1,024,732                      |       |
| Customer lists, net                                                                                                                                                                |       | 490,945                  |       | 531,632                 |       | 540,224                        |       |
| Favorable lease  commitments, net                                                                                                                                                  |       | 451,788                  |       | 465,197                 |       | 469,591                        |       |
| Trademarks                                                                                                                                                                         |       | 1,622,435                |       | 1,621,788               |       | 1,621,788                      |       |
| Goodwill                                                                                                                                                                           |       | 1,605,140                |       | 1,605,140               |       | 1,645,350                      |       |
| Debt issuance costs                                                                                                                                                                |       | 88,398                   |       | 97,537                  |       | 101,034                        |       |
| Other assets                                                                                                                                                                       |       | 22,572                   |       | 27,786                  |       | 31,093                         |       |
| Non-current assets of  discontinued operations                                                                                                                                     |       | —                   |       | 92,746                  |       | 140,797                        |       |
| Total assets                                                                                                                                                                       |       | $                        | 6,550,984  |                    | $          | 6,607,961                      |       | $ | 6,660,014 |   |
|                                                                                                                                                                               |       |                     |       |                    |       |                           |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                     |       |                     |       |                    |       |                           |       |
| Current liabilities:                                                                                                                                                               |       |                     |       |                    |       |                           |       |
| Accounts payable                                                                                                                                                                   |       | $                        | 297,841    |                    | $          | 300,439                        |       | $ | 240,789 |   |
| Accrued  liabilities                                                                                                                                                               |       | 416,077                  |       | 377,968                 |       | 379,909                        |       |
| Notes payable  and current maturities of long-term liabilities                                                                                                                     |       | 3,686                    |       | 3,887                   |       | 3,879                          |       |
| Current  liabilities of discontinued operations                                                                                                                                    |       | —                   |       | 16,764                  |       | 31,752                         |       |
| Total current  liabilities                                                                                                                                                         |       | 717,604                  |       | 699,058                 |       | 656,329                        |       |
|                                                                                                                                                                               |       |                     |       |                    |       |                           |       |
| Long-term liabilities:                                                                                                                                                             |       |                     |       |                    |       |                           |       |
| Senior secured  term loan facility                                                                                                                                                 |       | 1,700,000                |       | 1,875,000               |       | 1,875,000                      |       |
| Senior  debentures due 2028                                                                                                                                                        |       | 120,858                  |       | 120,711                 |       | 120,663                        |       |
| Senior notes                                                                                                                                                                       |       | 700,000                  |       | 700,000                 |       | 700,000                        |       |
| Senior  subordinated notes                                                                                                                                                         |       | 500,000                  |       | 500,000                 |       | 500,000                        |       |
| Deferred income  taxes                                                                                                                                                             |       | 1,021,524                |       | 1,048,925               |       | 1,115,216                      |       |
| Deferred real  estate credits, net                                                                                                                                                 |       | 40,474                   |       | 27,316                  |       | 10,804                         |       |
| Other long-term  liabilities                                                                                                                                                       |       | 199,090                  |       | 190,195                 |       | 184,175                        |       |
| Non-current  liabilities of discontinued operations                                                                                                                                |       | —                   |       | 12,775                  |       | 16,972                         |       |
| Total long-term  liabilities                                                                                                                                                       |       | 4,281,946                |       | 4,474,922               |       | 4,522,830                      |       |
|                                                                                                                                                                               |       |                     |       |                    |       |                           |       |
| Minority interest in  discontinued operations                                                                                                                                      |       | —                   |       | 6,314                   |       | 12,810                         |       |
|                                                                                                                                                                               |       |                     |       |                    |       |                           |       |
| Common stock (par value  $0.01 per share, 1,012,341 shares issued at April 28, 2007 and 1,012,264  shares issued at July 29, 2006 and   April 29, 2006)   |       | 10                  |       | 10                 |       | 10                        |       |
| Additional paid-in  capital                                                                                                                                                        |       | 1,409,882                |       | 1,405,373               |       | 1,403,929                      |       |
| Accumulated other  comprehensive income                                                                                                                                            |       | 1,289                    |       | 9,829                   |       | 9,666                          |       |
| Retained earnings                                                                                                                                                                  |       | 140,253                  |       | 12,455                  |       | 54,440                         |       |
| Total shareholders’  equity                                                                                                                                                   |       | 1,551,434                |       | 1,427,667               |       | 1,468,045                      |       |
| Total liabilities and shareholders’ equity                                                                                                                                    |       | $                        | 6,550,984  |                    | $          | 6,607,961                      |       | $ | 6,660,014 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

1

----

**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(UNAUDITED)**
| **(in thousands)**                                                           | ** ** | **Thirteen  weeks ended  April 28,  2007** |      |   | **Thirteen  weeks ended  April 29,  2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|-----------|--------|------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **(Successor)**                                      |      |   | **(Successor)**                                      | ** ** |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Revenues                                                                          |       | $                                                    | 1,073,374 |   |                                                 | $          | 992,318 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 627,879                                              |      |   | 589,264                                              |       |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 247,652                                              |      |   | 235,555                                              |       |
| Income from  credit card operations                                               |       | (17,069                                              | )         |   | (15,136                                              | )          |
| Depreciation  expense                                                             |       | 34,255                                               |      |   | 31,584                                               |       |
| Amortization of  customer lists                                                   |       | 13,621                                               |      |   | 13,483                                               |       |
| Amortization of  favorable lease commitments                                      |       | 4,469                                                |      |   | 4,502                                                |       |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Operating  earnings                                                               |       | 162,567                                              |      |   | 133,066                                              |       |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Interest  expense, net                                                            |       | 63,787                                               |      |   | 67,040                                               |       |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Earnings from  continuing operations before income taxes                          |       | 98,780                                               |      |   | 66,026                                               |       |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Income taxes                                                                      |       | 37,842                                               |      |   | 25,051                                               |       |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Earnings from  continuing operations                                              |       | 60,938                                               |      |   | 40,975                                               |       |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Loss from discontinued  operations, net of taxes                                  |       | (1,390                                               | )         |   | (428                                                 | )          |
|                                                                              |       |                                                 |      |   |                                                 |       |
| Net earnings                                                                      |       | $                                                    | 59,548    |   |                                                 | $          | 40,547 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

2

----

**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF EARNINGS**

**(UNAUDITED)**
| **(in thousands)**                                                           | ** ** | **Thirty-Nine  weeks ended  April 28,  2007** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **                                                                        | ** ** | **(Successor)**                                         | ** ** | **(Successor)**                                    | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| Revenues                                                                          |       | $                                                       | 3,408,421  |                                               | $          | 2,500,610  |       |                                              |       | $ | 632,372 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 2,084,916                                               |       | 1,603,039                                          |       |       |       | 371,542                                           |       |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 778,767                                                 |       | 579,434                                            |       |       |       | 155,632                                           |       |
| Income from  credit card operations                                               |       | (51,370                                                 | )          | (35,894                                            | )          |       |       | (7,818                                            | )          |
| Depreciation  expense                                                             |       | 101,503                                                 |       | 75,062                                             |       |       |       | 19,209                                            |       |
| Amortization of  customer lists                                                   |       | 40,764                                                  |       | 31,116                                             |       |       |       | —                                            |       |
| Amortization of  favorable lease commitments                                      |       | 13,408                                                  |       | 10,389                                             |       |       |       | —                                            |       |
| Transaction and  other costs                                                      |       | —                                                  |       | —                                             |       |       |       | 23,544                                            |       |
| Other income                                                                      |       | (4,210                                                  | )          | —                                             |       |       |       | —                                            |       |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| Operating  earnings                                                               |       | 444,643                                                 |       | 237,464                                            |       |       |       | 70,263                                            |       |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| Interest expense  (income), net                                                   |       | 198,142                                                 |       | 150,340                                            |       |       |       | (910                                              | )          |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| Earnings from  continuing operations before income taxes                          |       | 246,501                                                 |       | 87,124                                             |       |       |       | 71,173                                            |       |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| Income taxes                                                                      |       | 95,932                                                  |       | 33,457                                             |       |       |       | 26,226                                            |       |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| Earnings from  continuing operations                                              |       | 150,569                                                 |       | 53,667                                             |       |       |       | 44,947                                            |       |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| (Loss) earnings  from discontinued operations, net of taxes                       |       | (22,771                                                 | )          | 773                                                |       |       |       | (793                                              | )          |
|                                                                              |       |                                                    |       |                                               |       |       |       |                                              |       |
| Net earnings                                                                      |       | $                                                       | 127,798    |                                               | $          | 54,440     |       |                                              |       | $ | 44,154 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

3

----

**NEIMANMARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(UNAUDITED)
| **(in thousands)**                                                              | ** ** | **Thirty-Nine  weeks ended  April 28,  2007** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **                                                                           | ** ** | **(Successor)**                                         | ** ** | **(Successor)**                                    | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** |
| **CASH FLOWS — OPERATING  ACTIVITIES**                                          |       |                                                    |       |                                               |       |       |       |                                              |       |
| Net earnings                                                                         |       | $                                                       | 127,798    |                                               | $          | 54,440     |       |                                              |       | $ | 44,154 |   |
| Loss (earnings) from  discontinued operations                                        |       | 22,771                                                  |       | (773                                               | )          |       |       | 793                                               |       |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                                    |       |                                               |       |       |       |                                              |       |
| Depreciation  expense                                                                |       | 101,503                                                 |       | 75,062                                             |       |       |       | 19,209                                            |       |
| Amortization of  debt issue costs                                                    |       | 10,588                                                  |       | 8,070                                              |       |       |       | 96                                                |       |
| Amortization of  customer lists and favorable lease commitments                      |       | 54,172                                                  |       | 41,505                                             |       |       |       | —                                            |       |
| Non-cash charges  related to step-up in carrying value of inventory                  |       | —                                                  |       | 38,067                                             |       |       |       | —                                            |       |
| Stock-based  compensation charges                                                    |       | 4,354                                                   |       | 2,509                                              |       |       |       | 19,968                                            |       |
| Deferred income  taxes                                                               |       | (26,271                                                 | )          | (41,928                                            | )          |       |       | (6,921                                            | )          |
| Other, primarily  costs related to defined benefit pension plans                     |       | 13,114                                                  |       | 23,966                                             |       |       |       | (4,621                                            | )          |
|                                                                                 |       | 308,029                                                 |       | 200,918                                            |       |       |       | 72,678                                            |       |
| Changes in operating  assets and liabilities:                                        |       |                                                    |       |                                               |       |       |       |                                              |       |
| (Increase)  decrease in merchandise inventories                                      |       | (114,439                                                | )          | 68,465                                             |       |       |       | (172,924                                          | )          |
| (Increase)  decrease in other current assets                                         |       | (45,689                                                 | )          | 19,910                                             |       |       |       | (881                                              | )          |
| Decrease  (increase) in other assets                                                 |       | 329                                                     |       | 735                                                |       |       |       | (2,274                                            | )          |
| Increase  (decrease) in accounts payable and accrued liabilities                     |       | 38,356                                                  |       | (25,348                                            | )          |       |       | 122,608                                           |       |
| Payment of  deferred compensation and stock-based awards                             |       | —                                                  |       | (12,901                                            | )          |       |       | —                                            |       |
| Increase in  deferred real estate credits                                            |       | 757                                                     |       | 11,990                                             |       |       |       | 4,326                                             |       |
| Net cash provided by  operating activities — continuing operations              |       | 187,343                                                 |       | 263,769                                            |       |       |       | 23,533                                            |       |
| Net cash (used for)  provided by operating activities — discontinued operations |       | (10,553                                                 | )          | 685                                                |       |       |       | (4,098                                            | )          |
| **Net cash provided by operating  activities**                                       |       | 176,790                                                 |       | 264,454                                            |       |       |       | 19,435                                            |       |
| **CASH FLOWS — INVESTING  ACTIVITIES**                                          |       |                                                    |       |                                               |       |       |       |                                              |       |
| Capital expenditures                                                                 |       | (104,163                                                | )          | (107,179                                           | )          |       |       | (25,575                                           | )          |
| Payment to minority  interest holder in Kate Spade                                   |       | (59,400                                                 | )          | —                                             |       |       |       | —                                            |       |
| Net proceeds from sale  of Kate Spade                                                |       | 121,469                                                 |       | —                                             |       |       |       | —                                            |       |
| Acquisition of The  Neiman Marcus Group, Inc.                                        |       | —                                                  |       | (5,156,423                                         | )          |       |       | —                                            |       |
| Net cash used for  investing activities — continuing operations                 |       | (42,094                                                 | )          | (5,263,602                                         | )          |       |       | (25,575                                           | )          |
| Net cash used for  investing activities — discontinued operations               |       | (128                                                    | )          | (5,035                                             | )          |       |       | (736                                              | )          |
| **Net cash used for investing  activities**                                          |       | (42,222                                                 | )          | (5,268,637                                         | )          |       |       | (26,311                                           | )          |
| **CASH FLOWS — FINANCING  ACTIVITIES**                                          |       |                                                    |       |                                               |       |       |       |                                              |       |
| Repayment of borrowings                                                              |       | (4,554                                                  | )          | (1,078                                             | )          |       |       | —                                            |       |
| Borrowings under  asset-based revolving credit facility                              |       | —                                                  |       | 150,000                                            |       |       |       | —                                            |       |
| Repayment of borrowings  under asset-based revolving credit facility                 |       | —                                                  |       | (150,000                                           | )          |       |       | —                                            |       |
| Borrowings under senior  term loan facility                                          |       | —                                                  |       | 1,975,000                                          |       |       |       | —                                            |       |
| Repayment of borrowings  under senior term loan facility                             |       | (175,000                                                | )          | (100,000                                           | )          |       |       | —                                            |       |
| Borrowings of senior  notes and subordinated debt                                    |       | —                                                  |       | 1,200,000                                          |       |       |       | —                                            |       |
| Repayment of senior  notes due 2008                                                  |       | —                                                  |       | (134,734                                           | )          |       |       | —                                            |       |
| Debt issuance costs  paid                                                            |       | (1,449                                                  | )          | (102,854                                           | )          |       |       | —                                            |       |
| Cash equity  contributions                                                           |       | —                                                  |       | 1,427,739                                          |       |       |       | —                                            |       |
| Proceeds from purchase  of common stock                                              |       | 150                                                     |       | —                                             |       |       |       | —                                            |       |
| Cash dividends paid                                                                  |       | —                                                  |       | —                                             |       |       |       | (7,346                                            | )          |
| Net cash (used for)  provided by financing activities — continuing operations   |       | (180,853                                                | )          | 4,264,073                                          |       |       |       | (7,346                                            | )          |
| Net cash (used for)  provided by financing activities — discontinued operations |       | (1,675                                                  | )          | 4,832                                              |       |       |       | 5,000                                             |       |
| **Net cash (used for) provided by  financing activities**                            |       | (182,528                                                | )          | 4,268,905                                          |       |       |       | (2,346                                            | )          |
| **CASH AND CASH EQUIVALENTS**                                                        |       |                                                    |       |                                               |       |       |       |                                              |       |
| Decrease during the  period                                                          |       | (47,960                                                 | )          | (735,278                                           | )          |       |       | (9,222                                            | )          |
| Beginning balance                                                                    |       | 224,763                                                 |       | 844,260                                            |       |       |       | 853,482                                           |       |
| Ending balance                                                                       |       | 176,803                                                 |       | 108,982                                            |       |       |       | 844,260                                           |       |
| Less cash and cash  equivalents of discontinued operations                           |       | —                                                  |       | 1,539                                              |       |       |       | 1,056                                             |       |
| Ending balance —  continuing operations                                         |       | $                                                       | 176,803    |                                               | $          | 107,443    |       |                                              |       | $ | 843,204 |   |

 

4

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**NEIMAN MARCUS,INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(UNAUDITED)
| **(in thousands)**                                             | ** ** | **Thirty-Nine  weeks ended  April 28,  2007** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **(Successor)**                                         | ** ** | **(Successor)**                                    | ** ** | ** ** | ** ** | **(Predecessor)**                                 | ** ** |
| **Supplemental  Schedule of Cash Flow Information**                 |       |                                                    |       |                                               |       |       |       |                                              |       |
|                                                                |       |                                                    |       |                                               |       |       |       |                                              |       |
| Cash paid during  the period for:                                   |       |                                                    |       |                                               |       |       |       |                                              |       |
| Interest                                                            |       | $                                                       | 208,068    |                                               | $          | 122,253    |       |                                              |       | $ | 134 |   |
| Income taxes                                                        |       | $                                                       | 117,469    |                                               | $          | (13,332    | )          |                                              |       | $ | 10,693 |   |
| Noncash  activities:                                                |       |                                                    |       |                                               |       |       |       |                                              |       |
| Equity contribution from Holding                                    |       | $                                                       | —     |                                               | $          | 25,000     |       |                                              |       | $ | — |   |
| Equity contribution from management shareholders                    |       | $                                                       | —     |                                               | $          | 17,891     |       |                                              |       | $ | — |   |
| Reduction in equity for deemed dividend to  management shareholders |       | $                                                       | —     |                                               | $          | 69,200     |       |                                              |       | $ | — |   |
| Additions to  property and equipment                                |       | $                                                       | 1,607      |                                               | $          | 11,909     |       |                                              |       | $ | — |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

5

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**NEIMANMARCUS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.   Basis of Presentation

 

Wehave prepared the accompanying unaudited condensed consolidated financialstatements in accordance with generally accepted accounting principles forinterim financial information and the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, these financial statements do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Therefore, these financial statements shouldbe read in conjunction with our Annual Report on Form 10-K for the fiscal yearended July 29, 2006.

 

Inour opinion, the accompanying unaudited condensed consolidated financial statementscontain all adjustments, consisting of normal recurring adjustments, necessaryto present fairly our financial position, results of operations and cash flowsfor the applicable interim periods.  Dueto seasonal and other factors, the results of operations for these periods arenot necessarily comparable to, or indicative of, results of any other interimperiod or for the fiscal year as a whole.

 

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

 

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

 

Inconnection with the acquisition of NMG, Holding made an aggregate cash equitycontribution of $1,420.0 million and a noncash equity contribution of$25.0 million to the Company in exchange for the Company issuing 999,100shares of its common stock to Holding. In addition, certain members ofexecutive management of the Company made cash equity contributions aggregating$7.7 million and noncash equity contributions, consisting of shares ofcommon stock and common stock options in NMG, aggregating $17.9 million inexchange for 12,264 shares of common stock in the Company.

 

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

 

Ourfiscal year ends on the Saturday closest to July 31.  All references to the third quarter of fiscalyear 2007 relate to the thirteen weeks ended April 28, 2007 (Successor).  All references to the third quarter of fiscalyear 2006 relate to the thirteen weeks ended April 29, 2006 (Successor).  All references to year-to-date fiscal 2007relate to the thirty-nine weeks ended April 28, 2007 (Successor).  All references to year-to-date fiscal 2006relate to the combined period comprised of thirty weeks ended April 29, 2006(Successor) and the nine weeks ended October 1, 2005 (Predecessor).

 

***Use of Estimates****.*  Weare required to make estimates and assumptions about future events in preparingfinancial statements in conformity with generally accepted accountingprinciples.  These estimates andassumptions affect the amounts of assets, liabilities, revenues and expensesand the disclosure of gain and loss contingencies at the date of the unauditedcondensed consolidated financial statements. While we believe that our past estimates and assumptions have beenmaterially accurate, our current estimates are subject to change if differentassumptions as to the outcome of future 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 believeto be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts andcircumstances dictate.  Since futureevents and their effects cannot be 

6

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determined with absolute certainty, actual results maydiffer from the estimates used in preparing the accompanying unaudited condensedconsolidated financial statements.

** **

We believe the followingcritical accounting policies, among others, encompass the more significantjudgments and estimates used in the preparation of our financial statements:

·                  Recognition of revenues;

·                  Valuation of merchandiseinventories, including determination of original retail values, recognition ofmarkdowns and vendor allowances, estimation of inventory shrinkage, anddetermination of cost of goods sold;

·                  Determination ofimpairment of long-lived assets;

·                  Recognitionof advertising and catalog costs;

·                  Measurementof liabilities related to our loyalty programs;

·                  Recognitionof income taxes; 

·                  Measurement of accruals forlitigation, general liability, workers' compensation and health insurance,short-term disability, pension and postretirement health care benefits; and

·                  Allocation of the price paid toacquire the Company to our assets and liabilities as of the date of theAcquisition (as more fully described in Note 3).

 

A detailed description ofour critical accounting policies is included in our Annual Report on Form 10-Kfor the fiscal year ended July 29, 2006.

 

***Recent Accounting Pronouncements. ***In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement No. 109” (FIN 48), which clarifies the accounting for uncertainty intax positions.  FIN 48 requires that werecognize in our consolidated financial statements the impact of a taxposition, if that position is more likely than not of being sustained uponexamination, based on the technical merits of the position.  We will be required to implement theprovisions of FIN 48 no later than the first quarter of fiscal year 2008. Wehave not completed our evaluation of the impact, if any, of adopting FIN 48 onour consolidated financial statements.  

 

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin No. 108(SAB 108).  SAB 108 addresses the processand diversity in practice of quantifying financial statement misstatementsresulting in the potential build up of improper amounts on the balancesheet.  We will be required to adopt theprovisions of SAB 108 in the fourth quarter of fiscal year 2007.  We currently do not believe that the adoptionof SAB 108 will have a material impact on our consolidated financialstatements.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (FAS 157), which provides guidance for using fair value to measurecertain assets and liabilities.  FAS 157will apply whenever another standard requires or permits assets or liabilitiesto be measured at fair value.  Thestandard does not expand the use of fair value to any new circumstances.  FAS 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, or our fiscal yearending August 1, 2009.  We have not yetevaluated the impact, if any, of adopting FAS 157 on our consolidated financialstatements.

 

In September 2006, theFASB issued Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans”(FAS 158).  FAS 158 requires employers toreport a postretirement benefit asset for plans that are overfunded and apostretirement benefit liability for plans that are underfunded. Deferred plancosts and income are required to be reported in accumulated other comprehensiveincome (OCI), net of tax effects, until they are amortized.  We will be required to adopt the requirementto recognize the funded status of our benefit plans and the disclosurerequirements of FAS 158 as of July 28, 2007. We have not yet evaluated the impact, if any, of adopting FAS 158 on ourconsolidated financial statements.

 

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

 

 

7

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2.  The Transactions

 

As discussed inNote 1, the Acquisition was completed on October 6, 2005 and was financed by:

·            Borrowingsunder a senior secured asset-based revolving credit facility (Asset-BasedRevolving Credit Facility) and a secured term loan credit facility (SeniorSecured Term Loan Facility) (collectively, the Secured Credit Facilities);

·            the issuanceof 9.0%/9.75% senior notes due 2015 (Senior Notes);

·            the issuanceof 10.375% senior subordinated notes due 2015 (Senior Subordinated Notes); and

·            equityinvestments funded by direct and indirect equity investments from the Sponsors,co-investors and management. 

The Acquisition occurred simultaneously with:

·            the closingof the financing transactions and equity investments described above;

·            the call forredemption of, the deposit into a segregated account of the estimated amount ofthe redemption payment related to, and the ratable provision of securitypursuant to the terms thereof, for our 6.65% senior notes due 2008 (2008Notes); 

·            the ratableprovision of security to our 7.125% senior debentures due 2028 (2028Debentures) pursuant to the terms thereof; and

·            thetermination of a previous $350 million unsecured revolving credit agreement(Credit Agreement). 

 

We refer to the above transactions, the Acquisitionand our payment of any costs related to these transactions collectively hereinas the “Transactions.”   

***Transaction and Other Costs.***Duringthe period from July 30, 2005 to October 1, 2005, the Predecessor expensed$23.5 million in connection with the Transactions. These costs consistedprimarily of $4.5 million of accounting, investment banking, legal and othercosts associated with the Transactions and a $19.0 million non-cash charge forstock compensation resulting from the accelerated vesting of Predecessor stockoptions and restricted stock in connection with the Acquisition.

***CarryoverBasis Adjustment for Management Shareholders.***Executive management participants held certainequity interests, including stock options, in the Predecessor prior to theTransactions and continue to hold equity interests in the Company, representingindirect equity interests in the Successor after the Transactions.  In accordance with the provisions of EmergingIssues Task Force No. 88-16, "Basis in Leveraged BuyoutTransactions," the basis of executive management's indirect interests inthe Successor after the Transactions is carried over at the basis of theirinterests in the Predecessor prior to the Transactions. The carryover basis ofsuch interests less the net cash received by the management participantsrepresents a deemed dividend of $69.2 million to the managementparticipants and has been recognized as a reduction to shareholders' equity.

 

 

**3.  Purchase Accounting**

** **

Weaccounted for the Acquisition in accordance with the provisions of Statement ofFinancial Accounting Standards No. 141 “Business Combinations” (SFAS 141),whereby the purchase price paid to effect the Acquisition was allocated tostate the acquired assets and liabilities at fair value. The Acquisition andthe allocation of the purchase price were recorded as of October 1, 2005,the beginning of our October accounting period. The purchase price was approximately$5,461.7 million. The sources and uses of funds in connection with theTransactions and the redemption of our 2008 Notes are summarized below (inmillions):

8

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| **Sources**                                                                                   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|
| Asset-Based  Revolving Credit Facility                                                        |       | $          | 150.0      |   |
| Secured Term Loan  Facility                                                                   |       | 1,975.0    |       |
| Senior Notes                                                                                  |       | 700.0      |       |
| Senior Subordinated  Notes                                                                    |       | 500.0      |       |
| Cash on hand                                                                                  |       | 666.1      |       |
| Equity  contribution—cash                                                                |       | 1,427.7    |       |
| Equity contribution—non-cash                                                             |       | 42.9       |       |
| Total sources                                                                                 |       | $          | 5,461.7    |   |
| ** **                                                                                    | ** ** | ** ** | ** ** |
| **Uses**                                                                                      | ** ** | ** ** | ** ** |
| Consideration paid to  stockholders (including non-cash management rollover of $17.9 million) |       | $          | 5,110.8    |   |
| Transaction costs  (including non-cash items of $18.8 million)                                |       | 82.3       |       |
| Redemption of existing  2008 Notes                                                            |       | 134.7      |       |
| Debt issuance costs  (including non-cash items of $6.3 million)                               |       | 109.2      |       |
| Payment of deferred  compensation obligations and other accrued liabilities                   |       | 24.7       |       |
| Total uses                                                                                    |       | $          | 5,461.7    |   |

 

Inconnection with the purchase price allocation, we made estimates of the fairvalues of our long-lived and intangible assets based upon assumptions relatedto future cash flows, discount rates and asset lives. As of October 29, 2005,we recorded preliminary purchase accounting adjustments to increase thecarrying value of our property and equipment and inventory, to establishintangible assets for our tradenames, customer lists and favorable leasecommitments and to revalue our long-term benefit plan obligations, among otherthings. We revised these preliminary purchase accounting adjustments during thesecond, third and fourth quarters of fiscal year 2006 as additional informationbecame available. The final purchase accounting adjustments, as reflected inour July 29, 2006 consolidated balance sheet, were as follows (in millions):

 
| Cash consideration:                                                                             |   |      |   |    |    |
|-------------------------------------------------------------------------------------------------|--------|-----------|--------|---------|---------|
| Paid to  shareholders                                                                           |   |      |   | $       | 5,092.9 |   |
| Transaction  costs                                                                              |   |      |   | 63.5    |    |
|                                                                                            |   |      |   | 5,156.4 |    |
| Non-cash  consideration                                                                         |   |      |   | 36.7    |    |
| Total consideration                                                                             |   |      |   | 5,193.1 |    |
|                                                                                            |   |      |   |    |    |
| Net assets acquired at  historical cost                                                         |   |      |   | 1,638.2 |    |
| Adjustments to state acquired  assets at fair value:                                            |   |      |   |    |    |
|    1)  Increase carrying value of property and equipment                         |   | $         | 137.8  |    |    |   |
|    2)  Increase carrying value of inventory                                      |   | 38.1      |   |    |    |
|    3)  Write-off historical goodwill and tradenames                              |   | (71.5)    |   |    |    |
|    4)  Record intangible assets acquired                                         |   |      |   |    |    |
|        Customer  lists                                       |   | 576.5     |   |    |    |
|        Favorable  lease commitments                          |   | 480.0     |   |    |    |
|        Tradenames                                            |   | 1,621.8   |   |    |    |
|    5)  Write-off other assets, primarily debt issue costs                        |   | (3.7)     |   |    |    |
|    6)  Adjustment to state 2008 Notes at redemption value                        |   | (6.2)     |   |    |    |
|    7)  Adjustment to state 2028 Debentures at fair value                         |   | 4.5       |   |    |    |
|    8)  Write-off deferred real estate credits                                    |   | 90.2      |   |    |    |
|    9)  Increase in long-term benefit obligations, primarily pension  obligations |   | (57.6)    |   |    |    |
|  10) Tax impact of  purchase accounting adjustments                                        |   | (1,049.3) |   |    |    |
|  11) Increase  carrying values of assets of Gurwitch Products, L.L.C and Kate Spade LLC.   |   | 120.0     |   |    |    |
| Deemed dividend to  management shareholders                                                     |   | 69.2      |   | 1,949.8 |    |
| Net assets acquired at  fair value                                                              |   |      |   | 3,588.0 |    |
| Goodwill at Acquisition date                                                                    |   |      |   | $       | 1,605.1 |   |
|                                                                                                 |        |           |        |         |         |  |  |

** **

9

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Goodwilland indefinite-lived intangible assets, such as tradenames, are not subject toamortization. Rather, recoverability of goodwill and indefinite-livedintangible assets is assessed annually and upon the occurrence of certainevents. The recoverability assessment requires us to make judgments andestimates regarding fair values. Fair values are determined using estimatedfuture cash flows, including growth assumptions for future revenues, grossmargin rates and other estimates. To the extent that our estimates are notrealized, future assessments could result in impairment charges.

 

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

 
| 2007 |   | $      | 72,254 |   |
|------|--------|--------|--------|--------|
| 2008 |   | 72,254 |   |
| 2009 |   | 72,254 |   |
| 2010 |   | 72,254 |   |
| 2011 |   | 61,543 |   |
| 2012 |   | 48,898 |   |

 

 

**4.  Transactions with Sponsors**

** **

Inconnection with the Transactions, we entered into a management servicesagreement with affiliates of the Sponsors pursuant to which affiliates of oneof the Sponsors received on the closing date a transaction fee of$25 million in cash. Affiliates of the other Sponsor waived any cashtransaction fee in connection with the Transactions.

 

Inaddition, pursuant to such agreement, and in exchange for on-going consultingand management advisory services that will be provided to us by the Sponsorsand their affiliates, affiliates of the Sponsors will receive an aggregateannual management fee equal to the lesser of (i) 0.25% of our consolidatedannual revenues or (ii) $10 million. Affiliates of the Sponsors willalso receive reimbursement for out-of-pocket expenses incurred by them or theiraffiliates in connection with services provided pursuant to the agreement.These management fees are payable quarterly in arrears.  During the thirty-nine weeks ended April 28,2007, and the thirty weeks ended April 29, 2006, we recorded management fees of$8.6 million and $6.4 million, respectively, which are included in selling,general and administrative expenses in the condensed consolidated statements ofearnings.

 

Themanagement services agreement also provides that affiliates of the Sponsors mayreceive future fees in connection with certain subsequent financing andacquisition or disposition transactions. The management services agreementincludes customary exculpation and indemnification provisions in favor of theSponsors and their affiliates.

 

 

**5.  Stock-Based Compensation**

* *

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

 

In December 2004, the FASB issued SFASNo. 123(R), “Share-Based Payment” (SFAS 123(R)). This standard is a revisionof SFAS 123 and supersedes APB 25 and its related implementation guidance. SFAS123(R) requires all share-based payments to employees, including grantsof employee stock options, to be recognized in the financial statements basedon their fair values. We adopted SFAS 123(R) as of the beginning of our firstquarter of fiscal year 2006 using the modified prospective method, whichrequired us to record stock compensation for all unvested and new awards as ofthe adoption date. Accordingly, we have not restated prior period amountspresented herein.

*** ***

10

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*** ***

***PredecessorStock-Based Compensation Accounting. ***Inconnection with the adoption of the provisions of SFAS 123(R), we recordednon-cash charges for stock compensation of approximately $20.0 million in theperiod from July 31, 2005 to October 1, 2005 primarily as a result of theaccelerated vesting of all Predecessor options and restricted stock inconnection with the Transactions.

 

***Successor Stock-Based Compensation Accounting.***  TheCompany has approved equity-based management arrangements which authorizeequity awards to be granted to certain management employees for up to 87,992.0shares of the common stock of the Company, of which options for 81,716.3 shareswere issued in fiscal year 2006 and options for 2,496.0 shares were issued infiscal year 2007.  All options areoutstanding at April 28, 2007.  Optionsgenerally vest over four to five years and expire 10 years from the date ofgrant.  At April 28, 2007, options for27,437.9 shares were vested.

 

The exerciseprice of approximately 50% of such options escalate at a 10% compound rate peryear until the earlier to occur of (i) exercise, (ii) the fifthanniversary of the date of grant or (iii) the occurrence of a change incontrol. However, in the event the Sponsors cause the sale of shares of theCompany to an unaffiliated entity, the exercise price will cease to accrete atthe time of the sale with respect to a pro rata portion of the accretingoptions.

 

Weuse the Black-Scholes option-pricing model to determine the fairvalue of our options as of the date of grant. A summary of the 2006 and 2007 grants and fair value assumptions is asfollows:

 
| ** **                             | ** ** | **2006 Grants**         | ** ** | **2007 Grants**                        | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise Price  Options** | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise Price  Options** | ** ** |
| Options  outstanding at April 28, 2007 |       | 43,594.6                     |       | 38,121.7                                    |       | 1,248.0 |   | 1,248.0 |   |
| Exercise Price  at April 28, 2007      |       | $                            | 1,445      |                                        | $          | 1,590 |   | $ | 1,942 |   | $ | 1,942 |   |
| Term                                   |       | 5                            |       | 5                                           |       | 5 |   | 5 |   |
| Volatility                             |       | 29.72                        | %          | 29.72                                       | %          | 29.96 | % | 29.96 | % |
| Risk-Free Rate                         |       | 4.23                         | %          | 4.23                                        | %          | 4.53 | % | 4.53 | % |
| Dividend Yield                         |       | —                       |       | —                                      |       | — |   | — |   |
| Fair Value                             |       | $                            | 494        |                                        | $          | 247 |   | $ | 676 |   | $ | 341 |   |

 

Expectedvolatility is based on a combination of the Predecessor's historical volatilityadjusted for our new leverage and estimates of implied volatility of ourpeer group.

 

Werecognized non-cash stock compensation expense of $4.4 million for thethirty-nine weeks ended April 28, 2007, and $2.5 million for the thirty weeksended April 29, 2006, which is included in selling, general and administrativeexpenses. At April 28, 2007, unearned non-cash stock-based compensationthat we expect to recognize as expense over the next 5 years aggregatesapproximately $20.3 million.

 

 

**6.  Discontinued Operations**

** **

***Gurwitch Products, L.L.C.*** On July 27, 2006, we sold our majorityinterest in Gurwitch Products, L.L.C. to Alticor Inc., for pretax net cashproceeds of approximately $40.8 million (Gurwitch Disposition).  Gurwitch Products, L.L.C. designs and marketsthe Laura Mercier cosmetics line and had revenues of approximately $71.6million in fiscal year 2006.

 

***Kate Spade LLC.***In April 2005, the minority investor inKate Spade LLC exercised the put option with respect to the sale of the fullamount of its 44% stake in such company to NMG. We subsequently entered into astandstill agreement to postpone the put process while we engaged indiscussions with the minority investor in Kate Spade LLC regarding certainstrategic alternatives, including the possible sale of such company.  In October 2006, we entered into an agreementto settle the put option whereby we purchased the interest held by the minorityinvestor for approximately $59.4 million.

 

In November 2006, we entered into a definitive agreement to sell 100%of the ownership 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. wereconsummated in December 2006.

 

Kate Spade LLC designs and markets high-end accessories and hadrevenues of approximately $84.7 million in fiscal year 2006.

 

11

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TheCompany’s unaudited condensed consolidated financial statements, accompanyingnotes and other information provided in this Quarterly Report on Form 10-Qreflect Gurwitch Products, L.L.C. and Kate Spade LLC as discontinued operationsfor all periods presented.

***Results of Discontinued Operations.***  Summarizedfinancial information with respect to the results of operations of Kate SpadeLLC and Gurwitch Products L.L.C. is as follows:
| ** **                                                  | ** ** | **Quarter-to-Date**                              | ** ** | **Year-to-Date**                                 | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                     | ** ** | **Thirteen  weeks  ended  April 28,  2007** | ** ** | **Thirteen  weeks  ended  April 29,  2006** | ** ** | **Thirty-nine  weeks  ended  April 28,  2007** | ** ** | **Thirty  weeks  ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** |
| ** **                                                  | ** ** | **(Successor)**                                  | ** ** | **(Successor)**                                  | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Revenues                                                    |       | $                                                | —     |                                             | $          | 34,691 |   | $ | 29,612 |   | $ | 82,605 |   |   |   | $ | 19,277 |   |
| (Loss) earnings  from operations before income taxes        |       | $                                                | —     |                                             | $          | (526 | ) | $ | 3,494 |   | $ | 2,106 |   |   |   | $ | (1,412 | ) |
| Income taxes                                                |       | —                                           |       | (98                                              | )          | 1,967 |   | 1,333 |   |   |   | (619 | ) |
| Net (loss) earnings  from operations                        |       | —                                           |       | (428                                             | )          | 1,527 |   | 773 |   |   |   | (793 | ) |
| Loss on  disposition before income taxes                    |       | (1,390                                           | )          | —                                           |       | (13,398 | ) | — |   |   |   | — |   |
| Income taxes                                                |       | —                                           |       | —                                           |       | (10,900 | ) | — |   |   |   | — |   |
| Net loss on disposition                                     |       | (1,390                                           | )          | —                                           |       | (24,298 | ) | — |   |   |   | — |   |
| (Loss) earnings from discontinued operations, net of  taxes |       | $                                                | (1,390     | )                                                | $          | (428 | ) | $ | (22,771 | ) | $ | 773 |   |   |   | $ | (793 | ) |

 

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

**7.  Income from Credit Card Operations**

Pursuant to a long-term marketing and servicing alliance with HSBC, HSBCoffers credit card and non-card payment plans bearing our brands and we receiveongoing payments from HSBC based on credit card sales and compensation formarketing and servicing activities (HSBC Program Income).  We recognize HSBC Program Income when earned.

8.  Long-term Debt

The significantcomponents of our long-term debt are as follows:
| **(in thousands)**                | ** ** | **Interest  Rate** | ** ** | **April 28,  2007** | ** ** | **July 29,  2006** | ** ** | **April 29,  2006** | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **(Successor)**          | ** ** | **(Successor)**         | ** ** | **(Successor)**          | ** ** |
| Asset-Based Revolving  Credit Facility |       | variable           |       | $                        | —     |                    | $          | —                   |       | $ | — |   |
| Senior Secured Term  Loan Facility     |       | variable           |       | 1,700,000                |       | 1,875,000               |       | 1,875,000                |       |
| 2028 Debentures                        |       | 7.125%             |       | 120,858                  |       | 120,711                 |       | 120,663                  |       |
| 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                         |       |               |       | $                        | 3,020,858  |                    | $          | 3,195,711                |       | $ | 3,195,663 |   |

*** ***

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

As of April 28, 2007, NMG had $575.3 million of unused borrowingavailability under the Asset-Based Revolving Credit Facility based on aborrowing base of over $600.0 million and after giving effect to$24.7 million used for letters of credit.

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

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

If at any time the aggregate amount of outstanding loans, unreimbursedletter of credit drawings and undrawn letters of credit under the Asset-BasedRevolving Credit Facility exceeds the lesser of (i) the commitment amountand (ii) the borrowing base, NMG will be required to repay outstandingloans or cash collateralize letters of credit in an aggregate amount equal tosuch excess, with no reduction of the commitment amount. If the amountavailable under the Asset-Based Revolving Credit Facility is less than$60 million or an event of default has occurred, NMG will be required torepay outstanding loans and cash collateralize letters of credit with the cashNMG would then be required to deposit daily in a collection account maintainedwith the agent under the Asset-Based Revolving Credit Facility. NMG mayvoluntarily reduce the unutilized portion of the commitment amount and repayoutstanding loans at any time without premium or penalty other than customary “breakage”costs with respect to LIBOR loans. There is no scheduled amortization under theAsset-Based Revolving Credit Facility; the principal amount of the loansoutstanding is due and payable in full on October 6, 2010.

All obligations under the Asset-Based Revolving Credit Facilityare guaranteed by the Company and certain of NMG’s existing and future domesticsubsidiaries. As of April 28, 2007, the liabilities of NMG’s non-guarantorsubsidiaries totaled approximately $4.4 million, or 0.1% of consolidatedliabilities, and the assets of NMG’s non-guarantor subsidiaries aggregatedapproximately $6.6 million, or 0.1% of consolidated total assets. Allobligations under NMG’s Asset-Based Revolving Credit Facility, and theguarantees of those obligations, are secured, subject to certain significantexceptions, by substantially all of the assets of the Company, NMG and thesubsidiaries that have guaranteed the Asset-Based Revolving CreditFacility (subsidiary guarantors), including:

·                  afirst-priority security interest in personal property consisting of inventoryand related accounts, cash, deposit accounts, all payments received by NMG orthe subsidiary guarantors from credit card clearinghouses and processors orotherwise in respect of all credit card charges for sales of inventory by NMGand the subsidiary guarantors, certain related assets and proceeds of theforegoing; and

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

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·                  asecond-priority security interest in, and mortgages on, substantially allother tangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s material owned and leasedreal property (which currently consists of approximately half of NMG’sfull-line retail stores) and equipment.

Capital stock and other securities of a subsidiary of NMG that are ownedby NMG or any subsidiary guarantor will not constitute collateral under NMG’sAsset-Based Revolving Credit Facility to the extent that such securitiescannot secure NMG’s 2028 Debentures or other secured public debt obligationswithout requiring the preparation and filing of separate financial statementsof such subsidiary in accordance with applicable Securities and ExchangeCommission’s rules. As a result, the collateral under NMG’s Asset-BasedRevolving Credit Facility will include shares of capital stock or othersecurities of subsidiaries of NMG or any subsidiary guarantor only to theextent that the applicable value of such securities (on asubsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amountof the 2028 Debentures or other secured public debt obligations of NMG.

The Asset-Based Revolving Credit Facility contains a number ofcovenants that, among other things and subject to certain significantexceptions, restrict its ability and the ability of its subsidiaries to:

·                  incuradditional indebtedness;

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

·                  makeinvestments, loans, advances and acquisitions;

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

·                  engagein transactions with NMG’s affiliates;

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

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

The covenants limiting dividends and other restricted payments;investments, loans, advances and acquisitions; and prepayments or redemptionsof other indebtedness, each permit the restricted actions in an unlimitedamount, subject to the satisfaction of certain payment conditions, principallythat NMG must have at least $75.0 million of pro forma excess availabilityunder the Asset-Based Revolving Credit Facility and that NMG must be inpro forma compliance with the fixed charge coverage ratio described below.

Although the credit agreement governing the Asset-Based RevolvingCredit Facility does not require NMG to comply with any financial ratiomaintenance covenants, if less than $60.0 million were available to beborrowed under the Asset-Based Revolving Credit Facility at any time, NMGwould not be permitted to borrow any additional amounts unless its pro formaratio of consolidated EBITDA to consolidated Fixed Charges (as such terms aredefined in the credit agreement) were at least 1.1 to 1.0. The credit agreementalso contains customary affirmative covenants and events of default.

***Senior Secured Term Loan Facility.***  OnOctober 6, 2005, in connection with the Transactions, NMG entered into acredit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility with Credit Suisse asadministrative agent and collateral agent. The full amount of the SeniorSecured Term Loan Facility was borrowed on October 6, 2005. In the secondquarter of fiscal year 2006, NMG voluntarily repaid $100.0 millionprincipal amount of the loans under the Senior Secured Term Loan Facility andin the second quarter of fiscal year 2007, NMG voluntarily repaid $175.0million principal amount.

At April 28, 2007, borrowings under the Senior SecuredTerm Loan Facility bore interest at a rate per annum equal to, at NMG’s option,either (a) a base rate determined by reference to the higher of(1) the prime rate of Credit Suisse and (2) the federal fundseffective rate plus 1¤2of 1% or (b) a LIBOR rate, subject to certain adjustments, in each caseplus an applicable margin. At April 28, 2007, the applicable margin withrespect to base rate borrowings was 1.00% and the applicable margin

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with respect to LIBOR borrowings was 2.00%. Theinterest rate on the outstanding borrowings pursuant to the Senior Secured TermLoan Facility was 7.35% at April 28, 2007.

On February 8, 2007, NMG entered into an amendment tothe credit agreement for the Senior Secured Term Loan Facility to decrease theinterest rates applicable to borrowings under that facility by 0.25%. Asamended, the applicable margin with respect to base rate borrowings is 0.75% or1.00%, depending upon NMG’s Consolidated Leverage Ratio (as defined in theamended credit agreement) on such date, and the applicable margin with respectto LIBOR borrowings is 1.75% or 2.00%, also depending upon NMG’s ConsolidatedLeverage Ratio on such date. Since the inception of the Senior Secured Term LoanFacility, we have entered into amendments to reduce the applicable margins withrespect to borrowings pursuant to the Senior Secured Term Loan Facility by0.50%.

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 2006, NMG was not required to prepay anyoutstanding term loans pursuant to the annual excess cash flow requirements. Ifa change of control (as defined in the credit agreement) occurs, NMG will berequired to offer to prepay all outstanding term loans, at a prepayment priceequal to 101% of the principal amount to be prepaid, plus accrued and unpaidinterest to the date of prepayment. NMG also must offer to prepay outstandingterm loans at 100% of the principal amount to be prepaid, plus accrued andunpaid interest, with the proceeds of certain asset sales under certaincircumstances.

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

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

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

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

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

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

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

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***2028 Debentures.***   In May 1998, NMG issued$125.0 million aggregate principal amount of its 7.125% 2028 Debentures.In connection with the Transactions, NMG equally and ratably secured the 2028Debentures by a first lien security interest on certain collateral subject toliens granted under NMG’s Senior Secured Credit Facilities constituting(a) (i) 100% of the capital stock of certain of NMG’s existing and futuredomestic subsidiaries, and (ii) 100% of the non-voting stock and 65% ofthe voting stock of certain of NMG’s existing and future foreign subsidiariesand (b) certain of NMG’s principal properties that include approximatelyhalf of NMG’s full-line stores, in each case, to the extent required by theterms of the indenture governing the 2028 Debentures. The 2028 Debenturescontain covenants that restrict NMG’s ability to create liens and enter intosale and lease back transactions. The collateral securing the 2028 Debentureswill be released upon the release of liens on such collateral under NMG’sSenior Secured Credit Facilities and any other debt (other than the 2028Debentures) secured by such collateral. Capital stock and other securities of asubsidiary of NMG that are owned by NMG or any subsidiary will not constitutecollateral under the 2028 Debentures to the extent such property does notconstitute collateral under NMG’s Senior Secured Credit Facilities as describedabove. The 2028 Debentures are guaranteed on an unsecured, senior basis by theCompany.

The fair value of 2028 Debentures at April 28, 2007was approximately $128.8 million.

***Senior Notes.***   OnOctober 6, 2005, Newton Acquisition Merger Sub, Inc. issued$700.0 million aggregate original principal amount of 9.0% / 9.75% SeniorNotes under a senior indenture (Senior Indenture) with Wells Fargo Bank,National Association, as trustee. At the closing of the Transactions, as thesurviving corporation in the Acquisition, NMG assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior Indenture. The SeniorNotes mature on October 15, 2015.

For any interest payment period throughOctober 15, 2010, NMG may, at its option, elect to pay interest on theSenior Notes entirely in cash (Cash Interest) or entirely by increasing theprincipal amount of the outstanding Senior Notes or by issuing additionalSenior Notes (PIK Interest). Cash Interest on the Senior Notes accrues at therate of 9% per annum. PIK Interest on the Senior Notes accrues at the rate of9.75% per annum. After October 15, 2010, NMG will make all interestpayments on the Senior Notes entirely in cash. All Senior Notes mature onOctober 15, 2015 and have the same rights and benefits as the senior notesissued on October 6, 2005. Interest on the Senior Notes is payablequarterly in arrears on each January 15, April 15, July 15 andOctober 15, commencing on January 15, 2006.

The Senior Notes are fully and unconditionallyguaranteed, on a joint and several unsecured, senior basis, by each of NMG’swholly-owned domestic subsidiaries that guarantee NMG’s obligations underits Senior Secured Credit Facilities and by the Company. The Senior Notes andthe guarantees thereof are NMG’s and the guarantors’ unsecured, seniorobligations and rank (i) equal in the right of payment with all of NMG’sand the guarantors’ existing and future senior indebtedness, including anyborrowings under NMG’s Senior Secured Credit Facilities and the guaranteesthereof and NMG’s 2028 Debentures; and (ii) senior to all of NMG’s and itsguarantors’ existing and future subordinated indebtedness, including the SeniorSubordinated Notes due 2015 and the guarantees thereof. The Senior Notes alsoare effectively junior in priority to NMG’s and its guarantors’ obligationsunder all secured indebtedness, including NMG’s Senior Secured CreditFacilities, the 2028 Debentures, and any other secured obligations of NMG, ineach case, to the extent of the value of the assets securing such obligations.In addition, the Senior Notes are structurally subordinated to all existing andfuture liabilities, including trade payables, of NMG’s subsidiaries that arenot providing guarantees.

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

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

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

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Upon the occurrence of a change of control (as definedin the Senior Indenture), each holder of the Senior Notes has the right torequire NMG to repurchase some or all of such holder’s Senior Notes at a pricein cash equal to 101% of the aggregate principal amount thereof plus accruedand unpaid interest, and Additional Interest, if any, to the date of purchase.

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

·                  incuradditional indebtedness;

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

·                  makeinvestments;

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

·                  engagein transactions with NMG’s affiliates;

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

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

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

The fair value of NMG’s Senior Notes at April 28, 2007was approximately $773.5 million.

***Senior Subordinated Notes.***   OnOctober 6, 2005, Newton Acquisition Merger Sub, Inc. issued$500.0 million aggregate principal amount of 10.375% Senior SubordinatedNotes under a senior subordinated indenture (Senior Subordinated Indenture)with Wells Fargo Bank, National Association, as trustee. At the closing of theTransactions, as the surviving corporation in the Acquisition, NMG assumed allthe obligations of Newton Acquisition Merger Sub, Inc. under the SeniorSubordinated Indenture. The Senior Subordinated Notes mature on October 15,2015. Interest on the Senior Subordinated Notes is payable in cashsemi-annually in arrears on each April 15 and October 15, commencingApril 15, 2006.

The Senior Subordinated Notes are fully andunconditionally guaranteed, on a joint and several unsecured, seniorsubordinated basis, by each of NMG’s wholly-owned domestic subsidiariesthat guarantee NMG’s obligations under its Senior Secured Credit Facilities andby the Company. The Senior Subordinated Notes and the guarantees thereof areNMG’s and the guarantors’ unsecured, senior subordinated obligations and rank(i) junior to all of NMG’s and the guarantors’ existing and future seniorindebtedness, including the Senior Notes and any borrowings under NMG’s SeniorSecured Credit Facilities, and the guarantees thereof and NMG’s 2028Debentures; (ii) equally with any of NMG’s and the guarantors’ futuresenior subordinated indebtedness; and (iii) senior to any of NMG’s and theguarantors’ future subordinated indebtedness. In addition, the Senior SubordinatedNotes 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 redemptionor sinking fund payments with respect to the Senior Subordinated Notes, but,under certain circumstances, NMG may be required to offer to purchase SeniorSubordinated Notes as described below. The Company may from time to timeacquire Senior Subordinated Notes by means other than a redemption, whether bytender offer, in open market purchases, through negotiated transactions orotherwise, in accordance with applicable securities laws.

Except as described below, the Senior SubordinatedNotes are not redeemable at NMG’s option prior to October 15, 2010. Fromand after October 15, 2010, NMG may redeem the Senior Subordinated Notes,in whole or in part, at a redemption price equal to 105.188% of principal amount,declining annually to 100% of principal amount on October 15, 2013, plusaccrued and unpaid

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interest, andAdditional Interest (as defined in the Senior Subordinated Indenture), if any,thereon to the applicable redemption date.

Prior toOctober 15, 2008, NMG may, at its option, subject to certain conditions,redeem up to 35% of the original aggregate principal amount of SeniorSubordinated Notes at a redemption price equal to 110.375% of the aggregateprincipal amount thereof, plus accrued and unpaid interest, and AdditionalInterest, if any, thereon to the redemption date, with the net cash proceeds ofone or more equity offerings of NMG or any direct or indirect parent of NMG tothe extent such net proceeds are contributed to NMG.

At any time priorto October 15, 2010, NMG also may redeem all or a part of the SeniorSubordinated Notes at a redemption price equal to 100% of the principal amountof Senior Subordinated Notes redeemed plus an applicable premium, as providedin the Senior Subordinated Indenture, and accrued and unpaid interest andAdditional Interest, if any, to the redemption date.

Upon theoccurrence of a change of control (as defined in the Senior SubordinatedIndenture), NMG will make an offer to purchase all of the Senior SubordinatedNotes at a price in cash equal to 101% of the aggregate principal amountthereof plus accrued and unpaid interest, and Additional Interest, if any, tothe date of purchase.

The indenturegoverning the Senior Subordinated Notes contains covenants substantiallysimilar to those applicable to NMG’s Senior Notes described above. The SeniorSubordinated Indenture also provides for events of default, which, if any ofthem occurs, would permit or require the principal, premium, if any, interestand any other monetary obligations on all outstanding Senior Notes to be dueand payable immediately, subject to certain exceptions.

The fair value of NMG’sSenior Subordinated Notes at April 28, 2007 was approximately $561.9 million.

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

***Maturities of Long-Term Debt.***  At April 28, 2007, annual maturities oflong-term debt during the next five fiscal years and thereafter are as follows(in millions):
| 2007       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2008       |   | —  |   |
| 2009       |   | —  |   |
| 2010       |   | —  |   |
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| Thereafter |   | 3,020.9 |   |

 

The above tabledoes not reflect future excess cash flow prepayments, if any, that may berequired under the Senior Secured Term Loan Facility.

***InterestRate Swaps.***  TheCompany uses derivative financial instruments to help manage its interest raterisk. Effective December 6, 2005, NMG entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit its exposure to interest rate increases relatedto a portion of its floating rate indebtedness. The interest rate swapagreements terminate after five years. At April 28, 2007, the fair value of NMG’s interest rate swap agreementswas a gain of approximately $4.4 million, which amount is included inother assets.

As of the effective date,NMG designated the interest rate swaps as cash flow hedges. As a result,changes in the fair value of NMG’s swaps are recorded as a component of othercomprehensive income. At April 28, 2007, we have $1.4 million of unrecognizedgains, net of tax, on our interest rate swap agreements included in othercomprehensive income.

As a result of theswap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.732% to 6.983% per quarter through 2010 and result in an average fixed rateof 6.821%.

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***Interest expense.***  The significant components of interestexpense are as follows:
| ** **                             | ** ** | **Quarter-to-Date**                              | ** ** | **Year-to-Date**                                 | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                | ** ** | **Thirteen  weeks  ended  April 28,  2007** | ** ** | **Thirteen  weeks  ended  April 29,  2006** | ** ** | **Thirty-nine  weeks  ended  April 28,  2007** | ** ** | **Thirty  weeks  ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** |
| ** **                             | ** ** | **(Successor)**                                  | ** ** | **(Successor)**                                  | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | **(Predecessor)** | ** ** |
|                                   |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Asset-Based  Revolving Credit Facility |       | $                                                | —     |                                             | $          | — |   | $ | — |   | $ | 1,332 |   |   |   | $ | — |   |
| Senior Secured  Term Loan Facility     |       | 30,648                                           |       | 33,170                                           |       | 99,419 |   | 76,765 |   |   |   | — |   |
| 2028 Debentures                        |       | 2,227                                            |       | 2,226                                            |       | 6,689 |   | 5,136 |   |   |   | 1,542 |   |
| Senior Notes                           |       | 15,750                                           |       | 15,925                                           |       | 47,250 |   | 35,875 |   |   |   | — |   |
| Senior  Subordinated Notes             |       | 12,969                                           |       | 13,113                                           |       | 38,906 |   | 29,540 |   |   |   | — |   |
| 2008 Notes                             |       | —                                           |       | —                                           |       | — |   | 639 |   |   |   | 1,439 |   |
| Amortization of  debt issue costs      |       | 3,554                                            |       | 3,497                                            |       | 10,588 |   | 8,070 |   |   |   | 96 |   |
| Other                                  |       | 867                                              |       | 1,094                                            |       | 2,847 |   | (729 | ) |   |   | 205 |   |
| Total interest expense                 |       | 66,015                                           |       | 69,025                                           |       | 205,699 |   | 156,628 |   |   |   | 3,282 |   |
| Less:                                  |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest income                        |       | 1,665                                            |       | 1,117                                            |       | 5,416 |   | 3,931 |   |   |   | 3,046 |   |
| Capitalized interest                   |       | 563                                              |       | 868                                              |       | 2,141 |   | 2,357 |   |   |   | 1,146 |   |
| Interest expense  (income), net        |       | $                                                | 63,787     |                                             | $          | 67,040 |   | $ | 198,142 |   | $ | 150,340 |   |   |   | $ | (910 | ) |

 

9.  Other Income

In the first quarter offiscal year 2007, we received consideration aggregating $4.2 million inconnection with the merger of Wedding Channel.com and The Knot. We held aminority operating interest in Wedding Channel.com and accounted for ourinvestment under the cost method. In prior years, we had previously reduced ourcarrying value of this investment to zero.

10.  Accumulated Other Comprehensive Income(Loss)

The following table shows the components ofaccumulated other comprehensive income (loss):
| **(in thousands)**                       | ** ** | **April 28,  2007** | ** ** | **July 29,  2006** | ** ** | **April 29,  2006** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **(Successor)**          | ** ** | **(Successor)**         | ** ** | **(Successor)**          | ** ** |
|                                          |       |                     |       |                    |       |                     |       |
| Unrealized gain  on financial instruments     |       | $                        | 1,399      |                    | $          | 9,990                    |       | $ | 9,350 |   |
| Other                                         |       | (110                     | )          | (161                    | )          | 316                      |       |
| Total accumulated other  comprehensive income |       | $                        | 1,289      |                    | $          | 9,829                    |       | $ | 9,666 |   |

 

11.  Employee Benefit Plans

***Descriptionof Benefit Plans.*** We sponsor a defined benefit pension plan (Pension Plan) coveringsubstantially all full-time employees. We also sponsor an unfunded supplemental executive retirement plan (SERPPlan) that provides additional pension benefits to certain employees.  Benefits under both plans are based on theemployees’ years of service and compensation over defined periods ofemployment.  Pension Plan assets consistprimarily of equity and fixed income securities.

Retirees and active employees hired prior to March 1,1989 are eligible to participate in a plan providing certain limitedpostretirement health care benefits (Postretirement Plan) if they have metcertain service and minimum age requirements.

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***Costsof Benefits. ***Thecomponents of the expenses incurred under our Pension Plan, SERP Plan andPostretirement Plan are as follows:
| ** **                                               | ** ** | **Quarter-to-Date**                              | ** ** | **Year-to-Date**                                 | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                  | ** ** | **Thirteen  weeks  ended  April 28,  2007** | ** ** | **Thirteen  weeks  ended  April 29,  2006** | ** ** | **Thirty-nine  weeks  ended  April 28,  2007** | ** ** | **Thirty  weeks  ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** |
| ** **                                               | ** ** | **(Successor)**                                  | ** ** | **(Successor)**                                  | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Pension Plan:                                            |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Service cost                                             |       | $                                                | 3,321      |                                             | $          | 4,027 |   | $ | 11,165 |   | $ | 9,293 |   |   |   | $ | 2,823 |   |
| Interest cost                                            |       | 4,935                                            |       | 5,250                                            |       | 16,661 |   | 12,115 |   |   |   | 3,468 |   |
| Expected return on plan assets                           |       | (5,842                                           | )          | (5,684                                           | )          | (17,594 | ) | (13,118 | ) |   |   | (3,636 | ) |
| Net amortization of losses and prior service  costs |       | —                                           |       | —                                           |       | — |   | — |   |   |   | 1,205 |   |
| Pension Plan expense                                     |       | $                                                | 2,414      |                                             | $          | 3,593 |   | $ | 10,232 |   | $ | 8,290 |   |   |   | $ | 3,860 |   |
|                                                     |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| SERP Plan:                                               |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Service cost                                             |       | $                                                | 351        |                                             | $          | 474 |   | $ | 1,289 |   | $ | 1,094 |   |   |   | $ | 330 |   |
| Interest cost                                            |       | 1,232                                            |       | 1,114                                            |       | 3,696 |   | 2,571 |   |   |   | 730 |   |
| Net amortization of losses and prior service  costs |       | —                                           |       | —                                           |       | — |   | — |   |   |   | 394 |   |
| SERP Plan expense                                        |       | $                                                | 1,583      |                                             | $          | 1,588 |   | $ | 4,985 |   | $ | 3,665 |   |   |   | $ | 1,454 |   |
|                                                     |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Postretirement  Plan:                                    |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Service cost                                             |       | $                                                | 15         |                                             | $          | 12 |   | $ | 43 |   | $ | 27 |   |   |   | $ | 8 |   |
| Interest cost                                            |       | 136                                              |       | 214                                              |       | 590 |   | 494 |   |   |   | 139 |   |
| Net amortization of losses (gains)                       |       | (48                                              | )          | —                                           |       | (48 | ) | — |   |   |   | (5 | ) |
| Postretirement expense                                   |       | $                                                | 103        |                                             | $          | 226 |   | $ | 585 |   | $ | 521 |   |   |   | $ | 142 |   |

 

***PurchaseAccounting Adjustments. ***Theobligations and assets related to our benefit plans were valued at fair valueas of the date of the Acquisition as follows:
| **(in thousands)**                                                     | ** ** | **Pension  Plan** | ** ** | **SERP  Plan** | ** ** | **Postretirement  Plan** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|
|                                                                        |       |              |       |           |       |                     |       |
| Benefit  obligations at fair value (5.75% discount rate)                    |       | $                 | 354,807    |           | $          | 76,806                   |       | $ | 15,281 |   |
| Assets held by  defined benefit pension plan, at fair value                 |       | 287,871           |       | —         |       | —                   |       |
| Excess of  benefit obligations over plan assets                             |       | 66,936            |       | 76,806         |       | 15,281                   |       |
| Less: previously  recorded benefit plan obligations recorded by Predecessor |       | (19,655           | )          | (63,540        | )          | (18,205                  | )          |
| Adjustment to increase  benefit plan obligations                            |       | $                 | 47,281     |           | $          | 13,266                   |       | $ | (2,924 | ) |

 

***FundingPolicy and Plan Assets.*** Our policy is to fund the Pension Plan at or above the minimum requiredby law.  Based upon currently availableinformation, we will not be required to make contributions to the Pension Planduring fiscal year 2007; however, we could decide to make a voluntarycontribution based on our evaluation of the Pension Plan.

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12. Segments

 

We have identified two reportable segments:Specialty Retail stores and Direct Marketing. The Specialty Retail storessegment includes all Neiman Marcus and Bergdorf Goodman retail stores,including Neiman Marcus clearance stores. The Direct Marketing segment conductsboth online and print catalog operations under the Neiman Marcus, BergdorfGoodman and Horchow brand names.  Boththe Specialty Retail stores and Direct Marketing segments derive their revenuesfrom the sales of high-end fashion apparel, accessories, cosmetics andfragrances from leading designers, precious and fashion jewelry and decorativehome accessories.

 

Operating earnings for the segments include 1) revenues, 2) cost ofsales, 3) direct selling, general, and administrative expenses, 4) other directoperating expenses, 5) income from credit card operations and 6) depreciationexpense for the respective segment. Items not allocated to our operating segments include those items notconsidered by management in measuring the assets and profitability of oursegments. These amounts include 1) corporate expenses including, but notlimited to, treasury, investor relations, legal and finance support services,and general corporate management, 2) charges related to the application ofpurchase accounting adjustments made in connection with the Acquisitionincluding amortization of customer lists and favorable lease commitments andother non-cash valuation charges and 3) interest expense.  These items, while often times related to theoperations of a segment, are not considered by segment operating management,corporate operating management and the chief operating decision maker inassessing segment operating performance. The accounting policies of the operating segments are the same as thosedescribed in the summary of significant accounting policies (except withrespect to purchase accounting adjustments not allocated to the operatingsegments).  Our senior management evaluates the performance of our assets on aconsolidated basis.

21

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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 28,  2007** | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirty-nine  weeks ended  April 28,  2007** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** |
| ** **                                                                                      | ** ** | **(Successor)**                                      | ** ** | **(Successor)**                                      | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | **(Predecessor)** | ** ** |
| REVENUES:                                                                                       | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | ** ** | ** ** |
| Specialty Retail  stores                                                                        |       | $                                                    | 908,010    |                                                 | $          | 840,221 |   | $ | 2,857,889 |   | $ | 2,084,131 |   |   |   | $ | 544,857 |   |
| Direct Marketing                                                                                |       | 165,364                                              |       | 152,097                                              |       | 550,532 |   | 416,479 |   |   |   | 87,515 |   |
| Total                                                                                           |       | $                                                    | 1,073,374  |                                                 | $          | 992,318 |   | $ | 3,408,421 |   | $ | 2,500,610 |   |   |   | $ | 632,372 |   |
| OPERATING EARNINGS:                                                                             | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | ** ** | ** ** |
| Specialty Retail  stores                                                                        |       | $                                                    | 168,119    |                                                 | $          | 142,603 |   | $ | 446,209 |   | $ | 280,984 |   |   |   | $ | 91,372 |   |
| Direct Marketing                                                                                |       | 29,805                                               |       | 22,950                                               |       | 89,735 |   | 67,280 |   |   |   | 8,246 |   |
| Subtotal                                                                                        |       | 197,924                                              |       | 165,553                                              |       | 535,944 |   | 348,264 |   |   |   | 99,618 |   |
| Corporate  expenses                                                                             |       | (17,267                                              | )          | (14,963                                              | )          | (41,339 | ) | (33,334 | ) |   |   | (5,811 | ) |
| Amortization of  customer lists and favorable lease commitments                                 |       | (18,090                                              | )          | (17,985                                              | )          | (54,172 | ) | (41,505 | ) |   |   | — |   |
| Non-cash items  related to other valuation adjustments made in connection with the  Acquisition |       | —                                               |       | 461                                                  |       | — |   | (35,961 | ) |   |   | — |   |
| Other income (1)                                                                                |       | —                                               |       | —                                               |       | 4,210 |   | — |   |   |   | — |   |
| Transaction and  other costs                                                                    |       | —                                               |       | —                                               |       | — |   | — |   |   |   | (23,544 | ) |
| Total                                                                                           |       | $                                                    | 162,567    |                                                 | $          | 133,066 |   | $ | 444,643 |   | $ | 237,464 |   |   |   | $ | 70,263 |   |
| CAPITAL EXPENDITURES:                                                                           | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | ** ** | ** ** |
| Specialty Retail  stores                                                                        |       | $                                                    | 28,275     |                                                 | $          | 33,119 |   | $ | 89,766 |   | $ | 97,064 |   |   |   | $ | 22,784 |   |
| Direct Marketing                                                                                |       | 5,206                                                |       | 5,040                                                |       | 14,397 |   | 10,115 |   |   |   | 2,791 |   |
| Total                                                                                           |       | $                                                    | 33,481     |                                                 | $          | 38,159 |   | $ | 104,163 |   | $ | 107,179 |   |   |   | $ | 25,575 |   |
| DEPRECIATION EXPENSE:                                                                           | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |   |   | ** ** | ** ** |
| Specialty Retail  stores                                                                        |       | $                                                    | 29,629     |                                                 | $          | 27,778 |   | $ | 88,063 |   | $ | 66,052 |   |   |   | $ | 17,313 |   |
| Direct Marketing                                                                                |       | 3,461                                                |       | 3,217                                                |       | 9,941 |   | 6,368 |   |   |   | 1,896 |   |
| Subtotal                                                                                        |       | 33,090                                               |       | 30,995                                               |       | 98,004 |   | 72,420 |   |   |   | 19,209 |   |
| Depreciation  expense on step-up of fixed assets made in connection with the Acquisition        |       | 1,165                                                |       | 589                                                  |       | 3,499 |   | 2,642 |   |   |   | — |   |
| Total                                                                                           |       | $                                                    | 34,255     |                                                 | $          | 31,584 |   | $ | 101,503 |   | $ | 75,062 |   |   |   | $ | 19,209 |   |

 

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**(1)Other income represents the proceeds we received in settlement of our cost methodinvestment in an internet retailer. We had previously reduced our carryingvalue in this investment to zero.**

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** **

**13.  Commitments and Contingencies**

*** ***

***Long-term Incentive Plan.***  Following the consummation of theTransactions, the Company created a long-term incentive plan (Long-termIncentive Plan) that provides for a cash incentive payable upon a change ofcontrol, as defined, subject to the attainment of certain performanceobjectives to employees who had historically been eligible for stock-based compensationprograms of the Predecessor.  Performanceobjectives and targets are based on cumulative EBITDA percentages for threeyear periods beginning in fiscal year 2006. Earned awards for each completed performance period will be credited toa book account and will earn interest at a contractually defined annual rateuntil the award is paid.  Awards will bepaid within 30 days of a change of control or the first day there is a publicmarket of at least 20% of total outstanding common stock.

 

***Cash Incentive Plan. ***Followingthe consummation of the Transactions, the Company also adopted a cash incentiveplan (Cash Incentive Plan) to aid in the retention of certain keyexecutives.  The Cash Incentive Planprovides for the creation of a $14 million cash bonus pool to be shared by allparticipants based on the number of vested and unvested stock options andunderlying shares that were granted pursuant to the Management Equity IncentivePlan.  Each participant in the Cash IncentivePlan will be entitled to a cash bonus upon the earlier to occur of a change ofcontrol or an initial public offering, as defined in the Cash Incentive Plan,provided that the internal rate of return to the Sponsors is positive.

 

***Litigation.***  We arecurrently involved in various legal actions and proceedings that arose in theordinary course of business. We believe that any liability arising as a resultof these actions and proceedings will not have a material adverse effect on ourfinancial position, results of operations or cash flows.

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**14. CondensedConsolidating Financial Information**(with respect to NMG’sobligations under the Senior Notes andthe Senior Subordinated Notes)  

All of NMG’s obligations under the Senior Notes and the SeniorSubordinated Notes, as well as its obligations under the Asset-Based RevolvingCredit Facility and the Senior Secured Term Loan Facility, are guaranteed bythe Company and certain of NMG’s existing and future domestic subsidiaries(principally, Bergdorf Goodman, Inc. through which NMG conducts the operationsof its Bergdorf Goodman stores and NM Nevada Trust which holds legal title tocertain real property and intangible assets used by the Company in conductingits operations). The guarantees by the Company and each subsidiary guarantorare full and unconditional and joint and several.  Currently, the Company’s non-guarantorsubsidiaries consist principally of an operating subsidiary domiciled in Canadaproviding support services to our Direct Marketing operations. Previously, ournon-guarantor subsidiaries also included Kate Spade LLC (prior to its sale inDecember 2006) and Gurwitch Products, L.L.C. (prior to its sale in July 2006),which are reflected in the tables below as discontinued operations.

The following condensed consolidating financialinformation represents the financial information of Neiman Marcus, Inc.and its wholly-owned subsidiary guarantors, prepared on the equity basisof accounting. The information is presented in accordance with the requirementsof Rule 3-10 under the Securities and Exchange Commission’sRegulation S-X. The financial information may not necessarily beindicative of results of operations, cash flows or financial position had thesubsidiary guarantors operated as independent entities.
| ** **                                                     | ** ** | **April 28, 2007 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(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  intangibles, net                                 |       | —                                        |       | 1,960,914 |   | 2,209,394 |   | — |   | — |   | 4,170,308 |   |
| Other assets                                                   |       | —                                        |       | 110,722 |   | 248 |   | — |   | — |   | 110,970 |   |
| 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 |   |
| Notes payable  and current maturities of long-term 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 |   |

 

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| ** **                                                     | ** ** | **July 29, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                            | —     |   | $ | 222,308 |   | $ | 986 |   | $ | 446 |   | $ | — |   | $ | 223,740 |   |
| Merchandise inventories                                        |       | —                                       |       | 711,443 |   | 84,252 |   | 7 |   | (2,081 | ) | 793,621 |   |
| Other current assets                                           |       | —                                       |       | 89,359 |   | 8,294 |   | 3,681 |   | 544 |   | 101,878 |   |
| Current assets of discontinued operations                      |       | —                                       |       | — |   | — |   | 16,617 |   | — |   | 16,617 |   |
| Total current assets                                           |       | —                                       |       | 1,023,110 |   | 93,532 |   | 20,751 |   | (1,537 | ) | 1,135,856 |   |
| Property and  equipment, net                                   |       | —                                       |       | 875,725 |   | 152,109 |   | 2,445 |   | — |   | 1,030,279 |   |
| Goodwill and  intangibles, net                                 |       | —                                       |       | 2,007,770 |   | 2,215,987 |   | — |   | — |   | 4,223,757 |   |
| Other assets                                                   |       | —                                       |       | 124,929 |   | 389 |   | 5 |   | — |   | 125,323 |   |
| Investments in  subsidiaries                                   |       | 1,427,667                                    |       | 2,429,916 |   | — |   | — |   | (3,857,583 | ) | — |   |
| Non-current  assets of discontinued operations                 |       | —                                       |       | — |   | — |   | 92,746 |   | — |   | 92,746 |   |
| Total assets                                                   |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,462,017 |   | $ | 115,947 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                 | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                          |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                            | —     |   | $ | 263,800 |   | $ | 31,835 |   | $ | 4,260 |   | $ | 544 |   | $ | 300,439 |   |
| Accrued liabilities                                            |       | —                                       |       | 310,551 |   | 67,340 |   | 77 |   | — |   | 377,968 |   |
| Notes payable and current maturities of long-term  liabilities |       | —                                       |       | 3,887 |   | — |   | — |   | — |   | 3,887 |   |
| Current liabilities of discontinued operations                 |       | —                                       |       | — |   | — |   | 16,764 |   | — |   | 16,764 |   |
| Total current liabilities                                      |       | —                                       |       | 578,238 |   | 99,175 |   | 21,101 |   | 544 |   | 699,058 |   |
| Long-term  liabilities:                                        |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Long-term  debt                                                |       | —                                       |       | 3,195,711 |   | — |   | — |   | — |   | 3,195,711 |   |
| Deferred income  taxes                                         |       | —                                       |       | 1,048,925 |   | — |   | — |   | — |   | 1,048,925 |   |
| Other long-term  liabilities                                   |       | —                                       |       | 210,909 |   | 6,597 |   | 5 |   | — |   | 217,511 |   |
| Non-current  liabilities of discontinued operations            |       | —                                       |       | — |   | — |   | 12,775 |   | — |   | 12,775 |   |
| Total long-term  liabilities                                   |       | —                                       |       | 4,455,545 |   | 6,597 |   | 12,780 |   | — |   | 4,474,922 |   |
| Minority  interest                                             |       | —                                       |       | — |   | — |   | — |   | 6,314 |   | 6,314 |   |
| Total  shareholders’ equity                               |       | 1,427,667                                    |       | 1,427,667 |   | 2,356,245 |   | 82,066 |   | (3,865,978 | ) | 1,427,667 |   |
| Total liabilities and  shareholders’ equity               |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,462,017 |   | $ | 115,947 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |

 

25

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| ** **                                                     | ** ** | **April 29, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                   | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                             | —     |   | $ | 104,911 |   | $ | 1,214 |   | $ | 1,318 |   | $ | — |   | $ | 107,443 |   |
| Merchandise inventories                                        |       | —                                        |       | 739,378 |   | 94,496 |   | 7 |   | — |   | 833,881 |   |
| Other current assets                                           |       | —                                        |       | 89,402 |   | 10,420 |   | 3,681 |   | 544 |   | 104,047 |   |
| Current assets of discontinued operations                      |       | —                                        |       | — |   | — |   | 40,034 |   | — |   | 40,034 |   |
| Total current assets                                           |       | —                                        |       | 933,691 |   | 106,130 |   | 45,040 |   | 544 |   | 1,085,405 |   |
| Property and  equipment, net                                   |       | —                                        |       | 868,145 |   | 154,052 |   | 2,535 |   | — |   | 1,024,732 |   |
| Goodwill and  intangibles, net                                 |       | —                                        |       | 2,033,939 |   | 2,243,014 |   | — |   | — |   | 4,276,953 |   |
| Other assets                                                   |       | —                                        |       | 131,680 |   | 442 |   | 5 |   | — |   | 132,127 |   |
| Investments in  subsidiaries                                   |       | 1,468,045                                     |       | 2,515,750 |   | — |   | — |   | (3,983,795 | ) | — |   |
| Non-current  assets of discontinued operations                 |       | —                                        |       | — |   | — |   | 140,797 |   | — |   | 140,797 |   |
| Total assets                                                   |       | $                                             | 1,468,045  |   | $ | 6,483,205 |   | $ | 2,503,638 |   | $ | 188,377 |   | $ | (3,983,251 | ) | $ | 6,660,014 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                 | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                             | —     |   | $ | 205,688 |   | $ | 30,230 |   | $ | 4,327 |   | $ | 544 |   | $ | 240,789 |   |
| Accrued liabilities                                            |       | —                                        |       | 305,861 |   | 73,841 |   | 207 |   | — |   | 379,909 |   |
| Notes payable and current maturities of long-term  liabilities |       | —                                        |       | 3,879 |   | — |   | — |   | — |   | 3,879 |   |
| Current liabilities of discontinued operations                 |       | —                                        |       | — |   | — |   | 31,752 |   | — |   | 31,752 |   |
| Total current liabilities                                      |       | —                                        |       | 515,428 |   | 104,071 |   | 36,286 |   | 544 |   | 656,329 |   |
| Long-term  liabilities:                                        |       |                                          |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | —                                        |       | 3,195,663 |   | — |   | — |   | — |   | 3,195,663 |   |
| Deferred income taxes                                          |       | —                                        |       | 1,115,216 |   | — |   | — |   | — |   | 1,115,216 |   |
| Other long-term liabilities                                    |       | —                                        |       | 188,853 |   | 6,121 |   | 5 |   | — |   | 194,979 |   |
| Non-current liabilities of discontinued operations             |       | —                                        |       | — |   | — |   | 16,972 |   | — |   | 16,972 |   |
| Total long-term liabilities                                    |       | —                                        |       | 4,499,732 |   | 6,121 |   | 16,977 |   | — |   | 4,522,830 |   |
| Minority  interest                                             |       | —                                        |       | — |   | — |   | — |   | 12,810 |   | 12,810 |   |
| Total  shareholders’ equity                               |       | 1,468,045                                     |       | 1,468,045 |   | 2,393,446 |   | 135,114 |   | (3,996,605 | ) | 1,468,045 |   |
| Total liabilities and  shareholders’ equity               |       | $                                             | 1,468,045  |   | $ | 6,483,205 |   | $ | 2,503,638 |   | $ | 188,377 |   | $ | (3,983,251 | ) | $ | 6,660,014 |   |

 

26

----

 
| ** **                                                                        | ** ** | **Thirteen weeks ended April 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **(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  operations                                               |       | —                                                                            |       | (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 |   |
| Earnings (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 |   |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended April 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                       | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                 | —     |   | $ | 838,927 |   | $ | 153,327 |   | $ | 64 |   | $ | — |   | $ | 992,318 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                            |       | 502,018 |   | 87,047 |   | 199 |   | — |   | 589,264 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                            |       | 205,615 |   | 30,303 |   | (363 | ) | — |   | 235,555 |   |
| Income from credit card  operations                                               |       | —                                                                            |       | (13,688 | ) | (1,448 | ) | — |   | — |   | (15,136 | ) |
| Depreciation expense                                                              |       | —                                                                            |       | 26,874 |   | 4,595 |   | 115 |   | — |   | 31,584 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                            |       | 15,038 |   | 2,947 |   | — |   | — |   | 17,985 |   |
| Operating earnings                                                                |       | —                                                                            |       | 103,070 |   | 29,883 |   | 113 |   | — |   | 133,066 |   |
| Interest expense, net                                                             |       | —                                                                            |       | 67,040 |   | — |   | — |   | — |   | 67,040 |   |
| Intercompany royalty  charges (income)                                            |       | —                                                                            |       | 59,959 |   | (59,959 | ) | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (40,547                                                                           | )          | (89,527 | ) | — |   | — |   | 130,074 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 40,547                                                                            |       | 65,598 |   | 89,842 |   | 113 |   | (130,074 | ) | 66,026 |   |
| Income taxes                                                                      |       | —                                                                            |       | 25,051 |   | — |   | — |   | — |   | 25,051 |   |
| Earnings (loss) from  continuing operations                                       |       | 40,547                                                                            |       | 40,547 |   | 89,842 |   | 113 |   | (130,074 | ) | 40,975 |   |
| Earnings (loss) from  discontinued operations, net of taxes                       |       | —                                                                            |       | — |   | — |   | (466 | ) | 38 |   | (428 | ) |
| Net earnings (loss)                                                               |       | $                                                                                 | 40,547     |   | $ | 40,547 |   | $ | 89,842 |   | $ | (353 | ) | $ | (130,036 | ) | $ | 40,547 |   |

 

27

----

 
| ** **                                                                        | ** ** | **Thirty-nine weeks ended April 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(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 operations                                               |       | —                                                                               |       | (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 |   |

 

28

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| ** **                                                                        | ** ** | **Thirty weeks ended April 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                     | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                               | —     |   | $ | 2,131,989 |   | $ | 368,211 |   | $ | 410 |   | $ | — |   | $ | 2,500,610 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                                          |       | 1,369,939 |   | 232,678 |   | 422 |   | — |   | 1,603,039 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                                          |       | 509,752 |   | 70,243 |   | (561 | ) | — |   | 579,434 |   |
| Income from  credit card operations                                               |       | —                                                                          |       | (32,629 | ) | (3,265 | ) | — |   | — |   | (35,894 | ) |
| Depreciation  expense                                                             |       | —                                                                          |       | 62,471 |   | 12,329 |   | 262 |   | — |   | 75,062 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                          |       | 34,704 |   | 6,801 |   | — |   | — |   | 41,505 |   |
| Operating  earnings                                                               |       | —                                                                          |       | 187,752 |   | 49,425 |   | 287 |   | — |   | 237,464 |   |
| Interest  expense, net                                                            |       | —                                                                          |       | 150,340 |   | — |   | — |   | — |   | 150,340 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                                          |       | 145,472 |   | (145,472 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (54,440                                                                         | )          | (195,957 | ) | — |   | — |   | 250,397 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 54,440                                                                          |       | 87,897 |   | 194,897 |   | 287 |   | (250,397 | ) | 87,124 |   |
| Income taxes                                                                      |       | —                                                                          |       | 33,457 |   | — |   | — |   | — |   | 33,457 |   |
| Earnings (loss)  from continuing operations                                       |       | 54,440                                                                          |       | 54,440 |   | 194,897 |   | 287 |   | (250,397 | ) | 53,667 |   |
| Earnings (loss)  from discontinued operations, net of taxes                       |       | —                                                                          |       | — |   | — |   | 1,848 |   | (1,075 | ) | 773 |   |
| Net earnings (loss)                                                               |       | $                                                                               | 54,440     |   | $ | 54,440 |   | $ | 194,897 |   | $ | 2,135 |   | $ | (251,472 | ) | $ | 54,440 |   |

 
| ** **                                                                        | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **NMG**                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                | 530,667    |   | $ | 101,556 |   | $ | 149 |   | $ | — |   | $ | 632,372 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 312,454                                                                          |       | 58,986 |   | 102 |   | — |   | 371,542 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 135,279                                                                          |       | 20,491 |   | (138 | ) | — |   | 155,632 |   |
| Income from  credit card operations                                               |       | (6,994                                                                           | )          | (824 | ) | — |   | — |   | (7,818 | ) |
| Depreciation  expense                                                             |       | 16,118                                                                           |       | 3,015 |   | 76 |   | — |   | 19,209 |   |
| Transaction and  other costs                                                      |       | 23,544                                                                           |       | — |   | — |   | — |   | 23,544 |   |
| Operating  earnings                                                               |       | 50,266                                                                           |       | 19,888 |   | 109 |   | — |   | 70,263 |   |
| Interest income,  net                                                             |       | (910                                                                             | )          | — |   | — |   | — |   | (910 | ) |
| Intercompany  royalty charges (income)                                            |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (65,444                                                                          | )          | — |   | — |   | 65,444 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 70,380                                                                           |       | 66,128 |   | 109 |   | (65,444 | ) | 71,173 |   |
| Income taxes                                                                      |       | 26,226                                                                           |       | — |   | — |   | — |   | 26,226 |   |
| Earnings (loss)  from continuing operations                                       |       | 44,154                                                                           |       | 66,128 |   | 109 |   | (65,444 | ) | 44,947 |   |
| (Loss) earnings  from discontinued operations, net of taxes                       |       | —                                                                           |       | — |   | (1,346 | ) | 553 |   | (793 | ) |
| Net earnings (loss)                                                               |       | $                                                                                | 44,154     |   | $ | 66,128 |   | $ | (1,237 | ) | $ | (64,891 | ) | $ | 44,154 |   |

 

29

----

 
| ** **                                                                                   | ** ** | **Thirty-nine weeks ended April 28, 2007 (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(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 |   |
| Non-cash charges  related to step-up in carrying value of inventory                          |       | —                                                                               |       | — |   | — |   | — |   | — |   | — |   |
| Stock-based  compensation charges                                                            |       | —                                                                               |       | 4,354 |   | — |   | — |   | — |   | 4,354 |   |
| Deferred income taxes                                                                        |       | —                                                                               |       | (26,271 | ) | — |   | — |   | — |   | (26,271 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans |       | —                                                                               |       | 10,799 |   | 2,315 |   | — |   | — |   | 13,114 |   |
| 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 |   |

 

30

----

 
| ** **                                                                                    | ** ** | **Thirty weeks ended April 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                     | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                          |       | $                                                                               | 54,440     |   | $ | 54,440 |   | $ | 194,897 |   | $ | 2,135 |   | $ | (251,472 | ) | $ | 54,440 |   |
| (Earnings) loss  from discontinued operations                                                 |       | —                                                                          |       | — |   | — |   | (1,848 | ) | 1,075 |   | (773 | ) |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                          |       | 62,471 |   | 12,329 |   | 262 |   | — |   | 75,062 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                          |       | 8,070 |   | — |   | — |   | — |   | 8,070 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                          |       | 34,704 |   | 6,801 |   | — |   | — |   | 41,505 |   |
| Non-cash  charges related to step-up in carrying value of inventory                           |       | —                                                                          |       | 32,890 |   | 5,177 |   | — |   | — |   | 38,067 |   |
| Stock-based  compensation charges                                                             |       | —                                                                          |       | 2,509 |   | — |   | — |   | — |   | 2,509 |   |
| Deferred income  taxes                                                                        |       | —                                                                          |       | (41,928 | ) | — |   | — |   | — |   | (41,928 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                          |       | 24,157 |   | 1,063 |   | (1,254 | ) | — |   | 23,966 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                          |       | 145,471 |   | (145,471 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (54,440                                                                         | )          | (195,957 | ) | — |   | — |   | 250,397 |   | — |   |
| Changes in  operating assets and liabilities, net                                             |       | —                                                                          |       | 128,775 |   | (67,185 | ) | 1,261 |   | — |   | 62,851 |   |
| Net cash  provided by continuing operating activities                                         |       | —                                                                          |       | 255,602 |   | 7,611 |   | 556 |   | — |   | 263,769 |   |
| Net cash  provided by discontinued operations                                                 |       | —                                                                          |       | — |   | — |   | 685 |   | — |   | 685 |   |
| Net cash  provided by operating activities                                                    |       | —                                                                          |       | 255,602 |   | 7,611 |   | 1,241 |   | — |   | 264,454 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                         |       | —                                                                          |       | (100,086 | ) | (7,319 | ) | 226 |   | — |   | (107,179 | ) |
| Acquisition of  The Neiman Marcus Group, Inc.                                                 |       | —                                                                          |       | (5,156,423 | ) | — |   | — |   | — |   | (5,156,423 | ) |
| Intercompany  (receivable) payable                                                            |       | (1,427,739                                                                      | )          | — |   | — |   | — |   | 1,427,739 |   | — |   |
| Net cash (used  for) provided by continuing investing activities                              |       | (1,427,739                                                                      | )          | (5,256,509 | ) | (7,319 | ) | 226 |   | 1,427,739 |   | (5,263,602 | ) |
| Net cash used  for discontinued operations                                                    |       | —                                                                          |       | — |   | — |   | (5,035 | ) | — |   | (5,035 | ) |
| Net cash (used  for) provided by investing activities                                         |       | (1,427,739                                                                      | )          | (5,256,509 | ) | (7,319 | ) | (4,809 | ) | 1,427,739 |   | (5,268,637 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from  borrowings                                                                     |       | —                                                                          |       | 3,325,000 |   | — |   | — |   | — |   | 3,325,000 |   |
| Repayment of  borrowings                                                                      |       | —                                                                          |       | (385,812 | ) | — |   | — |   | — |   | (385,812 | ) |
| Debt issuance  costs paid                                                                     |       | —                                                                          |       | (102,854 | ) | — |   | — |   | — |   | (102,854 | ) |
| Cash equity  contributions                                                                    |       | 1,427,739                                                                       |       | 1,427,739 |   | — |   | — |   | (1,427,739 | ) | 1,427,739 |   |
| Net cash  provided by (used for) continuing financing activities                              |       | 1,427,739                                                                       |       | 4,264,073 |   | — |   | — |   | (1,427,739 | ) | 4,264,073 |   |
| Net cash  provided by discontinued operations                                                 |       | —                                                                          |       | — |   | — |   | 4,832 |   | — |   | 4,832 |   |
| Net cash provided  by (used for) financing activities                                         |       | 1,427,739                                                                       |       | 4,264,073 |   | — |   | 4,832 |   | (1,427,739 | ) | 4,268,905 |   |
| **CASH  AND CASH EQUIVALENTS**                                                                |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease)  increase during the period                                                        |       | —                                                                          |       | (736,834 | ) | 292 |   | 1,264 |   | — |   | (735,278 | ) |
| Beginning  balance                                                                            |       | —                                                                          |       | 841,745 |   | 922 |   | 1,593 |   | — |   | 844,260 |   |
| Ending balance                                                                                |       | —                                                                          |       | 104,911 |   | 1,214 |   | 2,857 |   | — |   | 108,982 |   |
| Less cash of  discontinued operations                                                         |       | —                                                                          |       | — |   | — |   | 1,539 |   | — |   | 1,539 |   |
| Ending balance                                                                                |       | $                                                                               | —     |   | $ | 104,911 |   | $ | 1,214 |   | $ | 1,318 |   | $ | — |   | $ | 107,443 |   |

 

31

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| ** **                                                                                   | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **NMG**                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                                | 44,154     |   | $ | 66,128 |   | $ | (1,237 | ) | $ | (64,891 | ) | $ | 44,154 |   |
| Loss (earnings)  from discontinued operations                                                |       | —                                                                           |       | — |   | 1,346 |   | (553 | ) | 793 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | 16,118                                                                           |       | 3,015 |   | 76 |   | — |   | 19,209 |   |
| Amortization of debt issue costs                                                             |       | 96                                                                               |       | — |   | — |   | — |   | 96 |   |
| Stock-based compensation charges                                                             |       | 19,968                                                                           |       | — |   | — |   | — |   | 19,968 |   |
| Deferred income taxes                                                                        |       | (6,921                                                                           | )          | — |   | — |   | — |   | (6,921 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | (5,371                                                                           | )          | 254 |   | 496 |   | — |   | (4,621 | ) |
| Intercompany royalty income payable (receivable)                                             |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (65,444                                                                          | )          | — |   | — |   | 65,444 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | 505,360                                                                          |       | (20,294 | ) | (534,211 | ) | — |   | (49,145 | ) |
| Net cash  provided by (used for) continuing operating activities                             |       | 554,200                                                                          |       | 2,863 |   | (533,530 | ) | — |   | 23,533 |   |
| Net cash used  for discontinued operations                                                   |       | —                                                                           |       | — |   | (4,098 | ) | — |   | (4,098 | ) |
| Net cash  provided by (used for) operating activities                                        |       | 554,200                                                                          |       | 2,863 |   | (537,628 | ) | — |   | 19,435 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | (22,455                                                                          | )          | (2,736 | ) | (384 | ) | — |   | (25,575 | ) |
| Net cash used  for continuing investing activities                                           |       | (22,455                                                                          | )          | (2,736 | ) | (384 | ) | — |   | (25,575 | ) |
| Net cash used  for discontinued operations                                                   |       | —                                                                           |       | — |   | (736 | ) | — |   | (736 | ) |
| Net cash used  for investing activities                                                      |       | (22,455                                                                          | )          | (2,736 | ) | (1,120 | ) | — |   | (26,311 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Cash dividends  paid                                                                         |       | (7,346                                                                           | )          | — |   | — |   | — |   | (7,346 | ) |
| Net cash used  for continuing financing activities                                           |       | (7,346                                                                           | )          | — |   | — |   | — |   | (7,346 | ) |
| Net cash  provided by discontinued operations                                                |       | —                                                                           |       | — |   | 5,000 |   | — |   | 5,000 |   |
| Net cash (used  for) provided by financing activities                                        |       | (7,346                                                                           | )          | — |   | 5,000 |   | — |   | (2,346 | ) |
| **CASH  AND CASH EQUIVALENTS**                                                               |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Increase  (decrease) during the period                                                       |       | 524,399                                                                          |       | 127 |   | (533,748 | ) | — |   | (9,222 | ) |
| Beginning  balance                                                                           |       | 317,346                                                                          |       | 795 |   | 535,341 |   | — |   | 853,482 |   |
| Ending balance                                                                               |       | 841,745                                                                          |       | 922 |   | 1,593 |   | — |   | 844,260 |   |
| Less cash of  discontinued operations                                                        |       | —                                                                           |       | — |   | 1,056 |   | — |   | 1,056 |   |
| Ending balance                                                                               |       | $                                                                                | 841,745    |   | $ | 922 |   | $ | 537 |   | $ | — |   | $ | 843,204 |   |

 

32

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15.  CondensedConsolidating Financial Information (with respect to NMG’s obligations under the 2028 Debentures)

All of NMG’s obligations under the 2028 Debentures are guaranteed by theCompany. The guarantee by the Company is full and unconditional and joint andseveral. Currently, the Company’s non-guarantor subsidiaries consistprincipally of Bergdorf Goodman, Inc. through which NMG conducts theoperations of its Bergdorf Goodman stores and NM Nevada Trust which holds legaltitle to certain real property and intangible assets used by NMG in conductingits operations. Previously, our non-guarantor subsidiaries also included KateSpade LLC (prior to its sale in December 2006) and Gurwitch Products, L.L.C.(prior to its sale in July 2006), which are reflected in the tables below asdiscontinued operations.

The following condensed consolidating financial information representsthe financial information of Neiman Marcus, Inc. and its non-guarantorsubsidiaries, prepared on the equity basis of accounting. The information ispresented in accordance with the requirements of Rule 3-10 under theSecurities and Exchange Commission’s Regulation S-X. The financialinformation may not necessarily be indicative of results of operations, cashflows or financial position had the non-guarantor subsidiaries operated asindependent entities.
| ** **                                                     | ** ** | **April 28, 2007 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(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  intangibles, net                                 |       | —                                        |       | 1,960,914 |   | 2,209,394 |   | — |   | 4,170,308 |   |
| Other assets                                                   |       | —                                        |       | 110,722 |   | 248 |   | — |   | 110,970 |   |
| 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 |   |
| Notes payable  and current maturities of long-term 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 |   |

** **

33

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** **
| ** **                                                     | ** ** | **July 29, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                  | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     |       |                                         |       |   |   |   |   |   |   |   |   |
| Current assets:                                                |       |                                         |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                     |       | $                                            | —     |   | $ | 222,308 |   | $ | 1,432 |   | $ | — |   | $ | 223,740 |   |
| Merchandise  inventories                                       |       | —                                       |       | 711,443 |   | 84,259 |   | (2,081 | ) | 793,621 |   |
| Other current  assets                                          |       | —                                       |       | 89,359 |   | 11,975 |   | 544 |   | 101,878 |   |
| Current assets  of discontinued operations                     |       | —                                       |       | — |   | 16,617 |   | — |   | 16,617 |   |
| Total current  assets                                          |       | —                                       |       | 1,023,110 |   | 114,283 |   | (1,537 | ) | 1,135,856 |   |
| Property and equipment,  net                                   |       | —                                       |       | 875,725 |   | 154,554 |   | — |   | 1,030,279 |   |
| Goodwill and  intangibles, net                                 |       | —                                       |       | 2,007,770 |   | 2,215,987 |   | — |   | 4,223,757 |   |
| Other assets                                                   |       | —                                       |       | 124,929 |   | 394 |   | — |   | 125,323 |   |
| Investments in  subsidiaries                                   |       | 1,427,667                                    |       | 2,429,916 |   | — |   | (3,857,583 | ) | — |   |
| Non-current assets of  discontinued operations                 |       | —                                       |       | — |   | 92,746 |   | — |   | 92,746 |   |
| Total assets                                                   |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,577,964 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                 |       |                                         |       |   |   |   |   |   |   |   |   |
| Current liabilities:                                           |       |                                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                            | —     |   | $ | 263,800 |   | $ | 36,095 |   | $ | 544 |   | $ | 300,439 |   |
| Accrued  liabilities                                           |       | —                                       |       | 310,551 |   | 67,417 |   | — |   | 377,968 |   |
| Notes payable  and current maturities of long-term liabilities |       | —                                       |       | 3,887 |   | — |   | — |   | 3,887 |   |
| Current liabilities  of discontinued operations                |       | —                                       |       | — |   | 16,764 |   | — |   | 16,764 |   |
| Total current  liabilities                                     |       | —                                       |       | 578,238 |   | 120,276 |   | 544 |   | 699,058 |   |
| Long-term  liabilities:                                        |       |                                         |       |   |   |   |   |   |   |   |   |
| Long-term  debt                                                |       | —                                       |       | 3,195,711 |   | — |   | — |   | 3,195,711 |   |
| Deferred income  taxes                                         |       | —                                       |       | 1,048,925 |   | — |   | — |   | 1,048,925 |   |
| Other long-term  liabilities                                   |       | —                                       |       | 210,909 |   | 6,602 |   | — |   | 217,511 |   |
| Non-current  liabilities of discontinued operations            |       | —                                       |       | — |   | 12,775 |   | — |   | 12,775 |   |
| Total long-term  liabilities                                   |       | —                                       |       | 4,455,545 |   | 19,377 |   | — |   | 4,474,922 |   |
| Minority interest                                              |       | —                                       |       | — |   | — |   | 6,314 |   | 6,314 |   |
| Total shareholders’  equity                               |       | 1,427,667                                    |       | 1,427,667 |   | 2,438,311 |   | (3,865,978 | ) | 1,427,667 |   |
| Total liabilities and shareholders’ equity                |       | $                                            | 1,427,667  |   | $ | 6,461,450 |   | $ | 2,577,964 |   | $ | (3,859,120 | ) | $ | 6,607,961 |   |

** **

34

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** **
| ** **                                                     | ** ** | **April 29, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                   | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     |       |                                          |       |   |   |   |   |   |   |   |   |
| Current assets:                                                |       |                                          |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                             | —     |   | $ | 104,911 |   | $ | 2,532 |   | $ | — |   | $ | 107,443 |   |
| Merchandise inventories                                        |       | —                                        |       | 739,378 |   | 94,503 |   | — |   | 833,881 |   |
| Other current assets                                           |       | —                                        |       | 89,402 |   | 14,101 |   | 544 |   | 104,047 |   |
| Current assets of discontinued operations                      |       | —                                        |       | — |   | 40,034 |   | — |   | 40,034 |   |
| Total current assets                                           |       | —                                        |       | 933,691 |   | 151,170 |   | 544 |   | 1,085,405 |   |
| Property and  equipment, net                                   |       | —                                        |       | 868,145 |   | 156,587 |   | — |   | 1,024,732 |   |
| Goodwill and  intangibles, net                                 |       | —                                        |       | 2,033,939 |   | 2,243,014 |   | — |   | 4,276,953 |   |
| Other assets                                                   |       | —                                        |       | 131,680 |   | 447 |   | — |   | 132,127 |   |
| Investments in  subsidiaries                                   |       | 1,468,045                                     |       | 2,515,750 |   | — |   | (3,983,795 | ) | — |   |
| Non-current  assets of discontinued operations                 |       | —                                        |       | — |   | 140,797 |   | — |   | 140,797 |   |
| Total assets                                                   |       | $                                             | 1,468,045  |   | $ | 6,483,205 |   | $ | 2,692,015 |   | $ | (3,983,251 | ) | $ | 6,660,014 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                 |       |                                          |       |   |   |   |   |   |   |   |   |
| Current  liabilities:                                          |       |                                          |       |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                             | —     |   | $ | 205,688 |   | $ | 34,557 |   | $ | 544 |   | $ | 240,789 |   |
| Accrued liabilities                                            |       | —                                        |       | 305,861 |   | 74,048 |   | — |   | 379,909 |   |
| Notes payable and current maturities of long-term  liabilities |       | —                                        |       | 3,879 |   | — |   | — |   | 3,879 |   |
| Current liabilities of discontinued operations                 |       | —                                        |       | — |   | 31,752 |   | — |   | 31,752 |   |
| Total current liabilities                                      |       | —                                        |       | 515,428 |   | 140,357 |   | 544 |   | 656,329 |   |
| Long-term  liabilities:                                        |       |                                          |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | —                                        |       | 3,195,663 |   | — |   | — |   | 3,195,663 |   |
| Deferred income taxes                                          |       | —                                        |       | 1,115,216 |   | — |   | — |   | 1,115,216 |   |
| Other long-term liabilities                                    |       | —                                        |       | 188,853 |   | 6,126 |   | — |   | 194,979 |   |
| Non-current liabilities of discontinued operations             |       | —                                        |       | — |   | 16,972 |   | — |   | 16,972 |   |
| Total long-term liabilities                                    |       | —                                        |       | 4,499,732 |   | 23,098 |   | — |   | 4,522,830 |   |
| Minority  interest                                             |       | —                                        |       | — |   | — |   | 12,810 |   | 12,810 |   |
| Total  shareholders’ equity                               |       | 1,468,045                                     |       | 1,468,045 |   | 2,528,560 |   | (3,996,605 | ) | 1,468,045 |   |
| Total liabilities and  shareholders’ equity               |       | $                                             | 1,468,045  |   | $ | 6,483,205 |   | $ | 2,692,015 |   | $ | (3,983,251 | ) | $ | 6,660,014 |   |

 

35

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** **
| ****                                                                              | ** ** | **Thirteen weeks ended April 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **(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  operations                                               |       | —                                                                            |       | (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 |   |
| Earnings (loss) from  discontinued operations, net of taxes                       |       | —                                                                            |       | — |   | (1,390 | ) | — |   | (1,390 | ) |
| Net earnings (loss)                                                               |       | $                                                                                 | 59,548     |   | $ | 59,548 |   | $ | 97,275 |   | $ | (156,823 | ) | $ | 59,548 |   |

** **
| ****                                                                              | ** ** | **Thirteen weeks ended April 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                       | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                 | —     |   | $ | 838,927 |   | $ | 153,391 |   | $ | — |   | $ | 992,318 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                            |       | 502,018 |   | 87,246 |   | — |   | 589,264 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                            |       | 205,615 |   | 29,940 |   | — |   | 235,555 |   |
| Income from credit card  operations                                               |       | —                                                                            |       | (13,688 | ) | (1,448 | ) | — |   | (15,136 | ) |
| Depreciation expense                                                              |       | —                                                                            |       | 26,874 |   | 4,710 |   | — |   | 31,584 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                            |       | 15,038 |   | 2,947 |   | — |   | 17,985 |   |
| Operating earnings                                                                |       | —                                                                            |       | 103,070 |   | 29,996 |   | — |   | 133,066 |   |
| Interest expense, net                                                             |       | —                                                                            |       | 67,040 |   | — |   | — |   | 67,040 |   |
| Intercompany royalty  charges (income)                                            |       | —                                                                            |       | 59,959 |   | (59,959 | ) | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (40,547                                                                           | )          | (89,527 | ) | — |   | 130,074 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 40,547                                                                            |       | 65,598 |   | 89,955 |   | (130,074 | ) | 66,026 |   |
| Income taxes                                                                      |       | —                                                                            |       | 25,051 |   | — |   | — |   | 25,051 |   |
| Earnings (loss) from  continuing operations                                       |       | 40,547                                                                            |       | 40,547 |   | 89,955 |   | (130,074 | ) | 40,975 |   |
| Earnings (loss) from  discontinued operations, net of taxes                       |       | —                                                                            |       | — |   | (466 | ) | 38 |   | (428 | ) |
| Net earnings (loss)                                                               |       | $                                                                                 | 40,547     |   | $ | 40,547 |   | $ | 89,489 |   | $ | (130,036 | ) | $ | 40,547 |   |

 

36

----

 
| ****                                                                              | ** ** | **Thirty-nine weeks ended April 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(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 operations                                               |       | —                                                                               |       | (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 |   |

 

37

----

 
| ** **                                                                        | ** ** | **Thirty weeks ended April 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                     | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                               | —     |   | $ | 2,131,989 |   | $ | 368,621 |   | $ | — |   | $ | 2,500,610 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                                          |       | 1,369,939 |   | 233,100 |   | — |   | 1,603,039 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                                          |       | 509,752 |   | 69,682 |   | — |   | 579,434 |   |
| Income from  credit card operations                                               |       | —                                                                          |       | (32,629 | ) | (3,265 | ) | — |   | (35,894 | ) |
| Depreciation  expense                                                             |       | —                                                                          |       | 62,471 |   | 12,591 |   | — |   | 75,062 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                          |       | 34,704 |   | 6,801 |   | — |   | 41,505 |   |
| Operating  earnings                                                               |       | —                                                                          |       | 187,752 |   | 49,712 |   | — |   | 237,464 |   |
| Interest  expense, net                                                            |       | —                                                                          |       | 150,340 |   | — |   | — |   | 150,340 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                                          |       | 145,472 |   | (145,472 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (54,440                                                                         | )          | (195,957 | ) | — |   | 250,397 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 54,440                                                                          |       | 87,897 |   | 195,184 |   | (250,397 | ) | 87,124 |   |
| Income taxes                                                                      |       | —                                                                          |       | 33,457 |   | — |   | — |   | 33,457 |   |
| Earnings (loss)  from continuing operations                                       |       | 54,440                                                                          |       | 54,440 |   | 195,184 |   | (250,397 | ) | 53,667 |   |
| Earnings (loss)  from discontinued operations, net of taxes                       |       | —                                                                          |       | — |   | 1,848 |   | (1,075 | ) | 773 |   |
| Net earnings (loss)                                                               |       | $                                                                               | 54,440     |   | $ | 54,440 |   | $ | 197,032 |   | $ | (251,472 | ) | $ | 54,440 |   |

 
| ** **                                                                        | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **NMG**                                                                          | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                | 530,667    |   | $ | 101,705 |   | $ | — |   | $ | 632,372 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 312,454                                                                          |       | 59,088 |   | — |   | 371,542 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 135,279                                                                          |       | 20,353 |   | — |   | 155,632 |   |
| Income from  credit card operations                                               |       | (6,994                                                                           | )          | (824 | ) | — |   | (7,818 | ) |
| Depreciation  expense                                                             |       | 16,118                                                                           |       | 3,091 |   | — |   | 19,209 |   |
| Transaction and  other costs                                                      |       | 23,544                                                                           |       | — |   | — |   | 23,544 |   |
| Operating  earnings                                                               |       | 50,266                                                                           |       | 19,997 |   | — |   | 70,263 |   |
| Interest income,  net                                                             |       | (910                                                                             | )          | — |   | — |   | (910 | ) |
| Intercompany  royalty charges (income)                                            |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (65,444                                                                          | )          | — |   | 65,444 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 70,380                                                                           |       | 66,237 |   | (65,444 | ) | 71,173 |   |
| Income taxes                                                                      |       | 26,226                                                                           |       | — |   | — |   | 26,226 |   |
| Earnings (loss)  from continuing operations                                       |       | 44,154                                                                           |       | 66,237 |   | (65,444 | ) | 44,947 |   |
| (Loss) earnings  from discontinued operations, net of taxes                       |       | —                                                                           |       | (1,346 | ) | 553 |   | (793 | ) |
| Net earnings (loss)                                                               |       | $                                                                                | 44,154     |   | $ | 64,891 |   | $ | (64,891 | ) | $ | 44,154 |   |

 

38

----

| ** **                                                                                    | ** ** | **Thirty-nine weeks ended April 28, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(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 |   |
| Non-cash  charges related to step-up in carrying value of inventory                           |       | —                                                                               |       | — |   | — |   | — |   | — |   |
| Stock-based  compensation charges                                                             |       | —                                                                               |       | 4,354 |   | — |   | — |   | 4,354 |   |
| Deferred income  taxes                                                                        |       | —                                                                               |       | (26,271 | ) | — |   | — |   | (26,271 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                               |       | 10,799 |   | 2,315 |   | — |   | 13,114 |   |
| 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 |   |

** **

** **

39

----

** **
| ** **                                                                                    | ** ** | **Thirty weeks ended April 29, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                     | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                               | 54,440     |   | $ | 54,440 |   | $ | 197,032 |   | $ | (251,472 | ) | $ | 54,440 |   |
| (Earnings) loss from  discontinued operations                                                 |       | —                                                                          |       | — |   | (1,848 | ) | 1,075 |   | (773 | ) |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                          |       | 62,471 |   | 12,591 |   | — |   | 75,062 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                          |       | 8,070 |   | — |   | — |   | 8,070 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                          |       | 34,704 |   | 6,801 |   | — |   | 41,505 |   |
| Non-cash  charges related to step-up in carrying value of inventory                           |       | —                                                                          |       | 32,890 |   | 5,177 |   | — |   | 38,067 |   |
| Stock-based  compensation charges                                                             |       | —                                                                          |       | 2,509 |   | — |   | — |   | 2,509 |   |
| Deferred income  taxes                                                                        |       | —                                                                          |       | (41,928 | ) | — |   | — |   | (41,928 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                          |       | 24,157 |   | (191 | ) | — |   | 23,966 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                          |       | 145,471 |   | (145,471 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (54,440                                                                         | )          | (195,957 | ) | — |   | 250,397 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | —                                                                          |       | 128,775 |   | (65,924 | ) | — |   | 62,851 |   |
| Net cash provided by  continuing operating activities                                         |       | —                                                                          |       | 255,602 |   | 8,167 |   | — |   | 263,769 |   |
| Net cash provided by  discontinued operations                                                 |       | —                                                                          |       | — |   | 685 |   | — |   | 685 |   |
| Net cash provided by  operating activities                                                    |       | —                                                                          |       | 255,602 |   | 8,852 |   | — |   | 264,454 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | —                                                                          |       | (100,086 | ) | (7,093 | ) | — |   | (107,179 | ) |
| Acquisition of The  Neiman Marcus Group, Inc.                                                 |       | —                                                                          |       | (5,156,423 | ) | — |   | — |   | (5,156,423 | ) |
| Intercompany  (receivable) payable                                                            |       | (1,427,739                                                                      | )          | — |   | — |   | 1,427,739 |   | — |   |
| Net cash (used for)  provided by continuing investing activities                              |       | (1,427,739                                                                      | )          | (5,256,509 | ) | (7,093 | ) | 1,427,739 |   | (5,263,602 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                          |       | — |   | (5,035 | ) | — |   | (5,035 | ) |
| Net cash (used for)  provided by investing activities                                         |       | (1,427,739                                                                      | )          | (5,256,509 | ) | (12,128 | ) | 1,427,739 |   | (5,268,637 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Proceeds from  borrowings                                                                     |       | —                                                                          |       | 3,325,000 |   | — |   | — |   | 3,325,000 |   |
| Repayment of borrowings                                                                       |       | —                                                                          |       | (385,812 | ) | — |   | — |   | (385,812 | ) |
| Debt issuance costs  paid                                                                     |       | —                                                                          |       | (102,854 | ) | — |   | — |   | (102,854 | ) |
| Cash equity  contributions                                                                    |       | 1,427,739                                                                       |       | 1,427,739 |   | — |   | (1,427,739 | ) | 1,427,739 |   |
| Net cash provided by  (used for) continuing financing activities                              |       | 1,427,739                                                                       |       | 4,264,073 |   | — |   | (1,427,739 | ) | 4,264,073 |   |
| Net cash provided by  discontinued operations                                                 |       | —                                                                          |       | — |   | 4,832 |   | — |   | 4,832 |   |
| Net cash provided by  (used for) financing activities                                         |       | 1,427,739                                                                       |       | 4,264,073 |   | 4,832 |   | (1,427,739 | ) | 4,268,905 |   |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                            |       |   |   |   |   |   |   |   |   |
| (Decrease) increase  during the period                                                        |       | —                                                                          |       | (736,834 | ) | 1,556 |   | — |   | (735,278 | ) |
| Beginning balance                                                                             |       | —                                                                          |       | 841,745 |   | 2,515 |   | — |   | 844,260 |   |
| Ending balance                                                                                |       | —                                                                          |       | 104,911 |   | 4,071 |   | — |   | 108,982 |   |
| Less cash of  discontinued operations                                                         |       | —                                                                          |       | — |   | 1,539 |   | — |   | 1,539 |   |
| Ending balance                                                                                |       | $                                                                               | —     |   | $ | 104,911 |   | $ | 2,532 |   | $ | — |   | $ | 107,443 |   |

** **

40

----

** **
| ** **                                                                                   | ** ** | **Nine weeks ended October 1, 2005 (Predecessor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **NMG**                                                                          | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                                             |       |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                                | 44,154     |   | $ | 64,891 |   | $ | (64,891 | ) | $ | 44,154 |   |
| Loss (earnings)  from discontinued operations                                                |       | —                                                                           |       | 1,346 |   | (553 | ) | 793 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                                             |       |   |   |   |   |   |   |
| Depreciation                                                                                 |       | 16,118                                                                           |       | 3,091 |   | — |   | 19,209 |   |
| Amortization of debt issue costs                                                             |       | 96                                                                               |       | — |   | — |   | 96 |   |
| Stock-based compensation charges                                                             |       | 19,968                                                                           |       | — |   | — |   | 19,968 |   |
| Deferred income taxes                                                                        |       | (6,921                                                                           | )          | — |   | — |   | (6,921 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | (5,371                                                                           | )          | 750 |   | — |   | (4,621 | ) |
| Intercompany royalty income payable (receivable)                                             |       | 46,240                                                                           |       | (46,240 | ) | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (65,444                                                                          | )          | — |   | 65,444 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | 505,360                                                                          |       | (554,505 | ) | — |   | (49,145 | ) |
| Net cash  provided by (used for) continuing operating activities                             |       | 554,200                                                                          |       | (530,667 | ) | — |   | 23,533 |   |
| Net cash used  for discontinued operations                                                   |       | —                                                                           |       | (4,098 | ) | — |   | (4,098 | ) |
| Net cash  provided by (used for) operating activities                                        |       | 554,200                                                                          |       | (534,765 | ) | — |   | 19,435 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                                             |       |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | (22,455                                                                          | )          | (3,120 | ) | — |   | (25,575 | ) |
| Net cash used  for continuing investing activities                                           |       | (22,455                                                                          | )          | (3,120 | ) | — |   | (25,575 | ) |
| Net cash used  for discontinued operations                                                   |       | —                                                                           |       | (736 | ) | — |   | (736 | ) |
| Net cash used  for investing activities                                                      |       | (22,455                                                                          | )          | (3,856 | ) | — |   | (26,311 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                                             |       |   |   |   |   |   |   |
| Cash dividends  paid                                                                         |       | (7,346                                                                           | )          | — |   | — |   | (7,346 | ) |
| Net cash used  for continuing financing activities                                           |       | (7,346                                                                           | )          | — |   | — |   | (7,346 | ) |
| Net cash  provided by discontinued operations                                                |       | —                                                                           |       | 5,000 |   | — |   | 5,000 |   |
| Net cash (used  for) provided by financing activities                                        |       | (7,346                                                                           | )          | 5,000 |   | — |   | (2,346 | ) |
| **CASH  AND CASH EQUIVALENTS**                                                               |       |                                                                             |       |   |   |   |   |   |   |
| Increase  (decrease) during the period                                                       |       | 524,399                                                                          |       | (533,621 | ) | — |   | (9,222 | ) |
| Beginning  balance                                                                           |       | 317,346                                                                          |       | 536,136 |   | — |   | 853,482 |   |
| Ending balance                                                                               |       | 841,745                                                                          |       | 2,515 |   | — |   | 844,260 |   |
| Less cash of  discontinued operations                                                        |       | —                                                                           |       | 1,056 |   | — |   | 1,056 |   |
| Ending balance                                                                               |       | $                                                                                | 841,745    |   | $ | 1,459 |   | $ | — |   | $ | 843,204 |   |

 

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

**EXECUTIVEOVERVIEW**

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourAnnual Report on Form 10-K for the fiscal year ended July 29, 2006.  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 a discussion of the risks, uncertainties and assumptions relating to ourforward-looking statements.

**Overview**

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

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

Prior to the Acquisition, the Company had noindependent assets or operations.  Afterthe Acquisition, the Company represents the Successor to NMG since the Company’ssole asset is its investment in NMG and its operations consist solely of theoperating activities of NMG as well as costs incurred by the Company related toits investment in NMG.  For periods priorto the Acquisition, NMG is deemed to be the predecessor to the Company.  As a result, for periods prior to theTransactions, the financial statements of the Company consist of the financialstatements of NMG for such periods. The accompanying condensed consolidatedstatements of earnings and cash flows present our results of operations andcash flows for the periods preceding the Acquisition (Predecessor) and theperiods succeeding the Acquisition (Successor), respectively. All references to“we” and “our” relate to the Company for periods subsequent to the Transactionsand to NMG for periods prior to the Transactions.

We have prepared our discussion of the results ofoperations for the thirty-nine weeks ended April 28, 2007 by comparingthe results of operations for the thirty-nine weeks ended April 28, 2007 to thecombined earnings and cash flows for the Predecessor nine week period endedOctober 1, 2005 and the Successor thirty week period ended April 29, 2006. Although this combined presentation does notcomply with generally accepted accounting principles (GAAP), we believe that itprovides a meaningful method of comparison. The combined operating results havenot been prepared on a pro forma basis under applicable regulations and may notreflect the actual results we would have achieved absent the Transactions andmay not be predictive of future results of operations.

In connection with the Transactions, we incurred significantindebtedness and became highly leveraged. See “Liquidity and Capital Resources.”In addition, the purchase price paid in connection with the Acquisition wasallocated to state the acquired assets and liabilities at fair value at theAcquisition date. The purchase accounting adjustments increased the carryingvalue of our property and equipment and inventory, established intangibleassets for our tradenames, customer lists and favorable lease commitments andrevalued our long-term benefit plan obligations, among other things. Subsequentto the Transactions, interest expense and non-cash depreciation andamortization charges have significantly increased. As a result, our successorfinancial statements subsequent to the Transactions are not comparable to ourpredecessor financial statements.

Our fiscal year ends on the Saturday closest to July 31.  All references to the third quarter of fiscalyear 2007 relate to the thirteen weeks ended April 28, 2007 (Successor).  All references to the third quarter of fiscalyear 2006 relate to the thirteen weeks ended April 29, 2006 (Successor).  All references to year-to-date fiscal 2007relate to the thirty-nine weeks ended April 28, 2007 (Successor).  All references to year-to-date fiscal 2006relate to the combined period comprised of the thirty weeks ended April 29,2006 (Successor) and the nine weeks ended October 1, 2005 (Predecessor).

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On July 27, 2006, we sold our majority interest in GurwitchProducts, L.L.C. to Alticor Inc., for pretax net cash proceeds ofapproximately $40.8 million (Gurwitch Disposition).  Gurwitch Products, L.L.C. designs and marketsthe Laura Mercier cosmetics line and had annual revenues of approximately $71.6million in fiscal year 2006.  Thenet assets of Gurwitch Products, L.L.C. were sold for their net carryingvalue (after purchase accounting adjustments made in connection with theTransactions to state such assets at fair value).

In April 2005, theminority investor in Kate Spade LLC exercised the put option with respect tothe sale of the full amount of its 44% stake in such company to NMG. We subsequentlyentered into a standstill agreement to postpone the put process while weengaged in discussions with the minority investor in Kate Spade LLC regardingcertain strategic alternatives, including the possible sale of such company.  In October 2006, we entered into an agreementto settle the put option whereby we purchased the interest held by the minorityinvestor for approximately $59.4 million.

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

Kate Spade LLC designsand markets high-end accessories and had revenues of approximately $84.7million in fiscal year 2006. Fiscal year 2007 revenues of Kate Spade LLCthrough its disposition in December 2006 aggregated $29.6 million.

TheCompany’s unaudited condensed consolidated financial statements, accompanyingnotes and other information provided in this Quarterly Report on Form 10-Qreflect Gurwitch Products, L.L.C. and Kate Spade LLC as discontinued operationsfor all periods presented.

**Factors Affecting Our Results**

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

·                  Commissionsfrom leased departments—A small portion of the sales of our Specialty Retailstores consist of commissions from certain departments in our stores that welease to independent companies.

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

Our revenues can be affected by the following factors:

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

·                  changesin the level of full-price sales;

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

·                  ourability to successfully implement our store expansion and remodelingstrategies;

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

·                  generaleconomic conditions.

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

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***Costof goods sold including buying and occupancy costs (excluding depreciation)(COGS).***  COGSconsists of the following components:

·                  Inventorycosts—We utilize the retail method of accounting, which is widely used in theretail industry due to its practicality, for substantially all of ourmerchandise inventories. Merchandise inventories are stated at the lower ofcost or market. Under the retail inventory method, the valuation of inventoriesat cost and the resulting gross margins are determined by applying a calculatedcost-to-retail ratio, for various groupings of similar items, to the retailvalue of inventories. The cost of the inventory reflected on the consolidatedbalance sheet is decreased by charges to cost of goods sold at the time theretail value of the inventory is lowered through the use of markdowns. Hence,earnings are negatively impacted when merchandise is marked down.

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

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

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

With the introduction of new fashions in the first andthird fiscal quarters and our emphasis on full-price selling in these quarters,a lower level of markdowns and higher margins are characteristic of thesequarters.

Consistent with industry business practice, we receiveallowances from certain of our vendors in support of the merchandise wepurchase for resale. Certain allowances are received to reimburse us formarkdowns taken or to support the gross margins that we earn in connection withthe sales of the vendor’s merchandise. These allowances result in an increaseto gross margin when we earn the allowances and they are approved by thevendor. Other allowances we receive represent reductions to the amounts we payto acquire the merchandise. These allowances reduce the cost of the acquiredmerchandise and are recognized at the time the goods are sold.  We received vendor allowances of$56.3 million, or 1.7% of revenues, in year-to-date fiscal 2007 and$51.5 million, or 1.6% of revenues, in year-to-date fiscal 2006.

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

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

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

·                  factorsaffecting revenues generally;

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

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

***Selling,general and administrative expenses (excluding depreciation) (SG&A).***  SG&A principally consists of 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 Specialty Retailsegment consist primarily of print media costs related to promotional materialsmailed to our customers, while advertising costs incurred by our DirectMarketing operation relate to the production, printing and distribution of ourprint catalogs and the production of the photographic content on our websites,as well as online marketing costs. We receive advertising allowances fromcertain of our merchandise vendors. Substantially all the 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 $57.1 million for the thirty-nine weeks ended April 28, 2007 and

44

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$55.8 million for the thirty-nine weeks ended April 29, 2006 (including$18.6 million for the Predecessor prior to the Acquisition).

We also receive allowances from certain merchandise vendors inconjunction with compensation programs for employees who sell the vendor’smerchandise. These allowances are netted against the related compensationexpense that we incur. Amounts received from vendors related to compensationprograms were $49.9 million for the thirty-nine weeks ended April 28, 2007 and$45.1 million for the thirty-nine weeks ended April 29, 2006 (including$10.1 million for the Predecessor prior to the Acquisition).

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

·                  changesin the number of sales associates primarily due to expansion of existing storesand new store openings, including increased health care and related benefitsexpenses;

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

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

***Income from credit card operations***.  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.  Inthe future, the HSBC Program Income may be:

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

·                  increasedbased upon changes to our historical credit card program related to, amongother things, the interest rates applied to unpaid balances and the assessmentof late fees.

**Seasonality**

We conduct our selling activities in two primaryselling seasons—Fall and Spring. The Fall season is comprised of our first andsecond fiscal quarters and the Spring season is comprised of our third andfourth fiscal quarters.

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

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

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

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

**OPERATING RESULTS**

**Performance Summary**

The following table sets forth certain items expressedas percentages of net revenues for the periods indicated.
| ** **                                                                        | ** ** | **Quarter-to-Date**                                  | ** ** | **Year-to-Date**                                     | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Thirteen  weeks ended  April 28,  2007** | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirty-nine  weeks ended  April 28,  2007** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Thirty-nine  weeks ended  April 29,  2006** | ** ** |
| ** **                                                                        | ** ** | **(Successor)**                                      | ** ** | **(Successor)**                                      | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | **(Predecessor)** | ** ** | **(Combined)** | ** ** |
| Revenues                                                                          |       | 100.0                                                | %          | 100.0                                                | %          | 100.0 | % | 100.0 | % |   |   | 100.0 | % | 100.0 | % |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 58.5                                                 |       | 59.4                                                 |       | 61.2 |   | 64.1 |   |   |   | 58.8 |   | 63.0 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 23.1                                                 |       | 23.7                                                 |       | 22.8 |   | 23.2 |   |   |   | 24.6 |   | 23.5 |   |
| Income from credit card  operations                                               |       | (1.6                                                 | )          | (1.5                                                 | )          | (1.5 | ) | (1.4 | ) |   |   | (1.2 | ) | (1.4 | ) |
| Depreciation expense                                                              |       | 3.2                                                  |       | 3.2                                                  |       | 3.0 |   | 3.0 |   |   |   | 3.0 |   | 3.0 |   |
| Amortization of  customer lists                                                   |       | 1.3                                                  |       | 1.4                                                  |       | 1.2 |   | 1.2 |   |   |   | — |   | 1.0 |   |
| Amortization of  favorable lease commitments                                      |       | 0.4                                                  |       | 0.5                                                  |       | 0.4 |   | 0.4 |   |   |   | — |   | 0.3 |   |
| Transaction and other  costs                                                      |       | —                                               |       | —                                               |       | — |   | — |   |   |   | 3.7 |   | 0.8 |   |
| Other income                                                                      |       | —                                               |       | —                                               |       | (0.1 | ) | — |   |   |   | — |   | — |   |
| Operating earnings                                                                |       | 15.1                                                 |       | 13.4                                                 |       | 13.0 |   | 9.5 |   |   |   | 11.1 |   | 9.8 |   |
| Interest expense  (income), net                                                   |       | 5.9                                                  |       | 6.8                                                  |       | 5.8 |   | 6.0 |   |   |   | (0.1 | ) | 4.8 |   |
| Earnings from continuing  operations before income taxes                          |       | 9.2                                                  |       | 6.7                                                  |       | 7.2 |   | 3.5 |   |   |   | 11.3 |   | 5.1 |   |
| Income taxes                                                                      |       | 3.5                                                  |       | 2.5                                                  |       | 2.8 |   | 1.3 |   |   |   | 4.1 |   | 1.9 |   |
| Earnings from  continuing operations                                              |       | 5.7                                                  |       | 4.1                                                  |       | 4.4 |   | 2.1 |   |   |   | 7.1 |   | 3.1 |   |
| Loss from discontinued  operations                                                |       | (0.1                                                 | )          | 0.0                                                  |       | (0.7 | ) | 0.0 |   |   |   | (0.1 | ) | 0.0 |   |
| Net earnings                                                                      |       | 5.5                                                  | %          | 4.1                                                  | %          | 3.7 | % | 2.2 | % |   |   | 7.0 | % | 3.1 | % |

 

In connection with the Transactions, the Companyincurred significant indebtedness and became highly leveraged.  See “Liquidity and Capital Resources.”  In addition, the purchase price paid in connectionwith the Acquisition was allocated to state the acquired assets and liabilitiesat fair value.  The purchase accountingadjustments increased the carrying value of our property and equipment andinventory, established intangible assets for our tradenames, customer lists andfavorable lease commitments and revalued our long-term benefit planobligations, among other things. Subsequent to the Transactions, interest expense and non-cashdepreciation and amortization charges have significantly increased.   As a result, our Successor financialstatements subsequent to the Transactions are not comparable to our Predecessorfinancial statements.

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Set forth in the following table is certain summaryinformation with respect 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 28,  2007** | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirty-nine  weeks ended  April 28,  2007** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Thirty-nine  weeks ended  April 29,  2006** | ** ** |
| ** **                                                                                     | ** ** | **(Successor)**     | ** ** | **(Successor)**                                      | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | ** ** | **(Predecessor)** | ** ** | **(Combined)** | ** ** |
| REVENUES                                                                                       |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                   | 908.0      |                                                 | $          | 840.2 |   | $ | 2,857.9 |   | $ | 2,084.1 |   |   |   | $ | 544.9 |   | $ | 2,629.0 |   |
| Direct Marketing                                                                               |       | 165.4               |       | 152.1                                                |       | 550.5 |   | 416.5 |   |   |   | 87.5 |   | 504.0 |   |
| Total                                                                                          |       | $                   | 1,073.4    |                                                 | $          | 992.3 |   | $ | 3,408.4 |   | $ | 2,500.6 |   |   |   | $ | 632.4 |   | $ | 3,133.0 |   |
|                                                                                           |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| OPERATING  EARNINGS                                                                            |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                        |       | $                   | 168.1      |                                                 | $          | 142.6 |   | $ | 446.2 |   | $ | 281.0 |   |   |   | $ | 91.4 |   | $ | 372.4 |   |
| Direct Marketing                                                                               |       | 29.8                |       | 23.0                                                 |       | 89.7 |   | 67.3 |   |   |   | 8.2 |   | 75.5 |   |
| Subtotal                                                                                       |       | 197.9               |       | 165.6                                                |       | 535.9 |   | 348.3 |   |   |   | 99.6 |   | 447.9 |   |
| Corporate expenses                                                                             |       | (17.3               | )          | (15.0                                                | )          | (41.3 | ) | (33.3 | ) |   |   | (5.8 | ) | (39.1 | ) |
| Amortization of customer lists and favorable lease  commitments                                |       | (18.1               | )          | (18.0                                                | )          | (54.2 | ) | (41.5 | ) |   |   | — |   | (41.5 | ) |
| Non-cash items related to other valuation  adjustments made in connection with the Acquisition |       | —              |       | 0.5                                                  |       | — |   | (36.0 | ) |   |   | — |   | (36.0 | ) |
| Other income (1)                                                                               |       | —              |       | —                                               |       | 4.2 |   | — |   |   |   | — |   | — |   |
| Transaction and other costs                                                                    |       | —              |       | —                                               |       | — |   | — |   |   |   | (23.5 | ) | (23.5 | ) |
| Total                                                                                          |       | $                   | 162.6      |                                                 | $          | 133.1 |   | $ | 444.6 |   | $ | 237.5 |   |   |   | $ | 70.3 |   | $ | 307.7 |   |
|                                                                                           |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| OPERATING PROFIT  MARGIN                                                                       |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Specialty Retail  stores                                                                       |       | 18.5                | %          | 17.0                                                 | %          | 15.6 | % | 13.5 | % |   |   | 16.8 | % | 14.2 | % |
| Direct Marketing                                                                               |       | 18.0                | %          | 15.1                                                 | %          | 16.3 | % | 16.2 | % |   |   | 9.4 | % | 15.0 | % |
| Total                                                                                          |       | 15.1                | %          | 13.4                                                 | %          | 13.0 | % | 9.5 | % |   |   | 11.1 | % | 9.8 | % |
|                                                                                           |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| CHANGE IN  COMPARABLE REVENUES (2)                                                             |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                        |       | 5.6                 | %          | 5.7                                                  | %          | 6.1 | % | 5.3 | % |   |   | 9.8 | % | 6.2 | % |
| Direct Marketing                                                                               |       | 8.7                 | %          | 16.5                                                 | %          | 9.2 | % | 14.2 | % |   |   | 9.6 | % | 13.4 | % |
| Total                                                                                          |       | 6.1                 | %          | 7.3                                                  | %          | 6.6 | % | 6.7 | % |   |   | 9.8 | % | 7.3 | % |
|                                                                                           |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| SALES PER SQUARE  FOOT                                                                         |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Specialty Retail  stores                                                                       |       | $                   | 157        |                                                 | $          | 149 |   | $ | 499 |   | $ | 375 |   |   |   | $ | 103 |   | $ | 478 |   |
|                                                                                           |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| STORE COUNT                                                                                    |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Neiman Marcus  and Bergdorf Goodman stores:                                                    |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Open at beginning of period                                                                    |       | 39                  |       | 38                                                   |       | 38 |   | 37 |   |   |   | 36 |   | 36 |   |
| Opened during the period                                                                       |       | 1                   |       | —                                               |       | 2 |   | 1 |   |   |   | 1 |   | 2 |   |
| Open at end of period                                                                          |       | 40                  |       | 38                                                   |       | 40 |   | 38 |   |   |   | 37 |   | 38 |   |
| Clearance  centers:                                                                            |       |                |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Open at beginning of period                                                                    |       | 19                  |       | 17                                                   |       | 18 |   | 17 |   |   |   | 16 |   | 16 |   |
| Opened during the period                                                                       |       | —              |       | 1                                                    |       | 1 |   | 1 |   |   |   | 1 |   | 2 |   |
| Open at end of  period                                                                         |       | 19                  |       | 18                                                   |       | 19 |   | 18 |   |   |   | 17 |   | 18 |   |
|                                                                                                |            |                     |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)             Otherincome represents the proceeds we received in settlement of our cost methodinvestment in an internet retailer. We had previously reduced our carryingvalue in this investment to zero.

(2)             Comparablerevenues include 1) revenues derived from our retail stores open for morethan 52 weeks, including stores that have been relocated or expanded and2) revenues from our Direct Marketing operation. Comparable revenuesexclude 1) revenues of closed stores and 2) revenues from our discontinuedoperations (Gurwitch Products, L.L.C. and Kate Spade LLC).

47

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**Fiscal Year 2007Highlights**

We believe that our product assortment of luxury,designer and fashion merchandise, coupled with our sales promotion activitiesand our commitment to superior customer service, have been critical to oursuccess in the past. In addition, we believe these factors are critical to ourfuture growth and success.  Highlightsfrom the third quarter of fiscal year 2007 include:

·                  **Increases in revenues**—We generated revenue growth in thequarterly and year-to-date fiscal periods ended April 28, 2007 of 8.2% and8.8%, respectively. These increases were attributable to 1) increases incomparable revenues, 2) revenues from new stores and 3) higher internet sales.

Comparablerevenues increased 6.1% in the third quarter of fiscal year 2007 and 6.6% inthe year-to-date fiscal 2007 period.  Theincreases in comparable revenues were achieved on top of increases incomparable revenues of 7.3% in the third quarter of fiscal year 2006 and 7.3%in the year-to-date fiscal 2006 period.

For Specialty Retailstores, our sales per square foot for the last twelve trailing months increasedby 4.3% to $631 as of April 2007 compared to $605 as of April 2006.

·                  **Decreases in cost of goods sold including buying and occupancy costs(excluding depreciation)**—COGS represented 58.5% of revenues in thethird quarter of fiscal year 2007 and 59.4% of revenues in the third quarter offiscal year 2006.  This decrease was dueto 1) an increase in margins of approximately 0.5% of revenues, primarily inour Specialty Retail stores, related to lower product costs as a percentage ofrevenues and a higher level of full-price sales and 2) an increase in marginsof approximately 0.3% of revenues resulting from a decrease in non-cashpurchase accounting adjustments recorded in the third quarter of fiscal year2006 as a result of the write-up of inventories to fair value at theAcquisition date.

COGS represented 61.2% ofrevenues in the year-to-date fiscal period ended April 28, 2007 and 63.0% ofrevenues in the prior year-to-date fiscal period. This decrease is primarilydue to non-cash purchase accounting adjustments in fiscal year 2006 of $42.5million, or 1.4% of revenues.  Excludingthe impact of purchase accounting adjustments, COGS decreased by 0.4% ofrevenues in the year-to-date fiscal 2007 period.  The year-to-date fiscal 2007 decrease in COGSwas achieved on top of a decrease in COGS of 0.5% of revenues in theyear-to-date fiscal 2006 period.  Webelieve these decreases are reflective of a lower level of markdowns requiredin the Fall Season of fiscal year 2007 as well as our continuing emphasis onfull-price sales and inventory management.

·                  **Decreases in selling, general and administrative expenses (excludingdepreciation)**—SG&A decreased in the third quarter of fiscal year2007 to 23.1% of revenues from 23.7% of revenues in the third quarter of fiscalyear 2006 and decreased in the year-to-date fiscal period of 2007 to 22.8% ofrevenues from 23.5% of revenues in the corresponding fiscal period of2006.  The year-to-date fiscal 2007decrease in SG&A was achieved on top of a decrease in SG&A of 0.7% ofrevenues in the year-to-date fiscal 2006 period.  We believe these decreases are reflective ofboth our continued leveraging of certain costs, primarily advertising, andemphasis on expense containment and control.

·                  **Increases in operating earnings—**For the third quarter of fiscalyear 2007, our operating earnings were $162.6 million, or 15.1% ofrevenues, compared to $133.1 million, or 13.4% of revenues, in the prior yearfiscal quarter.  The increase inoperating earnings in the third quarter of fiscal 2007 was primarily due to anincrease of $32.3 million in the operating earnings generated by our SpecialtyRetail Stores and Direct Marketing segments.

For year-to-date fiscal2007, our operating earnings were $444.6 million, or 13.0% of revenues,compared to $307.7 million, or 9.8% of revenues, for the year-to-date fiscal2006 period.  Year-to-date fiscal 2007operating earnings increased primarily due to 1) an increase of $88.0 millionin the operating earnings generated by our Specialty Retail Stores and DirectMarketing segments given the year-over-year increases in revenues, grossmargins achieved and expense leveraging, 2) a decrease of $23.5 million intransaction costs incurred in the first quarter of fiscal year 2006 and 3) a$23.3 million net decrease in non-cash charges related to the amortization ofintangible assets and other asset valuation adjustments recorded in connectionwith the Acquisition.

48

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**Thirteen Weeks Ended April 28, 2007 Compared toThirteen Weeks Ended April 29, 2006**

***Revenues.**** *Our revenues for thethird quarter of fiscal year 2007 of $1,073.4 million increased $81.1 million,or 8.2%, from $992.3 million in the third quarter of fiscal year 2006.  The increase in revenues was due to increasesin comparable revenues, revenues from new stores, and higher internetsales.  Revenues increased in the thirdquarter of fiscal year 2007 compared to the prior year period at all ouroperating companies.

Comparablerevenues for the third quarter of fiscal year 2007 were $1,052.9 millioncompared to $992.3 million in the prior year fiscal quarter, representing anincrease of 6.1%.  Comparable revenuesincreased in the third quarter of fiscal year 2007 by 5.6% for Specialty Retailstores and 8.7% for Direct Marketing compared to the third quarter of fiscalyear 2006.

New storesgenerated sales of $20.5 million in the third quarter of fiscal year 2007. Inthe third quarter of fiscal year 2007, internet sales by Direct Marketing were$121.3 million, an increase of 25.6% compared to the third quarter of fiscalyear 2006.

***Costof goods sold including buying and occupancy costs (excluding depreciation).***  COGS for the third quarter of fiscal year2007 and fiscal year 2006 were:
| ** **                                                                                                                 | ** ** | **Thirteen weeks ended  April 28, 2007  (Successor)** | ** ** | **Thirteen weeks ended  April 29, 2006  (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(in millions, except percentages)**                                                                       | ** ** | **$**                                                                     | ** ** | **% of  revenues**                                                   | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| COGS, before  purchase accounting adjustments                                                                              |       | $                                                                         | 627.9      |                                                                      | 58.5       | % | $ | 586.4 |   | 59.1 | % |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of acquired inventories |       | —                                                                    |       | —                                                                    |       | 2.9 |   | 0.3 | % |
| COGS, as reported                                                                                                          |       | $                                                                         | 627.9      |                                                                      | 58.5       | % | $ | 589.3 |   | 59.4 | % |

 

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

The decrease inCOGS as reported under GAAP to 58.5% of revenues from 59.4% of revenues in theprior year fiscal period is primarily due to:

·            increasedmargins generated by our Specialty Retail stores of approximately 0.5% ofrevenues due primarily to lower product costs and a higher portion offull-price sales in the third quarter of fiscal year 2007; and

·            $2.9million of non-cash charges included in COGS in the third quarter of fiscalyear 2006 primarily related to the step-up in the carrying value of theacquired inventories recorded in connection with the Transactions.

Consistentwith industry business practice, we receive allowances from certain of ourvendors in support of the merchandise we purchase for resale.  We receive certain allowances to reimburse usfor markdowns taken and/or to support the gross margins realized in connectionwith the sales of the vendor’s merchandise. We recognize these allowances as a decrease in COGS when the allowancesare earned and approved by the vendor. Other allowances we receive represent reductions to the amountsinitially paid to acquire the merchandise. We recognize these allowances as a reduction in the cost of the acquiredmerchandise resulting in a decrease in COGS at the time the goods aresold.  We received vendor allowances of $9.7 million, or 0.9% of revenues, in thethird quarter of fiscal year 2007 and $7.5 million, or 0.8% of revenues,in the third quarter of fiscal year 2006.

49

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***Selling,general and administrative expenses (excluding depreciation)*.**  SG&A expenses were 23.1% of revenues inthe third quarter of fiscal year 2007 compared to 23.7% of revenues in theprior year fiscal period.

The net decreasein SG&A expenses as a percentage of revenues in the third quarter of fiscalyear 2007 was primarily due to:

·            adecrease in marketing and advertising costs of approximately 0.6% of revenuesprimarily due to 1) higher internet sales by our Direct Marketing segment,which have a lower expense to revenue ratio than catalog sales, and 2) adecrease of costs incurred by our Specialty Retail stores;

·            adecrease in insurance expense of 0.4% of revenues due to the impact offavorable insurance claims experience; and

·            lowerlong-term benefits expenses of approximately 0.4% of revenues.

These decreases inSG&A expenses, as a percentage of revenues, were partially offset by:

·            anincrease in estimated annual incentive compensation costs to be incurred infiscal year 2007 of approximately 0.5% of revenues;

·            aincrease in preopening expenses primarily associated with the opening of ourAustin store in the third quarter of fiscal year 2007, by approximately 0.1% ofrevenues; and

·            anincrease in professional fees of 0.1% of revenues.

***Income from credit card operations, net.  ***We received HSBC Program Income of $17.1 million,or 1.6% of revenues, in the third quarter of fiscal year 2007 compared to $15.1million, or 1.5% of revenues, in the third quarter of fiscal year 2006. HSBCProgram Income increased as a percentage of revenues in the third quarter offiscal year 2007 compared to the prior year period as a result of changes madeto our credit card program in fiscal year 2006 related to, among other things,the interest rates applied to unpaid balances and the assessment of late fees.

***Depreciationexpense. ***Depreciationexpense was $34.3 million, or 3.2% of revenues, in the third quarter of fiscalyear 2007 compared to $31.6 million, or 3.2% of revenues, in the prior yearfiscal period. The increase in depreciation expense was primarily due to ahigher level of capital spending in recent years.

***Amortizationexpense. ***Amortizationof acquisition related intangibles (customer lists and favorable leasecommitments) recorded as a result of the application of purchase accounting inconnection with the Acquisition aggregated $18.1 million, or 1.7% of revenues,in the third quarter of fiscal year 2007 compared to $18.0 million, or 1.9% ofrevenues, in the third quarter of fiscal year 2006.

***Segmentoperating earnings.*** Segment operating earnings for our Specialty Retail stores and DirectMarketing segments do not reflect the impact of adjustments to revalue ourassets and liabilities to estimated fair value at the Acquisition date.  See Note 12 to our unaudited condensedconsolidated financial statements.

Operating earningsfor our Specialty Retail stores segment were $168.1 million, or 18.5% ofSpecialty Retail stores revenues, for the third quarter of fiscal year 2007compared to $142.6 million, or 17.0% of Specialty Retail stores revenues, forthe prior year fiscal period.  Theincrease in operating margin was primarily due to 1) increased product marginsdue primarily to lower product costs as a percentage of revenues and a higherportion of full-price sales and 2) net reductions in expenses as a percentageof revenues, particularly marketing and advertising, insurance and benefitspartially offset by higher incentive compensation and pre-opening expenses.

Operating earningsfor Direct Marketing increased to $29.8 million, or 18.0% of Direct Marketingrevenues, in the third quarter of fiscal year 2007 from $23.0 million, or 15.1%of Direct Marketing revenues, for the prior year period.  The increase in operating margin for DirectMarketing was primarily the result of the continued leveraging of advertisingand marketing costs, as a percentage of revenues, due to the continued growthin internet sales, which have a lower expense to revenue ratio than catalogsales.

50

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***Interestexpense, net*.**  Netinterest expense was $63.8 million, or 5.9% of revenues, in the third quarterof fiscal year 2007 and $67.0 million, or 6.8% of revenues, for the prior yearperiod.   The significant components of interest expense are as follows:
| (in thousands)                | ** ** | **Thirteen  weeks ended  April 28,  2007** | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **(Successor)**                                      | ** ** | **(Successor)**                                      | ** ** |
| Senior Secured  Term Loan Facility |       | $                                                    | 30,648     |                                                 | $          | 33,170 |   |
| 2028 Debentures                    |       | 2,227                                                |       | 2,226                                                |       |
| Senior Notes                       |       | 15,750                                               |       | 15,925                                               |       |
| Senior  Subordinated Notes         |       | 12,969                                               |       | 13,113                                               |       |
| Amortization of  debt issue costs  |       | 3,554                                                |       | 3,497                                                |       |
| Other                              |       | 867                                                  |       | 1,094                                                |       |
| Total interest expense             |       | 66,015                                               |       | 69,025                                               |       |
| Less:                              |       |                                                 |       |                                                 |       |
| Interest income                    |       | 1,665                                                |       | 1,117                                                |       |
| Capitalized interest               |       | 563                                                  |       | 868                                                  |       |
| Interest expense, net              |       | $                                                    | 63,787     |                                                 | $          | 67,040 |   |

 

***Incometaxes.***  Oureffective income tax rate for the thirteen weeks ended April 28, 2007 was 38.3%compared to 37.9% for the thirteen weeks ended April 29, 2006.

The Company closed its Internal Revenue Service (IRS) examination offederal tax returns for fiscal years 2004 and 2003 during the first quarter offiscal year 2007 and paid the related tax liability during the second quarterof fiscal year 2007.

**Thirty-Nine Weeks Ended April 28, 2007 Compared toThirty-Nine Weeks Ended April 29, 2006**

***Revenues.**** *Our revenues foryear-to-date fiscal 2007 of $3,408.4 million increased $275.4 million, or 8.8%,from $3,133.0 million in year-to-date fiscal 2006.  The increase in revenues was due to increasesin comparable revenues, revenues from new stores and higher internetsales.  Revenues increased inyear-to-date fiscal 2007 compared to the prior year period at all our operatingcompanies.

Comparablerevenues for the thirty-nine weeks ended April 28, 2007 were $3,339.5 millioncompared to $3,132.8 million in the prior year fiscal period, representing anincrease of 6.6%. Comparable revenues increased in the year-to-date fiscal 2007period by 6.1% for Specialty Retail stores and 9.2% for Direct Marketingcompared to year-to-date fiscal 2006.

New storesgenerated sales of $66.7 million in year-to-date fiscal 2007 and internet salesby Direct Marketing were $378.2 million, an increase of 22.0% compared to theprior year fiscal period.

***Costof goods sold including buying and occupancy costs (excluding depreciation).***  COGS for year-to-date fiscal 2007 andyear-to-date fiscal 2006 were:
| ** **                                                                                                                 | ** ** | **Thirty-nine weeks ended  April 28, 2007  (Successor)** | ** ** | **Thirty-nine weeks ended  April 29, 2006  (Combined)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **(in millions, except percentages)**                                                                       | ** ** | **$**                                                                        | ** ** | **% of  revenues**                                                     | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| COGS, before  purchase accounting adjustments                                                                              |       | $                                                                            | 2,084.9    |                                                                        | 61.2       | % | $ | 1,932.1 |   | 61.6 | % |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of acquired inventories |       | —                                                                       |       | —                                                                      |       | 42.5 |   | 1.4 |   |
| COGS, as reported                                                                                                          |       | $                                                                            | 2,084.9    |                                                                        | 61.2       | % | $ | 1,974.6 |   | 63.0 | % |

 

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

51

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The decrease inCOGS as reported under GAAP to 61.2% of revenues from 63.0% in the prior yearfiscal period is primarily due to:

·            $42.5million of non-cash charges included in COGS in year-to-date fiscal 2006primarily related to the step-up in the carrying value of the acquiredinventories recorded in connection with the Transactions; and

·            increasedmargins generated by our Specialty Retail stores of approximately 0.4% ofrevenues due primarily to lower product costs, a decrease in net markdownsincurred in the Fall Season and a higher level of full-price sales in theyear-to-date fiscal 2007 period.

Consistentwith industry business practice, we receive allowances from certain of ourvendors in support of the merchandise we purchase for resale.  We receive certain allowances to reimburse usfor markdowns taken and/or to support the gross margins realized in connectionwith the sales of the vendor’s merchandise. We recognize these allowances as a decrease in COGS when the allowancesare earned and approved by the vendor. Other allowances we receive represent reductions to the amounts paid toacquire the merchandise.  We recognizethese allowances as a reduction in the cost of the acquired merchandiseresulting in a decrease in COGS at the time the goods are sold.  We received vendorallowances of $56.3 million, or 1.7% of revenues, in year-to-date fiscal2007 and $51.5 million, or 1.6% of revenues, in year-to-date fiscal 2006.

***Selling,general and administrative expenses (excluding depreciation)*.**  SG&A expenses were 22.8% of revenues inyear-to-date fiscal 2007 compared to 23.5% of revenues in the prior year fiscalperiod.

The net decreasein SG&A expenses as a percentage of revenues in year-to-date fiscal 2007was primarily due to:

·            adecrease in marketing and advertising costs of approximately 0.5% of revenuesprimarily due to 1) higher internet sales by our Direct Marketing segment,which have a lower expense to revenue ratio than catalog sales and 2) adecrease of costs incurred by our Specialty Retail stores;

·            lowerlong-term benefits expenses of approximately 0.3% of revenues;

·            adecrease in insurance expense of 0.2% of revenues due to the impact of favorableinsurance claims experience; and

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

These decreases inSG&A expenses, as a percentage of revenues, were partially offset by anincrease in estimated annual incentive compensation costs to be incurred inyear-to-date fiscal 2007 of approximately 0.3% of revenues.

***Income from credit card operations, net.  ***We received HSBC Program Income of $51.4 million,or 1.5% of revenues, in year-to-date fiscal 2007 compared to $43.7 million, or1.4% of revenues, in year-to-date fiscal 2006. HSBC Program Income increased as a percentage of revenues inyear-to-date fiscal 2007 compared to the prior year period as a result ofchanges made to our credit card program in fiscal year 2006 related to, amongother things, the interest rates applied to unpaid balances and the assessmentof late fees.

***Depreciationexpense. ***Depreciationexpense was $101.5 million, or 3.0% of revenues, in year-to-date fiscal 2007compared to $94.3 million, or 3.0% of revenues, in the prior year fiscalperiod.  The increase in depreciationexpense was primarily due to a higher level of capital spending in recentyears.

***Amortizationexpense. ***Amortizationof acquisition related intangibles (customer lists and favorable lease commitments)recorded as a result of the application of purchase accounting in connectionwith the Acquisition aggregated $54.2 million, or 1.6% of revenues, foryear-to-date fiscal 2007 and $41.5 million, or 1.3% of revenues, foryear-to-date fiscal 2006.  The increasein amortization expense in year-to-date fiscal 2007 is due primarily to theSuccessor period in which amortization expense was recorded in all thirty-nineweeks in year-to-date fiscal 2007 compared to thirty weeks in year-to-datefiscal 2006.

***Segmentoperating earnings.*** Segment operating earnings for our Specialty Retail Stores and DirectMarketing segments do not reflect the impact of adjustments to revalue ourassets and liabilities to estimated fair value at the Acquisition date.  See  Note 12 to our unaudited condensed consolidated financial statements.

Operating earningsfor our Specialty Retail stores segment were $446.2 million, or 15.6% ofSpecialty Retail stores revenues, for year-to-date fiscal 2007 compared to$372.4 million, or 14.2% of Specialty Retail stores revenues, for the prioryear fiscal period.  The increase inoperating margin was primarily due to 1) increased product margins dueprimarily to both lower

52

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product costs andlower markdowns as a percentage of revenues and a higher portion of full-pricesales and 2) net reductions in expenses as a percentage of revenues, primarilymarketing and advertising, insurance, benefits and pre-opening expensespartially offset by higher incentive compensation.

Operating earningsfor Direct Marketing increased to $89.7 million, or 16.3% of Direct Marketingrevenues, in year-to-date fiscal 2007 from $75.5 million, or 15.0% of DirectMarketing revenues, for the prior year period. The increases in operating earnings and operating margin for DirectMarketing were primarily the result of 1) lower product costs as a percentageof revenues and 2) a decrease in advertising and marketing costs, as apercentage of revenues, due to the continued growth in internet sales,partially offset by, 3) an increase in buying and occupancy costs required tosupport the growth in sales.

***Interestexpense, net*.**  Netinterest expense was $198.1 million, or 5.8% of revenues, in year-to-datefiscal 2007 and $149.4 million, or 4.8% of revenues, for the prior year fiscal period.   Thesignificant components of interest expense are as follows:

 

| (in thousands)                    | ** ** | **Thirty-nine  weeks ended  April 28,  2007** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | ** ** | **Nine  weeks ended   October 1,  2005** | ** ** | **Thirty-nine  weeks ended  April 29,  2006** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------|------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **(Successor)**                                         | ** ** | **(Successor)**                                    |       |       | **(Predecessor)**                                       | ** ** | **(Combined)**                                          | ** ** |
|                                   |       |                                                    |       |                                               |       |       |                                                    |       |                                                    |       |
| Asset-Based  Revolving Credit Facility |       | $                                                       | —     |                                               | $          | 1,332      |                                                    |       | $                                                       | —     |   | $ | 1,332 |   |
| Senior Secured  Term Loan Facility     |       | 99,419                                                  |       | 76,765                                             |       |       | —                                                  |       | 76,765                                                  |       |
| 2028 Debentures                        |       | 6,689                                                   |       | 5,136                                              |       |       | 1,542                                                   |       | 6,678                                                   |       |
| Senior Notes                           |       | 47,250                                                  |       | 35,875                                             |       |       | —                                                  |       | 35,875                                                  |       |
| Senior  Subordinated Notes             |       | 38,906                                                  |       | 29,540                                             |       |       | —                                                  |       | 29,540                                                  |       |
| 2008 Notes                             |       | —                                                  |       | 639                                                |       |       | 1,439                                                   |       | 2,078                                                   |       |
| Amortization of  debt issue costs      |       | 10,588                                                  |       | 8,070                                              |       |       | 96                                                      |       | 8,166                                                   |       |
| Other                                  |       | 2,847                                                   |       | (729                                               | )          |       | 205                                                     |       | (524                                                    | )          |
| Total interest expense                 |       | 205,699                                                 |       | 156,628                                            |       |       | 3,282                                                   |       | 159,910                                                 |       |
| Less:                                  |       |                                                    |       |                                               |       |       |                                                    |       |                                                    |       |
| Interest income                        |       | 5,416                                                   |       | 3,931                                              |       |       | 3,046                                                   |       | 6,977                                                   |       |
| Capitalized interest                   |       | 2,141                                                   |       | 2,357                                              |       |       | 1,146                                                   |       | 3,503                                                   |       |
| Interest expense  (income), net        |       | $                                                       | 198,142    |                                               | $          | 150,340    |                                                    |       | $                                                       | (910       | ) | $ | 149,430 |   |

 

The increase ininterest expense is due to the $3.3 billion increase in debt incurred inconnection with the Transactions.  Thedecrease in interest income was due primarily to interest earned on higheraverage invested balances after the Credit Card Sale in July 2005 and prior tothe Transactions.

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

***Incometaxes.***  Oureffective income tax rate was 38.9% for the thirty-nine weeks ended April 28,2007.  Our effective income tax rate was38.4% for the thirty weeks ended April 29, 2006 and 36.8% for the nine weeksended October 1, 2005, resulting in a combined year-to-date fiscal 2006 rate of37.7%.  Our effective tax rate for thenine-weeks ended October 1, 2005 was favorably impacted by a higher level oftax-exempt interest income earned during the period on higher cash balancesmaintained prior to the Acquisition.

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**Inflation andDeflation**

Webelieve changes in revenues and net earnings that have resulted from inflationor deflation have not been material during the periods presented. In recentyears, we have experienced certain inflationary conditions related to 1) increasesin product costs due primarily to changes in foreign currency exchange ratesthat have reduced the purchasing power of the U.S. dollar and 2) increasesin SG&A. We purchase a substantial portion of our inventory from foreignsuppliers whose costs are affected by the fluctuation of their local currencyagainst the dollar or who price their merchandise in currencies other than thedollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us mostsignificantly; however, we source goods from numerous countries and thus areaffected by changes in numerous currencies and, generally, by fluctuations inthe U.S. dollar relative to such currencies. Accordingly, changes in the valueof the dollar relative to foreign currencies may increase our cost of goodssold and if we are unable to pass such cost increases to our customers, ourgross margins, and ultimately our earnings, would decrease. Foreign currencyfluctuations could have a material adverse effect on our business, financialcondition and results of operations in the future. We attempt to offset theeffects of inflation through price increases and control of expenses, althoughour ability to increase prices may be limited by competitive factors. Weattempt to offset the effects of merchandise deflation, which has occurred on alimited basis in recent years, through control of expenses. There is noassurance, however, that inflation or deflation will not materially affect ouroperations in the future.

 

 

**LIQUIDITYAND CAPITAL RESOURCES**

** **

Ourcash requirements consist principally of:

 

·                  the funding of our merchandise purchases;

 

·                  capital expenditures for new storeconstruction, store renovations and upgrades of our management informationsystems;

 

·                  debt service requirements;

 

·                  income tax payments; and

 

·                  obligations related to our Pension Plan.

 

Ourprimary sources of short-term liquidity are comprised of cash on hand andavailability under our Asset-Based Revolving Credit Facility. The amountsof cash on hand and borrowings under the Asset-Based Revolving CreditFacility are influenced by a number of factors, including revenues, workingcapital levels, vendor terms, the level of capital expenditures, cashrequirements related to financing instruments and debt service obligationsfollowing the Transactions, Pension Plan funding obligations and our taxpayment obligations, among others.

 

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

 

Webelieve that operating cash flows, available vendor financing and amountsavailable pursuant to our senior secured Asset-Based Revolving CreditFacility will be sufficient to fund our operations, anticipated capitalexpenditure requirements, debt service obligations, contractual obligations andcommitments and Pension Plan funding requirements through the end of fiscalyear 2007.

 

At April28, 2007, cash and cash equivalents were $176.8 million compared to $107.4 millionat April 29, 2006. Net cash provided by operating activities was $176.8 millionin year-to-date fiscal 2007 compared to net cash provided by operatingactivities of $283.9 million in year-to-date fiscal 2006. Cash flowsrelated to operating activities were lower in year-to-date fiscal 2007 than inthe prior year period primarily due to 1) an $85.7 million increase in cashinterest requirements on indebtedness incurred in connection with theTransactions and 2) a $120.1 million increase in cash requirements for incometaxes. These 

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

 

Netcash used for investing activities was $42.2 million year-to-date fiscal2007 which consisted of 1) capital expenditures of $104.2 million, 2) $121.5million received from Liz Claiborne, Inc. for the sale of Kate Spade and 3) thepurchase of the minority interest held in Kate Spade for $59.4 million.  Net cash used in investing activities was $5,294.9 millionin year-to-date fiscal 2006, which consisted of 1) $5,156.4 million paid inconnection with the Acquisition and 2) $132.8 million for capital expenditures.  

 

Weincurred capital expenditures in fiscal 2007 related to the construction of newstores in Charlotte, Austin and Natick and the remodel of our Atlanta store. Weincurred capital expenditures in fiscal 2006 related to the construction of newstores in San Antonio and Boca Raton and the remodels of our San Francisco,Houston, Beverly Hills, Newport Beach and Bergdorf Goodman stores. We openedour San Antonio store in September 2005, our Boca Raton store inNovember 2005 and our Charlotte store in September 2006.  We opened our Austin store in March 2007 andplan to open the Natick store in September 2007.  We currently project capital expenditures forfiscal year 2007 to be approximately $155 to $165 million.

 

Netcash used for financing activities was $182.5 million in year-to-datefiscal 2007 as compared to net cash provided by financing activities of $4,266.6 millionin year-to-date fiscal 2006. In year-to-date fiscal 2007, we voluntarily repaid$175.0 million principal amount of the loans under the Senior Secured Term LoanFacility.  In year-to-date fiscal 2006,proceeds from debt incurred in connection with the Transactions, net ofissuance costs, aggregated $3,222.1 million and cash equity contributionsreceived in connection with the Transactions aggregated $1,427.7 million.  In year-to-date fiscal 2006, we also repaidour $150.0 million of seasonal borrowings under our Asset-Based RevolvingCredit Facility, paid $134.7 million for the redemption of our 2008 Notespursuant to our call of such notes for redemption in connection with theTransactions and voluntarily repaid $100.0 million principal amount ofborrowings on the Senior Secured Term Loan Facility. 

 

 

**Financing Structure at April 28, 2007**

** **

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

 

***Senior Secured Asset-Based Revolving Credit Facility.***  OnOctober 6, 2005, in connection with the Transactions, NMG entered into acredit agreement and related security and other agreements for a senior securedAsset-Based Revolving Credit Facility with Deutsche Bank Trust CompanyAmericas as administrative agent and collateral agent. The Asset-BasedRevolving Credit Facility provides financing of up to $600.0 million,subject to a borrowing base equal to at any time the lesser of 80% of eligibleinventory (valued at the lower of cost or market value) and 85% of net orderlyliquidation value of the eligible inventory, less certain reserves. The Asset-BasedRevolving Credit Facility includes borrowing capacity available for letters ofcredit and for borrowings on same-day notice. At the closing of theTransactions, NMG utilized $150.0 million of the Asset-BasedRevolving Credit Facility for loans and approximately $16.5 million forletters of credit. In the second quarter of fiscal year 2006, NMG repaid allloans under the Asset-Based Revolving Credit Facility. As of April 28,2007, NMG had $575.3 million of unused borrowing availability under theAsset-Based Revolving Credit Facility based on a borrowing base of over$600.0 million and after giving effect to $24.7 million used forletters of credit.

 

TheAsset-Based Revolving Credit Facility provides that NMG has the right atany time to request up to $200.0 million of additional commitments, butthe lenders are under no obligation to provide any such additional commitments,and any increase in commitments will be subject to customary conditions precedent.If NMG were to request any such additional commitments and the existing lendersor new lenders were to agree to provide such commitments, the Asset-BasedRevolving Credit Facility size could be increased to up to $800.0 million,but NMG's ability to borrow would still be limited by the amount of theborrowing base.

 

Borrowingsunder the Asset-Based Revolving Credit Facility bear interest at a rateper annum equal to, at NMG's option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Deutsche Bank TrustCompany Americas and (2) the federal funds effective rate plus  1¤2 of 1% or(b) a LIBOR rate, subject to certain adjustments, in each case plus anapplicable margin. The initial applicable margin is 0% with respect to baserate borrowings and 1.75% with respect to LIBOR borrowings. The applicablemargin is subject to adjustment based on the historical availability under theAsset-Based Revolving Credit Facility. In addition, NMG is required topay a commitment fee of 0.375% per annum in respect of the unutilizedcommitments. If

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theaverage revolving loan utilization is 50% or more for any applicable period,the commitment fee will be reduced to 0.250% for such period. NMG must also paycustomary letter of credit fees and agency fees.

 

Ifat any time the aggregate amount of outstanding loans, unreimbursed letter ofcredit drawings and undrawn letters of credit under the Asset-BasedRevolving Credit Facility exceeds the lesser of (i) the commitment amountand (ii) the borrowing base, NMG will be required to repay outstandingloans or cash collateralize letters of credit in an aggregate amount equal tosuch excess, with no reduction of the commitment amount. If the amountavailable under the Asset-Based Revolving Credit Facility is less than$60 million or an event of default has occurred, NMG will be required torepay outstanding loans and cash collateralize letters of credit with the cashNMG would then be required to deposit daily in a collection account maintainedwith the agent under the Asset-Based Revolving Credit Facility. NMG mayvoluntarily reduce the unutilized portion of the commitment amount and repayoutstanding loans at any time without premium or penalty other than customary"breakage" costs with respect to LIBOR loans. There is no scheduledamortization under the Asset-Based Revolving Credit Facility; theprincipal amount of the loans outstanding is due and payable in full onOctober 6, 2010.

 

Allobligations under the Asset-Based Revolving Credit Facility areguaranteed by the Company and certain of NMG's existing and future domesticsubsidiaries. As of April 28, 2007, the liabilities of NMG's non-guarantorsubsidiaries totaled approximately $4.4 million, or 0.1% of consolidatedliabilities, and the assets of NMG's non-guarantor subsidiaries aggregatedapproximately $6.6 million, or 0.1% of consolidated total assets. Allobligations under NMG's Asset-Based Revolving Credit Facility, and theguarantees of those obligations, are secured, subject to certain significantexceptions, by substantially all of the assets of the Company, NMG and thesubsidiaries that have guaranteed the Asset-Based Revolving CreditFacility (subsidiary guarantors), including:

 

·                  a first-priority security interest inpersonal property consisting of inventory and related accounts, cash, depositaccounts, all payments received by NMG or the subsidiary guarantors from creditcard clearinghouses and processors or otherwise in respect of all credit cardcharges for sales of inventory by NMG and the subsidiary guarantors, certainrelated assets and proceeds of the foregoing; and

 

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

 

·                  a second-priority security interest in,and mortgages on, substantially all other tangible and intangible assets ofNMG, the Company and each subsidiary guarantor, including a significant portionof NMG's material owned and leased real property (which currently consists ofapproximately half of NMG's full-line retail stores) and equipment.

 

Capitalstock and other securities of a subsidiary of NMG that are owned by NMG or anysubsidiary guarantor will not constitute collateral under NMG's Asset-BasedRevolving Credit Facility to the extent that such securities cannot secureNMG's 2028 Debentures or other secured public debt obligations withoutrequiring the preparation and filing of separate financial statements of suchsubsidiary in accordance with applicable SEC rules. As a result, the collateralunder NMG's Asset-Based Revolving Credit Facility will include shares ofcapital stock or other securities of subsidiaries of NMG or any subsidiaryguarantor only to the extent that the applicable value of such securities (on asubsidiary-by-subsidiary basis) is less than 20% of the aggregate principalamount of the 2028 Debentures or other secured public debt obligations of NMG. 

 

NMG'sAsset-Based Revolving Credit Facility contains a number of covenantsthat, among other things and subject to certain significant exceptions,restrict its ability and the ability of its subsidiaries to:

 

·                  incur additional indebtedness;

 

·                  pay dividends on NMG's capital stock orredeem, repurchase or retire NMG's capital stock or indebtedness;

 

·                  make investments, loans, advances andacquisitions;

 

·                  create restrictions on the payment ofdividends or other amounts to NMG from its subsidiaries that are notguarantors;

 

·                  engage in transactions with NMG's affiliates;

 

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

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·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and lease back transactions.

 

Thecovenants limiting dividends and other restricted payments; investments, loans,advances and acquisitions; and prepayments or redemptions of other indebtedness,each permit the restricted actions in an unlimited amount, subject to thesatisfaction of certain payment conditions, principally that NMG must have atleast $75.0 million of pro forma excess availability under the Asset-BasedRevolving Credit Facility and that NMG must be in pro forma compliance with thefixed charge coverage ratio described below.

 

Althoughthe credit agreement governing the Asset-Based Revolving Credit Facilitydoes not require NMG to comply with any financial ratio maintenance covenants,if less than $60.0 million were available to be borrowed under the Asset-BasedRevolving Credit Facility at any time, NMG would not be permitted to borrow anyadditional amounts unless its pro forma ratio of consolidated EBITDA toconsolidated Fixed Charges (as such terms are defined in the credit agreement)were at least 1.1 to 1.0. The credit agreement also contains customaryaffirmative covenants and events of default.

 

***Senior Secured Term Loan Facility.***  OnOctober 6, 2005, in connection with the Transactions, NMG entered into acredit agreement and related security and other agreements for a$1,975.0 million Senior Secured Term Loan Facility with Credit Suisse asadministrative agent and collateral agent. The full amount of the Senior SecuredTerm Loan Facility was borrowed on October 6, 2005. In the second quarterof fiscal year 2006, NMG voluntarily repaid $100.0 million principalamount of the loans under the Senior Secured Term Loan Facility and in thesecond quarter of fiscal year 2007, NMG voluntarily repaid $175.0 millionprincipal amount.  

 

At April 28, 2007, borrowings under the Senior SecuredTerm Loan Facility bore interest at a rate per annum equal to, at NMG's option,either (a) a base rate determined by reference to the higher of (1) theprime rate of Credit Suisse and (2) the federal funds effective rate plus  1¤2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. At April 28, 2007,the applicable margin with respect to base rate borrowings was 1.00% and theapplicable margin with respect to LIBOR borrowings was 2.00%. The interest rateon the outstanding borrowings pursuant to the Senior Secured Term Loan Facilitywas 7.35% at April 28, 2007.  

On February 8, 2007, NMG enteredinto an amendment to the credit agreement for the Senior Secured Term LoanFacility to decrease the interest rates applicable to borrowings under thatfacility by 0.25%. As amended, the applicable margin with respect tobase rate borrowings is 0.75% or 1.00%, depending upon NMG’s ConsolidatedLeverage Ratio (as defined in the amended credit agreement) on such date, andthe applicable margin with respect to LIBOR borrowings is 1.75% or 2.00%, alsodepending upon NMG’s Consolidated Leverage Ratio on such date.  Since the inception of the Senior SecuredTerm Loan Facility, we have entered into amendments to reduce the applicablemargins with respect to borrowings pursuant to the Senior Secured Term LoanFacility by 0.50%.

Thecredit agreement governing the Senior Secured Term Loan Facility requires NMGto prepay outstanding term loans with 50% (which percentage will be reduced to25% if NMG's total leverage ratio is less than a specified ratio and will bereduced to 0% if NMG's total leverage ratio is less than a specified ratio) ofits annual excess cash flow (as defined in the credit agreement).  For fiscal year 2006, NMG was not required toprepay any outstanding term loans pursuant to the annual excess cash flowrequirements.  If a change of control (asdefined in the credit agreement) occurs, NMG will be required to offer toprepay all outstanding term loans, at a prepayment price equal to 101% of theprincipal amount to be prepaid, plus accrued and unpaid interest to the date ofprepayment. NMG also must offer to prepay outstanding term loans at 100% of theprincipal amount to be prepaid, plus accrued and unpaid interest, with theproceeds of certain asset sales under certain circumstances.

 

NMGmay voluntarily prepay outstanding loans under the Senior Secured Term LoanFacility at any time without premium or penalty other than customary"breakage" costs with respect to LIBOR loans. There is no scheduledamortization under the Senior Secured Term Loan Facility. The principal amountof the loans outstanding is due and payable in full on April 6, 2013.

 

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

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

 

·                  a first-priority security interest in,and mortgages on, substantially all other tangible and intangible assets ofNMG, the Company and each subsidiary guarantor, including a significant portionof NMG's material owned and leased real property (which currently consists ofapproximately half of NMG's full-line retail stores) and equipment, butexcluding, among other things, the collateral described in the following bulletpoint; and

 

·                  a second-priority security interest inpersonal property consisting of inventory and related accounts, cash, depositaccounts, all payments received by NMG or the subsidiary guarantors from creditcard clearinghouses and processors or otherwise in respect of all credit cardcharges for sales of inventory by NMG and the subsidiary guarantors, certainrelated assets and proceeds of the foregoing.

 

Capitalstock and other securities of a subsidiary of NMG that are owned by NMG or anysubsidiary guarantor will not constitute collateral under NMG's Senior SecuredTerm Loan Facility to the extent that such securities cannot secure the 2028Debentures or other secured public debt obligations without requiring thepreparation and filing of separate financial statements of such subsidiary inaccordance with applicable SEC rules. As a result, the collateral under NMG'sSenior Secured Term Loan Facility will include shares of capital stock or othersecurities of subsidiaries of NMG or any subsidiary guarantor only to theextent that the applicable value of such securities (on asubsidiary-by-subsidiary basis) is less than 20% of the aggregate principalamount of the 2028 Debentures or other secured public debt obligations of NMG. 

 

Thecredit agreement governing the Senior Secured Term Loan Facility contains anumber of negative covenants that are substantially similar to those governingthe Senior Notes and additional covenants related to the security arrangementsfor the Senior Secured Term Loan Facility. The credit agreement also containscustomary affirmative covenants and events of default.

 

***2028 Debentures.***  In May 1998, NMG issued$125.0 million aggregate principal amount of its 7.125% 2028 Debentures.In connection with the Transactions, NMG equally and ratably secured the 2028Debentures by a first lien security interest on certain collateral subject toliens granted under NMG's Senior Secured Credit Facilities constituting(a) (i) 100% of the capital stock of certain of NMG's existing and futuredomestic subsidiaries, and (ii) 100% of the non-voting stock and 65% ofthe voting stock of certain of NMG's existing and future foreign subsidiariesand (b) certain of NMG's principal properties that include approximatelyhalf of NMG's full-line stores, in each case, to the extent required by theterms of the indenture governing the 2028 Debentures. The 2028 Debenturescontain covenants that restrict NMG's ability to create liens and enter intosale and lease back transactions. The collateral securing the 2028 Debentureswill be released upon the release of liens on such collateral under NMG'sSenior Secured Credit Facilities and any other debt (other than the 2028Debentures) secured by such collateral. Capital stock and other securities of asubsidiary of NMG that are owned by NMG or any subsidiary will not constitutecollateral under the 2028 Debentures to the extent such property does notconstitute collateral under NMG's Senior Secured Credit Facilities, asdescribed above. The 2028 Debentures are guaranteed on an unsecured, seniorbasis by the Company.

 

***Senior Notes.**** *OnOctober 6, 2005, Newton Acquisition Merger Sub, Inc. issued$700.0 million aggregate original principal amount of 9.0% / 9.75% SeniorNotes under a senior indenture (Senior Indenture) with Wells Fargo Bank,National Association, as trustee. At the closing of the Transactions, as thesurviving corporation in the Acquisition, NMG assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior Indenture. The SeniorNotes mature on October 15, 2015.

 

Forany interest payment period through October 15, 2010, NMG may, at itsoption, elect to pay interest on the Senior Notes entirely in cash (CashInterest) or entirely by increasing the principal amount of the outstandingSenior Notes or by issuing additional Senior Notes (PIK Interest). CashInterest on the Senior Notes accrues at the rate of 9% per annum. PIK Intereston the Senior Notes accrues at the rate of 9.75% per annum. AfterOctober 15, 2010, NMG will make all interest payments on the Senior Notesentirely in cash. All Senior Notes mature on October 15, 2015 and have thesame rights and benefits as the senior notes issued on October 6, 2005.Interest on the Senior Notes is payable quarterly in arrears on each January 15,April 15, July 15 and October 15, commencing on January 15,2006.

 

TheSenior Notes are fully and unconditionally guaranteed on a joint and severalunsecured, senior basis, by each of NMG's wholly-owned domesticsubsidiaries that guarantee NMG's obligations under its Senior Secured CreditFacilities and by the Company. The Senior Notes and the guarantees thereof areNMG's and the guarantors' unsecured, senior obligations and rank (i) equalin the right of payment with all of NMG's and the guarantors' existing andfuture senior indebtedness, including any borrowings under NMG's Senior SecuredCredit Facilities and the guarantees thereof and NMG's 2028 Debentures; and(ii) senior 

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toall of NMG's and its guarantors' existing and future subordinated indebtedness,including the Senior Subordinated Notes due 2015 and the guarantees thereof.The Senior Notes also are effectively junior in priority to NMG's and itsguarantors' obligations under all secured indebtedness, including NMG's SeniorSecured Credit Facilities, the 2028 Debentures, and any other securedobligations of NMG, in each case, to the extent of the value of the assetssecuring such obligations. In addition, the Senior Notes are structurallysubordinated to all existing and future liabilities, including trade payables,of NMG's subsidiaries that are not providing guarantees.

 

NMGis not required to make any mandatory redemption or sinking fund payments withrespect to the Senior Notes, but under certain circumstances, NMG may berequired to offer to purchase Senior Notes as described below. NMG may fromtime to time acquire Senior Notes by means other than a redemption, whether bytender offer, in open market purchases, through negotiated transactions orotherwise, in accordance with applicable securities laws.

 

Exceptas described below, the Senior Notes are not redeemable at NMG's option priorto October 15, 2010. From and after October 15, 2010, NMG may redeemthe Senior Notes, in whole or in part, at a redemption price equal to 104.5% ofprincipal amount, declining annually to 100% of the principal amount onOctober 15, 2013, plus accrued and unpaid interest, and AdditionalInterest (as defined in the Senior Indenture), if any, thereon to theapplicable redemption date.

 

Priorto October 15, 2008, NMG may, at its option, subject to certainconditions, redeem up to 35% of the original aggregate principal amount ofSenior Notes at a redemption price equal to 109% of the aggregate principalamount thereof, plus accrued and unpaid interest, and Additional Interest, ifany, thereon to the redemption date, with the net cash proceeds of one or moreequity offerings of NMG or any direct or indirect parent of NMG to the extentsuch net proceeds are contributed to NMG. At any time prior to October 15,2010, NMG also may redeem all or a part of the Senior Notes at a redemptionprice equal to 100% of the principal amount of Senior Notes redeemed plus anapplicable premium, as provided in the Senior Indenture, and accrued and unpaidinterest and Additional Interest, if any, to the redemption date.

 

Uponthe occurrence of a change of control (as defined in the Senior Indenture),each holder of the Senior Notes has the right to require NMG to repurchase someor all of such holder's Senior Notes at a price in cash equal to 101% of theaggregate principal amount thereof plus accrued and unpaid interest, andAdditional Interest, if any, to the date of purchase.

 

Theindenture governing the Senior Notes contains covenants that limit NMG'sability and certain of its subsidiaries' ability to:

 

·                  incuradditional indebtedness;

 

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

 

·                  makeinvestments;

 

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

 

·                  engagein transactions with NMG's affiliates;

 

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

 

·                  consolidateor merge;

 

·                  createliens; and

 

·                  enterinto sale and lease back transactions.

 

TheSenior Indenture also provides for events of default, which, if any of themoccurs, would permit or require the principal, premium, if any, interest andany other monetary obligations on all outstanding Senior Notes to be due andpayable immediately.

 

***Senior Subordinated Notes.**** *On October 6, 2005, Newton Acquisition MergerSub, Inc. issued $500.0 million aggregate principal amount of 10.375%Senior Subordinated Notes under a senior subordinated indenture (SeniorSubordinated Indenture) with Wells Fargo Bank, National Association, astrustee. At the closing of the Transactions, as the surviving corporation inthe Acquisition, NMG assumed all the obligations of Newton Acquisition MergerSub, Inc. under the Senior Subordinated Indenture. 

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TheSenior Subordinated Notes mature on October 15, 2015. Interest on theSenior Subordinated Notes is payable in cash semi-annually in arrears on eachApril 15 and October 15, commencing April 15, 2006.

 

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

 

NMGis not required to make any mandatory redemption or sinking fund payments withrespect to the Senior Subordinated Notes, but, under certain circumstances, NMGmay be required to offer to purchase Senior Subordinated Notes as describedbelow. NMG may from time to time acquire Senior Subordinated Notes by meansother than a redemption, whether by tender offer, in open market purchases,through negotiated transactions or otherwise, in accordance with applicablesecurities laws.

 

Exceptas described below, the Senior Subordinated Notes are not redeemable at NMG'soption prior to October 15, 2010. From and after October 15, 2010,NMG may redeem the Senior Subordinated Notes, in whole or in part, at aredemption price equal to 105.188% of principal amount, declining annually to100% of principal amount on October 15, 2013, plus accrued and unpaidinterest, and Additional Interest (as defined in the Senior SubordinatedIndenture), if any, thereon to the applicable redemption date.

 

Priorto October 15, 2008, NMG may, at its option, subject to certainconditions, redeem up to 35% of the original aggregate principal amount ofSenior Subordinated Notes at a redemption price equal to 110.375% of theaggregate principal amount thereof, plus accrued and unpaid interest, andAdditional Interest, if any, thereon to the redemption date, with the net cashproceeds of one or more equity offerings of NMG or any direct or indirectparent of NMG to the extent such net proceeds are contributed to NMG.

 

Atany time prior to October 15, 2010, NMG also may redeem all or a part ofthe Senior Subordinated Notes at a redemption price equal to 100% of theprincipal amount of Senior Subordinated Notes redeemed plus an applicablepremium, as provided in the Senior Subordinated Indenture, as of, and accruedand unpaid interest and Additional Interest, if any, to the redemption date.

 

Uponthe occurrence of a change of control (as defined in the Senior SubordinatedIndenture), NMG will make an offer to purchase all of the Senior SubordinatedNotes at a price in cash equal to 101% of the aggregate principal amountthereof plus accrued and unpaid interest, and Additional Interest, if any, tothe date of purchase.

 

Theindenture governing the Senior Subordinated Notes contains covenantssubstantially similar to those applicable to NMG's Senior Notes describedabove. The Senior Subordinated Indenture also provides for events of default,which, if any of them occurs, would permit or require the principal, premium,if any, interest and any other monetary obligations on all outstanding SeniorNotes to be due and payable immediately, subject to certain exceptions.

 

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

*** ***

***Interest Rate Swaps.***  NMG uses derivative financialinstruments to help manage its interest rate risk. Effective December 6,2005, NMG entered into floating to fixed interest rate swap agreements for anaggregate notional amount of $1,000.0 million to limit its exposure tointerest rate increases related to a portion of its floating rate indebtedness.The interest rate swap agreements terminate after five years.  At April 28, 2007, the fair value of NMG'sinterest rate swap agreements was a gain of approximately $4.4 million,which amount is included in other assets. 

 

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

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As a result of the swap agreements, NMG’s effectivefixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.732% to 6.983% per quarter through2010 and result in an average fixed rate of 6.821%.

**OTHER MATTERS**

**Factors That MayAffect Future Results**

Matters discussed in MD&A include forward-lookingstatements. Forward-looking statements generally can be identified by theuse of forward-looking terminology such as “may,” “plan,” “predict,” “expect,”“estimate,” “intend,” “would,” “could,” “should,” “anticipate,” “believe,” “project”or “continue.” We make these forward-looking statements based on ourexpectations and beliefs concerning future events, as well as currentlyavailable 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 our forward-lookingstatements. Factors that could affect future performance include, but are notlimited, to:

*Political and General EconomicConditions*

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

·                  terrorist activities in the United States andelsewhere;

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

*Customer Demographic Issues*

·                  changes in the demographic or retailenvironment;

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

·                  changes in consumer preferences or fashiontrends;

·                  changes in our relationships with keycustomers;

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

*Merchandise Procurement and SupplyChain Considerations*

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

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

·                  changes in foreign currency exchange orinflation rates;

·                  significant increases in paper, printing andpostage costs;

*Industry and Competitive Factors*

·                  competitive responses to our loyaltyprograms, marketing, merchandising and promotional efforts or inventoryliquidations by vendors or other retailers;

·                  seasonality of the retail business;

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

·                  delays in anticipated store openings andrenovations;

·                  our success in enforcing our intellectualproperty rights;

*Employee Considerations*

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

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

*Legal and Regulatory Issues*

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

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

* Leverage Considerations*

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

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

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

*Other Factors*

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

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

·                  other risks, uncertainties and factors setforth in this Quarterly Report on Form 10-Q, including those set forth in Item1A, “Risk Factors”.

The foregoing factors are not exhaustive, and newfactors may emerge or changes to the foregoing factors may occur that couldimpact our business. Except to the extent required by law, we undertake noobligation to update or revise (publicly or otherwise) any forward-lookingstatements to reflect subsequent events, new information or futurecircumstances.

**CriticalAccounting Policies**

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

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See Note 1 of the Notesto Condensed Consolidated Financial Statements in Item 1 for a summary of ourcritical accounting policies.  A completedescription of our critical accounting policies is included in our Annual Reportto Shareholders on Form 10-K for the fiscal year ended July 29, 2006.

***Recent AccountingPronouncements. ***InJuly 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN48), which clarifies the accounting for uncertainty in tax positions.  FIN 48 requires that we recognize in ourconsolidated financial statements the impact of a tax position, if thatposition is more likely than not of being sustained upon examination, based onthe technical merits of the position.  Wewill be required to implement the provisions of FIN 48 no later than the firstquarter of fiscal year 2008. We have not completed our evaluation of theimpact, if any, of adopting FIN 48 on our consolidated financial statements.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108(SAB 108).  SAB 108 addresses the processand diversity in practice of quantifying financial statement misstatements resultingin the potential build up of improper amounts on the balance sheet.  We will be required to adopt the provisionsof SAB 108 in the fourth quarter of fiscal year 2007.  We currently do not believe that the adoptionof SAB 108 will have a material impact on our consolidated financialstatements.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, “FairValue Measurements” (FAS 157), which provides guidance for using fair value tomeasure certain assets and liabilities. FAS 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.  FAS 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 FAS 157 on ourconsolidated financial statements.

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans”(FAS 158).  FAS 158 requires employers toreport a postretirement benefit asset for plans that are overfunded and apostretirement benefit liability for plans that are underfunded. Deferred plancosts and income are required to be reported in accumulated other comprehensiveincome (OCI), net of tax effects, until they are amortized.  We will be required to adopt the requirementto recognize the funded status of our benefit plans and the disclosurerequirements of FAS 158 as of  July 28,2007.  We have not yet evaluated theimpact, if any, of adopting FAS 158 on our consolidated financial statements.

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

**ITEM 3.**   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s financialinstruments represents the potential loss arising from adverse changes ininterest rates. The Company does not enter into derivative financialinstruments for trading purposes. The Company seeks to manage exposure toadverse interest rate changes through its normal operating and financingactivities. The Company is exposed to interest rate risk through its borrowingactivities, which are described in Note 8 to the condensed consolidatedfinancial statements.

As of April 28, 2007, NMG had no borrowingsoutstanding under its Asset-Based Revolving Credit Facility that bearsinterest 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 28, 2007, NMG had $1,700.0 million ofdebt under its Senior Secured Term Loan Facility issued in connection with theTransactions that bears interest at floating rates. A 1% increase in thesefloating rates would increase annual interest expense by approximately$17.0 million.

NMG uses derivative financial instruments to helpmanage its interest rate risk.  EffectiveDecember 6, 2005, NMG  entered intofloating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit its exposure to interest rateincreases related to a portion of its floating rate indebtedness. The interestrate swap agreements terminate after five 

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years.     As a result of the swap agreements, NMG’seffective fixed interest rates as to the $1,000.0 million in floating rateindebtedness will currently range from 6.732% to 6.983% per quarter through2010 and result in an average fixed rate of 6.821%.

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

**ITEM 4.   CONTROLSAND PROCEDURES**

**a. DisclosureControls and Procedures.**

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation as of April 28, 2007, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, as well as other key members of our management, of theeffectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based onthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective to providereasonable assurance that information required to be disclosed in our reportsfiled or submitted under the Exchange Act is recorded, accumulated, processed,summarized, reported and communicated on a timely basis within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

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

In the ordinary course of business, we routinelyenhance our information systems by either upgrading our current systems orimplementing new systems. No change occurred in our internal controls overfinancial reporting during the quarter ended April28, 2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

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**NEIMANMARCUS, INC.**

 

**PART II**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

Note 13 of theNotes to Condensed Consolidated Financial Statements in Part I, Item 1 isincorporated herein by reference as if fully restated herein.  Note 13 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.   RISKFACTORS**

** **

**Risks Related to Our Structure and NMG’s Indebtedness**

 

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

** **

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

 

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

 

As aresult of the Transactions, we are highly leveraged.  As of April 28, 2007, the principal amount ofNMG’s total indebtedness was approximately $3,030.6 million and the unusedborrowing availability under the $600 million Asset-Based Revolving CreditFacility was approximately $575.3 million after giving effect to $24.7 millionof letters of credit outstanding thereunder. NMG’s substantial indebtedness, combined with its lease and otherfinancial obligations and contractual commitments, could have other importantconsequences. For example, it could:

 

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

 

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

 

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

 

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

 

·                  place NMG at a competitive disadvantagecompared to its competitors that are less highly leveraged and therefore may beable to take advantage of opportunities that its leverage prevents it fromexploiting; and

 

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

 

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

 

Inaddition, NMG’s interest expense could increase if interest rates increasebecause the entire amount of the indebtedness under the senior secured creditfacilities bears interest at floating rates.  As of April 28, 2007, NMG had $1,700.0 million principal amount offloating rate debt, consisting of outstanding borrowings under Senior SecuredTerm Loan Facility.  NMG also had at 

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thatdate approximately $575.3 million of unused floating rate debt borrowingcapacity available under the Asset-Based Revolving Credit Facility based on aborrowing base of over $600.0 million at that date and after giving effect to $24.7million used for letters of credit. Effective December 6, 2005, NMG entered into floating to fixed interestrate swap agreements for an aggregate notional amount of $1,000.0 million tolimit its exposure to interest rate increases related to a portion of itsfloating rate indebtedness.  

 

**To service NMG’s indebtedness, it will require asignificant amount of cash. NMG’s ability to generate cash depends on manyfactors beyond its control, and any failure to meet the its debt serviceobligations could harm its business, financial condition and results ofoperations.**

 

NMG’sability to pay interest on and principal of the debt obligations will primarilydepend upon NMG’s future operating performance. As a result, prevailingeconomic conditions and financial, business and other factors, many of whichare beyond our control, will affect its ability to make these payments.

 

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

 

Contractuallimitations on NMG’s ability to execute any necessary alternative financingplans could exacerbate the effects of any failure to generate sufficient cashflow to satisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits NMG to borrow upto $600.0 million; however, NMG’s ability to borrow thereunder is limitedby a 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 liquidation value of the eligible inventory, less certainreserves.  In addition, our ability toborrow under this facility is limited by a minimum liquidity condition,providing that, if less than $60.0 million is available at any time, NMGis not permitted to borrow any additional amounts under the Asset-BasedRevolving Credit Facility unless NMG’s pro forma ratio of consolidated EBITDAto consolidated Fixed Charges (as such terms are defined in the creditagreement for the senior secured asset-based revolving credit facility)is at least 1.1 to 1.0.  Our ability tomeet this financial ratio may be affected by events beyond our control, and wecannot assure you that we will meet this ratio.

 

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

** **

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

 

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

 

·                  incur additional indebtedness;

 

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

 

·                  make investments;

 

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

 

·                  engage in transactions with its affiliates;

 

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·                  sell assets, including capital stock of NMG’ssubsidiaries;

 

·                  consolidate or merge;

 

·                  create liens; and

 

·                  enter into sale and lease back transactions.

 

Inaddition, NMG’s ability to borrow under the Asset-Based Revolving CreditFacility is limited by a borrowing base and a minimum liquidity condition, asdescribed above.

 

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

 

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

 

Theoperating and financial restrictions and covenants in these debt agreements andany future financing agreements may adversely affect NMG’s ability to financefuture operations or capital needs or to engage in other business activities.

 

** **

**Risks Related to Our Business and Industry**

* *

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

 

Thespecialty retail industry is highly competitive and fragmented. Competition isstrong both to attract and sell to customers and to establish relationshipswith, and obtain merchandise from, key vendors.

 

Wecompete for customers with specialty retailers, traditional and high-enddepartment stores, national apparel chains, vendor-owned proprietaryboutiques, individual specialty apparel stores and direct marketing firms. Wecompete for customers principally on the basis of quality and fashion, customerservice, value, assortment and presentation of merchandise, marketing andcustomer loyalty programs and, in the case of Neiman Marcus and BergdorfGoodman, store ambiance. In our Specialty Retail business, merchandiseassortment is a critical competitive factor, and retail stores compete forexclusive, preferred and limited distribution arrangements with key designers.Many of our competitors are larger than we are and have greater financialresources than we do. In addition, certain designers from whom we sourcemerchandise have established competing free-standing retail stores in the samevicinity as our stores. If we fail to successfully compete for customers ormerchandise, our business will suffer.

 

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

 

Ourrelationships with established and emerging designers are a key factor in ourposition as a retailer of high-fashion merchandise, and a substantial portionof our revenues is attributable to our sales of designer merchandise. Many ofour key vendors limit the number of retail channels they use to sell theirmerchandise and competition among luxury retailers to obtain and sell thesegoods is intense. Our relationships with our designers have been a significantcontributor to our past success. We have no guaranteed supply arrangements withour principal merchandising sources. Accordingly, there can be no assurancethat such sources will continue to meet our quality, style and volumerequirements. Moreover, nearly all of the brands of our top designers are soldby competing retailers, and many of our top designers also have their own dedicatedretail stores. If one or more of our top designers were to cease providing uswith adequate supplies of merchandise or, conversely, were to increase sales ofmerchandise through its own stores or to the stores of our competitors, ourbusiness could be adversely affected. In addition, any decline in thepopularity or quality of any of our designer brands could adversely affect ourbusiness.

 

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

 

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

 

**Our failure to identify changes in consumer preferencesor fashion trends may adversely affect our performance.**

 

Oursuccess depends in large part on our ability to identify fashion trends as wellas to anticipate, gauge and react to changing consumer demands in a timelymanner. If we fail to adequately match our product mix to prevailing customertastes, we may be required to sell our merchandise at higher average markdownlevels and lower average margins. Furthermore, the products we sell oftenrequire long lead times to order and must appeal to consumers whose preferencescannot be predicted with certainty and often change rapidly. Consequently, wemust stay abreast of emerging lifestyle and consumer trends and anticipatetrends and fashions that will appeal to our consumer base. Any failure on ourpart to anticipate, identify and respond effectively to changing consumerdemands and fashion trends could adversely affect our business.

** **

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

 

Basedupon our expansion strategy, we expect that planned new stores will add over 582,000square feet of new store space over approximately the next four fiscal years,representing an increase of over 11% above the current aggregate square footageof our full-line Neiman Marcus and Bergdorf Goodman stores, and that ourstore remodeling program will add additional new store space from remodels thatare already underway.  New store openingsinvolve certain risks, including constructing, furnishing and supplying a storein a timely and cost effective manner, accurately assessing the demographic orretail environment at a given location, hiring and training quality staff,obtaining necessary permits and zoning approvals, obtaining commitments from acore group of vendors to supply the new store, integrating the new store intoour distribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, cost effectivemanner, minimize disruptions to our existing operations, and succeed increating an improved shopping environment. If we fail to execute on these orother aspects of our store expansion and remodeling strategy, we could sufferharm to our sales, an increase in costs and expenses and an adverse effect onour business.

 

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

 

Theeconomic downturn that followed the terrorist attacks of September 11,2001 had a material adverse effect on our business. Any further acts ofterrorism or other future conflicts may disrupt commerce and undermine consumerconfidence, cause a downturn in the economy generally, cause consumer spendingor shopping center traffic to decline or reduce the desire of our customers tomake discretionary purchases. Any of the foregoing factors could negativelyimpact our sales revenue, particularly in the case of any terrorist attacktargeting retail space, such as a shopping center. Furthermore, an act ofterrorism or war, or the threat thereof, could negatively impact our businessby interfering with our ability to obtain merchandise from foreignmanufacturers. Any future inability to obtain merchandise from our foreignmanufacturers or to substitute other manufacturers, at similar costs and in atimely manner, could adversely affect our business.

 

**Deterioration in economic conditions could adverselyaffect our business.**

 

Themerchandise we sell consists in large part of luxury retail goods. The purchaseof these goods by customers is discretionary, and therefore highly dependentupon the level of consumer spending, particularly among affluent customers.Accordingly, sales of these products may be adversely affected by an economicdownturn, increases in consumer debt levels, uncertainties regarding futureeconomic prospects or a decline in consumer confidence. An economic downturn inthe United States generally or in any of the geographic areas in which we havestores, particularly in Texas, California, Florida and the New York Citymetropolitan area, from which we derive a significant portion of our revenues,could have a material adverse effect on our business and results of operations.

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**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 specialty retail industry willcontinue to depend to a significant extent on our senior management team,buyers and key sales associates. We rely on the experience of our seniormanagement, who have specific knowledge relating to us and our industry thatwould be difficult to replace. If we were to lose a portion of our buyers orkey sales associates, our ability to benefit from long-standing relationshipswith key vendors or to provide relationship-based customer service maysuffer. We cannot assure you that we will be able to retain our current seniormanagement team, buyers or key sales associates. The loss of any of theseindividuals could adversely affect our business.

**Inflationmay adversely affect our business operations in the future.**

In recent years, we have experienced certaininflationary conditions in our cost base due primarily to (1) changes inforeign currency exchange rates that have reduced the purchasing power of theU.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 cannot assure you that our attempts to offsetthe effects of inflation and cost increases through control of expenses,passing cost increases on to customers or any other method will be successful.Any future inflation could adversely affect our profitability and our business.

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

We maintain loyalty programs that are designed tocultivate long-term relationships with our customers and enhance the quality ofservice we provide to our customers. We must constantly monitor and update theterms of our loyalty programs so that they continue to meet the demands andneeds of our customers and remain competitive with loyalty programs offered byother high-end specialty retailers. Given that approximately 50% of ourrevenues at Neiman Marcus stores during each of the last three 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.

**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 proprietary credit card program throughwhich credit is extended to customers under the “Neiman Marcus” and “BergdorfGoodman” names. Because a majority of our revenues were transacted through ourproprietary credit cards, changes in our proprietary credit card arrangementthat adversely impact our ability to facilitate the provision of consumercredit may adversely affect our performance. In July 2005, we sold our approximately three million private labelcredit card accounts and related assets, as well as the outstanding balancesassociated with such accounts. Initially, we continue to handle key customer service functions,including new account processing, most transaction authorization, billingadjustments, collection services and customer inquiries. As part of thistransaction, we have changed, and will continue to change, the terms of creditoffered to our customers following the Credit Card Sale. In addition, thepurchaser of our credit card business will have discretion over certainpolicies and arrangements with credit card customers and may change thesepolicies and arrangements in ways that affect our relationship with thesecustomers. Any such changes in our credit card arrangements may adverselyaffect our credit card program and ultimately, our business.

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

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

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

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seasoncould render a portion of our inventory incompatible with those unseasonableconditions. Reduced sales from extreme or prolonged unseasonable weatherconditions would adversely affect our business.

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

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

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

The specialty retail industry is seasonal in nature,with a higher level of sales typically generated in the fall and holidayselling seasons. We have in the past experienced significant fluctuation in ourrevenues from quarter to quarter with a disproportionate amount of our revenuesfalling in our second fiscal quarter, which coincides with the holiday season.In addition, we incur significant additional expenses in the period leading upto the months of November and December in anticipation of higher sales volumein those periods, including for additional inventory, advertising andemployees.

**Our business is affected by foreign currency fluctuations.**

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

**Conditions in, and the United States’ relationship with, thecountries where we source our merchandise 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 increases in costs associated with the productionof catalogs and other promotional material may adversely affect our operatingincome.**

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 andcontrolled by the Sponsors, and their interests as equity holders may conflictwith those of our creditors.**

We are indirectly owned and controlled by the Sponsorsand certain other equity investors, and the Sponsors have the ability tocontrol our policies and operations. The interests of the Sponsors may not inall cases be aligned with those of our creditors. For example, if we encounterfinancial difficulties or are unable to pay our debts as they mature, theinterests of our equity holders might conflict with our creditors’ interests.In addition, our equity holders may have an interest in pursuing acquisitions,divestitures, financings or other transactions that, in their judgment, couldenhance their equity investments, even though such transactions might involverisks to holders of our indebtedness. Furthermore, the Sponsors may in thefuture own businesses that 

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directlyor indirectly compete with us. One or more of the Sponsors also may pursueacquisition opportunities that may be complementary to our business, and as aresult, those acquisition opportunities may not be available to us.

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

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

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

**Failure to successfully maintain and update informationtechnology systems and enhance existing systems may adversely affect our business.**

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

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

Substantially all of our merchandise is delivered tous by our vendors as finished goods and is manufactured in numerous locations,including Europe and the United States and, to a lesser extent, China, Mexicoand South America. Our vendors rely on third party carriers to delivermerchandise to our distribution facilities. In addition, our success depends onour ability to efficiently source and distribute merchandise to our SpecialtyRetail stores and Direct Marketing customers. Events such as U.S. or foreignlabor strikes, natural disasters, work stoppages or boycotts affecting themanufacturing or transportation sectors could increase the cost or reduce thesupply of merchandise available to us and could adversely affect our results ofoperations.

###### **ITEM2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

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

None.

**ITEM 6.   EXHIBITS**
| 3.1    | Amended and Restated Certificate of Incorporation of  the Company, incorporated herein by reference to the Company’s Current Report  on Form 8-K dated October 12, 2005.                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                         |
| 3.2    | Amended and Restated Bylaws of the Company,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                      |
|   |                                                                                                                                                                                                                         |
| 4.1    | Indenture, dated as of May 27, 1998, between the  Company and The Bank of New York, as trustee, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal year  ended July 31, 2004. |

 

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| 4.2   |   | Form of 7.125% Senior  Notes Due 2028, dated May 27, 1998, incorporated herein by reference to the  Company’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 Company’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
| 4.4   |   | Senior Subordinated  Indenture dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo  Bank, National Association, trustee, incorporated herein by reference to the  Company’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 Company’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  Company’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 Company, and the  Initial Purchasers, incorporated herein by reference to the Company’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 Company, Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., and Burton M. Tansky,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 10.2* |   | Rollover Agreement  dated as of October 4, 2005 by and among the Company, Newton Acquisition,  Inc., and Burton M. Tansky, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| 10.3* |   | Form of Rollover  Agreement by and among the Company, Newton Acquisition, Inc. and certain  members of management, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 10.4  |   | Credit Agreement dated  as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition  Merger Sub, Inc., the Company, 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 Company’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 Company, 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                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |

 

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|        |   | America Securities LLC  and Goldman Sachs Credit Partners L.P. as joint bookrunners, Deutsche Bank  Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as co-syndication agents and the lenders thereunder,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                                    |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.6   |   | Pledge and Security  Agreement dated as of October 6, 2005 among Newton Acquisition Merger Sub,  Inc., the Company, Newton Acquisition, Inc., the Subsidiary Guarantors and  Deutsche Bank Trust Company Americas, as administrative agent and collateral  agent, incorporated herein by reference to the Company’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                    |   |
| 10.7   |   | Pledge and Security and  Intercreditor Agreement dated as of October 6, 2005, among Newton Acquisition  Merger Sub, Inc., the Company, Newton Acquisition, Inc., the Subsidiary  Guarantors and Credit Suisse, as administrative agent and collateral agent,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                        |   |
| 10.8   |   | Lien Subordination and  Intercreditor Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary  Guarantors, Deutsche Bank Trust Company Americas, as revolving facility  agent, and Credit Suisse, as term loan agent, incorporated herein by  reference to the Company’s Current Report on Form 8-K dated October 12, 2005.                                                                            |   |
| 10.9   |   | Form of First Priority  Mortgage, Assignment of Leases and Rents, Security Agreement and Financing  Statement from the Company to Credit Suisse, incorporated herein by reference  to the Company’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                     |   |
| 10.10  |   | Form of First Priority  Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and  Financing Statement from the Company to Credit Suisse, incorporated herein by  reference to the Company’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                           |   |
| 10.11  |   | Form of Second Priority  Mortgage, Assignment of Leases and Rents, Security Agreement and Financing  Statement from the Company to Deutsche Bank Trust Company Americas,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                                                                                                            |   |
| 10.12  |   | Form of Second Priority  Leasehold Mortgage, Assignment of Lease and Rents, Security Agreement and  Financing Statement from the Company to Deutsche Bank Trust Company Americas,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                                                                                                   |   |
| 10.13  |   | Amendment No. 1 dated  as of October 6, 2005 to the Credit Agreement dated as of October 6, 2005  among the Company, Newton Acquisition, Inc., each subsidiary of the Company  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 Company’s Current Report on Form 8-K dated October  12, 2005.                                        |   |
| 10.14* |   | Newton Acquisition,  Inc. Management Equity Incentive Plan, incorporated herein by reference to  the Company’s Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                          |   |
| 10.15* |   | Stock Option Agreement  made as of November 29, 2005 between the Company and Burton M. Tansky,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated December 5, 2005.                                                                                                                                                                                                                                                                      |   |
| 10.16* |   | Form of Stock Option  Agreement made as of November 29, 2005 between the Company and certain  eligible key employees, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                |   |
| 10.17  |   | Amendment No. 2 dated  as of January 26, 2006 to the Credit Agreement dated as of October 6, 2005,  as amended, among The Neiman Marcus Group, Inc., Newton Acquisition, Inc.,  each subsidiary of The Neiman Marcus Group, Inc. from time to time party  thereto, the Lenders thereunder and Credit Suisse, as administrative agent  and collateral agent for the Lenders, incorporated by reference to the  Company’s Current Report on Form 8-K dated January 30, 2006. |   |
| 10.18* |   | Employment Agreement  between The Neiman Marcus Group, Inc. and Karen Katz, dated February 1, 2006,                                                                                                                                                                                                                                                                                                                                                                             |   |

 

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|       |   | effective as of October  6, 2005, incorporated herein by reference to the Company’s Current Report on  Form 8-K dated February 1, 2006.                                                                                                                                                                                                                                                                                                                                                       |   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.19 |   | Management Services  Agreement, dated as of October 6, 2005 among Newton Acquisition Merger Sub,  Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P., TPG GenPar III, L.P. and  Warburg Pincus LLC, incorporated herein by reference to the Company’s  Quarterly Report on Form 10-Q for the quarter ended January 28, 2006.                                                                                                                                                                 |   |
| 10.20 |   | Registration Rights  Agreement, dated as of October 6, 2005, among Newton Acquisition Merger Sub,  Inc., Newton Acquisition, Inc., Newton Holding, LLC and the “Holders” identified  therein as parties thereto, incorporated herein by reference to the Company’s  Quarterly Report on Form 10-Q for the quarter ended January 28, 2006.                                                                                                                                           |   |
| 10.21 |   | Amendment No. 1 dated  as of March 28, 2006 to the Pledge and Security Intercreditor Agreement dated  as of October 6, 2005, among Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., Newton Acquisition, Inc. (now Neiman Marcus, Inc.), the  subsidiary grantors party thereto, Credit Suisse, as administrative agent and  collateral agent for the Secured Parties, incorporated herein by reference to  the Company’s Current Report on Form 8-K dated March 28, 2006. |   |
| 10.22 |   | Credit Card Program  Agreement, dated as of June 8, 2005, by and among the Company, Bergdorf  Goodman, Inc., HSBC Bank Nevada, N.A. and Household Corporation, incorporated  herein by reference to the Company’s Current Report on Form 8-K dated June 8,  2005.                                                                                                                                                                                                                             |   |
| 10.23 |   | Form of Servicing  Agreement, by and between the Company and HSBC Bank Nevada, N.A.,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated June 8, 2005.                                                                                                                                                                                                                                                                                                       |   |
| 10.24 |   | Confidentiality,  Non-Competition and Termination Benefits Agreement between Bergdorf Goodman,  Inc. and James J. Gold dated May 3, 2004, incorporated herein by reference to  the Company’s Annual Report on Form 10-K for the fiscal year ended July 31,  2004.                                                                                                                                                                                                                             |   |
| 10.25 |   | Confidentiality, Non-Competition  and Termination Benefits Agreement between the Company and Steven P. Dennis  dated September 9, 2004, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated September 9, 2004.                                                                                                                                                                                                                                                |   |
| 10.26 |   | Change of Control  Termination Protection Agreement between the Company and Burton M. Tansky  dated April 1, 2005, incorporated herein by reference to the Company’s  Quarterly Report on Form 10-Q for the quarter ended April 30, 2005.                                                                                                                                                                                                                                                     |   |
| 10.27 |   | Form of Change of  Control Termination Protection Agreement between the Company and certain  eligible executives, including the Named Executive Officers, dated April 1,  2005, incorporated herein by reference to the Company’s Quarterly Report on  Form 10-Q for the quarter ended April 30, 2005.                                                                                                                                                                                        |   |
| 10.28 |   | The Neiman Marcus  Group, Inc. Executive Change of Control Severance Plan dated April 1, 2005,  incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q  for the quarter ended April 30, 2005.                                                                                                                                                                                                                                                                        |   |
| 10.29 |   | The Neiman Marcus  Group, Inc. General Change of Control Severance Plan dated April 1, 2005,  incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q  for the quarter ended April 30, 2005.                                                                                                                                                                                                                                                                          |   |
| 10.30 |   | Stockholder Agreement,  dated as of May 1, 2005, among Newton Acquisition, Inc., Newton Acquisition  Merger Sub, Inc. and other parties signatory thereto, incorporated herein by  reference to the Company’s Current Report on Form 8-K dated May 4, 2005.                                                                                                                                                                                                                                   |   |
| 10.31 |   | Amendment No. 3, dated  as of October 12, 2006, to the Credit Agreement dated as of October 6, 2005,  as amended, 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  Company’s Current Report on Form 8-K dated October 17, 2006.               |   |
| 10.32 |   | The Neiman Marcus  Group, Inc. Key Employee Deferred Compensation Plan effective as of January  1, 2006,                                                                                                                                                                                                                                                                                                                                                                                           |   |

 

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|       |   | incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Annual Report on Form 10-K for  the fiscal year ended July 29, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.33 |   | Newton Acquisition,  Inc. Cash Incentive Plan effective as of November 29, 2005, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Annual Report on Form  10-K for the fiscal year ended July 29, 2006.                                                                                                                                                                                                                                                                                                                                                             |   |
| 10.34 |   | 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  Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended July 29,  2006. |   |
| 10.35 |   | Amendment No. 4 dated  as of February 8, 2007 to the Credit Agreement dated as of October 6, 2005,  as amended, 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  Company’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)             Filedherewith

*                    Currentmanagement contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedhereunto duly authorized.

NEIMAN MARCUS,INC.(Registrant)
| Signature             | ** ** | **Title**                                                   | ** ** | **Date**     |
|-----------------------|------------|-------------------------------------------------------------|------------|--------------|
|                  |       |                                                        |       |         |
| /s/ T. Dale Stapleton |       | Vice President and Controller                               |       | June 6, 2007 |
| T. Dale Stapleton     |       | and Duly Authorized Officer  (principal accounting officer) |       |         |

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