**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549**

# **FORM 10-Q**

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

### **Forthe Quarterly Period Ended January 27, 2007**

**OR**

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

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

**NeimanMarcus, Inc.**(Exact name of registrant as specified in its charter)

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

 

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

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x  No  ̈

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

Large acceleratedfiler **o   **                Accelerated filer **o**                              Non-acceleratedfiler x

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  ̈  No x

There were 1,012,341 shares of the registrant’s common stock, par value$.01 per share, outstanding at January 27, 2007.

 

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**NEIMANMARCUS, INC.**

#### **INDEX**

|                | ** ** | ** **                                                                                                                                                                                                            | ** ** | **Page** |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|           |       |                                                                                                                                                                                                                  |       |     |
| Part I.        |       | Financial Information                                                                                                                                                                                                 |       |     |
|           |       |                                                                                                                                                                                                                  |       |     |
| Item 1.   |       | Condensed  Consolidated Balance Sheets as of January 27, 2007 (Successor), July 29, 2006  (Successor) and January 28, 2006 (Successor)                                                                                |       | 1        |
|           |       |                                                                                                                                                                                                                  |       |     |
|           |       | Condensed Consolidated  Statements of Earnings for the Thirteen Weeks Ended January 27, 2007  (Successor) and Thirteen Weeks Ended January 28, 2006 (Successor)                                                       |       | 2        |
|           |       |                                                                                                                                                                                                                  |       |     |
|           |       | Condensed  Consolidated Statements of Earnings for the Twenty-Six Weeks Ended January  27, 2007 (Successor), Seventeen Weeks Ended January 28, 2006 (Successor) and  Nine Weeks Ended October 1, 2005 (Predecessor)   |       | 3        |
|           |       |                                                                                                                                                                                                                  |       |     |
|           |       | Condensed  Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended January  27, 2007 (Successor), Seventeen Weeks Ended January 28, 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 1 A. |       | 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                                                                                                                                                                                                                    |

 

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**NEIMANMARCUS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)**
| **(in thousands, except shares)**                                                                                                          | ** ** | **January 27,  2007** | ** ** | **July 29,  2006** | ** ** | **January 28,  2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                | ** ** | **(Successor)**            | ** ** | **(Successor)**         | ** ** | **(Successor)**            | ** ** |
| **ASSETS**                                                                                                                                                |       |                       |       |                    |       |                       |       |
| Current assets:                                                                                                                                           |       |                       |       |                    |       |                       |       |
| Cash and cash  equivalents                                                                                                                                |       | $                          | 188,547    |                    | 223,740 $  |                       | $          | 90,621 |   |
| Accounts  receivable                                                                                                                                      |       | 35,493                     |       | 30,164                  |       | 18,284                     |       |
| Merchandise  inventories                                                                                                                                  |       | 812,291                    |       | 793,621                 |       | 769,276                    |       |
| Deferred income  taxes                                                                                                                                    |       | 42,197                     |       | 31,503                  |       | 23,823                     |       |
| Other current  assets                                                                                                                                     |       | 56,441                     |       | 40,211                  |       | 91,463                     |       |
| Current assets  of discontinued operations                                                                                                                |       | —                     |       | 16,617                  |       | 38,824                     |       |
| Total current  assets                                                                                                                                     |       | 1,134,969                  |       | 1,135,856               |       | 1,032,291                  |       |
|                                                                                                                                                      |       |                       |       |                    |       |                       |       |
| Property and equipment,  net                                                                                                                              |       | 1,035,014                  |       | 1,030,279               |       | 1,022,969                  |       |
| Customer lists, net                                                                                                                                       |       | 504,507                    |       | 531,632                 |       | 553,707                    |       |
| Favorable lease  commitments, net                                                                                                                         |       | 456,258                    |       | 465,197                 |       | 474,093                    |       |
| Trademarks                                                                                                                                                |       | 1,622,493                  |       | 1,621,788               |       | 1,621,788                  |       |
| Goodwill                                                                                                                                                  |       | 1,605,140                  |       | 1,605,140               |       | 1,670,497                  |       |
| Debt issuance costs                                                                                                                                       |       | 91,262                     |       | 97,537                  |       | 104,532                    |       |
| Other assets                                                                                                                                              |       | 23,397                     |       | 27,786                  |       | 15,825                     |       |
| Non-current assets of  discontinued operations                                                                                                            |       | —                     |       | 92,746                  |       | 114,947                    |       |
| Total assets                                                                                                                                              |       | $                          | 6,473,040  |                    | $          | 6,607,961                  |       | $ | 6,610,649 |   |
|                                                                                                                                                      |       |                       |       |                    |       |                       |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                            |       |                       |       |                    |       |                       |       |
| Current liabilities:                                                                                                                                      |       |                       |       |                    |       |                       |       |
| Accounts payable                                                                                                                                          |       | $                          | 264,372    |                    | $          | 300,439                    |       | $ | 268,276 |   |
| Accrued  liabilities                                                                                                                                      |       | 426,985                    |       | 377,968                 |       | 363,822                    |       |
| Notes payable  and current maturities of long-term liabilities                                                                                            |       | 3,425                      |       | 3,887                   |       | 3,707                      |       |
| Current  liabilities of discontinued operations                                                                                                           |       | —                     |       | 16,764                  |       | 30,398                     |       |
| Total current  liabilities                                                                                                                                |       | 694,782                    |       | 699,058                 |       | 666,203                    |       |
|                                                                                                                                                      |       |                       |       |                    |       |                       |       |
| Long-term liabilities:                                                                                                                                    |       |                       |       |                    |       |                       |       |
| Senior secured term  loan facility                                                                                                                        |       | 1,700,000                  |       | 1,875,000               |       | 1,875,000                  |       |
| Senior  debentures due 2028                                                                                                                               |       | 120,809                    |       | 120,711                 |       | 120,614                    |       |
| Senior notes                                                                                                                                              |       | 700,000                    |       | 700,000                 |       | 700,000                    |       |
| Senior  subordinated notes                                                                                                                                |       | 500,000                    |       | 500,000                 |       | 500,000                    |       |
| Deferred income  taxes                                                                                                                                    |       | 1,033,067                  |       | 1,048,925               |       | 1,115,696                  |       |
| Deferred real  estate credits, net                                                                                                                        |       | 32,196                     |       | 27,316                  |       | 8,857                      |       |
| Other long-term  liabilities                                                                                                                              |       | 197,573                    |       | 190,195                 |       | 178,468                    |       |
| Non-current  liabilities of discontinued operations                                                                                                       |       | —                     |       | 12,775                  |       | 16,560                     |       |
| Total long-term  liabilities                                                                                                                              |       | 4,283,645                  |       | 4,474,922               |       | 4,515,195                  |       |
|                                                                                                                                                      |       |                       |       |                    |       |                       |       |
| Minority interest in  discontinued operations                                                                                                             |       | —                     |       | 6,314                   |       | 13,024                     |       |
|                                                                                                                                                      |       |                       |       |                    |       |                       |       |
| Common stock (par value  $0.01 per share, 1,012,341 shares issued at January 27, 2007 and 1,012,264  shares issued at July 29, 2006 and January 28, 2006) |       | 10                         |       | 10                      |       | 10                         |       |
| Additional paid-in  capital                                                                                                                               |       | 1,408,373                  |       | 1,405,373               |       | 1,402,908                  |       |
| Accumulated other  comprehensive income (loss)                                                                                                            |       | 5,523                      |       | 9,829                   |       | (583                       | )          |
| Retained earnings                                                                                                                                         |       | 80,707                     |       | 12,455                  |       | 13,892                     |       |
| Total shareholders’  equity                                                                                                                          |       | 1,494,613                  |       | 1,427,667               |       | 1,416,227                  |       |
| Total liabilities and shareholders’ equity                                                                                                           |       | $                          | 6,473,040  |                    | $          | 6,607,961                  |       | $ | 6,610,649 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

1

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**NEIMANMARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(UNAUDITED)**
| **(in thousands)**                                                           | ** ** | **Thirteen  weeks ended  January 27,   2007** | ** ** | **Thirteen  weeks ended  January 28,   2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **(Successor)**                                              | ** ** | **(Successor)**                                              | ** ** |
|                                                                              |       |                                                         |       |                                                         |       |
| Revenues                                                                          |       | $                                                            | 1,295,836  |                                                         | $          | 1,194,481 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 850,258                                                      |       | 822,165                                                      |       |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 283,581                                                      |       | 266,618                                                      |       |
| Income from  credit card operations                                               |       | (17,930                                                      | )          | (16,972                                                      | )          |
| Depreciation  expense                                                             |       | 34,073                                                       |       | 34,238                                                       |       |
| Amortization of  customer lists                                                   |       | 13,581                                                       |       | 14,384                                                       |       |
| Amortization of  favorable lease commitments                                      |       | 4,469                                                        |       | 4,328                                                        |       |
|                                                                              |       |                                                         |       |                                                         |       |
| Operating  earnings                                                               |       | 127,804                                                      |       | 69,720                                                       |       |
|                                                                              |       |                                                         |       |                                                         |       |
| Interest  expense, net                                                            |       | 65,537                                                       |       | 66,047                                                       |       |
|                                                                              |       |                                                         |       |                                                         |       |
| Earnings from  continuing operations before income taxes                          |       | 62,267                                                       |       | 3,673                                                        |       |
|                                                                              |       |                                                         |       |                                                         |       |
| Income taxes                                                                      |       | 24,089                                                       |       | 1,615                                                        |       |
|                                                                              |       |                                                         |       |                                                         |       |
| Earnings from  continuing operations                                              |       | 38,178                                                       |       | 2,058                                                        |       |
|                                                                              |       |                                                         |       |                                                         |       |
| Earnings from  discontinued operations, net of taxes                              |       | 2,845                                                        |       | 986                                                          |       |
|                                                                              |       |                                                         |       |                                                         |       |
| Net earnings                                                                      |       | $                                                            | 41,023     |                                                         | $          | 3,044 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

2

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**NEIMANMARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(UNAUDITED)**
| **(in thousands)**                                                           | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** | **Seventeen  weeks ended  January 28,  2006** | ** ** | ** ** | **Nine   weeks ended   October 1,  2005** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **(Successor)**                                          | ** ** | **(Successor)**                                         | ** ** | ** ** | **(Predecessor)**                                             | ** ** |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| Revenues                                                                          |       | $                                                        | 2,335,048  |                                                    | $          | 1,508,293  |                                                          |       | $ | 632,372 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | 1,457,037                                                |       | 1,013,775                                               |       |       | 371,542                                                       |       |
| Selling, general and  administrative expenses (excluding depreciation)            |       | 531,113                                                  |       | 343,880                                                 |       |       | 155,632                                                       |       |
| Income from credit card  operations                                               |       | (34,301                                                  | )          | (20,757                                                 | )          |       | (7,818                                                        | )          |
| Depreciation expense                                                              |       | 67,249                                                   |       | 43,479                                                  |       |       | 19,209                                                        |       |
| Amortization of  customer lists                                                   |       | 27,143                                                   |       | 17,633                                                  |       |       | —                                                        |       |
| Amortization of  favorable lease commitments                                      |       | 8,939                                                    |       | 5,887                                                   |       |       | —                                                        |       |
| Transaction and other  costs                                                      |       | —                                                   |       | —                                                  |       |       | 23,544                                                        |       |
| Other income                                                                      |       | (4,210                                                   | )          | —                                                  |       |       | —                                                        |       |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| Operating earnings                                                                |       | 282,078                                                  |       | 104,396                                                 |       |       | 70,263                                                        |       |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| Interest expense  (income), net                                                   |       | 134,354                                                  |       | 83,300                                                  |       |       | (910                                                          | )          |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| Earnings from  continuing operations before income taxes                          |       | 147,724                                                  |       | 21,096                                                  |       |       | 71,173                                                        |       |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| Income taxes                                                                      |       | 58,091                                                   |       | 8,406                                                   |       |       | 26,226                                                        |       |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| Earnings from  continuing operations                                              |       | 89,633                                                   |       | 12,690                                                  |       |       | 44,947                                                        |       |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| (Loss) earnings from  discontinued operations, net of taxes                       |       | (21,381                                                  | )          | 1,202                                                   |       |       | (793                                                          | )          |
|                                                                              |       |                                                     |       |                                                    |       |       |                                                          |       |
| Net earnings                                                                      |       | $                                                        | 68,252     |                                                    | $          | 13,892     |                                                          |       | $ | 44,154 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

3

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**NEIMAN MARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**
| **(in thousands)**                                                              | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** | **Seventeen  weeks ended  January 28,  2006** | ** ** | ** ** | **Nine   weeks ended   October 1,  2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **(Successor)**                                          | ** ** | **(Successor)**                                         | ** ** | ** ** | **(Predecessor)**                                             | ** ** |
| **CASH  FLOWS - OPERATING ACTIVITIES**                                               |       |                                                     |       |                                                    |       |       |                                                          |       |
| Net earnings                                                                         |       | $                                                        | 68,252     |                                                    | $          | 13,892     |                                                          |       | $ | 44,154 |   |
| Loss (earnings)  from discontinued operations                                        |       | 21,381                                                   |       | (1,202                                                  | )          |       | 793                                                           |       |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                                     |       |                                                    |       |       |                                                          |       |
| Depreciation expense                                                                 |       | 67,249                                                   |       | 43,479                                                  |       |       | 19,209                                                        |       |
| Amortization of debt issue costs                                                     |       | 7,033                                                    |       | 4,636                                                   |       |       | 96                                                            |       |
| Amortization of customer lists and favorable lease  commitments                      |       | 36,082                                                   |       | 23,520                                                  |       |       | —                                                        |       |
| Non-cash charges related to step-up in carrying  value of inventory                  |       | —                                                   |       | 36,392                                                  |       |       | —                                                        |       |
| Stock-based compensation charges                                                     |       | 2,850                                                    |       | 1,483                                                   |       |       | 19,968                                                        |       |
| Deferred income taxes                                                                |       | (24,147                                                  | )          | (35,877                                                 | )          |       | (6,921                                                        | )          |
| Other, primarily costs related to defined benefit  pension plans                     |       | 10,136                                                   |       | 17,779                                                  |       |       | (4,621                                                        | )          |
|                                                                                 |       | 188,836                                                  |       | 104,102                                                 |       |       | 72,678                                                        |       |
| Changes in  operating assets and liabilities:                                        |       |                                                     |       |                                                    |       |       |                                                          |       |
| (Increase) decrease in accounts receivable                                           |       | (5,329                                                   | )          | 3,712                                                   |       |       | (7,779                                                        | )          |
| (Increase) decrease in merchandise inventories                                       |       | (18,670                                                  | )          | 134,651                                                 |       |       | (172,924                                                      | )          |
| (Increase) decrease in other current assets                                          |       | (16,230                                                  | )          | (13,236                                                 | )          |       | 6,898                                                         |       |
| Decrease (increase) in other assets                                                  |       | 365                                                      |       | (110                                                    | )          |       | (2,274                                                        | )          |
| Increase (decrease) in accounts payable and accrued  liabilities                     |       | 12,019                                                   |       | (19,070                                                 | )          |       | 122,608                                                       |       |
| Payment of deferred compensation and stock-based  awards                             |       | —                                                   |       | (12,901                                                 | )          |       | —                                                        |       |
| Increase in deferred real estate credits                                             |       | 1,025                                                    |       | 10,064                                                  |       |       | 4,326                                                         |       |
| Net cash provided  by operating activities – continuing operations              |       | 162,016                                                  |       | 207,212                                                 |       |       | 23,533                                                        |       |
| Net cash (used  for) provided by operating activities – discontinued operations |       | (9,163                                                   | )          | 4,907                                                   |       |       | (4,098                                                        | )          |
| **Net  cash provided by operating activities**                                       |       | 152,853                                                  |       | 212,119                                                 |       |       | 19,435                                                        |       |
| **CASH  FLOWS – INVESTING ACTIVITIES**                                          |       |                                                     |       |                                                    |       |       |                                                          |       |
| Capital  expenditures                                                                |       | (70,682                                                  | )          | (69,022                                                 | )          |       | (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.                                        |       | —                                                   |       | (5,155,923                                              | )          |       | —                                                        |       |
| Net cash used  for investing activities – continuing operations                 |       | (8,613                                                   | )          | (5,224,945                                              | )          |       | (25,575                                                       | )          |
| Net cash used  for investing activities – discontinued operations               |       | (128                                                     | )          | (3,273                                                  | )          |       | (736                                                          | )          |
| **Net  cash used for investing activities**                                          |       | (8,741                                                   | )          | (5,228,218                                              | )          |       | (26,311                                                       | )          |
| **CASH  FLOWS – FINANCING ACTIVITIES**                                          |       |                                                     |       |                                                    |       |       |                                                          |       |
| Repayment of  borrowings                                                             |       | (3,045                                                   | )          | —                                                  |       |       | —                                                        |       |
| 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                                                            |       | (758                                                     | )          | (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   |       | (178,653                                                 | )          | 4,265,151                                               |       |       | (7,346                                                        | )          |
| Net cash (used  for) provided by financing activities – discontinued operations |       | (1,675                                                   | )          | (1,789                                                  | )          |       | 5,000                                                         |       |
| **Net  cash (used for) provided by financing activities**                            |       | (180,328                                                 | )          | 4,263,362                                               |       |       | (2,346                                                        | )          |
| **CASH  AND CASH EQUIVALENTS**                                                       |       |                                                     |       |                                                    |       |       |                                                          |       |
| Decrease during  the period                                                          |       | (36,216                                                  | )          | (752,737                                                | )          |       | (9,222                                                        | )          |
| Beginning  balance                                                                   |       | 224,763                                                  |       | 844,260                                                 |       |       | 853,482                                                       |       |
| Ending balance                                                                       |       | 188,547                                                  |       | 91,523                                                  |       |       | 844,260                                                       |       |
| Less cash and  cash equivalents of discontinued operations                           |       | —                                                   |       | 902                                                     |       |       | 1,056                                                         |       |
| Ending balance -  continuing operations                                              |       | $                                                        | 188,547    |                                                    | $          | 90,621     |                                                          |       | $ | 843,204 |   |

 

4

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**NEIMANMARCUS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(UNAUDITED)**
| **(in thousands)**                                             | ** ** | **Twenty-Six  weeks ended  January 27,  2007** | ** ** | **Seventeen  weeks ended  January 28,  2006** | ** ** | ** ** | **Nine   weeks ended   October 1,  2005** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|---------------------------------------------------------------|------------|
| ** **                                                          | ** ** | **(Successor)**                                          | ** ** | **(Successor)**                                         | ** ** | ** ** | **(Predecessor)**                                             | ** ** |
| **Supplemental  Schedule of Cash Flow Information**                 |       |                                                     |       |                                                    |       |       |                                                          |       |
|                                                                |       |                                                     |       |                                                    |       |       |                                                          |       |
| Cash paid during  the period for:                                   |       |                                                     |       |                                                    |       |       |                                                          |       |
| Interest                                                            |       | $                                                        | 137,029    |                                                    | $          | 49,462     |                                                          |       | $ | 134 |   |
| Income taxes                                                        |       | $                                                        | 83,066     |                                                    | $          | 25,657     |                                                          |       | $ | 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                                |       | $                                                        | 822        |                                                    | $          | 11,220     |                                                          |       | $ | — |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

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**NEIMANMARCUS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

1.     Basis of Presentation

We have prepared the accompanying unaudited condensed consolidatedfinancial statements in accordance with generally accepted accounting principlesfor interim 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.

In our opinion, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments, consisting of normal recurringadjustments, necessary to present fairly our financial position, results ofoperations and cash flows for the applicable interim periods.  The results of operations for these periodsare not necessarily comparable to, or indicative of, results of any otherinterim period or for the fiscal year as a whole.

***Acquisition. ***OnApril 22, 2005, Neiman Marcus, Inc., formerly NewtonAcquisition, Inc. (the Company), and its wholly-owned subsidiary,Newton Acquisition Merger Sub, Inc. (Merger Sub), were formed andincorporated 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 Texas Pacific Group and Warburg Pincus LLC(the Sponsors) for the purpose of acquiring The Neiman Marcus Group, Inc.(NMG). The equity subscriptions were subsequently funded by the Sponsors.

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

In connection with the acquisition of NMG, Holding made an aggregatecash equity contribution of $1,420.0 million and a noncash equitycontribution of $25.0 million to the Company in exchange for the Companyissuing 999,100 shares of its common stock to Holding. In addition, certainmembers of executive management of the Company made cash equity contributionsaggregating $7.7 million and noncash equity contributions, consisting ofshares of common stock and common stock options in NMG, aggregating $17.9 millionin exchange for 12,264 shares of common stock in the Company.

Prior to the Acquisition, the Company had no independent assets oroperations.  After the Acquisition, theCompany represents the Successor to NMG since the Company’s sole asset is itsinvestment in NMG and its operations consist solely of the operating activitiesof NMG as well as costs incurred by the Company related to its investment inNMG.  For periods prior to theAcquisition, 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 consolidated statements ofearnings and cash flows present our results of operations and cash flows forthe periods preceding the Acquisition (Predecessor) and the periods succeedingthe Acquisition (Successor), respectively. All references to “we” and “our”relate to the Company for periods subsequent to the Transactions and to NMG forperiods prior to the Transactions.

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter offiscal year 2007 relate to the thirteen weeks ended January 27, 2007(Successor).  All references to thesecond quarter of fiscal year 2006 relate to the thirteen weeks ended January28, 2006 (Successor).  All references toyear-to-date fiscal 2007 relate to the twenty-six weeks ended January 27, 2007(Successor).  All references toyear-to-date fiscal 2006 relate to the combined period comprised of seventeenweeks ended January 28, 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 absolutecertainty, actual results may differ from the estimates used in preparing theaccompanying unaudited condensed consolidated financial statements.

We believe thefollowing critical accountingpolicies, among others, encompass the more significant judgments and estimatesused in the preparation of our financial statements:

·                  Recognitionof revenues;

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

·                  Determinationof impairment of long-lived assets;

·                  Recognitionof advertising and catalog costs;

·                  Measurementof liabilities related to our loyalty programs;

·                  Recognitionof income taxes;

·                  Measurementof accruals for litigation, general liability, workers’ compensation and healthinsurance, short-term disability, pension and postretirement health carebenefits; and

·                  Allocationof the price paid to acquire the Company to our assets and liabilities as ofthe date of the Acquisition (as more fully described in Note 3).

A detaileddescription of our critical accounting policies is included in our AnnualReport on Form 10-K for the fiscal year ended July 29, 2006.

***Recent Accounting Pronouncements. ***In July 2006, the FASBissued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes –an interpretation of FASB Statement No. 109” (FIN 48), which clarifies theaccounting for uncertainty in tax positions. FIN 48 requires that we recognize in our consolidated financialstatements the impact of a tax position, if that position is more likely thannot of being sustained upon examination, based on the technical merits of theposition.  We will be required toimplement the provisions of FIN 48 no later than the first quarter of fiscalyear 2008. We have not completed our evaluation of the impact, if any, ofadopting 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 no later than 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 the impact, if any, of adopting FAS 158 on ourconsolidated 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 theimpact, if any, of adopting FAS 159 on our consolidated financial statements.

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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 occurredsimultaneously 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 (2008 Notes);

·            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 abovetransactions, the Acquisition and our payment of any costs related to thesetransactions collectively herein as the “Transactions.”

***Transaction and Other Costs.*****During the period from July 30, 2005 to October 1, 2005,the Predecessor expensed $23.5 million in connection with the Transactions.These costs consisted primarily of $4.5 million of accounting, investmentbanking, legal and other costs associated with the Transactions and a $19.0million non-cash charge for stock compensation resulting from the acceleratedvesting of Predecessor stock options and restricted stock in connection withthe 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 Buyout Transactions,” thebasis of executive management’s indirect interests in the Successor after theTransactions is carried over at the basis of their interests in the Predecessorprior to the Transactions. The carryover basis of such interests less the netcash received by the management participants represents a deemed dividend of$69.2 million to the management participants and has been recognized as areduction to shareholders’ equity.

**3.**               Purchase Accounting

We accounted for the Acquisition in accordance with the provisions ofStatement of Financial Accounting Standards No. 141 “Business Combinations”(SFAS No. 141), whereby the purchase price paid to effect the Acquisitionwas allocated to state the acquired assets and liabilities at fair value. TheAcquisition and the allocation of the purchase price were recorded as ofOctober 1, 2005, the beginning of our October accounting period. Thepurchase price was approximately $5,461.7 million. The sources and uses offunds in connection with the Transactions and the redemption of our 2008 Notesare summarized below (in millions):

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    |   |

 

In connection with the purchase price allocation, we made estimates ofthe fair values of our long-lived and intangible assets based upon assumptionsrelated to future cash flows, discount rates and asset lives. 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 |   |
|                                                      |        |                                                                                          |        |          |         |  |  |  |  |

 

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Goodwill and indefinite-lived intangible assets, such as tradenames, arenot subject to amortization. Rather, recoverability of goodwill andindefinite-lived intangible assets is assessed annually and upon the occurrenceof certain events. The recoverability assessment requires us to make judgmentsand estimates regarding fair values. Fair values are determined using estimatedfuture cash flows, including growth assumptions for future revenues, grossmargin rates and other estimates. To the extent that our estimates are notrealized, future assessments could result in impairment charges.

Customer lists are amortized using the straight-line method over theirestimated useful lives, ranging from 5 to 26 years (weighted average life of 13years).  Favorable lease commitments areamortized straight-line over the remaining lives of the leases, ranging from 6to 49 years (weighted average life of 33 years).  Total estimated amortization of allacquisition-related intangible assets 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

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

In addition, pursuant to such agreement, and in exchange for on-goingconsulting and management advisory services that will be provided to us by theSponsors and their affiliates, affiliates of the Sponsors will receive anaggregate annual management fee equal to the lesser of (i) 0.25% of ourconsolidated annual revenues or (ii) $10 million. Affiliates of theSponsors will also receive reimbursement for out-of-pocket expenses incurred bythem or their affiliates in connection with services provided pursuant to theagreement. These management fees are payable quarterly in arrears.  During the twenty-six weeks ended January 27,2007, and the seventeen weeks ended January 28, 2006, we recorded managementfees of $5.9 million and $3.8 million, respectively, which are included inselling, general and administrative expenses in the condensed consolidatedstatements of earnings.

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

**5.**               Stock-Based Compensation

The Predecessor accounted for stock-based compensation awards toemployees in accordance with Accounting Principles Board Opinion No. 25 “Accountingfor Stock Issued to Employees” (APB No. 25) and its relatedinterpretations. Accordingly, we recognized compensation expense on ourrestricted stock awards but did not recognize compensation expense for stockoptions since all options granted had an exercise price equal to the marketvalue of our common stock on the grant date. We did not adopt the previousvoluntary expense recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation” (SFAS No. 123), whereby the fair value ofstock-based compensation awards would have been expensed over the termsof awards. However, consistent with the disclosure requirements of SFASNo. 123, we made pro forma disclosures of the effect that application ofthe fair value expense recognition provisions of SFAS No. 123 would havehad on our net earnings.

In December 2004, the FASB issued SFAS No. 123(R), “Share-BasedPayment” (SFAS No. 123(R)). This standard is a revision of SFAS No. 123and supersedes APB No. 25 and its related implementation guidance. SFASNo. 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their fair values. We adopted SFAS No. 123(R) as of the beginningof our first quarter of fiscal year 2006 using the modified prospective method,which required us to record stock compensation for all unvested and new awardsas of the adoption date. Accordingly, we have not restated prior period amountspresented herein.

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***PredecessorStock-Based Compensation Accounting. ***Inconnection with the adoption of the provisions of SFAS No. 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 CompensationAccounting.***  The Company has approved equity-basedmanagement arrangements which authorize equity awards to be granted to certainmanagement employees for up to 87,992.0 shares of the common stock of theCompany, of which options for 81,716.3 shares were issued in fiscal year 2006and options for 2,496 shares were issued in fiscal year 2007.  All options are outstanding at January 27,2007.  Options generally vest over fourto five years and expire 10 years from the date of grant.  At January 27, 2007, options for 24,533.7shares were vested.

The exercise price of approximately 50% of such options escalate at a10% compound rate per year until the earlier to occur of (i) exercise,(ii) the fifth anniversary of the date of grant or (iii) theoccurrence of a change in control; provided that in the event the Sponsorscause the sale of shares of the Company to an unaffiliated entity, the exerciseprice will cease to accrete at the time of the sale with respect to apro rata portion of the accreting options.

We use the Black-Scholes option-pricing model to determinethe fair value of our options as of the date of grant.  A summary of the 2006 and 2007grants and fairvalue assumptions is as follows:
|                                          | ** ** | **2006 Grants**         | ** ** | **2007 Grants**                        | ** ** |
|------------------------------------------|------------|------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise Price  Options** | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise Price  Options** | ** ** |
| Options  outstanding at January 27, 2007 |       | 43,594.6                     |       | 38,121.7                                    |       | 1,248.0 |   | 1,248.0 |   |
| Exercise Price  at January 27, 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 |   |

 

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

We recognized non-cash stock compensation expense of $2.9 millionfor the twenty-six weeks ended January 27, 2007, and $1.5 million for theseventeen weeks ended January 28, 2006, which is included in selling, generaland administrative expenses. At January 27, 2007, unearned non-cash stock-basedcompensation that we expect to recognize as expense over the next 5 yearsaggregates approximately $21.8 million.

**6.**               Discontinued Operations

***Gurwitch Products, L.L.C.***  On July 27, 2006, we soldour majority interest in Gurwitch Products, L.L.C. to Alticor Inc., forpretax net cash proceeds of approximately $40.8 million (GurwitchDisposition).  Gurwitch Products, L.L.C.designs and markets the Laura Mercier cosmetics line and had revenues of approximately$71.6 million in fiscal year 2006.

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

In November 2006, 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% interestand the 44% minority interest subsequently purchased by NMG) for pretax netcash proceeds of approximately $121.5 million. Both the purchase of the minority interest in Kate Spade LLC and thesale of Kate Spade LLC to Liz Claiborne, Inc. were consummated in December2006.

Kate Spade LLC designsand markets high-end accessories and had revenues of approximately $84.7million in fiscal year 2006.

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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  January 27,  2007** | ** ** | **Thirteen  weeks  ended  January 28,  2006** | ** ** | **Twenty-six  weeks  ended  January 27,  2007** | ** ** | **Seventeen  weeks  ended  January 28,  2006** | ** ** | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** |
| ** **                                               | ** ** | **(Successor)**                                    | ** ** | **(Successor)**                                    | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
|                                                     |       |                                               |       |                                               |       |   |   |   |   |   |   |   |
| Revenues                                                 |       | $                                                  | 10,704     |                                               | $          | 36,935 |   | $ | 29,612 |   | $ | 47,913 |   |   | $ | 19,277 |   |
|                                                     |       |                                               |       |                                               |       |   |   |   |   |   |   |   |
| Earnings (loss) from  operations before income taxes     |       | $                                                  | 2,345      |                                               | $          | 1,939 |   | $ | 3,494 |   | $ | 2,634 |   |   | $ | (1,412 | ) |
| Income taxes                                             |       | 1,289                                              |       | 953                                                |       | 1,967 |   | 1,432 |   |   | (619 | ) |
| Net earnings                                             |       | 1,056                                              |       | 986                                                |       | 1,527 |   | 1,202 |   |   | (793 | ) |
|                                                     |       |                                               |       |                                               |       |   |   |   |   |   |   |   |
| Gain (loss) on  disposition before income taxes          |       | 3,467                                              |       | —                                             |       | (12,008 | ) | — |   |   | — |   |
| Income taxes                                             |       | (1,678                                             | )          | —                                             |       | (10,900 | ) | — |   |   | — |   |
| Net earnings (loss) on  disposition                      |       | 1,789                                              |       | —                                             |       | (22,908 | ) | — |   |   | — |   |
|                                                     |       |                                               |       |                                               |       |   |   |   |   |   |   |   |
| Earnings (loss) from discontinued operations, net of tax |       | $                                                  | 2,845      |                                               | $          | 986 |   | $ | (21,381 | ) | $ | 1,202 |   |   | $ | (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** | ** ** | **January 27,  2007** | ** ** | **July 29,  2006** | ** ** | **January 28,  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%             |       | 120,809                    |       | 120,711                 |       | 120,614                    |       |
| 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                         |       |               |       | $                          | 3,020,809  |                    | $          | 3,195,711                  |       | $ | 3,195,614 |   |

 

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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 January 27, 2007, NMG had $575.4 millionof unused borrowing availability under the Asset-Based Revolving CreditFacility based on a borrowing base of over $600.0 million and after givingeffect to $24.6 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 such additionalcommitments, and any increase in commitments will be subject to customaryconditions precedent. If NMG were to request any such additional commitmentsand the existing lenders or new lenders were to agree to provide suchcommitments, the Asset-Based Revolving Credit Facility size could beincreased to up to $800.0 million, but NMG’s ability to borrow would stillbe limited by the amount of the borrowing base.

Borrowings under the Asset-Based Revolving Credit Facility bearinterest at a rate per annum equal to, at NMG’s option, either (a) a baserate determined by reference to the higher of (1) the prime rate ofDeutsche Bank Trust Company Americas and (2) the federal funds effectiverate plus  1¤2 of 1% or(b) 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 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 January 27, 2007, the liabilities of NMG’s non-guarantorsubsidiaries totaled approximately $4.9 million, or 0.1% of consolidatedliabilities, and the assets of NMG’s non-guarantor subsidiaries aggregatedapproximately $5.9 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 ofinventory and related accounts, cash, deposit accounts, all payments receivedby NMG or the subsidiary guarantors from credit card clearinghouses and processorsor otherwise in respect of all credit card charges for sales of inventory byNMG and the subsidiary guarantors, certain related assets and proceeds of theforegoing; and

·                  asecond-priority pledge of 100% of NMG’s capital stock and certain of the capitalstock held by NMG, the Company or any subsidiary guarantor (which pledge, inthe case of any foreign subsidiary is limited to 100% of the non-voting stock(if any) and 65% of the voting stock of such foreign subsidiary); 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 principalamount of 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.***  On October 6,2005, in connection with the Transactions, NMG entered into a credit agreementand related security and other agreements for a $1,975.0 million SeniorSecured Term Loan Facility with Credit Suisse as administrative agent andcollateral agent. The full amount of the Senior Secured Term Loan Facility wasborrowed on October 6, 2005. In the second quarter of fiscal year 2006,NMG voluntarily repaid $100.0 million principal amount of the loans underthe Senior Secured Term Loan Facility and in the second quarter of fiscal year2007, NMG voluntarily repaid $175.0 million principal amount.

At January 27,2007, borrowings under the Senior Secured Term Loan Facility bore interest at arate per annum equal to, at NMG’s option, either (a) a base rate determinedby reference to the higher of (1) the prime rate of Credit Suisse and(2) the federal funds effectiverate plus  1¤2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. At January 27,2007, the applicable margin with respect to base rate borrowings was 1.25% andthe applicable margin

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with respect toLIBOR borrowings was 2.25%. The interest rate on the outstanding borrowingspursuant to the Senior Secured Term Loan Facility was 7.60% at January 27,2007.

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%.

The credit agreement governing the Senior Secured Term Loan Facilityrequires NMG to prepay outstanding term loans with 50% (which percentage willbe reduced to 25% if NMG’s total leverage ratio is less than a specified ratioand will be reduced to 0% if NMG’s total leverage ratio is less than aspecified ratio) of its annual excess cash flow (as defined in the creditagreement). For fiscal year 2006, NMG was not required to prepay anyoutstanding term loans pursuant to the annual excess cash flow requirements.  If a change of control (as defined in thecredit agreement) occurs, NMG will be required to offer to prepay alloutstanding term loans, at a prepayment price equal to 101% of the principalamount to be prepaid, plus accrued and unpaid interest to the date ofprepayment. NMG also must offer to prepay outstanding term loans at 100% of theprincipal amount to be prepaid, plus accrued and unpaid interest, with theproceeds of certain asset sales under certain circumstances.

NMG may voluntarily prepay outstanding loans under the Senior SecuredTerm Loan Facility at any time without premium or penalty other than customary “breakage”costs with respect to LIBOR loans. There is no scheduled amortization under theSenior Secured Term Loan Facility. The principal amount of the loans outstandingis due and payable in full on April 6, 2013.

All obligations under the Senior Secured Term Loan Facility areunconditionally guaranteed by the Company and each direct and indirect domesticsubsidiary of NMG that guarantees the obligations of NMG under its Asset-BasedRevolving Credit Facility. All obligations under the Senior Secured Term LoanFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the assets of theCompany, 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 subsidiary guarantor,including a significant portion of NMG’s material owned and leased realproperty (which currently consists of approximately half of NMG’s full-lineretail stores) and equipment, but excluding, among other things, the collateraldescribed in the following bullet point; and

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

Capital stock and other securities of a subsidiary of NMG that are ownedby NMG or any subsidiary guarantor will not constitute collateral under NMG’sSenior Secured Term Loan Facility to the extent that such securities cannotsecure the 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 Senior Secured Term Loan Facility will include shares of capitalstock or other securities of subsidiaries of NMG or any subsidiary guarantoronly to the extent that the applicable value of such securities (on asubsidiary-by-subsidiary basis) is less than 20% of the aggregate principalamount of the 2028 Debentures or other secured public debt obligations of NMG.

The credit agreement governing the Senior Secured Term Loan Facilitycontains a number of negative covenants that are substantially similar to thosegoverning the Senior Notes and additional covenants related to the securityarrangements for the Senior Secured Term Loan Facility. The credit agreementalso contains customary affirmative covenants and events of default.

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

The fair value of2028 Debentures at January 27, 2007was approximately $125.0 million.

***Senior Notes.**** *On October 6, 2005,Newton Acquisition Merger Sub, Inc. issued $700.0 million aggregateoriginal principal amount of 9.0% / 9.75% Senior Notes under a senior indenture(Senior Indenture) with Wells Fargo Bank, National Association, as trustee. Atthe closing of the Transactions, as the surviving corporation in theAcquisition, NMG assumed all the obligations of Newton Acquisition MergerSub, Inc. under the Senior Indenture. The Senior Notes mature onOctober 15, 2015.

For any interest payment period through October 15, 2010, NMG may,at its option, elect to pay interest on the Senior 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 eachJanuary 15, April 15, July 15 and October 15, commencing onJanuary 15, 2006.

The Senior Notes are fully and unconditionally guaranteed, on a jointand several unsecured, senior basis, by each of NMG’s wholly-owneddomestic subsidiaries that guarantee NMG’s obligations under its Senior SecuredCredit Facilities and by the Company. The Senior Notes and the guaranteesthereof are NMG’s and the guarantors’ unsecured, senior obligations and rank(i) equal in the right of payment with all of NMG’s and the guarantors’existing and future senior indebtedness, including any borrowings under NMG’sSenior Secured Credit Facilities and the guarantees thereof and NMG’s 2028Debentures; and (ii) senior to all of NMG’s and its guarantors’ existingand future subordinated indebtedness, including the Senior Subordinated Notesdue 2015 and the guarantees thereof. The Senior Notes also are effectivelyjunior in priority to NMG’s and its guarantors’ obligations under all securedindebtedness, including NMG’s Senior Secured Credit Facilities, the 2028Debentures, and any other secured obligations of NMG, in each case, to theextent of the value of the assets securing such obligations. In addition, theSenior Notes are structurally subordinated to all existing and futureliabilities, including trade payables, of NMG’s subsidiaries that are notproviding guarantees.

NMG is not required to make any mandatory redemption or sinking fundpayments with respect to the Senior Notes, but under certain circumstances, NMGmay be required to offer to purchase Senior Notes as described below. NMG mayfrom time to time acquire Senior Notes by means other than a redemption,whether by tender offer, in open market purchases, through negotiatedtransactions or otherwise, in accordance with applicable securities laws.

Except as described below, the Senior Notes are not redeemable at NMG’soption prior to October 15, 2010. From and after October 15, 2010,NMG may redeem the Senior Notes, in whole or in part, at a redemption priceequal to 104.5% of principal amount, declining annually to 100% of theprincipal amount on October 15, 2013, plus accrued and unpaid interest,and Additional Interest (as defined in the Senior Indenture), if any, thereonto the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option, subject tocertain conditions, redeem up to 35% of the original aggregate principal amountof Senior 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.

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

The indenture governing the Senior Notes contains covenants that limitNMG’s ability and certain of its subsidiaries’ ability to:

·                  incuradditional indebtedness;

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

·                  makeinvestments;

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

·                  engagein transactions with NMG’s affiliates;

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

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

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

The fair value ofNMG’s Senior Notes at January 27, 2007 was approximately $768.3 million.

***Senior Subordinated Notes.**** *On October 6, 2005,Newton Acquisition Merger Sub, Inc. issued $500.0 million aggregateprincipal amount of 10.375% Senior Subordinated Notes under a seniorsubordinated indenture (Senior Subordinated Indenture) with Wells Fargo Bank,National Association, as trustee. At the closing of the Transactions, as thesurviving corporation in the Acquisition, NMG assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior SubordinatedIndenture. The Senior Subordinated Notes mature on October 15, 2015.Interest on the Senior Subordinated Notes is payable in cash semi-annually inarrears on each April 15 and October 15, commencing April 15,2006.

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

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

Except as described below, the Senior Subordinated Notes are notredeemable at NMG’s option 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 unpaid 

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interest, and Additional Interest (as defined in the Senior SubordinatedIndenture), if any, thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option, subject tocertain conditions, redeem up to 35% of the original aggregate principal amountof Senior 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.

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

Upon the occurrence of a change of control (as defined in the SeniorSubordinated Indenture), NMG will make an offer to purchase all of the SeniorSubordinated Notes at a price in cash equal to 101% of the aggregate principalamount thereof plus accrued and unpaid interest, and Additional Interest, ifany, to the date of purchase.

The indenture 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.

The fair value ofNMG’s Senior Subordinated Notes at January 27, 2007 was approximately $558.8million.

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

***Maturities of Long-Term Debt.***  At January27, 2007, annual maturities of long-term debt during the next five fiscal yearsand thereafter are as follows (in millions):
| 2007       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2008       |   | —  |   |
| 2009       |   | —  |   |
| 2010       |   | —  |   |
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| Thereafter |   | 3,020.8 |   |

 

The above table does not reflect future excess cash flow prepayments, ifany, that may be required under the Senior Secured Term Loan Facility.

***Interest Rate Swaps.***  The Company uses derivativefinancial instruments to help manage its interest rate risk. EffectiveDecember 6, 2005, NMG entered into floating to fixed interest rate swapagreements for an aggregate notional amount of $1,000.0 million to limitits exposure to interest rate increases related to a portion of its floatingrate indebtedness. The interest rate swap agreements terminate after fiveyears.  At January 27, 2007, the fairvalue of NMG’s interest rate swap agreements was a gain of approximately$13.5 million, which amount is included in other assets.

Asof the effective date, NMG designated the interest rate swaps as cash flowhedges. As a result, changes in the fair value of NMG’s swaps are recorded as acomponent of other comprehensive income. At January 27, 2007, we have$6.8 million of unrecognized gains, net of tax, on our interest rate swapagreements included in other comprehensive income.

As aresult of the swap agreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.716% to 7.289% per quarter and result in an average fixed rateof 6.897%.

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***Interest expense.***  Thesignificant components of interest expense are as follows:
|                                             | ** ** | **Quarter-to-Date**                                | ** ** | **Year-to-Date**                                   | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **Thirteen  weeks  ended  January 27,  2007** | ** ** | **Thirteen  weeks  ended  January 28,  2006** | ** ** | **Twenty-six  weeks  ended  January 27,  2007** | ** ** | **Seventeen  weeks  ended  January 28,  2006** | ** ** | ** ** | **Nine  weeks  ended  October 1,  2005** | ** ** |
| ** **                                  | ** ** | **(Successor)**                                    | ** ** | **(Successor)**                                    | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
|                                        |       |                                               |       |                                               |       |   |   |   |   |   |   |   |
| Asset-Based  Revolving Credit Facility      |       | $                                                  | —     |                                               | $          | 751 |   | $ | — |   | $ | 1,332 |   |   | $ | — |   |
| Senior Secured  Term Loan Facility          |       | 33,068                                             |       | 35,381                                             |       | 68,771 |   | 43,595 |   |   | — |   |
| 2028 Debentures                             |       | 2,236                                              |       | 2,226                                              |       | 4,462 |   | 2,911 |   |   | 1,542 |   |
| Senior Notes                                |       | 15,750                                             |       | 15,925                                             |       | 31,500 |   | 19,950 |   |   | — |   |
| Senior  Subordinated Notes                  |       | 12,969                                             |       | 13,113                                             |       | 25,937 |   | 16,427 |   |   | — |   |
| 2008 Notes                                  |       | —                                             |       | —                                             |       | — |   | 639 |   |   | 1,439 |   |
| Amortization of  debt issue costs and other |       | 4,476                                              |       | 1,588                                              |       | 9,013 |   | 2,749 |   |   | 301 |   |
| Total interest expense                      |       | 68,499                                             |       | 68,984                                             |       | 139,683 |   | 87,603 |   |   | 3,282 |   |
| Less:                                       |       |                                               |       |                                               |       |   |   |   |   |   |   |   |
| Interest income                             |       | 2,109                                              |       | 1,852                                              |       | 3,751 |   | 2,814 |   |   | 3,046 |   |
| Capitalized interest                        |       | 853                                                |       | 1,085                                              |       | 1,578 |   | 1,489 |   |   | 1,146 |   |
| Interest expense  (income), net             |       | $                                                  | 65,537     |                                               | $          | 66,047 |   | $ | 134,354 |   | $ | 83,300 |   |   | $ | (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 OtherComprehensive Income (Loss)

Thefollowing table shows the componentsof accumulated other comprehensive income (loss):
| (in thousands)                                  | ** ** | **January 27,  2007** | ** ** | **July 29,  2006** | ** ** | **January 28,  2006** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                           | ** ** | **(Successor)**            | ** ** | **(Successor)**         | ** ** | **(Successor)**            | ** ** |
|                                                 |       |                       |       |                    |       |                       |       |
| Unrealized gain  (loss) on financial instruments     |       | $                          | 6,843      |                    | $          | 9,990                      |       | $ | (412 | ) |
| Other                                                |       | (1,320                     | )          | (161                    | )          | (171                       | )          |
| Total accumulated other  comprehensive income (loss) |       | $                          | 5,523      |                    | $          | 9,829                      |       | $ | (583 | ) |

 

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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***Costs of Benefits. ***The components of theexpenses incurred under our Pension Plan, SERP Plan and Postretirement Plan areas follows:
| ** **                                          | ** ** | **Quarter-to-Date**                                    | ** ** | **Year-to-Date**                                       | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in thousands)**                             | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** | **Thirteen  weeks ended  January 28,  2006** | ** ** | **Twenty-six  weeks ended  January 27,  2007** | ** ** | **Seventeen  weeks ended  January 28,  2006** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** |
| ** **                                          | ** ** | **(Successor)**                                        | ** ** | **(Successor)**                                        | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| Pension Plan:                                       |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Service cost                                        |       | $                                                      | 3,922      |                                                   | $          | 4,027 |   | $ | 7,844 |   | $ | 5,266 |   |   | $ | 2,823 |   |
| Interest cost                                       |       | 5,863                                                  |       | 5,250                                                  |       | 11,726 |   | 6,865 |   |   | 3,468 |   |
| Expected return  on plan assets                     |       | (5,876                                                 | )          | (5,684                                                 | )          | (11,752 | ) | (7,434 | ) |   | (3,636 | ) |
| Net amortization  of losses and prior service costs |       | —                                                 |       | —                                                 |       | — |   | — |   |   | 1,205 |   |
| Pension Plan  expense                               |       | $                                                      | 3,909      |                                                   | $          | 3,593 |   | $ | 7,818 |   | $ | 4,697 |   |   | $ | 3,860 |   |
|                                                |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| SERP Plan:                                          |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Service cost                                        |       | $                                                      | 469        |                                                   | $          | 474 |   | $ | 938 |   | $ | 620 |   |   | $ | 330 |   |
| Interest cost                                       |       | 1,232                                                  |       | 1,114                                                  |       | 2,464 |   | 1,457 |   |   | 730 |   |
| Net amortization  of losses and prior service costs |       | —                                                 |       | —                                                 |       | — |   | — |   |   | 394 |   |
| SERP Plan  expense                                  |       | $                                                      | 1,701      |                                                   | $          | 1,588 |   | $ | 3,402 |   | $ | 2,077 |   |   | $ | 1,454 |   |
|                                                |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Postretirement Plan:                                |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Service cost                                        |       | $                                                      | 14         |                                                   | $          | 12 |   | $ | 28 |   | $ | 15 |   |   | $ | 8 |   |
| Interest cost                                       |       | 227                                                    |       | 214                                                    |       | 454 |   | 280 |   |   | 139 |   |
| Net amortization  of losses (gains)                 |       | —                                                 |       | —                                                 |       | — |   | — |   |   | (5 | ) |
| Postretirement expense                              |       | $                                                      | 241        |                                                   | $          | 226 |   | $ | 482 |   | $ | 295 |   |   | $ | 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 voluntary contributionbased on our evaluation of the Pension Plan.

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12.         Segments

Wehave identified two reportable segments: Specialty Retail stores and DirectMarketing. The Specialty Retail stores segment includes all Neiman Marcus andBergdorf Goodman retail stores, including Neiman Marcus clearance stores. TheDirect Marketing segment conducts both online and print catalog operationsunder the Neiman Marcus, Bergdorf Goodman and Horchow brand names.  Both the Specialty Retail stores and DirectMarketing segments derive their revenues from the sales of high-end fashionapparel, accessories, cosmetics and fragrances from leading designers, preciousand fashion jewelry and decorative home accessories.

Operating earnings forthe segments include 1) revenues, 2) cost of sales, 3) direct selling, general,and administrative expenses, 4) other direct operating expenses, 5) income fromcredit card operations and 6) depreciation expense for the respectivesegment.  Items not allocated to ouroperating segments include those items not considered by management in measuringthe assets and profitability of our segments. These amounts include 1)corporate expenses including, but not limited to, treasury, investor relations,legal and finance support services, and general corporate management,2) charges related to the application of purchase accounting adjustmentsmade in connection with the Acquisition including amortization of customerlists and favorable lease commitments and other non-cash valuation charges and3) interest expense.  These items, whileoften times related to the operations of a segment, are not considered bysegment operating management, corporate operating management and the chiefoperating decision maker in assessing segment operating performance.  The accounting policies of the operatingsegments are the same as those described in the summary of significantaccounting policies (except with respect to purchase accounting adjustments notallocated to the operating segments).  Our senior management evaluates the performance ofour assets on a consolidated 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  January 27,  2007** | ** ** | **Thirteen  weeks ended  January 28,  2006** | ** ** | **Twenty-six  weeks ended  January 27,  2007** | ** ** | **Seventeen  weeks ended  January 28,  2006** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** |
|                                                                                              |       | **(Successor)**                                        | ** ** | **(Successor)**                                        | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** |
| REVENUES:                                                                                         |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Specialty Retail  stores                                                                          |       | $                                                      | 1,069,946  |                                                   | $          | 981,501 |   | $ | 1,949,879 |   | $ | 1,243,911 |   |   | $ | 544,857 |   |
| Direct Marketing                                                                                  |       | 225,890                                                |       | 212,980                                                |       | 385,169 |   | 264,382 |   |   | 87,515 |   |
| Total                                                                                             |       | $                                                      | 1,295,836  |                                                   | $          | 1,194,481 |   | $ | 2,335,048 |   | $ | 1,508,293 |   |   | $ | 632,372 |   |
|                                                                                              |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| OPERATING EARNINGS:                                                                               |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Specialty Retail  stores                                                                          |       | $                                                      | 121,515    |                                                   | $          | 94,317 |   | $ | 278,090 |   | $ | 138,382 |   |   | $ | 91,372 |   |
| Direct Marketing                                                                                  |       | 39,131                                                 |       | 37,915                                                 |       | 59,930 |   | 44,329 |   |   | 8,246 |   |
| Subtotal                                                                                          |       | 160,646                                                |       | 132,232                                                |       | 338,020 |   | 182,711 |   |   | 99,618 |   |
| Corporate  expenses                                                                               |       | (14,792                                                | )          | (14,387                                                | )          | (24,070 | ) | (18,371 | ) |   | (5,811 | ) |
| Amortization of  customer lists and favorable lease commitments                                   |       | (18,050                                                | )          | (18,712                                                | )          | (36,082 | ) | (23,520 | ) |   | — |   |
| Non-cash charges  related to other valuation adjustments made in connection with the  Acquisition |       | —                                                 |       | (29,413                                                | )          | — |   | (36,424 | ) |   | — |   |
| Other income (1)                                                                                  |       | —                                                 |       | —                                                 |       | 4,210 |   | — |   |   | — |   |
| Transaction and  other costs                                                                      |       | —                                                 |       | —                                                 |       | — |   | — |   |   | (23,544 | ) |
| Total                                                                                             |       | $                                                      | 127,804    |                                                   | $          | 69,720 |   | $ | 282,078 |   | $ | 104,396 |   |   | $ | 70,263 |   |
|                                                                                              |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| CAPITAL EXPENDITURES:                                                                             |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Specialty Retail  stores                                                                          |       | $                                                      | 23,274     |                                                   | $          | 43,653 |   | $ | 61,491 |   | $ | 63,947 |   |   | $ | 22,784 |   |
| Direct Marketing                                                                                  |       | 5,989                                                  |       | 3,372                                                  |       | 9,191 |   | 5,075 |   |   | 2,791 |   |
| Total                                                                                             |       | $                                                      | 29,263     |                                                   | $          | 47,025 |   | $ | 70,682 |   | $ | 69,022 |   |   | $ | 25,575 |   |
|                                                                                              |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| DEPRECIATION EXPENSE:                                                                             |       |                                                   |       |                                                   |       |   |   |   |   |   |   |   |
| Specialty Retail  stores                                                                          |       | $                                                      | 29,493     |                                                   | $          | 30,521 |   | $ | 58,434 |   | $ | 38,274 |   |   | $ | 17,313 |   |
| Direct Marketing                                                                                  |       | 3,410                                                  |       | 2,484                                                  |       | 6,480 |   | 3,151 |   |   | 1,896 |   |
| Subtotal                                                                                          |       | 32,903                                                 |       | 33,005                                                 |       | 64,914 |   | 41,425 |   |   | 19,209 |   |
| Depreciation  expense on step-up of fixed assets made in connection with the Acquisition          |       | 1,170                                                  |       | 1,233                                                  |       | 2,335 |   | 2,054 |   |   | — |   |
| Total                                                                                             |       | $                                                      | 34,073     |                                                   | $          | 34,238 |   | $ | 67,249 |   | $ | 43,479 |   |   | $ | 19,209 |   |

 

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

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**13.**         Commitments and Contingencies

***Long-termIncentive Plan.*** Following the consummation of the Transactions, the Company created along-term incentive plan (Long-term Incentive Plan) that provides for a cashincentive payable upon a change of control, as defined, subject to theattainment of certain performance objectives to employees who have historicallybeen eligible for stock-based compensation. Performance objectives and targets are based on cumulative EBITDApercentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performanceperiod will be credited to a book account and will earn interest at acontractually defined annual  rate untilthe award is paid.  Awards will be paidwithin 30 days of a change of control or the first day there is a public marketof at least 20% of total outstanding common stock.

***CashIncentive Plan. ***Followingthe consummation of the Transactions, the Company also adopted a cash incentiveplan (Cash Incentive Plan) to aid in the retention of certain keyexecutives.  The Cash Incentive Planprovides for the creation of a $14 million cash bonus pool to be shared by allparticipants based on the number of vested and unvested stock options andunderlying shares that were granted pursuant to the Management Equity IncentivePlan.  Each participant in the 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 result of these actions andproceedings will not have a material adverse effect on our financial position,results of operations or cash flows.

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**14.**         Condensed Consolidating Financial Information(with respect to NMG’s obligations under the Senior Notes and the 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 financial information representsthe financial information of Neiman Marcus, Inc. and its wholly-ownedsubsidiary guarantors, prepared on the equity basis of accounting. Theinformation is presented in accordance with the requirements of Rule 3-10under the Securities and Exchange Commission’s Regulation S-X. Thefinancial information may not necessarily be indicative of results ofoperations, cash flows or financial position had the subsidiary guarantorsoperated as independent entities.
| ** **                                                     | ** ** | **January 27, 2007 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                               | —     |   | $ | 187,772 |   | $ | 767 |   | $ | 8 |   | $ | — |   | $ | 188,547 |   |
| Accounts receivable                                            |       | —                                          |       | 26,407 |   | 4,861 |   | 3,681 |   | 544 |   | 35,493 |   |
| Merchandise inventories                                        |       | —                                          |       | 731,482 |   | 81,263 |   | 7 |   | (461 | ) | 812,291 |   |
| Other current assets                                           |       | —                                          |       | 92,474 |   | 6,164 |   | — |   | — |   | 98,638 |   |
| Total current assets                                           |       | —                                          |       | 1,038,135 |   | 93,055 |   | 3,696 |   | 83 |   | 1,134,969 |   |
| Property and  equipment, net                                   |       | —                                          |       | 884,173 |   | 148,662 |   | 2,179 |   | — |   | 1,035,014 |   |
| Goodwill and  intangibles, net                                 |       | —                                          |       | 1,976,063 |   | 2,212,335 |   | — |   | — |   | 4,188,398 |   |
| Other assets                                                   |       | —                                          |       | 114,364 |   | 295 |   | — |   | — |   | 114,659 |   |
| Investments in  subsidiaries                                   |       | 1,494,613                                       |       | 2,336,705 |   | — |   | — |   | (3,831,318 | ) | — |   |
| Total assets                                                   |       | $                                               | 1,494,613  |   | $ | 6,349,440 |   | $ | 2,454,347 |   | $ | 5,875 |   | $ | (3,831,235 | ) | $ | 6,473,040 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                 |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                                          |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                               | —     |   | $ | 231,331 |   | $ | 27,725 |   | $ | 4,772 |   | $ | 544 |   | $ | 264,372 |   |
| Accrued liabilities                                            |       | —                                          |       | 344,536 |   | 82,367 |   | 82 |   | — |   | 426,985 |   |
| Notes payable and current maturities of long-term  liabilities |       | —                                          |       | 3,425 |   | — |   | — |   | — |   | 3,425 |   |
| Total current liabilities                                      |       | —                                          |       | 579,292 |   | 110,092 |   | 4,854 |   | 544 |   | 694,782 |   |
| Long-term  liabilities:                                        |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | —                                          |       | 3,020,809 |   | — |   | — |   | — |   | 3,020,809 |   |
| Deferred income taxes                                          |       | —                                          |       | 1,033,067 |   | — |   | — |   | — |   | 1,033,067 |   |
| Other long-term liabilities                                    |       | —                                          |       | 221,659 |   | 8,110 |   | — |   | — |   | 229,769 |   |
| Total long-term liabilities                                    |       | —                                          |       | 4,275,535 |   | 8,110 |   | — |   | — |   | 4,283,645 |   |
| Total  shareholders’ equity                               |       | 1,494,613                                       |       | 1,494,613 |   | 2,336,145 |   | 1,021 |   | (3,831,779 | ) | 1,494,613 |   |
| Total liabilities and  shareholders’ equity               |       | $                                               | 1,494,613  |   | $ | 6,349,440 |   | $ | 2,454,347 |   | $ | 5,875 |   | $ | (3,831,235 | ) | $ | 6,473,040 |   |

 

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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 |   |
| Accounts receivable                                            |       | —                                       |       | 22,189 |   | 3,750 |   | 3,681 |   | 544 |   | 30,164 |   |
| Merchandise inventories                                        |       | —                                       |       | 711,443 |   | 84,252 |   | 7 |   | (2,081 | ) | 793,621 |   |
| Other current assets                                           |       | —                                       |       | 67,170 |   | 4,544 |   | — |   | — |   | 71,714 |   |
| 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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| ** **                                                     | ** ** | **January 28, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                                |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                     |       | $                                               | —     |   | $ | 88,707 |   | $ | 1,118 |   | $ | 796 |   | $ | — |   | $ | 90,621 |   |
| Accounts  receivable                                           |       | —                                          |       | 10,761 |   | 3,359 |   | 3,618 |   | 546 |   | 18,284 |   |
| Merchandise  inventories                                       |       | —                                          |       | 689,261 |   | 80,007 |   | 8 |   | — |   | 769,276 |   |
| Other current  assets                                          |       | —                                          |       | 109,043 |   | 5,827 |   | 416 |   | — |   | 115,286 |   |
| Current assets  of discontinued operations                     |       | —                                          |       | — |   | — |   | 38,824 |   | — |   | 38,824 |   |
| Total current  assets                                          |       | —                                          |       | 897,772 |   | 90,311 |   | 43,662 |   | 546 |   | 1,032,291 |   |
| Property and equipment,  net                                   |       | —                                          |       | 863,855 |   | 156,406 |   | 2,708 |   | — |   | 1,022,969 |   |
| Goodwill and  intangibles, net                                 |       | —                                          |       | 2,074,196 |   | 2,245,889 |   | — |   | — |   | 4,320,085 |   |
| Other assets                                                   |       | —                                          |       | 119,864 |   | 488 |   | 5 |   | — |   | 120,357 |   |
| Investments in  subsidiaries                                   |       | 1,416,227                                       |       | 2,488,441 |   | — |   | — |   | (3,904,668 | ) | — |   |
| Non-current assets of  discontinued operations                 |       | —                                          |       | — |   | — |   | 114,947 |   | — |   | 114,947 |   |
| Total assets                                                   |       | $                                               | 1,416,227  |   | $ | 6,444,128 |   | $ | 2,493,094 |   | $ | 161,322 |   | $ | (3,904,122 | ) | $ | 6,610,649 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                 |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Current liabilities:                                           |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                               | —     |   | $ | 235,513 |   | $ | 28,043 |   | $ | 4,174 |   | $ | 546 |   | $ | 268,276 |   |
| Accrued  liabilities                                           |       | —                                          |       | 295,685 |   | 68,090 |   | 47 |   | — |   | 363,822 |   |
| Notes payable  and current maturities of long-term liabilities |       | —                                          |       | 3,707 |   | — |   | — |   | — |   | 3,707 |   |
| Current  liabilities of discontinued operations                |       | —                                          |       | — |   | — |   | 30,398 |   | — |   | 30,398 |   |
| Total current  liabilities                                     |       | —                                          |       | 534,905 |   | 96,133 |   | 34,619 |   | 546 |   | 666,203 |   |
| Long-term  liabilities:                                        |       |                                            |       |   |   |   |   |   |   |   |   |   |   |
| Long-term  debt                                                |       | —                                          |       | 3,195,614 |   | — |   | — |   | — |   | 3,195,614 |   |
| Deferred income  taxes                                         |       | —                                          |       | 1,115,696 |   | — |   | — |   | — |   | 1,115,696 |   |
| Other long-term  liabilities                                   |       | —                                          |       | 181,686 |   | 5,634 |   | 5 |   | — |   | 187,325 |   |
| Non-current  liabilities of discontinued operations            |       | —                                          |       | — |   | — |   | 16,560 |   | — |   | 16,560 |   |
| Total long-term  liabilities                                   |       | —                                          |       | 4,492,996 |   | 5,634 |   | 16,565 |   | — |   | 4,515,195 |   |
| Minority interest                                              |       | —                                          |       | — |   | — |   | — |   | 13,024 |   | 13,024 |   |
| Total shareholders’  equity                               |       | 1,416,227                                       |       | 1,416,227 |   | 2,391,327 |   | 110,138 |   | (3,917,692 | ) | 1,416,227 |   |
| Total liabilities and shareholders’ equity                |       | $                                               | 1,416,227  |   | $ | 6,444,128 |   | $ | 2,493,094 |   | $ | 161,322 |   | $ | (3,904,122 | ) | $ | 6,610,649 |   |

 

26

----

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

 

 
| ** **                                                                        | ** ** | **Thirteen weeks ended January 28, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                         | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                   | —     |   | $ | 1,032,725 |   | $ | 161,481 |   | $ | 275 |   | $ | — |   | $ | 1,194,481 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                                              |       | 704,640 |   | 117,357 |   | 168 |   | — |   | 822,165 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                                              |       | 234,323 |   | 32,448 |   | (153 | ) | — |   | 266,618 |   |
| Income from  credit card operations                                               |       | —                                                                              |       | (15,519 | ) | (1,453 | ) | — |   | — |   | (16,972 | ) |
| Depreciation  expense                                                             |       | —                                                                              |       | 27,952 |   | 6,173 |   | 113 |   | — |   | 34,238 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                              |       | 15,962 |   | 2,750 |   | — |   | — |   | 18,712 |   |
| Operating  earnings                                                               |       | —                                                                              |       | 65,367 |   | 4,206 |   | 147 |   | — |   | 69,720 |   |
| Interest  expense, net                                                            |       | —                                                                              |       | 66,047 |   | — |   | — |   | — |   | 66,047 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                                              |       | 66,819 |   | (66,819 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (3,044                                                                              | )          | (72,158 | ) | — |   | — |   | 75,202 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 3,044                                                                               |       | 4,659 |   | 71,025 |   | 147 |   | (75,202 | ) | 3,673 |   |
| Income taxes                                                                      |       | —                                                                              |       | 1,615 |   | — |   | — |   | — |   | 1,615 |   |
| Earnings (loss)  from continuing operations                                       |       | 3,044                                                                               |       | 3,044 |   | 71,025 |   | 147 |   | (75,202 | ) | 2,058 |   |
| Earnings (loss)  from discontinued operations, net of taxes                       |       | —                                                                              |       | — |   | — |   | 1,767 |   | (781 | ) | 986 |   |
| Net earnings (loss)                                                               |       | $                                                                                   | 3,044      |   | $ | 3,044 |   | $ | 71,025 |   | $ | 1,914 |   | $ | (75,983 | ) | $ | 3,044 |   |

 

27

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

 

28

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| ** **                                                                        | ** ** | **Seventeen weeks ended January 28, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                    | —     |   | $ | 1,299,247 |   | $ | 208,701 |   | $ | 345 |   | $ | — |   | $ | 1,508,293 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                               |       | 867,402 |   | 146,152 |   | 221 |   | — |   | 1,013,775 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                               |       | 301,428 |   | 42,650 |   | (198 | ) | — |   | 343,880 |   |
| Income from credit card  operations                                               |       | —                                                                               |       | (18,940 | ) | (1,817 | ) | — |   | — |   | (20,757 | ) |
| Depreciation expense                                                              |       | —                                                                               |       | 35,598 |   | 7,734 |   | 147 |   | — |   | 43,479 |   |
| Amortization of customer  lists and favorable lease commitments                   |       | —                                                                               |       | 19,666 |   | 3,854 |   | — |   | — |   | 23,520 |   |
| Operating earnings                                                                |       | —                                                                               |       | 94,093 |   | 10,128 |   | 175 |   | — |   | 104,396 |   |
| Interest expense, net                                                             |       | —                                                                               |       | 83,300 |   | — |   | — |   | — |   | 83,300 |   |
| Intercompany royalty  charges (income)                                            |       | —                                                                               |       | 85,120 |   | (85,120 | ) | — |   | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (13,892                                                                              | )          | (96,625 | ) | — |   | — |   | 110,517 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 13,892                                                                               |       | 22,298 |   | 95,248 |   | 175 |   | (110,517 | ) | 21,096 |   |
| Income taxes                                                                      |       | —                                                                               |       | 8,406 |   | — |   | — |   | — |   | 8,406 |   |
| Earnings (loss) from  continuing operations                                       |       | 13,892                                                                               |       | 13,892 |   | 95,248 |   | 175 |   | (110,517 | ) | 12,690 |   |
| Earnings (loss) from  discontinued operations, net of taxes                       |       | —                                                                               |       | — |   | — |   | 2,315 |   | (1,113 | ) | 1,202 |   |
| Net earnings (loss)                                                               |       | $                                                                                    | 13,892     |   | $ | 13,892 |   | $ | 95,248 |   | $ | 2,490 |   | $ | (111,630 | ) | $ | 13,892 |   |

 
|                                                                                   | ** ** | **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

----

| ** **                                                                                    | ** ** | **Twenty-six weeks ended January 27, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                           | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                                     | 68,252     |   | $ | 68,252 |   | $ | 196,521 |   | $ | (19,834 | ) | $ | (244,939 | ) | $ | 68,252 |   |
| Loss from discontinued  operations                                                            |       | —                                                                                |       | — |   | — |   | 19,892 |   | 1,489 |   | 21,381 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                                |       | 57,555 |   | 9,503 |   | 191 |   | — |   | 67,249 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                                |       | 7,033 |   | — |   | — |   | — |   | 7,033 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                                |       | 30,199 |   | 5,883 |   | — |   | — |   | 36,082 |   |
| Non-cash  charges related to step-up in carrying value of inventory                           |       | —                                                                                |       | — |   | — |   | — |   | — |   | — |   |
| Stock-based  compensation charges                                                             |       | —                                                                                |       | 2,850 |   | — |   | — |   | — |   | 2,850 |   |
| Deferred income  taxes                                                                        |       | —                                                                                |       | (24,147 | ) | — |   | — |   | — |   | (24,147 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                                |       | 8,530 |   | 1,606 |   | — |   | — |   | 10,136 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                                |       | 143,643 |   | (143,643 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (68,252                                                                               | )          | (175,198 | ) | — |   | — |   | 243,450 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | —                                                                                |       | 25,776 |   | (62,936 | ) | 10,340 |   | — |   | (26,820 | ) |
| Net cash provided by  continuing operating activities                                         |       | —                                                                                |       | 144,493 |   | 6,934 |   | 10,589 |   | — |   | 162,016 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                                |       | — |   | — |   | (9,163 | ) | — |   | (9,163 | ) |
| Net cash provided by  operating activities                                                    |       | —                                                                                |       | 144,493 |   | 6,934 |   | 1,426 |   | — |   | 152,853 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | —                                                                                |       | (62,445 | ) | (7,153 | ) | (1,084 | ) | — |   | (70,682 | ) |
| Payment to minority  interest holder in Kate Spade                                            |       | —                                                                                |       | (59,400 | ) | — |   | — |   | — |   | (59,400 | ) |
| Net proceeds from sale  of Kate Spade                                                         |       | —                                                                                |       | 121,469 |   | — |   | — |   | — |   | 121,469 |   |
| Net cash used for continuing  investing activities                                            |       | —                                                                                |       | (376 | ) | (7,153 | ) | (1,084 | ) | — |   | (8,613 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                                |       | — |   | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for  investing activities                                                       |       | —                                                                                |       | (376 | ) | (7,153 | ) | (1,212 | ) | — |   | (8,741 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                       |       | —                                                                                |       | (178,045 | ) | — |   | — |   | — |   | (178,045 | ) |
| Debt issuance costs  paid                                                                     |       | —                                                                                |       | (758 | ) | — |   | — |   | — |   | (758 | ) |
| Proceeds from purchase  of common stock                                                       |       | —                                                                                |       | 150 |   | — |   | — |   | — |   | 150 |   |
| Net cash used for  continuing financing activities                                            |       | —                                                                                |       | (178,653 | ) | — |   | — |   | — |   | (178,653 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                                |       | — |   | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for  financing activities                                                       |       | —                                                                                |       | (178,653 | ) | — |   | (1,675 | ) | — |   | (180,328 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Decrease during the  period                                                                   |       | —                                                                                |       | (34,536 | ) | (219 | ) | (1,461 | ) | — |   | (36,216 | ) |
| Beginning balance                                                                             |       | —                                                                                |       | 222,308 |   | 986 |   | 1,469 |   | — |   | 224,763 |   |
| Ending balance                                                                                |       | $                                                                                     | —     |   | $ | 187,772 |   | $ | 767 |   | $ | 8 |   | $ | — |   | $ | 188,547 |   |

 

30

----

 
| ** **                                                                                   | ** ** | **Seventeen weeks ended January 28, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                                          | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                                    | 13,892     |   | $ | 13,892 |   | $ | 95,248 |   | $ | 2,490 |   | $ | (111,630 | ) | $ | 13,892 |   |
| (Earnings) loss  from discontinued operations                                                |       | —                                                                               |       | — |   | — |   | (2,315 | ) | 1,113 |   | (1,202 | ) |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                                               |       | 35,598 |   | 7,734 |   | 147 |   | — |   | 43,479 |   |
| Amortization of debt issue costs                                                             |       | —                                                                               |       | 4,636 |   | — |   | — |   | — |   | 4,636 |   |
| Amortization of customer lists and favorable lease  commitments                              |       | —                                                                               |       | 19,666 |   | 3,854 |   | — |   | — |   | 23,520 |   |
| Non-cash charges related to step-up in  carrying value of inventory                          |       | —                                                                               |       | 31,263 |   | 5,129 |   | — |   | — |   | 36,392 |   |
| Stock-based compensation charges                                                             |       | —                                                                               |       | 1,483 |   | — |   | — |   | — |   | 1,483 |   |
| Deferred income taxes                                                                        |       | —                                                                               |       | (35,877 | ) | — |   | — |   | — |   | (35,877 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | —                                                                               |       | 18,503 |   | 531 |   | (1,255 | ) | — |   | 17,779 |   |
| Intercompany royalty income payable (receivable)                                             |       | —                                                                               |       | 85,120 |   | (85,120 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (13,892                                                                              | )          | (96,625 | ) | — |   | — |   | 110,517 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                                               |       | 122,230 |   | (20,636 | ) | 1,516 |   | — |   | 103,110 |   |
| Net cash  provided by continuing operating activities                                        |       | —                                                                               |       | 199,889 |   | 6,740 |   | 583 |   | — |   | 207,212 |   |
| Net cash  provided by discontinued operations                                                |       | —                                                                               |       | — |   | — |   | 4,907 |   | — |   | 4,907 |   |
| Net cash  provided by operating activities                                                   |       | —                                                                               |       | 199,889 |   | 6,740 |   | 5,490 |   | — |   | 212,119 |   |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | —                                                                               |       | (62,155 | ) | (6,544 | ) | (323 | ) | — |   | (69,022 | ) |
| Acquisition of  The Neiman Marcus Group, Inc.                                                |       | —                                                                               |       | (5,155,923 | ) | — |   | — |   | — |   | (5,155,923 | ) |
| Intercompany  (receivable) payable                                                           |       | (1,427,739                                                                           | )          | — |   | — |   | — |   | 1,427,739 |   | — |   |
| Net cash (used  for) provided by continuing investing activities                             |       | (1,427,739                                                                           | )          | (5,218,078 | ) | (6,544 | ) | (323 | ) | 1,427,739 |   | (5,224,945 | ) |
| Net cash used  for discontinued operations                                                   |       | —                                                                               |       | — |   | — |   | (3,273 | ) | — |   | (3,273 | ) |
| Net cash (used  for) provided by investing activities                                        |       | (1,427,739                                                                           | )          | (5,218,078 | ) | (6,544 | ) | (3,596 | ) | 1,427,739 |   | (5,228,218 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from  borrowings                                                                    |       | —                                                                               |       | 3,325,000 |   | — |   | — |   | — |   | 3,325,000 |   |
| Repayment of  borrowings                                                                     |       | —                                                                               |       | (384,734 | ) | — |   | — |   | — |   | (384,734 | ) |
| 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                                                                            |       | 4,265,151 |   | — |   | — |   | (1,427,739 | ) | 4,265,151 |   |
| Net cash used  for discontinued operations                                                   |       | —                                                                               |       | — |   | — |   | (1,789 | ) | — |   | (1,789 | ) |
| Net cash  provided by (used for) financing activities                                        |       | 1,427,739                                                                            |       | 4,265,151 |   | — |   | (1,789 | ) | (1,427,739 | ) | 4,263,362 |   |
| **CASH  AND CASH EQUIVALENTS**                                                               |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease)  increase during the period                                                       |       | —                                                                               |       | (753,038 | ) | 196 |   | 105 |   | — |   | (752,737 | ) |
| Beginning  balance                                                                           |       | —                                                                               |       | 841,745 |   | 922 |   | 1,593 |   | — |   | 844,260 |   |
| Ending balance                                                                               |       | —                                                                               |       | 88,707 |   | 1,118 |   | 1,698 |   | — |   | 91,523 |   |
| Less cash of  discontinued operations                                                        |       | —                                                                               |       | — |   | — |   | 902 |   | — |   | 902 |   |
| Ending balance                                                                               |       | $                                                                                    | —     |   | $ | 88,707 |   | $ | 1,118 |   | $ | 796 |   | $ | — |   | $ | 90,621 |   |

 

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.
|                                                                | ** ** | **January 27, 2007 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| Current assets:                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                               | —     |   | $ | 187,772 |   | $ | 775 |   | $ | — |   | $ | 188,547 |   |
| Accounts receivable                                            |       | —                                          |       | 26,407 |   | 8,542 |   | 544 |   | 35,493 |   |
| Merchandise inventories                                        |       | —                                          |       | 731,482 |   | 81,270 |   | (461 | ) | 812,291 |   |
| Other current assets                                           |       | —                                          |       | 92,474 |   | 6,164 |   | — |   | 98,638 |   |
| Total current assets                                           |       | —                                          |       | 1,038,135 |   | 96,751 |   | 83 |   | 1,134,969 |   |
| Property and  equipment, net                                   |       | —                                          |       | 884,173 |   | 150,841 |   | — |   | 1,035,014 |   |
| Goodwill and  intangibles, net                                 |       | —                                          |       | 1,976,063 |   | 2,212,335 |   | — |   | 4,188,398 |   |
| Other assets                                                   |       | —                                          |       | 114,364 |   | 295 |   | — |   | 114,659 |   |
| Investments in  subsidiaries                                   |       | 1,494,613                                       |       | 2,336,705 |   | — |   | (3,831,318 | ) | — |   |
| Total assets                                                   |       | $                                               | 1,494,613  |   | $ | 6,349,440 |   | $ | 2,460,222 |   | $ | (3,831,235 | ) | $ | 6,473,040 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                 |       |                                            |       |   |   |   |   |   |   |   |   |
| Current  liabilities:                                          |       |                                            |       |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                               | —     |   | $ | 231,331 |   | $ | 32,497 |   | $ | 544 |   | $ | 264,372 |   |
| Accrued liabilities                                            |       | —                                          |       | 344,536 |   | 82,449 |   |   |   | 426,985 |   |
| Notes payable and current maturities of long-term  liabilities |       | —                                          |       | 3,425 |   | — |   | — |   | 3,425 |   |
| Total current liabilities                                      |       | —                                          |       | 579,292 |   | 114,946 |   | 544 |   | 694,782 |   |
| Long-term  liabilities:                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | —                                          |       | 3,020,809 |   | — |   | — |   | 3,020,809 |   |
| Deferred income taxes                                          |       | —                                          |       | 1,033,067 |   | — |   | — |   | 1,033,067 |   |
| Other long-term liabilities                                    |       | —                                          |       | 221,659 |   | 8,110 |   | — |   | 229,769 |   |
| Total long-term liabilities                                    |       | —                                          |       | 4,275,535 |   | 8,110 |   | — |   | 4,283,645 |   |
| Total  shareholders’ equity                               |       | 1,494,613                                       |       | 1,494,613 |   | 2,337,166 |   | (3,831,779 | ) | 1,494,613 |   |
| Total liabilities and  shareholders’ equity               |       | $                                               | 1,494,613  |   | $ | 6,349,440 |   | $ | 2,460,222 |   | $ | (3,831,235 | ) | $ | 6,473,040 |   |

 

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 |   |
| Accounts receivable                                            |       | —                                       |       | 22,189 |   | 7,431 |   | 544 |   | 30,164 |   |
| Merchandise inventories                                        |       | —                                       |       | 711,443 |   | 84,259 |   | (2,081 | ) | 793,621 |   |
| Other current assets                                           |       | —                                       |       | 67,170 |   | 4,544 |   | — |   | 71,714 |   |
| 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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|                                                                | ** ** | **January 28, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                        | ** ** | **Company**                                     | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     |       |                                            |       |   |   |   |   |   |   |   |   |
| Current assets:                                                |       |                                            |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                               | —     |   | $ | 88,707 |   | $ | 1,914 |   | $ | — |   | $ | 90,621 |   |
| Accounts receivable                                            |       | —                                          |       | 10,761 |   | 6,977 |   | 546 |   | 18,284 |   |
| Merchandise inventories                                        |       | —                                          |       | 689,261 |   | 80,015 |   | — |   | 769,276 |   |
| Other current assets                                           |       | —                                          |       | 109,043 |   | 6,243 |   | — |   | 115,286 |   |
| Current assets of discontinued operations                      |       | —                                          |       | — |   | 38,824 |   | — |   | 38,824 |   |
| Total current assets                                           |       | —                                          |       | 897,772 |   | 133,973 |   | 546 |   | 1,032,291 |   |
| Property and  equipment, net                                   |       | —                                          |       | 863,855 |   | 159,114 |   | — |   | 1,022,969 |   |
| Goodwill and  intangibles, net                                 |       | —                                          |       | 2,074,196 |   | 2,245,889 |   | — |   | 4,320,085 |   |
| Other assets                                                   |       | —                                          |       | 119,864 |   | 493 |   | — |   | 120,357 |   |
| Investments in  subsidiaries                                   |       | 1,416,227                                       |       | 2,488,441 |   | — |   | (3,904,668 | ) | — |   |
| Non-current  assets of discontinued operations                 |       | —                                          |       | — |   | 114,947 |   | — |   | 114,947 |   |
| Total assets                                                   |       | $                                               | 1,416,227  |   | $ | 6,444,128 |   | $ | 2,654,416 |   | $ | (3,904,122 | ) | $ | 6,610,649 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                 |       |                                            |       |   |   |   |   |   |   |   |   |
| Current liabilities:                                           |       |                                            |       |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                               | —     |   | $ | 235,513 |   | $ | 32,217 |   | $ | 546 |   | $ | 268,276 |   |
| Accrued liabilities                                            |       | —                                          |       | 295,685 |   | 68,137 |   | — |   | 363,822 |   |
| Notes payable and current maturities of long-term  liabilities |       | —                                          |       | 3,707 |   | — |   | — |   | 3,707 |   |
| Current liabilities of discontinued operations                 |       | —                                          |       | — |   | 30,398 |   | — |   | 30,398 |   |
| Total current liabilities                                      |       | —                                          |       | 534,905 |   | 130,752 |   | 546 |   | 666,203 |   |
| Long-term  liabilities:                                        |       |                                            |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | —                                          |       | 3,195,614 |   | — |   | — |   | 3,195,614 |   |
| Deferred income taxes                                          |       | —                                          |       | 1,115,696 |   | — |   | — |   | 1,115,696 |   |
| Other long-term liabilities                                    |       | —                                          |       | 181,686 |   | 5,639 |   | — |   | 187,325 |   |
| Non-current liabilities of discontinued operations             |       | —                                          |       | — |   | 16,560 |   | — |   | 16,560 |   |
| Total long-term liabilities                                    |       | —                                          |       | 4,492,996 |   | 22,199 |   | — |   | 4,515,195 |   |
| Minority  interest                                             |       | —                                          |       | — |   | — |   | 13,024 |   | 13,024 |   |
| Total  shareholders’ equity                               |       | 1,416,227                                       |       | 1,416,227 |   | 2,501,465 |   | (3,917,692 | ) | 1,416,227 |   |
| Total liabilities and  shareholders’ equity               |       | $                                               | 1,416,227  |   | $ | 6,444,128 |   | $ | 2,654,416 |   | $ | (3,904,122 | ) | $ | 6,610,649 |   |

 

35

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

 
| ** **                                                                        | ** ** | **Thirteen weeks ended January 28, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                         | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                   | —     |   | $ | 1,032,725 |   | $ | 161,756 |   | $ | — |   | $ | 1,194,481 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                                              |       | 704,640 |   | 117,525 |   | — |   | 822,165 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                                              |       | 234,323 |   | 32,295 |   | — |   | 266,618 |   |
| Income from  credit card operations                                               |       | —                                                                              |       | (15,519 | ) | (1,453 | ) | — |   | (16,972 | ) |
| Depreciation  expense                                                             |       | —                                                                              |       | 27,952 |   | 6,286 |   | — |   | 34,238 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                              |       | 15,962 |   | 2,750 |   | — |   | 18,712 |   |
| Operating  earnings                                                               |       | —                                                                              |       | 65,367 |   | 4,353 |   | — |   | 69,720 |   |
| Interest  expense, net                                                            |       | —                                                                              |       | 66,047 |   | — |   | — |   | 66,047 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                                              |       | 66,819 |   | (66,819 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (3,044                                                                              | )          | (72,158 | ) | — |   | 75,202 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 3,044                                                                               |       | 4,659 |   | 71,172 |   | (75,202 | ) | 3,673 |   |
| Income taxes                                                                      |       | —                                                                              |       | 1,615 |   | — |   | — |   | 1,615 |   |
| Earnings (loss)  from continuing operations                                       |       | 3,044                                                                               |       | 3,044 |   | 71,172 |   | (75,202 | ) | 2,058 |   |
| Earnings (loss)  from discontinued operations, net of taxes                       |       | —                                                                              |       | — |   | 1,767 |   | (781 | ) | 986 |   |
| Net earnings (loss)                                                               |       | $                                                                                   | 3,044      |   | $ | 3,044 |   | $ | 72,939 |   | $ | (75,983 | ) | $ | 3,044 |   |

 

36

----

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

 

37

----

| ** **                                                                        | ** ** | **Seventeen weeks ended January 28, 2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                                    | —     |   | $ | 1,299,247 |   | $ | 209,046 |   | $ | — |   | $ | 1,508,293 |   |
| Cost of goods sold  including buying and occupancy costs (excluding depreciation) |       | —                                                                               |       | 867,402 |   | 146,373 |   | — |   | 1,013,775 |   |
| Selling, general and  administrative expenses (excluding depreciation)            |       | —                                                                               |       | 301,428 |   | 42,452 |   | — |   | 343,880 |   |
| Income from credit card  operations                                               |       | —                                                                               |       | (18,940 | ) | (1,817 | ) | — |   | (20,757 | ) |
| Depreciation expense                                                              |       | —                                                                               |       | 35,598 |   | 7,881 |   | — |   | 43,479 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                                               |       | 19,666 |   | 3,854 |   | — |   | 23,520 |   |
| Operating earnings                                                                |       | —                                                                               |       | 94,093 |   | 10,303 |   | — |   | 104,396 |   |
| Interest expense, net                                                             |       | —                                                                               |       | 83,300 |   | — |   | — |   | 83,300 |   |
| Intercompany royalty  charges (income)                                            |       | —                                                                               |       | 85,120 |   | (85,120 | ) | — |   | — |   |
| Equity in earnings of  subsidiaries                                               |       | (13,892                                                                              | )          | (96,625 | ) | — |   | 110,517 |   | — |   |
| Earnings (loss) from  continuing operations before income taxes                   |       | 13,892                                                                               |       | 22,298 |   | 95,423 |   | (110,517 | ) | 21,096 |   |
| Income taxes                                                                      |       | —                                                                               |       | 8,406 |   | — |   | — |   | 8,406 |   |
| Earnings (loss) from  continuing operations                                       |       | 13,892                                                                               |       | 13,892 |   | 95,423 |   | (110,517 | ) | 12,690 |   |
| Earnings (loss) from  discontinued operations, net of taxes                       |       | —                                                                               |       | — |   | 2,315 |   | (1,113 | ) | 1,202 |   |
| Net earnings (loss)                                                               |       | $                                                                                    | 13,892     |   | $ | 13,892 |   | $ | 97,738 |   | $ | (111,630 | ) | $ | 13,892 |   |

 
|                                                                                   | ** ** | **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

----

** **
| ** **                                                                                    | ** ** | **Twenty-six weeks ended January 27, 2007 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **Company**                                                                           | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                           |       | $                                                                                     | 68,252     |   | $ | 68,252 |   | $ | 176,687 |   | $ | (244,939 | ) | $ | 68,252 |   |
| Loss from discontinued  operations                                                            |       | —                                                                                |       | — |   | 19,892 |   | 1,489 |   | 21,381 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:          |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                  |       | —                                                                                |       | 57,555 |   | 9,694 |   | — |   | 67,249 |   |
| Amortization of  debt issue costs                                                             |       | —                                                                                |       | 7,033 |   | — |   | — |   | 7,033 |   |
| Amortization of  customer lists and favorable lease commitments                               |       | —                                                                                |       | 30,199 |   | 5,883 |   | — |   | 36,082 |   |
| Non-cash  charges related to step-up in carrying value of inventory                           |       | —                                                                                |       | — |   | — |   | — |   | — |   |
| Stock-based  compensation charges                                                             |       | —                                                                                |       | 2,850 |   | — |   | — |   | 2,850 |   |
| Deferred income  taxes                                                                        |       | —                                                                                |       | (24,147 | ) | — |   | — |   | (24,147 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit  plans |       | —                                                                                |       | 8,530 |   | 1,606 |   | — |   | 10,136 |   |
| Intercompany  royalty income payable (receivable)                                             |       | —                                                                                |       | 143,643 |   | (143,643 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                           |       | (68,252                                                                               | )          | (175,198 | ) | — |   | 243,450 |   | — |   |
| Changes in operating  assets and liabilities, net                                             |       | —                                                                                |       | 25,776 |   | (52,596 | ) | — |   | (26,820 | ) |
| Net cash provided by  continuing operating activities                                         |       | —                                                                                |       | 144,493 |   | 17,523 |   | — |   | 162,016 |   |
| Net cash used for  discontinued operations                                                    |       | —                                                                                |       | — |   | (9,163 | ) | — |   | (9,163 | ) |
| Net cash provided by  operating activities                                                    |       | —                                                                                |       | 144,493 |   | 8,360 |   | — |   | 152,853 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                          |       | —                                                                                |       | (62,445 | ) | (8,237 | ) | — |   | (70,682 | ) |
| Payment to minority  interest holder in Kate Spade                                            |       | —                                                                                |       | (59,400 | ) | — |   | — |   | (59,400 | ) |
| Net proceeds from sale  of Kate Spade                                                         |       | —                                                                                |       | 121,469 |   | — |   | — |   | 121,469 |   |
| Net cash used for  continuing investing activities                                            |       | —                                                                                |       | (376 | ) | (8,237 | ) | — |   | (8,613 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                                |       | — |   | (128 | ) | — |   | (128 | ) |
| Net cash used for  investing activities                                                       |       | —                                                                                |       | (376 | ) | (8,365 | ) | — |   | (8,741 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                      |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Repayment of borrowings                                                                       |       | —                                                                                |       | (178,045 | ) | — |   | — |   | (178,045 | ) |
| Debt issuance costs  paid                                                                     |       | —                                                                                |       | (758 | ) | — |   | — |   | (758 | ) |
| Proceeds from purchase  of common stock                                                       |       | —                                                                                |       | 150 |   | — |   | — |   | 150 |   |
| Net cash used for  continuing financing activities                                            |       | —                                                                                |       | (178,653 | ) | — |   | — |   | (178,653 | ) |
| Net cash used for  discontinued operations                                                    |       | —                                                                                |       | — |   | (1,675 | ) | — |   | (1,675 | ) |
| Net cash used for  financing activities                                                       |       | —                                                                                |       | (178,653 | ) | (1,675 | ) | — |   | (180,328 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |
| Decrease during the  period                                                                   |       | —                                                                                |       | (34,536 | ) | (1,680 | ) | — |   | (36,216 | ) |
| Beginning balance                                                                             |       | —                                                                                |       | 222,308 |   | 2,455 |   | — |   | 224,763 |   |
| Ending balance                                                                                |       | $                                                                                     | —     |   | $ | 187,772 |   | $ | 775 |   | $ | — |   | $ | 188,547 |   |

 

39

----

| ** **                                                                                   | ** ** | **Seventeen weeks ended January 28, 2006 (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                                          | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS—OPERATING ACTIVITIES**                                                     |       |                                                                                 |       |   |   |   |   |   |   |   |   |
| Net earnings (loss)                                                                          |       | $                                                                                    | 13,892     |   | $ | 13,892 |   | $ | 97,738 |   | $ | (111,630 | ) | $ | 13,892 |   |
| (Earnings) loss from  discontinued operations                                                |       | —                                                                               |       | — |   | (2,315 | ) | 1,113 |   | (1,202 | ) |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                                                 |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                                               |       | 35,598 |   | 7,881 |   | — |   | 43,479 |   |
| Amortization of debt  issue costs                                                            |       | —                                                                               |       | 4,636 |   | — |   | — |   | 4,636 |   |
| Amortization of  customer lists and favorable lease commitments                              |       | —                                                                               |       | 19,666 |   | 3,854 |   | — |   | 23,520 |   |
| Non-cash charges  related to step-up in carrying value of inventory                          |       | —                                                                               |       | 31,263 |   | 5,129 |   | — |   | 36,392 |   |
| Stock-based  compensation charges                                                            |       | —                                                                               |       | 1,483 |   | — |   | — |   | 1,483 |   |
| Deferred income taxes                                                                        |       | —                                                                               |       | (35,877 | ) | — |   | — |   | (35,877 | ) |
| Other, primarily costs  related to defined benefit pension and other long-term benefit plans |       | —                                                                               |       | 18,503 |   | (724 | ) | — |   | 17,779 |   |
| Intercompany royalty  income payable (receivable)                                            |       | —                                                                               |       | 85,120 |   | (85,120 | ) | — |   | — |   |
| Equity in earnings of  subsidiaries                                                          |       | (13,892                                                                              | )          | (96,625 | ) | — |   | 110,517 |   | — |   |
| Changes in operating  assets and liabilities, net                                            |       | —                                                                               |       | 122,230 |   | (19,120 | ) | — |   | 103,110 |   |
| Net cash provided by  continuing operating activities                                        |       | —                                                                               |       | 199,889 |   | 7,323 |   | — |   | 207,212 |   |
| Net cash provided by  discontinued operations                                                |       | —                                                                               |       | — |   | 4,907 |   | — |   | 4,907 |   |
| Net cash provided by  operating activities                                                   |       | —                                                                               |       | 199,889 |   | 12,230 |   | — |   | 212,119 |   |
| **CASH FLOWS—INVESTING ACTIVITIES**                                                     |       |                                                                                 |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                                               |       | (62,155 | ) | (6,867 | ) | — |   | (69,022 | ) |
| Acquisition of The  Neiman Marcus Group, Inc.                                                |       | —                                                                               |       | (5,155,923 | ) | — |   | — |   | (5,155,923 | ) |
| Intercompany  (receivable) payable                                                           |       | (1,427,739                                                                           | )          | — |   | — |   | 1,427,739 |   | — |   |
| Net cash (used for)  provided by continuing investing activities                             |       | (1,427,739                                                                           | )          | (5,218,078 | ) | (6,867 | ) | 1,427,739 |   | (5,224,945 | ) |
| Net cash used for  discontinued operations                                                   |       | —                                                                               |       | — |   | (3,273 | ) | — |   | (3,273 | ) |
| Net cash (used for)  provided by investing activities                                        |       | (1,427,739                                                                           | )          | (5,218,078 | ) | (10,140 | ) | 1,427,739 |   | (5,228,218 | ) |
| **CASH FLOWS—FINANCING ACTIVITIES**                                                     |       |                                                                                 |       |   |   |   |   |   |   |   |   |
| Proceeds from  borrowings                                                                    |       | —                                                                               |       | 3,325,000 |   | — |   | — |   | 3,325,000 |   |
| Repayment of borrowings                                                                      |       | —                                                                               |       | (384,734 | ) | — |   | — |   | (384,734 | ) |
| 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                                                                            |       | 4,265,151 |   | — |   | (1,427,739 | ) | 4,265,151 |   |
| Net cash used for  discontinued operations                                                   |       | —                                                                               |       | — |   | (1,789 | ) | — |   | (1,789 | ) |
| Net cash provided by  (used for) financing activities                                        |       | 1,427,739                                                                            |       | 4,265,151 |   | (1,789 | ) | (1,427,739 | ) | 4,263,362 |   |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                                                 |       |   |   |   |   |   |   |   |   |
| (Decrease) increase  during the period                                                       |       | —                                                                               |       | (753,038 | ) | 301 |   | — |   | (752,737 | ) |
| Beginning balance                                                                            |       | —                                                                               |       | 841,745 |   | 2,515 |   | — |   | 844,260 |   |
| Ending balance                                                                               |       | —                                                                               |       | 88,707 |   | 2,816 |   | — |   | 91,523 |   |
| Less cash of discontinued  operations                                                        |       | —                                                                               |       | — |   | 902 |   | — |   | 902 |   |
| Ending balance                                                                               |       | $                                                                                    | —     |   | $ | 88,707 |   | $ | 1,914 |   | $ | — |   | $ | 90,621 |   |

 

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 OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

**EXECUTIVE OVERVIEW**

The following discussion and analysis of our financialcondition and results of operations should be read in conjunction withour Annual Report on Form 10-K for the fiscal year ended July 29, 2006.  Unlessotherwise specified, the meanings of all defined terms in Management’sDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) are consistent with the meanings of such terms as defined in theNotes to the Condensed Consolidated Financial Statements. This discussioncontains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of therisks, uncertainties and assumptions relating to our forward-lookingstatements.

**Overview**

Neiman Marcus, Inc. (the Company), together with ouroperating segments and subsidiaries, is a high-end specialty retailer. Ouroperations include the Specialty Retail stores segment and the Direct Marketingsegment. The Specialty Retail stores segment consists primarily of 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 withTexas Pacific Group and Warburg Pincus LLC (the Sponsors).

Prior to the Acquisition, the Company had no independentassets or operations.  After theAcquisition, the Company represents the Successor to NMG since the Company’ssole asset is its investment in NMG and its operations consist solely of theoperating activities of NMG as well as costs incurred by the Company related toits investment in NMG.  For periods priorto the Acquisition, NMG is deemed to be the predecessor to the Company.  As a result, for periods prior to 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 twenty-six weeks ended January 27, 2007 by comparingthe results of operations for the twenty-six weeks ended January 27, 2007 tothe combined earnings and cash flows for the Predecessor nine-week period endedOctober 1, 2005 and the Successor seventeen week period ended January 28, 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 second quarter offiscal year 2007 relate to the thirteen weeks ended January 27, 2007(Successor).  All references to thesecond quarter of fiscal year 2006 relate to the thirteen weeks ended January28, 2006 (Successor).  All references toyear-to-date fiscal 2007 relate to the twenty-six weeks ended January 27, 2007(Successor).  All references toyear-to-date fiscal 2006 relate to the combined period comprised of seventeenweeks ended January 28, 2006 (Successor) and the nine weeks ended October 1,2005 (Predecessor).

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On July 27, 2006, we sold our majority interest inGurwitch Products, 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. Year-to-date fiscal 2007, Kate Spade LLC hadrevenues of $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.

**FactorsAffecting 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.

·                  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 a description of theseasonality of our business, see “Seasonality.”

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***Cost of goods sold including buying and occupancy costs (excludingdepreciation) (COGS).*** COGS consists of the followingcomponents:

·                  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.

Withthe introduction of new fashions in the first and third fiscal quarters and ouremphasis on full-price selling in these quarters, a lower level of markdownsand higher margins are characteristic of these quarters.

Consistentwith industry business practice, we receive allowances from certain of ourvendors in support of the merchandise we purchase for resale. Certainallowances are received to reimburse us for markdowns taken or to support thegross margins that we earn in connection with the sales of the vendor’smerchandise. These allowances result in an increase to gross margin when weearn the allowances and they are approved by the vendor. Other allowances wereceive represent reductions to the amounts we pay to acquire the merchandise.These allowances reduce the cost of the acquired merchandise and are recognizedat the time the goods are sold.  Wereceived vendor allowances of$46.6 million, or 2.0% of revenues, in year-to-date fiscal 2007 and $44.0 million,or 2.1% of revenues, in year-to-date fiscal 2006.

Changesin our COGS as a percentage of revenues are affected primarily by the followingfactors:

·                  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.

Advertisingcosts incurred by our Specialty Retail segment consist primarily of print mediacosts related to promotional materials mailed to our customers, whileadvertising costs incurred by our Direct Marketing operation relate to theproduction, printing and distribution of our print catalogs and the productionof the photographic content on our websites, as well as online marketing costs.We receive advertising allowances from certain of our merchandise vendors.Substantially all the advertising allowances we receive representreimbursements of direct, specific and incremental costs that we incur topromote the vendor’s merchandise in connection with our various advertisingprograms, primarily catalogs and other print media. As a result, theseallowances are recorded as a reduction of our advertising costs when earned.Vendor allowances earned and recorded as a reduction to selling, general andadministrative expenses aggregated approximately $34.1 million for thetwenty-six weeks ended January 27, 2007

44

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and$34.8 million for the twenty-six weeks ended January 28, 2006 (including $18.6million 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 $33.1 million for the twenty-six weeks ended January 27, 2007 and$29.6 million for the twenty-six weeks ended January 28, 2006 (including$10.1 million for the Predecessor prior to the Acquisition).

Changes in our selling, general and administrative expenses are affectedprimarily 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 primary selling seasons—Falland Spring. The Fall season is comprised of our first and second fiscalquarters and the Spring season is comprised of our third and fourth fiscalquarters.

Our first fiscal quarter is generally characterized by a higher level offull-price selling with a focus on the initial introduction of Fall seasonfashions. Aggressive in-store marketing activities designed to stimulatecustomer 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 in salesthat occurs during the holiday season, the second fiscal quarter is typicallythe quarter in which our revenues are the highest and in which expenses as apercentage of revenues are the lowest. Our working capital requirements arealso the greatest in the first and second fiscal quarters as a result of higherseasonal requirements.

Similarly, the third fiscal quarter is generally characterized by ahigher level of full-price selling with a focus on the initial introduction ofSpring season fashions. Aggressive in-store marketing activities designed tostimulate customer buying, a lower level of markdowns and higher margins areagain characteristic of this quarter. Revenues are generally the lowest in thefourth fiscal quarter with a focus on promotional activities offering Springseason goods to the customer on a marked down basis, resulting in lower marginsduring the quarter. Our working capital requirements are typically lower in thethird and fourth fiscal quarters than in the other quarters.

A large percentage of our merchandise assortment, particularly in theapparel, fashion accessories and shoe categories, is ordered months in advanceof the introduction of such goods. 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. As a result, inherent in thesuccessful execution of our business plans is our ability both to predict thefashion trends that will be of interest to our customers and to anticipatefuture spending 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 ofconsumer spending. Conversely, in the event we buy fashion goods that are notaccepted by the customer or the level of consumer spending is less than weanticipated, we typically incur a higher than anticipated level of markdowns,net of vendor allowances, to sell the goods that remain at the end of theseason, resulting in lower operating profits. We believe that the experience ofour merchandising and selling organizations helps to minimize the inherent riskin predicting fashion trends.

**OPERATING RESULTS**

**Performance Summary**

Thefollowing table sets forth certain items expressed as percentages of netrevenues for the periods indicated.
| ** **                                                                        | ** ** | **Quarter-to-Date**                                    | ** ** | **Year-to-Date**                                       | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** | **Thirteen  weeks ended  January 28,  2006** | ** ** | **Twenty-six  weeks ended  January 27,  2007** | ** ** | **Seventeen  weeks ended  January 28,  2006** | ** ** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Twenty-six  weeks ended  January 28,  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) |       | 65.6                                                   |       | 68.8                                                   |       | 62.4 |   | 67.2 |   |   | 58.8 |   | 64.7 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 21.9                                                   |       | 22.3                                                   |       | 22.7 |   | 22.8 |   |   | 24.6 |   | 23.3 |   |
| Income from  credit card operations                                               |       | (1.4                                                   | )          | (1.4                                                   | )          | (1.5 | ) | (1.4 | ) |   | (1.2 | ) | (1.3 | ) |
| Depreciation expense                                                              |       | 2.6                                                    |       | 2.9                                                    |       | 2.9 |   | 2.9 |   |   | 3.0 |   | 2.9 |   |
| Amortization of  customer lists                                                   |       | 1.0                                                    |       | 1.2                                                    |       | 1.2 |   | 1.2 |   |   | — |   | 0.8 |   |
| Amortization of  favorable lease commitments                                      |       | 0.3                                                    |       | 0.4                                                    |       | 0.4 |   | 0.4 |   |   | — |   | 0.3 |   |
| Transaction and  other costs                                                      |       | —                                                 |       | —                                                 |       | — |   | — |   |   | 3.7 |   | 1.1 |   |
| Other income                                                                      |       | —                                                 |       | —                                                 |       | (0.2 | ) | — |   |   | — |   | — |   |
| Operating  earnings                                                               |       | 9.9                                                    |       | 5.8                                                    |       | 12.1 |   | 6.9 |   |   | 11.1 |   | 8.2 |   |
| Interest expense  (income), net                                                   |       | 5.1                                                    |       | 5.5                                                    |       | 5.8 |   | 5.5 |   |   | (0.1 | ) | 3.8 |   |
| Earnings from  continuing operations before income taxes                          |       | 4.8                                                    |       | 0.3                                                    |       | 6.3 |   | 1.4 |   |   | 11.3 |   | 4.3 |   |
| Income taxes                                                                      |       | 1.9                                                    |       | 0.1                                                    |       | 2.5 |   | 0.6 |   |   | 4.1 |   | 1.6 |   |
| Earnings from  continuing operations                                              |       | 2.9                                                    |       | 0.2                                                    |       | 3.8 |   | 0.8 |   |   | 7.1 |   | 2.7 |   |
| Earnings (loss)  from discontinued operations                                     |       | 0.2                                                    |       | 0.1                                                    |       | (0.9 | ) | 0.1 |   |   | (0.1 | ) | 0.0 |   |
| Net earnings                                                                      |       | 3.2                                                    | %          | 0.3                                                    | %          | 2.9 | % | 0.9 | % |   | 7.0 | % | 2.7 | % |

 

In connection with the Transactions, the Company incurredsignificant indebtedness and became highly leveraged.  See “Liquidity and Capital Resources.”  In addition, the purchase price paid inconnection with the Acquisition was allocated to state the acquired assets andliabilities at fair value.  The purchaseaccounting adjustments increased the carrying value of our property andequipment and inventory, established intangible assets for our tradenames,customer lists and favorable lease commitments and revalued our long-termbenefit plan obligations, among other things. Subsequent to the Transactions, interest expense and non-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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Setforth 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 endedJanuary 27,  2007 | ** ** | **Thirteen  weeks ended**January 28,  2006 | ** ** | **Twenty-six  weeks ended**January 27,  2007 | ** ** | **Seventeen**weeks ended  January 28,  2006 | ** ** | ** ** | **Nine weeks**endedOctober 1,  2005 | ** ** | **Twenty-six  weeks ended**January 28,  2006 | ** ** |
| ** **                                                                                       | ** ** | **(Successor)**                                    | ** ** | **(Successor)**                                      | ** ** | **(Successor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** | **(Combined)** | ** ** |
| REVENUES                                                                                         |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                          |       | $                                                  | 1,069.9    |                                                 | $          | 981.5 |   | $ | 1,949.9 |   | $ | 1,243.9 |   |   | $ | 544.9 |   | $ | 1,788.8 |   |
| Direct Marketing                                                                                 |       | 225.9                                              |       | 213.0                                                |       | 385.1 |   | 264.4 |   |   | 87.5 |   | 351.9 |   |
| Total                                                                                            |       | $                                                  | 1,295.8    |                                                 | $          | 1,194.5 |   | $ | 2,335.0 |   | $ | 1,508.3 |   |   | $ | 632.4 |   | $ | 2,140.7 |   |
|                                                                                             |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| OPERATING  EARNINGS                                                                              |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                          |       | $                                                  | 121.5      |                                                 | $          | 94.3 |   | $ | 278.1 |   | $ | 138.4 |   |   | $ | 91.4 |   | $ | 229.8 |   |
| Direct Marketing                                                                                 |       | 39.1                                               |       | 37.9                                                 |       | 59.9 |   | 44.3 |   |   | 8.2 |   | 52.5 |   |
| Subtotal                                                                                         |       | 160.6                                              |       | 132.2                                                |       | 338.0 |   | 182.7 |   |   | 99.6 |   | 282.3 |   |
| Corporate expenses                                                                               |       | (14.7                                              | )          | (14.4                                                | )          | (24.0 | ) | (18.4 | ) |   | (5.8 | ) | (24.2 | ) |
| Amortization of customer lists andfavorable lease  commitments                                   |       | (18.1                                              | )          | (18.7                                                | )          | (36.1 | ) | (23.5 | ) |   | — |   | (23.5 | ) |
| Non-cash charges related to other valuation adjustments  made in connection with the Acquisition |       | —                                             |       | (29.4                                                | )          | — |   | (36.4 | ) |   | — |   | (36.4 | ) |
| Other income (1)                                                                                 |       | —                                             |       | —                                               |       | 4.2 |   | — |   |   | — |   | — |   |
| Transaction and other costs                                                                      |       | —                                             |       | —                                               |       | — |   | — |   |   | (23.5 | ) | (23.5 | ) |
| Total                                                                                            |       | $                                                  | 127.8      |                                                 | $          | 69.7 |   | $ | 282.1 |   | $ | 104.4 |   |   | $ | 70.3 |   | $ | 174.7 |   |
|                                                                                             |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| OPERATING PROFIT  MARGIN                                                                         |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                          |       | 11.4                                               | %          | 9.6                                                  | %          | 14.3 | % | 11.1 | % |   | 16.8 | % | 12.8 | % |
| Direct Marketing                                                                                 |       | 17.3                                               | %          | 17.8                                                 | %          | 15.6 | % | 16.8 | % |   | 9.4 | % | 14.9 | % |
| Total                                                                                            |       | 9.9                                                | %          | 5.8                                                  | %          | 12.1 | % | 6.9 | % |   | 11.1 | % | 8.2 | % |
|                                                                                             |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| CHANGE IN  COMPARABLE REVENUES (2)                                                               |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                          |       | 7.0                                                | %          | 4.5                                                  | %          | 6.3 | % | 5.0 | % |   | 9.8 | % | 6.4 | % |
| Direct Marketing                                                                                 |       | 6.1                                                | %          | 13.2                                                 | %          | 9.5 | % | 12.9 | % |   | 9.6 | % | 12.1 | % |
| Total                                                                                            |       | 6.8                                                | %          | 6.0                                                  | %          | 6.8 | % | 6.3 | % |   | 9.8 | % | 7.3 | % |
|                                                                                             |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| SALES PER SQUARE  FOOT                                                                           |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Specialty Retail stores                                                                          |       | $                                                  | 187        |                                                 | $          | 177 |   | $ | 342 |   | $ | 226 |   |   | $ | 103 |   | $ | 329 |   |
|                                                                                             |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| STORE COUNT                                                                                      |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Neiman Marcus  and Bergdorf Goodman stores:                                                      |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Open at beginning of period                                                                      |       | 39                                                 |       | 37                                                   |       | 38 |   | 37 |   |   | 36 |   | 36 |   |
| Opened during the period                                                                         |       | —                                             |       | 1                                                    |       | 1 |   | 1 |   |   | 1 |   | 2 |   |
| Open at end of period                                                                            |       | 39                                                 |       | 38                                                   |       | 39 |   | 38 |   |   | 37 |   | 38 |   |
| Clearance  centers:                                                                              |       |                                               |       |                                                 |       |   |   |   |   |   |   |   |   |   |
| Open at beginning of period                                                                      |       | 18                                                 |       | 17                                                   |       | 18 |   | 17 |   |   | 16 |   | 16 |   |
| Opened during the period                                                                         |       | 1                                                  |       | —                                               |       | 1 |   | — |   |   | 1 |   | 1 |   |
| Open at end of  period                                                                           |       | 19                                                 |       | 17                                                   |       | 19 |   | 17 |   |   | 17 |   | 17 |   |

 

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**(1)**Other income represents the proceeds wereceived in settlement of our cost method investment in an internet retailer.We had previously reduced our carrying value in this investment to zero.

(2)  Comparable revenues include 1) revenuesderived from our retail stores open for more than 52 weeks, includingstores that have been relocated or expanded and 2) revenues from ourDirect Marketing operation. Comparable revenues exclude 1) revenues of closedstores and 2) revenues from our discontinued operations (Gurwitch Products,L.L.C. and Kate Spade LLC).

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**Fiscal Year 2007 Highlights**

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 second quarter of fiscal year 2007 include:

·                  **Increases in revenues**—We generated revenue growth in thequarterly and year-to-date fiscal periods ended January 27, 2007 of 8.5% and9.1%, respectively. These increases were attributable to 1) increases incomparable revenues, 2) revenues from new stores and 3) higher internet sales.

Comparablerevenues increased 6.8% in both the second quarter of fiscal year 2007 and the2007 year-to-date fiscal period.  Theincreases in comparable revenues were achieved on increases in comparablerevenues of 6.0% in the second quarter of fiscal year 2006 and 7.3% in the 2006year-to-date fiscal period.

For Specialty Retail stores,our sales per square foot for the last twelve trailing months increased by 4.5%to $624 as of January 2007 compared to $597 as of January 2006.

·                  **Decreases in cost of goods sold including buying and occupancy costs(excluding depreciation)**—COGS represented 65.6% of revenues in thesecond quarter of fiscal year 2007 and 68.8% of revenues in the second quarterof fiscal year 2006.  This decrease wasprimarily due to purchase accounting adjustments in the second quarter offiscal year 2006 which increased COGS by $31.7 million, or 2.7% ofrevenues.  COGS represented 62.4% ofrevenues in the year-to-date fiscal period ended January 27, 2007 and 64.7% ofrevenues in the prior year-to-date fiscal period. This decrease is primarilydue to purchase accounting adjustments in fiscal year 2006 of $39.6 million, or1.9% of revenues.

Excluding the impact ofpurchase accounting adjustments, COGS decreased by 0.4% of revenues in theyear-to-date fiscal 2007 period.  Theyear-to-date fiscal 2007 decrease in COGS was achieved on top of a decrease inCOGS of 0.4% of revenues in the year-to-date fiscal 2006 period.  We believe these decreases are reflective ofour continuing emphasis on full-price sales and inventory management.

·                  **Decreases in selling, general and administrative expenses (excludingdepreciation)**—SG&A decreased in the second quarter of fiscalyear 2007 to 21.9% of revenues from 22.3% of revenues in the second quarter offiscal year 2006 and decreased in the year-to-date fiscal period of 2007 to22.7% of revenues from 23.3% 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 0.6% 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 second quarter offiscal year 2007, our operating earnings were $127.8 million, or 9.9% ofrevenues, compared to $69.7 million, or 5.8% of revenues, in the prior yearfiscal quarter.  For year-to-date fiscal2007, our operating earnings were $282.1 million, or 12.1% of revenues comparedto $174.7 million, or 8.2% of revenues, for the year-to-date fiscal 2006period.  The increase in operatingearnings in the second quarter of fiscal 2007 was primarily due to 1) anincrease of $28.4 million in the operating earnings generated by our SpecialtyRetail Stores and Direct Marketing segments and 2) a $30.0 million net decreasein non-cash charges related to the amortization of intangible assets and otherasset valuation adjustments recorded in connection with the Acquisition.

Year-to-datefiscal 2007 operating earnings increased primarily due to 1) an increase of$55.7 million in the operating earnings generated by our Specialty RetailStores and Direct Marketing segments, 2) other income of $4.2 million receivedin settlement of our cost method investment in an internet retailer in thefirst quarter of fiscal year 2007, 3) a decrease of $23.5 million intransaction costs incurred in the first quarter of fiscal year 2006 and 4) a$23.8 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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**ThirteenWeeks Ended January 27, 2007 Compared to Thirteen Weeks Ended January 28, 2006**

***Revenues.**** *Our revenues for thesecond quarter of fiscal year 2007 of $1,295.8 million increased $101.3million, or 8.5%, from $1,194.5 million in the second quarter of fiscal year2006.  The increase in revenues was dueto increases in comparable revenues, revenues from new stores, and higherinternet sales.  Revenues increased inthe second quarter of fiscal year 2007 compared to the prior year period at allour operating companies.

Comparablerevenues for the second quarter of fiscal year 2007 were $1,276.1 millioncompared to $1,194.3 million in the prior year fiscal quarter, representing anincrease of 6.8%.  Comparable revenuesincreased in the second quarter of fiscal year 2007 by 7.0% for SpecialtyRetail stores and 6.1% for Direct Marketing compared to the second quarter offiscal year 2006.

New storesgenerated sales of $19.4 million in the second quarter of fiscal year 2007. Inthe second quarter of fiscal year 2007, internet sales by Direct Marketing were$155.8 million, an increase of 16.2% compared to the second quarter of fiscalyear 2006.

***Costof goods sold including buying and occupancy costs (excluding depreciation).***  COGS for the second quarter of fiscal year2007 and fiscal year 2006 were:
| ** **                                                                                                                 | ** ** | **Thirteen weeks ended  January 27, 2007  (Successor)** | ** ** | **Thirteen weeks ended  January 28, 2006  (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| **(in millions, except percentages)**                                                                       | ** ** | **$**                                                                       | ** ** | **% of  revenues**                                                     | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| COGS, before  purchase accounting adjustments                                                                              |       | $                                                                           | 850.3      |                                                                        | 65.6       | % | $ | 790.5 |   | 66.1 | % |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of acquired inventories |       | —                                                                      |       | —                                                                      |       | 31.7 |   | 2.7 | % |
| COGS, as reported                                                                                                          |       | $                                                                           | 850.3      |                                                                        | 65.6       | % | $ | 822.2 |   | 68.8 | % |

 

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 65.6% of revenues from 68.8% of revenues in theprior year fiscal period is primarily due to:

·            $31.7million of non-cash charges included in COGS in the second quarter of fiscalyear 2006 primarily related to the step-up in the carrying value of theacquired inventories recorded in connection with the Transactions;

·            increasedmargins generated by our Specialty Retail stores of approximately 0.9% ofrevenues due primarily to a decrease in net markdowns incurred in the secondquarter of fiscal year 2007, partially offset by;

·            decreasedmargins generated by Direct Marketing of approximately 0.2% of revenuesprimarily as a result of promotional programs conducted in the holiday season.

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 allowances areearned and approved by the vendor.  Otherallowances we receive represent reductions to the amounts initially 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 receivedvendor allowances of $36.4 million, or 2.8% of revenues, in the secondquarter of fiscal year 2007 and $36.0 million, or 3.0% of revenues, in thesecond quarter of fiscal year 2006.

49

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***Selling,general and administrative expenses (excluding depreciation)*.**  SG&A expenses were 21.9% of revenues inthe second quarter of fiscal year 2007 compared to 22.3% of revenues in theprior year fiscal period.

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

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

·            adecrease in preopening expenses associated with a lower level of new storeopenings in the second quarter of fiscal year 2007, by approximately 0.2% ofrevenues.

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 0.1% of revenues.

***Income from credit card operations, net.  ***We received HSBC Program Income of $17.9 million,or 1.4% of revenues, in the second quarter of fiscal year 2007 compared to$17.0 million, or 1.4% of revenues, in the second quarter of fiscal year 2006.

***Depreciationexpense. ***Depreciationexpense was $34.1 million, or 2.6% of revenues, in the second quarter of fiscalyear 2007 compared to $34.2 million, or 2.9% of revenues, in the prior yearfiscal period.

***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 1.3% of revenues,in the second quarter of fiscal year 2007 compared to $18.7 million, or 1.6% ofrevenues, in the second 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 $121.5 million, or 11.4% ofSpecialty Retail stores revenues, for the second quarter of fiscal year 2007compared to $94.3 million, or 9.6% of Specialty Retail stores revenues, for theprior year fiscal period.  The increasesin operating earnings and operating margin were primarily due to 1) a lowerlevel of net markdowns as a percentage of revenues and 2) lower SG&Aexpenses as a percentage of revenues, primarily preopening costs andadvertising expenses.

Operating earningsfor Direct Marketing increased to $39.1 million, or 17.3% of Direct Marketingrevenues, in the second quarter of fiscal year 2007 from $37.9 million, or17.8% of Direct Marketing revenues, for the prior year period.  The decrease in operating margin for DirectMarketing was primarily the result of 1) an increase in COGS due to holidaypromotional activities and 2) an increase in buying and occupancy costs,partially offset by, 3) a decrease in advertising and marketing costs, as apercentage of revenues, incurred to support internet sales.

50

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***Interestexpense, net*.**  Netinterest expense was $65.5 million, or 5.1% of revenues, in the second quarterof fiscal year 2007 and $66.0 million, or 5.5% of revenues, for the prior yearperiod.   The significant components of interest expense are as follows:
| (in thousands)                         | ** ** | **Thirteen  weeks ended  January 27,  2007** | ** ** | **Thirteen  weeks ended  January 28,  2006** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                  | ** ** | **(Successor)**                                        | ** ** | **(Successor)**                                        | ** ** |
| Asset-Based  Revolving Credit Facility      |       | $                                                      | —     |                                                   | $          | 751 |   |
| Senior Secured  Term Loan Facility          |       | 33,068                                                 |       | 35,381                                                 |       |
| 2028 Debentures                             |       | 2,236                                                  |       | 2,226                                                  |       |
| Senior Notes                                |       | 15,750                                                 |       | 15,925                                                 |       |
| Senior  Subordinated Notes                  |       | 12,969                                                 |       | 13,113                                                 |       |
| Amortization of  debt issue costs and other |       | 4,476                                                  |       | 1,588                                                  |       |
| Total interest expense                      |       | 68,499                                                 |       | 68,984                                                 |       |
| Less:                                       |       |                                                   |       |                                                   |       |
| Interest income                             |       | 2,109                                                  |       | 1,852                                                  |       |
| Capitalized interest                        |       | 853                                                    |       | 1,085                                                  |       |
| Interest expense, net                       |       | $                                                      | 65,537     |                                                   | $          | 66,047 |   |

 

***Incometaxes.***  Oureffective income tax rate for the thirteen weeks ended January 27, 2007 was38.7% compared to 44.0% for the thirteen weeks ended January 28, 2006. On arate basis, our effective income tax rate for the second quarter of fiscal year2006 was unfavorably impacted by a lower level of pretax earnings generated inthe quarter which resulted in a higher level of significance of non-deductibleexpenses to pretax earnings.

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.  The recordedinterest liability related to the assessment at January 27, 2007 is sufficientto cover the interest assessment made by the IRS.

**Twenty-Six Weeks Ended January 27, 2007 Compared toTwenty-Six Weeks Ended January 28, 2006**

***Revenues.**** *Our revenues foryear-to-date fiscal 2007 of $2,335.0 million increased $194.3 million, or 9.1%,from $2,140.7 million in year-to-date fiscal 2006.  The increase in revenues was due to increasesin comparable revenues, revenues from new stores and higher internet sales.  Revenues increased in year-to-date fiscal2007 compared to the prior year period at all our operating companies.

Comparablerevenues for the twenty-six weeks ended January 27, 2007 were $2,286.6 millioncompared to $2,140.5 million in the prior year fiscal period, representing anincrease of 6.8%. Comparable revenues increased in the year-to-date fiscal 2007period by 6.3% for Specialty Retail stores and 9.5% for Direct Marketingcompared to year-to-date fiscal 2006.

New storesgenerated sales of $46.2 million in year-to-date fiscal 2007 and internet salesby Direct Marketing were $256.9 million, an increase of 20.4% 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:
|                                                                                                                            | ** ** | **Twenty-six weeks ended   January 27, 2007  (Successor)** | ** ** | **Twenty-six weeks ended   January 28, 2006  (Combined)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| **(in millions, except percentages)**                                                                       | ** ** | **$**                                                                               | ** ** | **% of  revenues**                                                            | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| COGS, before  purchase accounting adjustments                                                                              |       | $                                                                                   | 1,457.0    |                                                                               | 62.4       | % | $ | 1,345.7 |   | 62.8 | % |
| Purchase  accounting adjustments, primarily non-cash charges related to step-up in  carrying value of acquired inventories |       | —                                                                              |       | —                                                                             |       | 39.6 |   | 1.9 |   |
| COGS, as reported                                                                                                          |       | $                                                                                   | 1,457.0    |                                                                               | 62.4       | % | $ | 1,385.3 |   | 64.7 | % |

 

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

51

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to analyze trends in our business and evaluate our performance relativeto other companies in our industry.

The decrease inCOGS as reported under GAAP to 62.4% of revenues from 64.7% in the prior yearfiscal period is primarily due to:

·            $39.6million 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 0.5% ofrevenues due primarily to a decrease in net markdowns incurred and a higherportion of full-price sales.

Margins generatedby Direct Marketing in year-to-date fiscal 2007 were consistent with those inyear-to-date fiscal 2006.

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 $46.6 million, or 2.0% of revenues, in year-to-date fiscal2007 and $44.0 million, or 2.1% of revenues, in year-to-date fiscal 2006.

***Selling,general and administrative expenses (excluding depreciation)*.**  SG&A expenses were 22.7% of revenues inyear-to-date fiscal 2007 compared to 23.3% 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 0.4% of revenuesprimarily due to both higher internet sales by our Direct Marketing segment,which have a lower expense to revenue ratio than catalog sales, and a decreaseof costs incurred by our Specialty Retail stores;

·            adecrease in preopening expenses of approximately 0.2% of revenues; and

·            lowerlong-term benefits of approximately 0.2% 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 0.2% of revenues; and

·            anincrease in management services fees of $2.1 million, or 0.1% of revenues,payable to the Sponsors as a result of the Acquisition.

***Income from credit card operations, net.  ***We received HSBC Program Income of $34.3 million,or 1.5% of revenues, in year-to-date fiscal 2007 compared to $28.6 million, or1.3% 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 $67.2 million, or 2.9% of revenues, in year-to-date fiscal 2007compared to $62.7 million, or 2.9% of revenues, in the prior year fiscalperiod.  The increase in depreciation wasprimarily due to 1) a higher level of capital spending in recent years and 2)additional depreciation expense resulting from the revaluation of our propertyand equipment at fair value in connection with the Acquisition.

***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 $36.1 million, or 1.6% of revenues,for year-to-date fiscal 2007 and $23.5 million, or 1.1% 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 over twenty-sixweeks in year-to-date fiscal 2007 compared to seventeen weeks in year-to-datefiscal 2006.

52

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***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 $278.1 million, or 14.3% ofSpecialty Retail stores revenues, for year-to-date fiscal 2007 compared to$229.8 million, or 12.8% of Specialty Retail stores revenues, for the prioryear fiscal period.  The increases inoperating earnings and operating margin were primarily due to 1) a lower levelof net markdowns as a percentage of revenues and 2) lower SG&A expenses asa percentage of revenues, primarily preopening, benefits and advertisingexpenses.

Operating earningsfor Direct Marketing increased to $59.9 million, or 15.6% of Direct Marketingrevenues, in year-to-date fiscal 2007 from $52.5 million, or 14.9% 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 and 2) a decreasein advertising and marketing costs, as a percentage of revenues, incurred tosupport internet sales, partially offset by, 3) an increase in buying and occupancycosts.

***Interestexpense, net*.**  Netinterest expense was $134.4 million, or 5.8% of revenues, in year-to-datefiscal 2007 and $82.4 million, or 3.8% of revenues, for the prior year fiscalperiod.   The significant components of interest expense are as follows:
| (in thousands)                         | ** ** | **Twenty-six  weeks ended  January 27,  2007** | ** ** | **Seventeen  weeks ended  January 28,  2006** | ** ** | ** ** | **Nine  weeks ended  October 1,  2005** | ** ** | **Twenty-six  weeks ended  January 28,  2006** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **(Successor)**                                          | ** ** | **(Successor)**                                         | ** ** | ** ** | **(Predecessor)**                                 | ** ** | **(Combined)**                                           | ** ** |
|                                        |       |                                                     |       |                                                    |       |       |                                              |       |                                                     |       |
| Asset-Based  Revolving Credit Facility      |       | $                                                        | —     |                                                    | $          | 1,332      |                                              |       | $                                                        | —     |   | $ | 1,332 |   |
| Senior Secured  Term Loan Facility          |       | 68,771                                                   |       | 43,595                                                  |       |       | —                                            |       | 43,595                                                   |       |
| 2028 Debentures                             |       | 4,462                                                    |       | 2,911                                                   |       |       | 1,542                                             |       | 4,453                                                    |       |
| Senior Notes                                |       | 31,500                                                   |       | 19,950                                                  |       |       | —                                            |       | 19,950                                                   |       |
| Senior Subordinated  Notes                  |       | 25,937                                                   |       | 16,427                                                  |       |       | —                                            |       | 16,427                                                   |       |
| 2008 Notes                                  |       | —                                                   |       | 639                                                     |       |       | 1,439                                             |       | 2,078                                                    |       |
| Amortization of  debt issue costs and other |       | 9,013                                                    |       | 2,749                                                   |       |       | 301                                               |       | 3,050                                                    |       |
| Total interest expense                      |       | 139,683                                                  |       | 87,603                                                  |       |       | 3,282                                             |       | 90,885                                                   |       |
| Less:                                       |       |                                                     |       |                                                    |       |       |                                              |       |                                                     |       |
| Interest income                             |       | 3,751                                                    |       | 2,814                                                   |       |       | 3,046                                             |       | 5,860                                                    |       |
| Capitalized interest                        |       | 1,578                                                    |       | 1,489                                                   |       |       | 1,146                                             |       | 2,635                                                    |       |
| Interest expense  (income), net             |       | $                                                        | 134,354    |                                                    | $          | 83,300     |                                              |       | $                                                        | (910       | ) | $ | 82,390 |   |

 

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 the first quarter of fiscal year 2007, wereceived consideration aggregating $4.2 million, or 0.2% of revenues, 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.

***Incometaxes.***  Oureffective income tax rate was 39.3% for the twenty-six weeks ended January 27,2007.  Our effective income tax rate was39.8% for the seventeen weeks ended January 28, 2006 and 36.8% for the nineweeks ended October 1, 2005, resulting in a combined year-to-date fiscal 2006rate of 37.5%.  Our effective tax ratefor the nine-weeks ended October 1, 2005 was favorably impacted by a higherlevel of tax-exempt interest income earned during the period on higher cashbalances maintained prior to the Acquisition.

53

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**Inflation and Deflation**

We believe changes in revenues and net earnings that have resulted frominflation or deflation have not been material during the periods presented. Inrecent years, we have experienced certain inflationary conditions related to1) increases in product costs due primarily to changes in foreign currencyexchange rates that have reduced the purchasing power of the U.S. dollar and2) increases in SG&A. We purchase a substantial portion of ourinventory from foreign suppliers whose costs are affected by the fluctuation oftheir local currency against the dollar or who price their merchandise incurrencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchangerate affect us most significantly; however, we source goods from numerouscountries and thus are affected by changes in numerous currencies and,generally, by fluctuations in the U.S. dollar relative to such currencies.Accordingly, changes in the value of the dollar relative to foreign currenciesmay increase our cost of goods sold and if we are unable to pass such costincreases to our customers, our gross margins, and ultimately our earnings,would decrease. Foreign currency fluctuations could have a material adverseeffect on our business, financial condition and results of operations in thefuture. We attempt to offset the effects of inflation through price increasesand control of expenses, although our ability to increase prices may be limitedby competitive factors. We attempt to offset the effects of merchandise deflation,which has occurred on a limited basis in recent years, through control ofexpenses. There is no assurance, however, that inflation or deflation will notmaterially affect our operations in the future.

**LIQUIDITY AND CAPITAL RESOURCES**

Our cash requirements consist principally of:

·                  thefunding of our merchandise purchases;

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

·                  debtservice requirements;

·                  incometax payments; and

·                  obligationsrelated to our Pension Plan.

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

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

We believe that operating cash flows, available vendor financing andamounts available pursuant to our senior secured Asset-Based RevolvingCredit Facility 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 January 27, 2007, cash and cash equivalents were $188.5 millioncompared to $90.6 million at January 28, 2006. Net cash provided by operatingactivities was $152.9 million year-to-date fiscal 2007 compared to netcash provided by operating activities of $231.6 million year-to-datefiscal 2006. Cash flows related to operating activities were lower inyear-to-date fiscal 2007 than in the prior year period primarily due to 1) a$87.4 million increase in cash interest requirements on indebtedness incurredin

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connection with the Transactions, 2) a $46.7 million increase in cashrequirements for income taxes, partially offset by 3) a $24.6 million decreasein working capital requirements.

Net cash used for investing activities was $8.7 millionyear-to-date fiscal 2007 which consisted of 1) capital expenditures of $70.7million, 2) $121.5 million received from Liz Claiborne, Inc. for the sale of KateSpade and 3) the purchase of the minority interest held in Kate Spade for $59.4million.  Net cash used in investingactivities was $5,254.5 million in year-to-date fiscal 2006, whichconsisted of 1) $5,155.9 million paid in connection with the Acquisition and 2)$94.6 million for capital expenditures.

We incurred capital expenditures in fiscal 2007 related to theconstruction of new stores in Charlotte, Austin and Natick and the remodel ofour Atlanta store. We incurred capital expenditures in fiscal 2006 related tothe construction of new stores in San Antonio and Boca Raton and the remodelsof our San Francisco, Houston, Beverly Hills, Newport Beach and BergdorfGoodman stores. We opened our San Antonio store in September 2005, ourBoca Raton store in November 2005 and our Charlotte store in September2006.  We plan to open the Austin storein March 2007 and the Natick store in September 2007.  We currently project capital expenditures forfiscal year 2007 to be approximately $165 to $175 million.

Net cash used for financing activities was $180.3 million inyear-to-date fiscal 2007 as compared to net cash provided by financingactivities of $4,261.0 million in year-to-date fiscal 2006. In year-to-datefiscal 2007, we voluntarily repaid $175.0 million principal amount of the loansunder the Senior Secured Term Loan Facility. In year-to-date fiscal 2006, proceeds from debt incurred in connectionwith the Transactions, net of issuance costs, aggregated $3,222.1 millionand cash equity contributions received in connection with the Transactionsaggregated $1,427.7 million.  Inyear-to-date fiscal 2006, we also repaid our $150.0 million of seasonalborrowings under our Asset-Based Revolving Credit Facility, paid $134.7 millionfor the redemption of our 2008 Notes pursuant to our call of such notes forredemption in connection with the Transactions and voluntarily repaid $100.0million principal amount of borrowings on the Senior Secured Term LoanFacility.

**Financing Structure at January27, 2007**

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

***Senior Secured Asset-Based Revolving CreditFacility.***  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 January 27, 2007, NMG had $575.4 millionof unused borrowing availability under the Asset-Based Revolving CreditFacility based on a borrowing base of over $600.0 million and after givingeffect to $24.6 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 Revolving Credit Facility bearinterest at a rate per annum equal to, at NMG’s option, either (a) a baserate determined by reference to the higher of (1) the prime rate ofDeutsche Bank Trust Company Americas and (2) the federal funds effectiverate plus  1¤2 of 1% or(b) 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 the average revolving loan utilization is 50% or more for anyapplicable period, the commitment fee will be reduced to 0.250% for suchperiod. NMG must also pay customary letter of credit fees and agency fees.

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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 January 27, 2007, the liabilities of NMG’s non-guarantorsubsidiaries totaled approximately $4.9 million, or 0.1% of consolidatedliabilities, and the assets of NMG’s non-guarantor subsidiaries aggregatedapproximately $5.9 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 ofinventory and related accounts, cash, deposit accounts, all payments receivedby NMG or the subsidiary guarantors from credit card clearinghouses andprocessors or otherwise in respect of all credit card charges for sales ofinventory by NMG and the subsidiary guarantors, certain related assets andproceeds of the foregoing; and

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

·                  asecond-priority security interest in, and mortgages on, substantially allother tangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s 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 SEC rules. As a result, thecollateral under NMG’s Asset-Based Revolving Credit Facility will includeshares of capital stock or other securities of subsidiaries of NMG or anysubsidiary guarantor only to the extent that the applicable value of such securities(on a subsidiary-by-subsidiary basis) is less than 20% of the aggregateprincipal amount of the 2028 Debentures or other secured public debtobligations of NMG.

NMG’s 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;

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·                  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 January 27, 2007,borrowings under the Senior Secured Term Loan Facility bore interest at a rateper annum equal to, at NMG’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and(2) the federal funds effective rate plus  1¤2 of 1% or (b) a LIBOR rate, subject tocertain adjustments, in each case plus an applicable margin. At January 27,2007, the applicable margin with respect to base rate borrowings was 1.25% andthe applicable margin with respect to LIBOR borrowings was 2.25%. The interestrate on the outstanding borrowings pursuant to the Senior Secured Term LoanFacility was 7.60% at January 27, 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%.

The credit agreement governing the Senior Secured Term Loan Facilityrequires NMG to prepay outstanding term loans with 50% (which percentage willbe reduced to 25% if NMG’s total leverage ratio is less than a specified ratioand will be reduced to 0% if NMG’s total leverage ratio is less than aspecified ratio) of its annual excess cash flow (as defined in the creditagreement).  For fiscal year 2006, NMGwas not required to prepay any outstanding term loans pursuant to the annualexcess cash flow requirements.  If achange of control (as defined in the credit agreement) occurs, NMG will berequired to offer to prepay all outstanding term loans, at a prepayment priceequal to 101% of the principal amount to be prepaid, plus accrued and unpaidinterest to the date of prepayment. NMG also must offer to prepay outstandingterm loans at 100% of the principal amount to be prepaid, plus accrued andunpaid interest, with the proceeds of certain asset sales under certaincircumstances.

NMG may voluntarily prepay outstanding loans under the Senior SecuredTerm Loan Facility at any time without premium or penalty other than customary “breakage”costs with respect to LIBOR loans. There is no scheduled amortization under theSenior Secured Term Loan Facility. The principal amount of the loansoutstanding is due and payable in full on April 6, 2013.

All obligations under the Senior Secured Term Loan Facility areunconditionally guaranteed by the Company and each direct and indirect domesticsubsidiary of NMG that guarantees the obligations of NMG under its Asset-BasedRevolving Credit Facility. All obligations under the Senior Secured Term LoanFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiary guarantors, including:

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

·                  afirst-priority security interest in, and mortgages on, substantially allother tangible and intangible assets of NMG, the Company and each subsidiaryguarantor, including a significant portion of NMG’s 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 ofinventory by NMG and the subsidiary guarantors, certain related assets andproceeds of the foregoing.

Capital stock and other securities of a subsidiary of NMG that are ownedby NMG or any subsidiary guarantor will not constitute collateral under NMG’sSenior Secured Term Loan Facility to the extent that such securities cannotsecure the 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 Senior Secured Term Loan Facility will include shares of capitalstock or other securities of subsidiaries of NMG or any subsidiary guarantoronly to the extent that the applicable value of such securities (on asubsidiary-by-subsidiary basis) is less than 20% of the aggregate principalamount of the 2028 Debentures or other secured public debt obligations of NMG.

The credit agreement governing the Senior Secured Term Loan Facilitycontains a number of negative covenants that are substantially similar to thosegoverning the Senior Notes and additional covenants related to the securityarrangements for the Senior Secured Term Loan Facility. The credit agreementalso contains customary affirmative covenants and events of default.

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

***Senior Notes.**** *On October 6, 2005,Newton Acquisition Merger Sub, Inc. issued $700.0 million aggregateoriginal principal amount of 9.0% / 9.75% Senior Notes under a senior indenture(Senior Indenture) with Wells Fargo Bank, National Association, as trustee. Atthe closing of the Transactions, as the surviving corporation in theAcquisition, NMG assumed all the obligations of Newton Acquisition MergerSub, Inc. under the Senior Indenture. The Senior Notes mature onOctober 15, 2015.

For any interest payment period through October 15, 2010, NMG may,at its option, elect to pay interest on the Senior 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.

The Senior Notes are fully and unconditionally guaranteed on a joint andseveral unsecured, 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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to all of NMG’s and its guarantors’ existing and future subordinatedindebtedness, including the Senior Subordinated Notes due 2015 and theguarantees thereof. The Senior Notes also are effectively junior in priority toNMG’s and its guarantors’ obligations under all secured indebtedness, includingNMG’s Senior Secured Credit Facilities, the 2028 Debentures, and any othersecured obligations of NMG, in each case, to the extent of the value of theassets securing such obligations. In addition, the Senior Notes arestructurally subordinated to all existing and future liabilities, including tradepayables, of NMG’s subsidiaries that are not providing guarantees.

NMG is not required to make any mandatory redemption or sinking fundpayments with respect to the Senior Notes, but under certain circumstances, NMGmay be required to offer to purchase Senior Notes as described below. NMG mayfrom time to time acquire Senior Notes by means other than a redemption,whether by tender offer, in open market purchases, through negotiatedtransactions or otherwise, in accordance with applicable securities laws.

Except as described below, the Senior Notes are not redeemable at NMG’soption prior to October 15, 2010. From and after October 15, 2010,NMG may redeem the Senior Notes, in whole or in part, at a redemption priceequal to 104.5% of principal amount, declining annually to 100% of theprincipal amount on October 15, 2013, plus accrued and unpaid interest,and Additional Interest (as defined in the Senior Indenture), if any, thereonto the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option, subject tocertain conditions, redeem up to 35% of the original aggregate principal amountof Senior 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.

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

The indenture governing the Senior Notes contains covenants that limitNMG’s ability and certain of its subsidiaries’ ability to:

·                  incuradditional indebtedness;

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

·                  makeinvestments;

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

·                  engagein transactions with NMG’s affiliates;

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

·                  consolidateor merge;

·                  createliens; and

·                  enterinto sale and lease back transactions.

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

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

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

NMG is not required to make any mandatory redemption or sinking fundpayments with respect to the Senior Subordinated Notes, but, under certaincircumstances, NMG may be required to offer to purchase Senior SubordinatedNotes as described below. NMG may from time to time acquire Senior SubordinatedNotes by means other than a redemption, whether by tender offer, in open marketpurchases, through negotiated transactions or otherwise, in accordance withapplicable securities laws.

Except as described below, the Senior Subordinated Notes are notredeemable at NMG’s option prior to October 15, 2010. From and afterOctober 15, 2010, NMG may redeem the Senior Subordinated Notes, in wholeor in part, at a redemption price equal to 105.188% of principal amount,declining annually to 100% of principal amount on October 15, 2013, plusaccrued and unpaid interest, and Additional Interest (as defined in the SeniorSubordinated Indenture), if any, thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option, subject tocertain conditions, redeem up to 35% of the original aggregate principal amountof Senior 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.

At any time prior to October 15, 2010, NMG also may redeem all or apart of the Senior Subordinated Notes at a redemption price equal to 100% ofthe principal 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.

Upon the occurrence of a change of control (as defined in the SeniorSubordinated Indenture), NMG will make an offer to purchase all of the SeniorSubordinated Notes at a price in cash equal to 101% of the aggregate principalamount thereof plus accrued and unpaid interest, and Additional Interest, ifany, to the date of purchase.

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

***Interest Rate Swaps.***  NMG usesderivative financial instruments to help manage its interest rate risk.Effective December 6, 2005, NMG entered into floating to fixed interestrate swap agreements for an aggregate notional amount of $1,000.0 millionto limit its exposure to interest rate increases related to a portion of itsfloating rate indebtedness. The interest rate swap agreements terminate afterfive years.  At January 27, 2007, thefair value of NMG’s interest rate swap agreements was a gain of approximately$13.5 million, which amount is included in other assets.

As of the effective date, NMG designated the interest rate swaps as cashflow hedges. As a result, changes in the fair value of NMG’s swaps are recordedsubsequent to the effective date as a component of other comprehensive income.

As a result of the swap agreements, NMG’s effective fixed interest ratesas to the $1,000.0 million in floating rate indebtedness will currentlyrange from 6.716% to 7.289% per quarter and result in an average fixed rateof 6.897%.

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**OTHER MATTERS**

**Factors That May Affect 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 our stores,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 fashion trends;

·                  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 new factorsmay emerge or changes to the foregoing factors may occur that could impact ourbusiness. Except to the extent required by law, we undertake no obligation toupdate or revise (publicly or otherwise) any forward-looking statementsto reflect subsequent events, new information or future circumstances.

**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.

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 AnnualReport to Shareholders on Form 10-K for the fiscal year endedJuly 29, 2006.

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***Recent Accounting Pronouncements. ***In July 2006, the FASBissued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes –an interpretation of FASB Statement No. 109” (FIN 48), which clarifies theaccounting for uncertainty in tax positions. FIN 48 requires that we recognize in our consolidated financialstatements the impact of a tax position, if that position is more likely thannot of being sustained upon examination, based on the technical merits of theposition.  We will be required toimplement the provisions of FIN 48 no later than the first quarter of fiscalyear 2008. We have not completed our evaluation of the impact, if any, ofadopting 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 misstatementsresulting in the potential build up of improper amounts on the balancesheet.  We will be required to adopt theprovisions of SAB 108 no later than 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 a postretirementbenefit liability for plans that are underfunded. Deferred plan costs andincome are required to be reported in accumulated other comprehensive income(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.

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

The market risk inherent in the Company’s financial instrumentsrepresents the potential loss arising from adverse changes in interest rates.The Company does not enter into derivative financial instruments for tradingpurposes. The Company seeks to manage exposure to adverse interest rate changesthrough its normal operating and financing activities. The Company is exposedto interest rate risk through its borrowing activities, which are described inNote 8 to the condensed consolidated financial statements.

As of January 27, 2006, NMG had no borrowings outstanding under itsAsset-Based Revolving Credit Facility that bears interest at floatingrates. Future borrowings under NMG’s Asset-Based Revolving Facility, tothe extent of outstanding borrowings, would be affected by interest ratechanges.

At January 27, 2006, NMG had $1,700.0 million of debt under itsSenior Secured Term Loan Facility issued in connection with the Transactionsthat bears interest at floating rates. A 1% increase in these floating rateswould increase annual interest expense by approximately $17.0 million.

NMG uses derivative financial instruments to help manage its interestrate risk.  Effective December 6,2005, NMG  entered into floating to fixedinterest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit its exposure to interest rate increases relatedto a portion of its floating rate indebtedness. The interest rate swap agreementsterminate after five years.  At January27, 2007, the fair value of NMG’s interest rate swap agreements was a gain ofapproximately $13.5 million, which amount is included in other assets.

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As of the effective date, NMG designated the interest rate swaps as cashflow hedges. As a result, changes in the fair value of the swaps are recordedsubsequent to the effective date as a component of other comprehensive income.

As a result of the swap agreements, NMG’s effective fixed interest ratesas to the $1,000.0 million in floating rate indebtedness will currentlyrange from 6.716% to 7.289% per quarter and result in an average fixed rate of6.897%.

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

**ITEM 4. CONTROLS AND PROCEDURES**

**a. Disclosure Controls and Procedures.**

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation as of January 27, 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. Changes in Internal Control over FinancialReporting**

In the ordinary course of business, we routinely enhanceour information systems by either upgrading our current systems or implementingnew systems. No change occurred in our internal controls over financialreporting during the quarter ended January 27, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

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**NEIMANMARCUS, INC.**

**PART II**
| **ITEM 1.**                                                                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **LEGAL PROCEEDINGS** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | ** **            |
| Note 13 of the Notes to Condensed Consolidated  Financial Statements in Part I, Item 1 is incorporated herein by reference as  if fully restated herein.  Note 13  contains forward-looking statements that are subject to the risks and  uncertainties discussed in “Management’s Discussion and Analysis of Financial  Condition and Results of Operations — Factors That May Affect Future  Results.” |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | ** **            |
| **ITEM 1A.**                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **RISK FACTORS**      |

 

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

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

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

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

As a result of the Transactions, we are highlyleveraged.  As of January 27, 2007, theprincipal amount of NMG’s total indebtedness was approximately $3,031.3 millionand the unused borrowing availability under the $600 million Asset-BasedRevolving Credit Facility was approximately $575.4 million after giving effectto $24.6 million of letters of credit outstanding thereunder.  NMG’s substantial indebtedness, combined withits lease and other financial obligations and contractual commitments, couldhave other important consequences. 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, thereby reducingthe availability of cash flows to fund working capital, capital expenditures,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.

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

In addition, NMG’s interest expense could increase ifinterest rates increase because the entire amount of the indebtedness under thesenior secured credit facilities bears interest at floating rates.   As of January 27, 2007, NMG had $1,700.0 millionprincipal amount of floating rate debt, consisting of outstanding borrowingsunder Senior Secured Term Loan Facility. NMG also had at

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that date approximately $575.4 million of unused floatingrate debt borrowing capacity available under the Asset-Based Revolving CreditFacility based on a borrowing base of over $600.0 million at that date andafter giving effect to $24.6 million used for letters of credit.  Effective December 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 rate increasesrelated to a portion of its floating rate indebtedness.

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

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

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

Contractual limitations on NMG’s ability to execute anynecessary alternative financing plans could exacerbate the effects of anyfailure to generate sufficient cash flow to satisfy its debt serviceobligations.  The Asset-BasedRevolving Credit Facility permits NMG to borrow up to $600.0 million;however, NMG’s ability to borrow thereunder is limited by a borrowing base,which at any time will equal the lesser of 80% of eligible inventory valued atthe lower of cost or market value and 85% of the net orderly liquidation valueof the eligible inventory, less certain reserves.  In addition, our ability to borrow under thisfacility is limited by a minimum liquidity condition, providing that, if lessthan $60.0 million is available at any time, NMG is not permitted toborrow any additional amounts under the Asset-Based Revolving Credit Facilityunless NMG’s pro forma ratio of consolidated EBITDA to consolidated FixedCharges (as such terms are defined in the credit agreement for the seniorsecured asset-based revolving credit facility) is at least 1.1 to1.0.  Our ability to meet this financialratio may be affected by events beyond our control, and we cannot assure youthat we will meet this ratio.

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

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

The credit agreements governing NMG’s Asset-BasedRevolving Credit Facility and Senior Secured Term Loan Facility creditfacilities and the indentures governing the Senior Notes, the SeniorSubordinated Notes and the 2028 Debentures contain, and any future indebtednessof NMG would likely contain, a number of restrictive covenants that imposesignificant operating and financial restrictions, including restrictions on NMG’sability to engage in acts that may be in its best long-term interests. Theindentures governing the Senior Notes, the Senior Subordinated Notes and the2028 Debentures and the credit agreements governing the senior secured creditfacilities include covenants that, among other things, restrict NMG’s abilityto:

·                  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.

In addition, NMG’s ability to borrow under the Asset-BasedRevolving Credit Facility is limited by a borrowing base and a minimumliquidity condition, as described above.

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

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

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

**Risks Related to Our Business 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.

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

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

Our relationships with established and emerging designersare a key factor in our position as a retailer of high-fashion merchandise, anda substantial portion of our revenues is attributable to our sales of designermerchandise. Many of our key vendors limit the number of retail channels theyuse to sell their merchandise and competition among luxury retailers to obtainand sell these goods is intense. Our relationships with our designers have beena significant contributor to our past success. We have no guaranteed supplyarrangements with our principal merchandising sources. Accordingly, there canbe no assurance that such sources will continue to meet our quality, style andvolume requirements. Moreover, nearly all of the brands of our top designersare sold by competing retailers, and many of our top designers also have theirown dedicated retail stores. If one or more of our top designers were to ceaseproviding us with adequate supplies of merchandise or, conversely, were toincrease sales of merchandise through its own stores or to the stores of ourcompetitors, our business could be adversely affected. In addition, any declinein the popularity or quality of any of our designer brands could adverselyaffect our business.

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

We make decisions regarding the purchase of ourmerchandise well in advance of the season in which it will be sold. Forexample, women’s apparel, men’s apparel and shoes are typically ordered six tonine months in advance of the products being offered for sale while handbags,jewelry and other categories are typically ordered three to six months inadvance.  If our sales during any season,particularly a peak season, are significantly lower than we expect for anyreason, we may not be able to adjust our expenditures for inventory and otherexpenses in a timely fashion and may be left with a substantial amount ofunsold inventory. If that occurs, we may be forced to rely on markdowns orpromotional sales to dispose of excess inventory. This could have an adverseeffect on our margins and operating income. At the same time, if we fail topurchase a sufficient quantity of merchandise, we may not have an adequatesupply of products to meet consumer demand. This may cause us to lose sales orharm our customer relationships.

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

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

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

Based upon our expansion strategy, we expect that plannednew stores will add over 662,000 square feet of new store space overapproximately the next four fiscal years, representing an increase of over 12%above the current aggregate square footage of our full-line Neiman Marcus andBergdorf Goodman stores, and that our store remodeling program will addadditional new store space from remodels that are already underway.  New store openings involve certain risks,including constructing, furnishing and supplying a store in a timely and costeffective manner, accurately assessing the demographic or retail environment ata given location, hiring and training quality staff, obtaining necessarypermits and zoning approvals, obtaining commitments from a core group ofvendors to supply the new store, integrating the new store into ourdistribution network and building customer awareness and loyalty. Inundertaking store remodels, we must complete the remodel in a timely, costeffective manner, minimize disruptions to our existing operations, and succeedin creating an improved shopping environment. If we fail to execute on these orother aspects of our store expansion and remodeling strategy, we could sufferharm to our sales, an increase in costs and expenses and an adverse effect onour business.

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

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

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

The merchandise we sell consists in large part of luxuryretail goods. The purchase of these goods by customers is discretionary, andtherefore highly dependent upon the level of consumer spending, particularlyamong affluent customers. Accordingly, sales of these products may be adverselyaffected by an economic downturn, increases in consumer debt levels,uncertainties regarding future economic prospects or a decline in consumerconfidence. An economic downturn in the United States generally or in any ofthe geographic areas in which we have stores, particularly in Texas,California, Florida and the New York City metropolitan area, from which wederive a significant portion of our revenues, could have a material adverseeffect on our business and results of operations.

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

Our success in the 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.

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

In recent years, we have experienced certain inflationaryconditions in our cost base due primarily to (1) changes in foreigncurrency exchange rates that have reduced the purchasing power of the U.S.dollar and (2) increases in selling, general and administrative expenses,particularly with regard to employee benefits. Inflation can harm our marginsand profitability if we are unable to increase prices or cut costs enough tooffset the effects of inflation in our cost base. If inflation in these orother costs worsens, we cannot assure you that our attempts to offset theeffects of inflation and cost increases through control of expenses, passingcost increases on to customers or any other method will be successful. Anyfuture inflation could adversely affect our profitability and our business.

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

We maintain loyalty programs that are designed tocultivate long-term relationships with our customers and enhance the quality ofservice we provide to our customers. We must constantly monitor and update theterms of our loyalty programs so that they continue to meet the demands andneeds of our customers and remain competitive with loyalty programs offered byother high-end specialty retailers. Given that 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,applicable regulations and consumer credit patterns could adversely impact ourability to facilitate the provision of consumer credit to our customers andadversely affect our business.**

We maintain a proprietary credit card program throughwhich credit is extended to customers under the “Neiman Marcus” and “BergdorfGoodman” names. Because a majority of our revenues were transacted through ourproprietary credit cards, changes in our proprietary credit card arrangementthat adversely impact our ability to facilitate the provision of consumercredit may adversely affect our performance. In July 2005, we sold our approximately 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 extremeor unseasonable weather conditions.**

Extreme weather conditions in the areas in which our stores are locatedcould adversely affect our business. For example, heavy snowfall, rainfall orother extreme weather conditions over a prolonged period might make itdifficult for our customers to travel to our stores and thereby reduce oursales and profitability. Our business is also susceptible to unseasonableweather conditions. For example, extended periods of unseasonably warmtemperatures during the winter season or cool weather during the summer

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season could render aportion of our inventory incompatible with those unseasonable conditions.Reduced sales from extreme or prolonged unseasonable weather conditions wouldadversely affect our business.

**We aresubject to numerous regulations that could affect our operations.**

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

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

The specialty retail industry is seasonal in nature, witha higher level of sales typically generated in the fall and holiday sellingseasons. We have in the past experienced significant fluctuation in ourrevenues from quarter to quarter with a disproportionate amount of our revenuesfalling in our second fiscal quarter, which coincides with the holiday season.In addition, we 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 foreigncurrency fluctuations.**

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

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

A substantial majority of our merchandise is manufacturedoverseas, mostly in Europe. As a result, political instability or other eventsresulting in the disruption of trade from other countries or the imposition ofadditional regulations relating to or duties upon imports could causesignificant delays or interruptions in the supply of our merchandise orincrease our costs, either of which could have a material adverse effect on ourbusiness. If we are forced to source merchandise from other countries, 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 costsassociated with the production of catalogs and other promotional material mayadversely affect our operating income.**

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

**We areindirectly owned and controlled by the Sponsors, and their interests as equityholders may conflict with 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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directly or indirectly compete with us. One or more ofthe Sponsors also may pursue acquisition opportunities that may becomplementary to our business, and as a result, those acquisition opportunitiesmay not be available to us.

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

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

Additionally, third parties may assert claims against usalleging infringement, misappropriation or other violations of their 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 andupdate information technology systems and enhance existing systems mayadversely affect our business.**

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

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

Substantially all of our merchandise is delivered to usby 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.
| **ITEM 2.** | ** ** | **UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS** |
|-------------|------------|------------------------------------------------------------------|

 

None.
| **ITEM 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE  OF SECURITY 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                                                                  |

 

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|        |   | herein by reference to the Company’s Annual Report  on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2    |   | Form of 7.125% Senior Notes Due 2028, dated May 27,  1998, incorporated herein by reference to the 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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|        |   | Goldman Sachs Credit Partners L.P. as co-arrangers,  Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC  and Goldman Sachs Credit Partners L.P. as joint bookrunners, Deutsche Bank  Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as co-syndication agents and the lenders thereunder,  incorporated herein by reference to the 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. |

 

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| 10.18* |   | Employment Agreement between The Neiman Marcus  Group, Inc. and Karen Katz, dated February 1, 2006, effective as of October  6, 2005, incorporated herein by reference to the 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  |   | Credit Agreement dated as of June 9, 2004, among the  Company, the Lenders parties thereof, Bank of America, N.A., as Syndication  Agent, Wachovia Bank, N.A., as Syndication Agent, Wachovia Bank, N.A., Wells  Fargo Bank National Association, and BNP Paribas, as Documentation Agents,  and JPMorgan Chase Bank, as Administrative Agent, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal year  ended July 31, 2004.                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.26  |   | 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.                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.27  |   | The Neiman Marcus Group, Inc. 2005 Stock Incentive  Plan, incorporated herein by reference to the Company’s Current Report on  Form 8-K dated January 21, 2005.                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.28  |   | 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.                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.29  |   | 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.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.30  |   | 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.                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.31  |   | 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.                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.32  |   | Stockholder Agreement, dated as of May 1, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger                                                                                                                                                                                                                                                                                                                                                                                         |

 

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|        |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.33  |   | 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.                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.34  |   | The Neiman Marcus Group, Inc. Key Employee Deferred  Compensation Plan effective as of January 1, 2006, 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  |   | 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.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.36  |   | 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. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.37  |   | 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)    |   | Filed herewith                                                    |
|--------|--------|-------------------------------------------------------------------|
|   |   |                                                              |
| *      |   | Current management 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 |     | March 7, 2007 |   |
| T. Dale Stapleton     |       | and Duly Authorized Officer    |                          |     |          |
|                  |       | (principal accounting officer) |                          |     |          |
|                       |            |                                |                               |          |               |  |

 

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