**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**   |
|------------------------------------------------------|------------|--------------------------------------------------------|
| ** **                                           | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**            |
|                                                 |       |                                                   |
| **For the  Quarterly Period Ended October 27, 2007** |
| ** **                                           | ** ** | ** **                                             |
| **OR**                                               |
|                                                 |       |                                                   |
| **o**                                                | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d)** |
| ** **                                           | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**            |

 

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

** **

**Neiman Marcus, Inc.**

(Exact name of registrantas 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** |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No  ̈

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  ̈  No x

 

There were 1,012,919 shares of the registrant’s common stock, par value$.01 per share, outstanding at October 27, 2007.

 

 

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**NEIMAN MARCUS, INC.**

 

#### **INDEX**

 
|       |   |                                                                                                                                      |   |   |   | **Page** |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------|
| Part I.    |   | Financial Information                                                                                                                     |   |   |   |     |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 1.    |   | Condensed  Consolidated Balance Sheets as of October 27, 2007, July 28, 2007 and October  28, 2006                                        |   |   |   | 1        |
|       |   |                                                                                                                                      |   |   |   |     |
|       |   | Condensed Consolidated Statements of Earnings for the  Thirteen Weeks Ended October 27, 2007 and Thirteen Weeks Ended October 28,  2006   |   |   |   | 2        |
|       |   |                                                                                                                                      |   |   |   |     |
|       |   | Condensed Consolidated Statements of Cash Flows for  the Thirteen Weeks Ended October 27, 2007 and Thirteen Weeks Ended October  28, 2006 |   |   |   | 3        |
|       |   |                                                                                                                                      |   |   |   |     |
|       |   | Notes to Condensed Consolidated Financial Statements                                                                                      |   |   |   | 4        |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 2.    |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                               |   |   |   | 31       |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 3.    |   | Quantitative  and Qualitative Disclosures About Market Risk                                                                               |   |   |   | 46       |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 4.    |   | Controls and  Procedures                                                                                                                  |   |   |   | 46       |
|       |   |                                                                                                                                      |   |   |   |     |
| Part II.   |   | Other  Information                                                                                                                        |   |   |   |     |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 1.    |   | Legal Proceedings                                                                                                                         |   |   |   | 47       |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 1A.   |   | Risk  Factors                                                                                                                             |   |   |   | 47       |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 2.    |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                              |   |   |   | 53       |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 4.    |   | Submission of  Matters to a Vote of Security Holders                                                                                      |   |   |   | 53       |
|       |   |                                                                                                                                      |   |   |   |     |
| Item 6.    |   | Exhibits                                                                                                                                  |   |   |   | 54       |
|       |   |                                                                                                                                      |   |   |   |     |
| Signatures |   |                                                                                                                                      |   |   |   | 58       |

 

----

 

**NEIMANMARCUS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

** **
| **(in thousands, except shares)**                                                                                                                                   | ** ** | **October 27,  2007** | ** ** | **July 28,  2007** | ** ** | **October 28,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | ** **                 | ** ** | ** **              | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                       |       |                    |       |                       |       |
| Current assets:                                                                                                                                                                    |       |                       |       |                    |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                         |       | $                          | 80,556     |                    | $          | 141,207                    |       | $ | 159,430 |   |
| Merchandise  inventories                                                                                                                                                           |       | 1,085,511                  |       | 918,269                 |       | 971,302                    |       |
| Deferred income  taxes                                                                                                                                                             |       | 39,728                     |       | 39,728                  |       | 33,232                     |       |
| Other current  assets                                                                                                                                                              |       | 125,382                    |       | 115,765                 |       | 114,988                    |       |
| Current assets  of discontinued operations                                                                                                                                         |       | —                     |       | —                  |       | 16,354                     |       |
| Total current  assets                                                                                                                                                              |       | 1,331,177                  |       | 1,214,969               |       | 1,295,306                  |       |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| Property and  equipment, net                                                                                                                                                       |       | 1,057,994                  |       | 1,043,711               |       | 1,038,138                  |       |
| Goodwill and  intangible assets, net                                                                                                                                               |       | 4,131,294                  |       | 4,140,019               |       | 4,205,723                  |       |
| Debt issuance  costs                                                                                                                                                               |       | 81,290                     |       | 84,844                  |       | 94,797                     |       |
| Other assets                                                                                                                                                                       |       | 9,960                      |       | 17,456                  |       | 14,994                     |       |
| Non-current  assets of discontinued operations                                                                                                                                     |       | —                     |       | —                  |       | 79,297                     |       |
| Total assets                                                                                                                                                                       |       | $                          | 6,611,715  |                    | $          | 6,500,999                  |       | $ | 6,728,255 |   |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                     |       |                       |       |                    |       |                       |       |
| Current  liabilities:                                                                                                                                                              |       |                       |       |                    |       |                       |       |
| Accounts payable                                                                                                                                                                   |       | $                          | 350,365    |                    | $          | 361,299                    |       | $ | 346,297 |   |
| Accrued  liabilities                                                                                                                                                               |       | 442,642                    |       | 403,162                 |       | 431,295                    |       |
| Other current  liabilities                                                                                                                                                         |       | 3,470                      |       | 3,426                   |       | 4,179                      |       |
| Current  liabilities of discontinued operations                                                                                                                                    |       | —                     |       | —                  |       | 28,565                     |       |
| Total current  liabilities                                                                                                                                                         |       | 796,477                    |       | 767,887                 |       | 810,336                    |       |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| Long-term  liabilities:                                                                                                                                                            |       |                       |       |                    |       |                       |       |
| Long-term debt                                                                                                                                                                     |       | 2,945,955                  |       | 2,945,906               |       | 3,195,760                  |       |
| Deferred income  taxes                                                                                                                                                             |       | 982,492                    |       | 1,002,982               |       | 1,031,959                  |       |
| Deferred real  estate credits, net                                                                                                                                                 |       | 67,179                     |       | 54,068                  |       | 29,326                     |       |
| Other long-term  liabilities                                                                                                                                                       |       | 193,895                    |       | 172,144                 |       | 192,939                    |       |
| Non-current  liabilities of discontinued operations                                                                                                                                |       | —                     |       | —                  |       | 12,735                     |       |
| Total long-term  liabilities                                                                                                                                                       |       | 4,189,521                  |       | 4,175,100               |       | 4,462,719                  |       |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| Minority  interest in discontinued operations                                                                                                                                      |       | —                     |       | —                  |       | 5,993                      |       |
|                                                                                                                                                                               |       |                       |       |                    |       |                       |       |
| Common stock  (par value $0.01 per share, 1,012,919 shares issued at October 27, 2007,  1,012,919 shares issued at July 28, 2007 and 1,012,264 shares issued at  October 28, 2006) |       | 10                         |       | 10                      |       | 10                         |       |
| Additional  paid-in capital                                                                                                                                                        |       | 1,413,889                  |       | 1,412,386               |       | 1,406,741                  |       |
| Accumulated  other comprehensive income                                                                                                                                            |       | 8,673                      |       | 21,229                  |       | 2,772                      |       |
| Retained  earnings                                                                                                                                                                 |       | 203,145                    |       | 124,387                 |       | 39,684                     |       |
| Total  shareholders’ equity                                                                                                                                                   |       | 1,625,717                  |       | 1,558,012               |       | 1,449,207                  |       |
| Total  liabilities and shareholders’ equity                                                                                                                                   |       | $                          | 6,611,715  |                    | $          | 6,500,999                  |       | $ | 6,728,255 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

1

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**NEIMAN MARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS**

**(UNAUDITED)**

 
| **(in thousands)**                                                           | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen   weeks ended  October 28,  2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                             | ** ** | ** **                                                   | ** ** |
| Revenues                                                                          |       | $                                                      | 1,132,243  |                                                         | $          | 1,039,211 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 667,137                                                |       | 606,778                                                      |       |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 271,975                                                |       | 247,530                                                      |       |
| Income from  credit card program                                                  |       | (17,294                                                | )          | (16,371                                                      | )     |
| Depreciation  expense                                                             |       | 35,135                                                 |       | 33,175                                                       |       |
| Amortization of  customer lists                                                   |       | 13,611                                                 |       | 13,564                                                       |       |
| Amortization of  favorable lease commitments                                      |       | 4,385                                                  |       | 4,470                                                        |       |
| Other income                                                                      |       | (32,450                                                | )          | (4,210                                                       | )     |
|                                                                              |       |                                                   |       |                                                         |       |
| Operating  earnings                                                               |       | 189,744                                                |       | 154,275                                                      |       |
|                                                                              |       |                                                   |       |                                                         |       |
| Interest  expense, net                                                            |       | 61,223                                                 |       | 68,818                                                       |       |
|                                                                              |       |                                                   |       |                                                         |       |
| Earnings from  continuing operations before income taxes                          |       | 128,521                                                |       | 85,457                                                       |       |
|                                                                              |       |                                                   |       |                                                         |       |
| Income taxes                                                                      |       | 49,763                                                 |       | 34,002                                                       |       |
|                                                                              |       |                                                   |       |                                                         |       |
| Earnings from  continuing operations                                              |       | 78,758                                                 |       | 51,455                                                       |       |
|                                                                              |       |                                                   |       |                                                         |       |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                 |       | (24,226                                                      | )     |
|                                                                              |       |                                                   |       |                                                         |       |
| Net earnings                                                                      |       | $                                                      | 78,758     |                                                         | $          | 27,229 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

2

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**NEIMANMARCUS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| **(in thousands)**                                                              | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                           | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| **CASH  FLOWS - OPERATING ACTIVITIES**                                               |       |                                                   |       |                                                   |       |
| Net earnings                                                                         |       | $                                                      | 78,758     |                                                   | $          | 27,229 |   |
| Loss from  discontinued operations                                                   |       | —                                                 |       | 24,226                                                 |       |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                                   |       |                                                   |       |
| Depreciation  expense                                                                |       | 35,135                                                 |       | 33,175                                                 |       |
| Amortization of  debt issue costs                                                    |       | 3,554                                                  |       | 3,498                                                  |       |
| Amortization of  customer lists and favorable lease commitments                      |       | 17,996                                                 |       | 18,034                                                 |       |
| Gain on  curtailment of defined benefit retirement obligations                       |       | (32,450                                                | )          | —                                                 |       |
| Deferred income  taxes                                                               |       | (9,180                                                 | )          | (13,801                                                | )     |
| Other, primarily  costs related to defined benefit pension plans                     |       | 8,171                                                  |       | 7,133                                                  |       |
|                                                                                 |       | 101,984                                                |       | 99,494                                                 |       |
| Changes in operating  assets and liabilities:                                        |       |                                                   |       |                                                   |       |
| Increase in  merchandise inventories                                                 |       | (167,242                                               | )          | (178,076                                               | )     |
| Increase in  other current assets                                                    |       | (9,617                                                 | )          | (19,581                                                | )     |
| Increase in  other assets                                                            |       | (1,637                                                 | )          | (929                                                   | )     |
| Increase in  accounts payable and accrued liabilities                                |       | 48,624                                                 |       | 75,340                                                 |       |
| Increase in  deferred real estate credits                                            |       | 14,064                                                 |       | 2,428                                                  |       |
| Net cash used  for operating activities – continuing operations                 |       | (13,824                                                | )          | (21,324                                                | )     |
| Net cash  provided by operating activities – discontinued operations            |       | —                                                 |       | 1,059                                                  |       |
| **Net  cash used for operating activities**                                          |       | (13,824                                                | )          | (20,265                                                | )     |
| **CASH  FLOWS – INVESTING ACTIVITIES**                                          |       |                                                   |       |                                                   |       |
| Capital  expenditures                                                                |       | (46,038                                                | )          | (41,419                                                | )     |
| Purchases of  short-term investments                                                 |       | (10,000                                                | )          | —                                                 |       |
| Sales of  short-term investments                                                     |       | 10,000                                                 |       | —                                                 |       |
| Net cash used  for investing activities – continuing operations                 |       | (46,038                                                | )          | (41,419                                                | )     |
| Net cash used  for investing activities – discontinued operations               |       | —                                                 |       | (136                                                   | )     |
| **Net  cash used for investing activities**                                          |       | (46,038                                                | )          | (41,555                                                | )     |
| **CASH  FLOWS – FINANCING ACTIVITIES**                                          |       |                                                   |       |                                                   |       |
| Repayment of  borrowings                                                             |       | (789                                                   | )          | (809                                                   | )     |
| Debt issuance  costs paid                                                            |       | —                                                 |       | (758                                                   | )     |
| Net cash used  for financing activities – continuing operations                 |       | (789                                                   | )          | (1,567                                                 | )     |
| Net cash used  for financing activities – discontinued operations               |       | —                                                 |       | (925                                                   | )     |
| **Net  cash used for financing activities**                                          |       | (789                                                   | )          | (2,492                                                 | )     |
| **CASH  AND CASH EQUIVALENTS**                                                       |       |                                                   |       |                                                   |       |
| Decrease during  the period                                                          |       | (60,651                                                | )          | (64,312                                                | )     |
| Beginning  balance                                                                   |       | 141,207                                                |       | 224,763                                                |       |
| Ending balance                                                                       |       | 80,556                                                 |       | 160,451                                                |       |
| Less cash and  cash equivalents of discontinued operations                           |       | —                                                 |       | 1,021                                                  |       |
| Ending balance -  continuing operations                                              |       | $                                                      | 80,556     |                                                   | $          | 159,430 |   |
|                                                                                 |       |                                                   |       |                                                   |       |
| **Supplemental  Schedule of Cash Flow Information**                                  |       |                                                   |       |                                                   |       |
|                                                                                 |       |                                                   |       |                                                   |       |
| Cash paid during  the period for:                                                    |       |                                                   |       |                                                   |       |
| Interest                                                                             |       | $                                                      | 70,185     |                                                   | $          | 78,308 |   |
| Income taxes                                                                         |       | $                                                      | 7,994      |                                                   | $          | 11,024 |   |
| Noncash  activities:                                                                 |       |                                                   |       |                                                   |       |
| Additions to  property and equipment                                                 |       | $                                                      | —     |                                                   | $          | 822 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

3

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**NEIMAN MARCUS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**1.**              Basis ofPresentation

** **

We have prepared theaccompanying unaudited condensed consolidated financial statements inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, these financial statements do not include all of the informationand footnotes required by generally accepted accounting principles for completefinancial statements. Therefore, these financial statements should be read inconjunction with our Annual Report on Form 10-K for the fiscal year ended July28, 2007.

 

In our opinion, theaccompanying unaudited condensed consolidated financial statements contain alladjustments, consisting of normal recurring adjustments, necessary to presentfairly our financial position, results of operations and cash flows for theapplicable interim periods.

 

The specialty retailindustry is seasonal in nature, with a higher level of sales typicallygenerated in the fall and holiday selling seasons. Due to seasonal and otherfactors, the results of operations for the first quarter of fiscal year 2008are not necessarily comparable to, or indicative of, results of any otherinterim period or for the fiscal year as a whole.

 

Neiman Marcus, Inc. (theCompany) is a wholly-owned subsidiary of and is controlled by Newton Holding,LLC (Holding). Holding is controlled by investment funds affiliated with TPGCapital and Warburg Pincus (collectively, the Sponsors). The Company was formedby Holding for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG),which acquisition was completed on October 6, 2005 (the Acquisition). Prior tothe Acquisition, the Company had no independent assets or operations. After theAcquisition, the Company represents the successor to NMG since the Company’ssole asset is its investment in NMG and its operations consist solely of theoperating activities of NMG as well as costs incurred by the Company related toits investment in NMG.

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the first quarter offiscal year 2008 relate to the thirteen weeks ended October 27, 2007. Allreferences to the first quarter of fiscal year 2007 relate to the thirteenweeks ended October 28, 2006.

 

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

 

Certain prior periodbalances have been reclassified to conform to the current period presentation.

 

***Use of Estimates.***We are required to make estimates and assumptionsabout future events in preparing financial statements in conformity withgenerally accepted accounting principles. These estimates and assumptionsaffect the amounts of assets, liabilities, revenues and expenses and thedisclosure of gain and loss contingencies at the date of the unauditedcondensed consolidated financial statements. While we believe that our pastestimates and assumptions have been materially accurate, our current estimatesare subject to change if different assumptions as to the outcome of futureevents were made. We evaluate our estimates and judgments on an ongoing basisand predicate those estimates and judgments on historical experience and onvarious other factors that we believe to be reasonable under the circumstances.We make adjustments to our assumptions and judgments when facts andcircumstances dictate. Since future events and their effects cannot bedetermined with absolute certainty, actual results may differ from theestimates used in preparing the accompanying unaudited condensed consolidatedfinancial statements.

** **

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

 

•                  Recognition ofrevenues;

 

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

 

•                  Determination ofimpairment of long-lived assets;

 

•                  Recognition of advertising andcatalog costs;

 

4

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•                  Measurement of liabilities related toour loyalty programs;

 

•                  Recognition of income taxes; and

 

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

 

***RecentAccounting Pronouncements.***In September 2006, the FASBissued Statement of Financial Accounting Standards No. 157, “Fair ValueMeasurements” (SFAS 157), which provides guidance for using fair value tomeasure certain assets and liabilities. SFAS 157 will apply whenever anotherstandard requires or permits assets or liabilities to be measured at fair value.The standard does not expand the use of fair value to any new circumstances. SFAS157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, or our fiscal year ending August 1, 2009. We have not yetevaluated the impact, if any, of adopting SFAS 157 on our consolidatedfinancial statements.

 

In February 2007, theFASB issued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS159 expands opportunities to use fair value measurement in financial reportingand permits entities to choose to measure many financial instruments andcertain other items at fair value. This Statement is effective for fiscal yearsbeginning after November 15, 2007, or our fiscal year ending August 1, 2009. Wehave not yet evaluated the impact, if any, of adopting SFAS 159 on ourconsolidated financial statements.

 

**2.**              DiscontinuedOperations

** **

In February 1999, NMG acquired a 56% controlling interest in Kate SpadeLLC, a designer and marketer of high-end accessories. 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. In October2006, we entered into an agreement to settle the put option whereby wepurchased the interest held by the minority investor for approximately $59.4million.

 

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

 

The Company’s unaudited condensed consolidated financial statements,accompanying notes and other information provided in this Quarterly Report onForm 10-Q reflect Kate Spade LLC as discontinued operations for all periodspresented.

 

Summarized financial information with respect to the results ofoperations of Kate Spade LLC is as follows:

 
| **(in thousands)**                                    | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** **   |
|------------------------------------------------------------|------------|--------------------------------------------------------|--------------|
| ** **                                                 | ** ** | ** **                                             | ** **   |
| Revenues                                                   |       | $                                                      |  18,908 |   |
|                                                       |       |                                                   |         |
| Earnings from  discontinued operations before income taxes |       | $                                                      |  1,150  |   |
| Income taxes                                               |       | 679                                                    |         |
| Net earnings from discontinued operations                  |       | 471                                                    |         |
|                                                       |       |                                                   |         |
| Loss on  disposition before income taxes                   |       | (15,476                                                | )            |
| Income taxes                                               |       | (9,221                                                 | )            |
| Net loss on disposition                                    |       | (24,697                                                | )            |
|                                                       |       |                                                   |         |
| Loss from discontinued operations, net of taxes            |       | $                                                      | (24,226      | ) |
|                                                            |            |                                                        |              |  |  |

 

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

 

5

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**3.**              Goodwill andIntangible Assets, Net 

** **
| **(in thousands)**              | ** ** | **October 27,  2007** | ** ** | **July 28,  2007** | ** ** | **October 28,   2006** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------------|------------|
|                                 |       |                       |       |                    |       |                             |       |
| Goodwill                             |       | $                          | 1,614,273  |                    | $          | 1,605,140                        |       | $ | 1,605,140 |   |
| Tradenames                           |       | 1,610,315                  |       | 1,610,315               |       | 1,621,788                        |       |
| Customer lists,  net                 |       | 463,772                    |       | 477,245                 |       | 518,068                          |       |
| Favorable lease  commitments, net    |       | 442,934                    |       | 447,319                 |       | 460,727                          |       |
| Goodwill and  intangible assets, net |       | $                          | 4,131,294  |                    | $          | 4,140,019                        |       | $ | 4,205,723 |   |

 

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

 

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

 

Customer lists areamortized using the straight-line method over their estimated useful lives,ranging from 5 to 24 years (weighted average life of 13 years). Favorable leasecommitments are amortized straight-line over the remaining lives of the leases,ranging from 6 to 49 years (weighted average life of 33 years). Total estimatedamortization of all acquisition-related intangible assets is currentlyestimated as follows (in thousands):

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

 

**4.**              Long-term Debt

** **

The significant components of our long-term debt are as follows:

 
| **(in thousands)**            | ** ** | **Interest  Rate** | ** ** | **October 27,  2007** | ** ** | **July 28,  2007** | ** ** | **October 28,  2006** | ** ** |
|------------------------------------|------------|--------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                               |       |               |       |                       |       |                    |       |                       |       |
| Senior Secured  Term Loan Facility |       | variable           |       | $                          | 1,625,000  |                    | $          | 1,625,000                  |       | $ | 1,875,000 |   |
| 2028 Debentures                    |       | 7.125%             |       | 120,955                    |       | 120,906                 |       | 120,760                    |       |
| Senior Notes                       |       | 9.0%/9.75%         |       | 700,000                    |       | 700,000                 |       | 700,000                    |       |
| Senior  Subordinated Notes         |       | 10.375%            |       | 500,000                    |       | 500,000                 |       | 500,000                    |       |
| Long-term debt                     |       |               |       | $                          | 2,945,955  |                    | $          | 2,945,906                  |       | $ | 3,195,760 |   |

 

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

 

6

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As of October 27, 2007,NMG had $575.7 million of unused borrowing availability under the Asset-BasedRevolving Credit Facility based on a borrowing base of over $600.0 millionand after giving effect to $24.3 million used for letters of credit. TheAsset-Based Revolving Credit Facility provides that NMG has the right at anytime to request up to $200.0 million of additional commitments, but thelenders are under no obligation to provide any such additional commitments, andany increase in commitments will be subject to customary conditions precedent.If NMG were to request any such additional commitments and the existing lendersor new lenders were to agree to provide such commitments, the Asset-BasedRevolving Credit Facility size could be increased to up to $800.0 million,but NMG’s ability to borrow would still be limited by the amount of theborrowing base.

 

Borrowings under theAsset-Based Revolving Credit Facility bear interest at a rate per annum equalto, at NMG’s option, either (a) a base rate determined by reference to thehigher of (1) the prime rate of Deutsche Bank Trust Company Americas and(2) the federal funds effective rate plus 1/2 of 1%or (b) a LIBOR rate, subject to certain adjustments, in each case plus anapplicable margin. The initial applicable margin is 0% with respect to baserate borrowings and 1.75% with respect to LIBOR borrowings. The applicablemargin is subject to adjustment based on the historical availability under theAsset-Based Revolving Credit Facility. In addition, NMG is required to pay acommitment fee of 0.375% per annum in respect of the unutilized commitments. Ifthe average revolving loan utilization is 50% or more for any applicableperiod, the commitment fee will be reduced to 0.250% for such period. NMG mustalso pay customary letter of credit fees and agency fees.

 

If at any time theaggregate amount of outstanding loans, unreimbursed letter of credit drawingsand undrawn letters of credit under the Asset-Based Revolving Credit Facilityexceeds the lesser of (i) the commitment amount and (ii) theborrowing base, NMG will be required to repay outstanding loans or cashcollateralize letters of credit in an aggregate amount equal to such excess,with no reduction of the commitment amount. If the amount available under theAsset-Based Revolving Credit Facility is less than $60 million or an eventof default has occurred, NMG will be required to repay outstanding loans andcash collateralize letters of credit with the cash NMG would then be requiredto deposit daily in a collection account maintained with the agent under theAsset-Based Revolving Credit Facility. NMG may voluntarily reduce theunutilized portion of the commitment amount and repay outstanding loans at anytime without premium or penalty other than customary “breakage” costs withrespect to LIBOR loans. There is no scheduled amortization under the Asset-BasedRevolving Credit Facility; the principal amount of the loans outstanding is dueand payable in full on October 6, 2010.

 

All obligations under theAsset-Based Revolving Credit Facility are guaranteed by the Company and certainof NMG’s existing and future domestic subsidiaries. As of October 27, 2007, theliabilities of NMG’s non-guarantor subsidiaries totaled approximately$4.4 million, or 0.1% of consolidated liabilities, and the assets of NMG’snon-guarantor subsidiaries aggregated approximately $6.6 million, or 0.1%of consolidated total assets. All obligations under NMG’s Asset-Based RevolvingCredit Facility, and the guarantees of those obligations, are secured, subjectto certain significant exceptions, by substantially all of the assets of theCompany, NMG and the subsidiaries that have guaranteed the Asset-BasedRevolving Credit Facility (subsidiary guarantors), including:

 

•                  a first-priority securityinterest in personal property consisting of inventory and related accounts,cash, deposit accounts, all payments received by NMG or the subsidiary guarantorsfrom credit card clearinghouses and processors or otherwise in respect of allcredit card charges for sales of inventory by NMG and the subsidiaryguarantors, certain related assets and proceeds of the foregoing; and

 

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

 

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

 

Capital stock and othersecurities of a subsidiary of NMG that are owned by NMG or any subsidiaryguarantor will not constitute collateral under NMG’s Asset-Based RevolvingCredit Facility to the extent that such securities cannot secure NMG’s 2028Debentures or other secured public debt obligations without requiring thepreparation and filing of separate financial statements of such subsidiary inaccordance with applicable Securities and Exchange Commission’s rules. As aresult, the collateral under NMG’s Asset-Based Revolving Credit Facility willinclude shares of capital stock or other securities of subsidiaries of NMG orany subsidiary guarantor only to the extent that the applicable value of suchsecurities (on a subsidiary-by-subsidiary basis) is less than 20% of theaggregate principal amount of the 2028 Debentures or other secured public debtobligations of NMG.

 

7

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The Asset-Based RevolvingCredit Facility contains a number of covenants that, among other things andsubject to certain significant exceptions, restrict its ability and the abilityof its subsidiaries to:

 

•                  incur additionalindebtedness;

 

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

 

•                  make investments, loans,advances and acquisitions;

 

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

 

•                  engage in transactionswith NMG’s affiliates;

 

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

 

•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and leaseback transactions.

 

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

 

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

 

***SeniorSecured Term Loan Facility.***On October 6, 2005, NMGentered into a credit 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. NMGvoluntarily repaid $100.0 million principal amount of the loans under theSenior Secured Term Loan Facility in fiscal year 2006 and $250 million infiscal year 2007.

 

At October 27, 2007, borrowings under the SeniorSecured Term Loan Facility bore interest at a rate per annum equal to, at NMG’soption, either (a) a base rate determined by reference to the higher of(1) the prime rate of Credit Suisse and (2) the federal fundseffective rate plus 1/2 of 1% or (b) a LIBOR rate,subject to certain adjustments, in each case plus an applicable margin. AtOctober 27, 2007, the applicable margin with respect to base rate borrowingswas 0.75% and the applicable margin with respect to LIBOR borrowings was 1.75%.The interest rate on the outstanding borrowings pursuant to the Senior SecuredTerm Loan Facility was 7.45% at October 27, 2007.

 

The credit agreementgoverning the Senior Secured Term Loan Facility requires NMG to prepayoutstanding term loans with 50% (which percentage will be reduced to 25% if NMG’stotal leverage ratio is less than a specified ratio and will be reduced to 0%if NMG’s total leverage ratio is less than a specified ratio) of its annualexcess cash flow (as defined in the credit agreement). For fiscal year 2007,NMG was not required to prepay any outstanding term loans pursuant to theannual excess cash flow requirements. 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 voluntarilyprepay outstanding loans under the Senior Secured Term Loan Facility at anytime without premium or penalty other than customary “breakage” costs withrespect to LIBOR loans. There is no scheduled amortization under the SeniorSecured Term Loan Facility. The principal amount of the loans outstanding isdue and payable in full on April 6, 2013.

 

8

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All obligations under theSenior Secured Term Loan Facility are unconditionally guaranteed by the Companyand each direct and indirect domestic subsidiary of NMG that guarantees theobligations of NMG under its Asset-Based Revolving Credit Facility. Allobligations under the Senior Secured Term Loan Facility, and the guarantees ofthose obligations, are secured, subject to certain significant exceptions, by substantiallyall of the assets of the Company, NMG and the subsidiary guarantors, including:

 

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

 

•                  a first-priority securityinterest in, and mortgages on, substantially all other tangible and intangible assetsof NMG, the Company and each subsidiary guarantor, including a significantportion of NMG’s owned and leased real property (which currently consists ofapproximately half of NMG’s full-line retail stores) and equipment, butexcluding, among other things, the collateral described in the following bulletpoint; and

 

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

 

Capital stock and othersecurities of a subsidiary of NMG that are owned by NMG or any subsidiaryguarantor will not constitute collateral under NMG’s Senior Secured Term LoanFacility to the extent that such securities cannot secure the 2028 Debenturesor other secured public debt obligations without requiring the preparation andfiling of separate financial statements of such subsidiary in accordance withapplicable SEC rules. As a result, the collateral under NMG’s Senior SecuredTerm Loan Facility will include shares of capital stock or other securities ofsubsidiaries of NMG or any subsidiary guarantor only to the extent that theapplicable value of such securities (on a subsidiary-by-subsidiary basis) isless than 20% of the aggregate principal amount of the 2028 Debentures or othersecured public debt obligations of NMG.

 

The credit agreementgoverning the Senior Secured Term Loan Facility contains a number of negativecovenants that are substantially similar to those governing the Senior Notesand additional covenants related to the security arrangements for the SeniorSecured Term Loan Facility. The credit agreement also contains customaryaffirmative covenants and events of default.

 

***2028Debentures.***In May 1998, NMG issued$125.0 million aggregate principal amount of its 7.125% 2028 Debentures.NMG equally and ratably secures the 2028 Debentures by a first lien securityinterest on certain collateral subject to liens granted under NMG’s SeniorSecured Credit Facilities constituting (a) (i) 100% of the capital stockof certain of NMG’s existing and future domestic subsidiaries, and(ii) 100% of the non-voting stock and 65% of the voting stock of certainof NMG’s existing and future foreign subsidiaries and (b) certain of NMG’sprincipal properties that include approximately half of NMG’s full-line stores,in each case, to the extent required by the terms of the indenture governingthe 2028 Debentures. The 2028 Debentures contain covenants that restrict NMG’sability to create liens and enter into sale and lease back transactions. Thecollateral securing the 2028 Debentures will be released upon the release ofliens on such collateral under NMG’s Senior Secured Credit Facilities and anyother debt (other than the 2028 Debentures) secured by such collateral. Capitalstock and other securities of a subsidiary of NMG that are owned by NMG or anysubsidiary will not constitute collateral under the 2028 Debentures to theextent such property does not constitute collateral under NMG’s Senior SecuredCredit Facilities as described above. The 2028 Debentures are guaranteed on anunsecured, senior basis by the Company.

 

The fair value of 2028Debentures at October 27, 2007 was approximately $131.3 million.

 

***SeniorNotes.***In connection with the Acquisition, NMG incurred$700.0 million aggregate original principal amount of 9.0% / 9.75% SeniorNotes under a senior indenture (Senior Indenture) with Wells Fargo Bank,National Association, as trustee. The Senior Notes mature on October 15,2015.

 

For any interest paymentperiod through October 15, 2010, NMG may, at its option, elect to payinterest on the Senior Notes entirely in cash (Cash Interest) or entirely byincreasing the principal amount of the outstanding Senior Notes or by issuingadditional Senior Notes (PIK Interest). Cash Interest on the Senior Notes accruesat the rate of 9% per annum. PIK Interest on the Senior Notes accrues at therate of 9.75% per annum. To date, NMG has paid all interest obligations incash. After October 15, 2010, NMG will make all interest payments on theSenior Notes entirely in cash. All Senior Notes mature on October 15,2015. Interest on the Senior Notes is payable quarterly in arrears on eachJanuary 15, April 15, July 15 and October 15, commencing onJanuary 15, 2006.

 

9

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

 

NMG is not required tomake any mandatory redemption or sinking fund payments with respect to theSenior Notes, but under certain circumstances, NMG may be required to offer topurchase Senior Notes as described below. NMG may from time to time acquireSenior Notes by means other than a redemption, whether by tender offer, in openmarket purchases, through negotiated transactions or otherwise, in accordancewith applicable securities laws.

 

Except as describedbelow, the Senior Notes are not redeemable at NMG’s option prior toOctober 15, 2010. From and after October 15, 2010, NMG may redeem theSenior Notes, in whole or in part, at a redemption price equal to 104.5% ofprincipal amount, declining annually to 100% of the principal amount on October 15,2013, plus accrued and unpaid interest, and Additional Interest (as defined inthe Senior Indenture), if any, thereon to the applicable redemption date.

 

Prior to October 15,2008, NMG may, at its option, subject to certain conditions, redeem up to 35%of the original aggregate principal amount of Senior Notes at a redemptionprice equal to 109% of the aggregate principal amount thereof, plus accrued andunpaid interest, and Additional Interest, if any, thereon to the redemptiondate, with the net cash proceeds of one or more equity offerings of NMG or anydirect or indirect parent of NMG to the extent such net proceeds arecontributed to NMG. At any time prior to October 15, 2010, NMG also mayredeem all or a part of the Senior Notes at a redemption price equal to 100% ofthe principal amount of Senior Notes redeemed plus an applicable premium, asprovided in the Senior Indenture, and accrued and unpaid interest andAdditional Interest, if any, to the redemption date.

 

Upon the occurrence of achange of control (as defined in the Senior Indenture), each holder of theSenior Notes has the right to require NMG to repurchase some or all of suchholder’s Senior Notes at a price in cash equal to 101% of the aggregateprincipal amount thereof plus accrued and unpaid interest, and AdditionalInterest, if any, to the date of purchase.

 

The indenture governingthe Senior Notes contains covenants that limit NMG’s ability and certain of itssubsidiaries’ ability to:

 

•                  incur additionalindebtedness;

 

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

 

•                  make investments;

 

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

 

•                  engage in transactionswith NMG’s affiliates;

 

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

 

•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and leaseback transactions.

 

The Senior Indenture alsoprovides for events of default, which, if any of them occurs, would permit orrequire the principal, premium, if any, interest and any other monetaryobligations on all outstanding Senior Notes to be due and payable immediately.

 

The fair value of NMG’sSenior Notes at October 27, 2007 was approximately $745.5 million.

 

10

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***SeniorSubordinated Notes.***In connection with the Acquisition,NMG incurred $500.0 million aggregate principal amount of 10.375% SeniorSubordinated Notes under a senior subordinated indenture (Senior SubordinatedIndenture) with Wells Fargo Bank, National Association, as trustee. The SeniorSubordinated Notes mature on October 15, 2015. Interest on the SeniorSubordinated Notes is payable in cash semi-annually in arrears on eachApril 15 and October 15, commencing April 15, 2006.

 

The Senior Subordinated Notesare fully and unconditionally guaranteed, on a joint and several unsecured,senior subordinated basis, by each of NMG’s wholly-owned domestic subsidiariesthat guarantee NMG’s obligations under its Senior Secured Credit Facilities andby the Company. The Senior Subordinated Notes and the guarantees thereof areNMG’s and the guarantors’ unsecured, senior subordinated obligations and rank(i) junior to all of NMG’s and the guarantors’ existing and future seniorindebtedness, including the Senior Notes and any borrowings under NMG’s SeniorSecured Credit Facilities, and the guarantees thereof and NMG’s 2028Debentures; (ii) equally with any of NMG’s and the guarantors’ futuresenior subordinated indebtedness; and (iii) senior to any of NMG’s and theguarantors’ future subordinated indebtedness. In addition, the 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 tomake any mandatory redemption or sinking fund payments with respect to theSenior Subordinated Notes, but, under certain circumstances, NMG may berequired to offer to purchase Senior Subordinated Notes as described below. TheCompany may from time to time acquire Senior Subordinated Notes by means otherthan a redemption, whether by tender offer, in open market purchases, throughnegotiated transactions or otherwise, in accordance with applicable securitieslaws.

 

Except as describedbelow, the Senior Subordinated Notes are not redeemable at NMG’s option priorto October 15, 2010. From and after October 15, 2010, NMG may redeemthe Senior Subordinated Notes, in whole or in part, at a redemption price equalto 105.188% of principal amount, declining annually to 100% of principal amounton October 15, 2013, plus accrued and unpaid interest, and AdditionalInterest (as defined in the Senior Subordinated Indenture), if any, thereon tothe applicable redemption date.

 

Prior to October 15,2008, NMG may, at its option, subject to certain conditions, redeem up to 35%of the original aggregate principal amount of Senior Subordinated Notes at aredemption price equal to 110.375% of the aggregate principal amount thereof,plus accrued and unpaid interest, and Additional Interest, if any, thereon tothe redemption date, with the net cash proceeds of one or more equity offeringsof NMG or any direct or indirect parent of NMG to the extent such net proceedsare contributed to NMG.

 

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

 

Upon the occurrence of achange of control (as defined in the Senior Subordinated Indenture), NMG willmake an offer to purchase all of the Senior Subordinated Notes at a price incash equal to 101% of the aggregate principal amount thereof plus accrued andunpaid interest, and Additional Interest, if any, to the date of purchase.

 

The indenture governingthe Senior Subordinated Notes contains covenants substantially similar to thoseapplicable to NMG’s Senior Notes described above. The Senior SubordinatedIndenture also provides for events of default, which, if any of them occurs,would permit or require the principal, premium, if any, interest and any othermonetary obligations on all outstanding Senior Notes to be due and payableimmediately, subject to certain exceptions.

 

The fair value of NMG’sSenior Subordinated Notes at October 27, 2007 was approximately $545.0 million.

 

***Maturitiesof Long-Term Debt.***At October 27, 2007, annual maturitiesof long-term debt during the next five fiscal years and thereafter are asfollows (in millions):

 
| 2009       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2010       |   | —  |   |
| 2011       |   | —  |   |
| 2012       |   | —  |   |
| 2013       |   | —  |   |
| Thereafter |   | 2,946.0 |   |

 

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The above table does notreflect future excess cash flow prepayments, if any, that may be required underthe 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 five years.At October 27, 2007, the fair value of NMG’s interest rate swap agreements wasa loss of approximately $10.6 million, which amount is included in otherlong-term liabilities.

 

As of the effective date, NMG designated the interest rate swaps ascash flow hedges. As a result, changes in the fair value of NMG’s swaps arerecorded as a component of other comprehensive income. At October 27, 2007, wehave $7.5 million of unrecognized losses, net of tax, on our interest rate swapagreements included in other comprehensive income.

 

As a result of the swapagreements, NMG’s effective fixed interest rates as to the$1,000.0 million in floating rate indebtedness will currently range from6.489% to 6.733% per quarter through 2010 and result in an average fixed rateof 6.584%.

 

***Interestexpense.***The significant components of interest expenseare as follows:

 
| **(in thousands)**            | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                               |       |                                                   |       |                                                   |       |
| Senior Secured  Term Loan Facility |       | $                                                      | 27,976     |                                                   | $          | 35,703 |   |
| 2028 Debentures                    |       | 2,185                                                  |       | 2,226                                                  |       |
| Senior Notes                       |       | 15,453                                                 |       | 15,750                                                 |       |
| Senior  Subordinated Notes         |       | 12,724                                                 |       | 12,968                                                 |       |
| Amortization of  debt issue costs  |       | 3,554                                                  |       | 3,498                                                  |       |
| Other                              |       | 832                                                    |       | 1,040                                                  |       |
| Total interest  expense            |       | 62,724                                                 |       | 71,185                                                 |       |
| Less:                              |       |                                                   |       |                                                   |       |
| Interest income                    |       | 855                                                    |       | 1,642                                                  |       |
| Capitalized  interest              |       | 646                                                    |       | 725                                                    |       |
| Interest  expense, net             |       | $                                                      | 61,223     |                                                   | $          | 68,818 |   |

 

**5.**              Employee BenefitPlans

** **

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

 

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

 

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

 

•                  Participants’balances in our current 401(k) Plan will be automatically transferred to theRSP.

 

•                  Ourmatching contributions to the RSP will increase to a potential maximum 75% ofthe employee contribution (up to a 6% deferral) from the potential maximum 50%to the current 401(k) Plan (subject to IRS limit of $15,500 in 2008 foremployee contributions).

 

•                  Ourmatching contributions will vest to employees in two years as compared to thethree year vesting under the current 401(k) Plan.

 

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•                  Allcurrent employees, who do not participate in the current 401(k) Plan, andfuture employees will be automatically enrolled in the RSP at a salary deferralrate of 3% once eligibly requirements have been met.

 

Effective January 1,2008, we will also offer a new defined contribution supplemental executiveretirement plan.

 

Concurrent with theimplementation of the RSP and the new supplemental executive retirement plan,we will freeze benefits offered under our Pension Plan and SERP Plan for mostemployees. An employee with a minimum of ten years of service and whose ageplus years of service equals at least 65 (“Rule of 65”) as of December 31, 2007will be allowed either 1) to continue participation in our current 401(k) Planand Pension Plan (and SERP Plan, if eligible) or 2) to freeze the benefitearned under the Pension Plan (and SERP Plan, if eligible) and participate inthe RSP. No employee who has met vesting requirements will forfeit benefitsearned prior to January 1, 2008.

 

In connection with the redesign of our long-term benefit program, werecorded a one-time pension curtailment gain of $32.5 million (recorded asother income in our condensed consolidated statements of earnings) in the firstquarter of fiscal year 2008 to reflect the impact of freezing benefits to beprovided under the Pension and SERP Plans as of December 31, 2007.

 

***Costs of Benefits.***The components of the expensesincurred under our Pension Plan, SERP Plan and Postretirement Plan are asfollows:

** **
| **(in thousands)**         | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|---------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Pension Plan:                   |       |                                                   |       |                                                   |       |
| Service cost                    |       | $                                                      | 4,394      |                                                   | $          | 3,922 |   |
| Interest cost                   |       | 5,842                                                  |       | 5,863                                                  |       |
| Expected return  on plan assets |       | (6,160                                                 | )          | (5,876                                                 | )          |
| Net amortization  of gains      |       | (188                                                   | )          | —                                                 |       |
| Pension Plan  expense           |       | $                                                      | 3,888      |                                                   | $          | 3,909 |   |
|                            |       |                                                   |       |                                                   |       |
| Curtailment gain                |       | $                                                      | 26,113     |                                                   | $          | — |   |
|                            |       |                                                   |       |                                                   |       |
| SERP Plan:                      |       |                                                   |       |                                                   |       |
| Service cost                    |       | $                                                      | 468        |                                                   | $          | 469 |   |
| Interest cost                   |       | 1,270                                                  |       | 1,232                                                  |       |
| SERP Plan  expense              |       | $                                                      | 1,738      |                                                   | $          | 1,701 |   |
|                            |       |                                                   |       |                                                   |       |
| Curtailment gain                |       | $                                                      | 6,337      |                                                   | $          | — |   |
|                            |       |                                                   |       |                                                   |       |
| Postretirement  Plan:           |       |                                                   |       |                                                   |       |
| Service cost                    |       | $                                                      | 31         |                                                   | $          | 14 |   |
| Interest cost                   |       | 339                                                    |       | 227                                                    |       |
| Net amortization  of losses     |       | 137                                                    |       | —                                                 |       |
| Postretirement  Plan expense    |       | $                                                      | 507        |                                                   | $          | 241 |   |
|                                 |            |                                                        |            |                                                        |            |  |  |  |

 

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

 
| **(in thousands)**                   | ** ** | **October 27,  2007** | ** ** | **July 28,  2007** | ** ** | **October 28,  2006** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | ** **                 | ** ** | ** **              | ** ** | ** **                 | ** ** |
| Pension Plan                              |       | $                          | 37,100     |                    | $          | 55,603                     |       | $ | 82,728 |   |
| SERP Plan                                 |       | 79,965                     |       | 86,146                  |       | 81,693                     |       |
| Postretirement  Plan                      |       | 22,435                     |       | 22,091                  |       | 15,068                     |       |
|                                      |       | 139,500                    |       | 163,840                 |       | 179,489                    |       |
| Less: current  portion                    |       | (4,019                     | )          | (4,019                  | )          | —                     |       |
| Long-term  portion of benefit obligations |       | $                          | 135,481    |                    | $          | 159,821                    |       | $ | 179,489 |   |

 

13

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

 

In the first quarter offiscal year 2008, we reduced our recorded liability for projected benefitobligations payable by the Pension Plan by $26.1 million and by the SERP Planby $6.4 million to reflect the impact of freezing benefits to be provided underthese plans as of December 31, 2007.

 

***Funding Policy andPlan Assets.***Our policy is to fund the Pension Plan at orabove the minimum required by law. Based upon currently available information,we will not be required to make contributions to the Pension Plan during fiscalyear 2008. In fiscal year 2007, we made no contributions to our Pension Plan.

 

**6.**              Income Taxes

** **

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

 

The cumulative effect of adopting FIN 48 resulted in a net increase toour accruals for uncertain tax positions of $9.1 million for the derecognitionof certain tax benefits. This increase to our accruals was offset by acorresponding increase to goodwill as these uncertainties existed at the timeof the Acquisition. At adoption, the gross amount of unrecognized tax benefitswas $26.7 million, of which $3.5 million of unrecognized tax benefits would impactour effective tax rate, if recognized. We classify interest and penalties as acomponent of income tax expense and our liability for accrued interest andpenalties was $8.5 million upon adoption of FIN48.

 

We file income taxreturns in the U.S. federal jurisdiction and various state and localjurisdictions. We closed the Internal Revenue Service (IRS) examinations 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 IRS is now examining our federal tax returns forfiscal years 2005 and 2006. We believe our recorded tax liabilities as ofOctober 27, 2007 are sufficient to cover any potential assessments to bemade by the IRS upon the completion of their examinations. We will continue tomonitor the progress of the IRS examinations and review our recorded taxliabilities for potential audit assessments. With respect to state and localjurisdictions, with limited exceptions, the Company and its subsidiaries are nolonger subject to income tax audits for fiscal years before 2003. Based uponthe current status of in-progress examinations of our federal and state taxreturns and other factors, we do not anticipate significant increases ordecreases in the amounts of our unrecognized tax benefits within the next 12months. However, adjustments to increase or decrease the recorded taxliabilities may be required in the future as additional facts become known.

 

14

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**7.**              Stock-BasedCompensation

** **

The Company has approvedequity-based management arrangements which authorize equity awards to begranted to certain management employees for up to 87,992.0 shares of the commonstock of the Company. Options generally vest over four to five years and expire10 years from the date of grant.

 

A summary of the statusof our stock option plan as of October 27, 2007, July 28, 2007 and October 28,2006 and changes during the periods ended on these dates is as follows:

 
| ** **                            | ** ** | **October 27, 2007** | ** ** | **July 28, 2007**            | ** ** | **October 28, 2006** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **Shares**                     | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares**                     | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at  beginning of period   |       | 83,634.3                       |       | $                                      | 1,430      |                           | 81,716.3   |   | $ | 1,416 |   | 81,716.3 |   | $ | 1,416 |   |
| Granted                               |       | —                         |       | —                                 |       | 2,496.0                        |       | 1,942 |   | — |   | — |   |
| Exercised                             |       | —                         |       | —                                 |       | (578.0                         | )          | 1,590 |   | — |   | — |   |
| Outstanding at  end of period         |       | 83,634.3                       |       | $                                      | 1,430      |                           | 83,634.3   |   | $ | 1,430 |   | 81,716.3 |   | $ | 1,416 |   |
| Options  exercisable at end of period |       | 37,208.1                       |       | $                                      | 1,290      |                           | 29,764.1   |   | $ | 1,233 |   | 21,629.5 |   | $ | 1,085 |   |

 

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

 

All grants of stock options have an exercise priceequal to the fair market value of our common stock on the date of grant. Becausewe are privately held and there is no public market for our common stock, thefair market value of our common stock is determined by our CompensationCommittee at the time option grants are awarded. In determining the fair valueof our common stock, the Compensation Committee considers such factors as theCompany’s actual and projected financial results, the principal amount of theCompany’s indebtedness, valuations of the Company performed by third partiesand other factors it believes are material to the valuation process.

 

We use the Black-Scholesoption-pricing model to determine the fair value of our options as of the dateof grant in accordance with the provisions of SFAS 123(R). As of October 27,2007, we have not granted any stock options for fiscal year 2008. A summary ofthe fiscal year 2007 and fiscal year 2006 grants and fair value assumptions is asfollows:

 
| ** **                                                       | ** ** | **Fiscal Year 2007 Grants** | ** ** | **Fiscal Year 2006 Grants** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **Fair Value  Options**               | ** ** | **Accreting  Exercise Price  Options**     | ** ** | **Fair Value  Options** | ** ** | **Accreting  Exercise Price  Options** | ** ** |
| Options outstanding at October 27, 2007 |       | 1,248.0                                    |       | 1,248.0                                    |       | 43,594.6 |   | 37,543.7 |   |
| Exercise Price  at October 27, 2007                              |       | $                                          | 1,942      |                                       | $          | 1,942 |   | $ | 1,445 |   | $ | 1,749 |   |
| Term                                                             |       | 5                                          |       | 5                                          |       | 5 |   | 5 |   |
| Volatility                                                       |       | 29.96                                      | %          | 29.96                                      | %          | 29.72 | % | 29.72 | % |
| Risk-Free Rate                                                   |       | 4.53                                       | %          | 4.53                                       | %          | 4.23 | % | 4.23 | % |
| Dividend Yield                                                   |       | —                                     |       | —                                     |       | — |   | — |   |
| Fair Value                                                       |       | $                                          | 676        |                                       | $          | 341 |   | $ | 494 |   | $ | 247 |   |

 

Expected volatility isbased on a combination of NMG’s historical volatility adjusted for our newleverage and estimates of implied volatility of our peer group.

 

We recognized non-cashstock compensation expense of $1.5 million for the thirteen weeks endedOctober 27, 2007 and $1.4 million for the thirteen weeks ended October 28,2006, which is included in selling, general and administrative expenses. AtOctober 27, 2007, unearned non-cash stock-based compensation that we expect torecognize as expense over the next 5 years aggregates approximately$17.3 million.

 

15

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**8.**              Transactions withSponsors

** **

Pursuant to a managementservices agreement with affiliates of the Sponsors, and in exchange foron-going consulting and management advisory services that are provided to us bythe Sponsors and their affiliates, affiliates of the Sponsors receive anaggregate annual management fee equal to the lesser of (i) 0.25% of ourconsolidated annual revenues or (ii) $10 million. Affiliates of theSponsors also receive reimbursement for out-of-pocket expenses incurred by themor their affiliates in connection with services provided pursuant to theagreement. These management fees are payable quarterly in arrears. We recordedmanagement fees of $2.8 million during the thirteen weeks ended October 27,2007 and $2.6 million during the thirteen weeks ended October 28, 2006, whichare included in selling, general and administrative expenses in the condensedconsolidated statements of earnings.

 

The management servicesagreement also provides that affiliates of the Sponsors may receive future feesin connection with certain subsequent financing and acquisition or dispositiontransactions. The management services agreement includes customary exculpationand indemnification provisions in favor of the Sponsors and their affiliates.

 

**9.**              Income fromCredit Card Program

** **

Pursuant to a long-termmarketing and servicing alliance with HSBC, HSBC offers credit card andnon-card payment plans bearing our brands and we receive ongoing payments fromHSBC based on credit card sales and compensation for marketing and servicingactivities (HSBC Program Income). We recognize HSBC Program Income when earned.

 

**10.**       Other Income

** **

In the first quarter of fiscal year 2008, we recorded a one-timepension curtailment gain of $32.5 million as a result of our decision to freezePension and SERP benefits as of December 31, 2007. See Note 5 for moreinformation.

 

In the first quarter of fiscal year 2007, we received considerationaggregating $4.2 million, or 0.4% of revenues, in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot. Weaccounted for our investment in Wedding Channel.com under the cost method. Inprior years, we had previously reduced our carrying value of this investment tozero.

 

**11.**       Commitments andContingencies

** **

***Long-term Incentive Plan.***The Company has 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 had historicallybeen eligible for stock-based compensation programs of the Predecessor. Performanceobjectives and targets are based on cumulative EBITDA percentages for threeyear periods beginning in fiscal year 2006. Earned awards for each completedperformance period will be credited to a book account and will earn interest ata contractually defined annual rate until the award is paid. Awards will bepaid within 30 days of a change of control or the first day there is a publicmarket of at least 20% of total outstanding common stock.

 

***Cash Incentive Plan.***The Company also has a cashincentive plan (Cash Incentive Plan) to aid in the retention of certain keyexecutives. The Cash Incentive Plan provides for the creation of a $14 millioncash bonus pool. Each participant in the Cash Incentive Plan will be entitledto a cash bonus upon the earlier to occur of a change of control or an initialpublic offering, as defined in the Cash Incentive Plan, provided that theinternal rate of return to the Sponsorsis positive.

 

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

 

16

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

** **

The following table showsthe components of accumulated other comprehensive income (loss):

 
| **(in thousands)**                           | ** ** | **October 27,  2007** | ** ** | **July 28,  2007** | ** ** | **October 28,  2006** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|----------------------------|------------|
|                                              |       |                       |       |                    |       |                       |       |
| Unrealized  (loss) gain on financial instruments  |       | $                          | (7,542     | )                       | $          | 3,733                      |       | $ | 2,894 |   |
| Unfunded benefit  obligations                     |       | 15,709                     |       | 17,365                  |       | —                     |       |
| Other                                             |       | 506                        |       | 131                     |       | (122                       | )          |
| Total  accumulated other comprehensive income     |       | $                          | 8,673      |                    | $          | 21,229                     |       | $ | 2,772 |   |
|                                              |       |                       |       |                    |       |                       |       |
| Total  comprehensive income (loss) for the period |       | $                          | 66,202     |                    | $          | (13,291                    | )          | $ | 44,872 |   |

** **

**13.**       Segment Reporting

** **

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

 

Operatingearnings for the segments include 1) revenues, 2) cost of sales, 3) directselling, general, and administrative expenses, 4) other direct operatingexpenses, 5) income from credit card program and 6) depreciation expense forthe respective segment. Items not allocated to our operating segments includethose items not considered by management in measuring the assets andprofitability of our segments. These amounts include 1) corporate expensesincluding, but not limited to, treasury, investor relations, legal and financesupport services, and general corporate management, 2) charges related tothe application of purchase accounting adjustments made in connection with theAcquisition including amortization of customer lists and favorable leasecommitments and other non-cash items and 3) interest expense. These items, whileoften times related to the operations of a segment, are not considered bysegment operating management, corporate operating management and the chiefoperating decision maker in assessing segment operating performance. Theaccounting policies of the operating segments are the same as those describedin the summary of significant accounting policies (except with respect topurchase accounting adjustments not allocated to the operating segments). 

 

17

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Thefollowing tables set forth the information for our reportable segments:

 
| **(in thousands)**                                                                  | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                               | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| REVENUES                                                                                 |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                 |       | $                                                      | 961,598    |                                                   | $          | 879,932 |   |
| Direct Marketing                                                                         |       | 170,645                                                |       | 159,279                                                |       |
| Total                                                                                    |       | $                                                      | 1,132,243  |                                                   | $          | 1,039,211 |   |
|                                                                                     |       |                                                   |       |                                                   |       |
| OPERATING  EARNINGS                                                                      |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                 |       | $                                                      | 165,582    |                                                   | $          | 156,577 |   |
| Direct Marketing                                                                         |       | 23,262                                                 |       | 20,798                                                 |       |
| Subtotal                                                                                 |       | 188,844                                                |       | 177,375                                                |       |
| Corporate                                                                                |       | (13,554                                                | )          | (9,276                                                 | )          |
| Amortization of  customer lists and favorable lease commitments                          |       | (17,996                                                | )          | (18,034                                                | )          |
| Other income (1)                                                                         |       | 32,450                                                 |       | 4,210                                                  |       |
| Total                                                                                    |       | $                                                      | 189,744    |                                                   | $          | 154,275 |   |
|                                                                                     |       |                                                   |       |                                                   |       |
| CAPITAL  EXPENDITURES                                                                    |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                 |       | $                                                      | 40,189     |                                                   | $          | 38,217 |   |
| Direct Marketing                                                                         |       | 5,849                                                  |       | 3,202                                                  |       |
| Total                                                                                    |       | $                                                      | 46,038     |                                                   | $          | 41,419 |   |
|                                                                                     |       |                                                   |       |                                                   |       |
| DEPRECIATION  EXPENSE                                                                    |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                 |       | $                                                      | 29,931     |                                                   | $          | 28,941 |   |
| Direct Marketing                                                                         |       | 4,045                                                  |       | 3,070                                                  |       |
| Subtotal                                                                                 |       | 33,976                                                 |       | 32,011                                                 |       |
| Depreciation  expense on step-up of fixed assets made in connection with the Acquisition |       | 1,159                                                  |       | 1,164                                                  |       |
| Total                                                                                    |       | $                                                      | 35,135     |                                                   | $          | 33,175 |   |

 
| ** **                                            | ** ** | **October  27,   2007** | ** ** | **October  28,  2006** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ASSETS                                                |       |                    |       |                        |       |
| Tangible assets  of Specialty Retail stores           |       | $                       | 2,090,210  |                        | $          | 1,963,974 |   |
| Tangible assets  of Direct Marketing                  |       | 195,953                 |       | 181,928                     |       |
| Corporate  assets:                                    |       |                    |       |                        |       |
| Intangible  assets related to Specialty Retail stores |       | 3,565,382               |       | 3,614,812                   |       |
| Intangible  assets related to Direct Marketing        |       | 565,912                 |       | 590,911                     |       |
| Other                                                 |       | 194,258                 |       | 280,979                     |       |
| Assets of  discontinued operations                    |       | —                  |       | 95,651                      |       |
| Total                                                 |       | $                       | 6,611,715  |                        | $          | 6,728,255 |   |

** **

----

(1) For the first quarter of fiscal year 2008, other income representsa one-time pension curtailment gain of $32.5 million as a result of ourdecision to freeze Pension and SERP benefits as of December 31, 2007. For the firstquarter of fiscal year 2007, other income represents the proceeds we receivedin connection with the merger of Wedding Channel.com, in which we held aminority interest, and The Knot. We had previously reduced our carrying valuein this investment to zero.

 

18

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

** **

All of NMG’s obligationsunder the Senior Notes and the Senior Subordinated Notes, as well as itsobligations under the Asset-Based Revolving Credit Facility and the SeniorSecured Term Loan Facility, are guaranteed by the Company and certain of NMG’sexisting and future domestic subsidiaries (principally, BergdorfGoodman, Inc. through which NMG conducts the operations of its BergdorfGoodman stores and NM Nevada Trust which holds legal title to certain realproperty and intangible assets used by the Company in conducting itsoperations). The guarantees by the Company and each subsidiary guarantor arefull and unconditional and joint and several. Currently, the Company’snon-guarantor subsidiaries consist principally of an operating subsidiarydomiciled in Canada providing support services to our Direct Marketingoperations. Previously, our non-guarantor subsidiaries also included Kate SpadeLLC (prior to its sale in December 2006), which is reflected in the tablesbelow as discontinued operations.

 

The following condensedconsolidating financial information represents the financial information ofNeiman Marcus, Inc. and its wholly-owned subsidiary guarantors, preparedon the equity basis of accounting. The information is presented in accordancewith the requirements of Rule 3-10 under the Securities and ExchangeCommission’s Regulation S-X. The financial information may not necessarilybe indicative of results of operations, cash flows or financial position hadthe subsidiary guarantors operated as independent entities.

 
| ** **                                       | ** ** | **October 27, 2007** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                              | —     |   | $ | 79,514 |   | $ | 397 |   | $ | 645 |   | $ | — |   | $ | 80,556 |   |
| Merchandise  inventories                         |       | —                         |       | 966,974 |   | 118,530 |   | 7 |   | — |   | 1,085,511 |   |
| Other current  assets                            |       | —                         |       | 149,630 |   | 11,255 |   | 3,681 |   | 544 |   | 165,110 |   |
| Total current  assets                            |       | —                         |       | 1,196,118 |   | 130,182 |   | 4,333 |   | 544 |   | 1,331,177 |   |
| Property and  equipment, net                     |       | —                         |       | 917,353 |   | 138,377 |   | 2,264 |   | — |   | 1,057,994 |   |
| Goodwill and  intangible assets, net             |       | —                         |       | 1,937,964 |   | 2,193,330 |   | — |   | — |   | 4,131,294 |   |
| Other assets                                     |       | —                         |       | 91,119 |   | 131 |   | — |   | — |   | 91,250 |   |
| Investments in  subsidiaries                     |       | 1,625,717                      |       | 2,352,217 |   | — |   | — |   | (3,977,934 | ) | — |   |
| Total assets                                     |       | $                              | 1,625,717  |   | $ | 6,494,771 |   | $ | 2,462,020 |   | $ | 6,597 |   | $ | (3,977,390 | ) | $ | 6,611,715 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                              | —     |   | $ | 306,524 |   | $ | 38,988 |   | $ | 4,309 |   | $ | 544 |   | $ | 350,365 |   |
| Accrued  liabilities                             |       | —                         |       | 368,817 |   | 73,709 |   | 116 |   | — |   | 442,642 |   |
| Other current  liabilities                       |       | —                         |       | 3,470 |   | — |   | — |   | — |   | 3,470 |   |
| Total current  liabilities                       |       | —                         |       | 678,811 |   | 112,697 |   | 4,425 |   | 544 |   | 796,477 |   |
| Long-term  liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                         |       | 2,945,955 |   | — |   | — |   | — |   | 2,945,955 |   |
| Deferred income  taxes                           |       | —                         |       | 982,492 |   | — |   | — |   | — |   | 982,492 |   |
| Other long-term  liabilities                     |       | —                         |       | 261,796 |   | (722 | ) | — |   | — |   | 261,074 |   |
| Total long-term  liabilities                     |       | —                         |       | 4,190,243 |   | (722 | ) | — |   | — |   | 4,189,521 |   |
| Total shareholders’  equity                 |       | 1,625,717                      |       | 1,625,717 |   | 2,350,045 |   | 2,172 |   | (3,977,934 | ) | 1,625,717 |   |
| Total  liabilities and shareholders’ equity |       | $                              | 1,625,717  |   | $ | 6,494,771 |   | $ | 2,462,020 |   | $ | 6,597 |   | $ | (3,977,390 | ) | $ | 6,611,715 |   |

 

19

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| ** **                                       | ** ** | **July 28, 2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                 | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                           | —     |   | $ | 139,333 |   | $ | 1,196 |   | $ | 678 |   | $ | — |   | $ | 141,207 |   |
| Merchandise  inventories                         |       | —                      |       | 821,749 |   | 96,513 |   | 7 |   | — |   | 918,269 |   |
| Other current  assets                            |       | —                      |       | 142,632 |   | 8,636 |   | 3,681 |   | 544 |   | 155,493 |   |
| Total current  assets                            |       | —                      |       | 1,103,714 |   | 106,345 |   | 4,366 |   | 544 |   | 1,214,969 |   |
| Property and  equipment, net                     |       | —                      |       | 901,072 |   | 140,473 |   | 2,166 |   | — |   | 1,043,711 |   |
| Goodwill and  intangible assets, net             |       | —                      |       | 1,945,040 |   | 2,194,979 |   | — |   | — |   | 4,140,019 |   |
| Other assets                                     |       | —                      |       | 102,108 |   | 192 |   | — |   | — |   | 102,300 |   |
| Investments in  subsidiaries                     |       | 1,558,012                   |       | 2,333,438 |   | — |   | — |   | (3,891,450 | ) | — |   |
| Total assets                                     |       | $                           | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,441,989 |   | $ | 6,532 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                           | —     |   | $ | 318,439 |   | $ | 38,080 |   | $ | 4,236 |   | $ | 544 |   | $ | 361,299 |   |
| Accrued  liabilities                             |       | —                      |       | 329,625 |   | 73,479 |   | 58 |   | — |   | 403,162 |   |
| Other current  liabilities                       |       | —                      |       | 3,426 |   | — |   | — |   | — |   | 3,426 |   |
| Total current  liabilities                       |       | —                      |       | 651,490 |   | 111,559 |   | 4,294 |   | 544 |   | 767,887 |   |
| Long-term  liabilities:                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                      |       | 2,945,906 |   | — |   | — |   | — |   | 2,945,906 |   |
| Deferred income  taxes                           |       | —                      |       | 1,002,982 |   | — |   | — |   | — |   | 1,002,982 |   |
| Other long-term  liabilities                     |       | —                      |       | 226,982 |   | (770 | ) | — |   | — |   | 226,212 |   |
| Total long-term  liabilities                     |       | —                      |       | 4,175,870 |   | (770 | ) | — |   | — |   | 4,175,100 |   |
| Total  shareholders’ equity                 |       | 1,558,012                   |       | 1,558,012 |   | 2,331,200 |   | 2,238 |   | (3,891,450 | ) | 1,558,012 |   |
| Total  liabilities and shareholders’ equity |       | $                           | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,441,989 |   | $ | 6,532 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |

 

20

----

 
| ** **                                          | ** ** | **October 28, 2006** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                             | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                          |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current assets:                                     |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                          |       | $                              | —     |   | $ | 157,589 |   | $ | 981 |   | $ | 860 |   | $ | — |   | $ | 159,430 |   |
| Merchandise  inventories                            |       | —                         |       | 870,900 |   | 100,892 |   | 7 |   | (497 | ) | 971,302 |   |
| Other current  assets                               |       | —                         |       | 131,075 |   | 12,920 |   | 3,681 |   | 544 |   | 148,220 |   |
| Current assets  of discontinued operations          |       | —                         |       | — |   | — |   | 16,354 |   | — |   | 16,354 |   |
| Total current assets                                |       | —                         |       | 1,159,564 |   | 114,793 |   | 20,902 |   | 47 |   | 1,295,306 |   |
| Property and  equipment, net                        |       | —                         |       | 884,142 |   | 151,609 |   | 2,387 |   | — |   | 1,038,138 |   |
| Goodwill and  intangible assets, net                |       | —                         |       | 1,990,447 |   | 2,215,276 |   | — |   | — |   | 4,205,723 |   |
| Other assets                                        |       | —                         |       | 109,592 |   | 195 |   | 4 |   | — |   | 109,791 |   |
| Investments in  subsidiaries                        |       | 1,449,207                      |       | 2,421,126 |   | — |   | — |   | (3,870,333 | ) | — |   |
| Non-current  assets of discontinued operations      |       | —                         |       | — |   | — |   | 79,297 |   | — |   | 79,297 |   |
| Total assets                                        |       | $                              | 1,449,207  |   | $ | 6,564,871 |   | $ | 2,481,873 |   | $ | 102,590 |   | $ | (3,870,286 | ) | $ | 6,728,255 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**      |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Current  liabilities:                               |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                    |       | $                              | —     |   | $ | 309,678 |   | $ | 31,773 |   | $ | 4,302 |   | $ | 544 |   | $ | 346,297 |   |
| Accrued  liabilities                                |       | —                         |       | 358,791 |   | 70,751 |   | 445 |   | 1,308 |   | 431,295 |   |
| Other current  liabilities                          |       | —                         |       | 4,179 |   | — |   | — |   | — |   | 4,179 |   |
| Current  liabilities of discontinued operations     |       | —                         |       | — |   | — |   | 28,565 |   | — |   | 28,565 |   |
| Total current  liabilities                          |       | —                         |       | 672,648 |   | 102,524 |   | 33,312 |   | 1,852 |   | 810,336 |   |
| Long-term  liabilities:                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                      |       | —                         |       | 3,195,760 |   | — |   | — |   | — |   | 3,195,760 |   |
| Deferred income  taxes                              |       | —                         |       | 1,031,959 |   | — |   | — |   | — |   | 1,031,959 |   |
| Other long-term  liabilities                        |       | —                         |       | 215,297 |   | 6,964 |   | 4 |   | — |   | 222,265 |   |
| Non-current  liabilities of discontinued operations |       | —                         |       | — |   | — |   | 12,735 |   | — |   | 12,735 |   |
| Total long-term  liabilities                        |       | —                         |       | 4,443,016 |   | 6,964 |   | 12,739 |   | — |   | 4,462,719 |   |
| Minority  interest                                  |       | —                         |       | — |   | — |   | — |   | 5,993 |   | 5,993 |   |
| Total  shareholders’ equity                    |       | 1,449,207                      |       | 1,449,207 |   | 2,372,385 |   | 56,539 |   | (3,878,131 | ) | 1,449,207 |   |
| Total  liabilities and shareholders’ equity    |       | $                              | 1,449,207  |   | $ | 6,564,871 |   | $ | 2,481,873 |   | $ | 102,590 |   | $ | (3,870,286 | ) | $ | 6,728,255 |   |

 

21

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| ** **                                                                        | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 941,458 |   | $ | 190,785 |   | $ | — |   | $ | — |   | $ | 1,132,243 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                             |       | 557,697 |   | 109,247 |   | 193 |   | — |   | 667,137 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                             |       | 237,023 |   | 35,465 |   | (513 | ) | — |   | 271,975 |   |
| Income from  credit card program                                                  |       | —                                                             |       | (15,435 | ) | (1,859 | ) | — |   | — |   | (17,294 | ) |
| Depreciation  expense                                                             |       | —                                                             |       | 30,282 |   | 4,750 |   | 103 |   | — |   | 35,135 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                             |       | 15,059 |   | 2,937 |   | — |   | — |   | 17,996 |   |
| Other income                                                                      |       | —                                                             |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Operating  earnings                                                               |       | —                                                             |       | 149,282 |   | 40,245 |   | 217 |   | — |   | 189,744 |   |
| Interest  expense, net                                                            |       | —                                                             |       | 61,220 |   | 3 |   | — |   | — |   | 61,223 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (78,758                                                            | )          | (97,454 | ) | — |   | — |   | 176,212 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 78,758                                                             |       | 128,521 |   | 97,237 |   | 217 |   | (176,212 | ) | 128,521 |   |
| Income taxes                                                                      |       | —                                                             |       | 49,763 |   | — |   | — |   | — |   | 49,763 |   |
| Net earnings  (loss)                                                              |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,237 |   | $ | 217 |   | $ | (176,212 | ) | $ | 78,758 |   |

 
| ** **                                                                        | ** ** | **Thirteen weeks ended October 28, 2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 864,453 |   | $ | 174,758 |   | $ | — |   | $ | — |   | $ | 1,039,211 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                             |       | 509,506 |   | 97,080 |   | 192 |   | — |   | 606,778 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                             |       | 215,901 |   | 31,029 |   | 600 |   | — |   | 247,530 |   |
| Income from  credit card program                                                  |       | —                                                             |       | (14,630 | ) | (1,741 | ) | — |   | — |   | (16,371 | ) |
| Depreciation  expense                                                             |       | —                                                             |       | 28,425 |   | 4,654 |   | 96 |   | — |   | 33,175 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                             |       | 15,093 |   | 2,941 |   | — |   | — |   | 18,034 |   |
| Other income                                                                      |       | —                                                             |       | (4,210 | ) | — |   | — |   | — |   | (4,210 | ) |
| Operating  earnings                                                               |       | —                                                             |       | 114,368 |   | 40,795 |   | (888 | ) | — |   | 154,275 |   |
| Interest  expense, net                                                            |       | —                                                             |       | 68,818 |   | — |   | — |   | — |   | 68,818 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                             |       | 66,078 |   | (66,078 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (27,229                                                            | )          | (81,759 | ) | — |   | — |   | 108,988 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 27,229                                                             |       | 61,231 |   | 106,873 |   | (888 | ) | (108,988 | ) | 85,457 |   |
| Income taxes                                                                      |       | —                                                             |       | 34,002 |   | — |   | — |   | — |   | 34,002 |   |
| Earnings (loss)  from continuing operations                                       |       | 27,229                                                             |       | 27,229 |   | 106,873 |   | (888 | ) | (108,988 | ) | 51,455 |   |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                             |       | — |   | — |   | (23,657 | ) | (569 | ) | (24,226 | ) |
| Net earnings  (loss)                                                              |       | $                                                                  | 27,229     |   | $ | 27,229 |   | $ | 106,873 |   | $ | (24,545 | ) | $ | (109,557 | ) | $ | 27,229 |   |

 

22

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| ** **                                                                                   | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,237 |   | $ | 217 |   | $ | (176,212 | ) | $ | 78,758 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                             |       | 30,282 |   | 4,750 |   | 103 |   | — |   | 35,135 |   |
| Amortization of  debt issue costs                                                            |       | —                                                             |       | 3,554 |   | — |   | — |   | — |   | 3,554 |   |
| Amortization of  customer lists and favorable lease commitments                              |       | —                                                             |       | 15,059 |   | 2,937 |   | — |   | — |   | 17,996 |   |
| Deferred income  taxes                                                                       |       | —                                                             |       | (9,180 | ) | — |   | — |   | — |   | (9,180 | ) |
| Gain on  curtailment of defined benefit retirement obligations                               |       | —                                                             |       | (32,450 | ) | — |   | — |   | — |   | (32,450 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | —                                                             |       | 7,612 |   | 559 |   | — |   | — |   | 8,171 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                          |       | (78,758                                                            | )          | (97,454 | ) | — |   | — |   | 176,212 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                             |       | (68,554 | ) | (46,729 | ) | (525 | ) | — |   | (115,808 | ) |
| Net cash (used  for) provided by operating activities                                        |       | —                                                             |       | (15,378 | ) | 1,759 |   | (205 | ) | — |   | (13,824 | ) |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                             |       | (43,652 | ) | (2,558 | ) | 172 |   | — |   | (46,038 | ) |
| Purchases of  short-term investments                                                         |       | —                                                             |       | (10,000 | ) | — |   | — |   | — |   | (10,000 | ) |
| Sales of  short-term investments                                                             |       | —                                                             |       | 10,000 |   | — |   | — |   | — |   | 10,000 |   |
| Net cash (used  for) provided by investing activities                                        |       | —                                                             |       | (43,652 | ) | (2,558 | ) | 172 |   | — |   | (46,038 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                             |       | (789 | ) | — |   | — |   | — |   | (789 | ) |
| Net cash used  for financing activities                                                      |       | —                                                             |       | (789 | ) | — |   | — |   | — |   | (789 | ) |
| **CASH  AND CASH EQUIVALENTS**                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Decrease during  the period                                                                  |       | —                                                             |       | (59,819 | ) | (799 | ) | (33 | ) | — |   | (60,651 | ) |
| Beginning  balance                                                                           |       | —                                                             |       | 139,333 |   | 1,196 |   | 678 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                  | —     |   | $ | 79,514 |   | $ | 397 |   | $ | 645 |   | $ | — |   | $ | 80,556 |   |

 

23

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| ** **                                                                                   | ** ** | **Thirteen weeks ended October 28, 2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                  | 27,229     |   | $ | 27,229 |   | $ | 106,873 |   | $ | (24,545 | ) | $ | (109,557 | ) | $ | 27,229 |   |
| Loss from  discontinued operations                                                           |       | —                                                             |       | — |   | — |   | 23,657 |   | 569 |   | 24,226 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                             |       | 28,425 |   | 4,654 |   | 96 |   | — |   | 33,175 |   |
| Amortization of  debt issue costs                                                            |       | —                                                             |       | 3,498 |   | — |   | — |   | — |   | 3,498 |   |
| Amortization of  customer lists and favorable lease commitments                              |       | —                                                             |       | 15,093 |   | 2,941 |   | — |   | — |   | 18,034 |   |
| Deferred income  taxes                                                                       |       | —                                                             |       | (13,801 | ) | — |   | — |   | — |   | (13,801 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | —                                                             |       | 6,572 |   | 561 |   | — |   | — |   | 7,133 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                             |       | 66,078 |   | (66,078 | ) | — |   | — |   | — |   |
| Equity in  earnings of subsidiaries                                                          |       | (27,229                                                            | )          | (81,759 | ) | — |   | — |   | 108,988 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                             |       | (77,608 | ) | (44,415 | ) | 1,205 |   | — |   | (120,818 | ) |
| Net cash (used  for) provided by continuing operating activities                             |       | —                                                             |       | (26,273 | ) | 4,536 |   | 413 |   | — |   | (21,324 | ) |
| Net cash provided  by discontinued operations                                                |       | —                                                             |       | — |   | — |   | 1,059 |   | — |   | 1,059 |   |
| Net cash (used  for) provided by operating activities                                        |       | —                                                             |       | (26,273 | ) | 4,536 |   | 1,472 |   | — |   | (20,265 | ) |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | —                                                             |       | (36,879 | ) | (4,541 | ) | 1 |   | — |   | (41,419 | ) |
| Net cash used for  continuing investing activities                                           |       | —                                                             |       | (36,879 | ) | (4,541 | ) | 1 |   | — |   | (41,419 | ) |
| Net cash used for  discontinued operations                                                   |       | —                                                             |       | — |   | — |   | (136 | ) | — |   | (136 | ) |
| Net cash used for  investing activities                                                      |       | —                                                             |       | (36,879 | ) | (4,541 | ) | (135 | ) | — |   | (41,555 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                             |       | (809 | ) | — |   | — |   | — |   | (809 | ) |
| Debt issuance  costs paid                                                                    |       | —                                                             |       | (758 | ) | — |   | — |   | — |   | (758 | ) |
| Net cash used for  continuing financing activities                                           |       | —                                                             |       | (1,567 | ) | — |   | — |   | — |   | (1,567 | ) |
| Net cash used for  discontinued operations                                                   |       | —                                                             |       | — |   | — |   | (925 | ) | — |   | (925 | ) |
| Net cash used for  financing activities                                                      |       | —                                                             |       | (1,567 | ) | — |   | (925 | ) | — |   | (2,492 | ) |
| **CASH AND  CASH EQUIVALENTS**                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease)  increase during the period                                                       |       | —                                                             |       | (64,719 | ) | (5 | ) | 412 |   | — |   | (64,312 | ) |
| Beginning balance                                                                            |       | —                                                             |       | 222,308 |   | 986 |   | 1,469 |   | — |   | 224,763 |   |
| Ending balance                                                                               |       | —                                                             |       | 157,589 |   | 981 |   | 1,881 |   | — |   | 160,451 |   |
| Less cash of  discontinued operations                                                        |       | —                                                             |       | — |   | — |   | 1,021 |   | — |   | 1,021 |   |
| Ending balance                                                                               |       | $                                                                  | —     |   | $ | 157,589 |   | $ | 981 |   | $ | 860 |   | $ | — |   | $ | 159,430 |   |

 

24

----

 

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

 

All of NMG’s obligationsunder the 2028 Debentures are guaranteed by the Company. The guarantee by theCompany is full and unconditional and joint and several. Currently, the Company’snon-guarantor subsidiaries consist principally of Bergdorf Goodman, Inc.through which NMG conducts the operations of its Bergdorf Goodman stores and NMNevada Trust which holds legal title to certain real property and intangibleassets used by NMG in conducting its operations. Previously, our non-guarantorsubsidiaries also included Kate Spade LLC (prior to its sale in December 2006),which is reflected in the tables below as discontinued operations.

 

The following condensedconsolidating financial information represents the financial information ofNeiman Marcus, Inc. and its non-guarantor subsidiaries, prepared on theequity basis of accounting. The information is presented in accordance with therequirements of Rule 3-10 under the Securities and Exchange Commission’sRegulation S-X. The financial information may not necessarily beindicative of results of operations, cash flows or financial position had thenon-guarantor subsidiaries operated as independent entities.

 
| ** **                                       | ** ** | **October 27, 2007** | ** ** |
|--------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                              | —     |   | $ | 79,514 |   | $ | 1,042 |   | $ | — |   | $ | 80,556 |   |
| Merchandise  inventories                         |       | —                         |       | 966,974 |   | 118,537 |   | — |   | 1,085,511 |   |
| Other current  assets                            |       | —                         |       | 149,630 |   | 14,936 |   | 544 |   | 165,110 |   |
| Total current  assets                            |       | —                         |       | 1,196,118 |   | 134,515 |   | 544 |   | 1,331,177 |   |
| Property and  equipment, net                     |       | —                         |       | 917,353 |   | 140,641 |   | — |   | 1,057,994 |   |
| Goodwill and  intangible assets, net             |       | —                         |       | 1,937,964 |   | 2,193,330 |   | — |   | 4,131,294 |   |
| Other assets                                     |       | —                         |       | 91,119 |   | 131 |   | — |   | 91,250 |   |
| Investments in  subsidiaries                     |       | 1,625,717                      |       | 2,352,217 |   | — |   | (3,977,934 | ) | — |   |
| Total assets                                     |       | $                              | 1,625,717  |   | $ | 6,494,771 |   | $ | 2,468,617 |   | $ | (3,977,390 | ) | $ | 6,611,715 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                           |       |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                              | —     |   | $ | 306,524 |   | $ | 43,297 |   | $ | 544 |   | $ | 350,365 |   |
| Accrued  liabilities                             |       | —                         |       | 368,817 |   | 73,825 |   | — |   | 442,642 |   |
| Other current  liabilities                       |       | —                         |       | 3,470 |   | — |   | — |   | 3,470 |   |
| Total current  liabilities                       |       | —                         |       | 678,811 |   | 117,122 |   | 544 |   | 796,477 |   |
| Long-term  liabilities:                          |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                         |       | 2,945,955 |   | — |   | — |   | 2,945,955 |   |
| Deferred income  taxes                           |       | —                         |       | 982,492 |   | — |   | — |   | 982,492 |   |
| Other long-term  liabilities                     |       | —                         |       | 261,796 |   | (722 | ) | — |   | 261,074 |   |
| Total long-term  liabilities                     |       | —                         |       | 4,190,243 |   | (722 | ) | — |   | 4,189,521 |   |
| Total  shareholders’ equity                 |       | 1,625,717                      |       | 1,625,717 |   | 2,352,217 |   | (3,977,934 | ) | 1,625,717 |   |
| Total  liabilities and shareholders’ equity |       | $                              | 1,625,717  |   | $ | 6,494,771 |   | $ | 2,468,617 |   | $ | (3,977,390 | ) | $ | 6,611,715 |   |

 

25

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| ** **                                       | ** ** | **July 28, 2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| **(in thousands)**                          | ** ** | **Company**                 | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |                        |       |   |   |   |   |   |   |   |   |
| Current assets:                                  |       |                        |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | $                           | —     |   | $ | 139,333 |   | $ | 1,874 |   | $ | — |   | $ | 141,207 |   |
| Merchandise  inventories                         |       | —                      |       | 821,749 |   | 96,520 |   | — |   | 918,269 |   |
| Other current  assets                            |       | —                      |       | 142,632 |   | 12,317 |   | 544 |   | 155,493 |   |
| Total current  assets                            |       | —                      |       | 1,103,714 |   | 110,711 |   | 544 |   | 1,214,969 |   |
| Property and  equipment, net                     |       | —                      |       | 901,072 |   | 142,639 |   | — |   | 1,043,711 |   |
| Goodwill and  intangible assets, net             |       | —                      |       | 1,945,040 |   | 2,194,979 |   | — |   | 4,140,019 |   |
| Other assets                                     |       | —                      |       | 102,108 |   | 192 |   | — |   | 102,300 |   |
| Investments in  subsidiaries                     |       | 1,558,012                   |       | 2,333,438 |   | — |   | (3,891,450 | ) | — |   |
| Total assets                                     |       | $                           | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,448,521 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                        |       |   |   |   |   |   |   |   |   |
| Current  liabilities:                            |       |                        |       |   |   |   |   |   |   |   |   |
| Accounts payable                                 |       | $                           | —     |   | $ | 318,439 |   | $ | 42,316 |   | $ | 544 |   | $ | 361,299 |   |
| Accrued  liabilities                             |       | —                      |       | 329,625 |   | 73,537 |   | — |   | 403,162 |   |
| Other current  liabilities                       |       | —                      |       | 3,426 |   | — |   | — |   | 3,426 |   |
| Total current  liabilities                       |       | —                      |       | 651,490 |   | 115,853 |   | 544 |   | 767,887 |   |
| Long-term  liabilities:                          |       |                        |       |   |   |   |   |   |   |   |   |
| Long-term debt                                   |       | —                      |       | 2,945,906 |   | — |   | — |   | 2,945,906 |   |
| Deferred income  taxes                           |       | —                      |       | 1,002,982 |   | — |   | — |   | 1,002,982 |   |
| Other long-term  liabilities                     |       | —                      |       | 226,982 |   | (770 | ) | — |   | 226,212 |   |
| Total long-term  liabilities                     |       | —                      |       | 4,175,870 |   | (770 | ) | — |   | 4,175,100 |   |
| Total  shareholders’ equity                 |       | 1,558,012                   |       | 1,558,012 |   | 2,333,438 |   | (3,891,450 | ) | 1,558,012 |   |
| Total  liabilities and shareholders’ equity |       | $                           | 1,558,012  |   | $ | 6,385,372 |   | $ | 2,448,521 |   | $ | (3,890,906 | ) | $ | 6,500,999 |   |

 

26

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| ** **                                          | ** ** | **October 28, 2006** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|
| **(in thousands)**                             | ** ** | **Company**                    | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                          |       |                           |       |   |   |   |   |   |   |   |   |
| Current assets:                                     |       |                           |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                          |       | $                              | —     |   | $ | 157,589 |   | $ | 1,841 |   | $ | — |   | $ | 159,430 |   |
| Merchandise  inventories                            |       | —                         |       | 870,900 |   | 100,899 |   | (497 | ) | 971,302 |   |
| Other current  assets                               |       | —                         |       | 131,075 |   | 16,601 |   | 544 |   | 148,220 |   |
| Current assets  of discontinued operations          |       | —                         |       | — |   | 16,354 |   | — |   | 16,354 |   |
| Total current  assets                               |       | —                         |       | 1,159,564 |   | 135,695 |   | 47 |   | 1,295,306 |   |
| Property and  equipment, net                        |       | —                         |       | 884,142 |   | 153,996 |   | — |   | 1,038,138 |   |
| Goodwill and  intangible assets, net                |       | —                         |       | 1,990,447 |   | 2,215,276 |   | — |   | 4,205,723 |   |
| Other assets                                        |       | —                         |       | 109,592 |   | 199 |   | — |   | 109,791 |   |
| Investments in  subsidiaries                        |       | 1,449,207                      |       | 2,421,126 |   | — |   | (3,870,333 | ) | — |   |
| Non-current  assets of discontinued operations      |       | —                         |       | — |   | 79,297 |   | — |   | 79,297 |   |
| Total assets                                        |       | $                              | 1,449,207  |   | $ | 6,564,871 |   | $ | 2,584,463 |   | $ | (3,870,286 | ) | $ | 6,728,255 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**      |       |                           |       |   |   |   |   |   |   |   |   |
| Current  liabilities:                               |       |                           |       |   |   |   |   |   |   |   |   |
| Accounts payable                                    |       | $                              | —     |   | $ | 309,678 |   | $ | 36,075 |   | $ | 544 |   | $ | 346,297 |   |
| Accrued  liabilities                                |       | —                         |       | 358,791 |   | 71,196 |   | 1,308 |   | 431,295 |   |
| Other current  liabilities                          |       | —                         |       | 4,179 |   | — |   | — |   | 4,179 |   |
| Current  liabilities of discontinued operations     |       | —                         |       | — |   | 28,565 |   | — |   | 28,565 |   |
| Total current  liabilities                          |       | —                         |       | 672,648 |   | 135,836 |   | 1,852 |   | 810,336 |   |
| Long-term  liabilities:                             |       |                           |       |   |   |   |   |   |   |   |   |
| Long-term debt                                      |       | —                         |       | 3,195,760 |   | — |   | — |   | 3,195,760 |   |
| Deferred income  taxes                              |       | —                         |       | 1,031,959 |   | — |   | — |   | 1,031,959 |   |
| Other long-term  liabilities                        |       | —                         |       | 215,297 |   | 6,968 |   | — |   | 222,265 |   |
| Non-current  liabilities of discontinued operations |       | —                         |       | — |   | 12,735 |   | — |   | 12,735 |   |
| Total long-term  liabilities                        |       | —                         |       | 4,443,016 |   | 19,703 |   | — |   | 4,462,719 |   |
| Minority  interest                                  |       | —                         |       | — |   | — |   | 5,993 |   | 5,993 |   |
| Total  shareholders’ equity                    |       | 1,449,207                      |       | 1,449,207 |   | 2,428,924 |   | (3,878,131 | ) | 1,449,207 |   |
| Total  liabilities and shareholders’ equity    |       | $                              | 1,449,207  |   | $ | 6,564,871 |   | $ | 2,584,463 |   | $ | (3,870,286 | ) | $ | 6,728,255 |   |

 

27

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| ** **                                                                        | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor   Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 941,458 |   | $ | 190,785 |   | $ | — |   | $ | 1,132,243 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                             |       | 557,697 |   | 109,440 |   | — |   | 667,137 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                             |       | 237,023 |   | 34,952 |   | — |   | 271,975 |   |
| Income from  credit card program                                                  |       | —                                                             |       | (15,435 | ) | (1,859 | ) | — |   | (17,294 | ) |
| Depreciation  expense                                                             |       | —                                                             |       | 30,282 |   | 4,853 |   | — |   | 35,135 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                             |       | 15,059 |   | 2,937 |   | — |   | 17,996 |   |
| Other income                                                                      |       | —                                                             |       | (32,450 | ) | — |   | — |   | (32,450 | ) |
| Operating  earnings                                                               |       | —                                                             |       | 149,282 |   | 40,462 |   | — |   | 189,744 |   |
| Interest  expense, net                                                            |       | —                                                             |       | 61,220 |   | 3 |   | — |   | 61,223 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   |
| Equity in earnings  of subsidiaries                                               |       | (78,758                                                            | )          | (97,454 | ) | — |   | 176,212 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 78,758                                                             |       | 128,521 |   | 97,454 |   | (176,212 | ) | 128,521 |   |
| Income taxes                                                                      |       | —                                                             |       | 49,763 |   | — |   | — |   | 49,763 |   |
| Net earnings  (loss)                                                              |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,454 |   | $ | (176,212 | ) | $ | 78,758 |   |

** **
| ** **                                                                        | ** ** | **Thirteen weeks ended October 28, 2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenues                                                                          |       | $                                                                  | —     |   | $ | 864,453 |   | $ | 174,758 |   | $ | — |   | $ | 1,039,211 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | —                                                             |       | 509,506 |   | 97,272 |   | — |   | 606,778 |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | —                                                             |       | 215,901 |   | 31,629 |   | — |   | 247,530 |   |
| Income from  credit card program                                                  |       | —                                                             |       | (14,630 | ) | (1,741 | ) | — |   | (16,371 | ) |
| Depreciation  expense                                                             |       | —                                                             |       | 28,425 |   | 4,750 |   | — |   | 33,175 |   |
| Amortization of  customer lists and favorable lease commitments                   |       | —                                                             |       | 15,093 |   | 2,941 |   | — |   | 18,034 |   |
| Other income                                                                      |       | —                                                             |       | (4,210 | ) | — |   | — |   | (4,210 | ) |
| Operating  earnings                                                               |       | —                                                             |       | 114,368 |   | 39,907 |   | — |   | 154,275 |   |
| Interest  expense, net                                                            |       | —                                                             |       | 68,818 |   | — |   | — |   | 68,818 |   |
| Intercompany  royalty charges (income)                                            |       | —                                                             |       | 66,078 |   | (66,078 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                               |       | (27,229                                                            | )          | (81,759 | ) | — |   | 108,988 |   | — |   |
| Earnings (loss)  from continuing operations before income taxes                   |       | 27,229                                                             |       | 61,231 |   | 105,985 |   | (108,988 | ) | 85,457 |   |
| Income taxes                                                                      |       | —                                                             |       | 34,002 |   | — |   | — |   | 34,002 |   |
| Earnings (loss)  from continuing operations                                       |       | 27,229                                                             |       | 27,229 |   | 105,985 |   | (108,988 | ) | 51,455 |   |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                             |       | — |   | (23,657 | ) | (569 | ) | (24,226 | ) |
| Net earnings  (loss)                                                              |       | $                                                                  | 27,229     |   | $ | 27,229 |   | $ | 82,328 |   | $ | (109,557 | ) | $ | 27,229 |   |

 

28

----

 
| ** **                                                                                   | ** ** | **Thirteen weeks ended October 27, 2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                  | 78,758     |   | $ | 78,758 |   | $ | 97,454 |   | $ | (176,212 | ) | $ | 78,758 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                             |       | 30,282 |   | 4,853 |   | — |   | 35,135 |   |
| Amortization of  debt issue costs                                                            |       | —                                                             |       | 3,554 |   | — |   | — |   | 3,554 |   |
| Amortization of  customer lists and favorable lease commitments                              |       | —                                                             |       | 15,059 |   | 2,937 |   | — |   | 17,996 |   |
| Deferred income  taxes                                                                       |       | —                                                             |       | (9,180 | ) | — |   | — |   | (9,180 | ) |
| Gain on  curtailment of defined benefit retirement obligations                               |       | —                                                             |       | (32,450 | ) |   |   | — |   | (32,450 | )  |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | —                                                             |       | 7,612 |   | 559 |   | — |   | 8,171 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                             |       | 56,995 |   | (56,995 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                          |       | (78,758                                                            | )          | (97,454 | ) | — |   | 176,212 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                             |       | (68,554 | ) | (47,254 | ) | — |   | (115,808 | ) |
| Net cash (used  for) provided by operating activities                                        |       | —                                                             |       | (15,378 | ) | 1,554 |   | — |   | (13,824 | ) |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | —                                                             |       | (43,652 | ) | (2,386 | ) | — |   | (46,038 | ) |
| Purchases of  short-term investments                                                         |       | —                                                             |       | (10,000 | ) | — |   | — |   | (10,000 | ) |
| Sales of  short-term investments                                                             |       | —                                                             |       | 10,000 |   | — |   | — |   | 10,000 |   |
| Net cash used  for investing activities                                                      |       | —                                                             |       | (43,652 | ) | (2,386 | ) | — |   | (46,038 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                             |       | (789 | ) | — |   | — |   | (789 | ) |
| Net cash used  for financing activities                                                      |       | —                                                             |       | (789 | ) | — |   | — |   | (789 | ) |
| **CASH  AND CASH EQUIVALENTS**                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Decrease during  the period                                                                  |       | —                                                             |       | (59,819 | ) | (832 | ) | — |   | (60,651 | ) |
| Beginning  balance                                                                           |       | —                                                             |       | 139,333 |   | 1,874 |   | — |   | 141,207 |   |
| Ending balance                                                                               |       | $                                                                  | —     |   | $ | 79,514 |   | $ | 1,042 |   | $ | — |   | $ | 80,556 |   |

 

29

----

 
| ** **                                                                                   | ** ** | **Thirteen weeks ended October 28, 2006** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Company**                                                        | ** ** | **NMG** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS—OPERATING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net earnings  (loss)                                                                         |       | $                                                                  | 27,229     |   | $ | 27,229 |   | $ | 82,328 |   | $ | (109,557 | ) | $ | 27,229 |   |
| Loss from  discontinued operations                                                           |       | —                                                             |       | — |   | 23,657 |   | 569 |   | 24,226 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:         |       |                                                               |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                             |       | 28,425 |   | 4,750 |   | — |   | 33,175 |   |
| Amortization of  debt issue costs                                                            |       | —                                                             |       | 3,498 |   | — |   | — |   | 3,498 |   |
| Amortization of  customer lists and favorable lease commitments                              |       | —                                                             |       | 15,093 |   | 2,941 |   | — |   | 18,034 |   |
| Deferred income  taxes                                                                       |       | —                                                             |       | (13,801 | ) | — |   | — |   | (13,801 | ) |
| Other, primarily  costs related to defined benefit pension and other long-term benefit plans |       | —                                                             |       | 6,572 |   | 561 |   | — |   | 7,133 |   |
| Intercompany  royalty income payable (receivable)                                            |       | —                                                             |       | 66,078 |   | (66,078 | ) | — |   | — |   |
| Equity in  earnings of subsidiaries                                                          |       | (27,229                                                            | )          | (81,759 | ) | — |   | 108,988 |   | — |   |
| Changes in  operating assets and liabilities, net                                            |       | —                                                             |       | (77,608 | ) | (43,210 | ) | — |   | (120,818 | ) |
| Net cash (used  for) provided by continuing operating activities                             |       | —                                                             |       | (26,273 | ) | 4,949 |   | — |   | (21,324 | ) |
| Net cash  provided by discontinued operations                                                |       | —                                                             |       | — |   | 1,059 |   | — |   | 1,059 |   |
| Net cash (used  for) provided by operating activities                                        |       | —                                                             |       | (26,273 | ) | 6,008 |   | — |   | (20,265 | ) |
| **CASH  FLOWS—INVESTING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital  expenditures                                                                        |       | —                                                             |       | (36,879 | ) | (4,540 | ) | — |   | (41,419 | ) |
| Net cash used  for continuing investing activities                                           |       | —                                                             |       | (36,879 | ) | (4,540 | ) | — |   | (41,419 | ) |
| Net cash used  for discontinued operations                                                   |       | —                                                             |       | — |   | (136 | ) | — |   | (136 | ) |
| Net cash used  for investing activities                                                      |       | —                                                             |       | (36,879 | ) | (4,676 | ) | — |   | (41,555 | ) |
| **CASH  FLOWS—FINANCING ACTIVITIES**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Repayment of  borrowings                                                                     |       | —                                                             |       | (809 | ) | — |   | — |   | (809 | ) |
| Debt issuance  costs paid                                                                    |       | —                                                             |       | (758 | ) | — |   | — |   | (758 | ) |
| Net cash used  for continuing financing activities                                           |       | —                                                             |       | (1,567 | ) | — |   | — |   | (1,567 | ) |
| Net cash used  for discontinued operations                                                   |       | —                                                             |       | — |   | (925 | ) | — |   | (925 | ) |
| Net cash used  for financing activities                                                      |       | —                                                             |       | (1,567 | ) | (925 | ) | — |   | (2,492 | ) |
| **CASH  AND CASH EQUIVALENTS**                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| (Decrease)  increase during the period                                                       |       | —                                                             |       | (64,719 | ) | 407 |   | — |   | (64,312 | ) |
| Beginning  balance                                                                           |       | —                                                             |       | 222,308 |   | 2,455 |   | — |   | 224,763 |   |
| Ending balance                                                                               |       | —                                                             |       | 157,589 |   | 2,862 |   | — |   | 160,451 |   |
| Less cash of  discontinued operations                                                        |       | —                                                             |       | — |   | 1,021 |   | — |   | 1,021 |   |
| Ending balance                                                                               |       | $                                                                  | —     |   | $ | 157,589 |   | $ | 1,841 |   | $ | — |   | $ | 159,430 |   |

 

30

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** **

**ITEM2.**                 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

** **

**EXECUTIVE OVERVIEW**

 

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with our Annual Report on Form 10-K for the fiscal yearended July 28, 2007. Unless otherwise specified, the meanings of all definedterms in Management’s Discussion and Analysis of Financial Condition andResults of Operations (MD&A) are consistent with the meanings of such termsas defined in the Notes to the Condensed Consolidated Financial Statements.This discussion contains forward-looking statements. Please see “Forward-LookingStatements” for a discussion of the risks, uncertainties and assumptionsrelating to our forward-looking statements.

 

**Overview**

 

Neiman Marcus, Inc.(the Company), together with our operating segments and subsidiaries, is ahigh-end specialty retailer. Our operations include the Specialty Retail storessegment and the Direct Marketing segment. The Specialty Retail stores segmentconsists primarily of Neiman Marcus and Bergdorf Goodman stores. The DirectMarketing segment conducts both online and print catalog operations under thebrand names of Neiman Marcus, Bergdorf Goodman and Horchow.

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the first quarter offiscal year 2008 relate to the thirteen weeks ended October 27, 2007. Allreferences to the first quarter of fiscal year 2007 relate to the thirteenweeks ended October 28, 2006.

 

**FactorsAffecting Our Results**

 

***Revenues.***We generate our revenues from the sale of high-endmerchandise through our Specialty Retail stores and Direct Marketing operation.Components of our revenues include:

 

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

 

•                  Delivery and processing—Wegenerate revenues from delivery and processing charges related to merchandisedelivered to our customers from both our retail and direct marketingoperations.

 

Our revenues can beaffected by the following factors:

 

•                  changes in the level ofconsumer spending generally and, specifically, on luxury goods;

 

•                  changes in the level offull-price sales;

 

•                  changes in the level ofpromotional events conducted by our Specialty Retail stores and DirectMarketing operation;

 

•                  our ability tosuccessfully implement our store expansion and remodeling strategies;

 

•                  the rate of growth ininternet revenues by our Direct Marketing operation; and

 

•                  general economicconditions.

 

In addition, our revenuesare seasonal. For a description of the seasonality of our business, see “Seasonality.”

 

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

 

•                  Inventory costs—We utilize the retail method ofaccounting. Under the retail inventory method, the valuation of inventories atcost and the resulting gross margins are determined by applying a calculatedcost-to-retail ratio, for various groupings of similar items, to the retailvalue of our inventories. Merchandise inventories are stated at the lower ofcost or market. The cost of the inventory reflected on the consolidated balancesheet is decreased by charges to cost of goods sold at the time the retailvalue of the inventory is lowered through the use of markdowns. Hence, earningsare negatively impacted when merchandise is marked down. With the introductionof new fashions in the first and third fiscal quarters and our emphasis onfull-price selling in these quarters, a lower level of markdowns and highermargins are characteristic of these quarters.

 

•                  Buying costs—Buying costsconsist primarily of salaries and expenses incurred by our merchandising andbuying operations.

 

•                  Occupancy costs—Occupancycosts consist primarily of rent, property taxes and operating costs of our retail,distribution and support facilities. A significant portion of our buying andoccupancy costs are fixed.

 

•                  Delivery and processingcosts—Delivery and processing costs consist primarily of delivery charges wepay to third-party carriers and other costs related to the fulfillment ofcustomer orders not delivered at the point-of-sale.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. Certain allowances are received toreimburse us for markdowns taken or to support the gross margins that we earnin connection with the sales of the vendor’s merchandise. These allowancesresult in an increase to gross margin when we earn the allowances and they areapproved by the vendor. Other allowances we receive represent reductions to theamounts we pay to acquire the merchandise. These allowances reduce the cost ofthe acquired merchandise and are recognized at the time the goods are sold. Wereceived vendor allowances of $12.5 million, or 1.1% of revenues, in thethirteen weeks ended October 27, 2007 and $10.9 million, or 1.1% ofrevenues, in the thirteen weeks ended October 28, 2006.

 

Changes in our COGS as apercentage of revenues are affected primarily by the following factors:

 

•                  customer acceptance of anddemand for the merchandise we offer in a given season and the related impact ofsuch factors on the level of full-price sales;

 

•                  our ability to order anappropriate amount of merchandise to match customer demand and the relatedimpact on the level of net markdowns incurred;

 

•                  factors affecting revenuesgenerally;

 

•                  changes in occupancy costsprimarily associated with the opening of new stores or distribution facilities;and

 

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

 

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

 

Advertising costsincurred by our Specialty Retail segment consist primarily of print media costsrelated to promotional materials mailed to our customers, while advertisingcosts incurred by our Direct Marketing operation relate to the production,printing and distribution of our print catalogs and the production of thephotographic content on our websites, as well as online marketing costs. Wereceive advertising allowances from certain of our merchandise vendors.Substantially all the advertising allowances we receive representreimbursements of direct, specific and incremental costs that we incur topromote the vendor’s merchandise in connection with our various advertisingprograms, primarily catalogs and other print media. As a result, 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 $27.6 million, or 2.4% ofrevenues, for the thirteen weeks ended October 27, 2007 and $20.6 million, or2.0% of revenues, for the thirteen weeks ended October 28, 2006.

 

We also receiveallowances from certain merchandise vendors in conjunction with compensationprograms for employees who sell the vendor’s merchandise. These allowances arenetted against the related compensation expense that we incur. Amounts receivedfrom vendors related to compensation programs were $17.9 million, or 1.6% ofrevenues, for the thirteen weeks ended October 27, 2007 and $16.2 million,or 1.6% of revenues, for the thirteen weeks ended October 28, 2006.

 

Changes in ourselling, general and administrative expenses are affected primarily by thefollowing factors:

 

•                  changes in the number of sales associates primarilydue to new store openings and expansion of existing stores, including increasedhealth care and related benefits expenses;

 

•                  changes in expenses incurred in connection with ouradvertising and marketing programs; and

 

•                  changes in expenses related to insurance andlong-term benefits due to general economic conditions such as rising healthcare costs.

 

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

 

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

 

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

 

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**Seasonality**

 

We conduct our sellingactivities in two primary selling seasons—Fall and Spring. The Fall season iscomprised of our first and second fiscal quarters and the Spring season iscomprised of our third and fourth fiscal quarters.

 

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

 

Similarly, the thirdfiscal quarter is generally characterized by a higher level of full-priceselling with a focus on the initial introduction of Spring season fashions.Aggressive in-store marketing activities designed to stimulate customer buying,a lower level of markdowns and higher margins are again characteristic of thisquarter. Revenues are generally the lowest in the fourth fiscal quarter with afocus on promotional activities offering Spring season goods to the customer ona marked down basis, resulting in lower margins during the quarter. Our workingcapital requirements are typically lower in the third and fourth fiscalquarters than in the other quarters.

 

A large percentage of ourmerchandise assortment, particularly in the apparel, fashion accessories andshoe categories, is ordered months in advance of the introduction of suchgoods. For example, women’s apparel, men’s apparel and shoes are typicallyordered six to nine months in advance of the products being offered for salewhile handbags, jewelry and other categories are typically ordered three to sixmonths in advance. As a result, inherent in the successful execution of ourbusiness plans is our ability both to predict the fashion trends that will beof interest to our customers and to anticipate future spending patterns of ourcustomer base.

 

We monitor the salesperformance of our inventories throughout each season. We seek to orderadditional goods to supplement our original purchasing decisions when the levelof customer demand is higher than originally anticipated. However, in certainmerchandise categories, particularly fashion apparel, our ability to purchaseadditional goods can be limited. This can result in lost sales in the event ofhigher than anticipated demand of the fashion goods we offer or a higher thananticipated level of consumer spending. Conversely, in the event we buy fashiongoods that are not accepted by the customer or the level of consumer spendingis less than we anticipated, we typically incur a higher than anticipated levelof markdowns, net of vendor allowances, to sell the goods that remain at theend of the season, resulting in lower operating profits. We believe that theexperience of our merchandising and selling organizations helps to minimize theinherent risk in predicting fashion trends.

 

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**OPERATING RESULTS**

 

**Performance Summary**

 

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

 
| ** **                                                                        | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| Revenues                                                                          |       | 100.0                                                  | %          | 100.0                                                  | %          |
|                                                                              |       |                                                   |       |                                                   |       |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 58.9                                                   |       | 58.4                                                   |       |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 24.0                                                   |       | 23.8                                                   |       |
| Income from  credit card program                                                  |       | (1.5                                                   | )          | (1.6                                                   | )          |
| Depreciation  expense                                                             |       | 3.1                                                    |       | 3.2                                                    |       |
| Amortization of  customer lists                                                   |       | 1.2                                                    |       | 1.3                                                    |       |
| Amortization of  favorable lease commitments                                      |       | 0.4                                                    |       | 0.4                                                    |       |
| Other income                                                                      |       | (2.9                                                   | )          | (0.4                                                   | )          |
| Operating  earnings                                                               |       | 16.8                                                   |       | 14.8                                                   |       |
| Interest  expense, net                                                            |       | 5.4                                                    |       | 6.6                                                    |       |
| Earnings from  continuing operations before income taxes                          |       | 11.4                                                   |       | 8.2                                                    |       |
| Income taxes                                                                      |       | 4.4                                                    |       | 3.3                                                    |       |
| Earnings from  continuing operations                                              |       | 7.0                                                    |       | 5.0                                                    |       |
| Loss from  discontinued operations, net of taxes                                  |       | —                                                 |       | (2.3                                                   | )          |
| Net earnings                                                                      |       | 7.0                                                    | %          | 2.6                                                    | %          |

 

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Set forth in thefollowing table is certain summary information with respect to our operationsfor the periods indicated.

 
| **(dollars in millions, except sales per square foot)** | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | ** **                                             | ** ** | ** **                                             | ** ** |
| REVENUES                                                                                   |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                   |       | $                                                      | 961.6      |                                                   | $          | 879.9 |   |
| Direct Marketing                                                                           |       | 170.6                                                  |       | 159.3                                                  |       |
| Total                                                                                      |       | $                                                      | 1,132.2    |                                                   | $          | 1,039.2 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| OPERATING  EARNINGS                                                                        |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                   |       | $                                                      | 165.6      |                                                   | $          | 156.6 |   |
| Direct Marketing                                                                           |       | 23.2                                                   |       | 20.8                                                   |       |
| Subtotal                                                                                   |       | 188.8                                                  |       | 177.4                                                  |       |
| Corporate                                                                                  |       | (13.6                                                  | )          | (9.3                                                   | )          |
| Amortization of  customer lists and favorable lease commitments                            |       | (18.0                                                  | )          | (18.0                                                  | )          |
| Other income (1)                                                                           |       | 32.5                                                   |       | 4.2                                                    |       |
| Total                                                                                      |       | $                                                      | 189.7      |                                                   | $          | 154.3 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| OPERATING PROFIT  MARGIN                                                                   |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                   |       | 17.2                                                   | %          | 17.8                                                   | %          |
| Direct Marketing                                                                           |       | 13.6                                                   | %          | 13.1                                                   | %          |
| Total                                                                                      |       | 16.8                                                   | %          | 14.8                                                   | %          |
|                                                                                       |       |                                                   |       |                                                   |       |
| CHANGE IN  COMPARABLE REVENUES (2)                                                         |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                   |       | 6.4                                                    | %          | 5.4                                                    | %          |
| Direct Marketing                                                                           |       | 7.1                                                    | %          | 14.7                                                   | %          |
| Total                                                                                      |       | 6.5                                                    | %          | 6.8                                                    | %          |
|                                                                                       |       |                                                   |       |                                                   |       |
| SALES PER SQUARE  FOOT                                                                     |       |                                                   |       |                                                   |       |
| Specialty Retail  stores                                                                   |       | $                                                      | 163        |                                                   | $          | 155 |   |
|                                                                                       |       |                                                   |       |                                                   |       |
| STORE COUNT                                                                                |       |                                                   |       |                                                   |       |
| Neiman Marcus  and Bergdorf Goodman stores:                                                |       |                                                   |       |                                                   |       |
| Open at  beginning of period                                                               |       | 40                                                     |       | 38                                                     |       |
| Opened during  the period                                                                  |       | 1                                                      |       | 1                                                      |       |
| Open at end of  period                                                                     |       | 41                                                     |       | 39                                                     |       |
| Clearance  centers:                                                                        |       |                                                   |       |                                                   |       |
| Open at  beginning of period                                                               |       | 20                                                     |       | 18                                                     |       |
| Opened during  the period                                                                  |       | 1                                                      |       | —                                                 |       |
| Open at end of  period                                                                     |       | 21                                                     |       | 18                                                     |       |
|                                                                                       |       |                                                   |       |                                                   |       |
| NON-GAAP  FINANCIAL DATA EBITDA (3)                                                   |       | $                                                 | 242.9      |                                                   | $     | 205.5 |   |
| Adjusted EBITDA  (3)                                                                       |       | $                                                      | 210.4      |                                                   | $          | 205.5 |   |

** **

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**(1) For the first quarter of fiscal year 2008, other incomerepresents a one-time pension curtailment gain of $32.5 million as a result ofour decision to freeze Pension and SERP benefits as of December 31, 2007. Forthe first quarter of fiscal year 2007, other income represents the proceeds wereceived in connection with the merger of Wedding Channel.com, in which we helda minority interest, and The Knot. We had previously reduced our carrying valuein 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 revenues from ourdiscontinued operations (Kate Spade LLC).

 

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

 

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**First Quarter Fiscal Year 2008Highlights**

 

Highlights from the firstquarter of fiscal year 2008 include:

 

•                  **Revenues**—Our revenues for the first quarter of fiscal year 2008 were $1,132.2million, an increase of 9.0% as compared to the first quarter of fiscal year2007. This increase was attributable to 1) increases in comparable revenues, 2)revenues from new stores and 3) higher internet revenues.

 

Comparable revenuesincreased 6.5% in the first quarter of fiscal year 2008. This increase incomparable revenues was achieved on top of an increase in comparable revenuesof 6.8% in the first quarter of fiscal year 2007.

 

For Specialty Retailstores, our sales per square foot for the last twelve trailing months increasedby 5.5% to $647 as of October 2007 compared to $613 as of October 2006.

 

•                  **Cost of goods sold including buying andoccupancy costs (excluding depreciation)**—COGS represented 58.9% of revenues in the first quarter of fiscal year2008 and 58.4% of revenues in the first quarter of fiscal year 2007. Thisincrease was due primarily to a higher level of markdowns incurred by ourSpecialty Retail stores.

 

•                  **Selling, general and administrative expenses(excluding depreciation)**—SG&Aincreased in the first quarter of fiscal year 2008 to 24.0% of revenues from23.8% of revenues in the first quarter of fiscal year 2007. The increase inSG&A as a percentage of revenues is primarily due to 1) higher advertisingand promotion costs incurred by our Specialty Retail stores, partially offsetby 2) a lower level of marketing and advertising costs in our Direct Marketingoperation due to higher internet revenues and 3) expense leveraging.

 

•                  **Operating earnings—**For the first quarter of fiscal year 2008, ouroperating earnings were $189.7 million, or 16.8% of revenues, compared to$154.3 million, or 14.8% of revenues, in the prior year fiscal quarter. Theincrease in operating earnings in the first quarter of fiscal year 2008 was primarilydue to a one-time non-cash pension curtailment gain of $32.5 million, or 2.9%of revenues, as a result of our decision to freeze Pension and SERP benefits,offset by the increases in both COGS and SG&A described above.

 

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**Thirteen Weeks Ended October 27, 2007 Compared toThirteen Weeks Ended October 28, 2006**

** **

***Revenues.***Our revenues for the first quarter offiscal year 2008 of $1,132.2 million increased $93.0 million, or 9.0%, from$1,039.2 million in the first quarter of fiscal year 2007. The increase inrevenues was due to increases in comparable revenues, revenues from new storesand higher internet revenues. Revenues increased in the first quarter of fiscalyear 2008 compared to the prior year period at all our operating companies.

 

Comparable revenues for the first quarter of fiscal year 2008 were$1,106.5 million compared to $1,039.2 million in the prior year fiscal quarter,representing an increase of 6.5%. Comparable revenues increased in the firstquarter of fiscal year 2008 by 6.4% for Specialty Retail stores and 7.1% forDirect Marketing compared to the first quarter of fiscal year 2007.

 

New stores generated sales of $25.7 million in the first quarter offiscal year 2008. In the first quarter of fiscal year 2008, internet revenuesby Direct Marketing were $124.1 million, an increase of 22.8% compared to thefirst quarter of fiscal year 2007. The increase in internet revenues waspartially offset by decreases in catalog revenues as well as a decrease inrevenues from the home décor category, primarily offered by our Horchow brand.

 

***Cost of goods sold including buying and occupancy costs (excludingdepreciation).***COGS for the first quarter of fiscal year2008 were 58.9% of revenues compared to 58.4% of revenues in the first quarterof fiscal year 2007.

 

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

 

•            decreased marginsgenerated by our Specialty Retail stores due primarily to higher markdowns anda lower level of full-price sales in the first quarter of fiscal year 2008,partially offset by the leveraging of buying and occupancy costs; and

 

•            decreased marginsgenerated by our Direct Marketing segment due primarily to lower marginsrealized on delivery and processing revenues.

 

The higher level of markdowns incurred by our Specialty Retail storesin the first quarter of fiscal year 2008 is due to a lower than anticipatedlevel of demand we experienced during the first quarter. As a result, weconducted various promotions in the first quarter to begin the liquidation ofinventories held in excess of current and anticipated future sales trends. Weexpect to incur a higher level of markdowns in the second quarter of fiscalyear 2008 as we continue promotional efforts to complete the sell-through ofFall season inventories.

 

Our Direct Marketing operation continues to increase the use ofdiscounted and/or free shipping promotions to customers consistent withpromotional activities by other direct marketing retailers. We believe suchoffers will continue through the second quarter of fiscal year 2008.

 

***Selling, general and administrative expenses (excluding depreciation)*.**SG&A expenses were 24.0% of revenues in the first quarter of fiscal year2008 compared to 23.8% of revenues in the prior year fiscal period.

 

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

 

•            a higher level ofadvertising and promotions costs of approximately 0.5% of revenues incurred byour Specialty Retail stores during the first quarter of fiscal year 2008 inconnection with 1) the celebration of the 100th anniversary ofNeiman Marcus in October 2007 and 2) promotional events and activities conductedto bolster demand and facilitate the sell-through of inventories held in excessof current and anticipated future sales trends, partially offset by;

 

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

 

•            the leveraging of thefixed component of our SG&A expenses over a higher revenue base.

 

***Income from credit card program.***We received HSBCProgram Income of $17.3 million, or 1.5% of revenues, in the first quarter offiscal year 2008 compared to $16.4 million, or 1.6% of revenues, in the firstquarter of fiscal year 2007.

 

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***Depreciation expense.***Depreciation expense was$35.1 million, or 3.1% of revenues, in the first quarter of fiscal year 2008compared to $33.2 million, or 3.2% of revenues, in the prior year fiscalperiod. The $1.9 million increase in depreciation expense was primarily due toa higher level of capital spending in recent years.

 

***Amortization expense.***Amortization of intangibleassets (customer lists and favorable lease commitments) aggregated $18.0million, or 1.6% of revenues, in the first quarter of fiscal year 2008 comparedto $18.0 million, or 1.7% of revenues, in the first quarter of fiscal year2007.

 

***Other income.***In the first quarter of fiscal year2008, we recorded a one-time pension curtailment gain of $32.5 million, or 2.9%of revenues, as a result of our decision to freeze Pension and SERP benefits asof December 31, 2007.

 

In the first quarter of fiscal year 2007, we received considerationaggregating $4.2 million, or 0.4% of revenues, in connection with the merger ofWedding Channel.com, in which we held a minority interest, and The Knot. Weaccounted for our investment in Wedding Channel.com under the cost method. Inprior years, we had previously reduced our carrying value of this investment tozero.

 

***Segment operating earnings.***Segment operatingearnings for our Specialty Retail stores and Direct Marketing segments do notreflect the impact of adjustments to revalue our assets and liabilities toestimated fair value at the Acquisition date. See Note 13 to our unauditedcondensed consolidated financial statements.

 

Operating earnings for our Specialty Retail stores segment were $165.6million, or 17.2% of Specialty Retail stores revenues, for the first quarter offiscal year 2008 compared to $156.6 million, or 17.8% of Specialty Retailstores revenues, for the prior year fiscal period. The decrease in operatingmargin as a percentage of revenues was primarily due to 1) higher markdowns anda lower level of full-price sales as a result of lower than anticipated demandand 2) net increases in advertising and promotion costs.

 

Operating earnings for Direct Marketing increased to $23.2 million, or13.6% of Direct Marketing revenues, in the first quarter of fiscal year 2008from $20.8 million, or 13.1% of Direct Marketing revenues, for the prior yearperiod. The increases in operating earnings and operating margin for DirectMarketing were primarily the result of 1) a decrease in advertising andmarketing costs, as a percentage of revenues, due to the continued growth ininternet revenues, partially offset by 2) a decrease in margins realized ondelivery and processing revenues.

 

Total operating earnings in the first quarter of fiscal year 2008 were$189.7 million, or 16.8% of revenues, which included a curtailment gain of$32.5 million, or 2.9% of revenues. Total operating earnings in the firstquarter of fiscal year 2007 were $154.3 million, or 14.8% of revenues. Excludingthe curtailment gain, operating earnings margin decreased in the first quarterof fiscal year 2008 by 0.9% of revenue as a result of increases in COGS by 0.5%of revenue and SG&A expenses by 0.2% of revenue.

 

***Interest expense, net*.**Net interest expense was$61.2 million, or 5.4% of revenues, in the first quarter of fiscal year 2008and $68.8 million, or 6.6% of revenues, for the prior year period. The decreasein interest expense is primarily due to the repricing of our term loan as wellas the paydown of $250 million of debt during fiscal year 2007. The significantcomponents of interest expense are as follows:

 
| **(in thousands)**            | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                               |       |                                                   |       |                                                   |       |
| Senior Secured  Term Loan Facility |       | $                                                      | 27,976     |                                                   | $          | 35,703 |   |
| 2028 Debentures                    |       | 2,185                                                  |       | 2,226                                                  |       |
| Senior Notes                       |       | 15,453                                                 |       | 15,750                                                 |       |
| Senior  Subordinated Notes         |       | 12,724                                                 |       | 12,968                                                 |       |
| Amortization of  debt issue costs  |       | 3,554                                                  |       | 3,498                                                  |       |
| Other                              |       | 832                                                    |       | 1,040                                                  |       |
| Total interest  expense            |       | 62,724                                                 |       | 71,185                                                 |       |
| Less:                              |       |                                                   |       |                                                   |       |
| Interest income                    |       | 855                                                    |       | 1,642                                                  |       |
| Capitalized  interest              |       | 646                                                    |       | 725                                                    |       |
| Interest  expense, net             |       | $                                                      | 61,223     |                                                   | $          | 68,818 |   |

 

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***Income taxes.***Our effective income tax rate forthe thirteen weeks ended October 27, 2007 was 38.7% compared to 39.8% for thethirteen weeks ended October 28, 2006. Our effective income tax rate for thefirst quarter of fiscal year 2007 was unfavorably impacted by increases in taxliabilities.

 

We closed the InternalRevenue Service (IRS) examinations of federal tax returns for fiscal years 2004and 2003 during the first quarter of fiscal year 2007 and paid the related taxliability during the second quarter of fiscal year 2007. The IRS is nowexamining our federal tax returns for fiscal years 2005 and 2006. We believeour recorded tax liabilities as of October 27, 2007 are sufficient tocover any potential assessments to be made by the IRS upon the completion oftheir examinations. We will continue to monitor the progress of the IRSexaminations, as well as examinations by various state jurisdictions, andreview our recorded tax liabilities for potential audit assessments. Adjustmentsto increase or decrease the recorded tax liabilities may be required in thefuture as additional facts become known.

 

We adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year2008. The cumulative effect of adopting FIN 48 resulted in a net increase toour accruals for uncertain tax positions of $9.1 million for the derecognitionof certain tax benefits. This increase to our accruals was offset by acorresponding increase to goodwill as these uncertainties existed at the timeof the Acquisition.

 

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

 

We present the non-GAAP financial measure EBITDA and adjusted EBITDAbecause we use these measures to monitor and evaluate the performance of ourbusiness and believe the presentation of these measures will enhance investors’ability to analyze trends in our business, evaluate our performance relative toother companies in our industry and evaluate our ability to service our debt. Inaddition, we use EBITDA and Adjusted EBITDA as components of the measurement ofincentive compensation.

 

EBITDA and AdjustedEBITDA are not presentations made in accordance with GAAP and our computationof EBITDA and Adjusted EBITDA may vary from others in our industry. Inaddition, EBITDA and Adjusted EBITDA contain some, but not all, adjustmentsthat are taken into account in the calculation of the components of variouscovenants in the indentures governing NMG’s senior secured Asset-Based RevolvingCredit Facility, Senior Secured Term Loan Facility, Senior Notes and SeniorSubordinated Notes. EBITDA and Adjusted EBITDA should not be considered asalternatives to operating earnings or net earnings as measures of operatingperformance or cash flows as measures of liquidity. EBITDA and Adjusted EBITDAhave important limitations as analytical tools and should not be considered inisolation, or as a substitute for analysis of our results as reported underGAAP. For example, EBITDA and Adjusted EBITDA:

 

•                  do not reflect our cashexpenditures, or future requirements, for capital expenditures or contractualcommitments;

 

•                  do not reflect changes in,or cash requirements for, our working capital needs;

 

•                  do not reflect ourconsiderable interest expense, or the cash requirements necessary to serviceinterest or principal payments, on our debt;

 

•                  exclude tax payments thatrepresent a reduction in cash available; and

 

•                  do not reflect any cashrequirements for assets being depreciated and amortized that may have to bereplaced in the future.

 

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The following tablereconciles earnings from continuing operations as reflected in our consolidatedstatements of earnings prepared in accordance with GAAP to EBITDA and AdjustedEBITDA:

 
| **(dollars in millions)**                                         | ** ** | **Thirteen  weeks ended  October 27,  2007** | ** ** | **Thirteen  weeks ended  October 28,  2006** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                                        |       |                                                   |       |                                                   |       |
| Earnings from  continuing operations                                        |       | $                                                      | 78.8       |                                                   | $          | 51.5 |   |
| Income taxes                                                                |       | 49.8                                                   |       | 34.0                                                   |       |
| Interest  expense, net                                                      |       | 61.2                                                   |       | 68.8                                                   |       |
| Depreciation                                                                |       | 35.1                                                   |       | 33.2                                                   |       |
| Amortization of  customer lists and favorable lease commitments             |       | 18.0                                                   |       | 18.0                                                   |       |
| EBITDA (1)                                                                  |       | 242.9                                                  |       | 205.5                                                  |       |
| Non-cash gain on  curtailment of defined benefit retirement obligations (1) |       | (32.5                                                  | )          | —                                                 |       |
| Adjusted EBITDA                                                             |       | $                                                      | 210.4      |                                                   | $          | 205.5 |   |

 

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(1)          For the first quarter offiscal year 2008, operating earnings and EBITDA include a one-time pensioncurtailment gain of $32.5 million as a result of our decision to freeze Pensionand SERP benefits.

 

**Inflation and Deflation**

** **

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

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirementsconsist principally of:

 

•                  the funding of ourmerchandise purchases;

 

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

 

•                  debt service requirements;

 

•                  income tax payments; and

 

•                  obligations related to ourPension Plan.

 

Our primary sources ofshort-term liquidity are comprised of cash on hand and availability under ourAsset-Based Revolving Credit Facility. The amounts of cash on hand andborrowings under the Asset-Based Revolving Credit Facility are influenced by anumber of factors, including revenues, working capital levels, vendor terms,the level of capital expenditures, cash requirements 

 

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related to financinginstruments and debt service obligations, Pension Plan funding obligations andour tax payment obligations, among others.

 

Our working capitalrequirements fluctuate during the fiscal year, increasing substantially duringthe first and second quarters of each fiscal year as a result of higherseasonal levels of inventories. We have typically financed the increases inworking capital needs during the first and second fiscal quarters with cashflows from operations and, to a lesser extent, with cash provided fromborrowings under our credit facilities. In the first quarter of both fiscalyear 2008 and 2007, we have made no borrowings under our Asset-Based RevolvingCredit Facility.

 

We believe that operatingcash flows, available vendor financing and amounts available pursuant to oursenior secured Asset-Based Revolving Credit Facility will be sufficient to fundour operations, anticipated capital expenditure requirements, debt serviceobligations, contractual obligations and commitments and Pension Plan fundingrequirements through the end of fiscal year 2008.

 

At October 27, 2007, cashand cash equivalents were $80.6 million compared to $159.4 million atOctober 28, 2006. Net cash used for operating activities was $13.8 millionin the first quarter of fiscal 2008 compared to net cash used for operating activitiesof $20.3 million in the first quarter of fiscal 2007. Cash flows used foroperating activities were lower in the first quarter of fiscal year 2008 thanin the prior fiscal year period primarily due to 1) an $8.1 million decrease incash interest requirements on indebtedness incurred in connection with theAcquisition and 2) a $3.0 million decrease in cash requirements for incometaxes.

 

Net cash used forinvesting activities, representing capital expenditures, was $46.0 millionin the first quarter of fiscal 2008 and $41.6 million in the first quarterof fiscal 2007. We incurred capital expenditures in the first quarter of fiscalyear 2008 related to the construction of new stores in Natick and Topanga (thegreater Los Angeles area) and the remodel of our Atlanta store. We incurredcapital expenditures in the first quarter of fiscal year 2007 related to theconstruction of new stores in Charlotte, Austin and Natick and the remodels ofour Houston, San Francisco and Atlanta stores. We opened our Charlotte store inSeptember 2006, our Austin store in March 2007 and our Natick store inSeptember 2007. We expect to open the Topanga store in Fall 2008. We currentlyproject capital expenditures for fiscal year 2008 to be approximately $200 to$210 million.

 

Net cash used forfinancing activities was $0.8 million in the first quarter of fiscal year2008 as compared to net cash used for financing activities of $2.5 millionin the first quarter of fiscal year 2007.

 

**Financing Structure at October27, 2007**

 

Our major sources offunds are comprised of vendor financing, a $600.0 million Asset-BasedRevolving Credit Facility, $1,625.0 million Senior Secured Term LoanFacility, $700.0 million Senior Notes, $500.0 million SeniorSubordinated Notes, $125.0 million 2028 Debentures and operating leases.

 

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

 

As of October 27, 2007,NMG had $575.7 million of unused borrowing availability under the Asset-BasedRevolving Credit Facility based on a borrowing base of over $600.0 millionand after giving effect to $24.3 million used for letters of credit.

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Asset-Based Revolving Credit Facility.

 

***SeniorSecured Term Loan Facility.***On October 6, 2005, NMGentered into a credit 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. NMGvoluntarily repaid $100.0 million principal amount of the loans under theSenior Secured Term Loan Facility in fiscal year 2006 and $250 million infiscal year 2007.

 

At October 27, 2007, borrowings under the SeniorSecured Term Loan Facility bore interest at a rate per annum equal to, at NMG’soption, either (a) a base rate determined by reference to the higher of(1) the prime rate of Credit Suisse and (2) the

 

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federal funds effective rate plus 1/2of 1% or (b) a LIBOR rate, subject to certain adjustments, in each caseplus an applicable margin. At October 27, 2007, the applicable margin withrespect to base rate borrowings was 0.75% and the applicable margin withrespect to LIBOR borrowings was 1.75%. The interest rate on the outstandingborrowings pursuant to the Senior Secured Term Loan Facility was 7.45% atOctober 27, 2007.

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Senior Secured Term Loan Facility.

 

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

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the 2028 Debentures.

 

***SeniorNotes.***In connection with the Acquisition, NMG incurred$700.0 million aggregate original principal amount of 9.0% / 9.75% SeniorNotes under a senior indenture (Senior Indenture) with Wells Fargo Bank,National Association, as trustee. The Senior Notes mature on October 15,2015.

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Senior Notes.

 

***SeniorSubordinated Notes.***In connection with the Acquisition,NMG incurred $500.0 million aggregate principal amount of 10.375% SeniorSubordinated Notes under a senior subordinated indenture (Senior SubordinatedIndenture) with Wells Fargo Bank, National Association, as trustee. The SeniorSubordinated Notes mature on October 15, 2015. Interest on the SeniorSubordinated Notes is payable in cash semi-annually in arrears on eachApril 15 and October 15, commencing April 15, 2006.

 

See Note 4 of our Notesto Condensed Consolidated Financial Statements in Item 1 for a furtherdescription of the terms of the Senior Subordinated Notes.

 

***InterestRate Swaps.***NMG uses derivative financial instruments tohelp manage its interest rate risk. Effective December 6, 2005, NMGentered into floating to fixed interest rate swap agreements for an aggregatenotional amount of $1,000.0 million to limit its exposure to interest rateincreases related to a portion of its floating rate indebtedness. The interestrate swap agreements terminate after five years. At October 27, 2007, the fairvalue of NMG’s interest rate swap agreements was a loss of approximately$10.6 million, which amount is included in other long-term liabilities.

 

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

 

As a result of the swapagreements, NMG’s effective fixed interest rates as to the $1,000.0 millionin floating rate indebtedness will currently range from 6.489% to 6.733% perquarter through 2010 and result in an average fixed rate of 6.584%.

 

**OTHERMATTERS**

 

**FactorsThat May Affect Future Results**

 

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

 

*Politicaland General Economic Conditions*

 

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

 

•                  terrorist activities inthe United States and elsewhere;

 

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

 

*CustomerDemographic Issues*

 

•                  changes in the demographicor retail environment;

 

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

 

•                  changes in consumerpreferences or fashion trends;

 

•                  changes in ourrelationships with key customers;

 

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

 

*MerchandiseProcurement and Supply Chain Considerations*

 

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

 

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

 

•                  changes in foreigncurrency exchange or inflation rates;

 

•                  significant increases inpaper, printing and postage costs;

 

*Industryand Competitive Factors*

 

•                  competitive responses toour loyalty programs, marketing, merchandising and promotional efforts or inventoryliquidations by vendors or other retailers;

 

•                  seasonality of the retailbusiness;

 

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

 

•                  delays in anticipatedstore openings and renovations;

 

•                  our success in enforcingour intellectual property rights;

 

*EmployeeConsiderations*

 

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

 

•                  changes in ourrelationships with certain of our key sales associates and our ability to retainour key sales associates;

 

*Legaland Regulatory Issues*

 

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

 

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

 

*LeverageConsiderations*

 

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

 

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

 

•                  restrictions the terms andconditions of the indebtedness under our senior secured credit facilities may placeon our ability to respond to changes in our business or to take certainactions.

 

*OtherFactors*

 

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

 

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

 

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

 

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

 

**Critical Accounting Policies**

 

The preparation of condensed consolidated financial statements inconformity with generally accepted accounting principles requires us to makeestimates and assumptions about future events. These estimates and assumptionsaffect amounts of assets, liabilities, revenues and expenses and the disclosureof gain and loss contingencies at the date of the Condensed ConsolidatedFinancial Statements. Our 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 believeare reasonable under the circumstances. We make adjustments to our assumptionsand judgments when facts and circumstances dictate. Since future events andtheir effects cannot be determined with absolute certainty, actual results maydiffer from the estimates we used in preparing the accompanying CondensedConsolidated Financial Statements.

 

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

 

***RecentAccounting Pronouncements.***In September 2006, the FASBissued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”(SFAS 157), which provides guidance for using fair value to measure certainassets and liabilities. SFAS 157 will apply whenever another standard requiresor permits assets or liabilities to be measured at fair value. The standarddoes not expand the use of fair value to any new circumstances. SFAS 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, or our fiscal year ending August 1, 2009. We have not yetevaluated the impact, if any, of adopting SFAS 157 on our consolidatedfinancial statements.

 

In February 2007, theFASB issued Statement of Financial Accounting Standards No. 159, “The FairValue Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS159 expands opportunities to use fair value measurement in financial reportingand permits entities to choose to measure many financial instruments andcertain other items at fair value. This Statement is effective for fiscal yearsbeginning after November 15, 2007, or our fiscal year ending August 1, 2009. Wehave not yet evaluated the impact, if any, of adopting SFAS 159 on ourconsolidated financial statements.

 

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

 

The market risk inherentin the Company’s financial instruments represents the potential loss arisingfrom adverse changes in interest rates. The Company does not enter intoderivative financial instruments for trading purposes. The Company seeks tomanage exposure to adverse interest rate changes through its normal operatingand financing activities. The Company is exposed to interest rate risk throughits borrowing activities, which are described in Note 4 to the condensedconsolidated financial statements.

 

As of October 27, 2007,NMG had no borrowings outstanding under its Asset-Based Revolving CreditFacility that bears interest at floating rates. Future borrowings under NMG’sAsset-Based Revolving Facility, to the extent of outstanding borrowings, wouldbe affected by interest rate changes.

 

At October 27, 2007, NMGhad $1,625.0 million of debt under its Senior Secured Term Loan Facilityissued in connection with the Acquisition that bears interest at floatingrates.

 

NMG uses derivativefinancial instruments to help manage its interest rate risk. EffectiveDecember 6, 2005, NMG  entered intofloating to fixed interest rate swap agreements for an aggregate notionalamount of $1,000.0 million to limit its exposure to interest rateincreases related to a portion of its floating rate indebtedness. The interestrate swap agreements terminate after five years. As a result of the swapagreements, NMG’s effective fixed interest rates as to the $1,000.0 millionin floating rate indebtedness will currently range from 6.489% to 6.733% perquarter through 2010 and result in an average fixed rate of 6.584%. Withrespect to outstanding borrowings in excess of $1,000.0 million on the SeniorSecured Term Loan Facility, such borrowings are at floating rates. A 1%increase in these floating rates would increase annual interest expense byapproximately $6.3 million.

 

The effects of changes inthe U.S. equity and bond markets serve to increase or decrease the value ofpension plan assets, resulting in increased or decreased cash funding by theCompany. The Company seeks to manage exposure to adverse equity and bondreturns by maintaining diversified investment portfolios and utilizingprofessional investment managers.

 

**ITEM 4. CONTROLSAND PROCEDURES**

 

**a.****  Disclosure Controls andProcedures.**

 

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as ofOctober 27, 2007, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, as well as other key members ofour management, of the effectiveness of our disclosure controls and procedures(as defined in Rule 13a-15(e) and Rule 15d-15(e) under the ExchangeAct). Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective toprovide reasonable assurance that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, accumulated,processed, summarized, reported and communicated on a timely basis within thetime periods specified in the Securities and Exchange Commission’s rules andforms.

 

**b.****  Changes in Internal Control overFinancial Reporting.**

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter ended October 27, 2007 thathas materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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**NEIMAN MARCUS, INC.**

 

**PART II**

 

**ITEM 1.****              LEGALPROCEEDINGS**

 

Note 11 of the Notes to Condensed Consolidated Financial Statements inPart I, Item 1 is incorporated herein by reference as if fully restated herein.Note 11 contains forward-looking statements that are subject to the risks anduncertainties discussed in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Factors That May Affect Future Results.”

 

**ITEM 1A.****       RISKFACTORS**

 

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

 

**Becauseour ownership of NMG accounts for substantially all of our assets andoperations, we are subject to all risks applicable to NMG.**

 

Weare a holding company. NMG and its subsidiaries conduct substantially all ofour consolidated operations and own substantially all of our consolidatedassets. As a result, we are subject to all risks applicable to NMG. Inaddition, NMG’s Asset-Based Revolving Credit Facility, NMG’s Senior SecuredTerm Loan Facility and the indentures governing NMG’s senior notes and seniorsubordinated notes contain provisions limiting NMG’s ability to distributeearnings to us, in the form of dividends or otherwise.

 

**NMG hasa substantial amount of indebtedness, which may adversely affect NMG’s cashflow and its ability to operate the business, to comply with debt covenants andmake payments on its indebtedness.**

 

We are highly leveraged. Asof October 27, 2007, the principal amount of NMG’s total indebtedness wasapproximately $2,954.7 million and the unused borrowing availability under the$600 million Asset-Based Revolving Credit Facility was approximately $575.7million after giving effect to $24.3 million of letters of credit outstandingthereunder. NMG’s substantial indebtedness, combined with its lease and otherfinancial obligations and contractual commitments, could have other importantconsequences. For example, it could:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

In addition, NMG’sinterest expense could increase if interest rates increase because the entireamount of the indebtedness under the senior secured credit facilities bearsinterest at floating rates. As of October 27, 2007, NMG had approximately$1,625.0 million principal amount of floating rate debt, consisting ofoutstanding borrowings under Senior Secured Term Loan Facility. NMG also had atthat date approximately $575.7 million of unused floating rate debt borrowingcapacity available under 

 

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the Asset-Based RevolvingCredit Facility based on a borrowing base of over $600.0 million at that dateand after giving effect to $24.3 million used for letters of credit. EffectiveDecember 6, 2005, NMG entered into floating to fixed interest rate swapagreements for an aggregate notional amount of $1,000.0 million to limit itsexposure to interest rate increases related to a portion of its floating rateindebtedness.

 

**Toservice NMG’s indebtedness, it will require a significant amount of cash. NMG’sability to generate cash depends on many factors beyond its control, and anyfailure to meet the its debt service obligations could harm its business,financial condition and results of operations.**

 

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

 

If NMG does not generatesufficient cash flow from operations to satisfy the debt service obligations,NMG may have to undertake alternative financing plans, such as refinancing orrestructuring its indebtedness, selling assets, reducing or delaying capitalinvestments or seeking to raise additional capital. Our ability to restructureor refinance its debt will depend on the condition of the capital markets andour 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 orfuture debt instruments may restrict NMG from adopting some of thesealternatives. In addition, any failure to make payments of interest andprincipal on NMG’s outstanding indebtedness on a timely basis would likelyresult in a reduction of NMG’s credit rating, which could harm its ability toincur additional indebtedness on acceptable terms.

 

Contractual limitationson NMG’s ability to execute any necessary alternative financing plans couldexacerbate the effects of any failure to generate sufficient cash flow tosatisfy its debt service obligations. The Asset-Based Revolving Credit Facilitypermits NMG to borrow up to $600.0 million; however, NMG’s ability toborrow thereunder is limited by a borrowing base, which at any time will equalthe lesser of 80% of eligible inventory valued at the lower of cost or marketvalue and 85% of the net orderly liquidation value of the eligible inventory,less certain reserves. In addition, our ability to borrow under this facilityis limited by a minimum liquidity condition, providing that, if less than$60.0 million is available at any time, NMG is not permitted to borrow anyadditional amounts under the Asset-Based Revolving Credit Facility unless NMG’spro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as suchterms are defined in the credit agreement for the senior secured asset-basedrevolving credit facility) is at least 1.1 to 1.0. Our ability to meet thisfinancial ratio may be affected by events beyond our control which may preventus from meeting this ratio.

 

NMG’s inability togenerate sufficient cash flow to satisfy its debt service obligations, or torefinance its obligations at all or on commercially reasonable terms, wouldhave an adverse effect, which could be material, on NMG’s business, financialcondition and results of operations.

 

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

 

•                  incur additionalindebtedness;

 

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

 

•                  make investments;

 

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

 

•                  engage in transactionswith its affiliates;

 

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

 

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•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and leaseback transactions.

 

In addition, NMG’sability to borrow under the Asset-Based Revolving Credit Facility is limited bya borrowing base and a minimum liquidity condition, as described above.

 

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

 

A breach of any of therestrictive covenants would result in a default under the Asset-Based RevolvingCredit Facility and Senior Secured Term Loan Facility. If any such 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 andfinancial restrictions and covenants in these debt agreements and any futurefinancing agreements may adversely affect NMG’s ability to finance futureoperations or capital needs or to engage in other business activities.

 

**RisksRelated to Our Business and Industry**

 

**Thespecialty retail industry is highly competitive.**

 

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

 

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

 

**We aredependent on our relationships with certain designers, vendors and othersources of merchandise.**

 

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

 

**If wesignificantly overestimate our future sales, our profitability may be adverselyaffected.**

 

We make decisions regardingthe purchase of our merchandise well in advance of the season in which it willbe sold. For example, women’s apparel, men’s apparel and shoes are typicallyordered six to nine months in advance of the products being 

 

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offered for sale whilehandbags, jewelry and other categories are typically ordered three to sixmonths in advance. If our sales during any season, particularly a peak season,are significantly lower than we expect for any reason, we may not be able toadjust our expenditures for inventory and other expenses in a timely fashionand may be left with a substantial amount of unsold inventory. If that occurs,we may be forced to rely on markdowns or promotional sales to dispose of excessinventory. This could have an adverse effect on our margins and operatingincome. At the same time, if we fail to purchase a sufficient quantity ofmerchandise, we may not have an adequate supply of products to meet consumerdemand. This may cause us to lose sales or harm our customer relationships.

 

**Ourfailure to identify changes in consumer preferences or fashion trends mayadversely affect our performance.**

 

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

 

**Ourbusiness and performance may be affected by our ability to implement our storeexpansion and remodeling strategies.**

 

Based upon our expansionstrategy, we expect that planned new stores will add over 565,000 square feetof new store space over approximately the next three fiscal years, representingan increase of approximately 10% above the current aggregate square footage ofour full-line Neiman Marcus and Bergdorf Goodman stores, and that ourstore remodeling program will add additional new store space from remodels thatare already underway. New store openings involve certain risks, includingconstructing, furnishing and supplying a store in a timely and cost effectivemanner, accurately assessing the demographic or retail environment at a givenlocation, hiring and training quality staff, obtaining necessary permits andzoning approvals, obtaining commitments from a core group of vendors to supplythe new store, integrating the new store into our distribution network andbuilding customer awareness and loyalty. In undertaking store remodels, we mustcomplete the remodel in a timely, cost effective manner, minimize disruptionsto our existing operations, and succeed in creating an improved shoppingenvironment. If we fail to execute on these or other aspects of our storeexpansion and remodeling strategy, we could suffer harm to our sales, anincrease in costs and expenses and an adverse effect on our business.

 

**Acts ofterrorism could adversely affect our business.**

 

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

 

**Deteriorationin economic conditions could adversely affect our business.**

 

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

 

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**The lossof any of our senior management team or attrition among our buyers or key salesassociates could adversely affect our business.**

 

Our success in thespecialty retail industry will continue to depend to a significant extent onour senior management team, buyers and key sales associates. We rely on theexperience of our senior management, who have specific knowledge relating to usand our industry that would be difficult to replace. If we were to lose aportion of our buyers or key sales associates, our ability to benefit fromlong-standing relationships with key vendors or to provide relationship-basedcustomer service may suffer. We may not be able to retain our current seniormanagement team, buyers or key sales associates and the loss of any of theseindividuals could adversely affect our business.

 

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

 

In recent years, we haveexperienced certain inflationary conditions in our cost base due primarily to(1) changes in foreign currency exchange rates that have reduced thepurchasing power of the U.S. dollar and (2) increases in selling, generaland administrative expenses, particularly with regard to employee benefits.Inflation can harm our margins and profitability if we are unable to increaseprices or cut costs enough to offset the effects of inflation in our cost base.If inflation in these or other costs worsens, we may not be able to offset theeffects of inflation and cost increases through control of expenses, passingcost increases on to customers or any other method. Any future inflation couldadversely affect our profitability and our business.

 

**Failureto maintain competitive terms under our loyalty programs could adversely affectour business.**

 

We maintain loyaltyprograms that are designed to cultivate long-term relationships with ourcustomers and enhance the quality of service we provide to our customers. Wemust constantly monitor and update the terms of our loyalty programs so thatthey continue to meet the demands and needs of our customers and remaincompetitive with loyalty programs offered by other high-end specialtyretailers. Given that approximately 50% of our revenues at Neiman Marcus storesduring each of the last three calendar years were generated by our InCircleloyalty program members, our failure to continue to provide quality service andcompetitive loyalty programs to our customers through the InCircle loyaltyprogram could adversely affect our business.

 

**Changesin our credit card arrangements, applicable regulations and consumer creditpatterns could adversely impact our ability to facilitate the provision ofconsumer credit to our customers and adversely affect our business.**

 

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

 

In July 2005, we sold ourapproximately three million private label credit card accounts and relatedassets, as well as the outstanding balances associated with such accounts andwe entered into a long-term marketing and servicing alliance with HSBC thatexpires in June 2010. Under the terms of this alliance, HSBC offers creditcards and non-card payment plans and bears all credit risk with respect tosales transacted on the cards bearing our brands. We receive on-going paymentsfrom HSBC related to credit card sales. In addition, we continue to handle keycustomer service functions, including new account processing, most transactionauthorization, billing adjustments, collection services and customer inquiriesfor which we receive additional compensation from HSBC. As part of thistransaction, we have changed, and will continue to change, the terms of creditoffered to our customers following the Credit Card Sale.

 

The purchaser of ourcredit card business has discretion over certain policies and arrangements withour credit card customers and may change these policies and arrangements inways that affect our relationship with these customers. In addition, there canbe no assurance that, upon expiration of the current alliance with HSBC, thatwe will be able to enter into a replacement arrangement on terms comparable tothe current arrangement. Any changes in our credit card arrangements mayadversely affect our credit card program and ultimately, our business.

 

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

 

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**Ourbusiness can be affected by extreme or unseasonable weather conditions.**

 

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

 

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

 

We are subject tocustoms, truth-in-advertising and other laws, including consumer protectionregulations and zoning and occupancy ordinances that regulate retailersgenerally and/or govern the importation, promotion and sale of merchandise andthe operation of retail stores and warehouse facilities. Although we undertaketo monitor changes in these laws, if these laws change without our knowledge,or are violated by importers, designers, manufacturers or distributors, wecould experience delays in shipments and receipt of goods or be subject tofines or other penalties under the controlling regulations, any of which couldadversely affect our business.

 

**Ourrevenues and cash requirements are affected by the seasonal nature of ourbusiness.**

 

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

 

**Ourbusiness is affected by foreign currency fluctuations.**

 

We purchase a substantialportion of our inventory from foreign suppliers whose cost to us is affected bythe fluctuation of their local currency against the dollar or who price theirmerchandise in currencies other than the dollar. Fluctuations in the Euro-U.S.dollar exchange rate affect us most significantly; however, we source goodsfrom numerous countries and thus are affected by changes in numerous currenciesand, generally, by fluctuations in the U.S. dollar relative to 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 on 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.

 

**Conditionsin, and the United States’ relationship with, the countries where we source ourmerchandise could affect our sales.**

 

A substantial majority ofour merchandise is manufactured overseas, mostly in Europe. As a result,political instability or other events resulting in the disruption of trade fromother countries or the imposition of additional regulations relating to orduties upon imports could cause significant delays or interruptions in thesupply of our merchandise or increase our costs, either of which could have amaterial adverse effect on our business. If we are forced to source merchandisefrom other countries, those goods may be more expensive or of a different orinferior quality from the ones we now sell. The importance to us of our existingdesigner relationships could present additional difficulties, as it may not bepossible to source merchandise from a given designer from alternativejurisdictions. If we were unable to adequately replace the merchandise wecurrently source with merchandise produced elsewhere, our business could beadversely affected.

 

**Significantincreases in costs associated with the production of catalogs and otherpromotional materials may adversely affect our operating income.**

 

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

 

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**Weare indirectly owned and controlled by the Sponsors, and their interests asequity holders may conflict with those of our creditors.**

** **

We are indirectly ownedand controlled by the Sponsors and certain other equity investors, and theSponsors have the ability to control our policies and operations. The interestsof the Sponsors may not in all cases be aligned with those of our creditors.For example, if we encounter financial difficulties or are unable to pay ourdebts as they mature, the interests of our equity holders might conflict withour creditors’ interests. In addition, our equity holders may have an interestin pursuing acquisitions, divestitures, financings or other transactions that,in their judgment, could enhance their equity investments, even though suchtransactions might involve risks to holders of our indebtedness. Furthermore,the Sponsors may in the future own businesses that directly or indirectlycompete with us. One or more of the Sponsors also may pursue acquisitionopportunities that may be complementary to our business, and as a result, thoseacquisition opportunities may not be available to us.

 

**If weare unable to enforce our intellectual property rights, or if we are accused ofinfringing on a third party’s intellectual property rights, our net income maydecline.**

 

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

 

Additionally, thirdparties may assert claims against us alleging infringement, misappropriation orother violations of their tradename or other proprietary rights, whether or notthe claims have merit. Claims like these may be time consuming and expensive todefend and could result in our being required to cease using the tradename orother rights and selling the allegedly infringing products. This might have anadverse affect on our sales and cause us to incur significant litigation costsand expenses.

 

**Failureto successfully maintain and update information technology systems and enhanceexisting systems may adversely affect our business.**

 

To keep pace withchanging technology, we must continuously provide for the design andimplementation of new information technology systems as well as enhancements ofour existing systems. Any failure to adequately maintain and update theinformation technology systems supporting our online operations, salesoperations or inventory control could prevent our customers from purchasingmerchandise on our websites or prevent us from processing and deliveringmerchandise, which could adversely affect our business.

 

**Delaysin receipt of merchandise in connection with either the manufacturing orshipment of such merchandise can affect our performance.**

 

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

 

###### **ITEM 2.**               UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

###### ** **

None.

 

**ITEM 4.****             SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

 

None.

 

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**ITEM 6.****              EXHIBITS**

 
| 2.1    |   | Agreement and Plan of Merger, dated May 1, 2005,  among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Newton  Merger Sub, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 2.2    |   | Purchase, Sale and Servicing Transfer Agreement  dated as of June 8, 2005, among The Neiman Marcus Group, Inc., Bergdorf  Goodman, Inc., HSBC Bank Nevada, N.A. and HSBC Finance Corporation,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated June 8, 2005.                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 3.1    |   | Amended and Restated Certificate of Incorporation of  Neiman Marcus, Inc., incorporated herein by reference to The Neiman Marcus  Group, Inc.’s Registration Statement on Form S-1 (Registration No.  333-133184) dated April 10, 2006.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 3.2    |   | Amended and Restated Bylaws of Neiman Marcus, Inc.,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Registration Statement on Form S-1 (Registration No. 333-133184) dated April  10, 2006.                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.1    |   | Indenture, dated as of May 27, 1998, between The  Neiman Marcus Group, Inc. and The Bank of New York, as trustee, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Annual Report on Form  10-K for the fiscal year ended July 31, 2004.                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.2    |   | Form of 7.125% Senior Notes Due 2028, dated May 27,  1998, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.3    |   | Senior Indenture dated as of October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary  Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form  8-K dated October 12, 2005.                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.4    |   | Senior Subordinated Indenture dated as of October 6,  2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc.,  the Subsidiary Guarantors, and Wells Fargo Bank, National Association,  trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.5    |   | Form of 9%/9 3/4% Senior Notes due 2015,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.6    |   | Form of 10 3/8% Senior Subordinated Notes due 2015,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.7    |   | Registration Rights Agreement dated October 6, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial  Purchasers, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated October 12, 2005.                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.8    |   | First Supplemental Indenture, dated as of July 11,  2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company,  N.A., as successor trustee, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated July 11, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 4.9    |   | Second Supplemental Indenture, dated as of August  14, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus  Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company,  N.A., as successor trustee, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated August 15, 2006.              |
|   |   |                                                                                                                                                                                                                                                                                                                                                            |
| 10.1*  |   | Employment Agreement dated as of October 6, 2005 by  and among The Neiman Marcus Group, Inc., Newton Acquisition Merger Sub, Inc.,  Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                               |

 

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| 10.2*  |   | Rollover Agreement dated as of October 4, 2005 by  and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Burton  M. Tansky, incorporated herein by reference to The Neiman Marcus Group,  Inc.’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3*  |   | Form of Rollover Agreement by and among The Neiman  Marcus Group, Inc., Newton Acquisition, Inc., and certain members of  management, incorporated herein by reference to The Neiman Marcus Group,  Inc.’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Credit Agreement dated as of October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company  Americas, as administrative agent and collateral agent, Credit Suisse and  Deutsche Bank Securities Inc., as joint lead arrangers, Banc of America  Securities LLC and Goldman Sachs Credit Partners L.P., as co-arrangers,  Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC  and Goldman Sachs Credit Partners L.P., as joint bookrunners, and Credit  Suisse, Banc of America Securities LLC and Goldman Sachs Credit Partners  L.P., as co-syndication agents, General Electric Capital Corporation as  documentation agent and the lenders thereunder, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Credit Agreement dated as of October 6, 2005, among  Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman  Marcus Group, Inc., the Subsidiary Guarantors, Credit Suisse, as  administrative agent and collateral agent, Credit Suisse and Deutsche Bank  Securities Inc. as joint lead arrangers, Banc of America Securities LLC and  Goldman Sachs Credit Partners L.P. as co-arrangers, Credit Suisse, Deutsche  Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as joint bookrunners, Deutsche Bank Securities Inc., Banc of  America Securities LLC and Goldman Sachs Credit Partners L.P. as  co-syndication agents and the lenders thereunder, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | Pledge and Security Agreement dated as of October 6,  2005 among Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group,  Inc., Newton Acquisition, Inc., the Subsidiary Guarantors and Deutsche Bank  Trust Company Americas, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Pledge and Security and Intercreditor Agreement  dated as of October 6, 2005, among Newton Acquisition Merger Sub, Inc., The  Neiman Marcus Group, Inc., Newton Acquisition, Inc., the Subsidiary  Guarantors and Credit Suisse, as administrative agent and collateral agent,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8   |   | 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 Neiman Marcus Group, Inc.’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 Neiman  Marcus Group, Inc. to Credit Suisse, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.10  |   | Form of First Priority Leasehold Mortgage,  Assignment of Leases and Rents, Security Agreement and Financing Statement  from The Neiman Marcus Group, Inc. to Credit Suisse, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.11  |   | Form of Second Priority Mortgage, Assignment of  Leases and Rents, Security Agreement and Financing Statement from The Neiman  Marcus Group, Inc. to Deutsche Bank Trust Company Americas, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form  8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.12  |   | Form of Second Priority Leasehold Mortgage,  Assignment of Lease and Rents, Security Agreement and Financing Statement  from The Neiman Marcus Group, Inc. to Deutsche Bank Trust Company Americas,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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| 10.13  |   | Amendment No. 1 dated as of October 6, 2005 to the  Credit Agreement dated as of October 6, 2005 among The Neiman Marcus Group,  Inc., Newton Acquisition, Inc., each subsidiary of The Neiman Marcus Group,  Inc. from time to time party thereto, the Lenders thereunder, and Credit  Suisse, as administrative agent and as collateral agent for the Lenders,  incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated October 12, 2005.    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.14* |   | Newton Acquisition, Inc. Management Equity Incentive  Plan, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.15* |   | Stock Option Grant Agreement made as of November 29,  2005 between Newton Acquisition, Inc. and Burton M. Tansky, incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form  8-K dated December 5, 2005.                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.16* |   | Form of Stock Option Grant Agreement made as of  November 29, 2005 between Newton Acquisition, Inc. and certain eligible key  employees, incorporated herein by reference to The Neiman Marcus Group,  Inc.’s Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.17  |   | 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 Neiman Marcus Group, Inc.’s Current  Report on Form 8-K dated January 30, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.18* |   | Employment Agreement between The Neiman Marcus  Group, Inc. and Karen Katz, dated February 1, 2006, effective as of October  6, 2005, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated February 1, 2006.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.19  |   | 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 Neiman Marcus Group, Inc.’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 Neiman Marcus Group, Inc.’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 Neiman Marcus, Inc., The Neiman Marcus Group, Inc., the Subsidiaries  party thereto and Credit Suisse, as administrative agent and collateral  agent, incorporated herein by reference to The Neiman Marcus Group, Inc.’s  Current Report on Form 8-K dated March 29, 2006.                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.22  |   | Credit Card Program Agreement, dated as of June 8,  2005, by and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc.,  HSBC Bank Nevada, N.A. and Household Corporation, incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.23  |   | Form of Servicing Agreement, by and between The  Neiman Marcus Group, Inc. and HSBC Bank Nevada, N.A., incorporated herein by  reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated  June 8, 2005.                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.24* |   | 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 Neiman Marcus Group, Inc.’s  Annual Report on Form 10-K for the fiscal year ended July 31, 2004.                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.25  |   | Stockholder Agreement, dated as of May 1, 2005,  among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc. and the  other parties signatory thereto, incorporated herein by reference to The  Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.                                                                                                                                                                                                            |

 

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| 10.26* |   | Confidentiality, Non-Competition and Termination  Benefits Agreement between The Neiman Marcus Group, Inc. and Steven P. Dennis  dated September 9, 2004, incorporated herein by reference to The Neiman  Marcus Group, Inc.’s Current Report on Form 8-K dated September 9, 2004.                                                                                                                                                                                                                                                                                       |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.27* |   | Newton Acquisition, Inc. Cash Incentive Plan  effective as of November 29, 2005, incorporated herein by reference to the  Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended July  29, 2006.                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.28  |   | Management Stockholders’ Agreement dated as of  October 6, 2005 between Newton Acquisition, Inc., Newton Holding, LLC, TPG  Newton III, LLC, TPG Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg  Pincus Private Equity VIII, L.P., Warburg Pincus Netherlands Private Equity  VIII C.V. I, Warburg Pincus Germany Private Equity VIII K.G , Warburg Pincus  Private Equity IX, L.P., and the other parties signatory thereto,  incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on  Form 10-K for the fiscal year ended July 29, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.29* |   | The Neiman Marcus Group, Inc. Key Employee Deferred  Compensation Plan effective as of January 1, 2006, incorporated herein by  reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the  fiscal year ended July 29, 2006.                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.30  |   | Amendment No. 3 dated as of October 12,  2006 to the Credit Agreement dated as of October 6, 2005 among The  Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman  Marcus Group, Inc. from time to time party thereto, the Lenders thereunder  and Credit Suisse, as administrative agent and collateral agent for the  Lenders, incorporated by reference to Neiman Marcus, Inc.’s Current Report on  Form 8-K dated October 17, 2006.                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.31  |   | Amendment No. 4 dated as of February 8, 2007 to the  Credit Agreement dated as of October 6, 2005, among The Neiman Marcus Group,  Inc., Neiman Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc.  from time to time party thereto, the lenders thereunder, and Credit Suisse,  as administrative agent and collateral agent for the lenders incorporated  herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form  8-K dated February 14, 2007.                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 32     |   | Certifications of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (1)                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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

 

57

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SIGNATURES

 

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

 

 

NEIMAN MARCUS, INC.

(Registrant)

 
| **Signature**          | ** ** | **Title**                       | ** **                     | **Date**   | ** **       |
|------------------------|------------|---------------------------------|--------------------------------|------------|------------------|
| ** **             | ** ** | ** **                      | ** **                     | ** ** | ** **       |
| /s/ T. Dale  Stapleton |       |                            | Vice President and  Controller |       | December 4, 2007 |   |
| T. Dale  Stapleton     |       | and Duly Authorized  Officer    |                           |       |             |
|                   |       | (principal accounting  officer) |                           |       |             |
|                        |            |                                 |                                |            |                  |  |

 

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