**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the Quarterly Period Ended April 29, 2006**

 

**OR**

 

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

 

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

 

**Neiman Marcus, Inc.**

(Exact name of registrant as specified in its charter)

 

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

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.(1).

 

| YES  o | NO  ý |
|------------------|----------------------|

 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, or anon-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   ý |
|---------------------------------------|---------------------------------|-------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

| YES  o | NO  ý |
|------------------|----------------------|

 

There were 900 shares ofthe registrant’s common stock, par value $.01 per share, outstanding at April 29,2006.

 

----

(1)  Theregistrant became subject to reporting requirements under the Exchange Act of1934 on June 5, 2006.

 

 

----

 

**NEIMAN MARCUS, INC.**

 

**INDEX**

 
| Part I.  | Financial Information                                                                                                                                                                                                                      |   |
|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                                                                                                                                       |   |
| Item  1.      | Condensed Consolidated  Balance Sheets as of April 29, 2006 (Successor), July 30, 2005  (Predecessor) and April 30, 2005 (Predecessor)                                                                                      |   |
|          |                                                                                                                                                                                                                                       |   |
|          | Condensed Consolidated  Statements of Earnings for the Thirteen Weeks Ended April 29, 2006  (Successor) and Thirteen Weeks Ended April 30, 2005  (Predecessor)                                                         |   |
|          |                                                                                                                                                                                                                                       |   |
|          | Condensed Consolidated Statements of Earnings for  the Thirty Weeks Ended April 29, 2006 (Successor), Nine Weeks Ended  October 1, 2005 (Predecessor) and Thirty-Nine  Weeks Ended April 30, 2005 (Predecessor)   |   |
|          |                                                                                                                                                                                                                                       |   |
|          | Condensed Consolidated  Statements of Cash Flows for the Thirty Weeks Ended April 29, 2006  (Successor), Nine Weeks Ended October 1, 2005 (Predecessor) and Thirty-Nine Weeks Ended  April 30, 2005 (Predecessor) |   |
|          |                                                                                                                                                                                                                                       |   |
|          | Notes to Condensed  Consolidated Financial Statements                                                                                                                                                                                      |   |
|          |                                                                                                                                                                                                                                       |   |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                |   |
|          |                                                                                                                                                                                                                                       |   |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                                                |   |
|          |                                                                                                                                                                                                                                       |   |
| Item 4.       | Controls and  Procedures                                                                                                                                                                                                                   |   |
|          |                                                                                                                                                                                                                                       |   |
| Part II. | Other Information                                                                                                                                                                                                                          |   |
|          |                                                                                                                                                                                                                                       |   |
| Item 1.       | Legal Proceedings                                                                                                                                                                                                                          |   |
|          |                                                                                                                                                                                                                                       |   |
| Item 2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                                               |   |
|          |                                                                                                                                                                                                                                       |   |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                                                                                                                                       |   |
|          |                                                                                                                                                                                                                                       |   |
| Item  6.      | Exhibits                                                                                                                                                                                                                                   |   |
|          |                                                                                                                                                                                                                                       |
| Signatures    |                                                                                                                                                                                                                                       |

 

----

 

**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(UNAUDITED)**

 
| **(in thousands)**                                                                                                                       | ** **   | **April 29,  2006** | ** **   | ** **   | **July 30,  2005** | ** **   | **April 30,  2005** | ** **   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------------|--------------------------|--------------|--------------|-------------------------|--------------|--------------------------|--------------|
| ** **                                                                                                                               | ** **   | **(Successor)**          | ** **   | ** **   | **(Predecessor)**       | ** **   | **(Predecessor)**        | ** **   |
| **ASSETS**                                                                                                                               | ** **   | ** **               | ** **   | ** **   | ** **              | ** **   | ** **               | ** **   |
| Current assets:                                                                                                                          |         |                     |         |         |                    |         |                     |         |
| Cash and cash equivalents                                                                                                                |         | $                        | 108,982      |         |                    | $            | 853,482                  |         | $ | 337,589 |   |
| Restricted cash                                                                                                                          |         | —                   |         |         | —                  |         | 37,500                   |         |
| Accounts receivable, net of allowance                                                                                                    |         | 56,744                   |         |         | 29,886                  |         | 666,455                  |         |
| Merchandise inventories                                                                                                                  |         | 854,979                  |         |         | 748,366                 |         | 788,915                  |         |
| Other current assets                                                                                                                     |         | 64,700                   |         |         | 76,747                  |         | 49,715                   |         |
| Total current assets                                                                                                                     |         | 1,085,405                |         |         | 1,708,481               |         | 1,880,174                |         |
|                                                                                                                                     |         |                     |         |         |                    |         |                     |         |
| Property and  equipment, net                                                                                                             |         | 1,045,184                |         |         | 855,009                 |         | 821,810                  |         |
| Customer lists,  net                                                                                                                     |         | 554,650                  |         |         | —                  |         | —                   |         |
| Favorable lease  commitments, net                                                                                                        |         | 469,591                  |         |         | —                  |         | —                   |         |
| Trademarks                                                                                                                               |         | 1,691,155                |         |         | 56,645                  |         | 56,645                   |         |
| Goodwill                                                                                                                                 |         | 1,681,021                |         |         | 14,872                  |         | 14,872                   |         |
| Debt issuance  costs                                                                                                                     |         | 101,034                  |         |         | 3,526                   |         | 3,656                    |         |
| Other assets                                                                                                                             |         | 31,974                   |         |         | 22,127                  |         | 62,649                   |         |
| Total assets                                                                                                                             |         | $                        | 6,660,014    |         |                    | $            | 2,660,660                |         | $ | 2,839,806 |   |
|                                                                                                                                     |         |                     |         |         |                    |         |                     |         |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                           | ** **   | ** **               | ** **   | ** **   | ** **              | ** **   | ** **               | ** **   |
| Current  liabilities:                                                                                                                    |         |                     |         |         |                    |         |                     |         |
| Accounts payable                                                                                                                         |         | $                        | 251,444      |         |                    | $            | 282,887                  |         | $ | 246,971 |   |
| Accrued liabilities                                                                                                                      |         | 389,756                  |         |         | 332,937                 |         | 352,526                  |         |
| Notes payable and current maturities of long-term  liabilities                                                                           |         | 15,129                   |         |         | 1,450                   |         | 200                      |         |
| Current portion of borrowings under Credit Card  Facility                                                                                |         | —                   |         |         | —                  |         | 187,500                  |         |
| Total current liabilities                                                                                                                |         | 656,329                  |         |         | 617,274                 |         | 787,197                  |         |
|                                                                                                                                     |         |                     |         |         |                    |         |                     |         |
| Long-term  liabilities:                                                                                                                  |         |                     |         |         |                    |         |                     |         |
| Senior secured term loan facility                                                                                                        |         | 1,875,000                |         |         | —                  |         | —                   |         |
| Senior debentures due 2028                                                                                                               |         | 120,663                  |         |         | 124,823                 |         | 124,820                  |         |
| Senior notes                                                                                                                             |         | 700,000                  |         |         | —                  |         | —                   |         |
| Senior subordinated notes                                                                                                                |         | 500,000                  |         |         | —                  |         | —                   |         |
| Senior notes due 2008                                                                                                                    |         | —                   |         |         | 124,957                 |         | 124,953                  |         |
| Deferred real estate credits                                                                                                             |         | 11,099                   |         |         | 86,575                  |         | 74,429                   |         |
| Deferred income taxes                                                                                                                    |         | 1,129,899                |         |         | —                  |         | 33,614                   |         |
| Other long-term liabilities                                                                                                              |         | 186,169                  |         |         | 120,973                 |         | 99,500                   |         |
| Total long-term liabilities                                                                                                              |         | 4,522,830                |         |         | 457,328                 |         | 457,316                  |         |
|                                                                                                                                     |         |                     |         |         |                    |         |                     |         |
| Minority interest                                                                                                                        |         | 12,810                   |         |         | 12,112                  |         | 13,498                   |         |
|                                                                                                                                     |         |                     |         |         |                    |         |                     |         |
| ***Predecessor:***                                                                                                                       | *** *** | *** ***             | *** *** | *** *** | *** ***            | *** *** | *** ***             | *** *** |
| Common stocks (par value $0.01 per share, issued  49,716,309 shares at July 30, 2005 and 48,947,578 shares at April 30,  2005) |         |                     |         |         | 497                     |         | 497                      |         |
| ***Successor:***                                                                                                                         | *** *** | *** ***             | *** *** | *** *** | *** ***            | *** *** | *** ***             | *** *** |
| Common stock  (par value $0.01 per share, issued 1,012,264 shares)                                                                       |         | 10                       |         |         |                    |         |                     |         |
|                                                                                                                                     |         |                     |         |         |                    |         |                     |         |
| Additional  paid-in capital                                                                                                              |         | 1,473,129                |         |         | 520,414                 |         | 511,338                  |         |
| Carryover basis  adjustment for management shareholders                                                                                  |         | (69,200                  | )            |         | —                  |         | —                   |         |
| Accumulated  other comprehensive income (loss)                                                                                           |         | 9,666                    |         |         | (47,030                 | )            | (3,432                   | )            |
| Retained  earnings                                                                                                                       |         | 54,440                   |         |         | 1,125,726               |         | 1,099,053                |         |
| Treasury stock, at cost (768,731 shares at July 30,  2005 and 768,731 shares at April 30, 2005)                                |         |                     |         |         | (25,661                 | )            | (25,661                  | )            |
| Total  shareholders’ equity                                                                                                         |         | 1,468,045                |         |         | 1,573,946               |         | 1,581,795                |         |
| Total  liabilities and shareholders’ equity                                                                                         |         | $                        | 6,660,014    |         |                    | $            | 2,660,660                |         | $ | 2,839,806 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

1

----

 

**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(UNAUDITED)**

 
| **(in thousands)**                                                                | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirteen weeks ended  April 30,  2005** | ** **        |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|-------------------|
| ** **                                                                        | ** ** | **(Successor)**                                 | ** ** | ** **                                     | **(Predecessor)** | ** ** |
|                                                                              |       |                                            |       |                                           |              |   |
| Revenues                                                                          |       | $                                               | 1,027,009  |                                           |              | $ | 933,372 |   |
| Cost of goods  sold including buying and occupancy costs (excluding depreciation) |       | 602,957                                         |       |                                           | 549,740           |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 255,380                                         |       |                                           | 240,396           |   |
| Income from  credit card operations, net                                          |       | (15,136                                         | )          |                                           | (19,030           | ) |
| Depreciation  expense                                                             |       | 32,913                                          |       |                                           | 27,614            |   |
| Amortization of  customer lists                                                   |       | 13,715                                          |       |                                           | —            |   |
| Amortization of  favorable lease commitments                                      |       | 4,502                                           |       |                                           | —            |   |
|                                                                              |       |                                            |       |                                           |              |   |
| Operating  earnings                                                               |       | 132,678                                         |       |                                           | 134,652           |   |
|                                                                              |       |                                            |       |                                           |              |   |
| Interest  expense, net                                                            |       | 67,216                                          |       |                                           | 2,933             |   |
|                                                                              |       |                                            |       |                                           |              |   |
| Earnings before  income taxes and minority interest                               |       | 65,462                                          |       |                                           | 131,719           |   |
|                                                                              |       |                                            |       |                                           |              |   |
| Income taxes                                                                      |       | 24,953                                          |       |                                           | 50,713            |   |
|                                                                              |       |                                            |       |                                           |              |   |
| Earnings before  minority interest                                                |       | 40,509                                          |       |                                           | 81,006            |   |
|                                                                              |       |                                            |       |                                           |              |   |
| Minority  interest in net loss (earnings) of subsidiaries                         |       | 38                                              |       |                                           | (1,231            | ) |
|                                                                              |       |                                            |       |                                           |              |   |
| Net earnings                                                                      |       | $                                               | 40,547     |                                           |              | $ | 79,775 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

2

----

 
| **(in thousands)**                                                                | ** ** | **Thirty weeks  ended  April 29,  2006** | ** ** | **Nine weeks  ended  October 1,  2005** | ** **        | **Thirty-nine  weeks ended  April 30,  2005** | ** **        |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|-------------------|----------------------------------------------------|-------------------|
| ** **                                                                        | ** ** | **(Successor)**                               | ** ** | ** **                                   | **(Predecessor)** | ** **                                         | **(Predecessor)** | ** ** |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Revenues                                                                          |       | $                                             | 2,583,215  |                                         |              | $                                                  | 651,648           |   | $ | 2,970,533 |   |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 1,634,187                                     |       |                                         | 378,767           |                                               | 1,816,602         |   |
| Selling, general  and administrative expenses (excluding depreciation)            |       | 623,972                                       |       |                                         | 168,853           |                                               | 747,432           |   |
| Income from  credit card operations, net                                          |       | (35,894                                       | )          |                                         | (7,818            | )                                                  | (52,414           | ) |
| Depreciation  expense                                                             |       | 77,977                                        |       |                                         | 19,960            |                                               | 79,338            |   |
| Amortization of  customer lists                                                   |       | 31,652                                        |       |                                         | —            |                                               | —            |   |
| Amortization of  favorable lease commitments                                      |       | 10,389                                        |       |                                         | —            |                                               | —            |   |
| Transaction and  other costs                                                      |       | —                                        |       |                                         | 23,544            |                                               | —            |   |
| Loss on  disposition of Chef’s Catalog                                       |       | —                                        |       |                                         | —            |                                               | 15,348            |   |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Operating  earnings                                                               |       | 240,932                                       |       |                                         | 68,342            |                                               | 364,227           |   |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Interest expense  (income), net                                                   |       | 150,626                                       |       |                                         | (866              | )                                                  | 10,948            |   |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Earnings before  income taxes and minority interest                               |       | 90,306                                        |       |                                         | 69,208            |                                               | 353,279           |   |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Income taxes                                                                      |       | 34,791                                        |       |                                         | 25,607            |                                               | 136,014           |   |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Earnings before  minority interest                                                |       | 55,515                                        |       |                                         | 43,601            |                                               | 217,265           |   |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Minority  interest in net (earnings) loss of subsidiaries                         |       | (1,075                                        | )          |                                         | 553               |                                               | (2,787            | ) |
|                                                                              |       |                                          |       |                                         |              |                                               |              |   |
| Net earnings                                                                      |       | $                                             | 54,440     |                                         |              | $                                                  | 44,154            |   | $ | 214,478 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

3

----

 

**NEIMAN MARCUS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| **(in thousands)**                                                                   | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | **Nine weeks  ended  October 1,  2005** | ** **        | **Thirty-nine  weeks ended  April 30,  2005** | ** **        |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|-------------------|----------------------------------------------------|-------------------|
| ** **                                                                           | ** ** | **(Successor)**                               | ** ** | ** **                                   | **(Predecessor)** | ** **                                         | **(Predecessor)** | ** ** |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                | ** ** | ** **                                    | ** ** | ** **                                   | ** **        | ** **                                         | ** **        | ** ** |
| Net earnings                                                                         |       | $                                             | 54,440     |                                         |              | $                                                  | 44,154            |   | $ | 214,478 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities: |       |                                          |       |                                         |              |                                               |              |   |
| Depreciation                                                                         |       | 77,977                                        |       |                                         | 19,960            |                                               | 79,338            |   |
| Amortization of debt issue costs                                                     |       | 8,183                                         |       |                                         | —            |                                               | 465               |   |
| Amortization of customer lists and favorable lease  commitments                      |       | 42,041                                        |       |                                         | —            |                                               | —            |   |
| Non-cash charges related to step-up in carrying  value of inventory                  |       | 38,067                                        |       |                                         | —            |                                               | —            |   |
| Stock-based compensation charges                                                     |       | 2,509                                         |       |                                         | 19,968            |                                               | 3,646             |   |
| Deferred income taxes                                                                |       | (27,110                                       | )          |                                         | (7,327            | )                                                  | —            |   |
| Loss on disposition of Chef’s Catalog                                           |       | —                                        |       |                                         | —            |                                               | 15,348            |   |
| Minority interest                                                                    |       | 1,075                                         |       |                                         | (553              | )                                                  | 2,787             |   |
| Other, primarily costs related to defined benefit pension  plans                     |       | 8,876                                         |       |                                         | 1,656             |                                               | 23,111            |   |
|                                                                                 |       | 206,058                                       |       |                                         | 77,858            |                                               | 339,173           |   |
| Changes in operating assets and liabilities:                                         |       |                                          |       |                                         |              |                                               |              |   |
| Increase in accounts receivable                                                      |       | (19,481                                       | )          |                                         | (7,377            | )                                                  | (114,270          | ) |
| Decrease (increase) in merchandise inventories                                       |       | 67,217                                        |       |                                         | (173,829          | )                                                  | (78,955           | ) |
| Decrease in other current assets                                                     |       | 39,185                                        |       |                                         | 6,164             |                                               | 10,530            |   |
| Decrease (increase) in other assets                                                  |       | 735                                           |       |                                         | (2,274            | )                                                  | 12,276            |   |
| (Decrease) increase in accounts payable and accrued  liabilities                     |       | (27,629                                       | )          |                                         | 114,604           |                                               | 38,763            |   |
| Payment of deferred compensation and stock-based  awards                             |       | (12,901                                       | )          |                                         | —            |                                               | —            |   |
| Increase in deferred real estate credits                                             |       | 11,270                                        |       |                                         | 4,289             |                                               | 2,531             |   |
| Funding of defined benefit pension plan                                              |       | —                                        |       |                                         | —            |                                               | (20,000           | ) |
| **Net cash provided by operating activities**                                        |       | 264,454                                       |       |                                         | 19,435            |                                               | 190,048           |   |
| **CASH FLOWS - INVESTING ACTIVITIES**                                                | ** ** | ** **                                    | ** ** | ** **                                   | ** **        | ** **                                         | ** **        | ** ** |
| Capital expenditures                                                                 |       | (112,214                                      | )          |                                         | (26,311           | )                                                  | (150,830          | ) |
| Acquisition of The Neiman Marcus Group, Inc.                                    |       | (5,156,423                                    | )          |                                         | —            |                                               | —            |   |
| Increase in cash restricted for repayment of  borrowings under Credit Card Facility  |       | —                                        |       |                                         | —            |                                               | (37,500           | ) |
| Proceeds from the sale of Chef’s Catalog                                        |       | —                                        |       |                                         | —            |                                               | 14,419            |   |
| **Net cash used for investing activities**                                           |       | (5,268,637                                    | )          |                                         | (26,311           | )                                                  | (173,911          | ) |
| **CASH FLOWS - FINANCING ACTIVITIES**                                                | ** ** | ** **                                    | ** ** | ** **                                   | ** **        | ** **                                         | ** **        | ** ** |
| Proceeds from borrowings on lines of credit                                          |       | 21,000                                        |       |                                         | 5,750             |                                               | 7,750             |   |
| Repayment of borrowings on lines of credit                                           |       | (16,000                                       | )          |                                         | (750              | )                                                  | (9,113            | ) |
| Borrowings under asset-based revolving credit  facility                              |       | 150,000                                       |       |                                         | —            |                                               | —            |   |
| Repayment of borrowings under asset-based revolving  credit facility                 |       | (150,000                                      | )          |                                         | —            |                                               | —            |   |
| Borrowings under senior term loan facility                                           |       | 1,975,000                                     |       |                                         | —            |                                               | —            |   |
| Repayment of borrowings under senior term loan  facility                             |       | (100,000                                      | )          |                                         | —            |                                               | —            |   |
| Borrowings of senior notes and subordinated debt                                     |       | 1,200,000                                     |       |                                         | —            |                                               | —            |   |
| Repayment of senior notes due 2008                                                   |       | (134,734                                      | )          |                                         | —            |                                               | —            |   |
| Repayment of borrowings under Credit Card Facility                                   |       | —                                        |       |                                         | —            |                                               | (37,500           | ) |
| Capital lease obligation payments                                                    |       | (1,078                                        | )          |                                         | —            |                                               | —            |   |
| Debt issuance costs paid                                                             |       | (102,854                                      | )          |                                         | —            |                                               | —            |   |
| Cash equity contributions                                                            |       | 1,427,739                                     |       |                                         | —            |                                               | —            |   |
| Acquisitions of treasury stock                                                       |       | —                                        |       |                                         | —            |                                               | (3,088            | ) |
| Proceeds from stock-based compensation awards                                        |       | —                                        |       |                                         | —            |                                               | 16,432            |   |
| Cash dividends paid                                                                  |       | —                                        |       |                                         | (7,346            | )                                                  | (20,042           | ) |
| Distribution paid                                                                    |       | (168                                          | )          |                                         | —            |                                               | (1,354            | ) |
| **Net cash provided by (used for) financing  activities**                            |       | 4,268,905                                     |       |                                         | (2,346            | )                                                  | (46,915           | ) |
| **CASH AND CASH EQUIVALENTS**                                                        | ** ** | ** **                                    | ** ** | ** **                                   | ** **        | ** **                                         | ** **        | ** ** |
| Decrease during the period                                                           |       | (735,278                                      | )          |                                         | (9,222            | )                                                  | (30,778           | ) |
| Beginning balance                                                                    |       | 844,260                                       |       |                                         | 853,482           |                                               | 368,367           |   |
| Ending balance                                                                       |       | $                                             | 108,982    |                                         |              | $                                                  | 844,260           |   | $ | 337,589 |   |
| **Supplemental Schedule of Cash Flow  Information**                             | ** ** | ** **                                    | ** ** | ** **                                   | ** **        | ** **                                         | ** **        | ** ** |
| Cash paid (received) during the period for:                                          |       |                                          |       |                                         |              |                                               |              |   |
| Interest                                                                             |       | $                                             | 122,253    |                                         |              | $                                                  | 207               |   | $ | 12,992 |   |
| Income taxes                                                                         |       | $                                             | (13,332    | )                                            |              | $                                                  | 10,693            |   | $ | 98,942 |   |
| Noncash activities:                                                                  |       |                                          |       |                                         |              |                                               |              |   |
| Equity contribution from Holding                                                     |       | $                                             | 25,000     |                                         |              | $                                                  | —            |   | $ | — |   |
| Equity contribution from management shareholders                                     |       | $                                             | 17,891     |                                         |              | $                                                  | —            |   | $ | — |   |
| Capital lease additions                                                              |       | $                                             | 11,909     |                                         |              | $                                                  | —            |   | $ | — |   |

 

*See Notes to Condensed Consolidated Financial Statements.*

 

4

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**NEIMAN MARCUS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

 

1.                                       Basisof Presentation

 

On April 22, 2005,Neiman Marcus, Inc., formerly Newton Acquisition, Inc., (Parent) andits wholly-owned subsidiary, Newton Acquisition Merger Sub, Inc. (MergerSub) were formed and incorporated in the state of Delaware. On April 29,2005, the Parent received subscriptions for 900 shares of its common stock fromNewton Holding, LLC (Holding) in exchange for a capital contribution of $900and Merger Sub issued 900 shares of its common stock to Parent in exchange fora capital contribution of $900. Holding, the Parent and Merger Sub were formedby investment funds affiliated with Texas Pacific Group and Warburg Pincus LLC(the Sponsors) for the purpose of acquiring The Neiman Marcus Group, Inc.(the Company). The equity subscriptions were subsequently funded by theSponsors.

 

In connection with theacquisition of the Company, Holding made an aggregate cash equity contributionof $1.420.0 million and a noncash equity contribution of $25.0 million toParent in exchange for Parent issuing 999,100 shares of its common stock toHolding. In addition, certain members of executive management of the Companymade cash equity contributions aggregating $7.7 million and noncash equitycontributions, consisting of shares of common stock and common stock options inthe Company, aggregating $17.9 million in exchange for 12,264 shares of commonstock in the Parent.

 

The acquisition of theCompany was completed on October 6, 2005 through the merger of Merger Subwith and into the Company, with the Company being the surviving entity (theAcquisition). Subsequent to the Acquisition, the Company is a subsidiary of theParent, which is controlled by Holding.

 

From its inception on April 22,2005 until the completion of the Acquisition, the Parent had no independentoperations or cash flows of its own. Subsequent to the Acquisition, the Parent’sassets, liabilities, revenues and expenses and cash flows consist solely ofthose derived from its investment in the Company. The Acquisition has beenrecorded as of October 1, 2005, the beginning of the Company’s October accountingperiod.

 

The Company is consideredto be the predecessor of the Parent and the financial statements of the Companyare presented as the predecessor financial statements of the Parent prior tothe Acquisition. As a result, the condensed consolidated statements of earningsand cash flows of the Parent for the thirty-week period ended April 29,2006 consist of the earnings and cash flows of the Company for the thirty-weekperiod from the completion of the Acquisition to April 29, 2006 (since theParent had no independent operations or cash flows prior to the Acquisition). Thecondensed consolidated statements of earnings and cash flows of the Company forthe thirty-nine weeks ended April 30, 2005 and for the nine weeks ended October 1,2005 are presented as Predecessor financial statements for comparison purposes.

 

All references to the “Predecessor”relate to The Neiman Marcus Group, Inc. for periods prior to theAcquisition. All references to the “Successor” relate to Neiman Marcus, Inc.for periods subsequent to the Acquisition. All references to “we” and “our”relate to the Predecessor for the periods prior to the Acquisition and to theSuccessor for periods subsequent to the Acquisition. All references to the “Company”refer to The Neiman Marcus Group, Inc. and all references to the “Parent”refer to Neiman Marcus, Inc.

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the third quarter offiscal year 2006 relate to the thirteen weeks ended April 29, 2006 of theSuccessor. All references to the third quarter of fiscal year 2005 relate tothe thirteen weeks ended April 30, 2005 of the Predecessor. All referencesto the year-to-date fiscal year 2006 period relate to the combined thirty-nineweeks ended April 29, 2006 and all references to the year-to-date fiscalyear 2005 period relate to the thirty-nine weeks ended April 30, 2005.

 

We have preparedthe accompanying unaudited condensed consolidated financial statements inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, these financial statements do not include all ofthe information and footnotes required by generally accepted accountingprinciples for complete financial statements. Therefore, these financialstatements should be read in conjunction with the Predecessor’s Annual Reporton Form 10-K for the fiscal year ended July 30, 2005.

 

In our opinion,the accompanying unaudited condensed consolidated financial statements containall adjustments, consisting of normal recurring adjustments, necessary topresent fairly our financial position, results of operations and cash flows forthe applicable interim periods. The results of operations for these periods arenot necessarily comparable to, or indicative of, results of any other interimperiod or for the fiscal year as a whole.

 

5

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**We are required to make estimatesand assumptions about future events in preparing financial statements inconformity with generally accepted accounting principles. These estimates andassumptions affect the amounts of assets, liabilities, revenues and expensesand the disclosure of gain and loss contingencies at the date of the unauditedcondensed consolidated financial statements. While we believe that our 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:

 

•                  Preliminary allocation ofthe price paid to acquire the Company to our assets and liabilities as of thedate of the Acquisition (as more fully described in Note 3);

 

•                  Recognition of revenues;

 

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

 

•                  Determination of impairment of long-livedassets;

 

•                  Recognitionof advertising and catalog costs;

 

•                  Measurementof liabilities related to our loyalty programs;

 

•                  Recognitionof income taxes; and

 

•                  Measurement of accruals forlitigation, general liability, workers’ compensation and health insurance,short-term disability, pension and postretirement health care benefits.

 

A description of ourcritical accounting policies is included in the Predecessor’s Annual Report on Form 10-Kfor the fiscal year ended  July 30,2005.

 

Certainprior period balances have been reclassified to conform to the currentperiod presentation. Depreciation expense and income from credit cardoperations, net are now shown as separate line items on our statements ofearnings. Prior to the second quarter of fiscal year 2006, depreciation expensewas included in buying and occupancy costs and the income from our credit cardoperations was included as a reduction to selling, general and administrativeexpenses.

 

***RecentAccounting Pronouncements.***In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123 (R), “Share-BasedPayment” (SFAS No. 123(R)). This standard is a revision of SFAS No. 123,“Accounting for Stock-Based Compensation,” and supersedes Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25)and its related implementation guidance. SFAS No. 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values and waseffective for the first interim period or annual reporting period beginningafter June 15, 2005. We adopted SFAS No. 123(R) as of the beginningof our first quarter of fiscal year 2006 using the modified prospective method,which requires companies to record stock compensation for all unvested and newawards as of the adoption date. Accordingly, we have not restated the priorperiod amounts presented herein. See Note 5 for further description of ourstock-based compensation.

 

In March 2005, theFASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations, an interpretation of FASB Statement No. 143” (FIN47). FIN 47 clarifies that conditional asset retirement obligations meet thedefinition of liabilities and should be recognized when incurred if their fairvalues can be reasonably estimated. FIN 47 is effective no later than the endof fiscal years ending after December 15, 2005 with the cumulative effectof initially applying FIN 47 being recognized as a change in accountingprinciple. We are in the process of evaluating the expected effect of FIN 47,if any, on our consolidated financial statements.

 

6

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2.                                       TheTransactions

 

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

 

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

 

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

 

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

 

•            equityinvestments from Parent funded by direct and indirect equity investments fromthe Sponsors, co-investors and management.

 

The Acquisition occurred simultaneouslywith:

 

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

 

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

 

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

 

•            thetermination of our previous $350 million unsecured revolving credit agreement(Credit Agreement).

 

We refer to the above transactions, the Acquisitionand our payment of any costs related to these transactions collectively hereinas the “Transactions.”   We refer to theSenior Notes and Senior Subordinated Notes collectively herein as the “Notes.”

 

***Transaction and Other Costs.***During the period from July 30, 2005to October 1, 2005, the Predecessor expensed $23.5 million in connectionwith the Transactions. These costs consisted primarily of $4.5 million ofaccounting, investment banking, legal and other costs associated with theTransactions and a $19.0 million non-cash charge for stock compensationresulting from the accelerated vesting of Predecessor stock options andrestricted stock in connection with the Acquisition.

 

***Carryover Basis Adjustment forManagement Shareholders.*** Executive management participants held certain equityinterests, including stock options, in the Predecessor prior to theTransactions and continue to hold equity interests in the Parent, representingindirect equity interests in the Successor after the Transactions. In accordancewith the provisions of Emerging Issues Task Force No. 88-16, “Basis inLeveraged Buyout Transactions,” the basis of executive management’s indirectinterests in the Successor after the Transactions is carried over at the basisof their interests in the Predecessor prior to the Transactions. The carryoverbasis of such interests less the net cash received by the managementparticipants represents a deemed dividend of $69.2 million to the managementparticipants and has been recognized as a reduction to shareholders’ equity ofthe Successor.

 

7

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**3.**               Purchase Accounting

 

We have accounted for theAcquisition in accordance with the provisions of Statement of FinancialAccounting Standards (SFAS) No. 141, “Business Combinations,” whereby thepurchase price paid to effect the Acquisition is allocated to state theacquired assets and liabilities at fair value. The Acquisition and thepreliminary allocation of the purchase price have been recorded as of October 1,2005, the beginning of our October accounting period. The purchase pricewas approximately $5,461.7 million. The sources and uses of funds in connectionwith the Transactions and the redemption of our 2008 Notes are summarized below(in millions):

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

 

In connection with thepreliminary purchase price allocation, we have made estimates of the fairvalues of our long-lived and intangible assets based upon assumptions relatedto future cash flows, discount rates and asset lives utilizing currentlyavailable information. As of April 29, 2006, we have recorded preliminarypurchase accounting adjustments to increase the carrying value of our propertyand equipment and inventory, to establish intangible assets for our tradenames,customer lists and favorable lease commitments and to revalue our long-termbenefit plan obligations, among other things. This allocation of the purchaseprice is preliminary and subject to our review and finalization of assetvaluations.

 

8

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The purchase price hasbeen preliminarily allocated as follows (in millions):

 
| Cash consideration:                                                          |   |     |   |    |    |
|------------------------------------------------------------------------------|--------|----------|--------|---------|---------|
| Paid to shareholders                                                         |   |     |   | $       | 5,092.9 |   |
| Transaction costs                                                            |   |     |   | 63.5    |    |
|                                                                         |   |     |   | 5,156.4 |    |
| Non-cash  consideration                                                      |   |     |   | 36.7    |    |
| Total  consideration                                                         |   |     |   | 5,193.1 |    |
|                                                                         |   |     |   |    |    |
| Net assets  acquired at historical cost                                      |   |     |   | 1,638.1 |    |
|                                                                         |   |     |   |    |    |
| Adjustments to  state acquired assets at fair value:                         |   |     |   |    |    |
| 1) Increase carrying value of property and equipment                         |   | $        | 135.9  |    |    |   |
| 2) Increase carrying value of inventory                                      |   | 38.1     |   |    |    |
| 3) Write-off historical goodwill and tradenames                              |   | (71.5    | )      |    |    |
| 4) Record intangible assets acquired                                         |   |     |   |    |    |
| Customer lists                                                               |   | 586.3    |   |    |    |
| Favorable lease commitments                                                  |   | 480.0    |   |    |    |
| Tradenames                                                                   |   | 1,691.1  |   |    |    |
| 5) Write-off other assets, primarily debt issue  costs                       |   | (3.7     | )      |    |    |
| 6) Adjustment to state 2008 Notes at redemption  value                       |   | (6.2     | )      |    |    |
| 7) Adjustment to state 2028 Debentures at fair value                         |   | 4.5      |   |    |    |
| 8) Write-off deferred real estate credits                                    |   | 90.2     |   |    |    |
| 9) Increase in long-term benefit obligations,  primarily pension obligations |   | (57.6    | )      |    |    |
| 10) Tax impact of  valuation adjustments                                     |   | (1,082.3 | )      |    |    |
| Deemed dividend  to management shareholders                                  |   | 69.2     |   | 1,874.0 |    |
| Net assets  acquired at fair value                                           |   |     |   | 3,512.1 |    |
|                                                                         |   |     |   |    |    |
| Excess purchase  price recorded as goodwill                                  |   |     |   | $       | 1,681.0 |   |
|                                                                              |        |          |        |         |         |  |  |

** **

Our tradenames haveindefinite lives and are not subject to amortization. Our tradenames andgoodwill will be reviewed at least annually for impairment.

 

Total estimatedamortization of all acquisition-related intangible assets during the periodfrom October 6, 2005 through July 29, 2006 and for each of our fiscalyears ending in July 2006 to 2010 is currently estimated as follows (inthousands):

 
| October 6, 2005 through July 29, 2006 |   | $      | 60,261 |   |
|-------------------------------------------------|--------|--------|--------|--------|
| 2007                                            |   | 72,874 |   |
| 2008                                            |   | 72,874 |   |
| 2009                                            |   | 72,874 |   |
| 2010                                            |   | 72,874 |   |

 

9

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***ProForma Financial Information.***The following unaudited proforma results of operations assume that the Transactions occurred on August 1,2004. The following unaudited pro forma results do not give effect to the saleof our credit card receivables, which was completed on July 7, 2005, orthe disposition of Chef’s Catalog, which was completed on November 8, 2004.This unaudited pro forma information should not be relied upon as necessarilybeing indicative of the historical results that would have been obtained if theTransactions had actually occurred on that date, nor the results that may beobtained in the future. 

 
| ** **         | ** ** | **Thirteen weeks ended** | ** ** | **Thirty-nine weeks ended** | ** ** |
|--------------------|------------|--------------------------|------------|-----------------------------|------------|
| **(in thousands)** | ** ** | **April 29,  2006** | ** ** | **April 30,  2005**    | ** ** | **April 29,  2006** | ** ** | **April 30,  2005** | ** ** |
|               |       |                     |       |                        |       |   |   |   |   |
| Revenues           |       | $                        | 1,027,009  |                        | $          | 933,372 |   | $ | 3,234,863 |   | $ | 2,970,533 |   |
| Net income         |       | $                        | 42,730     |                        | $          | 27,390 |   | $ | 100,152 |   | $ | 34,123 |   |

 

Included in thedetermination of pro forma net income for the thirty-nine weeks ended April 30,2005 are pro forma adjustments for non-cash charges to increase cost of goodssold for the step-up in the carrying value of inventories acquired of $39.6million. These pro forma adjustments resulted in pro forma decreases to cost ofgoods sold in the thirteen and thirty-nine weeks ended April 29, 2006 bythe amount of the actual non-cash charges recorded during these periods.

 

**4.**               Transactions with Sponsors

** **

In connection with theTransactions, we entered into a management services agreement with affiliatesof the Sponsors pursuant to which affiliates of one of the Sponsors received onthe closing date a transaction fee of $25 million in cash in connection withthe Transactions. Affiliates of the other Sponsor waived any cash transactionfee in connection with the Transactions.

 

In addition, pursuant tosuch agreement, and in exchange for on-going consulting and management advisoryservices that will be provided to us by the Sponsors and their affiliates,affiliates of the Sponsors will receive an aggregate annual management fee equalto the lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10million. Affiliates of the Sponsors will also receive reimbursement for out-of-pocketexpenses incurred by them or their affiliates in connection with servicesprovided pursuant to the agreement. These management fees are payable quarterlyin arrears. During the third quarter of fiscal year 2006 and the thirty weeksended April 29, 2006, we recorded management fees of $2.6 million and $6.4million, respectively, which are included in selling, general andadministrative expenses in the condensed consolidated statements of earnings.

 

The management servicesagreement also provides that affiliates of the Sponsors may receive futurefees in connection with certain subsequent financing and acquisition ordisposition transactions. The management services agreement includes customaryexculpation and indemnification provisions in favor of the Sponsors and theiraffiliates.

 

10

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**5.**               Stock-Based Compensation

** **

The Predecessorpreviously accounted for stock-based compensation awards to employees inaccordance with APB No. 25 and its related interpretations. Accordingly,we recognized compensation expense on our restricted stock awards but did not recognizecompensation expense for stock options since all options granted had anexercise price equal to the market value of our common stock on the grant date.We did not adopt the previous voluntary expense recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation” (SFAS No. 123), whereby the fairvalue of stock-based compensation awards would have been expensed over theterms of awards. However, consistent with the disclosure requirements of SFAS No. 123,we made pro forma disclosures of the effect that application of the fair valueexpense recognition provisions of SFAS No. 123 would have had on our netearnings.

 

In December 2004,the FASB issued SFAS No. 123(R). This standard is a revision of SFAS No. 123and supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on their fairvalues and is effective for the first interim period or annual reporting periodbeginning after June 15, 2005. We adopted SFAS No. 123(R) as of thebeginning of our first quarter of fiscal year 2006 using the modifiedprospective method, which required us to record stock compensation for all unvestedand new awards as of the adoption date. Accordingly, we have not restated priorperiod amounts presented herein.

 

***PredecessorStock-Based Compensation Accounting.***In connection withthe adoption of the provisions of SFAS No. 123(R), we recorded non-cashcharges for stock compensation of approximately $20.0 million in the periodfrom July 31, 2005 to October 1, 2005 primarily as a result of theaccelerated vesting of all Predecessor options and restricted stock inconnection with the Transactions (see Note 2).

 

The following tableillustrates the pro forma effect on net earnings for periods prior to theadoption of SFAS No. 123(R) as if the Predecessor had applied the fairvalue recognition provisions of SFAS No. 123 during such periods:

 
| **(in thousands)**                                                                                                                        | ** ** | **Thirteen  weeks ended  April 30,  2005** | ** ** | **Thirty-nine  weeks ended  April 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **(Predecessor)**                               | ** ** | **(Predecessor)**                                  | ** ** |
| Net earnings:                                                                                                                             |       |                                            |       |                                               |       |
| As reported                                                                                                                               |       | $                                               | 79,775     |                                               | $          | 214,478 |   |
| Add: stock-based employee compensation recorded  under the intrinsic Value method of APB No. 25, net of related taxes                |       | 826                                             |       | 2,236                                              |       |
| Less: stock-based employee compensation expense  determined under the fair value based method of SFAS No. 123, net of  related taxes |       | (2,917                                          | )          | (8,436                                             | )          |
| Pro forma net earnings                                                                                                                    |       | $                                               | 77,684     |                                               | $          | 208,278 |   |

** **

***SuccessorStock-Based Compensation Accounting.***On November 29,2005, the Parent adopted a new equity-based management compensation plan, whichauthorizes equity awards to be granted for up to 80,708.8 shares of the commonstock of the Parent, of which options for 75,207.5 shares were issued tocertain management employees. All options are outstanding at April 29,2006. Options granted vest over five years and have an exercise price of $1,445per share, with the exercise price with respect to approximately 50% of suchoptions escalating at a 10% compound rate per year until the earlier to occurof (i) exercise, (ii) the fifth anniversary of the date of grant or (iii) theoccurrence of a change in control; provided that in the event the Sponsorscause the sale of shares of the Parent to an unaffiliated entity, the exerciseprice will cease to accrete at the time of the sale with respect to a pro rataportion of the accreting options. Using the Black-Scholes option-pricing model,the per share fair value of these options was approximately $494 for the fixedprice options and $247 for the options with escalating exercise prices. Inestimating the fair value of our options, we made the following assumptions:expected term to exercise of five years; expected volatility of 30%; risk-freeinterest rate of 4.23%; and no dividend yield. Expected volatility is based ona combination of the Predecessor’s historical volatility adjusted for our newleverage and estimates of implied volatility of our peer group.

 

For the thirty-weeksended April 29, 2006, we recognized non-cash stock compensation expense of$2.5 million, which is included in selling, general and administrative expenses.The adoption of SFAS No. 123(R) had no impact on our cash flows fromoperations or financing activities. At April 29, 2006, unearned non-cashstock-based compensation that we expect to recognize as expense over the next 5years aggregates approximately $25.6 million.

 

11

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**6.**               The Credit Card Sale

** **

***CreditCard Sale.***On July 7, 2005, HSBC Bank Nevada,National Association (HSBC) purchased our approximately three million privatelabel Neiman Marcus and Bergdorf Goodman credit card accounts and relatedassets, as well as the outstanding balances associated with such accounts(Credit Card Sale). The total purchase price was approximately $647 million,consisting of $534 million in net cash proceeds and the assumption ofapproximately $113 million of our outstanding debt under our previous revolvingcredit card securitization facility (Credit Card Facility). We recognized again of $6.2 million in connection with the sale of our credit cardportfolio to HSBC in the fourth quarter of fiscal year 2005.

 

As a part of theCredit Card Sale, we entered into a long-term marketing and servicing alliancewith HSBC. Under the terms of this alliance, HSBC offers credit card and non-cardpayment plans bearing our brands and we receive ongoing payments from HSBCrelated to credit card sales and compensation for marketing and servicingactivities (HSBC Program Income). In addition, we continue to handle certainkey customer service functions. In tandem with HSBC, we have initiated variouschanges in our credit card program to alter the credit terms available to ourcardholders and to enhance the earnings of the portfolio. These changes haveincreased the level of HSBC Program Income earned by the Company. In thefuture, the HSBC Program Income may be either decreased based upon thelevel of future services we provide to HSBC or increased based upon otherchanges to our historical credit card program related to, among other things,the interest rates applied to unpaid balances and the assessment of late fees.

 

A summary of the incomeearned in connection with our proprietary credit card program is as follows:

 
| ** **             | ** ** | **Quarter-to-Date**                             | ** ** | **Year-to-Date**                                | ** **        |
|------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|-------------------|
| **(in thousands)**     | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirteen  weeks ended  April 30,  2005** | ** **        | **Thirty  weeks ended  April 29,  2006** | ** ** | **Nine weeks ended  October 1,  2005** | ** ** | **Thirty-nine weeks ended  April 30,  2005** | ** ** |
| ** **             | ** ** | **(Successor)**                                 | ** ** | ** **                                      | **(Predecessor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
| ** **             | ** ** | ** **                                      | ** ** | ** **                                      | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| HSBC Program  Income   |       | $                                               | 15,136     |                                            |              | $ | — |   | $ | 35,894 |   |   | $ | 7,818 |   | $ | — |   |
| Finance charge  income |       | —                                          |       |                                            | 23,640            |   | — |   |   | — |   | 64,645 |   |
| Bad debt, net          |       | —                                          |       |                                            | (4,610            | ) | — |   |   | — |   | (12,231 | ) |
|                   |       | $                                               | 15,136     |                                            |              | $ | 19,030 |   | $ | 35,894 |   |   | $ | 7,818 |   | $ | 52,414 |   |

 

**7.**               Loss on Disposition of Chef’s Catalog

** **

In November 2004, wesold our Chef’s Catalog direct marketing business to a private equity firm. Chef’sCatalog is a multi-channel retailer of professional-quality kitchenware withrevenues in fiscal year 2004 of approximately $73 million. At October 30,2004, Chef’s Catalog had net tangible assets, primarily inventory, of $12.5million and net intangible assets of $17.2 million. We received proceeds, netof selling costs, of $14.4 million from the sale. As the carrying value of theChef’s Catalog assets exceeded the fair value of such assets as determined bythe sale, we incurred a pre-tax loss of $15.3 million in the first quarter offiscal year 2005 related to the disposition of Chef’s Catalog.

 

12

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8.               Long-termDebt

 

The significantcomponents of our long-term debt are as follows:

 
| **(in thousands)**                                              | ** ** | **Interest  Rate** | ** ** | **April 29,  2006** | ** ** | **July 30,  2005** | ** **        | **April 30,  2005** | ** **        |
|-----------------------------------------------------------------|------------|--------------------|------------|--------------------------|------------|-------------------------|-------------------|--------------------------|-------------------|
| ** **                                                      | ** ** | ** **         | ** ** | **(Successor)**          | ** ** | ** **              | **(Predecessor)** | ** **               | **(Predecessor)** | ** ** |
|                                                            |       |               |       |                     |       |                    |              |                     |              |   |
| Asset-Based  Revolving Credit Facility                          |       | variable           |       | $                        | —     |                    |              | $                        | —            |   | $ | — |   |
| Senior Secured  Term Loan Facility                              |       | variable           |       | 1,875,000                |       |                    | —            |                     | —            |   |
| 2028 Debentures                                                 |       | 7.125%             |       | 120,663                  |       |                    | 124,823           |                     | 124,820           |   |
| Senior Notes                                                    |       | 9.0/9.75%          |       | 700,000                  |       |                    | —            |                     | —            |   |
| Senior  Subordinated Notes                                      |       | 10.375%            |       | 500,000                  |       |                    | —            |                     | —            |   |
| 2008 Notes                                                      |       | 6.65%              |       | —                   |       |                    | 124,957           |                     | 124,953           |   |
| Credit Card  Facility                                           |       | variable           |       | —                   |       |                    | —            |                     | 187,500           |   |
|                                                            |       |               |       | 3,195,663                |       |                    | 249,780           |                     | 437,273           |   |
| Less: current portion of borrowings under Credit  Card Facility |       |               |       | —                   |       |                    | —            |                     | 187,500           |   |
| Long-term debt                                                  |       |               |       | $                        | 3,195,663  |                    |              | $                        | 249,780           |   | $ | 249,773 |   |

 

***Senior Secured Asset-Based Revolving CreditFacility.***On October 6,2005, in connection with the Transactions, the Company entered into a creditagreement and related security and other agreements for a senior secured Asset-BasedRevolving Credit Facility with Deutsche Bank Trust Company Americas asadministrative agent and collateral agent. The Asset-Based Revolving CreditFacility provides financing of up to $600.0 million, subject to aborrowing base equal to at any time the lesser of 80% of eligible inventory(valued at the lower of cost or market value) and 85% of net orderlyliquidation value of the eligible inventory, less certain reserves. The Asset-BasedRevolving Credit Facility includes borrowing capacity available for letters ofcredit and for borrowings on same-day notice. At the closing of theTransactions, the Company utilized $150.0 million of the Asset-BasedRevolving Credit Facility for loans and approximately $16.5 million for letters of credit. In the second quarter of  fiscal year 2006, the Company repaid allloans under the Asset-Based Revolving Credit Facility. As of April 29,2006, the Company had $573.2 millionof unused borrowing availability under the Asset-Based Revolving CreditFacility based on a borrowing base of over $600.0 million and after givingeffect to $26.8 million used for letters of credit.

 

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

 

Borrowingsunder the Asset-Based Revolving Credit Facility bear interest at a rate perannum equal to, at the Company’s option, either (a) a base rate determinedby reference to the higher of (1) the prime rate of Deutsche Bank TrustCompany Americas and (2) the federal funds effective rate plus 1/2 of 1%or (b) a LIBOR rate, subject to certain adjustments, in each case plus anapplicable margin. The initial applicable margin is 0% with respect to baserate borrowings and 1.75% with respect to LIBOR borrowings. The applicablemargin is subject to adjustment based on the historical availability under theAsset-Based Revolving Credit Facility.  In addition, the Company 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. TheCompany must also pay customary letter of credit fees and agency fees.

 

If atany time the aggregate amount of outstanding loans, unreimbursed letter ofcredit drawings and undrawn letters of credit under the Asset-Based RevolvingCredit Facility exceeds the lesser of (i) the commitment amount and (ii) theborrowing base, the Company  will berequired to repay outstanding loans or cash collateralize letters of credit inan aggregate amount equal to such excess, with no reduction of the commitmentamount. If the amount available under the Asset-Based Revolving Credit Facilityis less than $60 million or an event of default has occurred, the Companywill be required to repay outstanding loans and cash collateralize letters ofcredit with the cash the Company is required to deposit daily in a collectionaccount maintained with the agent under the Asset-Based Revolving CreditFacility. The Company may voluntarily reduce the unutilized portion of thecommitment amount and repay outstanding loans at any time without premium orpenalty other than customary “breakage” costs with respect to LIBOR loans. Thereis no scheduled amortization under the Asset-Based Revolving Credit Facility;the principal amount of the loans outstanding is due and payable in full on October 6,2010.

 

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All obligations under theAsset-Based Revolving Credit Facility are guaranteed by Parent and certain ofthe Company’s existing and future domestic subsidiaries (excluding, among others, GurwitchProducts, L.L.C., and Kate Spade LLC (Brand Development Companies)). As of April 29,2006, the liabilities of the Company’s non-guarantor subsidiaries totaledapproximately $38.1 million, or 0.7% of consolidated liabilities, and theassets of the Company’s non-guarantor subsidiaries aggregated approximately$194.0 million, or 2.9% of consolidated total assets. All obligations under theCompany’s Asset-Based Revolving Credit Facility, and the guarantees of  those obligations, are secured, subject tocertain significant exceptions, by substantially all of the Company’s assetsand the assets of Parent and the Company’s subsidiaries that have guaranteedthe Asset-Based Revolving Credit Facility (subsidiary guarantors), including:

 

•                  a first-priority security interest inpersonal property consisting of inventory and related accounts, cash, depositaccounts, all payments received by the Company or the subsidiary guarantorsfrom credit card clearinghouses and processors or otherwise in respect of all creditcard charges for sales of inventory by the Company and the subsidiaryguarantors, certain related assets and proceeds of the foregoing; and

 

•                  a second-priority pledge of 100% of theCompany’s capital stock and certain of the capital stock held by the Company,Parent 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 second-priority security interest in,and mortgages on, substantially all other tangible and intangible assets of theCompany, Parent and each subsidiary guarantor, including a significant portionof the Company’s material owned and leased real property (which currentlyconsists of a majority of the Company’s full-line retail stores) and equipment.

 

Capital stock and othersecurities of a subsidiary of the Company that are owned by the Company or anysubsidiary guarantor will not constitute collateral under the Company’s Asset-BasedRevolving Credit Facility to the extent that such securities cannot secure theCompany’s 2028 Debentures or other secured public debt obligations withoutrequiring the preparation and filing of separate financial statements of suchsubsidiary in accordance with applicable SEC rules. As a result, the collateralunder the Company’s Asset-Based Revolving Credit Facility will include sharesof capital stock or other securities of subsidiaries of the Company or anysubsidiary 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. Stock of the Company’s Brand Development Companies and theirassets also will not constitute collateral under the Company’s Asset-BasedRevolving Credit Facility.

 

TheCompany’s Asset-Based Revolving Credit Facility contains a number of covenantsthat, among other things and subject to certain significant exceptions,restrict its ability and the ability of its subsidiaries to:

 

•                  incur additional indebtedness;

 

•                  pay dividends on the Company’s capitalstock or redeem, repurchase or retire the Company’s capital stock orindebtedness;

 

•                  make investments, loans, advances andacquisitions;

 

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

 

•                  engage in transactions with the Company’saffiliates;

 

•                  sell assets, including capital stock ofthe Company’s subsidiaries;

 

•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and lease backtransactions.

 

Thecovenants limiting dividends and other restricted payments; investments, loans,advances and acquisitions; and prepayments or redemptions of other indebtedness,each permit the restricted actions in an unlimited amount, subject to thesatisfaction of certain payment conditions, principally that the Company musthave at least $75.0 million of pro forma excess availability under theAsset-Based Revolving Credit Facility and that the Company must be in pro formacompliance with the fixed charge coverage ratio described below.

 

Althoughthe credit agreement governing the Asset-Based Revolving Credit Facility doesnot require the Company to comply with any financial ratio maintenancecovenants, if less than $60.0 million were available to be borrowed underthe Asset-Based Revolving Credit Facility at any time, the Company would not bepermitted to borrow any additional amounts unless its pro forma ratio of

 

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consolidatedEBITDA to consolidated Fixed Charges (as such terms are defined in the creditagreement) were at least 1.1 to 1.0. The credit agreement also containscustomary affirmative covenants and events of default.

 

***Senior Secured Term Loan Facility.***On October 6, 2005, in connectionwith the Transactions, the Company entered into a credit agreement and relatedsecurity and other agreements for a $1,975.0 million Senior Secured TermLoan Facility with Credit Suisse as administrative agent and collateral agent. Thefull amount of the Senior Secured Term Loan Facility was borrowed on October 6,2005. In the second quarter of fiscal year 2006, the Company repaid $100.0million principal amount of the loans under the Senior Secured Term LoanFacility.

 

Borrowingsunder the Senior Secured Term Loan Facility bear interest at a rate per annumequal to, at the Company’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and (2) thefederal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subjectto certain adjustments, in each case plus an applicable margin. The applicablemargin is 1.5% with respect to base rate borrowings and 2.5% with respect toLIBOR borrowings. The interest rate on the outstanding borrowings pursuant tothe Senior Secured Term Loan Facility was 7.24% at April 29, 2006.

 

Thecredit agreement governing the Senior Secured Term Loan Facility requires theCompany to prepay outstanding term loans with 50% (which percentage will bereduced to 25% if the Company’s total leverage ratio is less than a specifiedratio and will be reduced to 0% if the Company’s total leverage ratio is lessthan a specified ratio) of its annual excess cash flow (as defined in thecredit agreement). If a change of control (as defined in the credit agreement)occurs, the Company will be required to offer to prepay all outstanding termloans, at a prepayment price equal to 101% of the principal amount to beprepaid, plus accrued and unpaid interest to the date of prepayment. TheCompany 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.

 

TheCompany may voluntarily prepay outstanding loans under the Senior SecuredTerm Loan Facility at any time without premium or penalty other than customary “breakage”costs with respect to LIBOR loans. If the Company repays all or any portion ofthe Senior Secured Term Loan Facility prior to October 6, 2006 (other thana prepayment that is made with certain designated asset sale proceeds), theCompany must pay 101% of the principal amount to be repaid. There is noscheduled amortization under the Senior Secured Term Loan Facility. Theprincipal amount of the loans outstanding is due and payable in full on April 6,2013.

 

Allobligations under the Senior Secured Term Loan Facility are unconditionallyguaranteed by Parent and each direct and indirect domestic subsidiary of theCompany that guarantees the obligations of the Company under its Asset-BasedRevolving Credit Facility. All obligations under the Senior Secured Term LoanFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the Company’s assetsand the assets of its Parent and the subsidiary guarantors, including:

 

•                  a first-priority pledge of 100% of theCompany’s capital stock and certain of the capital stock held by the Company,Parent 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 security interest in,and mortgages on, substantially all other tangible and intangible assets of theCompany, Parent and each subsidiary guarantor, including a significant portionof the Company’s material owned and leased real property (which currentlyconsists of a majority of the Company’s full-line retail stores) and equipment,but excluding, among other things, the collateral described in the followingbullet point; and

 

•                  a second-priority security interest inpersonal property consisting of inventory and related accounts, cash, depositaccounts, all payments received by the Company or the subsidiary guarantorsfrom credit card clearinghouses and processors or otherwise in respect of allcredit card charges for sales of inventory by the Company and the subsidiary guarantors,certain related assets and proceeds of the foregoing.

 

Capital stock and othersecurities of a subsidiary of the Company that are owned by the Company or anysubsidiary guarantor will not constitute collateral under the Company’s SeniorSecured Term Loan Facility to the extent that such securities cannot secure the2028 Debentures or other secured public debt obligations without requiring thepreparation and filing of separate financial statements of such subsidiary inaccordance with applicable SEC rules. As a result, the collateral under theCompany’s Senior Secured Term Loan Facility will include shares of capitalstock or other securities of subsidiaries of the Company or any subsidiaryguarantor only to the extent that the applicable value of such securities (on asubsidiary-by-subsidiary basis) is less than 20% of the aggregate principalamount of the 2028 Debentures or other secured public debt obligations. Stockof the Company’s Brand Development Companies and their assets also will not constitutecollateral under the Company’s Senior Secured Term Loan Facility.

 

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

 

***2028Debentures.***In May 1998, the Company issued $125.0million aggregate principal amount of its 2028 Debentures. In connection withthe Transactions, the Company equally and ratably secured the 2028 Debenturesby a first lien security interest on certain collateral subject to liensgranted under the Company’s Senior Secured Credit Facilities constituting (a) (i) 100%of the capital stock of certain of the Company’s existing and future domesticsubsidiaries, and (ii) 100% of the non-voting stock and 65% of the voting stockof certain of the Company’s existing and future foreign subsidiaries and (b) certainof the Company’s principal properties that include a majority of the Company’sfull-line stores, in each case, to the extent required by the terms of theindenture governing the 2028 Debentures. The 2028 Debentures contain covenantsthat restrict the Company’s ability to create liens and enter into sale andlease back transactions. The collateral securing the 2028 Debentures will bereleased upon the release of liens on such collateral under the Company’sSenior Secured Credit Facilities and any other debt (other than the 2028Debentures) secured by such collateral.  Capital stock and other securities of asubsidiary of the Company that are owned by the Company or any subsidiary willnot constitute collateral under the 2028 Debentures to the extent such propertydoes not constitute collateral under the Company’s Senior Secured CreditFacilities as described above. Parent is currently considering providing aguarantee of the 2028 Debentures.

 

***Senior Notes.***On October 6, 2005, NewtonAcquisition Merger Sub, Inc. issued $700.0 million aggregate originalprincipal amount of 9.0% / 9.75% Senior Notes under a senior indenture (SeniorIndenture) with Wells Fargo Bank, National Association, as trustee. At theclosing of the Transactions, as the surviving corporation in the Acquisition,the Company assumed all the obligations of Newton Acquisition Merger Sub, Inc.under the Senior Indenture. The Senior Notes mature on October 15, 2015.

 

For any interest payment period through October 15,2010, the Company may, at its option, elect to pay interest on the Senior Notesentirely in cash (Cash Interest) or entirely by increasing the principal amountof the outstanding Senior Notes or by issuing additional Senior Notes (PIKInterest). Cash Interest on the Senior Notes accrues at the rate of 9% perannum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum.After October 15, 2010, the Company will make all interest payments on theSenior Notes entirely in cash. All Senior Notes mature on October 15, 2015and have the same rights and benefits as the Senior Notes issued on October 6,2005. Interest on the Senior Notes is payable quarterly in arrears on each January 15,April 15, July 15 and October 15, commencing on January 15,2006.

 

TheSenior Notes are guaranteed, jointly and severally, on an unsecured, seniorbasis, by each of the Company’s wholly-owned domestic subsidiaries thatguarantee the Company’s obligations under its Senior Secured Credit Facilitiesand by Parent. The Senior Notes and the guarantees thereof are the Company’sand the guarantors’ unsecured, senior obligations and rank (i) equal inthe right of payment with all of the Company’s and the guarantors’ existing andfuture senior indebtedness, including any borrowings under the Company’s SeniorSecured Credit Facilities and the guarantees thereof and the Company’s 2028Debentures; and (ii) senior to all of the Company’s and its guarantors’existing and future subordinated indebtedness, including the SeniorSubordinated Notes due 2015 and the guarantees thereof. The Senior Notes alsoare effectively junior in priority to the Company’s and its guarantors’obligations under all secured indebtedness, including the Company’s SeniorSecured Credit Facilities, the 2028 Debentures, and any other securedobligations of the Company, in each case, to the extent of the value of theassets securing such obligations. In addition, the Senior Notes arestructurally subordinated to all existing and future liabilities, includingtrade payables, of the Company’s subsidiaries that are not providingguarantees.

 

TheCompany is not required to make any mandatory redemption or sinking fundpayments with respect to the Senior Notes, but under certain circumstances, theCompany may be required to offer to purchase Senior Notes as describedbelow. The Company may from time to time acquire Senior Notes by meansother than a redemption, whether by tender offer, in open market purchases, throughnegotiated transactions or otherwise, in accordance with applicable securitieslaws.

 

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

 

Prior to October 15, 2008, the Company may, atits option, subject to certain conditions, redeem up to 35% of the originalaggregate principal amount of Senior Notes at a redemption price equal to 109%of the aggregate principal amount thereof, *plus*accrued and unpaid interest, and Additional Interest, if any, thereon to theredemption date, with the net cash proceeds of one or more equity offerings ofthe Company or any direct or indirect parent of the Company to the extent suchnet proceeds are contributed to the Company. At any time prior to October 15, 2010, theCompany also may redeem all or a part of the Senior Notes at aredemption

 

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priceequal to 100% of the principal amount of Senior Notes redeemed plus anapplicable premium, as provided in the Senior Indenture, as of, and accrued andunpaid interest and Additional Interest, if any, to the redemption date.

 

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

 

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

 

•                  incur additional indebtedness;

 

•                  pay dividends on the Company’s capitalstock or redeem, repurchase or retire the Company’s capital stock orsubordinated indebtedness;

 

•                  make investments;

 

•                  create restrictions on the payment ofdividends or other amounts to the Company from its restricted subsidiaries thatare not guarantors of the notes;

 

•                  engage in transactions with the Company’saffiliates;

 

•                  sell assets, including capital stock ofthe Company’s subsidiaries;

 

•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and lease backtransactions.

 

TheCompany’s Brand Development Companies are not subject to the covenantscontained in the Senior Indenture. The Senior Indenture also provides forevents of default, which, if any of them occurs, would permit or require theprincipal, premium, if any, interest and any other monetary obligations on alloutstanding Senior Notes to be due and payable immediately.

 

***Senior Subordinated Notes.***On October 6, 2005, NewtonAcquisition Merger Sub, Inc. issued $500.0 million aggregate principalamount of 10.375% Senior Subordinated Notes under a senior subordinatedindenture (Senior Subordinated Indenture) with Wells Fargo Bank, NationalAssociation, as trustee. At the closing of the Transactions, as the survivingcorporation in the Acquisition, the Company assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior SubordinatedIndenture. The Senior Subordinated Notes mature on October 15, 2015. Intereston the Senior Subordinated Notes is payable in cash semi-annually in arrears oneach April 15 and October 15, commencing April 15, 2006.

 

TheSenior Subordinated Notes are guaranteed, jointly and severally, on anunsecured, senior subordinated basis, by each of the Company’s wholly-owneddomestic subsidiaries that guarantee the Company’s obligations under its SeniorSecured Credit Facilities and by Parent. The Senior Subordinated Notes and theguarantees thereof are the Company’s and the guarantors’ unsecured, seniorsubordinated obligations and rank (i)   junior to all of the Company’s and theguarantors’ existing and future senior indebtedness, including the Senior Notesand any borrowings under the Company’s Senior Secured Credit Facilities, andthe guarantees thereof and the Company’s 2028 Debentures; (ii) equallywith any of the Company’s and the guarantors’ future senior subordinatedindebtedness; and (iii) senior to any of the Company’s and the guarantors’future subordinated indebtedness. In addition, the Senior Subordinated Notesare structurally subordinated to all existing and future liabilities, includingtrade payables, of the Company’s subsidiaries that are not providingguarantees.

 

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

 

Exceptas described below, the Senior Subordinated Notes are not redeemable at theCompany’s option prior to October 15, 2010. From and after October 15,2010, the Company may redeem the Senior Subordinated Notes, in whole or inpart, at a redemption price equal to 105.188% of principal amount, decliningannually to 100% of principal amount on October 15, 2013, plus accrued andunpaid interest, and Additional Interest (as defined in the Senior SubordinatedIndenture), if any, thereon to the applicable redemption date.

 

Priorto October 15, 2008, the Company may, at its option, subject to certainconditions, redeem up to 35% of the original aggregate principal amount ofSenior Subordinated Notes at a redemption price equal to 110.375% of theaggregate principal amount thereof,

 

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*plus* accrued and unpaid interest, and Additional Interest, if any, thereonto the redemption date, with the net cash proceeds of one or more equityofferings of the Company or any direct or indirect parent of the Company to theextent such net proceeds are contributed to the Company.

 

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

 

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

 

Theindenture governing the Senior Subordinated Notes contains covenantssubstantially similar to those applicable to the Company’s Senior Notesdescribed above. The Senior Subordinated Indenture also provides for events ofdefault, which, if any of them occurs, would permit or require the principal,premium, if any, interest and any other monetary obligations on all outstandingSenior Notes to be due and payable immediately, subject to certain exceptions.

 

***Redemption of 2008 Notes.  ***In May 1998, the Company issued $125.0 millionaggregate principal amount of its 2008 Notes. Upon closing of the Transactions,the Company called its 2008 Notes for redemption pursuant to their terms. On November 7,2005, the Company used $134.7 million of reserved cash to redeem its 2008Notes, which included a call premium of $6.2 million plus accrued interest of$3.5 million through the redemption date.

 

***Maturitiesof Long-Term Debt.  ***AtApril 29, 2006, annual maturities of long-term debt during the next fiveyears and thereafter are as follows (in millions):

 
| 2006       |   | $       | — |   |
|------------|--------|---------|--------|--------|
| 2007       |   | —  |   |
| 2008       |   | —  |   |
| 2009       |   | —  |   |
| 2010       |   | —  |   |
| Thereafter |   | 3,195.7 |   |

 

***InterestRate Swaps.***The Company uses derivative financialinstruments to help manage its interest rate risk.  Effective December 6, 2005, the Companyentered 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. As of the effective date, theCompany designated the interest rate swaps as cash flow hedges. As a result,changes in the fair value of the Company’s swaps are recorded subsequent to theeffective date as a component of other comprehensive income.

 

At April 29, 2006,the fair value of the Company’s interest rate swap agreements was a gain ofapproximately $19.4 million, which amount is included in other assets. As aresult of the swap agreements, the Company’s effective fixed interest rates asto the $1,000.0 million in floating rate indebtedness will range from 6.931% to7.499% per quarter and result in an average fixed rate of 7.285%.

 

9.               AccumulatedOther Comprehensive Income (Loss)

 

The following table shows the components of accumulated othercomprehensive income (loss):

 
| **(in thousands)**                                   | ** ** | **April 29,  2006** | ** ** | **July 30,  2005** | ** **        | **April 30,  2005** | ** **        |
|------------------------------------------------------|------------|--------------------------|------------|-------------------------|-------------------|--------------------------|-------------------|
| ** **                                           | ** ** | **(Successor)**          | ** ** | ** **              | **(Predecessor)** | ** **               | **(Predecessor)** | ** ** |
|                                                 |       |                     |       |                    |              |                     |              |   |
| Unrealized gain  (loss) on financial instruments     |       | $                        | 9,350      |                    |              | $                        | (1,114            | ) | $ | 57 |   |
| Minimum pension  liability adjustments               |       | —                   |       |                    | (46,921           | )                        | (4,673            | ) |
| Other                                                |       | 316                      |       |                    | 1,005             |                     | 1,184             |   |
| Total  accumulated other comprehensive income (loss) |       | $                        | 9,666      |                    |              | $                        | (47,030           | ) | $ | (3,432 | ) |

 

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10.         EmployeeBenefit Plans

 

***Descriptionof Benefit Plans.***We sponsor a defined benefit pensionplan (Pension Plan) covering substantially all full-time employees. We alsosponsor an unfunded supplemental executive retirement plan (SERP Plan) thatprovides additional pension benefits to certain employees. Benefits under bothplans are based on the employees’ years of service and compensation overdefined periods of employment. Pension Plan assets consist primarily of equityand fixed income securities.

 

Retirees and activeemployees hired prior to March 1, 1989 are eligible to participate in aplan providing certain limited postretirement health care benefits(Postretirement Plan) if they have met certain service and minimum agerequirements.

 

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

 
| ** **                                         | ** ** | **Quarter-to-Date**                             | ** ** | **Year-to-Date**                                | ** **        |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|-------------------|
| **(in thousands)**                                 | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirteen  weeks ended  April 30,  2005** | ** **        | **Thirty  weeks ended  April 29,  2006** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Thirty-nine  weeks ended  April 30,  2005** | ** ** |
| ** **                                         | ** ** | **(Successor)**                                 | ** ** | ** **                                      | **(Predecessor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
| Pension Plan:                                      |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| Service cost                                       |       | $                                               | 4,027      |                                            |              | $ | 3,196 |   | $ | 9,293 |   |   | $ | 2,823 |   | $ | 9,588 |   |
| Interest cost                                      |       | 5,250                                           |       |                                            | 4,636             |   | 12,115 |   |   | 3,468 |   | 13,907 |   |
| Expected return on plan assets                     |       | (5,684                                          | )          |                                            | (4,712            | ) | (13,118 | ) |   | (3,636 | ) | (14,137 | ) |
| Net amortization of losses and prior service costs |       | —                                          |       |                                            | 1,208             |   | — |   |   | 1,205 |   | 3,626 |   |
| Pension Plan expense                               |       | $                                               | 3,593      |                                            |              | $ | 4,328 |   | $ | 8,290 |   |   | $ | 3,860 |   | $ | 12,984 |   |
|                                               |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| SERP Plan:                                         |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| Service cost                                       |       | $                                               | 474        |                                            |              | $ | 361 |   | $ | 1,094 |   |   | $ | 330 |   | $ | 1,084 |   |
| Interest cost                                      |       | 1,114                                           |       |                                            | 1,014             |   | 2,571 |   |   | 730 |   | 3,042 |   |
| Net amortization of losses and prior service costs |       | —                                          |       |                                            | 384               |   | — |   |   | 394 |   | 1,151 |   |
| SERP Plan expense                                  |       | $                                               | 1,588      |                                            |              | $ | 1,759 |   | $ | 3,665 |   |   | $ | 1,454 |   | $ | 5,277 |   |
|                                               |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| Postretirement  Plan:                              |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| Service cost                                       |       | $                                               | 12         |                                            |              | $ | 15 |   | $ | 27 |   |   | $ | 8 |   | $ | 44 |   |
| Interest cost                                      |       | 214                                             |       |                                            | 318               |   | 494 |   |   | 139 |   | 954 |   |
| Net amortization of losses (gains)                 |       | —                                          |       |                                            | 26                |   | — |   |   | (5 | ) | 79 |   |
| Postretirement expense                             |       | $                                               | 226        |                                            |              | $ | 359 |   | $ | 521 |   |   | $ | 142 |   | $ | 1,077 |   |

 

***PurchaseAccounting Adjustments.***The obligations and assetsrelated to our benefit plans were valued at fair value as of the date of theAcquisition, using a discount rate of 5.75%, as follows:

 
| **(in thousands)**                                                          | ** ** | **Pension  Plan** | ** ** | **SERP  Plan** | ** ** | **Postretirement  Plan** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|
|                                                                        |       |              |       |           |       |                     |       |
| Benefit  obligations at fair value                                          |       | $                 | 354,807    |           | $          | 76,806                   |       | $ | 15,281 |   |
| Assets held by  defined benefit pension plan, at fair value                 |       | 287,871           |       | —         |       | —                   |       |
| Excess of  benefit obligations over assets                                  |       | 66,936            |       | 76,806         |       | 15,281                   |       |
| Less: previously recorded benefit plan obligations recorded  by Predecessor |       | (19,655           | )          | (66,161        | )          | (18,205                  | )          |
| Adjustment to  increase benefit plan obligations                            |       | $                 | 47,281     |           | $          | 10,645                   |       | $ | (2,924 | ) |

 

19

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***FundingPolicy and Plan Assets.***Our policy is to fund the PensionPlan at or above the minimum required by law. In 2005, we made voluntarycontributions of $20.0 million for the plan year ended July 31, 2004. Basedupon currently available information, we will not be required to makecontributions to the Pension Plan for either the 2006 or 2005 plan years;however, we could decide to make a voluntary contribution based on ourevaluation of the Pension Plan.

 

***Effectof Medicare Subsidy on Postretirement Plan.***In December 2003,the U.S. Congress enacted the Medicare Prescription Drug, Improvement andModernization Act of 2003 (Act) that provides a prescription drug subsidy,beginning in January 2006, to companies that sponsor postretirement healthcare plans that provide drug benefits. Based upon the provisions of thelegislation enacted in January 2005, we reviewed the provisions of ourPostretirement Plan with our actuaries to determine whether the benefitsoffered by our plan met the statutory definition of “actuarially equivalent”prescription drug benefits that qualify for the federal subsidy. Based uponthis review, we believe that our benefits qualify for the subsidy. We estimatethe annual federal subsidy to be received in the next ten years under the Actto be approximately $0.2 million, which subsidy was considered in thedetermination of the fair value of the Postretirement Plan as of the date ofthe Acquisition.

 

11.         Segments

 

We have identified two reportablesegments: Specialty Retail Stores and Direct Marketing. The Specialty RetailStores segment includes all of our Neiman Marcus and Bergdorf Goodman retailstores, including Neiman Marcus clearance stores. The Direct Marketing segmentconducts both online operations and print catalog under the Neiman Marcus,Horchow and Bergdorf Goodman brand names. Other includes our 51% interest inGurwitch Products, L.L.C., which designs and markets the Laura Mercier cosmeticline, and our 56% interest in Kate Spade LLC, which designs and retails high-enddesigner handbags and accessories.

 

Both the Specialty Retail Stores andDirect Marketing segments, as well as Kate Spade LLC and Gurwitch Products,L.L.C., derive their revenues from the sale of high-end fashion apparel,accessories, cosmetics and fragrances from leading designers, precious andfashion jewelry and decorative home accessories.

 

The following table sets forth the informationfor our reportable segments:

 
| ** **                                                                                       | ** ** | **Quarter-to-Date**                             | ** ** | **Year-to-Date**                                | ** **        |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|-------------------|
| **(in thousands)**                                                                               | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirteen  weeks ended  April 30,  2005** | ** **        | **Thirty  weeks ended April 29,  2006** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Thirty-nine  weeks ended  April 30,  2005** | ** ** |
| ** **                                                                                       | ** ** | **(Successor)**                                 | ** ** | ** **                                      | **(Predecessor)** | ** ** | **(Successor)** | ** ** | ** ** | **(Predecessor)** | ** ** | **(Predecessor)** | ** ** |
| REVENUES:                                                                                        |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| Specialty Retail Stores                                                                          |       | $                                               | 840,220    |                                            |              | $ | 766,877 |   | $ | 2,084,129 |   |   | $ | 544,857 |   | $ | 2,415,749 |   |
| Direct Marketing                                                                                 |       | 152,097                                         |       |                                            | 130,532           |   | 416,479 |   |   | 87,515 |   | 458,514 |   |
| Other                                                                                            |       | 34,692                                          |       |                                            | 35,963            |   | 82,607 |   |   | 19,276 |   | 96,270 |   |
| **Total**                                                                                        |       | $                                               | 1,027,009  |                                            |              | $ | 933,372 |   | $ | 2,583,215 |   |   | $ | 651,648 |   | $ | 2,970,533 |   |
|                                                                                             |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| OPERATING  EARNINGS:                                                                             |       |                                            |       |                                            |              |   |   |   |   |   |   |   |   |
| Specialty Retail Stores                                                                          |       | $                                               | 142,603    |                                            |              | $ | 125,832 |   | $ | 280,984 |   |   | $ | 91,372 |   | $ | 343,781 |   |
| Direct Marketing                                                                                 |       | 22,950                                          |       |                                            | 16,780            |   | 67,280 |   |   | 8,246 |   | 55,943 |   |
| Other                                                                                            |       | (155                                            | )          |                                            | 4,572             |   | 4,006 |   |   | (1,923 | ) | 10,241 |   |
| Subtotal                                                                                         |       | 165,398                                         |       |                                            | 147,184           |   | 352,270 |   |   | 97,695 |   | 409,965 |   |
| Corporate expenses                                                                               |       | (14,375                                         | )          |                                            | (12,532           | ) | (30,691 | ) |   | (5,809 | ) | (30,390 | ) |
| Amortization of customer lists and favorable lease  commitments                                  |       | (18,217                                         | )          |                                            | —            |   | (42,041 | ) |   | — |   | — |   |
| Non-cash charges related to other valuation  adjustments made in connection with the Acquisition |       | (128                                            | )          |                                            | —            |   | (38,606 | ) |   | — |   | — |   |
| Transaction and other costs                                                                      |       | —                                          |       |                                            | —            |   | — |   |   | (23,544 | ) |   |   |
| Loss on disposition of Chef’s Catalog                                                       |       | —                                          |       |                                            | —            |   | — |   |   | — |   | (15,348 | ) |
| Total                                                                                            |       | $                                               | 132,678    |                                            |              | $ | 134,652 |   | $ | 240,932 |   |   | $ | 68,342 |   | $ | 364,227 |   |

 

20

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**12.**         Commitments and Contingencies

** **

***Investmentsin Brand Development Companies.***         Our brand development companies consist of our 56% interestin Kate Spade LLC, which designs and markets high-end designer handbags andaccessories, and our 51% interest in Gurwitch Products, L.L.C., which designsand markets the Laura Mercier cosmetics line. Our investments in andrelationships with our brand development companies are governed by operatingagreements that provide for an orderly transition process in the event anyinvestor wishes to sell its interest, or purchase another investor’s interest. Amongother things, these operating agreements contain currently exercisable putoption provisions entitling each minority investor to put their interest to us,and currently exercisable call option provisions entitling us to purchase eachminority investor’s interest, at a purchase price mutually agreed to by theparties. The purchase price will be determined, in the case of the Gurwitchinterests, by one or more nationally recognized investment banking firms and,in the case of the Kate Spade interests, by the parties or, in the event theparties are unable to agree on a mutually acceptable price, by a mutuallyacceptable nationally recognized investment banking firm, subject to certainconditions. We may elect to defer the consummation of a put option for aperiod of six months by cooperating with the other investors in seeking eithera sale of the relevant brand development company to a third party or a publicoffering of the relevant brand development company’s securities. If a sale to athird party or public offering of the relevant brand development company’ssecurities is not consummated within six months after the exercise of the putoption (which period may be automatically extended for an additional twomonths if a registration statement for the relevant brand development companyis filed with the SEC), we are obligated to consummate the put option. Underthe terms of the Kate Spade operating agreement, consummation of the put optionshall occur within thirty days after the determination of the valuation withrespect to the exercise of the put option, unless we have elected to defer theconsummation of the put option for the six-month period referred to above, andshould a third party sale or public offering of Kate Spade occur within suchsix-month period, we are required to pay the Kate Spade investors thedifference, if any, between the put option valuation price for their interestand the amount they realize through the third party sale of public offering.

 

In April 2005, theminority investors in Kate Spade LLC exercised the put option described abovewith respect to the full amount of their stake in such company. We subsequentlyentered into a standstill agreement to postpone the put process while weengaged in discussions with the minority investors of Kate Spade LLC regardingcertain strategic alternatives, including the possible sale of such company. Thestandstill agreement, as extended, expired on March 21, 2006, but theparties are continuing to pursue discussions regarding a possible sale of suchcompany while the put valuation process proceeds. Although such discussions areongoing, no assurance can be given that they will ultimately lead to any transaction.It is possible that we may be required to purchase the shares of theminority investors in Kate Spade LLC pursuant to the option as early as thefourth quarter of fiscal 2006.

 

We have also been indiscussions with the minority investors of Gurwitch Products, L.L.C. regardingcertain strategic alternatives, including the possible sale of such company. Noassurance can be given that these discussions will ultimately lead to anytransaction. In addition, the indentures governing the notes and the terms ofour senior secured credit facilities permit us to distribute all of our equityinterests in Gurwitch Products, L.L.C. to the holders of our equity withoutrestriction (except in certain limited circumstances when we are paying PIKinterest on the senior notes).

 

***Litigation.***We are currently involved in various legal actions andproceedings that arose in the ordinary course of our business. We believe thatany liability arising as a result of these actions and proceedings will nothave a material adverse effect on our financial position, results of operationsor cash flows.

 

On May 4, 2005, apurported class action complaint, NECA-IBEW Pension Fund (The DecaturPlan) v. The Neiman Marcus Group, Inc. et al. (CA No. 3-05 CV-0898B),was filed by a putative stockholder in federal court in the Northern Districtof Texas against our Company and its directors challenging the proposed merger.An amended complaint was filed on July 25, 2005. The amended complaintalleged a cause of action for breach of fiduciary duty against us and ourdirectors, claiming, among other things, that the defendants had endeavored tocomplete the sale of our Company and its assets at a grossly inadequate andunfair price and pursuant to an unfair process that failed to maximize shareholdervalue. In addition, the amended complaint alleged that our directors were notindependent and breached their fiduciary duties in connection with the approvalof the merger by, among other things, (i) tailoring the transaction toserve the interests of the defendants and the family of Richard A. Smith, thethen chairman of our board of directors and our largest stockholder, ratherthan structuring the merger to obtain the highest price for stockholders, (ii) deprivingpublic stockholders of the value of certain assets (including the credit cardbusiness and our third quarter 2005 profits), (iii) failing to realize thefinancial benefits from the sale of the credit card business, (iv) notengaging in a fair process of negotiating at arm’s length, including provisionsprecluding superior competing bids (including a termination fee and nosolicitation provision), and (v) structuring a preferential deal forinsiders. The amended complaint further claimed that our financial advisor hada conflict of interest by also acting as a financing source for the merger, andthat our proxy statement in respect of the merger omitted material informationpurportedly necessary to ensure a fully informed shareholder vote. The amendedcomplaint sought, among other things, injunctive relief to enjoin theconsummation of the merger, to rescind any actions taken to effect the merger,to direct the defendants to sell or auction our Company for the highestpossible price, and to impose a constructive trust in favor of plaintiffs upon anybenefits

 

21

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improperly received bydefendants. Following the closing of the merger, plaintiff voluntarilydismissed the lawsuit with prejudice as moot on December 1, 2005, andprovided a release of all of the defendants for claims arising out of themerger. The Company paid plaintiff’s attorneys’ fees in connection with certaindisclosures requested by plaintiff and included in the proxy statement sent tothe shareholders regarding the merger.

 

**13.**         Condensed Consolidating Financial Information

** **

All of the Company’s obligations underthe Asset-Based Revolving Credit Facility, the Senior Secured Term LoanFacility, the Senior Notes and the Senior Subordinated Notes are guaranteed bythe Parent and certain of the Company’s existing and future domesticsubsidiaries (principally, Bergdorf Goodman, Inc. through which theCompany conducts the operations of its Bergdorf Goodman stores and NM NevadaTrust which holds legal title to certain real property and intangible assetsused by the Company in conducting its operations). Non-guarantor subsidiariesconsist principally of Gurwitch Products, L.L.C., Kate Spade LLC and NeimanMarcus Funding Corporation through which the Company previously conducted itscredit card operations prior to the Credit Card Sale. The guarantees by theParent and each subsidiary guarantor are full and unconditional and joint andseveral.

 

The following condensed consolidatingfinancial information represents the financial information of Neiman Marcus, Inc.and its wholly-owned subsidiary guarantors, prepared on the equity basis ofaccounting. The information is presented in accordance with the requirements ofRule 3-10 under the Securities and Exchange Commission’s Regulation S-X. Thefinancial information may not necessarily be indicative of results ofoperations, cash flows or financial position had the subsidiary guarantorsoperated as independent entities.

 

22

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| ** **                                                     | ** ** | **April 29,  2006 (Successor)** | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------|------------|
| **(in thousands)**                                             | ** ** | **Parent**                           | ** ** | **Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                    | —     |   | $ | 104,911 |   | $ | 1,214 |   | $ | 2,857 |   | $ | — |   | $ | 108,982 |   |
| Accounts receivable, net of allowance                          |       | —                               |       | 31,858 |   | 4,808 |   | 19,682 |   | 396 |   | 56,744 |   |
| Merchandise inventories                                        |       | —                               |       | 739,378 |   | 94,496 |   | 24,752 |   | (3,647 | ) | 854,979 |   |
| Other current assets                                           |       | —                               |       | 57,071 |   | 5,612 |   | 2,017 |   | — |   | 64,700 |   |
| Total current assets                                           |       | —                               |       | 933,218 |   | 106,130 |   | 49,308 |   | (3,251 | ) | 1,085,405 |   |
|                                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Property and equipment, net                                    |       | —                               |       | 868,145 |   | 154,052 |   | 22,987 |   | — |   | 1,045,184 |   |
| Goodwill and intangibles, net                                  |       | —                               |       | 2,032,627 |   | 2,243,014 |   | 120,776 |   | — |   | 4,396,417 |   |
| Other assets                                                   |       | —                               |       | 131,680 |   | 443 |   | 885 |   | — |   | 133,008 |   |
| Investments in subsidiaries                                    |       | 1,468,045                            |       | 2,533,264 |   | — |   | — |   | (4,001,309 | ) | — |   |
|                                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total assets                                                   |       | $                                    | 1,468,045  |   | $ | 6,498,934 |   | $ | 2,503,639 |   | $ | 193,956 |   | $ | (4,004,560 | ) | $ | 6,660,014 |   |
|                                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities:                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                    | —     |   | $ | 205,688 |   | $ | 30,230 |   | $ | 15,130 |   | $ | 396 |   | $ | 251,444 |   |
| Accrued liabilities                                            |       | —                               |       | 306,906 |   | 73,841 |   | 9,452 |   | (443 | ) | 389,756 |   |
| Notes payable and current maturities of long-term  liabilities |       | —                               |       | 3,879 |   | — |   | 11,250 |   | — |   | 15,129 |   |
| Total current liabilities                                      |       | —                               |       | 516,473 |   | 104,071 |   | 35,832 |   | (47 | ) | 656,329 |   |
|                                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Long-term liabilities:                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | —                               |       | 3,195,663 |   | — |   | — |   | — |   | 3,195,663 |   |
| Deferred income taxes                                          |       | —                               |       | 1,129,899 |   | — |   | — |   | — |   | 1,129,899 |   |
| Other long-term liabilities                                    |       | —                               |       | 188,854 |   | 6,122 |   | 2,292 |   | — |   | 197,268 |   |
| Total long-term liabilities                                    |       | —                               |       | 4,514,416 |   | 6,122 |   | 2,292 |   | — |   | 4,522,830 |   |
|                                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Minority interest                                              |       | —                               |       | — |   | — |   | — |   | 12,810 |   | 12,810 |   |
|                                                           |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Total shareholders’ equity                                |       | 1,468,045                            |       | 1,468,045 |   | 2,393,446 |   | 155,832 |   | (4,017,323 | ) | 1,468,045 |   |
| Total liabilities and shareholders’ equity                |       | $                                    | 1,468,045  |   | $ | 6,498,934 |   | $ | 2,503,639 |   | $ | 193,956 |   | $ | (4,004,560 | ) | $ | 6,660,014 |   |

** **

**23**

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** **
| ** **                                                     | ** ** | **July 30, 2005  (Predecessor)** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**                                             | ** ** | **Company**                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                     | 317,346    |   | $ | 795 |   | $ | 535,341 |   | $ | — |   | $ | 853,482 |   |
| Accounts receivable, net of allowance                          |       | 7,910                                 |       | 2,929 |   | 18,688 |   | 359 |   | 29,886 |   |
| Merchandise inventories                                        |       | 650,916                               |       | 78,390 |   | 22,011 |   | (2,951 | ) | 748,366 |   |
| Other current assets                                           |       | 68,905                                |       | 5,603 |   | 2,239 |   | — |   | 76,747 |   |
| Total current assets                                           |       | 1,045,077                             |       | 87,717 |   | 578,279 |   | (2,592 | ) | 1,708,481 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Property and  equipment, net                                   |       | 697,514                               |       | 136,503 |   | 20,992 |   | — |   | 855,009 |   |
| Goodwill and  intangibles, net                                 |       | 14,875                                |       | 23,700 |   | 32,942 |   | — |   | 71,517 |   |
| Other assets                                                   |       | 24,035                                |       | 371 |   | 1,247 |   | — |   | 25,653 |   |
| Investments in  subsidiaries                                   |       | 706,376                               |       | — |   | — |   | (706,376 | ) | — |   |
| Total assets                                                   |       | $                                     | 2,487,877  |   | $ | 248,291 |   | $ | 633,460 |   | $ | (708,968 | ) | $ | 2,660,660 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                     | 233,116    |   | $ | 32,199 |   | $ | 17,213 |   | $ | 359 |   | $ | 282,887 |   |
| Accrued liabilities                                            |       | 245,378                               |       | 60,396 |   | 25,014 |   | 2,149 |   | 332,937 |   |
| Notes payable and current maturities of long-term  liabilities |       | 200                                   |       | — |   | 1,250 |   | — |   | 1,450 |   |
| Total current liabilities                                      |       | 478,694                               |       | 92,595 |   | 43,477 |   | 2,508 |   | 617,274 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Long-term  liabilities:                                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | 249,780                               |       | — |   | — |   | — |   | 249,780 |   |
| Other long-term liabilities                                    |       | 185,457                               |       | 18,626 |   | 3,465 |   | — |   | 207,548 |   |
| Total long-term liabilities                                    |       | 435,237                               |       | 18,626 |   | 3,465 |   | — |   | 457,328 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Minority  interest                                             |       | —                                |       | — |   | — |   | 12,112 |   | 12,112 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Total shareholders’  equity                               |       | 1,573,946                             |       | 137,070 |   | 586,518 |   | (723,588 | ) | 1,573,946 |   |
| Total  liabilities and shareholders’ equity               |       | $                                     | 2,487,877  |   | $ | 248,291 |   | $ | 633,460 |   | $ | (708,968 | ) | $ | 2,660,660 |   |

** **

**24**

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** **
| ** **                                                     | ** ** | **April 30, 2005 (Predecessor)** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| **(in thousands)**                                             | ** ** | **Company**                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets:                                                |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $                                     | 333,738    |   | $ | 494 |   | $ | 3,357 |   | $ | — |   | $ | 337,589 |   |
| Restricted cash                                                |       | —                                |       | — |   | 37,500 |   | — |   | 37,500 |   |
| Accounts receivable, net of allowance                          |       | 11,470                                |       | 3,668 |   | 650,962 |   | 355 |   | 666,455 |   |
| Merchandise inventories                                        |       | 688,968                               |       | 85,051 |   | 18,964 |   | (4,068 | ) | 788,915 |   |
| Other current assets                                           |       | 41,482                                |       | 5,079 |   | 3,154 |   | — |   | 49,715 |   |
| Total current assets                                           |       | 1,075,658                             |       | 94,292 |   | 713,937 |   | (3,713 | ) | 1,880,174 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Property and  equipment, net                                   |       | 668,125                               |       | 134,578 |   | 19,107 |   | — |   | 821,810 |   |
| Goodwill and  intangibles, net                                 |       | 14,875                                |       | 23,700 |   | 32,942 |   | — |   | 71,517 |   |
| Other assets                                                   |       | 64,022                                |       | 681 |   | 1,602 |   | — |   | 66,305 |   |
| Investments in  subsidiaries                                   |       | 673,660                               |       | — |   | — |   | (673,660 | ) | — |   |
| Total assets                                                   |       | $                                     | 2,496,340  |   | $ | 253,251 |   | $ | 767,588 |   | $ | (677,373 | ) | $ | 2,839,806 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current  liabilities:                                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $                                     | 205,098    |   | $ | 28,816 |   | $ | 12,702 |   | $ | 355 |   | $ | 246,971 |   |
| Accrued liabilities                                            |       | 273,452                               |       | 67,599 |   | 11,918 |   | (443 | ) | 352,526 |   |
| Notes payable and current maturities of long-term  liabilities |       | 200                                   |       | — |   | — |   | — |   | 200 |   |
| Current portion of borrowings under Credit Card Facility       |       | —                                |       | — |   | 187,500 |   | — |   | 187,500 |   |
| Total current liabilities                                      |       | 478,750                               |       | 96,415 |   | 212,120 |   | (88 | ) | 787,197 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Long-term  liabilities:                                        |       |                                  |       |   |   |   |   |   |   |   |   |
| Long-term debt                                                 |       | 249,773                               |       | — |   | — |   | — |   | 249,773 |   |
| Deferred income taxes                                          |       | 74,429                                |       | — |   | — |   | — |   | 74,429 |   |
| Other long-term liabilities                                    |       | 111,593                               |       | 18,764 |   | 2,757 |   | — |   | 133,114 |   |
| Total long-term liabilities                                    |       | 435,795                               |       | 18,764 |   | 2,757 |   | — |   | 457,316 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Minority  interest                                             |       | —                                |       | — |   | — |   | 13,498 |   | 13,498 |   |
|                                                           |       |                                  |       |   |   |   |   |   |   |   |   |
| Total  shareholders’ equity                               |       | 1,581,795                             |       | 138,072 |   | 552,711 |   | (690,783 | ) | 1,581,795 |   |
| Total  liabilities and shareholders’ equity               |       | $                                     | 2,496,340  |   | $ | 253,251 |   | $ | 767,588 |   | $ | (677,373 | ) | $ | 2,839,806 |   |

** **

**25**

----

** **
| ** **                                                                        | ** ** | **Thirteen weeks ended April 29,  2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Parent**                                                | ** ** | **Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                        | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                                         | —     |   | $ | 838,927 |   | $ | 153,327 |   | $ | 37,972 |   | $ | (3,217 | ) | $ | 1,027,009 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                                    |       | 502,017 |   | 87,047 |   | 16,756 |   | (2,863 | ) | 602,957 |   |
| Selling, general and administrative expenses (excluding  depreciation)            |       | —                                                    |       | 205,615 |   | 30,303 |   | 19,462 |   | — |   | 255,380 |   |
| Income from credit card operations, net                                           |       | —                                                    |       | (13,688 | ) | (1,448 | ) | — |   | — |   | (15,136 | ) |
| Depreciation expense                                                              |       | —                                                    |       | 26,874 |   | 4,595 |   | 1,444 |   | — |   | 32,913 |   |
| Amortization of customer lists and favorable lease  commitments                   |       | —                                                    |       | 15,038 |   | 2,947 |   | 232 |   | — |   | 18,217 |   |
|                                                                              |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Operating earnings                                                                |       | —                                                    |       | 103,071 |   | 29,883 |   | 78 |   | (354 | ) | 132,678 |   |
|                                                                              |       | —                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                                             |       | —                                                    |       | 67,040 |   | — |   | 176 |   | — |   | 67,216 |   |
| Intercompany royalty charges (income)                                             |       | —                                                    |       | 59,959 |   | (59,959 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (40,547                                                   | )          | (89,428 | ) | — |   | — |   | 129,975 |   | — |   |
|                                                                              |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Earnings before income taxes and minority interest                                |       | 40,547                                                    |       | 65,500 |   | 89,842 |   | (98 | ) | (130,329 | ) | 65,462 |   |
|                                                                              |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Income taxes                                                                      |       | —                                                    |       | 24,953 |   | — |   | — |   | — |   | 24,953 |   |
|                                                                              |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Earnings before minority interest                                                 |       | 40,547                                                    |       | 40,547 |   | 89,842 |   | (98 | ) | (130,329 | ) | 40,509 |   |
|                                                                              |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Minority interest in net loss of subsidiaries                                     |       | —                                                    |       | — |   | — |   | — |   | 38 |   | 38 |   |
|                                                                              |       |                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                      |       | $                                                         | 40,547     |   | $ | 40,547 |   | $ | 89,842 |   | $ | (98 | ) | $ | (130,291 | ) | $ | 40,547 |   |

** **

**26**

----

** **
| ** **                                                                        | ** ** | **Thirteen weeks ended April 30,  2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                                 | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                        | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                                           | 771,053    |   | $ | 126,145 |   | $ | 40,559 |   | $ | (4,385 | ) | $ | 933,372 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 462,837                                                     |       | 74,126 |   | 16,837 |   | (4,060 | ) | 549,740 |   |
| Selling, general and administrative  expenses(excluding depreciation)             |       | 195,899                                                     |       | 27,047 |   | 17,450 |   | — |   | 240,396 |   |
| Income from credit card operations, net                                           |       | —                                                      |       | — |   | (19,030 | ) | — |   | (19,030 | ) |
| Depreciation expense                                                              |       | 20,910                                                      |       | 5,413 |   | 1,291 |   | — |   | 27,614 |   |
| Amortization of customer lists and favorable lease  commitments                   |       | —                                                      |       | — |   | — |   | — |   | — |   |
|                                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Operating earnings                                                                |       | 91,407                                                      |       | 19,559 |   | 24,011 |   | (325 | ) | 134,652 |   |
|                                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                             |       | 1,316                                                       |       | — |   | 1,617 |   | — |   | 2,933 |   |
| Intercompany royalty charges (income)                                             |       | 52,169                                                      |       | (52,169 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (92,566                                                     | )          | — |   | — |   | 92,566 |   | — |   |
|                                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Earnings before income taxes and minority interest                                |       | 130,488                                                     |       | 71,728 |   | 22,394 |   | (92,891 | ) | 131,719 |   |
|                                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Income taxes                                                                      |       | 50,713                                                      |       | — |   | — |   | — |   | 50,713 |   |
|                                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Earnings before minority interest                                                 |       | 79,775                                                      |       | 71,728 |   | 22,394 |   | (92,891 | ) | 81,006 |   |
|                                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Minority interest in net earnings of subsidiaries                                 |       | —                                                      |       | — |   | — |   | (1,231 | ) | (1,231 | ) |
|                                                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net earnings                                                                      |       | $                                                           | 79,775     |   | $ | 71,728 |   | $ | 22,394 |   | $ | (94,122 | ) | $ | 79,775 |   |

** **

**27**

----

** **
| ** **                                                                        | ** ** | **Thirty weeks ended April 29,  2006 (Successor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Parent**                                              | ** ** | **Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                        | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                                       | —     |   | $ | 2,131,989 |   | $ | 368,211 |   | $ | 92,092 |   | $ | (9,077 | ) | $ | 2,583,215 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | —                                                  |       | 1,369,940 |   | 232,678 |   | 40,568 |   | (8,999 | ) | 1,634,187 |   |
| Selling, general and administrative expenses (excluding  depreciation)            |       | —                                                  |       | 509,752 |   | 70,243 |   | 43,977 |   | — |   | 623,972 |   |
| Income from credit card operations, net                                           |       | —                                                  |       | (32,629 | ) | (3,265 | ) | — |   | — |   | (35,894 | ) |
| Depreciation expense                                                              |       | —                                                  |       | 62,471 |   | 12,329 |   | 3,177 |   | — |   | 77,977 |   |
| Amortization of customer lists and favorable lease  commitments                   |       | —                                                  |       | 34,704 |   | 6,801 |   | 536 |   | — |   | 42,041 |   |
|                                                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Operating earnings                                                                |       | —                                                  |       | 187,751 |   | 49,425 |   | 3,834 |   | (78 | ) | 240,932 |   |
|                                                                              |       | —                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense, net                                                             |       | —                                                  |       | 150,340 |   | — |   | 286 |   | — |   | 150,626 |   |
| Intercompany royalty charges (income)                                             |       | —                                                  |       | 145,472 |   | (145,472 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (54,440                                                 | )          | (197,292 | ) | — |   | — |   | 251,732 |   | — |   |
|                                                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Earnings before income taxes and minority interest                                |       | 54,440                                                  |       | 89,231 |   | 194,897 |   | 3,548 |   | (251,810 | ) | 90,306 |   |
|                                                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Income taxes                                                                      |       | —                                                  |       | 34,791 |   | — |   | — |   | — |   | 34,791 |   |
|                                                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Earnings before minority interest                                                 |       | 54,440                                                  |       | 54,440 |   | 194,897 |   | 3,548 |   | (251,810 | ) | 55,515 |   |
|                                                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Minority interest in net earnings of subsidiaries                                 |       | —                                                  |       | — |   | — |   | — |   | (1,075 | ) | (1,075 | ) |
|                                                                              |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                      |       | $                                                       | 54,440     |   | $ | 54,440 |   | $ | 194,897 |   | $ | 3,548 |   | $ | (252,885 | ) | $ | 54,440 |   |

** **
| ** **                                                                        | ** ** | **Nine weeks ended October 1,  2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                              | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                        | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                                        | 530,666    |   | $ | 101,556 |   | $ | 22,919 |   | $ | (3,493 | ) | $ | 651,648 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 312,454                                                  |       | 58,986 |   | 10,202 |   | (2,875 | ) | 378,767 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 135,278                                                  |       | 20,491 |   | 13,084 |   | — |   | 168,853 |   |
| Income from credit card operations, net                                           |       | (6,994                                                   | )          | (824 | ) | — |   | — |   | (7,818 | ) |
| Depreciation expense                                                              |       | 16,117                                                   |       | 3,015 |   | 828 |   | — |   | 19,960 |   |
| Transaction and other costs                                                       |       | 23,544                                                   |       | — |   | — |   | — |   | 23,544 |   |
|                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Operating earnings                                                                |       | 50,267                                                   |       | 19,888 |   | (1,195 | ) | (618 | ) | 68,342 |   |
|                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Interest (income) expense, net                                                    |       | (909                                                     | )          | — |   | 43 |   | — |   | (866 | ) |
| Intercompany royalty charges (income)                                             |       | 46,240                                                   |       | (46,240 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (64,825                                                  | )          | — |   | — |   | 64,825 |   | — |   |
|                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Earnings before income taxes and minority interest                                |       | 69,761                                                   |       | 66,128 |   | (1,238 | ) | (65,443 | ) | 69,208 |   |
|                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Income taxes                                                                      |       | 25,607                                                   |       | — |   | — |   | — |   | 25,607 |   |
|                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Earnings before minority interest                                                 |       | 44,154                                                   |       | 66,128 |   | (1,238 | ) | (65,443 | ) | 43,601 |   |
|                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Minority interest in net loss of subsidiaries                                     |       | —                                                   |       | — |   | — |   | 553 |   | 553 |   |
|                                                                              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Net earnings                                                                      |       | $                                                        | 44,154     |   | $ | 66,128 |   | $ | (1,238 | ) | $ | (64,890 | ) | $ | 44,154 |   |

** **

**28**

----

** **
| ** **                                                                        | ** ** | **Thirty-nine weeks ended April 30,  2005 (Predecessor)** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(in thousands)**                                                                | ** ** | **Company**                                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| ** **                                                                        | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                          |       | $                                                              | 2,474,603  |   | $ | 398,966 |   | $ | 112,443 |   | $ | (15,479 | ) | $ | 2,970,533 |   |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 1,533,364                                                      |       | 251,907 |   | 45,884 |   | (14,553 | ) | 1,816,602 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 612,936                                                        |       | 83,103 |   | 51,393 |   | — |   | 747,432 |   |
| Income from credit card operations, net                                           |       | —                                                         |       | — |   | (52,414 | ) | — |   | (52,414 | ) |
| Depreciation expense                                                              |       | 62,475                                                         |       | 13,477 |   | 3,386 |   | — |   | 79,338 |   |
| Loss on disposition of Chef’s Catalog                                        |       | 7,048                                                          |       | 8,300 |   | — |   | — |   | 15,348 |   |
|                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Operating earnings                                                                |       | 258,780                                                        |       | 42,179 |   | 64,194 |   | (926 | ) | 364,227 |   |
|                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                             |       | 6,728                                                          |       | — |   | 4,220 |   | — |   | 10,948 |   |
| Intercompany royalty charges (income)                                             |       | 149,880                                                        |       | (149,880 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                |       | (248,320                                                       | )          | — |   | — |   | 248,320 |   | — |   |
|                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Earnings before income taxes and minority interest                                |       | 350,492                                                        |       | 192,059 |   | 59,974 |   | (249,246 | ) | 353,279 |   |
|                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Income taxes                                                                      |       | 136,014                                                        |       | — |   | — |   | — |   | 136,014 |   |
|                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Earnings before minority interest                                                 |       | 214,478                                                        |       | 192,059 |   | 59,974 |   | (249,246 | ) | 217,265 |   |
|                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Minority interest in net earnings of subsidiaries                                 |       | —                                                         |       | — |   | — |   | (2,787 | ) | (2,787 | ) |
|                                                                              |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net earnings                                                                      |       | $                                                              | 214,478    |   | $ | 192,059 |   | $ | 59,974 |   | $ | (252,033 | ) | $ | 214,478 |   |

** **

**29**

----

** **
| ** **                                                                                   | ** ** | **Thirty weeks ended April 29,  2006 (Successor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Parent**                                              | ** ** | **Company** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                        |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Net earnings                                                                                 |       | $                                                       | 54,440     |   | $ | 54,440 |   | $ | 194,897 |   | $ | 3,548 |   | $ | (252,885 | ) | $ | 54,440 |   |
| Adjustments to reconcile net earnings to net cash provided  by operating activities:         |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | —                                                  |       | 62,471 |   | 12,329 |   | 3,177 |   | — |   | 77,977 |   |
| Amortization of debt issue costs                                                             |       | —                                                  |       | 8,183 |   | — |   | — |   | — |   | 8,183 |   |
| Amortization of customer lists and favorable lease  commitments                              |       | —                                                  |       | 34,704 |   | 6,801 |   | 536 |   | — |   | 42,041 |   |
| Non-cash charges related to step-up in carrying  value of inventory                          |       | —                                                  |       | 32,890 |   | 5,177 |   | — |   | — |   | 38,067 |   |
| Stock-based compensation charges                                                             |       | —                                                  |       | 2,509 |   | — |   | — |   | — |   | 2,509 |   |
| Deferred income taxes                                                                        |       | —                                                  |       | (27,110 | ) | — |   | — |   | — |   | (27,110 | ) |
| Minority interest                                                                            |       | —                                                  |       | — |   | — |   | — |   | 1,075 |   | 1,075 |   |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | —                                                  |       | 8,636 |   | 1,063 |   | (823 | ) | — |   | 8,876 |   |
| Intercompany royalty income payable (receivable)                                             |       |                                                    |       | 145,471 |   | (145,471 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (54,440                                                 | )          | (197,292 | ) | — |   | — |   | 251,732 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | —                                                  |       | 130,615 |   | (67,185 | ) | (5,112 | ) | 78 |   | 58,396 |   |
| **Net cash provided by operating activities**                                                |       | —                                                  |       | 255,517 |   | 7,611 |   | 1,326 |   | — |   | 264,454 |   |
| **CASH FLOWS - INVESTING**                                                                   |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | —                                                  |       | (100,086 | ) | (7,319 | ) | (4,809 | ) | — |   | (112,214 | ) |
| Acquisition of The Neiman Marcus Group, Inc.                                            |       | —                                                  |       | (5,156,423 | ) | — |   | — |   | — |   | (5,156,423 | ) |
| Intercompany (receivable) payable                                                            |       | (1,427,739                                              | )          | — |   | — |   | — |   | 1,427,739 |   | — |   |
| **Net cash used for investing activities**                                                   |       | (1,427,739                                              | )          | (5,256,509 | ) | (7,319 | ) | (4,809 | ) | 1,427,739 |   | (5,268,637 | ) |
| **CASH FLOWS - FINANCING**                                                                   |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Proceeds from borrowings                                                                     |       | —                                                  |       | 3,325,000 |   | — |   | 21,000 |   | — |   | 3,346,000 |   |
| Repayment of borrowings                                                                      |       | —                                                  |       | (385,812 | ) | — |   | (16,000 | ) | — |   | (401,812 | ) |
| Debt issuance costs paid                                                                     |       | —                                                  |       | (102,854 | ) | — |   | — |   | — |   | (102,854 | ) |
| Cash equity contributions                                                                    |       | 1,427,739                                               |       | 1,427,739 |   | — |   | — |   | (1,427,739 | ) | 1,427,739 |   |
| Distributions paid                                                                           |       | —                                                  |       | 85 |   | — |   | (253 | ) | — |   | (168 | ) |
| **Net cash provided by financing activities**                                                |       | 1,427,739                                               |       | 4,264,158 |   | — |   | 4,747 |   | (1,427,739 | ) | 4,268,905 |   |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| (Decrease) increase during the period                                                        |       | —                                                  |       | (736,834 | ) | 292 |   | 1,264 |   | — |   | (735,278 | ) |
| Beginning balance                                                                            |       | —                                                  |       | 841,745 |   | 922 |   | 1,593 |   | — |   | 844,260 |   |
| Ending balance                                                                               |       | $                                                       | —     |   | $ | 104,911 |   | $ | 1,214 |   | $ | 2,857 |   | $ | — |   | $ | 108,982 |   |

** **

**30**

----

** **
| ** **                                                                                   | ** ** | **Nine weeks ended October 1,  2005 (Predecessor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                              | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                        |       |                                                     |       |   |   |   |   |   |   |   |   |
| Net earnings                                                                                 |       | $                                                        | 44,154     |   | $ | 66,128 |   | $ | (1,238 | ) | $ | (64,890 | ) | $ | 44,154 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities:         |       |                                                     |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | 16,117                                                   |       | 3,015 |   | 828 |   | — |   | 19,960 |   |
| Stock-based compensation charges                                                             |       | 19,968                                                   |       | — |   | — |   | — |   | 19,968 |   |
| Deferred income taxes                                                                        |       | (7,327                                                   | )          | — |   | — |   | — |   | (7,327 | ) |
| Minority interest                                                                            |       | —                                                   |       | — |   | — |   | (553 | ) | (553 | ) |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | 545                                                      |       | 254 |   | 857 |   | — |   | 1,656 |   |
| Intercompany royalty income payable (receivable)                                             |       | 46,240                                                   |       | (46,240 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (64,825                                                  | )          | — |   | — |   | 64,825 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | 499,327                                                  |       | (20,294 | ) | (538,074 | ) | 618 |   | (58,423 | ) |
| **Net cash provided by (used for) operating  activities**                                    |       | 554,199                                                  |       | 2,863 |   | (537,627 | ) | — |   | 19,435 |   |
| **CASH FLOWS - INVESTING ACTIVITIES**                                                        |       |                                                     |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | (22,454                                                  | )          | (2,736 | ) | (1,121 | ) | — |   | (26,311 | ) |
| **Net cash used for investing activities**                                                   |       | (22,454                                                  | )          | (2,736 | ) | (1,121 | ) | — |   | (26,311 | ) |
| **CASH FLOWS - FINANCING ACTIVITIES**                                                        |       |                                                     |       |   |   |   |   |   |   |   |   |
| Proceeds from borrowings on lines of credit                                                  |       | —                                                   |       | — |   | 5,750 |   | — |   | 5,750 |   |
| Repayment of borrowings on lines of credit                                                   |       | —                                                   |       | — |   | (750 | ) | — |   | (750 | ) |
| Cash dividends paid                                                                          |       | (7,346                                                   | )          | — |   | — |   | — |   | (7,346 | ) |
| **Net cash (used for) provided by financing  activities**                                    |       | (7,346                                                   | )          | — |   | 5,000 |   | — |   | (2,346 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                     |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | 524,399                                                  |       | 127 |   | (533,748 | ) | — |   | (9,222 | ) |
| Beginning balance                                                                            |       | 317,346                                                  |       | 795 |   | 535,341 |   | — |   | 853,482 |   |
| Ending balance                                                                               |       | $                                                        | 841,745    |   | $ | 922 |   | $ | 1,593 |   | $ | — |   | $ | 844,260 |   |

** **

**31**

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** **
| ** **                                                                                   | ** ** | **Thirty-nine weeks ended April 30,  2005 (Predecessor)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(in thousands)**                                                                           | ** ** | **Company**                                                    | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net earnings                                                                                 |       | $                                                              | 214,478    |   | $ | 192,059 |   | $ | 59,974 |   | $ | (252,033 | ) | $ | 214,478 |   |
| Adjustments to reconcile net earnings to net cash  provided by operating activities:         |       |                                                           |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                                 |       | 62,475                                                         |       | 13,477 |   | 3,386 |   | — |   | 79,338 |   |
| Amortization of debt issue costs                                                             |       | 465                                                            |       | — |   | — |   | — |   | 465 |   |
| Stock-based compensation charges                                                             |       | 3,646                                                          |       | — |   | — |   | — |   | 3,646 |   |
| Loss on disposition of Chef’s catalog                                                   |       | 7,048                                                          |       | 8,300 |   | — |   | — |   | 15,348 |   |
| Minority interest                                                                            |       | —                                                         |       | — |   | — |   | 2,787 |   | 2,787 |   |
| Other, primarily costs related to defined benefit  pension and other long-term benefit plans |       | 20,065                                                         |       | 2,148 |   | 898 |   | — |   | 23,111 |   |
| Intercompany royalty payable (receivable)                                                    |       | 149,879                                                        |       | (149,879 | ) | — |   | — |   | — |   |
| Equity in earnings of subsidiaries                                                           |       | (248,320                                                       | )          | — |   | — |   | 248,320 |   | — |   |
| Changes in operating assets and liabilities, net                                             |       | (116,794                                                       | )          | (54,795 | ) | 21,538 |   | 926 |   | (149,125 | ) |
| **Net cash provided by operating activities**                                                |       | 92,942                                                         |       | 11,310 |   | 85,796 |   | — |   | 190,048 |   |
| **CASH FLOWS - INVESTING ACTIVITIES**                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                         |       | (129,977                                                       | )          | (11,644 | ) | (9,209 | ) | — |   | (150,830 | ) |
| Proceeds from the sale of Chef’s Catalog                                                |       | 14,419                                                         |       | — |   | — |   | — |   | 14,419 |   |
| Increase in cash restricted for repayment of  borrowings under Credit Card Facility          |       | —                                                         |       | — |   | (37,500 | ) | — |   | (37,500 | ) |
| **Net cash used for investing activities**                                                   |       | (115,558                                                       | )          | (11,644 | ) | (46,709 | ) | — |   | (173,911 | ) |
| **CASH FLOWS - FINANCING ACTIVITIES**                                                        |       |                                                           |       |   |   |   |   |   |   |   |   |
| Proceeds from borrowings on lines of credit                                                  |       | —                                                         |       | — |   | 7,750 |   | — |   | 7,750 |   |
| Repayment of borrowings on lines of credit                                                   |       | (113                                                           | )          | — |   | (9,000 | ) | — |   | (9,113 | ) |
| Repayment of borrowings under Credit Card Facility                                           |       | —                                                         |       | — |   | (37,500 | ) | — |   | (37,500 | ) |
| Acquisitions of treasury stock                                                               |       | (3,088                                                         | )          | — |   | — |   | — |   | (3,088 | ) |
| Proceeds from stock-based compensation awards                                                |       | 16,432                                                         |       | — |   | — |   | — |   | 16,432 |   |
| Cash dividends paid                                                                          |       | (20,042                                                        | )          | — |   | — |   | — |   | (20,042 | ) |
| Distributions paid                                                                           |       | (1                                                             | )          | — |   | (1,353 | ) | — |   | (1,354 | ) |
| **Net cash used for financing activities**                                                   |       | (6,812                                                         | )          | — |   | (40,103 | ) | — |   | (46,915 | ) |
| **CASH AND CASH EQUIVALENTS**                                                                |       |                                                           |       |   |   |   |   |   |   |   |   |
| Increase (decrease) during the period                                                        |       | (29,428                                                        | )          | (334 | ) | (1,016 | ) | — |   | (30,778 | ) |
| Beginning balance                                                                            |       | 363,166                                                        |       | 828 |   | 4,373 |   | — |   | 368,367 |   |
| Ending balance                                                                               |       | $                                                              | 333,738    |   | $ | 494 |   | $ | 3,357 |   | $ | — |   | $ | 337,589 |   |

** **

**32**

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** **

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

** **

**EXECUTIVE OVERVIEW**

 

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with the Predecessor’s Annual Report on Form 10-K forthe fiscal year ended July 30, 2005. Unless otherwise specified, themeanings of all defined terms in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (MD&A) are consistent withthe meanings of such terms as defined in the Notes to the CondensedConsolidated Financial Statements. This discussion contains forward-lookingstatements. Please see “Forward-Looking Statements” for a discussion of therisks, uncertainties and assumptions relating to our forward-lookingstatements.

 

**Overview**

 

The Neiman Marcus Group, Inc.,together with our operating segments and subsidiaries, is a high-end specialtyretailer. Our operations include the Specialty Retail Stores segment and theDirect Marketing segment. The Specialty Retail Stores segment consistsprimarily of Neiman Marcus and Bergdorf Goodman stores. The Direct Marketingsegment conducts both online operations and print catalog under the brand namesof Neiman Marcus, Bergdorf Goodman, Horchow and Chef’s Catalog (prior to itsdisposition in November 2004). We own a 51% interest in Gurwitch Products,L.L.C., which designs and markets the Laura Mercier cosmetic line, and a 56%interest in Kate Spade LLC, which designs and markets high-end designerhandbags and accessories (the Brand Development Companies).

 

Neiman Marcus, Inc.(formerly Newton Acquisition, Inc.) (Parent) acquired The Neiman MarcusGroup, Inc. (Company) on October 6, 2005 through a merger transactionwith Newton Acquisition  Merger Sub, Inc.,a wholly-owned subsidiary of Neiman Marcus, Inc. The acquisition wasaccomplished through the merger of the Newton Acquisition Merger Sub, Inc.with and into the Company, with the Company being the surviving entity (theAcquisition). Subsequent to the Acquisition, we are a subsidiary of the Parent,which is controlled by Newton Holding, LLC (Holding). Both the Parent andHolding were formed by investment funds affiliated with Texas Pacific Group andWarburg Pincus LLC (the Sponsors). Although we continued as the same legalentity after the Acquisition, the accompanying condensed consolidatedstatements of earnings and cash flows present our results of operations andcash flows for the periods preceding the Acquisition (Predecessor) and the periodssucceeding the Acquisition (Successor), respectively. Parent’s sole asset is100% of the capital stock of the Company. Accordingly, a separate discussion ofthe Parent’s financial condition and results of operations is not providedsince the Company is representative of the Parent’s consolidated operations.

 

In connection with theTransactions, the Company incurred significant indebtedness and became highlyleveraged. See “Liquidity and Capital Resources.”  In addition, the purchase price paid in connectionwith the Acquisition has been preliminarily allocated to state the acquiredassets and liabilities at fair value. The preliminary purchase accountingadjustments increased the carrying value of our property and equipment andinventory, established intangible assets for our tradenames, customer lists andfavorable lease commitments and revalued our long-term benefit planobligations, among other things. Subsequent to the Transactions, interestexpense and non-cash depreciation and amortization charges have significantlyincreased. As a result, our Successor financial statements subsequent to theTransactions are not comparable to our Predecessor financial statements.

 

We have prepared ourdiscussion of the results of operations for the nine months (thirty-nine weeks)ended April 29, 2006 by comparing the results of operations of thePredecessor for the thirty-nine weeks ended April 30, 2005 to the combinedamounts obtained by adding the earnings and cash flows for the Predecessor nine-weekperiod ended October 1, 2005 and the Successor thirty-week period ended April 29,2006. Although this combined presentation does not comply with generallyaccepted accounting principles (GAAP), we believe that it provides a meaningfulmethod of comparison. The combined operating results have not been prepared ona pro forma basis under applicable regulations and may not reflect theactual results we would have achieved absent the Transactions and may notbe predictive of future results of operations.

 

Our fiscal year ends onthe Saturday closest to July 31. All references to the third quarter offiscal year 2006 relate to the thirteen weeks ended April 29, 2006 of theSuccessor. All references to the third quarter of fiscal year 2005 relate tothe thirteen weeks ended April 30, 2005 of the Predecessor. All referencesto the year-to-date fiscal year 2006 period relate to the combined thirty—nineweeks ended  April 29, 2006(calculated as described above) and all references to the year-to-date fiscalyear 2005 period relate to the thirty-nine weeks ended April 30, 2005.

 

33

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**FactorsAffecting Our Results**

 

***Revenues.***We generate our revenuesprimarily from the sale of high-end merchandise through our Specialty RetailStores and Direct Marketing operation. Components of our revenues include:

 

•                  Sales of merchandise—Revenuesfrom our Specialty Retail Stores are recognized at the later of the point ofsale or the delivery of goods to the customer. Revenues from our DirectMarketing operation are recognized when the merchandise is delivered to thecustomer. We maintain reserves for anticipated sales returns primarily based onour historical trends related to returns by both our retail and directmarketing customers.

 

•                  Commissions from leaseddepartments—A small portion of the sales of our Specialty Retail Stores consistof commissions from certain departments in our stores that we lease toindependent companies.

 

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

 

Our revenues can be affected 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;

 

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

 

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

 

•                  general economicconditions.

 

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

 

***Cost of goods sold including buying and occupancy costs(excluding depreciation) (COGS).***COGS consists of thefollowing components:

 

•                  Inventory costs—We utilizethe retail method of accounting, which is widely used in the retail industrydue to its practicality, for substantially all of our merchandise inventories. Merchandiseinventories are stated at the lower of cost or market. Under the retailinventory method, the valuation of inventories at cost and the resulting grossmargins are determined by applying a calculated cost-to-retail ratio, forvarious groupings of similar items, to the retail value of inventories. Thecost of the inventory reflected on the consolidated balance sheet is decreasedby charges to cost of goods sold at the time the retail value of the inventoryis lowered through the use of markdowns. Hence, earnings are negativelyimpacted when merchandise is marked down.

 

•                  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 ourretail, distribution and support facilities. A significant portion of ourbuying and occupancy 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.

 

With the introduction ofnew fashions in the first and third quarters and our emphasis on full-priceselling in these quarters, a lower level of markdowns and higher margins arecharacteristic of these quarters.

 

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

 

34

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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.

 

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

 

•                  the amount of vendorreimbursements we receive during the fiscal year.

 

***Selling, general and administrative expenses (excludingdepreciation) (SG&A).***SG&A principally consistsof costs related to employee compensation and benefits in the selling andadministrative support areas, advertising and catalog costs and insuranceexpense. A significant portion of our selling, general and administrativeexpenses are variable in nature and are dependent on the sales we 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. Substantiallyall the advertising allowances we receive represent reimbursements of direct,specific and incremental costs that we incur to promote the vendor’smerchandise in connection with our various advertising programs, primarilycatalogs and other print media. As a result, these allowances are recorded as areduction of our advertising costs when earned.

 

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.

 

Changes in our selling,general and administrative expenses are affected primarily by the followingfactors:

 

•                  changes in the number ofsales associates primarily due to expansion of existing stores and new storeopenings, including increased health care and related benefits expenses;

 

•                  changes in expensesincurred in connection with our advertising and marketing programs; and

 

•                  changes in expensesrelated to insurance and long-term benefits due to general economic conditionssuch as rising health care costs.

 

***Incomefrom credit card operations, net.  ***Priorto the Credit Card Sale on July 7, 2005, our credit card operationsgenerated finance charge income, net of credit losses, which we recognized asincome when earned. As a part of the Credit Card Sale, we entered into along-term marketing and servicing alliance with HSBC. Under the terms of thisalliance, HSBC offers credit card and non-card payment plans bearing our brandsand we receive ongoing payments from HSBC based on net credit card sales andcompensation for marketing and servicing activities (HSBC Program Income). Werecognize HSBC Program Income when earned. Prior to the second quarter offiscal year 2006, we presented income from credit card operations as areduction of selling, general and administrative expenses. We now present thisincome as a separate line item on our statements of earnings and havereclassified prior periods to conform to this presentation.

 

As a percentage ofrevenues, the HSBC Program Income is lower than the net finance charge incomewe earned prior to the Credit Card Sale. However, the resulting decrease inincome from credit card operations is mitigated, in part, by 1) decreases in SG&Aexpenses we incur due to the transfer of certain servicing functions to HSBCafter the sale, 2) decreases in our capital investments related to theservicing of the credit card portfolio and 3) decreases in carrying costsrelated to our previous funding of the seasonal working capital requirements ofthe credit card portfolio. In tandem with HSBC, we have initiated variouschanges in our credit card

 

35

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program to alter thecredit terms available to our cardholders and to enhance the earnings of theportfolio. These changes have increased the level of HSBC Program Income earnedby the Company.

 

In thefuture, the HSBC Program Income may be:

 

•                  decreased based upon thelevel of future services we provide to HSBC; and

 

•                  increased based upon otherchanges to our historical credit card program related to, among other things,the interest rates applied to unpaid balances and the assessment of late fees.

 

**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 the December holidayseason, the early introduction of resort season collections from certaindesigners and the sale of Fall season goods on a marked down basis. As aresult, margins are typically lower in the second fiscal quarter. However, dueto the seasonal increase in sales that occurs during the holiday season, thesecond fiscal quarter is typically the quarter in which our revenues are thehighest and in which expenses as a percentage of revenues are the lowest. Ourworking capital requirements are also the greatest in the first and secondfiscal 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 a focus on promotionalactivities offering Spring season goods to the customer on a marked down basis,resulting in lower margins during the quarter. Our working capital requirementsare typically lower in the third and fourth fiscal quarters than in the otherquarters.

 

A large percentage of ourmerchandise assortment, particularly in the apparel, fashion accessories andshoe categories, is ordered months in advance of the introduction of such goods.For example, women’s apparel, men’s apparel and shoes are typically ordered sixto nine months in advance of the products being offered for sale whilehandbags, 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 sales performanceof our inventories throughout each season. We seek to order additional goods tosupplement our original purchasing decisions when the level of customer demandis higher than originally anticipated. However, in certain merchandisecategories, particularly fashion apparel, our ability to purchase additionalgoods can be limited. This can result in lost sales in the event of higher thananticipated demand of the fashion goods we offer or a higher than anticipatedlevel of consumer spending. Conversely, in the event we buy fashion goods thatare not accepted by the customer or the level of consumer spending is less thanwe anticipated, we typically incur a higher than anticipated level ofmarkdowns, net of vendor allowances, to sell the goods that remain at the endof the season, resulting in lower operating profits. We believe that theexperience of our merchandising and selling organizations helps to minimize theinherent risk in predicting fashion trends.

 

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**OPERATING RESULTS**

 

**Performance Summary**

 

The following table sets forth certainitems expressed as percentages of net revenues for the periods indicated.

 
| ** **                                                                        | ** ** | **Quarter-to-Date**                             | ** ** | **Year-to-Date**                                | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirteen  weeks ended  April 30,  2005** | ** ** | **Thirty  weeks ended April 29,  2006** | ** ** | **Nine weeks  ended  October 1, 2005** | ** ** | **Thirty-nine  weeks ended  April 29,  2006** | ** ** | **Thirty-nine  weeks ended  April 30,  2005** | ** ** |
| ** **                                                                        | ** ** | **(Successor)**                                 | ** ** | **(Predecessor)**                               | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** | **(Combined)** | ** ** | **(Predecessor)** | ** ** |
|                                                                              |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Revenues                                                                          |       | 100.0                                           | %          | 100.0                                           | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of goods sold including buying and occupancy  costs (excluding depreciation) |       | 58.7                                            |       | 58.9                                            |       | 63.3 |   | 58.1 |   | 62.2 |   | 61.2 |   |
| Selling, general and administrative expenses  (excluding depreciation)            |       | 24.9                                            |       | 25.8                                            |       | 24.2 |   | 25.9 |   | 24.5 |   | 25.2 |   |
| Income from credit card operations, net                                           |       | (1.5                                            | )          | (2.0                                            | )          | (1.4 | ) | (1.2 | ) | (1.4 | ) | (1.8 | ) |
| Depreciation expense                                                              |       | 3.2                                             |       | 3.0                                             |       | 3.0 |   | 3.1 |   | 3.0 |   | 2.7 |   |
| Amortization of customer lists                                                    |       | 1.4                                             |       | —                                          |       | 1.2 |   | — |   | 1.0 |   | — |   |
| Amortization of favorable lease commitments                                       |       | 0.4                                             |       | —                                          |       | 0.4 |   | — |   | 0.3 |   | — |   |
| Transaction and other costs                                                       |       | —                                          |       | —                                          |       | — |   | 3.6 |   | 0.7 |   | — |   |
| Loss on disposition of Chef’s Catalog                                        |       | —                                          |       | —                                          |       | — |   | — |   | — |   | 0.5 |   |
| Operating earnings                                                                |       | 12.9                                            |       | 14.4                                            |       | 9.3 |   | 10.5 |   | 9.6 |   | 12.3 |   |
| Interest expense (income), net                                                    |       | 6.5                                             |       | 0.3                                             |       | 5.8 |   | (0.1 | ) | 4.6 |   | 0.4 |   |
| Earnings before income taxes and minority interest                                |       | 6.4                                             |       | 14.1                                            |       | 3.5 |   | 10.6 |   | 5.0 |   | 11.9 |   |
| Income taxes                                                                      |       | 2.4                                             |       | 5.4                                             |       | 1.3 |   | 3.9 |   | 1.9 |   | 4.6 |   |
| Earnings before minority interest                                                 |       | 3.9                                             |       | 8.7                                             |       | 2.2 |   | 6.7 |   | 3.1 |   | 7.3 |   |
| Minority interest in net (earnings) loss of  subsidiaries                         |       | 0.0                                             |       | (0.1                                            | )          | (0.1 | ) | 0.1 |   | (0.1 | ) | (0.1 | ) |
| Net earnings                                                                      |       | 3.9                                             | %          | 8.6                                             | %          | 2.1 | % | 6.8 | % | 3.0 | % | 7.2 | % |

 

In connection with theTransactions, the Company incurred significant indebtedness and became highlyleveraged. See “Liquidity and Capital Resources.”  In addition, the purchase price paid inconnection with the Acquisition has been preliminarily allocated to state theacquired assets and liabilities at fair value. The preliminary purchaseaccounting adjustments increased the carrying value of our property andequipment and inventory, established intangible assets for our tradenames,customer lists and favorable lease commitments and revalued our long-termbenefit plan obligations, among other things. Subsequent to the Transactions,interest expense and non-cash depreciation and amortization charges havesignificantly increased.  As a result,our Successor financial statements subsequent to the Transactions are notcomparable to our Predecessor financial statements.

 

37

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

 
| ** **                                                                                       | ** ** | **Quarter-to-Date**                             | ** ** | **Year-to-Date**                                | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| **(dollars in millions)**                                                                        | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirteen  weeks ended  April 30,  2005** | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Thirty-nine  weeks ended  April 29,  2006** | ** ** | **Thirty-nine  weeks ended  April 30,  2005** | ** ** |
| ** **                                                                                       | ** ** | **(Successor)**                                 | ** ** | **(Predecessor)**                               | ** ** | **(Successor)** | ** ** | **(Predecessor)** | ** ** | **(Combined)** | ** ** | **(Predecessor)** | ** ** |
| REVENUES                                                                                         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Specialty Retail Stores                                                                          |       | $                                               | 840.2      |                                            | $          | 766.9 |   | $ | 2,084.1 |   | $ | 544.9 |   | $ | 2,629.0 |   | $ | 2,415.7 |   |
| Direct Marketing                                                                                 |       | 152.1                                           |       | 130.5                                           |       | 416.5 |   | 87.5 |   | 504.0 |   | 458.5 |   |
| Other (1)                                                                                        |       | 34.7                                            |       | 36.0                                            |       | 82.6 |   | 19.2 |   | 101.9 |   | 96.3 |   |
| Total                                                                                            |       | $                                               | 1,027.0    |                                            | $          | 933.4 |   | $ | 2,583.2 |   | $ | 651.6 |   | $ | 3,234.9 |   | $ | 2,970.5 |   |
|                                                                                             |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| OPERATING EARNINGS                                                                               |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Specialty Retail Stores                                                                          |       | $                                               | 142.6      |                                            | $          | 125.8 |   | $ | 281.0 |   | $ | 91.4 |   | $ | 372.4 |   | $ | 343.8 |   |
| Direct Marketing                                                                                 |       | 23.0                                            |       | 16.8                                            |       | 67.3 |   | 8.2 |   | 75.5 |   | 55.9 |   |
| Other (1)                                                                                        |       | (0.2                                            | )          | 4.6                                             |       | 4.0 |   | (2.0 | ) | 2.0 |   | 10.2 |   |
| Subtotal                                                                                         |       | 165.4                                           |       | 147.2                                           |       | 352.3 |   | 97.6 |   | 449.9 |   | 409.9 |   |
| Corporate expenses                                                                               |       | (14.4                                           | )          | (12.5                                           | )          | (30.8 | ) | (5.8 | ) | (36.5 | ) | (30.4 | ) |
| Amortization of customer lists and favorable lease  commitments                                  |       | (18.2                                           | )          | —                                          |       | (42.0 | ) | — |   | (42.0 | ) | — |   |
| Non-cash charges related to other valuation  adjustments made in connection with the Acquisition |       | (0.1                                            | )          | —                                          |       | (38.6 | ) | — |   | (38.6 | ) | — |   |
| Transaction and other costs                                                                      |       | —                                          |       | —                                          |       | — |   | (23.5 | ) | (23.5 | ) | — |   |
| Loss on disposition of Chef’s Catalog                                                       |       | —                                          |       | —                                          |       | — |   | — |   | — |   | (15.3 | ) |
| Total                                                                                            |       | $                                               | 132.7      |                                            | $          | 134.7 |   | $ | 240.9 |   | $ | 68.3 |   | $ | 309.3 |   | $ | 364.2 |   |
|                                                                                             |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| OPERATING PROFIT MARGIN                                                                          |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Specialty Retail Stores                                                                          |       | 17.0                                            | %          | 16.4                                            | %          | 13.5 | % | 16.8 | % | 14.2 | % | 14.2 | % |
| Direct Marketing                                                                                 |       | 15.1                                            | %          | 12.9                                            | %          | 16.2 | % | 9.4 | % | 15.0 | % | 12.2 | % |
| Total                                                                                            |       | 12.9                                            | %          | 14.4                                            | %          | 9.3 | % | 10.5 | % | 9.6 | % | 12.3 | % |
|                                                                                             |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| CHANGE IN COMPARABLE REVENUES (2)                                                                |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Specialty Retail Stores                                                                          |       | 5.7                                             | %          | 6.5                                             | %          | 5.3 | % | 9.8 | % | 6.2 | % | 9.1 | % |
| Direct Marketing                                                                                 |       | 16.5                                            | %          | 16.8                                            | %          | 14.2 | % | 9.6 | % | 13.4 | % | 15.3 | % |
| Total                                                                                            |       | 6.8                                             | %          | 8.0                                             | %          | 6.6 | % | 9.0 | % | 7.1 | % | 9.9 | % |
|                                                                                             |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| SALES PER SQUARE FOOT                                                                            |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Specialty Retail Stores                                                                          |       | $                                               | 149        |                                            | $          | 141 |   | $ | 375 |   | $ | 103 |   | $ | 478 |   | $ | 449 |   |
|                                                                                             |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| STORE COUNT                                                                                      |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores:                                                       |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Open at beginning of period                                                                      |       | 38                                              |       | 37                                              |       | 37 |   | 36 |   | 36 |   | 37 |   |
| Opened during the period                                                                         |       | —                                          |       | —                                          |       | 1 |   | 1 |   | 2 |   | — |   |
| Open at end of period                                                                            |       | 38                                              |       | 37                                              |       | 38 |   | 37 |   | 38 |   | 37 |   |
| Clearance centers:                                                                               |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Open at beginning of period                                                                      |       | 17                                              |       | 15                                              |       | 17 |   | 16 |   | 16 |   | 14 |   |
| Opened during the period                                                                         |       | 1                                               |       | —                                          |       | 1 |   | 1 |   | 2 |   | 1 |   |
| Open at end of period                                                                            |       | 18                                              |       | 15                                              |       | 18 |   | 17 |   | 18 |   | 15 |   |

 

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(1)          Otherincludes the operations of the Brand Development Companies.

 

(2)          Comparablerevenues include 1) revenues derived from our retail stores open for more than52 weeks, including stores that have been relocated or expanded, 2) revenuesfrom our Direct Marketing operation and 3) revenues from our Brand DevelopmentCompanies. Comparable revenues exclude the revenues of closed stores and therevenues of our Chef’s Catalog operations (sold in November 2004) for allperiods prior to the Chef’s Catalog Disposition.

 

38

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**ThirdQuarter Fiscal Year 2006 Highlights**

 

We believe that ourproduct assortment of luxury, designer and fashion merchandise, coupled withour sales promotion activities and our commitment to superior customer service,have been critical to our success in the past. In addition, we believe thesefactors are critical to our future growth and success. A summary of the thirdfiscal quarter and the year-to-date fiscal year 2006 period operating resultsis as follows:

 

•                  **Revenues—**We generated revenue growth in the quarterly and the year-to-date fiscalyear periods ended April 29, 2006 of 10.0% and 8.9%, respectively. Theseincreases were attributable to 1) increases in comparable revenues, 2) revenuesderived from two new full-line stores and 3) the growth of internet sales.

 

Comparable revenues increased 6.8%in the third quarter of fiscal year 2006 and 7.1% in the year-to-date fiscalperiod.

 

ForSpecialty Retail Stores, our sales per square foot for the last twelve trailingmonths increased to $605 as of April 2006 compared to $567 as of April 2005.

 

•                  **Cost of goods sold including buying andoccupancy costs (excluding depreciation)—**COGS represented 58.7% of revenues in the third quarter of fiscal year2006 and 58.9% of revenues in the third quarter of  fiscal year 2005.  This decrease was due to a lower level of netmarkdowns in the third quarter of fiscal year 2006 than in the correspondingquarter in fiscal year 2005.

 

COGS represented 62.2% of revenuesin the combined year-to-date fiscal period of 2006 and 61.2% of revenues in thecorresponding fiscal period in 2005. This increase was primarily due topurchase accounting adjustments in fiscal year 2006 of $42.5 million, or 1.3%of revenues.

 

•                  **Selling, general and administrative expenses(excluding depreciation)—**SG&Adecreased in the third quarter of fiscal year 2006 to 24.9% of revenues from25.8% of revenues in the third quarter of fiscal year 2005 and decreased in thecombined year-to-date fiscal period of 2006 to 24.5% of revenues from 25.2% ofrevenues in the corresponding fiscal period of 2005.

 

•                  **Operating earnings-**For the third quarter of fiscal year 2006, ouroperating earnings were $132.7 million, or 12.9% of revenues, compared to $134.7million, or 14.4% of revenues, in the prior year fiscal quarter. For thecombined year-to-date fiscal year 2006, our operating earnings were $309.3million, or 9.6% of revenues, compared to $364.2 million, or 12.3% of revenuesfor the year-to-date fiscal year 2005 period.

 

Operating earnings in both thethird quarter and year-to-date periods in fiscal year 2006 were negativelyimpacted by 1) higher depreciation and amortization expenses due to higherasset values resulting from the revaluation of our assets to fair value as ofthe Acquisition date and 2) costs incurred in connection with the Transactions.These expenses aggregated $18.3 million, or 1.8% of revenues, in the thirdquarter of fiscal year 2006 and $104.1 million, or 3.2% of revenues, in theyear-to-date  fiscal year period of 2006.In addition, operating earnings, as a percentage of revenues, were negativelyimpacted by 1) higher depreciation charges of $4.7 million, or 0.1% of revenuesfor the third quarter, and $16.0 million, or 0.2% of revenues for the year-to-datefiscal year 2006 period, as a result of higher levels of capital expendituresfor new stores and store remodels in recent years and 2) a lower level ofincome from our credit card operations of $3.9 million, or 0.5% of revenues forthe third quarter, and $8.7 million, or 0.4% of revenues for the year-to-datefiscal year 2006 period, due to the sale of our credit card operations to HSBCin July 2005.

 

**Thirteen Weeks Ended April 29,2006 Compared to Thirteen Weeks Ended April 30, 2005**

** **

***Revenues.***Our revenues for the third quarter of fiscal year 2006 of$1,027.0 million increased $93.6 million, or 10.0%, from $933.4 million in thethird quarter of fiscal year 2005. This increase in our revenues isattributable to increases in comparable revenues, revenues from new stores andhigher internet sales. Revenues increased in the third quarter of fiscal year2006 compared to the prior year fiscal period at all our operating companies,except for Kate Spade.

 

Comparable revenues inthe third quarter of fiscal year 2006 increased 6.8% compared to the prior yearfiscal period. Comparable revenues increased 5.7% for Specialty Retail Storesand 16.5% for Direct Marketing. Comparable revenues decreased 6.8% for theBrand Development Companies in the third quarter of fiscal year 2006 comparedto the prior year fiscal period. The decrease in comparable revenues for theBrand Development Companies during the third quarter of fiscal year 2006relates primarily to lower wholesale and retail sales by Kate Spade.

 

39

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New stores generatedsales of $36.0 million in the third quarter of fiscal year 2006. In the thirdquarter of fiscal year 2006, internet sales by Direct Marketing were $96.7million, an increase of 30.9% compared to the third quarter of fiscal year2005.

 

***Costof goods sold including buying and occupancy costs (excluding depreciation).***COGSfor the third quarter of fiscal year 2006 and fiscal year 2005 were:

 
| ** **                                                                                                                | ** ** | **Thirteen weeks ended  April 29, 2006  (Successor)** | ** ** | **Thirteen weeks ended  April 30, 2005  (Predecessor)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **(in millions, except  percentages)**                                                                                    | ** ** | **$**                                                      | ** ** | **% of  revenues**                                           | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| COGS, before purchase accounting adjustments                                                                              |       | $                                                          | 600.1      |                                                         | 58.4       | % | $ | 549.7 |   | 58.9 | % |
| Purchase accounting adjustments, primarily non-cash  charges related to step-up in carrying value of acquired inventories |       | 2.9                                                        |       | 0.3                                                          |       | — |   | — |   |
| COGS, as reported                                                                                                         |       | $                                                          | 603.0      |                                                         | 58.7       | % | $ | 549.7 |   | 58.9 | % |

 

We present the non-GAAPfinancial measure COGS, before purchase accounting adjustments because we usethis measure to monitor and evaluate the performance of our business andbelieve the presentation of this measure will enhance investors’ ability toanalyze trends in our business and evaluate our performance relative to othercompanies in our industry.

 

The decrease in COGS asreported under GAAP to 58.7% of revenues from 58.9% of revenues in the prioryear fiscal period includes $2.9 million of purchase accounting adjustmentsrecorded in connection with the Transactions. The decrease in COGS beforepurchase accounting adjustments to 58.4% of revenues from 58.9% of revenues inthe prior year fiscal period was primarily due:

 

•            a decrease in product costs byapproximately 0.4% of revenues; and

 

•            a decrease in buying and occupancy costs byapproximately 0.1% of revenues, primarily due to leveraging rent expense on ahigher level of revenues in the third quarter of fiscal year 2006.

 

We had lower productcosts as a percentage of revenues during the third quarter of fiscal year 2006compared to the third quarter of fiscal year 2005 primarily due to:

 

•            a higher level of full-price salesgenerated by our Specialty Retail Stores as well as higher initial markups;

 

•            a lower level of net markdowns by ourSpecialty Retail Stores due to both a later markdown cadence and a higher levelof markdown allowances earned in the third quarter of fiscal year 2006 comparedto the third quarter of fiscal year 2005; offset, in part, by

 

•            a higher level of net markdowns by ourDirect Marketing segment.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. We receive certain allowances toreimburse us for markdowns taken and/or to support the gross margins realizedin connection with the sales of the vendor’s merchandise. We recognize theseallowances as a decrease in COGS when the allowances are earned and approved bythe vendor. Other allowances we receive represent reductions to the amountspaid to acquire the merchandise. We recognize these allowances as a reductionin the cost of the acquired merchandise resulting in a decrease in COGS at thetime the goods are sold. We received vendor allowances of $7.5 million, or0.7% of revenues, in the third quarter of fiscal year 2006 and$4.5 million, or 0.5% of revenues, in the third quarter of fiscal year2005.

 

***Selling,general and administrative expenses (excluding depreciation)*.**SG&A expenses were 24.9% of revenues in the third quarter of fiscalyear 2006 compared to 25.8% of revenues in the prior year fiscal period.

 

The net decrease inSG&A expenses as a percentage of revenues in the third quarter of fiscalyear 2006 was primarily due to:

 

•            lower expected annual incentivecompensation costs of approximately 0.4% of revenues;

 

•            a decrease in our payroll and employeebenefit costs, including medical and dental and workers’ compensation expense,by approximately 0.2% of revenues primarily due to the leveraging of theseexpenses on a  higher level of revenuesin the third quarter of fiscal year 2006;

 

40

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•            a decrease in costs incurred to support ourcredit card operations subsequent to the Credit Card Sale of approximately 0.1%of revenues;

 

•            a decrease in pension, SERP and post-retirementexpenses of approximately 0.1% of revenues primarily driven by both lowerdiscount rates and the revaluation of our related benefit obligations inconnection with purchase accounting adjustments required in connection with theAcquisition; and

 

•            a decrease in professional fees and legalfees of approximately 0.1%.

 

These decreases inSG&A expenses, as a percentage of revenues, were partially offset bymanagement services fees of $2.6 million, or 0.2% of revenues, payable to theSponsors as a result of the Acquisition.

 

***Incomefrom credit card operations, net.  ***Wereceived HSBC Program Income of $15.1 million, or 1.5% of revenues, in thethird quarter of fiscal year 2006 compared to net finance charge income of$19.0 million, or 2.0% of revenues, in the third quarter of fiscal year 2005.

 

***Depreciationexpense.***Depreciation expense was $32.9 million, or 3.2%of revenues, in the third quarter of fiscal year 2006 compared to $27.6million, or 3.0% of revenues, in the prior year fiscal period. The increase in depreciationexpense was  primarily due to 1) a higherlevel of capital spending in recent years and 2) additional depreciationexpense resulting from the revaluation of our property and equipment at fairvalue in connection with the Acquisition.

 

***Amortizationexpense.***Amortization of acquisition related intangibles(customer lists and favorable lease commitments) recorded as a result of theapplication of purchase accounting in connection with the Acquisitionaggregated $18.2 million, or 1.8% of revenues, for the third quarter of fiscalyear 2006. We had no amortization expense in the third quarter of fiscal year2005.

 

***Segmentoperating earnings.***Segment operating earnings for ourSpecialty Retail Stores and Direct Marketing segments do not reflect the impactof adjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date. See Note 11   toour unaudited condensed consolidated financial statements.

 

Operating earnings forour Specialty Retail Stores segment were $142.6 million, or 17.0% of SpecialtyRetail Stores revenues, for the third quarter of fiscal year 2006 compared to$125.8 million, or 16.4% of Specialty Retail Stores revenues, for the prioryear fiscal period. This increase in operating earnings and operating marginwas primarily due to 1) lower product costs driven by a lower level of netmarkdowns and 2) lower SG&A expenses for payroll and related benefits, as apercentage of revenues, as a result of the leveraging of these expenses on ahigher level of revenues in the third quarter of fiscal year 2006 and lowerincentive compensation costs. These positive effects on Specialty Retailoperating earnings margin were offset, in part, by 1) a lower level of incomefrom our credit card operations due to the sale of our credit card operationsto HSBC in July 2005 and 2) higher depreciation charges as a result ofhigher levels of capital expenditures for new stores and store remodels inrecent years.

 

Operating earnings forDirect Marketing increased to $23.0 million, or 15.1% of Direct Marketingrevenues, in the third quarter of fiscal year 2006 from $16.8 million, or 12.9%of Direct Marketing revenues, for the prior year period. The increase inoperating earnings and operating margin for Direct Marketing is primarily theresult of 1) higher product margins and 2) the decrease in advertising andmarketing costs, as a percentage of revenues, incurred to support internetsales.

 

41

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***Interestexpense, net*.**Net interest expense was $67.2 million inthe third quarter of fiscal year 2006 and $2.9 million for the prior yearfiscal year period.  The significantcomponents of interest expense are as follows:

 
| **(in thousands)**                      | ** ** | **Thirteen  weeks ended  April 29,  2006** | ** ** | **Thirteen  weeks ended  April 30,  2005** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **(Successor)**                                 | ** ** | **(Predecessor)**                               | ** ** |
| Senior Secured  Term Loan Facility      |       | $                                               | 33,170     |                                            | $          | — |   |
| 2028 Debentures                         |       | 2,226                                           |       | 2,226                                           |       |
| Senior Notes                            |       | 15,925                                          |       | —                                          |       |
| Senior  Subordinated Notes              |       | 13,113                                          |       | —                                          |       |
| Credit Agreement                        |       | —                                          |       | 1,575                                           |       |
| 2008 Notes                              |       | —                                          |       | 2,078                                           |       |
| Debt issue cost  amortization and other |       | 4,439                                           |       | 464                                             |       |
| Total interest expense                  |       | 68,873                                          |       | 6,343                                           |       |
|                                    |       |                                            |       |                                            |       |
| Less:                                   |       |                                            |       |                                            |       |
| Interest income                         |       | 789                                             |       | 1,712                                           |       |
| Capitalized interest                    |       | 868                                             |       | 1,698                                           |       |
| Interest  expense, net                  |       | $                                               | 67,216     |                                            | $          | 2,933 |   |

 

The increase in interestexpense was due to the $3.3 billion increase in debt incurred in connectionwith the Transactions.

 

***Incometaxes.***Our effective income tax rate for the thirteenweeks ended April 29, 2006 was 38.1% compared to 38.5% for the thirteenweeks ended April 30, 2005.

 

The Company’s federal taxreturns for fiscal years 2004 and 2003 are currently under examination by theInternal Revenue Service (IRS). We believe our recorded tax liabilities as of April 29,2006 are sufficient to cover any potential assessments to be made by the IRSupon the completion of their examinations. We will continue to monitor theprogress of the IRS examinations and review our recorded tax liabilities forpotential audit assessments. Adjustments to increase or decrease the recorded taxliabilities may be required in the future as additional facts becomeknown.

 

**Combined Thirty-nineWeeks Ended April 29, 2006 Compared to Thirty-nine Weeks Ended April 30,2005**

** **

***Revenues.***Our year-to-date fiscal year 2006 revenues of $3,234.9million increased $264.4 million, or 8.9%, from $2,970.5 million in the year-to-datefiscal year 2005 period, reflecting increases in comparable revenues, revenuesfrom new stores and higher internet sales. Revenues increased in the year-to-datefiscal year 2006 period compared to the prior year period at all our operatingcompanies, except for Kate Spade.

 

Comparable revenues inthe year-to-date fiscal year 2006 period increased 7.1% compared to the prioryear-to-date period. Comparable revenues increased 6.2% for Specialty RetailStores, 13.4% for Direct Marketing and 0.9% for the Brand Development Companiesin the year-to-date fiscal year 2006 period.

 

New stores generatedsales of $88.1 million in the year-to-date fiscal year 2006 period. In the year-to-datefiscal year 2006 period, internet sales by Direct Marketing were $310.0million, an increase of 33.1% from the year-to-date fiscal year 2005 period,excluding Chef’s Catalog. Total revenues of Chef’s Catalog (prior to its salein November 2004) of $13.9 million are included in consolidated revenuesfor the year-to-date fiscal year 2005 period.

 

42

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***Costof goods sold including buying and occupancy costs (excluding depreciation).***COGSfor the year-to-date fiscal year 2006 period and the year-to-date fiscal year2005 period were:

 
| ** **                                                                                                                | ** ** | **Thirty-nine weeks ended  April 29, 2006  (Combined)** | ** ** | **Thirty-nine weeks ended  April 30, 2005  (Predecessor)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(in millions, except  percentages)**                                                                                    | ** ** | **$**                                                        | ** ** | **% of  revenues**                                              | ** ** | **$** | ** ** | **% of  revenues** | ** ** |
| COGS, before purchase accounting adjustments                                                                              |       | $                                                            | 1,970.5    |                                                            | 60.9       | % | $ | 1,816.6 |   | 61.2 | % |
| Purchase accounting adjustments, primarily non-cash  charges related to step-up in carrying value of acquired inventories |       | 42.5                                                         |       | 1.3                                                             |       | — |   | — |   |
| COGS, as reported                                                                                                         |       | $                                                            | 2,013.0    |                                                            | 62.2       | % | $ | 1,816.6 |   | 61.2 | % |
|                                                                                                                           |            |                                                              |            |                                                                 |            |  |  |  |  |  |  |  |  |

 

We present the non-GAAPfinancial measure COGS, before purchase accounting adjustments because we usethis measure to monitor and evaluate the performance of our business andbelieve the presentation of this measure will enhance investors’ ability toanalyze trends in our business and evaluate our performance relative to othercompanies in our industry.

 

The increase in COGS asreported under GAAP to 62.2% of revenues from 61.2% of revenues in the prioryear fiscal period primarily reflects $42.5 million of purchase accountingadjustments recorded in connection with the Transactions. COGS before purchaseaccounting adjustments was 60.9% of revenues compared to 61.2% of revenues inthe prior year reflecting:

 

•            a decrease in product costs byapproximately 0.2% of revenues; and

 

•            a decrease in buying and occupancy costs byapproximately 0.1% of revenues, primarily due to leveraging payroll and rentexpense on a higher level of revenues in the year-to-date fiscal year 2006period.

 

We had lower productcosts as a percentage of revenues during the year-to-date fiscal year 2006period compared to the year-to-date fiscal year 2005 period primarily due to:

 

•            a higher level of full-price salesgenerated by our Specialty Retail Stores as well as higher initial mark-ups atboth Specialty Retail Stores and Direct Marketing;

 

•            a lower level of net markdowns by ourSpecialty Retail Stores due to both a later markdown cadence and a higher levelof markdown allowances earned in the third quarter of fiscal year 2006 comparedto the third quarter of fiscal year 2005, offset, in part, by

 

•            an increase in the level of net markdownsat Direct Marketing for the year-to-date period and at our Specialty RetailStores for the first and second quarters of fiscal year 2006.

 

Consistent with industrybusiness practice, we receive allowances from certain of our vendors in supportof the merchandise we purchase for resale. We receive certain allowances toreimburse us for markdowns taken and/or to support the gross margins realizedin connection with the sales of the vendor’s merchandise. We recognize theseallowances as a decrease in COGS when the allowances are earned and approved bythe vendor. Other allowances we receive represent reductions to the amountspaid to acquire the merchandise. We recognize these allowances as a reductionin the cost of the acquired merchandise resulting in a decrease in COGS at thetime the goods are sold. We received vendor allowances of $51.5 million or 1.6%of revenues, in the year-to-date fiscal year 2006 period and$47.4 million, or 1.6% of revenues, in the year-to-date fiscal year 2005period.

 

***Selling,general and administrative expenses (excluding depreciation)*.**SG&A expenses were 24.5% of revenues in the year-to-date fiscal year2006 period compared to 25.2% of revenues in the prior year fiscal year period.

 

The net decrease inSG&A expenses as a percentage of revenues in the year-to-date fiscal year2006 period was primarily due to:

 

•            a decrease in marketing and advertising costsof approximately 0.4% of revenues primarily due to higher internet sales by ourDirect Marketing segment, which have a lower expense to revenue ratio thancatalog sales;

 

•            a decrease in our payroll and employeebenefit costs, including medical and dental and workers’ compensation expense,by approximately 0.2% of revenues primarily due to the leveraging of theseexpenses on a higher level of revenues in the year-to-date fiscal year 2006period;

 

43

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•            lower expected annual incentivecompensation costs of approximately 0.2% of revenues;

 

•            a decrease in costs incurred to support ourcredit card operations subsequent to the Credit Card Sale of approximately 0.1%of revenues; and

 

•            a decrease in pension, SERP and post-retirementexpenses of approximately 0.1% of revenues primarily driven by both lowerdiscount rates and the revaluation of our related benefit obligations inconnection with purchase accounting adjustments required in connection with theAcquisition.

 

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

 

•            an increase in preopening expenses andstore remodeling expenses primarily incurred in connection with the opening ofour  San Antonio store in September 2005and our Boca Raton store in November 2005 by approximately 0.2% ofrevenues;

 

•            management services fees of $6.4 million,or 0.2% of revenues, payable to the Sponsors as a result of the Acquisition.

 

***Incomefrom credit card operations, net.  ***Wereceived HSBC Program Income of $43.7 million, or 1.4% of revenues, in the year-to-datefiscal year 2006 period compared to net finance charge income of $52.4 million,or 1.8% of revenues, in the year-to-date fiscal year 2005 period.

 

***Depreciationexpense.***Depreciation expense was $97.9 million, or 3.0%of revenues, in the year-to-date fiscal year 2006 period compared to $79.3million, or 2.7% of revenues, in the prior year period. The increase indepreciation was primarily due to 1) a higher level of capital spending inrecent years and 2) additional depreciation expense resulting from therevaluation of our property and equipment at fair value in connection with theAcquisition.

 

***Amortizationexpense.***Amortization of acquisition related intangibles(customer lists and favorable lease commitments) recorded as a result of theapplication of purchase accounting in connection with the Acquisitionaggregated $42.0 million, or 1.3% of revenues, for the year-to-date fiscal year2006 period. We had no amortization expense in the prior year period.

 

***Transactionand other costs.  ***Duringthe period July 30, 2005 to October 1, 2005, we expensed $23.5million in connection with the Transactions. These costs consisted of $4.5million of accounting, investment banking, legal and other costs associatedwith the Transactions and a $19.0 million non-cash charge for stockcompensation resulting from the accelerated vesting of Predecessor stockoptions and restricted stock.

 

***Segmentoperating earnings.***Segment operating earnings for our SpecialtyRetail Stores and Direct Marketing segments do not reflect the impact ofadjustments to revalue our assets and liabilities to estimated fair value atthe Acquisition date. See Note 11 to our unaudited condensed consolidatedfinancial statements.

 

Operating earnings forour Specialty Retail Stores segment were $372.4 million, or 14.2% of SpecialtyRetail Stores revenues, for the year-to-date fiscal year 2006 period comparedto $343.8 million, or 14.2% of Specialty Retail Stores revenues, for the prioryear period. Operating margin for Specialty Retail Stores was positivelyimpacted by 1) higher product margins, 2) lower SG&A expenses forcompensation and related benefits, as a percentage of revenues, as a result ofleveraging these expenses on a higher level of revenues in the year-to-datefiscal year 2006 period and 3) the leveraging of buying and occupancy costs ona higher level of revenues. These effects were offset, in part, by 1) a lowerlevel of income from our credit card operations due to the sale of our creditcard operations to HSBC in July 2005, 2) higher preopening costs and 3)higher depreciation charges as a result of higher levels of capitalexpenditures for new stores and store remodels in recent years.

 

Operating earnings forDirect Marketing increased to $75.5 million, or 15.0% of Direct Marketingrevenues, in the year-to-date fiscal year 2006 period from $55.9 million, or12.2% of Direct Marketing revenues, for the prior year period. The increase inoperating earnings and operating margin for Direct Marketing was primarily theresult of 1) higher product margins and 2) the decrease in advertising andmarketing costs, as a percentage of revenues, incurred to support internetsales.

 

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***Interestexpense, net*.**Net interest expense was $149.8 million inthe year-to-date fiscal year 2006 period and $10.9 million for the prior yearperiod.  The significant components ofinterest expense are as follows:

 
| **(in thousands)**                      | ** ** | **Thirty  weeks ended  April 29,  2006** | ** ** | **Nine weeks  ended  October 1,  2005** | ** ** | **Thirty-nine  weeks ended  April 29,  2006** | ** ** | **Thirty-nine  weeks ended  April 30,  2005** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **(Successor)**                               | ** ** | **(Predecessor)**                            | ** ** | **(Combined)**                                     | ** ** | **(Predecessor)**                                  | ** ** |
| Asset-Based  Revolving Credit Facility  |       | $                                             | 1,332      |                                         | $          | —                                             |       | $                                                  | 1,332      |   | $ | — |   |
| Senior Secured  Term Loan Facility      |       | 76,765                                        |       | —                                       |       | 76,765                                             |       | —                                             |       |
| 2028 Debentures                         |       | 5,136                                         |       | 1,542                                        |       | 6,678                                              |       | 6,678                                              |       |
| Senior Notes                            |       | 35,875                                        |       | —                                       |       | 35,875                                             |       | —                                             |       |
| Senior  Subordinated Notes              |       | 29,540                                        |       | —                                       |       | 29,540                                             |       | —                                             |       |
| Credit Agreement                        |       | —                                        |       | —                                       |       | —                                             |       | 4,110                                              |       |
| 2008 Notes                              |       | 638                                           |       | 1,439                                        |       | 2,077                                              |       | 6,231                                              |       |
| Debt issue cost  amortization and other |       | 7,300                                         |       | 345                                          |       | 7,645                                              |       | 1,385                                              |       |
| Total interest expense                  |       | 156,586                                       |       | 3,326                                        |       | 159,912                                            |       | 18,404                                             |       |
|                                    |       |                                          |       |                                         |       |                                               |       |                                               |       |
| Less:                                   |       |                                          |       |                                         |       |                                               |       |                                               |       |
| Interest income                         |       | 3,603                                         |       | 3,046                                        |       | 6,649                                              |       | 3,781                                              |       |
| Capitalized interest                    |       | 2,357                                         |       | 1,146                                        |       | 3,503                                              |       | 3,675                                              |       |
| Interest  expense, net                  |       | $                                             | 150,626    |                                         | $          | (866                                               | )          | $                                                  | 149,760    |   | $ | 10,948 |   |

 

The increase in interestexpense is due to the $3.3 billion increase in debt incurred in connection withthe Transactions. The increase in interest income was due primarily to interestearned on higher average invested balances after the Credit Card Sale in July 2005and prior to the Transactions.

 

***Incometaxes.***Our effectiveincome tax rate was 38.5% for the thirty weeks ended April 29, 2006. Oureffective income tax rate for the nine weeks ended October 1, 2005 was37.0%, resulting in an effective tax rate of 37.9% for the combined year-to-datefiscal year 2006 period. Our effective tax rate for the nine-weeks ended October 1,2005 was favorably impacted by a higher level of tax-exempt interest incomeearned during the period on higher cash balances maintained subsequent to theCredit Card Sale. Our effective income tax rate was 38.5% for the thirty-nineweeks ended April 30, 2005 and was also favorably impacted by tax-exemptinterest income.

** **

The Company’s federal taxreturns for fiscal years 2004 and 2003 are currently under examination by theInternal Revenue Service (IRS). We believe our recorded tax liabilities as of April 29,2006 are sufficient to cover any potential assessments to be made by the IRSupon the completion of their examinations. We will continue to monitor theprogress of the IRS examinations and review our recorded tax liabilities forpotential audit assessments. Adjustments to increase or decrease the recordedtax liabilities may be required in the future as additional facts becomeknown.

 

**Inflation andDeflation**

** **

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 in productcosts due primarily to changes in foreign currency exchange rates that havereduced the purchasing power of the U.S. dollar and 2) increases in SG&A. Wepurchase a substantial portion of our inventory from foreign suppliers whosecosts are affected by the fluctuation of their local currency against thedollar or who price their merchandise in currencies other than the dollar. Accordingly,changes in the value of the dollar relative to foreign currencies may increaseour cost of goods sold and if we are unable to pass such cost increases to ourcustomers, our gross margins, and ultimately our earnings, would decrease. Fluctuationsin the euro-U.S. dollar exchange rate affect us most significantly; however, wesource goods from numerous countries and thus are affected by changes innumerous currencies and, generally, by fluctuations in the U.S. dollar relativeto such currencies. Although we hedge some exposures to changes in foreigncurrency exchange rates arising in the ordinary course of business, foreigncurrency fluctuations could have a material adverse effect on our business,financial condition and results of operations in the future. We attempt tooffset the effects of inflation through price increases and control ofexpenses, although our ability to increase prices may be limited bycompetitive factors. We attempt to offset the effects of merchandise deflation,which has occurred on a limited basis in recent years, through control ofexpenses. There is no assurance, however, that inflation or deflation will notmaterially affect our operations in the future.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash requirements consist principally of:

 

•                  the funding of our merchandise purchases;

 

•                  capital expenditures for new store construction,store renovations and upgrades of our management information systems;

 

•                  debt service requirements;

 

•                  income tax payments; and

 

•                  obligations related to our Pension 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 related to financinginstruments and debt service obligations following the Transactions, PensionPlan funding obligations and our 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 and accounts receivable (prior to the CreditCard Sale in July 2005). We have typically financed the increases inworking capital needs during the first and second fiscal quarters with cashflows from operations and cash provided from borrowings under our creditfacilities. During year-to-date fiscal year 2006 period, we financed ourseasonal increases in working capital with cash flows from operations andborrowings under our Asset-Based Revolving Credit Facility. During the firstquarter of fiscal year 2006, we borrowed $150 million under our Asset-BasedRevolving Credit Facility.   We repaidthese borrowings in the second quarter of fiscal year 2006.

 

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 and debt service requirements, including Pension Plan fundingrequirements, contractual obligations and commitments, anticipated capitalexpenditure requirements and our debt service obligations, through the end of2006.

 

At April 29, 2006,cash and equivalents were $109.0 million compared to $337.6 million at April 30,2005. Net cash provided by operating activities was $283.9 million in 2006compared to $190.0 million in 2005. Cash flows related to operating activitieswere higher in the year-to-date fiscal year 2006 period primarily due to theCredit Card Sale in July 2005. In the year-to-date fiscal year 2005 period(prior to the Credit Card Sale), we funded an increase in accounts receivableof $114.3 million while in the year-to-date fiscal year 2006 period (subsequentto the Credit Card Sale), we funded an increase in accounts receivable of $26.9million.

 

Net cash used forinvesting activities was $5,294.9 million in the year-to-date fiscal year 2006period which consisted of 1) $5,156.4 million paid in connection with theAcquisition and 2) $138.5 million for capital expenditures.  Net cash used in investing activities was$173.9 million in the year-to-date fiscal year 2005 period primarily for $150.8million of capital expenditures and $37.5 million cash restricted for therepayment of the outstanding indebtedness on our Credit Card Facility, offsetby $14.4 million in cash proceeds from the sale of Chef’s Catalog. We incurredcapital expenditures in the year-to-date fiscal year 2006 period related to theconstruction of new stores in San Antonio and Boca Raton and the remodels ofour San Francisco, Houston, Beverly Hills, Newport Beach and Bergdorf Goodmanstores. We opened our San Antonio store in September 2005 and opened ourBoca Raton store in November 2005.

 

Net cash provided byfinancing activities was $4,266.6 million in the year-to-date fiscal year 2006period as compared to net cash used for financing activities of $46.9 millionin the year-to-date fiscal year 2005 period. Proceeds from debt incurred inconnection with the Transactions, net of issuance costs, aggregated $3,222.1million and cash equity contributions received in connection with theTransactions aggregated $1,427.7 million.  In the year-to-date fiscal year 2006 period,we also repaid our $150.0 million of seasonal borrowings under our Asset-BasedRevolving Credit Facility, paid $134.7 million for the redemption of our 2008Notes pursuant to our call of such notes for redemption in connection with theTransactions and repaid $100.0 million principal amount of borrowings on theSenior Term Loan Facility.

 

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**FinancingStructure**

 

Our major sources offunds are comprised of vendor financing, a $600.0 million Asset-Based RevolvingCredit Facility,  $1,975.0 million SeniorSecured Term Loan Facility, $700.0 million Senior Notes, $500.0 million SeniorSubordinated Notes, $125.0 million 2028 Debentures and operating leases.

 

***Senior Secured Asset-Based Revolving CreditFacility.***On October 6,2005, in connection with the Transactions, the Company entered into a creditagreement and related security and other agreements for a senior secured Asset-BasedRevolving Credit Facility with Deutsche Bank Trust Company Americas asadministrative agent and collateral agent. The Asset-Based Revolving CreditFacility provides financing of up to $600.0 million, subject to aborrowing base equal to at any time the lesser of 80% of eligible inventory(valued at the lower of cost or market value) and 85% of net orderlyliquidation value of the eligible inventory, less certain reserves. The Asset-BasedRevolving Credit Facility includes borrowing capacity available for letters ofcredit and for borrowings on same-day notice. At the closing of theTransactions, the Company utilized $150.0 million of the Asset-BasedRevolving Credit Facility for loans and approximately $16.5 million for letters of credit. In the second quarter offiscal year 2006, the Company repaid all loans under the Asset-Based RevolvingCredit Facility. As of April 29, 2006, the Company had $573.2 million ofunused borrowing availability under the Asset-Based Revolving Credit Facilitybased on a borrowing base of over $600.0 million and after giving effect to$26.8 million used for letters of credit.

 

TheAsset-Based Revolving Credit Facility provides that the Company has the rightat any time to request up to $200.0 million of additional commitments, butthe lenders are under no obligation to provide any such additional commitments,and any increase in commitments will be subject to customary conditionsprecedent. If the Company was to request any such additional commitments andthe existing lenders or new lenders were to agree to provide such commitments,the Asset-Based Revolving Credit Facility size could be increased to up to$800.0 million, but the Company’s ability to borrow would still be limitedby the amount of the borrowing base.

 

Borrowingsunder the Asset-Based Revolving Credit Facility bear interest at a rate perannum equal to, at the Company’s option, either (a) a base rate determinedby reference to the higher of (1) the prime rate of Deutsche Bank TrustCompany Americas and (2) the federal funds effective rate plus 1/2 of1% or (b) a LIBOR rate, subject to certain adjustments, in each case plusan applicable 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, the Company 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. TheCompany must also pay customary letter of credit fees and agency fees.

 

If atany time the aggregate amount of outstanding loans, unreimbursed letter ofcredit drawings and undrawn letters of credit under the Asset-Based RevolvingCredit Facility exceeds the lesser of (i) the commitment amount and (ii) theborrowing base, the Company 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, the Company will be required to repay outstandingloans and cash collateralize letters of credit with the cash the Company isrequired to deposit daily in a collection account maintained with the agentunder the Asset-Based Revolving Credit Facility. The Company may voluntarilyreduce the unutilized portion of the commitment amount and repay outstandingloans at any time without premium or penalty other than customary “breakage”costs with respect to LIBOR loans. There is no scheduled amortization under theAsset-Based Revolving Credit Facility; the principal amount of the loansoutstanding is due and payable in full on October 6, 2010.

 

Allobligations under the Asset-Based Revolving Credit Facility are guaranteed byParent and certain of the Company’s existing and future domestic subsidiaries(excluding, among others, Gurwitch Products, L.L.C., and Kate Spade LLC(Brand Development Companies)). As of April 29, 2006, the liabilities ofthe Company’s non-guarantor subsidiaries totaled approximately $38.1 million,or 0.7% of consolidated liabilities, and the assets of the Company’s non-guarantorsubsidiaries aggregated approximately $194.0 million, or 2.9% of consolidatedtotal assets. All obligations under the Company’s Asset-Based Revolving CreditFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the Company’s assetsand the assets of Parent and the Company’s subsidiaries that have guaranteedthe Asset-Based Revolving Credit Facility (subsidiary guarantors), including:

 

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

 

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•                  a second-priority pledge of 100% of theCompany’s capital stock and certain of the capital stock held by the Company,Parent 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 second-priority security interest in,and mortgages on, substantially all other tangible and intangible assets of theCompany, Parent and each subsidiary guarantor, including a significant portionof the Company’s material owned and leased real property (which currentlyconsists of a majority of the Company’s full-line retail stores) and equipment.

 

Capital stock and othersecurities of a subsidiary of the Company that are owned by the Company or anysubsidiary guarantor will not constitute collateral under the Company’s Asset-BasedRevolving Credit Facility to the extent that such securities cannot secure theCompany’s 2028 Debentures or other secured public debt obligations withoutrequiring the preparation and filing of separate financial statements of suchsubsidiary in accordance with applicable SEC rules. As a result, the collateralunder the Company’s Asset-Based Revolving Credit Facility will include sharesof capital stock or other securities of subsidiaries of the Company or anysubsidiary 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. Stock of the Company’s Brand Development Companies and theirassets also will not constitute collateral under the Company’s Asset-BasedRevolving Credit Facility.

 

TheCompany’s Asset-Based Revolving Credit Facility contains a number of covenantsthat, among other things and subject to certain significant exceptions,restrict its ability and the ability of its subsidiaries to:

 

•                  incur additional indebtedness;

 

•                  pay dividends on the Company’s capitalstock or redeem, repurchase or retire the Company’s capital stock orindebtedness;

 

•                  make investments, loans, advances andacquisitions;

 

•                  create restrictions on the payment ofdividends or other amounts to the Company from its  subsidiaries that are not guarantors;

 

•                  engage in transactions with the Company’saffiliates;

 

•                  sell assets, including capital stock ofthe Company’s subsidiaries;

 

•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and lease backtransactions.

 

Thecovenants limiting dividends and other restricted payments; investments, loans,advances and acquisitions; and prepayments or redemptions of otherindebtedness, each permit the restricted actions in an unlimited amount,subject to the satisfaction of certain payment conditions, principally that theCompany must have at least $75.0 million of pro forma excess availabilityunder the Asset-Based Revolving Credit Facility and that the Company must be inpro forma compliance with the fixed charge coverage ratio described below.

 

Althoughthe credit agreement governing the Asset-Based Revolving Credit Facility doesnot require the Company to comply with any financial ratio maintenancecovenants, if less than $60.0 million were available to be borrowed underthe Asset-Based Revolving Credit Facility at any time, the Company would not bepermitted to borrow any additional amounts unless its pro forma ratio ofconsolidated EBITDA to consolidated Fixed Charges (as such terms are defined inthe credit agreement) were at least 1.1 to 1.0. The credit agreement alsocontains customary affirmative covenants and events of default.

 

***Senior Secured Term Loan Facility.***On October 6, 2005, in connectionwith the Transactions, the Company entered into a credit agreement and relatedsecurity and other agreements for a $1,975.0 million Senior Secured TermLoan Facility with Credit Suisse as administrative agent and collateral agent. Thefull amount of the Senior Secured Term Loan Facility was borrowed on October 6,2005. In the second quarter of fiscal year 2006, the Company repaid $100.0million principal amount of the loans under the Senior Secured Term LoanFacility.

 

Borrowingsunder the Senior Secured Term Loan Facility bear interest at a rate per annumequal to, at the Company’s option, either (a) a base rate determined byreference to the higher of (1) the prime rate of Credit Suisse and (2) thefederal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subjectto certain adjustments, in each case plus an applicable margin. The applicablemargin is 1.5%

 

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withrespect to base rate borrowings and 2.5% with respect to LIBOR borrowings. Theinterest rate on the outstanding borrowings pursuant to the Senior Secured TermLoan Facility was 7.24% at April 29, 2006.

 

Thecredit agreement governing the Senior Secured Term Loan Facility requires theCompany to prepay outstanding term loans with 50% (which percentage will bereduced to 25% if the Company’s total leverage ratio is less than a specifiedratio and will be reduced to 0% if the Company’s total leverage ratio is lessthan a specified ratio) of its annual excess cash flow (as defined in thecredit agreement). If a change of control (as defined in the credit agreement)occurs, the Company will be required to offer to prepay all outstanding termloans, at a prepayment price equal to 101% of the principal amount to beprepaid, plus accrued and unpaid interest to the date of prepayment. TheCompany 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.

 

TheCompany may voluntarily prepay outstanding loans under the Senior SecuredTerm Loan Facility at any time without premium or penalty other than customary “breakage”costs with respect to LIBOR loans. If the Company repays all or any portion ofthe Senior Secured Term Loan Facility prior to October 6, 2006 (other thana prepayment that is made with certain designated asset sale proceeds), theCompany must pay 101% of the principal amount to be repaid. There is noscheduled amortization under the Senior Secured Term Loan Facility. The principalamount of the loans outstanding is due and payable in full on April 6,2013.

 

Allobligations under the Senior Secured Term Loan Facility are unconditionallyguaranteed by Parent and each direct and indirect domestic subsidiary of theCompany that guarantees the obligations of the Company under its Asset-BasedRevolving Credit Facility. All obligations under the Senior Secured Term LoanFacility, and the guarantees of those obligations, are secured, subject tocertain significant exceptions, by substantially all of the Company’s assetsand the assets of its Parent and the subsidiary guarantors, including:

 

•                  a first-priority pledge of 100% of theCompany’s capital stock and certain of the capital stock held by the Company,Parent 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 security interest in,and mortgages on, substantially all other tangible and intangible assets of theCompany, Parent and each subsidiary guarantor, including a significant portionof the Company’s material owned and leased real property (which currentlyconsists of a majority of the Company’s full-line retail stores) and equipment,but excluding, among other things, the collateral described in the followingbullet point; and

 

•                  a second-priority security interest inpersonal property consisting of inventory and related accounts, cash, depositaccounts, all payments received by the Company or the subsidiary guarantorsfrom credit card clearinghouses and processors or otherwise in respect of allcredit card charges for sales of inventory by the Company and the subsidiaryguarantors, certain related assets and proceeds of the foregoing.

 

Capital stock and othersecurities of a subsidiary of the Company that are owned by the Company or anysubsidiary guarantor will not constitute collateral under the Company’s SeniorSecured Term Loan Facility to the extent that such securities cannot secure the2028 Debentures or other secured public debt obligations without requiring thepreparation and filing of separate financial statements of such subsidiary inaccordance with applicable SEC rules. As a result, the collateral under the Company’sSenior Secured Term Loan Facility will include shares of capital stock or othersecurities of subsidiaries of the Company or any subsidiary guarantor only tothe extent that the applicable value of such securities (on a subsidiary-by-subsidiarybasis) is less than 20% of the aggregate principal amount of the 2028Debentures or other secured public debt obligations. Stock of the Company’sBrand Development Companies and their assets also will not constitutecollateral under the Company’s Senior Secured Term Loan Facility.

 

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

 

***2028Debentures.***In May 1998, the Company issued $125.0million aggregate principal amount of its 2028 Debentures. In connection withthe Transactions, the Company equally and ratably secured the 2028 Debenturesby a first lien security interest on certain collateral subject to liensgranted under the Company’s Senior Secured Credit Facilities constituting (a) (i) 100%of the capital stock of certain of the Company’s existing and future domesticsubsidiaries, and (ii) 100% of the non-voting stock and 65% of the votingstock of certain of the Company’s existing and future foreign subsidiaries and (b) certainof the Company’s principal properties that include a majority of the Company’sfull-line stores, in each case, to the extent required by the terms of theindenture governing the 2028 Debentures. The 2028 Debentures contain covenantsthat restrict the Company’s ability to create liens and enter into sale andlease back transactions. The collateral securing the 2028 Debentures will bereleased upon the release

 

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of liens on suchcollateral under the Company’s Senior Secured Credit Facilities and any otherdebt (other than the 2028 Debentures) secured by such collateral. Capital stockand other securities of a subsidiary of the Company that are owned by theCompany or any subsidiary will not constitute collateral under the 2028Debentures to the extent such property does not constitute collateral under theCompany’s Senior Secured Credit Facilities as described above. Parent iscurrently considering providing a guarantee of the 2028 Debentures.

 

***Senior Notes.***On October 6, 2005, NewtonAcquisition Merger Sub, Inc. issued $700.0 million aggregate originalprincipal amount of 9.0% / 9.75% Senior Notes under a senior indenture (SeniorIndenture) with Wells Fargo Bank, National Association, as trustee. At theclosing of the Transactions, as the surviving corporation in the Acquisition,the Company assumed all the obligations of Newton Acquisition Merger Sub, Inc.under the Senior Indenture. The Senior Notes mature on October 15, 2015.

 

For any interest payment period through October 15,2010, the Company may, at its option, elect to pay interest on the Senior Notesentirely in cash (Cash Interest) or entirely by increasing the principal amountof the outstanding Senior Notes or by issuing additional Senior Notes (PIKInterest). Cash Interest on the Senior Notes accrues at the rate of 9% perannum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum.After October 15, 2010, the Company will make all interest payments on theSenior Notes entirely in cash. All Senior Notes mature on October 15, 2015and have the same rights and benefits as the Senior Notes issued on October 6,2005. Interest on the Senior Notes is payable quarterly in arrears on each January 15,April 15, July 15 and October 15, commencing on January 15,2006.

 

TheSenior Notes are guaranteed, jointly and severally, on an unsecured, seniorbasis, by each of the Company’s wholly-owned domestic subsidiaries thatguarantee the Company’s obligations under its Senior Secured Credit Facilitiesand by Parent. The Senior Notes and the guarantees thereof are the Company’sand the guarantors’ unsecured, senior obligations and rank (i) equal inthe right of payment with all of the Company’s and the guarantors’ existing andfuture senior indebtedness, including any borrowings under the Company’s SeniorSecured Credit Facilities and the guarantees thereof and the Company’s 2028Debentures; and (ii) senior to all of the Company’s and its guarantors’existing and future subordinated indebtedness, including the Senior SubordinatedNotes due 2015 and the guarantees thereof. The Senior Notes also areeffectively junior in priority to the Company’s and its guarantors’ obligationsunder all secured indebtedness, including the Company’s Senior Secured CreditFacilities, the 2028 Debentures, and any other secured obligations of theCompany, in each case, to the extent of the value of the assets securing suchobligations. In addition, the Senior Notes are structurally subordinated to allexisting and future liabilities, including trade payables, of the Company’ssubsidiaries that are not providing guarantees.

 

TheCompany is not required to make any mandatory redemption or sinking fundpayments with respect to the Senior Notes, but under certain circumstances, theCompany may be required to offer to purchase Senior Notes as describedbelow. The Company may from time to time acquire Senior Notes by meansother than a redemption, whether by tender offer, in open market purchases,through negotiated transactions or otherwise, in accordance with applicablesecurities laws.

 

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

 

Prior to October 15, 2008, the Company may, atits option, subject to certain conditions, redeem up to 35% of the originalaggregate principal amount of Senior Notes at a redemption price equal to 109%of the aggregate principal amount thereof, *plus*accrued and unpaid interest, and Additional Interest, if any, thereon to theredemption date, with the net cash proceeds of one or more equity offerings ofthe Company or any direct or indirect parent of the Company to the extent suchnet proceeds are contributed to the Company. At any time prior to October 15, 2010, theCompany also may redeem all or a part of the Senior Notes at aredemption price equal to 100% of the principal amount of Senior Notes redeemedplus an applicable premium, as provided in the Senior Indenture, as of, andaccrued and unpaid interest and Additional Interest, if any, to the redemptiondate.

 

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

 

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

 

•                  incur additional indebtedness;

 

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•                  pay dividends on the Company’s capital stockor redeem, repurchase or retire the Company’s capital stock or subordinatedindebtedness;

 

•                  make investments;

 

•                  create restrictions on the payment ofdividends or other amounts to the Company from its restricted subsidiaries thatare not guarantors of the notes;

 

•                  engage in transactions with the Company’saffiliates;

 

•                  sell assets, including capital stock ofthe Company’s subsidiaries;

 

•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and lease backtransactions.

 

TheCompany’s Brand Development Companies are not subject to the covenantscontained in the Senior Indenture. The Senior Indenture also provides forevents of default, which, if any of them occurs, would permit or require theprincipal, premium, if any, interest and any other monetary obligations on alloutstanding Senior Notes to be due and payable immediately.

 

***Senior Subordinated Notes.***On October 6, 2005, NewtonAcquisition Merger Sub, Inc. issued $500.0 million aggregate principalamount of 10.375% Senior Subordinated Notes under a senior subordinatedindenture (Senior Subordinated Indenture) with Wells Fargo Bank, NationalAssociation, as trustee. At the closing of the Transactions, as the survivingcorporation in the Acquisition, the Company assumed all the obligations ofNewton Acquisition Merger Sub, Inc. under the Senior SubordinatedIndenture. The Senior Subordinated Notes mature on October 15, 2015. Intereston the Senior Subordinated Notes is payable in cash semi-annually in arrears oneach April 15 and October 15, commencing April 15, 2006.

 

TheSenior Subordinated Notes are guaranteed, jointly and severally, on anunsecured, senior subordinated basis, by each of the Company’s wholly-owneddomestic subsidiaries that guarantee the Company’s obligations under its  Senior Secured Credit Facilities and byParent. The Senior Subordinated Notes and the guarantees thereof are theCompany’s and the guarantors’ unsecured, senior subordinated obligations andrank (i)   junior to all of the Company’s and the guarantors’existing and future senior indebtedness, including the Senior Notes and anyborrowings under the Company’s Senior Secured Credit Facilities, and theguarantees thereof and the Company’s 2028 Debentures; (ii) equally withany of the Company’s and the guarantors’ future senior subordinatedindebtedness; and (iii) senior to any of the Company’s and the guarantors’future subordinated indebtedness. In addition, the Senior Subordinated Notesare structurally subordinated to all existing and future liabilities, includingtrade payables, of the Company’s subsidiaries that are not providingguarantees.

 

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

 

Exceptas described below, the Senior Subordinated Notes are not redeemable at theCompany’s option prior to October 15, 2010. From and after October 15,2010, the Company may redeem the Senior Subordinated Notes, in whole or inpart, at a redemption price equal to 105.188% of principal amount, decliningannually to 100% of principal amount on October 15, 2013, plus accrued andunpaid interest, and Additional Interest (as defined in the Senior SubordinatedIndenture), if any, thereon to the applicable redemption date.

 

Priorto October 15, 2008, the Company may, at its option, subject to certainconditions, redeem up to 35% of the original aggregate principal amount ofSenior Subordinated Notes at a redemption price equal to 110.375% of theaggregate principal amount thereof, *plus*accrued and unpaid interest, and Additional Interest, if any, thereon to theredemption date, with the net cash proceeds of one or more equity offerings ofthe Company or any direct or indirect parent of the Company to the extent suchnet proceeds are contributed to the Company.

 

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

 

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

 

Theindenture governing the Senior Subordinated Notes contains covenantssubstantially similar to those applicable to the Company’s Senior Notesdescribed above. The Senior Subordinated Indenture also provides for events ofdefault, which, if any of them occurs, would permit or require the principal,premium, if any, interest and any other monetary obligations on all outstandingSenior Notes to be due and payable immediately, subject to certain exceptions.

 

***Redemption of 2008 Notes.  ***In May 1998, the Company issued $125.0 millionaggregate principal amount of its 2008 Notes. Upon closing of the Transactions,the Company called its 2008 Notes for redemption pursuant to their terms. On November 7,2005, the Company used $134.7 million of reserved cash to redeem its 2008Notes, which included a call premium of $6.2 million plus accrued interest of$3.5 million through the redemption date.

*** ***

**OTHER MATTERS**

 

**FactorsThat May Affect Future Results**

 

Mattersdiscussed in MD&A include forward-looking statements. Forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,”“could,” “should,” “anticipate,” “believe,” “project” or “continue.” We makethese forward-looking statements based on our expectations and beliefsconcerning future events, as well as currently available data. These forward-lookingstatements involve a number of risks and uncertainties and, therefore, are notguarantees of future performance. A variety of factors could cause our actualresults to differ materially from the anticipated or expected results expressedin our forward-looking statements. Factors that could affect future performanceinclude, but are not limited, to:

 

*Politicaland General Economic Conditions*

 

•                  current political and general economic conditions orchanges in such conditions including relationships between the United Statesand the countries from which we source our merchandise;

 

•                  terrorist activities in the United States andelsewhere;

 

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

 

*CustomerDemographic Issues*

 

•                  changes in the demographic or retail environment;

 

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

 

•                  changes in consumer preferences or fashion trends;

 

•                  changes in our relationships with key customers;

 

•                  changes in our proprietary credit card arrangementthat adversely impact the ability to provide credit to our customers;

 

*MerchandiseProcurement and Supply Chain Considerations*

 

•                  changes in our relationships with designers, vendorsand other sources of merchandise, including adverse changes in their financialviability;

 

•                  delays in receipt of merchandise ordered due to workstoppages or other causes of delay in connection with either themanufacture or shipment of such merchandise;

 

•                  changes in foreign currency exchange or inflationrates;

 

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•                  significant increases in paper, printing and postagecosts;

 

*Industryand Competitive Factors*

 

•                  competitive responses to our loyalty programs,marketing, merchandising and promotional efforts or inventory liquidations byvendors or other retailers;

 

•                  seasonality of the retail business;

 

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

 

•                  delays in anticipated store openings andrenovations;

 

•                  our success in enforcing our intellectual propertyrights;

 

*EmployeeConsiderations*

 

•                  changes in key management personnel and our abilityto retain key management personnel;

 

•                  changes in our relationships with certain of our keysales associates and our ability to retain our key sales associates;

 

*Legal andRegulatory Issues*

 

•                  changes in government or regulatory requirementsincreasing our costs of operations;

 

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

 

*TheTransactions*

 

Theconsummation of the Transactions resulted in the Company becoming highlyleveraged.  As a result, the Company issubject to additional risk factors including:

 

•                  the effects of incurring a substantial amount ofindebtedness under the Company’s Senior Secured Credit Facilities and theNotes;

 

•                  the effects upon us of complying with the covenantscontained in the Company’s Senior Secured Credit Facilities and the indenturesgoverning the Notes;

 

•                  restrictions the terms and conditions of theindebtedness under the Company’s Senior Secured Credit Facilities and the Notesmay place on the Company’s ability to respond to changes in its businessor to take certain actions;

 

*OtherFactors*

 

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

 

•                  the design and implementation of new informationsystems as well as enhancements of existing systems.

 

The foregoing factors arenot exhaustive and new factors may emerge or changes to the foregoingfactors may occur that could impact our business. Except to the extentrequired by law, we undertake no obligation to update or revise (publicly orotherwise) any forward-looking statements to reflect subsequent events, newinformation or future circumstances.

 

**Critical AccountingPolicies**

** **

The preparation ofcondensed consolidated financial statements in conformity with generallyaccepted accounting principles requires us to make estimates and assumptionsabout future events. These estimates and assumptions affect amounts of assets,liabilities, revenues and expenses and the disclosure of gain and losscontingencies at the date of the Condensed Consolidated

 

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Financial Statements. Ourcurrent estimates are subject to change if different assumptions as to theoutcome of future events were made. We evaluate our estimates and judgments onan ongoing basis and predicate those estimates and judgments on historicalexperience and on various other factors that we believe are reasonable underthe circumstances. We make adjustments to our assumptions and judgments whenfacts and circumstances dictate. Since future events and their effects cannotbe determined with absolute certainty, actual results may differ from theestimates we used in preparing the accompanying Condensed ConsolidatedFinancial Statements.

 

**See Note 1 of the Notes toCondensed Consolidated Financial Statements in Item 1 for a summary of ourcritical accounting policies. A complete description of our critical accountingpolicies is included in our Annual Report to Shareholders on Form 10-K forthe fiscal year ended July 30, 2005.**

** **

Wehave changed the basis of presentation of certain prior year amounts andcalculations presented in this quarterly report to conform to the currentyear presentation. Depreciation expense and income from credit card operations,net are now shown as separate line items on our statements of earnings. Priorto the second quarter of fiscal year 2006, depreciation expense was included inbuying and occupancy costs and the income from our credit card operations wasincluded as a reduction to SG&A.

 

***Purchase Accounting.***We haveaccounted for the Acquisition in accordance with the provisions of Statement ofFinancial Accounting Standards (SFAS) 141, “Business Combinations,” whereby thepurchase price paid to effect the Acquisition is allocated to state theacquired assets and liabilities at fair value. The Acquisition and theallocation of the purchase price have been recorded as of October 1, 2005,the beginning of our October 2005 accounting period. In connection withthe preliminary purchase price allocation, we have made estimates of the fairvalues of our long-lived and intangible assets based upon assumptions relatedto future cash flows, discount rates and asset lives utilizing currentlyavailable information. As of April 29, 2006, we have recorded preliminarypurchase accounting adjustments to increase the carrying value of our propertyand equipment and inventory, to establish intangible assets for our tradenames,customer lists and favorable lease commitments and to revalue our long-termbenefit plan obligations, among other things. This allocation of the purchaseprice is preliminary and subject to our review and finalization of assetvaluations.

 

As of April 29,2006, we have recorded the following preliminary purchase accountingadjustments to increase the carrying values to estimated fair values based uponpreliminary valuation results:

 
| **(in millions)**                                                  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|
|                                                               |       |       |       |
| Property and  equipment                                            |       | $          | 135.9      |   |
| Customer lists                                                     |       | 586.3      |       |
| Favorable lease  commitments                                       |       | 480.0      |       |
| Tradenames                                                         |       | 1,691.1    |       |
| Goodwill                                                           |       | 1,681.0    |       |
| Long-term  benefit plan obligations, primarily pension obligations |       | 57.6       |       |
|                                                                    |            |            |            |  |

 

Further revisions to the purchase priceallocation will be made as additional information becomes available and suchrevisions could be material.

 

***RecentAccounting Pronouncements.***In December 2004, theFASB issued SFAS No. 123(R), “Share-Based Payment” (SFAS No. 123(R)).This standard is a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation,” and supersedes Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” (APB No. 25) and its relatedimplementation guidance. SFAS No. 123(R) requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair values and was effective for thefirst interim period or annual reporting period beginning after June 15,2005. We adopted SFAS No. 123(R) as of the beginning of our first quarterof fiscal year 2006 using the modified prospective method, which requirescompanies to record stock compensation for all unvested and new awards as ofthe adoption date. Accordingly, we have not restated the prior period amountspresented herein. See Note 5 for further description of our stock-basedcompensation.

 

In March 2005, theFASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations, an interpretation of FASB Statement No. 143” (FIN47). FIN 47 clarifies that conditional asset retirement obligations meet thedefinition of liabilities and should be recognized when incurred if their fairvalues can be reasonably estimated. FIN 47 is effective no later than the endof fiscal years ending after December 15, 2005. The cumulative effect ofinitially applying FIN 47 will be recognized as a change in accountingprinciple. We are in the process of evaluating the expected effect of FIN 47,if any, on our consolidated financial statements.

 

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**RISK FACTORS**

 

**RisksRelated to our Structure and the Company’s Indebtedness**

 

**Because our ownership of the Companyaccounts for substantially all of our assets and operations, we are subject toall risks applicable to the Company.**

 

We are a holding company. The Company and itssubsidiaries conduct substantially all of our consolidated operations and ownsubstantially all of our consolidated assets. As a result, we are subject toall risks applicable to the Company. In addition, the Company’s Asset-Based RevolvingCredit Facility, the Company’s Senior Secured Term Loan Facility and theindentures governing the Company’s Notes contain provisions limiting theCompany’s ability to distribute earnings to us, in the form of dividendsor otherwise.

 

**TheCompany has a substantial amount of indebtedness, which may adverselyaffect the Company’s cash flow and its ability to operate the Company’sbusiness, to comply with debt covenants and make payments on its indebtedness.**

 

As a result of theTransactions, the Company is highly leveraged. As of April 29, 2006, theprincipal amount of the Company’s total indebtedness was approximately $3,210.8million and the Company’s unused borrowing availability under the Company’s$600 million Asset-Based Revolving Credit Facility was approximately $573.2million after giving effect to $26.8 million of letters of credit outstandingthereunder. The Company’s substantial indebtedness, combined with its lease andother financial obligations and contractual commitments, could have other importantconsequences. For example, it could:

 

•                  make it more difficult forthe Company to satisfy its obligations with respect to its indebtedness and anyfailure to comply with the obligations of any of its debt instruments,including restrictive covenants and borrowing conditions, could result in anevent of default under the agreements governing the Company’s indebtedness;

 

•                  make the Company morevulnerable to adverse changes in general economic, industry and competitiveconditions and adverse changes in government regulation;

 

•                  require the Company todedicate a substantial portion of its cash flow from operations to payments onits indebtedness, thereby reducing the availability of its cash flows to fundworking capital, capital expenditures, acquisitions and other general corporatepurposes;

 

•                  limit the Company’sflexibility in planning for, or reacting to, changes in its business and theindustry in which it operates;

 

•                  place the Company at acompetitive disadvantage compared to its competitors that are less highlyleveraged and therefore may be able to take advantage of opportunitiesthat the Company’s leverage prevents it from exploiting; and

 

•                  limit the Company’sability to borrow additional amounts for working capital, capital expenditures,acquisitions, debt service requirements, execution of the Company’s businessstrategy or other purposes.

 

Any of the above listedfactors could materially adversely affect the Company’s business, financialcondition and results of operations.

 

In addition, the Company’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 April 29,2006, the Company had approximately $1,875.0 million principal amount offloating rate debt, consisting of outstanding borrowings under Senior SecuredTerm Loan Facility. The Company also had at that date approximately $573.2million of unused floating rate debt borrowing capacity available under theAsset-Based Revolving Credit Facility based on a borrowing base of over $600.0million at that date and after giving effect to $26.8 million used for lettersof credit. Effective December 6, 2005, the Company entered into floatingto fixed interest rate swap agreements for an aggregate notional amount of$1,000.0 million to limit its exposure to interest rate increases related to aportion of its floating rate indebtedness.

 

**Toservice the Company’s indebtedness, the Company will require a significant amountof cash. The Company’s ability to generate cash depends on many factors beyondits control, and any failure to meet the Company’s debt service obligationscould harm its business, financial condition and results of operations.**

 

The Company’s ability to payinterest on and principal of the Company’s debt obligations will primarilydepend upon the Company’s

 

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future operatingperformance. As a result, prevailing economic conditions and financial, businessand other factors, many of which are beyond the Company’s control, will affectits ability to make these payments.

 

If the Company does notgenerate sufficient cash flow from operations to satisfy the Company’s debtservice obligations, the Company may have to undertake alternativefinancing plans, such as refinancing or restructuring its indebtedness, sellingassets, reducing or delaying capital investments or seeking to raise additionalcapital. The Company’s ability to restructure or refinance its debt will dependon the condition of the capital markets and the Company’s financial conditionat such time. Any refinancing of the Company’s debt could be at higher interestrates and may require it to comply with more onerous covenants, whichcould further restrict its business operations. The terms of existing or futuredebt instruments may restrict the Company from adopting some of thesealternatives. In addition, any failure to make payments of interest andprincipal on the Company’s outstanding indebtedness on a timely basis wouldlikely result in a reduction of the Company’s credit rating, which could harmits ability to incur additional indebtedness on acceptable terms.

 

Contractual limitationson the Company’s ability to execute any necessary alternative financing planscould exacerbate the effects of any failure to generate sufficient cash flow tosatisfy its debt service obligations. The Company’s Asset-Based RevolvingCredit Facility permits it to borrow up to $600.0 million; however, theCompany’s ability to borrow thereunder is limited by a borrowing base, which atany time will equal the lesser of 80% of eligible inventory valued at the lowerof cost or market value and 85% of the net orderly liquidation value of theeligible inventory, less certain reserves. In addition, the Company’s abilityto borrow under this facility is limited by a minimum liquidity condition,providing that, if less than $60.0 million is available at any time, theCompany is not permitted to borrow any additional amounts under the Asset-BasedRevolving Credit Facility unless the Company’s pro forma ratio of consolidatedEBITDA to consolidated Fixed Charges (as such terms are defined in the creditagreement for the Company’s senior secured asset—based revolving credit facility)is at least 1.1 to 1.0. The Company’s ability to meet this financial ratio may beaffected by events beyond its control, and the Company cannot assure you thatit will meet this ratio.

 

The Company’s inabilityto generate 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 the Company’s business,financial condition and results of operations.

 

**Theterms of the Company’s****Asset-Based RevolvingCredit Facility and Senior Secured Term Loan Facility and the indentures governing the Notes and2028 Debentures may restrict the Company’s current and future operations,particularly its ability to respond to changes in its business or to takecertain actions.**

 

The credit agreementsgoverning the Company’s Asset-Based Revolving Credit Facility and SeniorSecured Term Loan Facility credit facilities and the indentures governing theNotes and 2028 Debentures contain, and any future indebtedness of the Company’swould likely contain, a number of restrictive covenants that impose significantoperating and financial restrictions, including restrictions on the Company’sability to engage in acts that may be in its best long-term interests. Theindentures governing the Notes and 2028 Debentures and the credit agreementsgoverning the Company’s senior secured credit facilities include covenantsthat, among other things, restrict its ability to:

 

•                  incur additionalindebtedness;

 

•                  pay dividends on theCompany’s capital stock or redeem, repurchase or retire the Company’s capitalstock or indebtedness;

 

•                  make investments;

 

•                  create restrictions on thepayment of dividends or other amounts to the Company from the Company’srestricted subsidiaries;

 

•                  engage in transactionswith the Company’s affiliates;

 

•                  sell assets, includingcapital stock of the Company’s subsidiaries;

 

•                  consolidate or merge;

 

•                  create liens; and

 

•                  enter into sale and leaseback transactions.

 

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

 

Moreover, the Company’sAsset-Based Revolving Credit Facility provides discretion to the agent bankacting on behalf of the lenders to impose additional availability and otherreserves, which could materially impair the amount of borrowings that wouldotherwise be available to the Company. There can be no assurance that the agentbank will not impose such reserves or, were it to do so, that the resultingimpact of this action would not materially and adversely impair the Company’sliquidity.

 

A breach of any of therestrictive covenants would result in a default under the Company’s Asset-BasedRevolving Credit Facility and Senior Secured Term Loan Facility. If any suchdefault occurs, the lenders under the Asset-Based Revolving Credit Facility andSenior Secured Term Loan Facility may elect to declare all outstandingborrowings under such facilities, together with accrued interest and otherfees, to be immediately due and payable, or enforce their security interest,any of which would result in an event of default under the Company’s Notes and2028 Debentures. The lenders would also have the right in these circumstancesto terminate any commitments they have to provide further borrowings.

 

The operating andfinancial restrictions and covenants in these debt agreements and any futurefinancing agreements may adversely affect the Company’s ability to financefuture operations 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.

 

**Weare dependent 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.

 

**Ifwe significantly overestimate our sales, our profitability may beadversely affected.**

 

We make decisionsregarding the purchase of our merchandise well in advance of the season inwhich it will be sold. For example, women’s apparel, men’s apparel and shoesare typically ordered six to nine months in advance of the products beingoffered for sale while handbags, jewelry and other categories are typicallyordered three to six months in advance.. If our sales during any season,particularly a peak season, are significantly lower than we expect for anyreason, we may not be able to adjust our expenditures for inventory andother expenses in a timely fashion and may be left with a substantialamount of unsold inventory. If that occurs, we may be forced to rely onmarkdowns or promotional sales to dispose of excess inventory. This could havean adverse effect on our margins and operating income. At the same time, if wefail to purchase a sufficient quantity of merchandise, we may not have anadequate supply of products to meet consumer demand. This may cause us tolose sales or harm our customer relationships.

 

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**Ourfailure to identify changes in consumer preferences or fashion trends may adverselyaffect our performance.**

 

Our success depends inlarge part on our ability to identify fashion trends as well as toanticipate, gauge and react to changing consumer demands in a timely manner. Ifwe fail to adequately 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 ourstore expansion and remodeling strategies.**

 

Based upon our expansionstrategy, we expect that planned new stores will add over 620,000 square feetof new store space over approximately the next four fiscal years, representingan increase of over 11% above the current aggregate square footage of our full-lineNeiman Marcus and Bergdorf Goodman stores, and that our store remodelingprogram will add additional new store space from remodels that are alreadyunderway. New store openings involve certain risks, including constructing,furnishing and supplying a store in a timely and cost effective manner,accurately assessing the demographic or retail environment at a given location,hiring and training quality staff, obtaining necessary permits and zoningapprovals, obtaining commitments from a core group of vendors to supply the newstore, integrating the new store into our distribution network and buildingcustomer awareness and loyalty. In undertaking store remodels, we must completethe remodel in a timely, cost effective manner, minimize disruptions to ourexisting operations, and succeed in creating an improved shopping environment.If we fail to execute on these or other aspects of our store expansion andremodeling strategy, we could suffer harm to our sales, an increase in costsand expenses and an adverse effect on our business.

 

**Actsof terrorism 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 sales revenue,particularly in the case of any terrorist attack targeting retail space, suchas a shopping center. Furthermore, an act of terrorism or war, or the threatthereof, could negatively impact our business by interfering with our abilityto obtain merchandise from foreign manufacturers. Any future inability toobtain merchandise from our foreign manufacturers or to substitute othermanufacturers, at similar costs and in a timely manner, could adversely affectour business.

 

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

 

The merchandise we sellconsists in large part of luxury retail goods. The purchase of these goodsby customers 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 in consumer debt levels, uncertainties regarding future economicprospects or a decline in consumer confidence. An economic downturn in theUnited States generally or in any of the geographic areas in which we havestores, particularly in Texas, California, Florida and the New York Citymetropolitan area, from which we derive a significant portion of our revenues,could have a material adverse effect on our business and results of operations.

 

**Theloss of any of our senior management team or attrition among our buyers or keysales associates 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 from long-standingrelationships with key vendors or to provide relationship-based customerservice may suffer. We cannot assure you that we will be able to retainour current senior management team, buyers or key sales associates. The loss ofany of these individuals 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) changesin foreign currency exchange rates that have reduced the purchasing power ofthe U.S. dollar and (2) increases in selling, general and administrative

 

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expenses, particularlywith regard to employee benefits. Inflation can harm our margins andprofitability if we are unable to increase prices or cut costs enough to offsetthe effects of inflation in our cost base. If inflation in these or other costsworsens, we cannot assure you that our attempts to offset the effects ofinflation and cost increases through control of expenses, passing costincreases on to customers or any other method will be successful. Any futureinflation could adversely 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 46% of our revenues at Neiman Marcus storesin calendar year 2005 were generated by our InCircle loyalty program members,our failure to continue to provide quality service and competitive loyaltyprograms to our customers through the InCircle loyalty program could adverselyaffect our business.

 

**Changesin our credit card arrangements, applicable regulations and consumer creditpatterns could adversely impact our ability to facilitate the provision of consumercredit 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 our approximately three million private label credit card accounts andrelated assets, as well as the outstanding balances associated with suchaccounts. Initially, we will continue to handle key customer service functions,including new account processing, most transaction authorization, billingadjustments, collection services and customer inquiries. As part of thistransaction, we are changing, and will continue to change, the terms of creditoffered to our customers following the Credit Card Sale. In addition, the purchaserof our credit card business will have discretion over certain policies andarrangements with credit card customers and may change these policies andarrangements in ways that affect our relationship with these customers. Anysuch changes in our credit card arrangements may adversely affect ourcredit 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 becharged by a credit provider. The purchaser of our credit card business issubject to regulations to which we were not subject prior to the Credit CardSale. Any effect of these regulations or change in the regulation of creditarrangements that would materially limit the availability of credit to ourcustomer base could adversely affect our business. In addition, changes incredit card use, payment patterns, and default rates may result from avariety of economic, legal, social, and other factors that we cannot control orpredict with certainty.

 

**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.

 

**Weare subject to numerous regulations that could affect our operations.**

 

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

 

**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 incursignificant additional

 

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expenses in the periodleading up to the months of November and December in anticipation ofhigher sales volume in those periods, including for additional inventory,advertising and employees.

 

**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. Accordingly, changes in thevalue of the dollar relative to foreign currencies may increase our costof goods sold and, if we are unable to pass such cost increases on to ourcustomers, decrease our gross margins and ultimately our earnings. Fluctuationsin the Euro-dollar exchange rate affect us most significantly; however, wesource goods from numerous countries and thus are affected by changes innumerous currencies and, generally, by fluctuations in the U.S. dollar relativeto such currencies. Although we hedge some exposures to changes in foreigncurrency exchange rates arising in the ordinary course of business, foreigncurrency fluctuations may have a material adverse effect on our business,financial condition and results of operations.

 

**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 differentor inferior quality from the ones we now sell. The importance to us of ourexisting designer relationships could present additional difficulties, as it may notbe possible 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 material 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 affectour operating income.

 

**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 ourcreditors. For example, if we encounter financial difficulties or are unable topay our debts as they mature, the interests of our equity holders mightconflict with our creditors’ interests. In addition, our equity holders may havean interest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investments,even though such transactions might involve risks to holders of our indebtedness.Furthermore, the Sponsors may in the future own businesses that directlyor indirectly compete with us. One or more of the Sponsors also may pursueacquisition opportunities that may be complementary to our business, andas a result, those acquisition opportunities may not be available to us.

 

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

 

We and our subsidiariescurrently own our trademarks and service marks, including the “Neiman Marcus,” “BergdorfGoodman” and “Kate Spade” marks. Our trademarks and service marks areregistered in the United States and in various foreign countries, primarily inEurope. The laws of some foreign countries do not protect proprietary rights tothe same extent as do the laws of the United States. Moreover, we are unable topredict the effect that any future foreign or domestic intellectual propertylegislation or regulation may have on our existing or future business. Theloss or reduction of any of our significant proprietary rights could have anadverse effect on our business.

 

Additionally, thirdparties may assert claims against us alleging infringement,misappropriation or other violations of their trademark or other proprietaryrights, whether or not the claims have merit. Claims like these may betime consuming and expensive to defend and could result in our being requiredto cease using the trademark or other rights and selling the allegedlyinfringing products. This might have an adverse affect on our sales and causeus to incur significant litigation costs and expenses.

 

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**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 efficiently to source anddistribute merchandise to our Specialty Retail Stores and Direct Marketingcustomers. Events such as U.S. or foreign labor strikes, natural disasters, workstoppages 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 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

As of April 29,2006, the Company had no borrowings outstanding under its Asset-Based RevolvingCredit Facility that bears interest at floating rates. Future borrowings underthe Company’s Asset-Based Revolving Facility, to the extent of outstandingborrowings, would be affected by interest rate changes.

 

At April 29, 2006,the Company had $1,875.0 million of debt under its Senior Secured Term LoanFacility issued in connection with the Transactions that bears interest atfloating rates. A 1% increase in these floating rates would increase annualinterest expense by approximately $18.7 million.

 

The Company usesderivative financial instruments to help manage its interest rate risk.  Effective December 6, 2005, the Companyentered 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. As of the effective date, theCompany designated the interest rate swaps as cash flow hedges. As a result,changes in the fair value of the swaps are recorded subsequent to the effectivedate as a component of other comprehensive income.

 

At April 29, 2006,the fair value of the Company’s interest rate swap agreements was a gain ofapproximately $19.4 million, which amount is included in other assets. As aresult of the swap agreements, the Company’s effective fixed interest rates as to the $1,000.0 million in floatingrate indebtedness will range from 6.931% to 7.499% per quarter and result in anaverage fixed rate of 7.285%.

 

The Company usesderivative financial instruments to manage foreign currency risk related to theprocurement of merchandise inventories from foreign sources. The Company entersinto foreign currency contracts denominated in the euro and British pound. TheCompany had foreign currency contracts in the form of forward exchangecontracts in the notional amounts of approximately $38.9 million as of April 29,2006 and approximately $35.7 million as of April 30, 2005. The marketrisk inherent in these instruments was not material to the Company’sconsolidated financial position, results of operations or cash flows in theyear—to—date fiscal year 2006 period.

 

Theeffects of changes in the U.S. equity and bond markets serve to increase ordecrease the value of Pension Plan assets, resulting in increased or decreasedcash funding by the Company. The Company seeks to manage exposure to adverseequity and bond returns by maintaining diversified investment portfolios andutilizing professional investment managers.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

**a.****               DisclosureControls and Procedures**

 

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of April 29,2006, under the supervision and with the participation of our Chief ExecutiveOfficer and Chief Financial Officer, as well as other key members of ourmanagement, of the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and Rule 15d-15(e) under theExchange Act). Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

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

 

In the ordinary course ofbusiness, we routinely enhance our information systems by either upgrading ourcurrent systems or implementing new systems. No change occurred in our internalcontrols over financial reporting during the quarter ended April 29, 2006that has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

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**NEIMANMARCUS, INC.**

 

**PART II**

 

###### **ITEM1.**               LEGALPROCEEDINGS

 

Note 12 of the Notes toCondensed Consolidated Financial Statements in Part I, Item 1 isincorporated herein by reference as if fully restated herein. Note 12 containsforward-looking statements that are subject to the risks and uncertaintiesdiscussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Factors That May Affect Future Results.”

 

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

###### ** **

None.

 

###### **ITEM4.**               SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

###### **ITEM6.**               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 Company’s Registration Statement on Form S-1 dated April 10,  2006.                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 3.2    | Amended and  Restated Bylaws of Neiman Marcus, Inc., incorporated herein by reference  to the Company’s Registration Statement on Form S-1 dated April 10,  2006.                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 4.1    | Indenture, dated  as of May 27, 1998, between the Company and The Bank of New York, as  trustee, incorporated herein by reference to the Company’s Annual Report on Form 10-K  for the fiscal year ended July 31, 2004.                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 4.2    | Form of  7.125% Senior Notes Due 2028, dated May 27, 1998, incorporated herein by  reference to the Company’s Annual Report on Form 10-K for the fiscal  year ended July 31, 2004.                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 4.3    | Senior Indenture  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo  Bank, National Association, trustee, incorporated herein by reference to the  Company’s Current Report on Form 8-K dated October 12, 2005.               |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 4.4    | Senior  Subordinated Indenture dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005. |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 4.5    | Form of  9%/9 3/4% Senior Notes due 2015, incorporated herein by reference to the  Company’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                    |
| 4.6    | Form of 10  3/8% Senior Subordinated Notes due 2015, incorporated herein by reference to  the Company’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                          |

 

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| 4.7    | Registration  Rights Agreement dated October 6, 2005, among Newton Acquisition, Inc.,  Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, the  Company, and the Initial Purchasers, incorporated herein by reference to the  Company’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1*  | Employment Agreement  dated as of October 6, 2005 by and among the Company, Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., and Burton M. Tansky,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2*  | Rollover  Agreement dated as of October 4, 2005 by and among the Company, Newton  Acquisition, Inc., and  Burton M. Tansky, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3*  | Form of  Rollover Agreement by and among the Company, Newton Acquisition, Inc.  and certain members of management, incorporated herein by reference to the  Company’s Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4   | Credit Agreement  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Company, the Subsidiary Guarantors,  Deutsche Bank Trust Company Americas, as administrative agent and collateral  agent, Credit Suisse and Deutsche Bank Securities Inc., as joint lead  arrangers, Banc of America Securities LLC and Goldman Sachs Credit Partners  L.P., as co-arrangers, Credit Suisse, Deutsche Bank Securities Inc., Banc of  America Securities LLC and Goldman Sachs Credit Partners L.P., as joint  bookrunners, and Credit Suisse, Banc of America Securities LLC and Goldman  Sachs Credit Partners L.P., as co-syndication agents, General Electric  Capital Corporation as documentation agent and the lenders thereunder,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5   | Credit Agreement  dated as of October 6, 2005, among Newton Acquisition, Inc., Newton  Acquisition Merger Sub, Inc., the Company, the Subsidiary Guarantors,  Credit Suisse, as administrative agent and collateral agent, Credit Suisse  and Deutsche Bank Securities Inc. as joint lead arrangers, Banc of America  Securities LLC and Goldman Sachs Credit Partners L.P. as co-arrangers, Credit  Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC and  Goldman Sachs Credit Partners L.P. as joint bookrunners, Deutsche Bank  Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit  Partners L.P. as co-syndication agents and the lenders thereunder,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6   | Pledge and  Security Agreement dated as of October 6, 2005 among Newton Acquisition  Merger Sub, Inc., the Company, Newton Acquisition, Inc., the  Subsidiary Guarantors and Deutsche Bank Trust Company Americas, as administrative  agent and collateral agent, incorporated herein by reference to the Company’s  Current Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7   | Pledge and  Security and Intercreditor Agreement dated as of October 6, 2005, among  Newton Acquisition Merger Sub, Inc., the Company, Newton Acquisition, Inc.,  the Subsidiary Guarantors and Credit Suisse, as administrative agent and  collateral agent, incorporated herein by reference to the Company’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   | Lien Subordination  and Intercreditor Agreement dated as of October 6, 2005, among Newton  Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the  Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as revolving  facility agent, and Credit Suisse, as term loan agent, incorporated herein by  reference to the Company’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.9   | Form of  First Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from the Company to Credit Suisse, incorporated  herein by reference to the Company’s Current Report on Form 8-K dated October 12,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.10  | Form of  First Priority Leasehold Mortgage, Assignment of Leases and Rents, Security  Agreement and Financing Statement from the Company to Credit Suisse,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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| 10.11  | Form of  Second Priority Mortgage, Assignment of Leases and Rents, Security Agreement  and Financing Statement from the Company to Deutsche Bank Trust Company  Americas, incorporated herein by reference to the Company’s Current Report on  Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                              |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12  | Form of  Second Priority Leasehold Mortgage, Assignment of Lease and Rents, Security  Agreement and Financing Statement from the Company to Deutsche Bank Trust  Company Americas, incorporated herein by reference to the Company’s Current  Report on Form 8-K dated October 12, 2005.                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.13  | Amendment No. 1  dated as of October 6, 2005 to the Credit Agreement dated as of October 6,  2005 among the Company, Newton Acquisition, Inc., each subsidiary of the  Company from time to time party thereto, the Lenders thereunder, and Credit  Suisse, as administrative agent and as collateral agent for the Lenders,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated October 12, 2005.                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.14* | Newton  Acquisition, Inc. Management Equity Incentive Plan, incorporated herein  by reference to the Company’s Current Report on Form 8-K dated December 5,  2005.                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.15* | Stock Option  Agreement made as of November 29, 2005 between the Company and Burton M.  Tansky, incorporated herein by reference to the Company’s Current Report on Form 8-K  dated December 5, 2005.                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.16* | Form of  Stock Option Agreement made as of November 29, 2005 between the Company  and certain eligible key employees, incorporated herein by reference to the  Company’s Current Report on Form 8-K dated December 5, 2005.                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.17  | Amendment No. 2  dated as of January 26, 2006 to the Credit Agreement dated as of October 6,  2005, as amended, among The Neiman Marcus Group, Inc., Newton  Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc.  from time to time party thereto, the Lenders thereunder and Credit Suisse, as  administrative agent and collateral agent for the Lenders, incorporated by  reference to the Company’s Current Report on Form 8-K dated January 30,  2006.                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.18* | Employment  Agreement between The Neiman Marcus Group, Inc. and Karen Katz, dated February 1,  2006, effective as of October 6, 2005, incorporated herein by reference  to the Company’s Current Report on Form 8-K dated February 1, 2006.                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.19  | Management  Services Agreement, dated as of October 6, 2005 among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P.,  TPG GenPar III, L.P. and Warburg Pincus LLC, incorporated herein by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 28,  2006.                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.20  | Registration  Rights Agreement, dated as of October 6, 2005, among Newton Acquisition  Merger Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and  the “Holders” identified therein as parties thereto, incorporated herein by  reference to the Company’s Quarterly Report on Form 10-Q for the quarter  ended January 28, 2006.                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21  | Amendment No. 1  dated as of March 28, 2006 to the Pledge and Security Intercreditor  Agreement dated as of October 6, 2005, among Newton Acquisition Merger  Sub, Inc., The Neiman Marcus Group, Inc., Newton Acquisition, Inc.  (now Neiman Marcus, Inc.), the subsidiary grantors party thereto, Credit  Suisse, as administrative agent and collateral agent for the Secured Parties,  incorporated herein by reference to the Company’s Current Report on Form 8-K  dated March 28, 2006. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.22  | Credit Card  Program Agreement, dated as of June 8, 2005, by and among The 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.                                                                                                                                                                                                                                                                                        |

 

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

 

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

 

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SIGNATURES

 

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

 

 

NEIMAN MARCUS, INC.

(Registrant)

 
| **Signature**          | ** ** | **Title**                       | ** **                     | **Date** | ** **         |
|------------------------|------------|---------------------------------|--------------------------------|----------|--------------------|
|                   |       |                            |                           |     |               |
| /s/ T. Dale  Stapleton |       |                            | Vice President  and Controller |     | June 8,  2006 |   |
| T. Dale  Stapleton     |       | and Duly  Authorized Officer    |                           |     |               |
|                   |       | (principal  accounting officer) |                           |     |               |
|                        |            |                                 |                                |          |                    |  |

 

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