UNITED ~~STATES~~ ~~SECURITIES AND EXCHANGE COMMISSION~~STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended April 30 29, ~~2005~~2006

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

Commission file no. 1-9659

The Neiman Marcus Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		95-4119509
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
One Marcus Square
1618 Main Street
Dallas, Texas 75201
(Address of principal executive offices)
(214) 741-6911
(Registrant’s telephone number, including area code)

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

~~YES~~1618 ýMain ~~NO o~~Street

~~Indicate~~Dallas, ~~by check mark whether the registrant is an accelerated filer (as defined in Rule~~Texas ~~12b-2 of the~~ ~~Exchange Act).~~75201

~~YES~~(Address ýof NOprincipal oexecutive offices)

As(214) ~~of June 3, 2005, the number of outstanding shares of each of the issuer’s classes of common stock was:~~741-6911

Class	Outstanding Shares
Class A Common Stock, $.01 Par Value		29,525,199
Class B Common Stock, $.01 Par Value		19,422,379

(Registrant’s telephone number, including area code)

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

YES o NO ý

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

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

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

YES o NO ý

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

(1) After October 6, 2005, the registrant was not subject to reporting requirements under the Exchange Act of 1934, but complied with those requirements pursuant to contractual obligations.

THE NEIMAN MARCUS GROUP, INC.

INDEX

Part I.	Financial Information
Item 1.	Condensed Consolidated Balance Sheets as of April 3029, ~~2005~~2006 (Successor), July 3130, ~~2004~~2005 (Predecessor) and ~~May~~April 130, ~~2004~~2005 (Predecessor)
	Condensed Consolidated Statements of Earnings for the Thirteen Weeks and Thirty-Nine Weeks Ended April 30, 2005 and May 1, 2004
	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 Cash Flows for the Thirty-Nine Weeks Ended April 30, 2005 and May 1, 2004
	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

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)	April 3029, ~~2005~~2006			~~July 31, 2004~~	July 30, 2005		~~May 1, 2004~~	April 30, 2005
				(As Restated, See Note 9)
	(Successor)				(Predecessor)			(Predecessor)
ASSETS
Current assets:
Cash and cash equivalents	$	~~337~~108,~~589~~982		$	~~368,367~~$	853,482	$	~~311,985~~$	337,589
Restricted cash	~~37,500~~—			—	—		—	37,500
Accounts receivable, net of allowance of $11,956, $10,078 and $11,104	666,455			551,687			599,581
Accounts receivable, net of allowance	56,744				29,886			666,455
Merchandise inventories	~~788~~854,~~915~~979			~~720,277~~	748,366		~~715,539~~	788,915
Other current assets	4964,~~715~~700			~~65,835~~	76,747		~~46,372~~	49,715
Total current assets	1,~~880~~085,~~174~~405			~~1,706,166~~	1,708,481		~~1,673,477~~	1,880,174
Property and equipment, net	~~821~~1,~~810~~045,184			~~750,483~~	855,009		~~743,852~~	821,810
Other assets	137,822			160,999			119,442
Customer lists, net	554,650				—			—
Total assets	$	2,839,806		$	2,617,648		$	2,536,771
Favorable lease commitments, net	469,591				—			—
LIABILITIES AND SHAREHOLDERS’ EQUITY
Trademarks	1,691,155				56,645			56,645
Current liabilities:
Goodwill	1,681,021				14,872			14,872
Accounts payable	$	246,971		$	289,282		$	234,264
Debt issuance costs	101,034				3,526			3,656
Accrued liabilities	352,526			286,833			316,305
Other assets	31,974				22,127			62,649
Notes payable and current maturities of long-term liabilities	200			1,563			1,237
Total assets	$	6,660,014			$	2,660,660		$	2,839,806
Current portion of borrowings under Credit Card Facility	187,500			150,000			37,500
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total current liabilities	787,197			727,678			589,306
Current liabilities:
Long-term liabilities:
Accounts payable	$	251,444			$	282,887		$	246,971
Notes and debentures	249,773			249,757			249,751
Accrued liabilities	389,756				332,937			352,526
Borrowings under Credit Card Facility	—			75,000			187,500
Notes payable and current maturities of long-term liabilities	15,129				1,450			200
Deferred real estate credits	74,429			71,898			73,208
Current portion of borrowings under Credit Card Facility	—				—			187,500
Other long-term liabilities	133,114			112,455			97,307
Total current liabilities	656,329				617,274			787,197
Total long-term liabilities	457,316			509,110			607,766
Long-term liabilities:
Minority interest	13,498			10,298			12,799
Senior secured term loan facility	1,875,000				—			—
Common stocks	497			492			493
Senior debentures due 2028	120,663				124,823			124,820
Additional paid-in capital	511,338			491,849			484,151
Senior notes	700,000				—			—
Accumulated other comprehensive loss	(3,432		)	(4,536		)	(26,752		)
Senior subordinated notes	500,000				—			—
Retained earnings	1,099,053			905,330			891,054
Senior notes due 2008	—				124,957			124,953
Treasury stock, at cost (768,731 shares, 710,227 shares and 699,777 shares)	(25,661		)	(22,573		)	(22,046		)
Deferred real estate credits	11,099				86,575			74,429
Total shareholders’ equity	1,581,795			1,370,562			1,326,900
Deferred income taxes	1,129,899				—			33,614
Total liabilities and shareholders’ equity	$	2,839,806		$	2,617,648		$	2,536,771
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 900 shares)	—
Additional paid-in capital	1,473,139				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 Condensed Consolidated Financial Statements.

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(in thousands)	Thirteen weeks ended April 29, 2006				Thirteen weeks ended April 30, 2005
(in thousands, except per share data)	April 30, 2005			May 1, 2004			April 30, 2005			May 1, 2004
	(Successor)				(Predecessor)
Revenues	$	~~933~~1,~~372~~027,009		$	~~873,167~~$	933,372	$	~~2,970,533~~		$	~~2,740,303~~
Cost of goods sold including buying and occupancy costs	576,204			544,663			1,892,904			1,773,999
Cost of goods sold including buying and occupancy costs (excluding depreciation)	602,957				549,740
Selling, general and administrative expenses	222,516			208,909			698,054			659,420
Selling, general and administrative expenses (excluding depreciation)	255,380				240,396
Loss on disposition of Chef’s Catalog	—			—			15,348			—
Income from credit card operations, net	(15,136		)		(19,030		)
Operating earnings	134,652			119,595			364,227			306,884
Depreciation expense	32,913				27,614
Interest expense, net	2,933			4,589			10,948			11,814
Amortization of customer lists	13,715				—
Earnings before income taxes and minority interest	131,719			115,006			353,279			295,070
Amortization of favorable lease commitments	4,502				—
Income taxes	50,713			44,852			136,014			107,576
Operating earnings	132,678				134,652
Earnings before minority interest	81,006			70,154			217,265			187,494
Interest expense, net	67,216				2,933
Minority interest in net earnings of subsidiaries	(1,231		)	(1,305		)	(2,787		)	(3,249		)
Earnings before income taxes and minority interest	65,462				131,719
Net earnings	$	79,775		$	68,849		$	214,478		$	184,245
Income taxes	24,953				50,713
Weighted average number of common and common equivalent shares outstanding:
Earnings before minority interest	40,509				81,006
Basic	48,390			48,208			48,309			47,929
Minority interest in net loss (earnings) of subsidiaries	38				(1,231		)
Diluted	49,695			49,124			49,427			48,806
Net earnings	$	40,547			$	79,775
Earnings per share:
Basic	$	1.65		$	1.43		$	4.44		$	3.84
Diluted	$	1.61		$	1.40		$	4.34		$	3.78

See Notes to Condensed Consolidated Financial Statements.

THE NEIMAN MARCUS GROUP, INC.

(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

~~CONDENSED~~See ~~CONSOLIDATED~~Notes ~~STATEMENTS~~to OFCondensed Consolidated ~~CASH~~Financial ~~FLOWS~~Statements.

~~(UNAUDITED)~~3

	Thirty-Nine Weeks Ended
(in thousands)	April 30, 2005			May 1, 2004
				(As Restated, See Note 9)
CASH FLOWS - OPERATING ACTIVITIES
Net earnings	$	214,478		$	184,245
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation	79,338			73,093
Loss on disposition of Chef’s Catalog	15,348			—
Minority interest	2,787			3,249
Other – primarily costs related to defined benefit pension and other long-term benefit plans	27,222			24,367
	339,173			284,954
Changes in operating assets and liabilities:
Decrease in undivided interests	—			242,565
Increase in accounts receivable	(114,270		)	(576,986		)
Increase in merchandise inventories	(78,955		)	(28,477		)
Decrease in other current assets	10,530			27,803
Decrease (increase) in other assets	12,276			(4,550		)
Increase in accounts payable and accrued liabilities	38,763			35,347
Increase in deferred real estate credits	2,531			2,866
Funding of defined benefit pension plan	(20,000		)	(30,000		)
Net cash provided by (used for) operating activities	190,048			(46,478		)
CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures	(150,830		)	(83,152		)
Increase in cash restricted for repayment of borrowings under Credit Card Facility	(37,500		)	—
Proceeds from sale of Chef’s Catalog	14,419			—
Net cash used for investing activities	(173,911		)	(83,152		)
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from borrowings	7,750			2,000
Repayment of debt	(9,113		)	(1,500		)
Borrowings under Credit Card Facility	—			225,000
Repayment of borrowings under Credit Card Facility	(37,500		)	—
Acquisitions of treasury stock	(3,088		)	(7,026		)
Proceeds from stock-based compensation awards	16,432			23,235
Cash dividends paid	(20,042		)	(6,312		)
Distributions paid	(1,354		)	(732		)
Net cash (used for) provided by financing activities	(46,915		)	234,665
CASH AND CASH EQUIVALENTS
(Decrease) increase during the period	(30,778		)	105,035
Beginning balance	368,367			206,950
Ending balance	$	337,589		$	311,985
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	12,992		$	9,050
Income taxes	$	98,942		$	70,657

THE NEIMAN MARCUS GROUP, INC.

~~See~~CONDENSED CONSOLIDATED ~~Notes~~STATEMENTS toOF ~~Condensed~~CASH ~~Consolidated Financial Statements.~~FLOWS

3(UNAUDITED)

THE NEIMAN MARCUS GROUP, INC.

(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 Parent	$	25,000		$	—		$	—
Equity contribution from management shareholders	$	17,891		$	—		$	—
Capital lease additions	$	11,909		$	—		$	—

~~NOTES~~See Notes TOto ~~CONDENSED~~Condensed ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements.

~~(UNAUDITED)~~4

~~1. Basis~~THE ofNEIMAN ~~Presentation~~MARCUS GROUP, INC.

WeNOTES ~~have prepared the~~TO ~~Condensed~~CONDENSED ~~Consolidated~~CONSOLIDATED ~~Financial~~FINANCIAL Statements of The Neiman Marcus Group, Inc. and its subsidiaries (Company) in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted for complete financial statements. Therefore, these financial statements should be read in conjunction with our amendment to the Annual Report on Form 10-K/A for the fiscal year ended July 31, 2004.STATEMENTS

Our fiscal year ends on the Saturday closest to July 31. All references to the third quarter of 2005 relate to the thirteen weeks ended April 30, 2005 and all references to the third quarter of 2004 relate to the thirteen weeks ended May 1, 2004. All references to 2005 relate to the thirty-nine weeks ended April 30, 2005 and all references to 2004 relate to the thirty-nine weeks ended May 1, 2004.(UNAUDITED)

In our opinion, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods1. ~~The results~~ Basis of ~~operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.~~Presentation

WeThe ~~are~~Neiman ~~required~~Marcus toGroup, Inc. ~~make~~(Company) ~~estimates and~~was ~~assumptions~~acquired ~~about~~on ~~future~~October ~~events~~6, in2005 ~~preparing~~through ~~financial~~a ~~statements~~merger intransaction ~~conformity~~ with ~~generally~~Newton ~~accepted~~Acquisition ~~accounting~~Merger ~~principles~~Sub, Inc. ~~These~~, ~~estimates~~a ~~and~~wholly-owned ~~assumptions~~subsidiary ~~affect the amounts~~ of ~~assets~~Neiman Marcus, ~~liabilities,~~Inc. ~~revenues~~(formerly ~~and~~Newton ~~expenses~~Acquisition, ~~and~~Inc.) ~~the~~(Parent). ~~disclosure~~The ofacquisition was ~~gain~~accomplished ~~and~~through ~~loss contingencies at~~ the ~~date~~merger of ~~the~~Newton ~~Condensed~~Acquisition ~~Consolidated~~Merger ~~Financial Statements~~Sub, Inc. ~~While~~ wewith ~~believe~~and into ~~that~~the ~~our past~~Company, ~~estimates~~with ~~and~~the ~~assumptions~~Company ~~have~~being ~~been~~the ~~materially~~surviving ~~accurate,~~entity ~~our~~(the ~~current~~Acquisition). ~~estimates~~Subsequent ~~are subject~~ to ~~change~~the ifAcquisition, ~~different~~we ~~assumptions~~are asa tosubsidiary of the ~~outcome~~Parent, ofwhich is ~~future~~controlled ~~events~~by ~~were~~Newton ~~made.~~Holding, WeLLC ~~evaluate~~(Holding). ~~our~~Both ~~estimates~~the Parent and ~~judgments~~Holding ~~on an ongoing~~were ~~basis~~formed ~~and~~by ~~predicate~~investment ~~those~~funds ~~estimates~~affiliated ~~and~~with ~~judgments~~Texas onPacific ~~historical~~Group ~~experience~~ and Warburg onPincus ~~various~~LLC ~~other~~(the ~~factors~~Sponsors). ~~that~~Although we ~~believe~~continued toas bethe ~~reasonable~~same ~~under~~legal ~~the~~entity after ~~circumstances. We~~the ~~make~~Acquisition, ~~adjustments~~the ~~to our~~accompanying ~~assumptions~~condensed ~~and~~consolidated ~~judgments~~statements ~~when~~of ~~facts~~ earnings and ~~circumstances~~cash ~~dictate. Since~~flows ~~future~~present ~~events~~our ~~and~~results ~~their~~of ~~effects~~operations ~~cannot be~~and ~~determined~~cash ~~with~~flows ~~absolute~~for ~~certainty,~~the ~~actual~~periods preceding ~~results~~the ~~may~~Acquisition ~~differ~~(Predecessor) ~~from~~and the ~~estimates~~ ~~used~~periods insucceeding ~~preparing~~ the Acquisition ~~accompanying~~(Successor), ~~Condensed Consolidated Financial Statements~~respectively.

~~Certain~~Our ~~prior~~fiscal ~~period~~year ~~balances~~ends ~~have~~on ~~been~~the Saturday closest to July 31. All references ~~reclassified~~to the third quarter of fiscal year 2006 relate to ~~conform~~the thirteen weeks ended April 29, 2006 of the Successor. All references to the ~~current~~third quarter of fiscal year 2005 relate to the thirteen weeks ended April 30, 2005 of the Predecessor. All references to the year-to-date fiscal year 2006 period ~~presentation~~relate to the combined thirty-nine weeks ended April 29, 2006 and all references to the year-to-date fiscal year 2005 period relate to the thirty-nine weeks ended April 30, 2005.

We ~~believe~~have prepared the accompanying ~~following~~unaudited ~~critical~~condensed consolidated financial statements in accordance with generally accepted accounting ~~policies,~~principles ~~among~~for ~~others,~~interim ~~encompass~~financial information and the ~~more~~instructions ~~significant~~to ~~judgments~~Form 10-Q and Article 10 of Regulation S-X. ~~estimates~~Accordingly, ~~used~~these infinancial ~~the~~statements ~~preparation~~do not include all of ~~our~~the information and footnotes required by generally accepted accounting principles for complete financial statements:. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 30, 2005.

~~• Revenue~~In our opinion, the ~~recognition;~~accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

~~• Valuation~~We are required to make estimates and assumptions about future events in preparing financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the amounts of ~~merchandise~~assets, ~~inventories~~liabilities, ~~including~~ ~~determination~~revenues and expenses and the disclosure of gain ~~original~~and ~~retail~~loss ~~values,~~contingencies ~~recognition~~at the date of ~~markdowns~~the unaudited condensed consolidated financial statements. While we believe that our past estimates and assumptions ~~vendor~~have ~~allowances~~been materially accurate, ~~estimation~~our current estimates are subject to change if different assumptions as to the outcome of ~~inventory~~future ~~shrinkage,~~events were made. We evaluate our estimates and ~~determination~~judgments ofon ~~cost~~an ongoing basis and predicate those estimates ofand ~~goods~~judgments ~~sold;~~on historical experience and on various other factors that we believe to be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited condensed consolidated financial statements.

~~• Determination~~We believe the following ofcritical ~~impairment~~accounting policies, among others, encompass the more significant judgments and estimates used in the preparation of ~~long-lived~~our ~~assets;~~financial statements:

• ~~Recognition~~ Preliminary allocation of ~~income~~the ~~and~~price ~~expenses~~paid ~~related~~to acquire the Company to our ~~previous~~assets ~~securitization~~and liabilities ~~program~~as of the date of the Acquisition (as more fully described in Note 3);

• Recognition of ~~advertising and catalog costs~~revenues;

• ~~Measurement~~ Valuation of ~~liabilities~~merchandise ~~related~~inventories, toincluding ~~our~~determination ~~loyalty~~of ~~programs~~original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage, and determination of cost of goods sold;

• ~~Recognition~~ Determination of impairment of ~~income~~long-lived ~~taxes~~assets; ~~and~~

• ~~Measurement~~ Recognition of ~~accruals~~advertising ~~for litigation, general liability, workers’ compensation~~ and ~~health insurance,~~catalog ~~short-term disability, pension and postretirement health care benefits.~~costs;

~~A description~~ • Measurement of ~~our~~liabilities ~~critical~~related ~~accounting policies~~to ~~is included in~~ our ~~amendment~~loyalty ~~to the Annual Report on Form 10-K/A for the fiscal year ended July 31, 2004.~~programs;

4• Recognition of income taxes; and

Stock-Based Compensation. We account for stock-based compensation awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, we have recognized compensation expense on our restricted stock and purchased restricted stock awards but have not recognized compensation expense for stock options since all options granted had an exercise price equal to the market value of our common stock on the grant date.5

~~The~~• Measurement of ~~following~~accruals ~~table~~for ~~illustrates~~litigation, ~~the~~general ~~effect~~liability, ~~on net~~workers’ ~~earnings~~compensation and ~~earnings per share as if we had applied the fair value~~health ~~recognition~~insurance, ~~provisions of SFAS No. 123 to stock~~short-~~based~~term ~~employee~~disability, ~~compensation using~~pension ~~the~~and ~~Black-Scholes~~postretirement ~~option-pricing~~health ~~model for 2005 and 2004:~~care benefits.

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(in thousands, except per share data)	April 30, 2005			May 1, 2004			April 30, 2005			May 1, 2004
Net earnings:
As reported	$	79,775		$	68,849		$	214,478		$	184,245
Add: stock-based employee compensation recorded under intrinsic value method, net of related taxes	1,343			866			3,646			2,233
Less: stock-based employee compensation expense determined under fair value based method, net of related taxes	(3,434		)	(3,076		)	(9,846		)	(8,644		)
Pro forma	$	77,684		$	66,639		$	208,278		$	177,834
Basic earnings per share:
As reported	$	1.65		$	1.43		$	4.44		$	3.84
Pro forma	$	1.61		$	1.38		$	4.31		$	3.71
Diluted earnings per share:
As reported	$	1.61		$	1.40		$	4.34		$	3.78
Pro forma	$	1.56		$	1.36		$	4.21		$	3.64

A description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 30, 2005.

~~The~~Certain ~~effects~~prior onperiod ~~pro~~balances ~~forma~~have ~~net~~been ~~earnings and~~reclassified ~~earnings~~to ~~per~~conform ~~share~~to ~~of expensing~~ the ~~estimated~~current ~~fair~~period ~~value~~presentation. ofDepreciation ~~stock~~expense ~~options~~and ~~are~~income ~~not~~from ~~necessarily~~credit ~~representative~~card ofoperations, ~~the effects on reported~~ net ~~earnings~~are ~~for future~~now ~~periods~~shown ~~due to such factors~~ as ~~the~~separate ~~vesting~~line ~~periods~~items ofon ~~stock options and~~our ~~the~~statements ~~potential issuance~~ of ~~additional~~earnings. ~~stock~~Prior ~~options~~to inthe ~~future~~second ~~years. In~~quarter ~~addition,~~of ~~the~~fiscal ~~Black-Scholes~~year ~~option-pricing~~2006, ~~model~~depreciation ~~has~~expense ~~inherent~~was ~~limitations~~included in ~~calculating~~buying ~~the~~and ~~fair~~occupancy ~~value~~costs ofand ~~stock~~the ~~options~~income ~~for~~from ~~which~~our nocredit ~~active~~card ~~market~~operations ~~exists~~was ~~since~~included ~~the~~as ~~model~~a ~~does~~reduction ~~not consider the inability~~ to ~~sell or transfer options~~selling, ~~vesting requirements~~ general and aadministrative ~~reduced exercise period upon termination of employment - all of which would reduce the fair value of the options~~expenses.

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

~~Reclassification~~In –March ~~Loyalty Programs. A substantial~~2005, ~~portion~~the ofFASB ~~the~~issued ~~points~~FASB ~~earned~~Interpretation byNo. ~~customers~~47, in“Accounting for ~~connection~~Conditional ~~with~~Asset ~~our loyalty~~Retirement ~~programs~~Obligations, ~~are~~an ~~redeemed~~interpretation ~~for~~of ~~gift~~FASB Statement ~~cards~~No. At ~~the~~143” ~~time~~(FIN ~~the~~47). ~~qualifying~~FIN ~~sales~~47 ~~giving~~clarifies ~~rise~~that toconditional ~~the~~asset ~~loyalty program~~retirement ~~points~~obligations ~~are~~meet ~~made, we defer~~ the ~~portion~~definition of ~~the~~liabilities ~~revenues~~and onshould ~~the~~be ~~qualifying~~recognized ~~sales~~when ~~transactions~~incurred ~~equal~~if totheir ~~our~~fair ~~estimate~~values ofcan ~~the~~be ~~retail~~reasonably ~~value~~estimated. ofFIN ~~the~~47 ~~gift~~is ~~cards to be~~effective ~~issued~~no ~~upon~~later ~~conversion~~than of the ~~points~~end toof ~~gift~~fiscal ~~cards. Beginning~~years inending ~~the~~after ~~first~~December ~~quarter~~15, of 2005, ~~we began~~with ~~to record~~ the cumulative ~~deferral~~effect of ~~revenues~~initially ~~related~~applying toFIN ~~gift~~47 ~~card~~being ~~awards~~recognized ~~under our loyalty programs~~ as a ~~reduction~~change ~~of revenues.~~ in ~~Previously,~~accounting ~~we charged such amounts to selling, general and administrative expenses (SG&A)~~principle. ~~In addition,~~ weWe ~~now~~are ~~charge~~in the ~~cost~~process of ~~all~~evaluating ~~other~~the ~~awards~~expected ~~under our loyalty programs~~effect ~~to cost~~ of ~~goods~~FIN ~~sold~~47, ~~(COGS)~~if ~~rather than SG&A. These changes in classification do not impact the previously reported operating earnings~~any, ~~net income~~on orour ~~earnings~~consolidated ~~per~~financial ~~share amounts~~statements.

2. The ~~following table presents quarterly and~~ ~~annual information giving recognition to the changes in classification related to our loyalty programs:~~Transactions

(in thousands)	Revenues		COGS		SG&A
Fiscal Year 2004:
First quarter	$	818,769	$	510,350	$	211,130
Second quarter	1,048,367		718,985		239,381
Third quarter	873,167		544,663		208,909
Fourth quarter	784,468		553,231		189,033
Total	$	3,524,771	$	2,327,229	$	848,453
Fiscal Year 2003:
First quarter	$	727,832	$	455,307	$	197,281
Second quarter	934,844		655,459		220,981
Third quarter	718,557		465,160		181,565
Fourth quarter	699,120		502,510		179,981
Total	$	3,080,353	$	2,078,436	$	779,808

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

~~Recent Accounting~~• Borrowings ~~Pronouncements. In~~under ~~December~~our ~~2004,~~senior ~~the~~secured ~~Financial~~asset-based ~~Accounting~~revolving ~~Standards~~credit ~~Board~~facility (~~FASB) issued SFAS No. 123R, “Share~~Asset-Based ~~Payment.” This~~ ~~standard~~Revolving isCredit aFacility) ~~revision of SFAS No. 123, “Accounting for Stock-Based Compensation,”~~ and ~~supersedes~~our ~~Accounting~~secured ~~Principles~~term ~~Board~~loan ~~Opinion~~credit ~~No.~~facility ~~25, “Accounting~~(Senior ~~for~~Secured ~~Stock~~Term ~~Issued~~Loan toFacility) ~~Employees~~(collectively,” ~~and its related implementation guidance. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in~~ the ~~financial~~Secured ~~statements~~Credit based on their fair values and is effective for the first interim period or annual reporting period beginning after June 15, 2005. We expect to adopt SFAS No. 123R in the first quarter of our fiscal year 2006. We are in the process of evaluating the impact of the adoption of SFAS No. 123R. The adoption of SFAS No. 123R will reduce reported net income and earnings per share because we will be required to recognize compensation expense for our stock options.Facilities);

6• the issuance of 9.0%/9.75% senior notes due 2015 (Senior Notes);

~~2. Loss~~• the onissuance ~~Disposition~~ of ~~Chef’s~~10.375% ~~Catalog~~senior subordinated notes due 2015 (Senior Subordinated Notes); and

~~In November 2004, we sold our Chef’s Catalog direct marketing business to a private~~ • equity ~~firm. Chef’s Catalog is a multi-channel retailer of~~ ~~professional-quality~~investments ~~kitchenware~~from ~~with~~Parent ~~revenues~~funded ofby ~~approximately~~direct ~~$73 million in fiscal year 2004. At October 30, 2004, Chef’s Catalog had net tangible assets, primarily inventory, of $12.5 million~~ and ~~net~~indirect ~~intangible~~equity ~~assets~~investments ~~of $17.2 million. We received proceeds, net of selling costs, of $14.4 million~~ from ~~the sale. As the~~ ~~carrying value of~~ the ~~Chef’s Catalog assets exceeded the net proceeds from the sale~~Sponsors, ~~we incurred a pre~~co-~~tax~~investors ~~loss~~and ~~of $15~~management.~~3 million in the first quarter of 2005 related to the disposition of Chef’s Catalog.~~

~~3. Operating~~The Acquisition ~~Segments~~occurred simultaneously with:

~~We have identified two~~• the ~~reportable~~closing ~~segments: Specialty Retail Stores and Direct Marketing. Our Specialty Retail Stores segment includes all~~ of ~~our Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus clearance stores. Our Direct Marketing segment conducts both print catalog and online operations under~~ the ~~Neiman~~ ~~Marcus,~~financing ~~Horchow~~transactions and ~~Bergdorf~~equity ~~Goodman~~investments ~~brand~~described ~~names and, until its disposition in November 2004, the Chef’s Catalog brand name. Other includes the operations of Kate Spade LLC and Gurwitch Products, LLC (the Brand Development Companies).~~above;

~~Both~~ • the ~~Specialty Retail~~ ~~Stores~~call ~~and~~for ~~Direct~~redemption ~~Marketing segments~~of, asthe ~~well~~deposit asinto ~~Kate~~a ~~Spade~~segregated ~~LLC~~account ~~and~~of ~~Gurwitch~~the estimated ~~Products,~~amount ~~LLC,~~of ~~derive~~the ~~their~~redemption ~~revenues~~payment ~~from~~related ~~the~~to, ~~sales~~and ofthe ~~high-end~~ratable ~~fashion~~provision of ~~apparel,~~security ~~accessories,~~pursuant ~~cosmetics~~to ~~and~~the ~~fragrances~~terms ~~from leading designers~~thereof, ~~precious and~~for ~~fashion~~our ~~jewelry~~6.65% ~~and~~senior ~~decorative~~notes ~~home~~due ~~accessories.~~2008 (2008 Notes);

~~The~~• the ratable ~~following~~provision ~~table~~of ~~sets~~security to our 7.125% senior debentures due 2028 (2028 ~~forth~~Debentures) ~~the~~pursuant ~~information~~to ~~for~~the ~~our~~terms ~~reportable~~thereof; ~~segments:~~and

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(in thousands)	April 30, 2005			May 1, 2004			April 30, 2005			May 1, 2004
REVENUES:
Specialty Retail Stores	$	766,877		$	717,562		$	2,415,749		$	2,213,811
Direct Marketing	130,532			126,204			458,514			445,694
Other	35,963			29,401			96,270			80,798
Total	$	933,372		$	873,167		$	2,970,533		$	2,740,303
OPERATING EARNINGS:
Specialty Retail Stores	$	125,832		$	114,283		$	343,781		$	276,447
Direct Marketing	16,780			9,791			55,943			45,086
Other	4,572			4,750			10,241			11,821
Subtotal	147,184			128,824			409,965			333,354
Corporate expenses	(12,532		)	(9,229		)	(30,390		)	(26,470		)
Loss on disposition of Chef’s Catalog	—			—			(15,348		)	—
Total	$	134,652		$	119,595		$	364,227		$	306,884

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

4We refer to the above transactions, the Acquisition and our payment of any costs related to these transactions collectively herein as the “Transactions. ~~Stock~~” We refer to the Senior Notes and Senior ~~Repurchase~~Subordinated ~~Program~~Notes collectively herein as the “Notes.”

In prior years, our Board of Directors authorized various stock repurchase programs and increases in the number of shares subject to repurchase. In the third quarter of 2005, we did not repurchase any shares. In the second quarter of 2005, we repurchased 4,100 shares at an average price of $57.60. In the first quarter of 2005, we repurchased 54,404 shares at an average price of $52.40. As of April 30, 2005, approximately 1.2 million shares remain available for repurchase under our stock repurchase programs.6

7Transaction and Other Costs. During the period from July 30, 2005 to October 1, 2005, the Predecessor expensed $23.5 million in connection with the Transactions. These costs consisted primarily of $4.5 million of accounting, investment banking, legal and other costs associated with the Transactions and a $19.0 million non-cash charge for stock compensation resulting from the accelerated vesting of Predecessor stock options and restricted stock in connection with the Acquisition.

5Carryover Basis Adjustment for Management Shareholders. ~~Earnings~~ ~~per~~Executive ~~Share~~management participants held certain equity interests, including stock options, in the Predecessor prior to the Transactions and continue to hold equity interests in the Parent, representing indirect equity interests in the Successor after the Transactions. In accordance with the provisions of Emerging Issues Task Force No. 88-16, “Basis in Leveraged Buyout Transactions,” the basis of executive management’s indirect interests in the Successor after the Transactions is carried over at the basis of their interests in the Predecessor prior to the Transactions. The carryover basis of such interests less the net cash received by the management participants represents a deemed dividend of $69.2 million to the management participants and has been recognized as a reduction to shareholders’ equity of the Successor.

~~The weighted average shares used in computing basic and diluted earnings per share (EPS) are presented in the table below~~3. We Purchase ~~made no adjustments to net earnings for the computations of basic and diluted EPS during the periods presented.~~Accounting

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
(in thousands of shares)	April 30, 2005		May 1, 2004		April 30, 2005		May 1, 2004
Weighted average shares outstanding	48,945		48,557		48,847		48,313
Less: shares of non-vested restricted stock	(555	)	(349	)	(538	)	(384	)
Shares for computation of basic EPS	48,390		48,208		48,309		47,929
Effect of dilutive stock options and restricted stock	1,305		916		1,118		877
Shares for computation of diluted EPS	49,695		49,124		49,427		48,806
Shares represented by antidilutive stock options	—		—		190		9

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

We do not include antidilutive stock options in the computation of diluted EPS because the exercise price of those options is greater than the average market price of the common shares.

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

6In connection with the preliminary purchase price allocation, we have made estimates of the fair values of our long-lived and intangible assets based upon assumptions related to future cash flows, discount rates and asset lives utilizing currently available information. ~~Undivided~~ As of April ~~Interests~~29, in2006, ~~NMG~~we ~~Credit~~have ~~Card~~recorded ~~Master~~preliminary ~~Trust~~purchase accounting adjustments to increase the carrying value of our property and equipment and inventory, to establish intangible assets for our tradenames, customer lists and favorable lease commitments and to revalue our long-term benefit plan obligations, among other things. This allocation of the purchase price is preliminary and subject to our review and finalization of asset valuations.

Pursuant to a revolving credit card securitization program (the Credit Card Facility), we transfer substantially all of our credit card receivables to a wholly-owned subsidiary, Neiman Marcus Funding Corporation, which in turn sells such receivables to the Neiman Marcus Credit Card Master Trust (Trust). At the inception of the Credit Card Facility in September 2000, the Trust issued certificates representing undivided interests in the credit card receivables to third-party investors in the face amount of $225 million (Sold Interests). We hold certificates representing interests in the credit card portfolio equal to the excess of the balance of the credit card portfolio over $225 million (Retained Interests). In order to maintain the committed level of securitized assets, the Trust uses cash collections on the securitized receivables to purchase new credit card balances from us in accordance with the terms of the Credit Card Facility.7

~~From~~The ~~the~~purchase ~~inception~~price ofhas ~~the~~been ~~Credit~~preliminarily ~~Card Facility~~allocated ~~until December 2003, our transfers and sales of credit card~~as ~~receivables~~follows ~~pursuant to the terms of the Credit Card Facility were accounted for as sales~~ (~~Off-Balance~~in ~~Sheet Accounting~~millions)~~. As~~: a result, we removed $225 million of credit card receivables from our balance sheet at the inception of the Credit Card Facility and the Trust’s $225 million repayment obligation to the holders of the certificates representing the Sold Interests was not shown as a liability on our consolidated balance sheet.

Beginning in December 2003, transfers to the Trust ceased to qualify for Off-Balance Sheet Accounting. Rather, credit card receivables transferred to the Trust after November 2003 remain on our balance sheet and our borrowings collateralized by those accounts receivable are recorded as liabilities on our balance sheet (Financing Accounting). The transition period from Off-Balance Sheet Accounting to Financing Accounting (Transition Period) lasted approximately four months (December 2003 to March 2004). During the Transition Period, we allocated cash collections on our credit card receivables to the previous Sold Interests and Retained Interests until such time as those balances were reduced to zero and we recorded a liability for our repayment obligation to the holders of the $225 million of certificates representing the Sold Interests. At the end of the Transition Period, our entire credit card portfolio was included in accounts receivable in our consolidated balance sheet and the $225 million repayment obligation was shown as a liability.

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

8Our tradenames have indefinite lives and are not subject to amortization. Our tradenames and goodwill will be reviewed at least annually for impairment.

AsTotal ofestimated ~~the~~amortization ~~start~~ of ~~the Transition Period in December 2003,~~all ~~the~~acquisition-related ~~carrying~~intangible ~~value~~assets ofduring the ~~Sold~~period ~~and~~from ~~Retained~~October ~~Interests exceeded face value by approximately $7.~~6, ~~million~~2005 ~~as a result of the application of the provisions of~~through ~~current~~July ~~accounting~~29, ~~rules related~~2006 ~~to the calculation of the gains on sale of the previous Sold Interests~~ and ~~the~~for ~~valuation~~each of ~~both~~our ~~Sold~~fiscal ~~and~~years ~~Retained Interests. During~~ending ~~the~~in ~~Transition~~July ~~Period, the~~2006 ~~$7.6~~to ~~million~~2010 ~~premium was amortized as a reduction of our net earnings from~~is ~~our~~currently ~~credit~~estimated ~~card portfolio (recorded~~ as afollows ~~reduction of selling, general and administrative expenses~~ (in ~~the consolidated statements of earnings~~thousands)~~. Of the $7.6 million premium, $2.3 million was amortized in the third quarter of 2004.~~:

Beginning in March 2005, cash collections were used by the Trust to begin repayment of the $225 million principal balance of the Class A Certificates in six monthly installments of $37.5 million. As of April 30, 2005, the Trust had made the first installment repayment of $37.5 million to reduce the principal balance of the Class A Certificates to $187.5 million. In addition, we held cash of $37.5 million at April 30, 2005, generated from collections received in April 2005 on our credit card receivables, restricted to the payment of the second installment repayment required to be made by the Trust in May 2005.

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

~~7. Employee Benefit Plans~~8

~~Description~~Pro ofForma ~~Benefit~~Financial ~~Plans~~Information. We ~~sponsor~~The following aunaudited ~~defined~~pro ~~benefit~~forma ~~pension~~results ~~plan (Pension~~of ~~Plan)~~operations ~~covering~~assume ~~substantially~~that ~~all~~the Transactions ~~full-time~~occurred ~~employees~~on August 1, 2004. We ~~also~~The ~~sponsor~~following anunaudited ~~unfunded~~pro ~~supplemental~~forma ~~executive~~results ~~retirement~~do ~~plan~~not ~~(SERP~~give ~~Plan)~~effect ~~that~~to ~~provides~~the ~~additional~~sale ~~pension~~of ~~benefits to~~our ~~certain~~credit ~~employees. Benefits~~card ~~under~~receivables, which ~~both~~was ~~plans~~completed ~~are~~on ~~based~~July on7, ~~the~~2005, ~~employees’~~or ~~years~~the disposition of ~~service~~Chef’s ~~and~~Catalog, ~~compensation~~which ~~over~~was ~~defined~~completed ~~periods~~on ofNovember ~~employment~~8, 2004. ~~Pension~~ This unaudited pro forma information should not ~~Plan~~be ~~assets~~relied ~~consist~~upon ~~primarily~~as necessarily being indicative of ~~equity~~the ~~and~~historical ~~fixed~~results ~~income~~that would ~~securities~~have been obtained if the Transactions had actually occurred on that date, nor the results that may be obtained in the future.

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

	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

~~Costs~~Included in the determination of ~~Benefits. The~~pro ~~components~~forma net income for the thirty-nine weeks ended April 30, 2005 are pro forma adjustments for non-cash charges to increase cost of goods sold for the ~~expenses~~step-up ~~incurred~~in ~~under~~the ~~our~~carrying ~~Pension~~value ~~Plan,~~of ~~SERP~~inventories ~~Plan~~acquired of $39.6 million. These pro forma adjustments resulted in pro forma decreases to cost of goods sold in the thirteen and ~~Postretirement~~thirty-nine weeks ended April 29, 2006 by the ~~Plan~~amount ~~are~~of asthe ~~follows:~~actual non-cash charges recorded during these periods.

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(in thousands)	April 30, 2005			May 1, 2004			April 30, 2005			May 1, 2004
Pension Plan:
Service cost	$	3,196		$	2,366		$	9,588		$	8,469
Interest cost	4,636			3,603			13,907			12,894
Expected return on plan assets	(4,712		)	(3,612		)	(14,137		)	(12,928		)
Net amortization of losses and prior service costs	1,208			698			3,626			2,498
Pension Plan expense	$	4,328		$	3,055		$	12,984		$	10,933
SERP Plan:
Service cost	$	361		$	342		$	1,084		$	1,024
Interest cost	1,014			978			3,042			2,930
Net amortization of losses and prior service costs	384			366			1,151			1,099
SERP Plan expense	$	1,759		$	1,686		$	5,277		$	5,053
Postretirement Plan:
Service cost	$	15		$	20		$	44		$	60
Interest cost	318			386			954			1,156
Net amortization of losses	26			110			79			331
Postretirement Plan expense	$	359		$	516		$	1,077		$	1,547

4. Transactions with Sponsors

9In connection with the Transactions, we entered into a management services agreement with affiliates of the Sponsors pursuant to which affiliates of one of the Sponsors received on the closing date a transaction fee of $25 million in cash in connection with the Transactions. Affiliates of the other Sponsor waived any cash transaction fee in connection with the Transactions.

~~Funding~~In ~~Policy~~addition, pursuant to such agreement, and ~~Plan~~in ~~Assets. Our~~exchange ~~policy~~for ison-going consulting toand ~~fund~~management ~~the~~advisory ~~Pension~~services ~~Plan~~that atwill ~~or above~~be ~~the~~provided ~~minimum~~to ~~required~~us by ~~law. In~~ the Sponsors ~~third~~and ~~quarter~~their affiliates, affiliates of ~~2005,~~the weSponsors ~~made~~will areceive ~~voluntary~~an aggregate ~~contribution~~annual ofmanagement ~~$20.0~~fee ~~million for~~equal to the ~~plan~~lesser ~~year~~of ~~ended~~(i) ~~July 31, 2004~~0. In25% ~~2004,~~of weour consolidated ~~made~~annual ~~voluntary~~revenues ~~contributions~~or of(ii) $~~30.0~~10 million. inAffiliates of the ~~second~~Sponsors ~~quarter~~will also receive reimbursement for ~~the~~out-of-pocket ~~plan~~expenses ~~year~~incurred ~~ended~~by ~~July 31,~~them ~~2003~~or their ~~and~~affiliates ~~$15~~in connection with services provided pursuant to the agreement.0 ~~million~~These management fees are payable quarterly in arrears. During the ~~fourth~~third quarter ~~for~~of fiscal year 2006 and the ~~plan~~thirty ~~year~~weeks ended ~~July 31~~April 29, ~~2004. Based~~2006, ~~upon~~we recorded ~~currently~~management ~~available~~fees ~~information, we~~of ~~will~~$2.6 ~~not~~million beand ~~required~~$6.4 tomillion, ~~make~~respectively, ~~contributions~~which are toincluded ~~the~~in ~~Pension~~selling, ~~Plan~~general ~~for~~and ~~either the~~administrative ~~2004~~expenses orin ~~2005~~the ~~plan~~condensed consolidated ~~years~~statements of earnings.

~~Effect~~The ofmanagement ~~Medicare~~services ~~Subsidy~~agreement onalso ~~Postretirement Plan. In December~~provides ~~2003, the U.S Congress enacted the Medicare Prescription Drug, Improvement~~that ~~and~~affiliates ~~Modernization Act~~ of ~~2003 (Act) that will provide a prescription drug subsidy, beginning in 2006, to companies that sponsor postretirement health care plans that provide drug benefits. Based upon~~ the ~~provisions~~Sponsors ofmay ~~the~~receive ~~legislation~~future ~~enacted~~fees in ~~January~~connection ~~2005, we reviewed the provisions of our Postretirement Plan~~ with ~~our actuaries to~~certain ~~determine~~subsequent ~~whether~~financing ~~the~~and ~~benefits~~acquisition ~~offered~~or bydisposition ~~our~~transactions. ~~plan meet the statutory~~The ~~definition~~management ofservices ~~“actuarially~~agreement ~~equivalent”~~includes ~~prescription~~customary ~~drug~~exculpation ~~benefits that qualify~~and ~~for~~indemnification ~~the~~provisions ~~federal~~in ~~subsidy. Based~~favor ~~upon this review, we believe that our benefits qualify for the subsidy. We expect to avail ourselves~~ of the ~~benefit of~~Sponsors ~~the subsidy although we are still evaluating the manner in which we~~ and~~/or the~~ ~~participants~~their ~~in the Postretirement Plan will receive the subsidy~~affiliates.

As of July 31, 2004, the projected benefit obligation for our Postretirement Plan, using a discount rate of 6.25 percent, was approximately $21.0 million. In accordance with the provisions of the FASB Staff Position 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” we revalued our projected benefit obligation as of January 31, 2005 to 1) incorporate the benefit associated with the federal subsidy we expect to receive and 2) reduce the discount rate to 5.75 percent. The revised obligation as January 31, 2005 is approximately $19.1 million, reflecting a reduction of approximately $2.6 million for the impact of the federal subsidy, offset by an increase of approximately $0.8 million for the change in discount rate.9

85. ~~Commitments~~ Stock-Based ~~and Contingencies~~Compensation

We ~~are~~previously ~~involved~~accounted infor ~~various~~stock-based ~~suits~~compensation awards to employees in accordance with APB No. 25 and ~~claims~~its inrelated interpretations. Accordingly, we recognized compensation expense on our restricted stock awards but did not recognize compensation expense for stock options since all options granted had an exercise price equal to the ~~ordinary~~market ~~course~~value of ~~business.~~ our common stock on the grant date. We dodid not ~~believe~~adopt ~~that~~ the ~~disposition~~previous voluntary expense recognition provisions of ~~any~~SFAS ~~such~~No. ~~suits~~123, or“Accounting ~~claims~~for ~~will~~Stock-Based Compensation” (SFAS No. 123), whereby the fair value of stock-based compensation awards would have abeen expensed ~~material~~over ~~adverse~~the ~~effect~~terms ~~upon~~of ~~our~~awards. ~~consolidated~~However, ~~results~~consistent with the disclosure requirements of ~~operations~~SFAS No. 123, we made pro forma disclosures of the effect that ~~cash~~application ~~flows~~of orthe ~~financial~~fair ~~position~~value expense recognition provisions of SFAS No. 123 would have had on our net earnings.

9In December 2004, the FASB issued SFAS No. ~~Restatements~~ 123(R). This standard is a revision of SFAS No. 123 and supersedes APB No. 25 and its related implementation guidance. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and is effective for the first interim period or annual reporting period beginning after June 15, 2005. We adopted SFAS No. 123(R) as of the beginning of our first quarter of fiscal year 2006 using the modified prospective method, which required us to record stock compensation for all unvested and new awards as of the adoption date. Accordingly, we have not restated prior period amounts presented herein.

~~Construction~~Predecessor ~~Allowances~~Stock-Based Compensation Accounting. WeIn ~~receive~~connection ~~allowances~~with ~~from~~the ~~developers~~adoption ~~related~~of to the provisions ~~construction~~ of ~~our~~SFAS ~~stores~~No. ~~These~~123(R), ~~allowances~~we ~~are~~ recorded asnon-cash ~~deferred~~charges ~~real~~for ~~estate~~stock compensation ~~credits and are recognized as a reduction~~ of ~~rent~~approximately ~~expense~~$20.0 onmillion ain ~~straight-line~~the ~~basis~~period ~~over~~from ~~the~~July ~~lease~~31, ~~term.~~2005 ~~Prior~~ to October ~~2005~~1, we2005 ~~recorded~~primarily ~~these allowances~~ as a ~~reduction~~result of ~~capital expenditures and, as a result,~~ the ~~carrying~~accelerated ~~values~~vesting of ~~our~~all Predecessor ~~property~~options and ~~equipment.~~restricted Westock ~~have corrected the errors~~ in ~~the~~connection ~~classification~~with ~~of construction allowances and, as a result, we have restated our balance sheets at May 1, 2004 and July 31, 2004 and our statement of cash flows for~~ the ~~thirty-nine~~Transactions (see ~~weeks~~Note ~~ended May 1, 2004~~2).

~~Retained Interests. Pursuant to~~The ~~the~~following ~~terms~~table ofillustrates the ~~Credit~~pro ~~Card~~forma ~~Facility,~~effect ason ~~more~~net ~~fully described in Note 6,~~earnings ~~our~~for ~~Retained~~periods ~~Interests~~prior ~~fluctuate~~to ~~monthly based on~~ the ~~underlying~~adoption ~~balance~~ of ~~our credit~~SFAS ~~card receivables~~No. We ~~previously reflected~~123(R) ~~the~~as ~~changes~~if inwe ~~our~~had ~~Retained~~applied ~~Interests~~the fair invalue ~~the~~recognition ~~determination~~provisions of ~~cash flows~~SFAS ~~from investing activities~~No. We ~~have determined~~123 ~~that~~during such presentation is not in accordance with generally accepted accounting principles and have corrected such error by restating our statements of cash flows to include the changes in the Retained Interests in the determination of cash flows from operating activities.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

~~The~~Successor ~~following~~Stock-Based ~~table~~Compensation Accounting. ~~summarizes~~On November 29, 2005, the ~~impact~~Parent adopted a new equity-based management compensation plan, which authorizes equity awards to be granted for up to 80,708.8 shares of ~~these~~the ~~restatements~~common stock of the Parent, of which options for 75,207.5 shares were issued to certain management employees. All options are outstanding at April 29, 2006. Options granted vest over five years and have an exercise price of $1,445 per share, with the exercise price with respect to approximately 50% of such options escalating at a 10% compound rate per year until the earlier to occur of (i) exercise, (ii) the fifth anniversary of the date of grant or (iii) the occurrence of a change in control; provided that in the event the Sponsors cause the sale of shares of the Parent to an unaffiliated entity, the exercise price will cease to accrete at the time of the sale with respect to a pro rata portion of the accreting options. Using the Black-Scholes option-pricing model, the per share fair value of these options was approximately $494 for the fixed price options and $247 for the options with escalating exercise prices. In estimating the fair value of our ~~previously~~options, ~~issued~~we ~~financial~~made ~~statements~~the following assumptions: expected term to exercise of five years; expected volatility of 30%; risk-free interest rate of 4.23%; and no dividend yield. Expected volatility is based on a combination of the Predecessor’s historical volatility adjusted for our new leverage and estimates of implied volatility of our peer group.

				Restatements
	As Originally Reported			Construction Allowances			Changes in Retained Interests			As Restated
Fiscal Year 2004
Consolidated Balance Sheet:
Property and equipment, net	$	693,772		$	56,711		$	—		$	750,483
Other assets	145,812			15,187			—			160,999
Total assets	2,545,750			71,898			—			2,617,648
Deferred real estate credits	—			71,898			—			71,898
Total long-term liabilities	437,212			71,898			—			509,110
Third Quarter 2004
Consolidated Balance Sheet:
Property and equipment, net	$	685,928		$	57,924		$	—		$	743,852
Other assets	104,158			15,284			—			119,442
Total assets	2,463,563			73,208			—			2,536,771
Deferred real estate credits	—			73,208			—			73,208
Total long-term liabilities	534,558			73,208			—			607,766
Consolidated Statement of Cash Flows:
Net cash used for operating activities	$	(291,289	)	$	2,246		$	242,565		$	(46,478	)
Net cash provided by (used for) investing activities	161,659			(2,246		)	(242,565		)	(83,152		)

For the thirty-weeks ended 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 from operations or financing activities. At April 29, 2006, unearned non-cash stock-based compensation that we expect to recognize as expense over the next 5 years aggregates approximately $25.6 million.

10~~. Recent Developments~~

~~Sale of Company~~6. ~~On March 16,~~ The ~~2005,~~Credit weCard announced that we were exploring various strategic alternatives to enhance shareholder value, including a possible sale of the Company, and that we had retained Goldman Sachs & Co. as the financial advisor to assist us in the review.Sale

Credit Card Sale. On July ~~May 1~~7, 2005, ~~our~~HSBC ~~Board~~Bank ~~of Directors~~Nevada, ~~approved~~National aAssociation ~~definitive~~(HSBC) ~~agreement~~purchased toour approximately ~~sell~~three ~~the~~million ~~Company~~private tolabel anNeiman ~~investment group~~Marcus ~~consisting~~and ofBergdorf ~~Texas~~Goodman credit ~~Pacific~~card ~~Group~~accounts and ~~Warburg~~related ~~Pincus~~assets, ~~LLC. Under~~as ~~the~~well ~~terms~~as of the ~~agreement,~~outstanding ~~Texas Pacific Group~~balances ~~and~~associated ~~Warburg~~with ~~Pincus~~such ~~will~~accounts ~~acquire~~(Credit ~~all~~Card ofSale). ~~the~~The ~~outstanding~~total ~~Class A~~purchase ~~and~~price ~~Class B~~was ~~shares~~approximately of$647 ~~the~~million, ~~Company~~consisting ~~for~~of $~~100.00~~534 ~~per~~million ~~share~~ in net cash, ~~representing~~proceeds ~~a transaction~~and ~~value~~the assumption of approximately $~~5.1~~113 ~~billion. Each~~million of ~~the~~our ~~investors~~outstanding ~~will~~debt ~~own~~under ~~equal~~our previous ~~stakes~~revolving incredit ~~the~~card ~~Company~~securitization ~~upon completion~~facility of(Credit ~~the~~Card ~~transaction~~Facility). ~~Completion~~We recognized a gain of ~~this~~$6.2 million ~~transaction~~in isconnection ~~contingent~~with ~~upon~~the ~~regulatory~~sale ~~review~~of ~~and~~our ~~approval~~credit bycard ~~the~~portfolio ~~Company’s~~to ~~shareholders~~HSBC ~~and~~in isthe ~~expected~~fourth toquarter ~~occur~~of byfiscal ~~November~~year 1, 2005.

11As a part of the Credit Card Sale, we entered into a long-term marketing and servicing alliance with HSBC. Under the terms of this alliance, HSBC offers credit card and non-card payment plans bearing our brands and we receive ongoing payments from HSBC related to credit card sales and compensation for marketing and servicing activities (HSBC Program Income). In addition, we continue to handle certain key customer service functions. In tandem with HSBC, we have initiated various changes in our credit card program to alter the credit terms available to our cardholders and to enhance the earnings of the portfolio. These changes have increased the level of HSBC Program Income earned by the Company. In the future, the HSBC Program Income may be either decreased based upon the level of future services we provide to HSBC or increased based upon other changes to our historical credit card program related to, among other things, the interest rates applied to unpaid balances and the assessment of late fees.

~~10. Recent~~A ~~Developments~~summary ~~(continued)~~of the income earned in connection with our proprietary credit card program is as follows:

Sale of Credit Card Portfolio. As contemplated in the negotiations that led to the sale of the Company for approximately $5.1 billion, we entered into a strategic alliance with HSBC-North America’s Retail Services (HSBC) on June 8, 2005 to support and enhance our credit card operations. In connection with this transaction, HSBC will purchase the private label credit card accounts and related assets of both Neiman Marcus and Bergdorf Goodman, as well as the outstanding balances associated with such accounts, for an amount equal to the face value of the outstanding receivables and accumulated accounts receivable collections. We expect to close this transaction by July 31, 2005, subject to customary review and closing conditions, for a purchase price of approximately $640 million, of which we will receive net cash proceeds of approximately $527 million and HSBC will assume $113 million of outstanding liabilities under our Credit Card Facility. In addition, we will receive on-going payments based on credit sales generated under the agreement. We will continue to handle key customer service functions including new account processing, transaction authorization, billing adjustments, collection services and customer inquiries.

	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

~~Litigation~~7. On Loss ~~May 4, 2005,~~on aDisposition ~~purported class action complaint, NECA-IBEW Pension Fund (The Decatur Plan) v. The Neiman Marcus Group, Inc. et al. (CA No. 3-05 CV-0898B), was filed by a putative stockholder~~ of ~~the~~Chef’s ~~Company in federal court in the Northern District of Texas against the Company and its directors challenging the proposed merger.~~Catalog

~~The~~In ~~complaint~~November ~~alleges~~2004, awe ~~cause~~sold ~~of action for breach of fiduciary duty against~~ our ~~directors,~~Chef’s ~~claiming,~~Catalog ~~among other~~direct ~~things,~~marketing ~~that the merger consideration~~ business to bea ~~paid~~private toequity ~~the~~firm. ~~Company~~Chef’s ~~stockholders~~ inCatalog ~~the merger~~ is ~~grossly~~a ~~inadequate~~multi-channel ~~and~~retailer ~~unfair and that the~~of ~~defendants~~professional-quality ~~failed~~kitchenware towith ~~maximize~~revenues ~~shareholder~~in ~~value~~fiscal ~~through~~year a2004 ~~proper sale~~ of ~~the~~ ~~Company~~approximately ~~and~~$73 ~~its assets~~million. In ~~addition,~~At ~~the complaint~~October ~~alleges~~30, ~~that~~2004, ~~the Company~~Chef’s ~~directors~~Catalog ~~breached~~had ~~their~~net ~~fiduciary duties~~tangible ~~in connection with the approval of the merger by~~assets, ~~among~~primarily ~~other things~~inventory, ~~tailoring the transaction to serve the interests~~ of ~~the~~$12.5 ~~defendants~~million and ~~the~~net ~~family~~intangible assets of ~~Richard~~$17.2 Amillion. ~~Smith~~We received proceeds, ~~Chairman~~net of ~~our~~selling ~~board~~costs, of ~~directors~~$14.4 ~~and the Company’s largest~~million ~~stockholder,~~from ~~rather than structuring~~ the ~~merger~~sale. toAs ~~obtain~~ the ~~highest~~carrying ~~price for our stockholders, depriving public stockholders of the~~ value of ~~certain assets of~~ the ~~Company (primarily the Company~~Chef’s ~~credit~~Catalog ~~card~~assets ~~division),~~exceeded ~~failing to~~the ~~realize~~fair ~~the~~value ~~financial~~of ~~benefits~~such ~~from~~assets aas ~~separate~~determined ~~sale~~by of the ~~Company’s credit card division~~sale, ~~not~~we ~~engaging~~incurred in a ~~fair~~pre-tax ~~process~~ loss of ~~negotiating at arm’s length and structuring a preferential deal for Company insiders~~$15. ~~The~~3 ~~complaint~~million ~~seeks,~~in ~~among other things, injunctive relief to enjoin~~ the ~~consummation~~first quarter of ~~the~~fiscal ~~merger,~~year ~~rescind~~2005 ~~any~~related ~~actions taken~~ to ~~effect~~ the ~~merger, direct the defendants to sell or auction the~~ ~~Company~~disposition ~~for the highest possible price, and impose a constructive trust in favor~~ of ~~plaintiffs~~Chef’s ~~upon any benefits improperly received by defendants~~Catalog.

~~The lawsuit is in its preliminary stage. We believe that the lawsuit is without merit and intend to defend vigorously against it.~~11

128. Long-term Debt

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

The Asset-Based Revolving Credit Facility provides that the Company has the right at any time to request up to $200.0 million of additional commitments, but the lenders are under no obligation to provide any such additional commitments, and any increase in commitments will be subject to customary conditions precedent. If the Company were to request any such additional commitments and the 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 the borrowing base.

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

If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (i) the commitment amount and (ii) the borrowing base, the Company will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount. If the amount available under the Asset-Based Revolving Credit Facility is less than $60 million or an event of default has occurred, the Company will be required to repay outstanding loans and cash collateralize letters of credit with the cash the Company is required to deposit daily in a collection account maintained with the agent under the Asset-Based Revolving Credit Facility. The Company may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. There is 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.

All obligations under the Asset-Based Revolving Credit Facility are guaranteed by Parent 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 of the Company’s non-guarantor subsidiaries totaled approximately $38.1 million, or 0.7% of consolidated liabilities, and the assets of the Company’s non-guarantor subsidiaries aggregated approximately $194.0 million, or 2.9% of consolidated total assets. All obligations under the Company’s Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the Company’s assets and the assets of Parent and the Company’s subsidiaries that have guaranteed the Asset-Based Revolving Credit Facility (subsidiary guarantors), including:

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

• a second-priority pledge of 100% of the Company’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 foreign subsidiary is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary); and

• a second-priority security interest in, and mortgages on, substantially all other tangible and intangible assets of the Company, Parent and each subsidiary guarantor, including a significant portion of the Company’s material owned and leased real property (which currently consists of a majority of the Company’s full-line retail stores) and equipment.

Capital stock and other securities of a subsidiary of the Company that are owned by the Company or any subsidiary guarantor will not constitute collateral under the Company’s Asset-Based Revolving Credit Facility to the extent that such securities cannot secure the Company’s 2028 Debentures or other secured public debt obligations without requiring the preparation and filing of separate financial statements of such subsidiary in accordance with applicable SEC rules. As a result, the collateral under the Company’s Asset-Based Revolving Credit Facility will include shares of capital stock or other securities of subsidiaries of the Company or any subsidiary guarantor only to the extent that the applicable value of such securities (on a subsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amount of the 2028 Debentures or other secured public debt obligations. Stock of the Company’s Brand Development Companies and their assets also will not constitute collateral under the Company’s Asset-Based Revolving Credit Facility.

The Company’s Asset-Based Revolving Credit Facility contains a number of covenants that, 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 capital stock or redeem, repurchase or retire the Company’s capital stock or indebtedness;

• make investments, loans, advances and acquisitions;

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

• engage in transactions with the Company’s affiliates;

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

• consolidate or merge;

• create liens; and

• enter into sale and lease back transactions.

The covenants 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 the satisfaction of certain payment conditions, principally that the Company must have at least $75.0 million of pro forma excess availability under the Asset-Based Revolving Credit Facility and that the Company must be in pro forma compliance with the fixed charge coverage ratio described below.

Although the credit agreement governing the Asset-Based Revolving Credit Facility does not require the Company to comply with any financial ratio maintenance covenants, if less than $60.0 million were available to be borrowed under the Asset-Based Revolving Credit Facility at any time, the Company would not be permitted to borrow any additional amounts unless its pro forma ratio of

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

Senior Secured Term Loan Facility. On October 6, 2005, in connection with the Transactions, the Company entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility with Credit Suisse as administrative agent and collateral agent. The full 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 $100.0 million principal amount of the loans under the Senior Secured Term Loan Facility.

Borrowings under the Senior Secured Term Loan Facility bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The applicable margin is 1.5% with respect to base rate borrowings and 2.5% with respect to LIBOR borrowings. The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 7.24% at April 29, 2006.

The credit agreement governing the Senior Secured Term Loan Facility requires the Company to prepay outstanding term loans with 50% (which percentage will be reduced to 25% if the Company’s total leverage ratio is less than a specified ratio and will be reduced to 0% if the Company’s total leverage ratio is less than a specified ratio) of its annual excess cash flow (as defined in the credit agreement). If a change of control (as defined in the credit agreement) occurs, the Company will be required to offer to prepay all outstanding term loans, at a prepayment price equal to 101% of the principal amount to be prepaid, plus accrued and unpaid interest to the date of prepayment. The Company also must offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales under certain circumstances.

The Company may voluntarily prepay outstanding loans under the Senior Secured Term 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 of the Senior Secured Term Loan Facility prior to October 6, 2006 (other than a prepayment that is made with certain designated asset sale proceeds), the Company must pay 101% of the principal amount to be repaid. There is no scheduled amortization under the Senior Secured Term Loan Facility. The principal amount of the loans outstanding is due and payable in full on April 6, 2013.

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

• a first-priority pledge of 100% of the Company’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 foreign subsidiary is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary); and

• a first-priority security interest in, and mortgages on, substantially all other tangible and intangible assets of the Company, Parent and each subsidiary guarantor, including a significant portion of the Company’s material owned and leased real property (which currently consists of a majority of the Company’s full-line retail stores) and equipment, but excluding, among other things, the collateral described in the following bullet point; and

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

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

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

2028 Debentures. In May 1998, the Company issued $125.0 million aggregate principal amount of its 2028 Debentures. In connection with the Transactions, the Company equally and ratably secured the 2028 Debentures by a first lien security interest on certain collateral subject to liens granted 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 domestic subsidiaries, and (ii) 100% of the non-voting stock and 65% of the voting stock of certain of the Company’s existing and future foreign subsidiaries and (b) certain of the Company’s principal properties that include a majority of the Company’s full-line stores, in each case, to the extent required by the terms of the indenture governing the 2028 Debentures. The 2028 Debentures contain covenants that restrict the Company’s ability to create liens and enter into sale and lease back transactions. The collateral securing the 2028 Debentures will be released upon the release of liens on such collateral under the Company’s Senior Secured Credit Facilities and any other debt (other than the 2028 Debentures) secured by such collateral. Capital stock and other securities of a subsidiary of the Company that are owned by the Company or any subsidiary will not constitute collateral under the 2028 Debentures to the extent such property does not constitute collateral under the Company’s Senior Secured Credit Facilities as described above. Parent is currently considering providing a guarantee of the 2028 Debentures.

Senior Notes. On October 6, 2005, Newton Acquisition Merger Sub, Inc. issued $700.0 million aggregate original principal amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture) with Wells Fargo Bank, National Association, as trustee. At the closing 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 Notes entirely in cash (Cash Interest) or entirely by increasing the principal amount of the outstanding Senior Notes or by issuing additional Senior Notes (PIK Interest). Cash Interest on the Senior Notes accrues at the rate of 9% per annum. 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 the Senior Notes entirely in cash. All Senior Notes mature on October 15, 2015 and 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.

The Senior Notes are guaranteed, jointly and severally, on an unsecured, senior basis, by each of the Company’s wholly-owned domestic subsidiaries that guarantee the Company’s obligations under its Senior Secured Credit Facilities and by Parent. The Senior Notes and the guarantees thereof are the Company’s and the guarantors’ unsecured, senior obligations and rank (i) equal in the right of payment with all of the Company’s and the guarantors’ existing and future senior indebtedness, including any borrowings under the Company’s Senior Secured Credit Facilities and the guarantees thereof and the Company’s 2028 Debentures; and (ii) senior to all of the Company’s and its guarantors’ existing and future subordinated indebtedness, including the Senior Subordinated Notes due 2015 and the guarantees thereof. The Senior Notes also are effectively junior in priority to the Company’s and its guarantors’ obligations under all secured indebtedness, including the Company’s Senior Secured Credit Facilities, the 2028 Debentures, and any other secured obligations of the Company, in each case, to the extent of the value of the assets securing such obligations. In addition, the Senior Notes are structurally subordinated to all existing and future liabilities, including trade payables, of the Company’s subsidiaries that are not providing guarantees.

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

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

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

price equal to 100% of the principal amount of Senior Notes redeemed plus an applicable premium, as provided in the Senior Indenture, as of, and accrued and unpaid interest and Additional Interest, if any, to the redemption date.

Upon the 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 to repurchase some or all of such holder’s Senior Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, and Additional Interest, if any, to the date of purchase.

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

• incur additional indebtedness;

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

• make investments;

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

• engage in transactions with the Company’s affiliates;

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

• consolidate or merge;

• create liens; and

• enter into sale and lease back transactions.

The Company’s Brand Development Companies are not subject to the covenants contained in the Senior Indenture. The Senior Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all outstanding Senior Notes to be due and payable immediately.

Senior Subordinated Notes. On October 6, 2005, Newton Acquisition Merger Sub, Inc. issued $500.0 million aggregate principal amount of 10.375% Senior Subordinated Notes under a senior subordinated indenture (Senior Subordinated Indenture) with Wells Fargo Bank, National Association, as trustee. At the closing 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 Subordinated Indenture. The Senior Subordinated Notes mature on October 15, 2015. Interest on the Senior Subordinated Notes is payable in cash semi-annually in arrears on each April 15 and October 15, commencing April 15, 2006.

The Senior Subordinated Notes are guaranteed, jointly and severally, on an unsecured, senior subordinated basis, by each of the Company’s wholly-owned domestic subsidiaries that guarantee the Company’s obligations under its Senior Secured Credit Facilities and by Parent. The Senior Subordinated Notes and the guarantees thereof are the Company’s and the guarantors’ unsecured, senior subordinated obligations and rank (i) junior to all of the Company’s and the guarantors’ existing and future senior indebtedness, including the Senior Notes and any borrowings under the Company’s Senior Secured Credit Facilities, and the guarantees thereof and the Company’s 2028 Debentures; (ii) equally with any of the Company’s and the guarantors’ future senior subordinated indebtedness; and (iii) senior to any of the Company’s and the guarantors’ future subordinated indebtedness. In addition, the Senior Subordinated Notes are structurally subordinated to all existing and future liabilities, including trade payables, of the Company’s subsidiaries that are not providing guarantees.

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

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

Prior to October 15, 2008, the Company may, at its option, subject to certain conditions, redeem up to 35% of the original aggregate principal amount of Senior Subordinated Notes at a redemption price equal to 110.375% of the aggregate principal amount thereof,

plus accrued and unpaid interest, and Additional Interest, if any, thereon to the redemption date, with the net cash proceeds of one or more equity offerings of the Company or any direct or indirect parent of the Company to the extent such net proceeds are contributed to the Company.

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

Upon the occurrence of a change of control (as defined in the Senior Subordinated Indenture), the Company will make an offer to purchase all of the Senior Subordinated Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, and Additional Interest, if any, to the date of purchase.

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

Redemption of 2008 Notes. In May 1998, the Company issued $125.0 million aggregate 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 2008 Notes, which included a call premium of $6.2 million plus accrued interest of $3.5 million through the redemption date.

Maturities of Long-Term Debt. At April 29, 2006, annual maturities of long-term debt during the next five years and thereafter are as follows (in millions):

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

Interest Rate Swaps. The Company uses derivative financial instruments to help manage its interest rate risk. Effective December 6, 2005, the Company entered into floating to 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 a portion of its floating rate indebtedness. The interest rate swap agreements terminate after five years. As of the effective date, the Company 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 the effective 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 of approximately $19.4 million, which amount is included in other assets. As a result of the swap agreements, the Company’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will range from 6.931% to 7.499% per quarter and result in an average fixed rate of 7.285%.

9. Accumulated Other Comprehensive Income (Loss)

The following table shows the components of accumulated other comprehensive 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	)

10. Employee Benefit Plans

Description of Benefit Plans. We sponsor a defined benefit pension plan (Pension Plan) covering substantially all full-time employees. We also sponsor an unfunded supplemental executive retirement plan (SERP Plan) that provides additional pension benefits to certain employees. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment. Pension Plan assets consist primarily of equity and fixed income securities.

Costs of Benefits. The components of the expenses incurred under 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

Purchase Accounting Adjustments. The obligations and assets related to our benefit plans were valued at fair value as of the date of the Acquisition, 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	)

Funding Policy and Plan Assets. Our policy is to fund the Pension Plan at or above the minimum required by law. In 2005, we made voluntary contributions of $20.0 million for the plan year ended July 31, 2004. Based upon currently available information, we will not be required to make contributions to the Pension Plan for either the 2006 or 2005 plan years; however, we could decide to make a voluntary contribution based on our evaluation of the Pension Plan.

Effect of Medicare Subsidy on Postretirement Plan. In December 2003, the U.S. Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) that provides a prescription drug subsidy, beginning in January 2006, to companies that sponsor postretirement health care plans that provide drug benefits. Based upon the provisions of the legislation enacted in January 2005, we reviewed the provisions of our Postretirement Plan with our actuaries to determine whether the benefits offered by our plan met the statutory definition of “actuarially equivalent” prescription drug benefits that qualify for the federal subsidy. Based upon this review, we believe that our benefits qualify for the subsidy. We estimate the annual federal subsidy to be received in the next ten years under the Act to be approximately $0.2 million, which subsidy was considered in the determination of the fair value of the Postretirement Plan as of the date of the Acquisition.

11. Segments

We have identified two reportable segments: Specialty Retail Stores and Direct Marketing. The Specialty Retail Stores segment includes all of our Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus clearance stores. The Direct Marketing segment conducts both online operations and print catalog under the Neiman Marcus, Horchow and Bergdorf Goodman brand names. Other includes our 51% interest in Gurwitch Products, L.L.C., which designs and markets the Laura Mercier cosmetic line, and our 56% interest in Kate Spade LLC, which designs and retails high-end designer handbags and accessories.

Both the Specialty Retail Stores and Direct 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 and fashion jewelry and decorative home accessories.

The following table sets forth the information for 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

12. Commitments and Contingencies

Investments in Brand Development Companies. Our brand development companies consist of our 56% interest in Kate Spade LLC, which designs and markets high-end designer handbags and accessories, and our 51% interest in Gurwitch Products, L.L.C., which designs and markets the Laura Mercier cosmetics line. Our investments in and relationships with our brand development companies are governed by operating agreements that provide for an orderly transition process in the event any investor wishes to sell its interest, or purchase another investor’s interest. Among other things, these operating agreements contain currently exercisable put option provisions entitling each minority investor to put their interest to us, and currently exercisable call option provisions entitling us to purchase each minority investor’s interest, at a purchase price mutually agreed to by the parties. The purchase price will be determined, in the case of the Gurwitch interests, 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 the parties are unable to agree on a mutually acceptable price, by a mutually acceptable nationally recognized investment banking firm, subject to certain conditions. We may elect to defer the consummation of a put option for a period of six months by cooperating with the other investors in seeking either a sale of the relevant brand development company to a third party or a public offering of the relevant brand development company’s securities. If a sale to a third party or public offering of the relevant brand development company’s securities is not consummated within six months after the exercise of the put option (which period may be automatically extended for an additional two months if a registration statement for the relevant brand development company is filed with the SEC), we are obligated to consummate the put option. Under the terms of the Kate Spade operating agreement, consummation of the put option shall occur within thirty days after the determination of the valuation with respect to the exercise of the put option, unless we have elected to defer the consummation of the put option for the six-month period referred to above, and should a third party sale or public offering of Kate Spade occur within such six-month period, we are required to pay the Kate Spade investors the difference, if any, between the put option valuation price for their interest and the amount they realize through the third party sale of public offering.

In April 2005, the minority investors in Kate Spade LLC exercised the put option described above with respect to the full amount of their stake in such company. We subsequently entered into a standstill agreement to postpone the put process while we engaged in discussions with the minority investors of Kate Spade LLC regarding certain strategic alternatives, including the possible sale of such company. The standstill agreement, as extended, expired on March 21, 2006, but the parties are continuing to pursue discussions regarding a possible sale of such company while the put valuation process proceeds. Although such discussions are ongoing, 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 the minority investors in Kate Spade LLC pursuant to the option as early as the fourth quarter of fiscal 2006.

We have also been in discussions with the minority investors of Gurwitch Products, L.L.C. regarding certain strategic alternatives, including the possible sale of such company. No assurance can be given that these discussions will ultimately lead to any transaction. In addition, the indentures governing the notes and the terms of our senior secured credit facilities permit us to distribute all of our equity interests in Gurwitch Products, L.L.C. to the holders of our equity without restriction (except in certain limited circumstances when we are paying PIK interest on the senior notes).

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

On May 4, 2005, a purported class action complaint, NECA-IBEW Pension Fund (The Decatur Plan) 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 District of Texas against our Company and its directors challenging the proposed merger. An amended complaint was filed on July 25, 2005. The amended complaint alleged a cause of action for breach of fiduciary duty against us and our directors, claiming, among other things, that the defendants had endeavored to complete the sale of our Company and its assets at a grossly inadequate and unfair price and pursuant to an unfair process that failed to maximize shareholder value. In addition, the amended complaint alleged that our directors were not independent and breached their fiduciary duties in connection with the approval of the merger by, among other things, (i) tailoring the transaction to serve the interests of the defendants and the family of Richard A. Smith, the then chairman of our board of directors and our largest stockholder, rather than structuring the merger to obtain the highest price for stockholders, (ii) depriving public stockholders of the value of certain assets (including the credit card business and our third quarter 2005 profits), (iii) failing to realize the financial benefits from the sale of the credit card business, (iv) not engaging in a fair process of negotiating at arm’s length, including provisions precluding superior competing bids (including a termination fee and no solicitation provision), and (v) structuring a preferential deal for insiders. The amended complaint further claimed that our financial advisor had a conflict of interest by also acting as a financing source for the merger, and that our proxy statement in respect of the merger omitted material information purportedly necessary to ensure a fully informed shareholder vote. The amended complaint sought, among other things, injunctive relief to enjoin the consummation of the merger, to rescind any actions taken to effect the merger, to direct the defendants to sell or auction our Company for the highest possible price, and to impose a constructive trust in favor of plaintiffs upon any benefits improperly received by defendants. Following the closing of the merger, plaintiff voluntarily dismissed the lawsuit with prejudice as moot on December 1, 2005, and provided a release of all of the defendants for claims arising out of the merger. The Company paid plaintiff’s attorneys’ fees in connection with certain disclosures requested by plaintiff and included in the proxy statement sent to the shareholders regarding the merger.

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

EXECUTIVE OVERVIEW

~~Company~~The ~~Profile~~following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 30, 2005. Unless otherwise specified, the meanings of all defined terms in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are consistent with the meanings of such terms as defined in the Notes to the Condensed Consolidated Financial Statements. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions relating to our forward-looking statements.

The Neiman Marcus Group, Inc., together with its operating divisions and subsidiaries, is a high-end specialty retailer. Our operations include the Specialty Retail Stores segment and the Direct Marketing segment. Our Specialty Retail Stores segment consists primarily of Neiman Marcus and Bergdorf Goodman stores. Our Direct Marketing segment conducts both print catalog and online operations under the brand names of Neiman Marcus, Horchow and Bergdorf Goodman and until its disposition in November 2004, the Chef’s Catalog brand name. In November 2004, we sold our Chef’s Catalog operations, as more fully described in Note 2 to the Condensed Consolidated Financial Statements.Overview

The Neiman Marcus Group, Inc., together with our operating segments and subsidiaries, is a high-end specialty retailer. Our operations include the Specialty Retail Stores segment and the Direct Marketing segment. The Specialty Retail Stores segment consists primarily of Neiman Marcus and Bergdorf Goodman stores. The Direct Marketing segment conducts both online operations and print catalog under the brand names of Neiman Marcus, Bergdorf Goodman, Horchow and Chef’s Catalog (prior to its disposition in November 2004). We own a 51% ~~percent~~ interest in Gurwitch Products, ~~LLC~~L.L.C., which ~~distributes~~ designs and markets the Laura Mercier cosmetic line, and a 56% ~~percent~~ interest in Kate Spade LLC, awhich ~~manufacturer~~designs and ~~retailer~~markets of high-end ~~designer~~ designer handbags and accessories~~. Gurwitch Products,~~ ~~LLC and Kate Spade LLC are hereafter referred to collectively as~~ (the “Brand Development Companies).”

~~Our~~The ~~fiscal~~Neiman ~~year~~Marcus ~~ends~~Group, Inc. (Company) was acquired on ~~the~~October ~~Saturday~~6, ~~closest~~2005 tothrough ~~July 31. All~~a ~~references~~merger totransaction with ~~the~~Newton ~~third~~Acquisition ~~quarter~~Merger Sub, Inc., a wholly-owned subsidiary of ~~2005~~Neiman ~~relate~~Marcus, toInc. (formerly Newton Acquisition, Inc.) (Parent). The acquisition was accomplished through the ~~thirteen~~merger ~~weeks~~of ~~ended~~the ~~April 30~~Newton Acquisition Merger Sub, ~~2005~~Inc. with and ~~all~~into ~~references~~the to Company, with the ~~third~~Company ~~quarter~~being ofthe ~~2004~~surviving ~~relate~~entity (the Acquisition). Subsequent to the ~~thirteen~~Acquisition, ~~weeks~~we ~~ended~~are ~~May 1~~a subsidiary of the Parent, ~~2004~~which is controlled by Newton Holding, LLC (Holding). ~~All~~ ~~references~~Both tothe ~~2005~~Parent ~~relate~~and Holding towere formed by investment funds affiliated with Texas Pacific Group and Warburg Pincus LLC (the ~~thirty-nine~~Sponsors). ~~weeks~~Although ~~ended~~we ~~April 30~~continued as the same legal entity after the Acquisition, ~~2005~~the accompanying condensed consolidated statements of earnings and ~~all~~cash ~~references~~flows topresent ~~2004~~our results of operations and ~~relate~~cash toflows for the ~~thirty-nine~~periods ~~weeks~~preceding ~~ended~~the ~~May 1~~Acquisition (Predecessor) and the periods succeeding the Acquisition (Successor), ~~2004~~respectively.

~~The~~In ~~information~~connection with the ~~contained~~Transactions, inthe ~~this~~Company ~~“Management’s~~incurred ~~Discussion~~significant indebtedness and ~~Analysis~~became ofhighly leveraged. ~~Financial~~See ~~Condition~~ “Liquidity and ~~Results~~Capital ~~of Operations~~Resources.” In ~~(MD&A)~~addition, ~~should~~the bepurchase ~~read~~price paid in connection ~~conjunction~~ with ~~our~~the Acquisition has been preliminarily allocated to state the ~~Annual~~acquired ~~Report~~assets onand ~~Form 10-K/A~~liabilities ~~for~~at fair value. The preliminary purchase accounting adjustments increased the ~~fiscal~~carrying ~~year~~value ~~ended~~of ~~July 31,~~our property and ~~2004. Unless~~equipment ~~otherwise~~and ~~specified~~inventory, ~~the~~established intangible assets for our tradenames, ~~meanings~~customer oflists ~~all~~and ~~defined~~favorable ~~terms~~lease incommitments ~~MD&A~~and ~~are~~revalued ~~consistent~~our ~~with~~long-term benefit plan obligations, among other things. Subsequent to the ~~meanings~~Transactions, interest ofexpense and non-cash depreciation and amortization charges have ~~such~~significantly ~~terms~~increased. asAs ~~defined~~a inresult, ~~the~~our ~~Notes~~Successor financial statements subsequent to the ~~Condensed~~Transactions ~~Consolidated~~are ~~Financial~~not comparable to our Predecessor financial ~~Statements~~statements.

~~Overview~~We have prepared our discussion of the ~~Business~~results of operations for the nine months (thirty-nine weeks) ended April 29, 2006 by comparing the results of operations of the Predecessor for the thirty-nine weeks ended April 30, 2005 to the combined amounts obtained by adding the earnings and cash flows for the Predecessor nine-week period ended October 1, 2005 and the Successor thirty-week period ended April 29, 2006. Although this combined presentation does not comply with generally accepted accounting principles (GAAP), we believe that it provides a meaningful method of comparison. The combined operating results have not been prepared on a pro forma basis under applicable regulations and may not reflect the actual results we would have achieved absent the Transactions and may not be predictive of future results of operations.

WeOur ~~believe~~fiscal ~~that~~year ~~our~~ends ~~unique~~on ~~product~~the ~~assortment~~Saturday closest to July 31. All references to the third quarter of ~~luxury,~~fiscal ~~designer~~year ~~and~~2006 relate to the thirteen weeks ended ~~fashion~~April ~~merchandise~~29, ~~coupled~~2006 ~~with~~of ~~our~~the ~~sales~~Successor. ~~promotion~~All ~~activities~~references ~~and~~to ~~our~~the third quarter of fiscal ~~commitment~~year 2005 relate to ~~superior~~the ~~customer~~thirteen ~~service~~weeks ended April 30, ~~have~~2005 ~~been~~of ~~critical~~the Predecessor. All references to ~~our~~the ~~success~~year-to-date in fiscal year 2006 period relate to the combined ~~past. In~~thirty-nine ~~addition~~weeks ended April 29, we2006 ~~believe~~(calculated ~~these~~as described above) ~~factors~~and ~~are~~all ~~critical~~references to ~~our~~the ~~future~~year-to-date ~~growth~~fiscal ~~and~~year ~~success~~2005 period relate to the thirty-nine weeks ended April 30, 2005.

We conduct our selling activities in two primary selling seasons – Fall and Spring. The Fall Season is comprised of our first and second fiscal quarters and the Spring Season is comprised of our third and fourth fiscal quarters. The first quarter is generally characterized by a higher level of full-price selling with a focus on the initial introduction of Fall Season fashions. Aggressive in-store marketing activities designed to stimulate customer buying, a lower level of markdowns and higher margins are characteristic of this quarter. The second quarter is more focused on promotional activities related to the December holiday season, the early introduction of resort season collections from certain designers and the sale of Fall Season goods on a marked down basis. As a result, margins are typically lower in the second quarter. However, due to the seasonal increase in sales that occurs during the holiday season, the second quarter is typically the quarter in which our sales are the highest and in which expenses are the lowest as a percentage of revenues. Our working capital requirements are also the greatest in the first and second quarters as a result of higher seasonal levels of accounts receivable and inventory.22

~~Similarly,~~Factors ~~the~~Affecting ~~third~~Our quarter is generally characterized by a higher level of full-price selling 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 this quarter. Sales are generally the lowest in the fourth quarter and are focused on promotional activities offering Spring Season goods to the customer on a marked down basis, resulting in lower margins during the quarter. As a result of the seasonality of our selling activities, inventory management is critical to our success.Results

~~Inherent~~Revenues. ~~in the successful execution of our business plans,~~We ~~particularly~~generate our ~~inventory~~revenues ~~management~~primarily ~~strategy,~~from ~~is our ability both to predict~~ the ~~fashion~~sale ~~trends that will be~~ of ~~interest~~high-end tomerchandise ~~our customers and to anticipate~~through ~~the future spending patterns of~~ our ~~customer~~Specialty ~~base. Accordingly,~~Retail weStores ~~monitor~~and ~~the~~Direct ~~sales~~Marketing ~~performance of our inventories throughout each season~~operation. We ~~seek~~Components ~~to order additional goods to supplement our original purchasing decisions when the level~~ of ~~customer demand is higher than originally anticipated. However, in certain merchandise categories, particularly fashion apparel,~~ our ~~ability to purchase~~ ~~additional~~revenues ~~goods can be limited. This can result in lost sales in the event of higher than anticipated demand for the fashion~~include:

13• Sales of merchandise—Revenues from our Specialty Retail Stores are recognized at the later of the point of sale or the delivery of goods to the customer. Revenues from our Direct Marketing operation are recognized when the merchandise is delivered to the customer. We maintain reserves for anticipated sales returns primarily based on our historical trends related to returns by both our retail and direct marketing customers.

~~goods~~• Commissions ~~offered~~from orleased adepartments—A ~~higher~~small ~~than~~portion ~~anticipated level~~ of ~~consumer spending. Conversely, in~~ the ~~event we~~ ~~buy~~sales ~~fashion~~of ~~goods that are not accepted by~~ our ~~customer~~Specialty orRetail ~~the~~Stores ~~level~~consist of ~~consumer~~ ~~spending~~commissions isfrom ~~less than we anticipated, we typically incur a higher than~~certain ~~anticipated~~departments ~~level of markdowns, net of vendor allowances, to sell the goods that remain at the end of the season, resulting~~ in ~~lower~~our ~~operating profits. We~~stores ~~believe~~ that ~~the~~we ~~experience of~~lease ~~our merchandising and selling organizations helps~~ to ~~minimize~~independent ~~the inherent risk in predicting fashion trends and related demand~~companies.

~~Third~~• Delivery ~~Quarter~~and ~~Fiscal~~processing—We ~~Year~~generate ~~2005~~revenues ~~Highlights~~from delivery and processing charges related to merchandise delivered to our customers from our retail and direct marketing operations.

~~Diluted~~Our ~~earnings~~revenues ~~per~~can ~~share~~be ~~for~~affected ~~the third quarter of 2005 increased 15.0~~by ~~percent to $1.61 from $1.40 in~~ the ~~prior~~following ~~year period. Other significant highlights for the third quarter of 2005 include~~factors:

• ~~Revenues~~changes ~~– Our revenues for the third quarter of 2005 were $933.4 million compared to $873.2 million~~ in the ~~prior~~level ~~year period. Revenues increased 6.9 percent in the third quarter~~ of ~~2005~~consumer ~~while~~spending ~~comparable~~generally ~~revenues increased 8.0 percent. Year to date~~and, ~~revenues have increased 8.4~~ ~~percent while comparable revenues have increased 9.9 percent. For Specialty Retail Stores~~specifically, ~~our~~on ~~sales~~luxury ~~per square foot for the last twelve trailing months increased to $564 as of April 2005 compared to $517 as of April 2004.~~goods;

• ~~Gross~~changes ~~margins – Margins increased to 38.3 percent of revenues~~ in the third quarter of 2005 from 37.6 percent in the third quarter of 2004. Year to date, margins have increased to 36.3 percent of revenues from 35.3 percent in the prior year period. These increases are reflective of the high level of ~~acceptance~~full-price ~~and demand for the fashion goods we offer as well as our efforts to align purchases and customer demand.~~sales;

• ~~Selling,~~changes ~~general and administrative expenses – Selling, general and administrative (SG&A) expenses decreased to 23.8 percent of revenues~~ in the ~~third~~level ~~quarter~~ of ~~2005~~promotional ~~from~~events ~~23.9~~conducted ~~percent~~by ~~in the third quarter of~~our ~~2004~~Specialty ~~and~~Retail ~~to 23.5 percent of revenues year to date from 24.1 percent in the prior year period.~~Stores;

• ~~Operating earnings – Operating earnings increased 12.6 percent in the third quarter of 2005, representing 14.4 percent of~~ our ~~revenues compared~~ability to ~~13.7~~successfully ~~percent~~implement ~~in the third quarter of 2004. Year to date, operating earnings increased 18.7 percent, representing 12.3 percent of~~ our ~~revenues~~store ~~for 2005 compared to~~expansion ~~11.2 percent in 2004. Operating earnings were 16.4 percent of revenues in the third quarter~~ and ~~14.2~~remodeling ~~percent year to date for our Specialty Retail Stores and 12.9 percent of revenues in the third quarter and 12.2 percent year to date for Direct Marketing.~~strategies;

~~Recent~~• the ~~Developments~~rate of growth in internet sales by our Direct Marketing operation; and

~~Sale~~• general ofeconomic ~~Company~~conditions. On March 16, 2005, we announced that we were exploring various strategic alternatives to enhance shareholder value, including a possible sale of the Company, and that we had retained Goldman Sachs & Co. as the financial advisor to assist us in the review.

OnIn ~~May 1~~addition, ~~2005,~~ our ~~Board~~revenues ~~of Directors approved a~~are ~~definitive agreement to sell the Company to an investment group consisting of Texas Pacific Group and Warburg Pincus LLC~~seasonal. ~~Under the~~ ~~terms~~For ofa ~~the~~description ~~agreement, Texas Pacific Group and Warburg Pincus will acquire all~~ of the ~~outstanding~~seasonality ~~Class A and Class B shares~~ of ~~The~~our ~~Neiman Marcus Group for $100.00 per share in cash~~business, ~~representing a transaction value of~~see ~~approximately $5~~“—Seasonality.1 billion. Each of the investors will own equal stakes in the company upon completion of the transaction. Completion of this transaction is contingent upon regulatory review and approval by the Company’s shareholders and is expected to occur by November 1, 2005.”

~~Sale~~Cost of ~~Credit~~goods ~~Card~~sold ~~Portfolio. As contemplated~~including inbuying ~~the negotiations that led to the sale of the Company for~~and ~~approximately~~occupancy ~~$5.1~~costs ~~billion,~~(excluding wedepreciation) ~~entered into a strategic alliance with HSBC-North America’s Retail Services~~ (~~HSBC~~COGS) ~~on June 8, 2005 to support and enhance our credit card operations~~. ~~In connection~~ ~~with this transaction, HSBC will purchase the private label credit~~COGS ~~card~~consists ~~accounts and related assets~~ of ~~both Neiman Marcus and Bergdorf Goodman, as well as~~ the ~~outstanding~~following balances associated with such accounts, for an amount equal to the face value of the outstanding receivables and accumulated accounts receivable collections. We expect to close this transaction by July 31, 2005, subject to customary review and closing conditions, for a purchase price of approximately $640 million, of which we will receive net cash proceeds of approximately $527 million and HSBC will assume $113 million of outstanding liabilities under our Credit Card Facility. In addition, we will receive on-going payments based on credit sales generated under the agreement. We will continue to handle key customer service functions including new account processing, transaction authorization, billing adjustments, collection services and customer inquiries.components:

~~See~~• Inventory ~~Note~~costs—We 10utilize the retail method of accounting, which is widely used in the retail industry due to its practicality, for substantially all of our merchandise inventories. Merchandise inventories are stated at the ~~Condensed~~lower ~~Consolidated~~of ~~Financial~~cost ~~Statements~~or market. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for ~~further~~various ~~discussion~~groupings of similar items, to the retail value of inventories. The cost of the inventory reflected on the consolidated balance sheet is decreased by charges to cost of goods sold at the time the retail value of the inventory is lowered through the use of markdowns. Hence, earnings are negatively impacted when merchandise is marked down.

14• Buying costs—Buying costs consist primarily of salaries and expenses incurred by our merchandising and buying operations.

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

~~Performance~~• Delivery ~~Summary~~and processing costs—Delivery and processing costs consist primarily of delivery charges we pay to third-party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.

~~The~~With ~~following~~the ~~table~~introduction ~~sets~~of ~~forth~~new fashions ~~certain~~in the first and third quarters and our emphasis on full-price selling ~~items~~in ~~expressed~~these asquarters, ~~percentages~~a lower level of ~~net~~markdowns ~~sales~~and ~~for~~higher ~~the~~margins ~~periods~~are ~~indicated~~characteristic of these quarters.

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	April 30, 2005		May 1, 2004		April 30, 2005		May 1, 2004
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold including buying and occupancy costs	61.7		62.4		63.7		64.7
Selling, general and administrative expenses	23.8		23.9		23.5		24.1
Loss on disposition of Chef’s Catalog	—		—		0.5		—
Operating earnings	14.4		13.7		12.3		11.2
Interest expense, net	0.3		0.5		0.4		0.4
Earnings before income taxes and minority interest	14.1		13.2		11.9		10.8
Income taxes	5.4		5.1		4.6		3.9
Earnings before minority interest	8.7		8.0		7.3		6.8
Minority interest in net earnings of subsidiaries	(0.1	)	(0.1	)	(0.1	)	(0.1	)
Net earnings	8.6	%	7.9	%	7.2	%	6.7	%

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn the

1523

~~Set~~allowances ~~forth~~and inthey are approved by the ~~following~~vendor. ~~table~~Other isallowances ~~certain~~we ~~summary~~receive ~~information~~represent ~~with~~reductions to the ~~respect~~amounts we pay to ~~our~~acquire ~~operations~~the ~~for~~merchandise. These allowances reduce the ~~periods~~cost ~~indicated~~of the acquired merchandise and are recognized at the time the goods are sold.

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(dollars in millions)	April 30, 2005			May 1, 2004			April 30, 2005			May 1, 2004
REVENUES
Specialty Retail Stores	$	766.9		$	717.6		$	2,415.7		$	2,213.8
Direct Marketing	130.5			126.2			458.5			445.7
Other (1)	36.0			29.4			96.3			80.8
Total	$	933.4		$	873.2		$	2,970.5		$	2,740.3
OPERATING EARNINGS
Specialty Retail Stores	$	125.8		$	114.3		$	343.8		$	276.5
Direct Marketing	16.8			9.8			55.9			45.1
Other (1)	4.6			4.7			10.2			11.8
Subtotal	147.2			128.8			409.9			333.4
Corporate expenses	(12.5		)	(9.2		)	(30.4		)	(26.5		)
Loss on disposition of Chef’s Catalog	—			—			(15.3		)	—
Total	$	134.7		$	119.6		$	364.2		$	306.9
OPERATING PROFIT MARGIN
Specialty Retail Stores	16.4		%	15.9		%	14.2		%	12.5		%
Direct Marketing	12.9		%	7.8		%	12.2		%	10.1		%
Total	14.4		%	13.7		%	12.3		%	11.2		%
COMPARABLE REVENUES (2)
Specialty Retail Stores (3)	6.5		%	22.2		%	9.1		%	13.7		%
Direct Marketing (4)	16.8		%	14.4		%	15.3		%	18.5		%
Total (3), (4)	8.0		%	22.0		%	9.9		%	14.9		%
SALES PER SQUARE FOOT
Specialty Retail Stores	$	141		$	133		$	445		$	411
STORE COUNT
Neiman Marcus and Bergdorf Goodman stores:
Open at beginning of period	37			37			37			37
Opened during the period	—			—			—			—
Open at end of period	37			37			37			37
Clearance centers:
Open at beginning of period	15			14			14			14
Opened during the period	—			—			1			—
Open at end of period	15			14			15			14

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

~~(1) Other~~• customer acceptance of and demand for the merchandise we ~~includes~~offer in a given season and the ~~operations~~related impact of such factors on the ~~Brand~~level ~~Development~~of full-price ~~Companies.~~sales;

~~(2) Comparable revenues~~• our ~~include~~ability 1)to ~~revenues~~order ~~derived~~an ~~from~~appropriate ~~our~~amount ~~retail~~of ~~stores open for more than~~merchandise 52to ~~weeks,~~match ~~including~~customer ~~stores~~demand ~~that~~and ~~have~~the ~~been~~related ~~relocated~~impact oron ~~expanded,~~the 2)level ~~revenues from~~of ~~our~~net ~~Direct Marketing operations and 3) wholesale revenues from our Brand~~markdowns ~~Development Companies.~~incurred;

~~(3) The~~• factors ~~calculation~~affecting ~~of the changes in comparable~~ revenues has been adjusted to give recognition to the change in classification of revenues deferred in connection with our loyalty programs, as more fully described in Note 1 to the Condensed Consolidated Financial Statements.generally;

~~(4) The calculation of the~~ • changes in ~~comparable revenues~~occupancy ~~has~~costs ~~been~~primarily ~~adjusted~~associated towith ~~exclude~~ the ~~revenues of Chef’s Catalog for all~~ ~~periods~~opening ~~prior to our sale~~ of ~~these~~new ~~operations~~stores inor ~~November 2004,~~distribution asfacilities; ~~more fully described in Note 2 to the Condensed Consolidated Financial Statements.~~and

16• the amount of vendor reimbursements we receive during the fiscal year.

~~Thirteen~~Selling, ~~Weeks~~general ~~Ended~~and ~~April 30,~~administrative expenses ~~2005~~(excluding ~~Compared~~depreciation) (SG&A). SG&A principally consists of costs related to ~~Thirteen~~employee ~~Weeks~~compensation ~~Ended~~and ~~May 1~~benefits in the selling and administrative support areas, ~~2004~~advertising and catalog costs and insurance expense. A significant portion of our selling, general and administrative expenses are variable in nature and are dependent on the sales we generate.

~~Revenues. Our~~Advertising ~~revenues~~costs ~~for~~incurred ~~the~~by ~~third~~our ~~quarter~~Specialty Retail segment consist primarily of ~~2005~~print media costs related to promotional materials mailed to our customers, while advertising costs incurred by our Direct Marketing operation relate to the production, printing and distribution of ~~$933.4~~our ~~million~~print ~~increased~~catalogs ~~$60.2~~and ~~million~~the production of the photographic content on our websites, oras 6well as online marketing costs.9 We receive ~~percent,~~advertising allowances from ~~$873~~certain of our merchandise vendors.2 ~~million~~Substantially all inthe advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the ~~third~~vendor’s merchandise ~~quarter~~in connection with our various advertising programs, primarily catalogs and other print media. As a result, these allowances are recorded as a reduction of ~~2004~~our advertising costs when earned.

~~Comparable~~We ~~revenues~~also ofreceive ~~$927.7~~allowances ~~million~~from certain merchandise vendors in ~~the~~conjunction ~~third~~with ~~quarter~~compensation ofprograms ~~2005~~for ~~increased~~employees ~~8.0~~who ~~percent~~sell ~~compared to~~ the ~~prior~~vendor’s ~~year period~~merchandise. ~~Comparable~~ ~~revenues~~These ~~increased~~allowances ~~6.5~~are ~~percent for~~netted ~~Specialty~~against ~~Retail Stores and 16.8 percent for Direct Marketing. Comparable revenues in~~ the ~~third~~related ~~quarter~~compensation ~~of 2004~~expense ~~increased~~that bywe 22incur.~~0 percent.~~

~~Revenues~~Changes ~~increased~~ in ~~the third quarter of 2005 compared to the prior year at all~~ our ~~operating companies~~selling, ~~consistent with a higher level of consumer spending, in~~ general~~, with a higher increase coming from the affluent luxury~~ ~~customer served by the Company. In addition, we believe the increases in comparable revenues were driven by sales events conducted by our Specialty Retail Stores~~ and byadministrative ~~the~~expenses ~~growth~~are ofaffected ~~internet sales~~primarily ~~for Direct Marketing. In the third quarter of 2005, internet sales~~ by ~~Direct Marketing were $73.8 million, an increase of 47.4 percent from~~ the ~~third~~following ~~quarter of 2004.~~factors:

~~Gross~~• changes ~~margin. Our~~in ~~gross~~the ~~margin~~number ~~was 38.3 percent~~ of ~~revenues for~~sales ~~the~~associates ~~third~~primarily ~~quarter~~due ~~of 2005 compared~~ to expansion ~~37.6~~of ~~percent~~existing instores ~~the~~and ~~prior~~new ~~year period. The~~store ~~increase~~openings, inincluding ~~gross~~increased ~~margin~~health ~~from~~care ~~the~~and ~~prior~~related ~~year~~benefits ~~period was due primarily to:~~expenses;

• ~~the increase~~changes in ~~product~~expenses ~~margins~~incurred byin ~~approximately~~connection ~~0.8~~with ~~percent~~our advertising ofand ~~revenues~~marketing programs; ~~offset by~~and

• ~~an increase~~changes in ~~buying~~expenses related to insurance and ~~occupancy~~long-term benefits ~~costs~~due byto ~~approximately~~general ~~0.2~~economic ~~percent~~conditions ~~of revenues~~such as rising health care costs.

WeIncome from credit card operations, net. Prior to the Credit Card Sale on July 7, 2005, our credit card operations generated ~~higher~~finance ~~product~~charge ~~margins~~income, ~~during~~net of credit losses, which we recognized as income when earned. As a part of the ~~third~~Credit Card Sale, we entered into a long-term marketing and servicing alliance with HSBC. Under the terms of this alliance, HSBC offers credit card and non-card payment plans bearing our brands and we receive ongoing payments from HSBC based on net credit card sales and compensation for marketing and servicing activities (HSBC Program Income). We recognize HSBC Program Income when earned. Prior to the second quarter of ~~2005~~fiscal year 2006, we presented income from credit card operations as a reduction of selling, general and administrative expenses. We ~~believe~~now present this income ~~increase~~as ina separate line item on our statements of earnings and have ~~product~~reclassified ~~margins~~prior ~~was~~periods ~~due~~to ~~primarily~~conform to: this presentation.

• As a percentage of revenues, the HSBC Program Income is lower than the ~~higher~~net ~~level~~finance ofcharge ~~full-price~~income ~~sales~~we ~~generated~~earned ~~during~~prior to the ~~quarter~~Credit Card Sale. However, the resulting decrease in income from credit card operations is mitigated, in part, by 1) decreases in SG&A expenses we incur due to the transfer of certain servicing functions to HSBC after the sale, 2) decreases in our ~~Specialty~~capital ~~Retail~~investments ~~Stores;~~related to the servicing of the credit card portfolio and 3) decreases in carrying costs related to our previous funding of the seasonal working capital requirements of the credit card portfolio. In tandem with HSBC, we have initiated various changes in our credit card

~~• higher margins realized by Direct Marketing after the disposition of Chef’s Catalog, which generated lower margins than our other Direct Marketing brands; and~~24

• program to alter the credit terms available to our cardholders and to ~~continued~~enhance ~~emphasis~~the onearnings ~~inventory~~of ~~management~~the portfolio. These changes have increased the level of HSBC Program Income earned by the Company.

~~Consistent~~In ~~with industry business practice, we receive allowances from certain of our vendors in support of~~ the merchandise we purchase for resale. We receive certain allowances to reimburse us for markdowns taken and/or to support the gross margins earned in connection with the sales of the vendor’s merchandise. We recognize these allowances as an increase to gross margin when the allowances are earned and approved by the vendor. Other allowances we receive represent reductions to the amounts paid to acquire the merchandise. We recognize these allowances as a reduction in the cost of the acquired merchandise resulting in an increase to gross margin at the time the goods are sold. As a percentage of revenuesfuture, the ~~level~~HSBC ~~of vendor allowances we received~~Program inIncome ~~the~~may ~~third quarter of 2005 was consistent with the prior year and did not have a significant impact on the year-over-year change in the gross margin we realized in the third quarter of 2005.~~be:

A• decreased ~~significant~~based ~~portion~~upon ~~of our buying and occupancy costs are fixed in nature. Buying and occupancy costs increased as a percentage of revenues during~~ the ~~third~~level ~~quarter~~ of ~~2005~~future ~~compared~~services we toprovide ~~the prior year period primarily due~~ to ~~higher~~HSBC; ~~depreciation~~ and ~~rent expenses as a percentage of revenues due to:~~

• aincreased based upon other changes to our historical credit ~~higher~~card ~~level~~program ofrelated ~~capital~~to, ~~spending~~among inother ~~recent~~things, ~~years;~~the interest rates applied to unpaid balances and the assessment of late fees.

• adjustments to rent and depreciation aggregating approximately $2.6 million, or 0.3 percent of revenues, made in connection with our review of the amortization periods assigned to our leased property and equipment and deferred real estate credits.Seasonality

~~Selling,~~We ~~general~~conduct ~~and~~our ~~administrative~~selling activities ~~expenses. SG&A~~in ~~expenses~~two ~~were~~primary 23selling seasons—Fall and Spring.8 ~~percent~~The ofFall season is ~~revenues~~comprised inof ~~the~~our ~~third~~first ~~quarter~~and ofsecond ~~2005~~fiscal ~~compared~~quarters toand ~~23.9~~the ~~percent~~Spring season is comprised of ~~revenues~~our ~~in the~~third ~~prior~~and ~~year~~fourth ~~period~~fiscal quarters.

17Our first fiscal quarter is generally characterized by a higher level of full-price selling with a focus on the initial introduction of Fall season fashions. Aggressive in-store marketing activities designed to stimulate customer buying, a lower level of markdowns and higher margins are characteristic of this quarter. The second fiscal quarter is more focused on promotional activities related to the December holiday season, the early introduction of resort season collections from certain designers and the sale of Fall season goods on a marked down basis. As a result, margins are typically lower in the second fiscal quarter. However, due to the seasonal increase in sales that occurs during the holiday season, the second fiscal quarter is typically the quarter in which our revenues are the highest and in which expenses as a percentage of revenues are the lowest. Our working capital requirements are also the greatest in the first and second fiscal quarters as a result of higher seasonal requirements.

~~The~~Similarly, ~~net~~the ~~decrease~~third infiscal quarter ~~SG&A~~is ~~expenses~~generally ascharacterized by a ~~percentage~~higher level of ~~revenues~~full-price selling 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 this quarter. Revenues are generally the ~~third~~lowest in the fourth fiscal quarter ofwith ~~2005~~a ~~was~~focus ~~primarily~~on promotional ~~due~~activities offering Spring season goods to: the customer on a marked down basis, resulting in lower margins during the quarter. Our working capital requirements are typically lower in the third and fourth fiscal quarters than in the other quarters.

~~• a~~A large percentage of our ~~decrease~~merchandise assortment, particularly in ~~marketing~~the apparel, fashion accessories and shoe ~~advertising~~categories, ~~costs~~is byordered ~~approximately~~months ~~0.5~~in ~~percent~~advance of the introduction of such ~~revenues~~goods. ~~primarily~~For ~~due~~example, women’s apparel, men’s apparel and shoes are typically ordered six to ~~the~~nine ~~elimination~~months in advance of ~~expenditures~~the products being offered for ~~Chef’s~~sale while ~~Catalog~~handbags, jewelry and other categories are typically ordered three to six ~~which~~months ~~were~~in ~~higher~~advance. asAs a ~~percentage~~result, inherent in the successful execution of ~~revenues~~our business ~~than~~plans is our ~~other~~ability ~~Direct~~both ~~Marketing~~to predict the fashion trends that will be ~~brands;~~of interest to our customers and to anticipate future spending patterns of our customer base.

~~• an~~We monitor the sales ~~increase~~performance inof our inventories throughout each season. We seek to order additional goods to supplement our original purchasing decisions when the ~~net~~level of ~~income~~customer ~~generated~~demand byis higher than originally anticipated. However, in certain merchandise categories, particularly fashion apparel, our ~~credit~~ability ~~card~~to ~~portfolio~~purchase additional bygoods can be limited. This can result in lost sales in the event of ~~approximately~~higher 0than anticipated demand of the fashion goods we offer or a higher than anticipated level of consumer spending.1 ~~percent~~Conversely, in the event we buy fashion goods that are not accepted by the customer or the level of ~~revenues~~consumer ~~consistent~~spending is ~~with~~less than we anticipated, we typically incur a higher than anticipated level of markdowns, net of vendor allowances, to sell the ~~increase~~goods that remain at the end of the season, resulting in lower operating profits. We believe that the experience of our merchandising and selling organizations helps to minimize the ~~sales~~inherent risk in predicting fashion trends.

In addition, SG&A expense declined as a percentage of revenues in the third quarter of 2005 compared to the prior year period by approximately 0.3 percent due to a $2.3 million reduction in the income generated by our credit card portfolio in the third quarter of 2004 related to the required amortization of the premium associated with the carrying values of the Retained and Sold Interests, as more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.25

~~These~~OPERATING ~~decreases in SG&A expenses, as a percentage of revenues, were partially offset by:~~RESULTS

~~• higher employee~~Performance ~~benefit expenses, including medical and pension expenses, by approximately 0.3 percent of revenues;~~Summary

~~• an~~The ~~increase~~following intable ~~costs,~~sets ~~primarily~~forth ~~payroll,~~certain byitems ~~approximately~~expressed ~~0.2~~as ~~percent~~percentages of net revenues~~, incurred~~ byfor ~~our Direct Marketing and~~ the ~~Brand~~periods ~~Development Companies in support of new business initiatives and the expansion of Kate Spade operations; and~~indicated.

• the increase in professional fees and other costs incurred in connection with the proposed sale of the Company by approximately 0.1 percent of revenues.

	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	%

~~Segment~~In ~~operating~~connection ~~earnings. Operating~~with ~~earnings~~the Transactions, ~~for~~the ~~our~~Company ~~Specialty~~incurred ~~Retail~~significant indebtedness and became highly ~~Stores~~leveraged. ~~segment~~See ~~were~~“Liquidity ~~$125~~and Capital Resources.8” In ~~million~~addition, ~~for~~the purchase price paid in connection with the ~~third~~Acquisition ~~quarter~~has ofbeen ~~2005~~preliminarily ~~compared~~allocated to state the ~~$114.3~~acquired ~~million~~assets ~~for~~and ~~the~~liabilities ~~prior~~at ~~year~~fair ~~period~~value. ~~This~~ ~~10.1~~The ~~percent~~preliminary ~~increase~~purchase ~~was~~accounting adjustments ~~primarily~~increased the ~~result~~carrying value of ~~increased revenues~~our property and ~~gross~~equipment ~~margins~~ and inventory, ~~net~~established ~~decreases~~intangible inassets ~~SG&A~~for ~~expenses~~our astradenames, acustomer lists and ~~percentage~~favorable oflease ~~revenues~~commitments and revalued our long-term benefit plan obligations, ~~offset~~among byother ~~increases~~things. inSubsequent ~~buying~~to the Transactions, interest expense and ~~occupancy~~non-cash ~~expenses~~depreciation asand amortization charges have significantly increased. As a ~~percentage~~result, ofour ~~revenues~~Successor financial statements subsequent to the Transactions are not comparable to our Predecessor financial statements.

Operating earnings for Direct Marketing increased to $16.8 million in the third quarter of 2005 from $9.8 million for the prior year period, primarily as a result of increased revenues and gross margins and net decreases in both buying and occupancy costs and SG&A expenses as percentages of revenues.26

~~Interest~~Set ~~expense,~~forth ~~net. Net interest expense was $2.9 million~~ in the ~~third~~ ~~quarter~~following oftable ~~2005~~is ~~and~~certain ~~$4.6~~summary ~~million~~information ~~for the prior year period. The decrease in net interest expense is~~with ~~primarily~~respect ~~due~~ to ~~increases~~our inoperations 1)for ~~investment~~the ~~income~~periods ~~generated by higher cash balances and 2) capitalized interest charges associated with store construction and remodeling activities~~indicated.

Income taxes. Our effective income tax rate was 38.5 percent for the third quarter of 2005 and 39.0 percent for the prior year period.

	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

~~Thirty-Nine Weeks Ended April 30,~~(1) Other ~~2005~~includes ~~Compared~~the tooperations ~~Thirty-Nine~~of ~~Weeks~~the ~~Ended~~Brand ~~May 1,~~Development ~~2004~~Companies.

~~Revenues. Our~~(2) Comparable revenues include 1) revenues derived from our retail stores open for ~~2005~~ ofmore $2than 52 weeks,~~970.5~~ ~~million~~including ~~increased~~stores ~~$230.2~~that ~~million,~~have orbeen ~~8.4~~relocated ~~percent~~or expanded, 2) revenues from our Direct Marketing operation and 3) revenues from our Brand Development ~~$2,740~~Companies.3 ~~million~~Comparable revenues exclude the revenues of closed stores and the revenues of our Chef’s Catalog operations (sold in November 2004) for all periods prior to the Chef’s Catalog Disposition.

Comparable revenues of $2,942.8 million in 2005 increased 9.9 percent compared to the prior year period. Comparable revenues increased 9.1 percent for Specialty Retail Stores and 15.3 percent for Direct Marketing. Comparable revenues in 2004 increased by 14.9 percent.27

~~Excluding~~Third ~~the~~Quarter ~~revenues~~Fiscal ~~from~~Year ~~our~~2006 Chef’s Catalog operations in 2004, revenues increased in 2005 compared to the prior year at all our operating companies, consistent with a higher level of consumer spending, in general, with a higher increase coming from the affluent luxury customer served by the Company. In addition, we believe the increases in comparable revenues were driven by sales events conducted by our Specialty Retail Stores and by the growth of internet sales for Direct Marketing. In 2005, internet sales by Direct Marketing, excluding Chef’s Catalog, were $233.1 million, an increase of 46.8 percent from 2004.Highlights

18We believe that our product assortment of luxury, designer and fashion merchandise, coupled with our sales promotion activities and our commitment to superior customer service, have been critical to our success in the past. In addition, we believe these factors are critical to our future growth and success. A summary of the third fiscal quarter and the year-to-date fiscal year 2006 period operating results is as follows:

~~Gross~~• Revenues—We ~~margin. Gross~~generated ~~margin~~revenue ~~was~~growth ~~36.3~~in ~~percent~~the quarterly and the year-to-date fiscal year periods ended April 29, 2006 of ~~revenues~~10.0% inand 8.9%, ~~2005~~respectively. ~~compared~~These increases were attributable to ~~35.3~~1) ~~percent~~increases in ~~the~~comparable revenues, ~~prior~~2) ~~year~~revenues ~~period. The~~derived ~~increase~~from intwo ~~gross~~new ~~margin~~full-line ~~was~~stores ~~due~~and 3) the growth ~~primarily~~of ~~to:~~internet sales.

~~• the increase~~Comparable revenues increased 6.8% in ~~product~~the ~~margins~~third byquarter ~~approximately~~of 0fiscal year 2006 and 7.91% ~~percent~~in ofthe ~~revenues;~~year-to-date ~~and~~fiscal period.

~~• a~~For Specialty Retail Stores, our sales per ~~decrease~~square infoot ~~buying~~for ~~and~~the ~~occupancy~~last ~~costs~~twelve bytrailing ~~approximately~~months ~~0.2~~increased ~~percent~~to $605 as of April ~~revenues~~2006 compared to $567 as of April 2005.

We• Cost ~~generated~~of goods ~~higher~~sold ~~product~~including ~~margins~~buying ~~at both our Specialty Retail Stores~~ and ~~our~~occupancy ~~Direct~~costs ~~Marketing~~(excluding ~~operations~~depreciation)—COGS ~~during~~represented ~~2005~~58. We7% ~~believe~~of ~~the~~revenues ~~increase~~ in ~~product~~the ~~margins at~~third ~~our~~quarter ~~Specialty~~of ~~Retail~~fiscal ~~Stores~~year ~~was~~2006 ~~due~~and ~~primarily~~58.9% ~~to the higher level~~ of ~~full-price sales~~revenues ~~generated~~in ~~for~~ the ~~period,~~third aquarter ~~lower level~~ of ~~net markdowns and our~~ ~~continued~~fiscal ~~emphasis~~year ~~on inventory management~~2005. We ~~also~~This ~~generated~~decrease ~~higher~~was ~~product~~due ~~margins in our Direct Marketing operations in 2005 subsequent~~ to ~~our~~a ~~disposition of Chef’s Catalog in November 2004. Chef’s Catalog generated~~ lower ~~margins than our other Direct Marketing brands. However, we have incurred a higher~~ level of net markdowns in ~~2005 for~~ ~~Direct~~the ~~Marketing~~third ~~due~~quarter ~~primarily~~of tofiscal ~~lower~~year 2006 than ~~anticipated~~in ~~sales~~the incorresponding ~~our~~quarter ~~catalog~~in ~~operations~~fiscal ~~during~~year ~~the December holiday season~~2005.

~~Consistent with industry business practice, we receive allowances from~~COGS ~~certain~~represented 62.2% of ~~our~~revenues ~~vendors~~ in ~~support of~~ the ~~merchandise~~combined ~~we purchase for resale. We receive certain allowances~~ year-to ~~reimburse~~-date usfiscal ~~for~~period ~~markdowns taken and/or to support the gross margins earned in connection with the sales~~ of ~~the vendor’s merchandise. We recognize these allowances as an increase~~ to2006 ~~gross margin when the allowances are earned~~ and ~~approved by the vendor~~61. ~~Other~~2% ~~allowances we receive represent reductions to the amounts paid to acquire the merchandise. We recognize these allowances as a reduction in the cost~~ of ~~the~~revenues ~~acquired merchandise resulting~~ in ~~an increase to gross margin at~~ the ~~time~~corresponding ~~the~~fiscal ~~goods~~period ~~are sold. While the dollar value of the vendor reimbursements we received decreased slightly as a percentage of revenues~~ in 2005. ~~compared to the prior~~This ~~year~~increase ~~period,~~was primarily due to apurchase ~~higher~~accounting ~~level~~adjustments ofin ~~full-price~~fiscal ~~selling, this~~year ~~decrease~~2006 ~~did~~of ~~not~~$42.5 ~~have~~million, aor ~~significant~~1.3% ~~impact~~of ~~on the year-over-year change in the gross margin we realized in 2005~~revenues.

A• Selling, general ~~significant portion of our buying~~ and ~~occupancy~~administrative ~~costs~~expenses ~~are~~(excluding ~~fixed~~depreciation)—SG&A ~~in nature. Buying and occupancy costs~~ decreased asin athe ~~percentage~~third quarter of ~~revenues during 2005 compared to the prior year~~fiscal ~~period~~year ~~primarily~~2006 ~~due~~ to ~~the~~24.9% ~~leveraging~~ of ~~fixed~~revenues ~~expenses,~~from ~~including~~25.8% ~~payroll expenses~~of ~~and~~revenues ~~depreciation,~~in ~~over~~ the ~~higher~~third ~~level~~quarter of ~~revenues we generated~~ ~~during~~fiscal year 2005~~. Included~~ ~~in buying~~ and ~~occupancy~~ ~~costs~~decreased in ~~2005~~the ~~are~~combined ~~adjustments~~ year-to-date ~~rent~~fiscal ~~and~~period ~~depreciation aggregating~~of ~~approximately~~2006 $4to 24.85% ~~million,~~of orrevenues 0from 25.2% ~~percent~~ of revenues, ~~made~~ in the ~~second~~corresponding ~~and~~fiscal ~~third~~period ~~quarters~~ of 2005 ~~in connection with our review of the amortization periods assigned to our leased property and equipment and deferred real estate credits~~.

~~Selling,~~• Operating earnings—For ~~general~~the ~~and~~third ~~administrative~~quarter ~~expenses. SG&A~~of fiscal ~~expenses~~year 2006, our operating earnings were 23$132.57 million, ~~percent~~or 12.9% of revenues, compared to $134.7 million, or 14.4% of revenues, in ~~2005~~the prior year fiscal quarter. For the combined year-to-date fiscal year 2006, our operating earnings were $309.3 million, or 9.6% of revenues, compared to 24$364.12 ~~percent~~million, or 12.3% of revenues infor the ~~prior~~year-to-date fiscal year 2005 period.

~~The~~Operating earnings ~~net~~in ~~decrease~~both the third quarter and year-to-date periods in ~~SG&A~~fiscal year 2006 were negatively impacted by 1) higher depreciation and amortization expenses due to higher asset values resulting from the revaluation of our assets to fair value as of the Acquisition date and 2) costs incurred in connection with the Transactions. These expenses aggregated $18.3 million, or 1.8% of revenues, in the third quarter of fiscal year 2006 and $104.1 million, or 3.2% of revenues, in the year-to-date fiscal year period of 2006. In addition, operating earnings, as a percentage of revenues, were negatively impacted by 1) higher depreciation charges of $4.7 million, or 0.1% of revenues for the third quarter, and $16.0 million, or 0.2% of revenues for the year-to-date fiscal year 2006 period, as a result of higher levels of capital expenditures for new stores and store remodels in recent years and 2) a lower level of income from our credit card ~~2005~~operations ~~was~~of ~~primarily~~$3.9 million, or 0.5% of revenues for the third quarter, and $8.7 million, or 0.4% of revenues for the year-to-date fiscal year 2006 period, due to the sale of our credit card operations to: HSBC in July 2005.

~~• a decrease~~Thirteen inWeeks ~~marketing~~Ended ~~and~~April ~~advertising costs by approximately 0.3 percent of revenues~~29, ~~primarily~~2006 ~~due~~Compared to ~~the elimination of expenditures for Chef’s Catalog~~ ~~which~~Thirteen ~~were~~Weeks ~~higher~~Ended asApril a30, ~~percentage of revenues than for our other Direct Marketing brands;~~2005

~~• a~~Revenues. ~~decrease~~Our inrevenues ~~incentive~~for ~~compensation~~the bythird ~~approximately~~quarter of fiscal year 2006 of $1,027.0 million increased $93.26 ~~percent~~million, or 10.0%, from $933.4 million in the third quarter of fiscal year 2005. This increase in our revenues; is attributable to increases in comparable revenues, revenues from new stores and higher internet sales. Revenues increased in the third quarter of fiscal year 2006 compared to the prior year fiscal period at all our operating companies, except for Kate Spade.

~~• an increase~~Comparable revenues in the ~~net~~third ~~income~~quarter ~~generated~~of byfiscal ~~our~~year ~~credit~~2006 ~~card~~increased 6.8% ~~portfolios~~compared byto the prior year fiscal period. Comparable revenues increased ~~approximately~~5.7% 0for Specialty Retail Stores and 16.15% ~~percent~~for ofDirect Marketing. Comparable revenues ~~consistent~~decreased ~~with~~6.8% for the ~~increase~~Brand Development Companies in ~~our~~the ~~sales~~third quarter of fiscal year 2006 compared to the prior year fiscal period. The decrease in comparable revenues for the Brand Development Companies during the third quarter of fiscal year 2006 relates primarily to lower wholesale and retail sales by Kate Spade.

In addition, SG&A expense declined as a percentage of revenues in 2005 by approximately 0.3 percent due to a $7.6 million reduction in the income generated by our credit card portfolio in 2004 related to the required amortization of the premium associated with the carrying value of the Retained and Sold Interests, as more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.28

~~These~~New ~~decreases~~stores generated sales of $36.0 million in ~~SG&A~~the ~~expenses~~third asquarter aof fiscal ~~percentage~~year 2006. In the third quarter of ~~revenues~~fiscal year 2006, internet sales by Direct Marketing were $96.7 million, an increase of 30.9% compared to the third ~~partially~~quarter ~~offset~~of ~~by:~~fiscal year 2005.

~~• an increase~~Cost inof ~~costs,~~goods ~~primarily~~sold ~~payroll,~~including bybuying ~~approximately 0.2 percent of revenues~~and ~~incurred~~occupancy bycosts ~~Direct~~(excluding ~~Marketing~~depreciation). ~~and~~COGS for the ~~Brand~~third ~~Development~~quarter ~~Companies in support~~ of ~~new~~ ~~business~~fiscal ~~initiatives~~year 2006 and ~~the~~fiscal ~~expansion~~year of2005 ~~Kate Spade operations;~~were:

• an increase in employee benefit expenses, including medical and pension expenses, by approximately 0.1 percent of revenues; and

	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	%

19We present the non-GAAP financial measure COGS, before purchase accounting adjustments because we use this measure to monitor and evaluate the performance of our business and believe the presentation of this measure will enhance investors’ ability to analyze trends in our business and evaluate our performance relative to other companies in our industry.

~~• a $3.7~~The ~~million~~decrease ~~reduction~~ in ~~SG&A~~COGS ~~expenses~~as ~~recorded~~reported inunder ~~the~~GAAP ~~second~~to ~~quarter~~58.7% of revenues from ~~2004~~58.9% ~~for~~of revenues in the ~~favorable~~prior ~~impact~~year offiscal ~~conclusions~~period includes $2.9 million of purchase ~~certain~~accounting ~~sales~~adjustments ~~tax~~recorded ~~and~~in ~~unclaimed~~connection with the Transactions. The ~~property~~decrease ~~examinations~~in ~~for~~COGS ~~which~~before ~~the~~purchase ~~agreed-on~~accounting ~~settlements~~adjustments ~~were~~to ~~less~~58.4% ~~than~~of ~~the~~revenues ~~amounts~~from we58.9% ~~previously~~of ~~estimated.~~revenues in the prior year fiscal period was primarily due:

~~Loss on disposition of Chef’s Catalog. In November 2004, we sold our Chef’s Catalog direct marketing business to~~ • a ~~private equity firm. Chef’s Catalog is a multi-channel retailer of~~ ~~professional-quality~~decrease ~~kitchenware~~in ~~with~~product ~~revenues~~costs ofby approximately ~~$73 million in fiscal year 2004~~0. ~~At October 30, 2004, Chef’s Catalog had net tangible assets, primarily inventory, of $12.5 million and net intangible assets of $17.2 million. We received proceeds, net of selling costs, of $14.~~4% ~~million from the sale. As the carrying value~~ of ~~the~~revenues; ~~Chef’s Catalog assets exceeded the net proceeds from the sale, we incurred a pre-tax loss of $15.3 million in the first quarter of 2005 related to the disposition of Chef’s Catalog.~~and

~~Segment~~• a decrease ~~operating~~in ~~earnings. Operating~~buying ~~earnings~~and ~~for~~occupancy ~~our~~costs ~~Specialty~~by ~~Retail Stores~~approximately ~~segment were $343~~0.81% ~~million~~of ~~for~~revenues, primarily ~~2005~~due ~~compared~~ to ~~$276.5~~leveraging ~~million~~rent ~~for~~expense ~~the prior~~on ~~year~~a ~~period. This~~higher ~~24.4~~level ~~percent increase~~of ~~was~~revenues ~~primarily~~in the third ~~result~~quarter of ~~increased~~fiscal ~~sales~~year ~~and margins and net decreases in both buying and occupancy expenses and SG&A expenses as a percentage of revenues~~2006.

~~Operating~~We ~~earnings~~had ~~for~~lower ~~Direct~~product ~~Marketing~~costs ~~increased~~as toa ~~$55.9~~percentage ~~million~~of ~~in 2005~~revenues ~~from~~during ~~$45.1 million for~~ the ~~prior~~third quarter ~~year period, primarily as a result~~ of ~~increased~~ ~~revenues~~fiscal ~~and~~year ~~margins~~2006 ~~and~~compared ato ~~decrease~~the inthird ~~SG&A~~quarter ~~expenses~~of asfiscal ayear 2005 ~~percentage~~primarily ofdue ~~revenues.~~to:

~~Interest~~• a higher ~~expense,~~level ~~net. Net~~of ~~interest~~full-price ~~expense~~sales ~~was~~generated ~~$10.9~~by ~~million~~our inSpecialty ~~2005 and~~Retail ~~$11.8~~Stores ~~million~~as well ~~for~~as ~~the~~higher ~~prior~~initial ~~year period.~~markups;

~~The~~• a lower level of net ~~decrease~~markdowns inby ~~net~~our ~~interest~~Specialty ~~expense~~Retail ~~was~~Stores due to ~~increases~~both a later markdown cadence and a higher level of markdown allowances earned in: the third quarter of fiscal year 2006 compared to the third quarter of fiscal year 2005; offset, in part, by

• ~~interest~~ a ~~income~~higher ~~generated~~level of net markdowns by ~~higher~~our ~~cash~~Direct ~~balances;~~Marketing segment.

~~• capitalized~~Consistent with industry business practice, we receive allowances from ~~interest~~certain ~~charges~~of ~~associated~~our vendors in support of the merchandise we purchase for resale. We receive certain allowances to reimburse us for markdowns taken and/or to support the gross margins realized in connection with ~~store~~the ~~construction~~sales of the vendor’s merchandise. We recognize these allowances as a decrease in COGS when the allowances are earned and ~~remodeling~~approved ~~activities~~by the vendor. Other allowances we receive represent reductions to the amounts paid to acquire the merchandise. We recognize these allowances as a reduction in the cost of the acquired merchandise resulting in a decrease in COGS at the time the goods are sold. We received vendor allowances of $7.5 million, or 0.7% of revenues, in the third ~~offset~~quarter ~~by;~~of fiscal year 2006 and $4.5 million, or 0.5% of revenues, in the third quarter of fiscal year 2005.

~~• an increase~~Selling, ingeneral ~~the~~and ~~interest~~administrative ~~expense~~expenses (excluding ~~attributable~~depreciation). toSG&A ~~the~~expenses ~~monthly distributions to~~were ~~the~~24.9% ~~holders~~ of revenues in the ~~Sold~~third ~~Interests~~quarter ~~that~~of ~~began~~fiscal toyear be2006 ~~charged~~compared to ~~interest~~25.8% ~~expense~~of revenues in ~~December 2003 as a result of~~ the ~~discontinuance~~prior ofyear ~~Off-Balance~~fiscal ~~Sheet Accounting~~period.

~~Income~~The ~~taxes. Our~~net ~~effective~~decrease ~~income~~in ~~tax~~SG&A ~~rate~~expenses ~~was~~as ~~38.5 percent~~a ~~for~~percentage ~~2005~~of ~~and~~revenues ~~36.5 percent for~~ in the ~~prior~~third ~~year period. In the second~~ quarter of ~~2004,~~fiscal ~~the~~year ~~Company recognized~~2006 ~~a net income tax benefit of $7.5 million related to favorable settlements associated with previous state tax filings. Excluding this benefit, the effective tax rate~~ was ~~39.0~~primarily ~~percent~~due ~~for 2004.~~to:

~~Outlook~~• lower expected annual incentive compensation costs of approximately 0.4% of revenues;

~~Based~~• a decrease ~~on current estimates, we anticipate increases~~ in ~~comparable~~our ~~store revenues~~payroll ofand 5employee tobenefit 7costs, ~~percent~~including ~~for~~medical ~~our~~and dental ~~fourth~~and ~~quarter~~workers’ ~~ending~~compensation ~~July 30~~expense, ~~2005. Comparable~~ ~~revenues increased~~ by ~~12.6~~ ~~percent~~approximately ~~in our quarter ended July 31, 2004~~0. ~~The~~2% ~~accuracy~~ of ~~our assumptions and forecasts~~revenues isprimarily ~~subject~~due to ~~uncertainties~~the ~~and~~leveraging ~~circumstances~~of ~~beyond~~these ~~our~~expenses ~~control. Consequently,~~on ~~actual~~a ~~results~~higher ~~could~~level ~~differ~~of ~~materially~~revenues ~~from~~in the ~~forecasted~~third ~~results. See~~quarter ~~“Factors That May Affect Future Results” for a discussion~~ of ~~items~~fiscal ~~and~~year ~~events that could cause our actual results to vary from our expectations.~~2006;

~~Inflation and Deflation~~29

~~We believe changes in revenues and net earnings that have resulted from~~• a ~~inflation~~decrease ~~or deflation have not been material during the periods presented. In recent years, we have experienced certain inflationary conditions related to 1) increases~~ in ~~product~~ costs ~~due~~incurred ~~primarily~~ to ~~changes~~support inour ~~foreign~~credit ~~currency~~card ~~exchange~~operations ~~rates~~subsequent ~~that have~~to ~~reduced~~ the ~~purchasing~~Credit ~~power~~Card ofSale ~~the U.S. dollar and 2) increases in SG&A. We attempt to offset the effects~~ of ~~inflation~~approximately ~~through control of expenses and price increases, although our ability to increase prices may be limited by competitive factors~~0. We1% ~~attempt to offset the effects~~ of ~~merchandise~~ deflation, which has occurred on a limited basis in recent years, through control of expenses. There is no assurance, however, that inflation or deflation will not materially affect our operations in the future.revenues;

20• a decrease in pension, SERP and post-retirement expenses of approximately 0.1% of revenues primarily driven by both lower discount rates and the revaluation of our related benefit obligations in connection with purchase accounting adjustments required in connection with the Acquisition; and

~~LIQUIDITY AND~~• a ~~CAPITAL~~decrease ~~RESOURCES~~in professional fees and legal fees of approximately 0.1%.

~~Our~~These ~~cash~~decreases ~~requirements~~in ~~consist~~SG&A ~~principally~~expenses, as a percentage of: revenues, were partially offset by management services fees of $2.6 million, or 0.2% of revenues, payable to the Sponsors as a result of the Acquisition.

• Income from credit card operations, net. We received HSBC Program Income of $15.1 million, or 1.5% of revenues, in the ~~funding~~third quarter of ~~our~~fiscal ~~accounts~~year ~~receivable~~2006 ~~and~~compared ~~merchandise~~to ~~purchases;~~net finance charge income of $19.0 million, or 2.0% of revenues, in the third quarter of fiscal year 2005.

~~• capital~~Depreciation expense. Depreciation ~~expenditures~~expense ~~for~~was ~~new~~$32.9 ~~store~~million, ~~growth~~or 3.2% of revenues, ~~store~~in ~~renovations~~the third quarter of fiscal year 2006 compared to $27.6 million, or 3.0% of revenues, in the prior year fiscal period. The increase in depreciation expense was primarily due to 1) a higher level of capital spending in recent years and ~~upgrades~~2) additional depreciation expense resulting from the revaluation of our property and equipment at fair ~~management~~value ~~information~~in ~~systems;~~connection with the Acquisition.

~~• debt~~Amortization expense. Amortization ~~service~~of ~~requirements;~~acquisition related intangibles (customer lists and favorable lease commitments) recorded as a result of the application of purchase accounting in connection with the Acquisition aggregated $18.2 million, or 1.8% of revenues, for the third quarter of fiscal year 2006. We had no amortization expense in the third quarter of fiscal year 2005.

~~• obligations~~Segment operating earnings. Segment ~~related~~operating earnings for our Specialty Retail Stores and Direct Marketing segments do not reflect the impact of adjustments to revalue our ~~Pension~~assets ~~Plan~~and liabilities to estimated fair value at the Acquisition date. See Note 11 to our unaudited condensed consolidated financial statements.

~~Our~~Operating ~~working~~earnings ~~capital~~for ~~requirements~~our ~~fluctuate~~Specialty ~~during~~Retail Stores segment were $142.6 million, or 17.0% of Specialty Retail Stores revenues, for the third quarter of fiscal year 2006 compared to $125.8 million, ~~increasing~~or 16.4% of Specialty Retail ~~substantially~~Stores ~~during~~revenues, for the ~~first~~prior year fiscal period. This increase in operating earnings and ~~second~~operating ~~quarters~~margin was primarily due to 1) lower product costs driven by a lower level of ~~each~~net ~~fiscal~~markdowns ~~year~~and 2) lower SG&A expenses for payroll and related benefits, as a percentage of revenues, as a result of the leveraging of these expenses on a higher ~~seasonal~~level ~~levels~~of revenues in the third quarter of ~~accounts~~fiscal ~~receivable~~year 2006 and ~~inventory. We~~lower ~~typically~~incentive ~~finance~~compensation ~~the~~costs. ~~increases~~These inpositive ~~working~~effects ~~capital~~on ~~needs~~Specialty ~~during~~Retail ~~the~~operating ~~first~~earnings ~~and~~margin ~~second~~were ~~fiscal~~offset, ~~quarters~~in ~~with~~part, ~~cash~~by ~~flows~~1) ~~from~~a ~~operations,~~lower ~~cash~~level ~~provided~~of income from our credit card operations due to the ~~Credit~~sale ~~Card~~of our ~~Facility~~credit card operations to HSBC in July 2005 and 2) higher depreciation charges ~~borrowings~~as ~~under~~a ~~our~~result ~~$350~~of ~~million~~higher ~~unsecured~~levels ~~Credit~~of ~~Agreement~~capital expenditures for new stores and store remodels in recent years.

~~Our~~Operating ~~primary~~earnings ~~sources~~for ~~of short-term~~Direct ~~liquidity~~Marketing ~~are~~increased ~~comprised~~to of$23.0 ~~cash~~million, ~~on hand and availability under our~~or ~~Credit Agreement~~15. As1% of ~~April 30, 2005,~~Direct weMarketing ~~had~~revenues, ~~cash~~in ~~and~~the ~~cash~~third ~~equivalents~~quarter of ~~$337.6~~fiscal ~~million~~year ~~and no outstanding~~2006 ~~borrowings~~from ~~under~~$16.8 ~~our~~million, ~~Credit~~or ~~Agreement~~12. ~~Our~~9% ~~cash~~of ~~and~~Direct ~~cash~~Marketing ~~equivalents~~revenues, ~~consisted~~for ~~principally~~the ofprior ~~invested cash and~~year ~~store operating cash~~period. At ~~May 1, 2004,~~The weincrease ~~had~~in ~~cash~~operating ~~and~~earnings ~~cash equivalents of $312.0 million~~ and nooperating ~~outstanding borrowings~~margin ~~under~~for ~~a previous $300 million unsecured revolving credit~~Direct ~~facility. The~~Marketing ~~amount~~is ofprimarily ~~cash on hand and borrowings under~~ the ~~credit~~result ~~facility~~of ~~are~~1) ~~influenced~~higher byproduct amargins ~~number~~and of2) ~~factors,~~the ~~including~~decrease ~~revenues,~~in ~~accounts~~advertising ~~receivable~~ and ~~inventory~~marketing ~~levels~~costs, ~~vendor~~as ~~terms,~~a ~~the level~~percentage of ~~capital expenditures~~revenues, incurred ~~cash requirements related~~ to ~~financing instruments,~~support ~~Pension~~internet ~~Plan funding obligations and tax payment obligations, among others~~sales.

We believe that operating cash flows, currently available vendor financing and amounts available pursuant to our Credit Agreement should be sufficient to fund our operations and debt service requirements, including repayment of the $225 million Credit Card Facility, Pension Plan funding requirements, contractual obligations and commitments and currently anticipated capital expenditure requirements through the end of 2005.30

WeInterest ~~generated cash from operations~~expense, ~~prior to changes in operating assets and liabilities, of $339~~net.~~2 million in 2005 compared to $285.0 million in prior~~ ~~year period. This $54.2 million increase in cash generated from operations was due to higher sales and earnings levels realized in 2005.~~ Net ~~cash~~interest ~~provided~~expense ~~by operating activities~~ was $~~190~~67.02 million in ~~2005. In~~ the ~~presentation~~third ofquarter ~~net cash flows used for operating activities in 2004~~ of ~~$46.5~~fiscal ~~million in the accompanying statement~~year of2006 ~~cash flows, the cash generated from operations was reduced by the increase in the undivided interests in the NMG Credit Card Master Trust~~ and ~~accounts receivable from~~ $~~265~~2.79 million atfor ~~August 2,~~the ~~2003~~prior toyear ~~$599.6~~fiscal ~~million~~year ~~at May 1, 2004~~period. ~~This~~ ~~increase~~The ~~in accounts~~significant ~~receivable~~components ~~is attributable both to a higher investment in accounts receivable due to higher revenues during 2005 and the discontinuance~~ of ~~Off-Balance~~interest ~~Sheet Accounting~~expense ~~beginning~~are ~~in December 2003,~~ as ~~more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.~~follows:

Net cash used for investing activities was $173.9 million in 2005 compared to $83.2 million in the prior year period. The increase in cash used for investing activities in 2005 was primarily due to a higher level of capital expenditures in 2005 and the $37.5 million of cash restricted as of April 30, 2005 for the repayment of the outstanding indebtedness on our Credit Card Facility, offset by $14.4 million of proceeds from the sale of Chef’s Catalog in 2005.

(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

~~Capital~~The ~~expenditures~~increase ~~were $150.8 million~~ in ~~2005~~interest ~~and~~expense ~~$83.2~~was ~~million~~due ~~in the prior year period. We incurred capital expenditures in the third quarter of 2005 related~~ to the ongoing construction of new stores in San Antonio, Texas and Boca Raton, Florida and the remodels of our San Francisco, Houston, Los Angeles and Newport Beach stores. We currently project capital expenditures for 2005 to be approximately $200 million to $210 million primarily for new store construction, store renovations and upgrades to information systems, including warehousing systems to support our Direct Marketing operation and a new human capital management system3. In3 ~~support of~~billion ~~our store construction and renovation activities, we expect to receive~~increase ~~construction allowances of $20 million to $25 million~~ in ~~2005. We~~debt ~~completed~~incurred ~~the renovation of our store~~ in ~~Newport~~ ~~Beach~~connection inwith the ~~third quarter of 2005 and we are currently remodeling our stores in Los Angeles, San Francisco and Houston~~Transactions. We expect to complete the expansion and renovation of the Los Angeles store in the fourth quarter of 2005 and the San Francisco and Houston stores in the spring of fiscal year 2006. We expect to open our San Antonio and Boca Raton stores in the first quarter of fiscal year 2006.

21Income taxes. Our effective income tax rate for the thirteen weeks ended April 29, 2006 was 38.1% compared to 38.5% for the thirteen weeks ended April 30, 2005.

~~Financing~~The ~~Structure~~Company’s federal tax returns for fiscal years 2004 and 2003 are currently under examination by the Internal 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 IRS upon the completion of their examinations. We will continue to monitor the progress of the IRS examinations and review our recorded tax liabilities for potential audit assessments. Adjustments to increase or decrease the recorded tax liabilities may be required in the future as additional facts become known.

~~Our~~Combined ~~major~~Thirty-nine ~~sources~~Weeks ofEnded ~~funds~~April ~~are comprised of vendor financing~~29, ~~the $350 million unsecured Credit Agreement, the $225~~2006 ~~million~~Compared ~~Credit~~to ~~Card~~Thirty-nine ~~Facility,~~Weeks ~~$125~~Ended ~~million~~April ~~senior unsecured notes~~30, ~~$125 million senior unsecured debentures, operating leases and capital leases.~~2005

AtRevenues. ~~April 30, 2005,~~Our weyear-to-date ~~had~~fiscal ~~$187.5~~year ~~million~~2006 ~~borrowings~~revenues ~~under~~of ~~our Credit Card Facility~~$3,234. ~~Repayment~~9 ofmillion ~~this~~increased ~~obligation began in April 2005~~$264.4 inmillion, ~~six~~or ~~monthly~~8.9%, ~~installments~~from of $372,970.5 million~~. Borrowings~~ ~~pursuant~~in the year-to-date ~~the~~fiscal ~~Credit~~year ~~Card~~2005 period, ~~Facility~~reflecting ~~bear~~increases ~~interest~~in atcomparable ~~the contractually-defined~~revenues, ~~rate~~revenues offrom ~~one~~new ~~month~~stores and ~~LIBOR~~higher ~~plus~~internet 0sales.27 ~~percent~~Revenues ~~(3.22~~increased ~~percent at~~in ~~April 30,~~the ~~2005)~~year-to-date ~~and~~fiscal ~~are~~year 2006 ~~payable~~period ~~monthly~~compared to the ~~holders~~prior ofyear ~~the~~period ~~Class A~~at all our operating companies, ~~Certificates~~except for Kate Spade.

InComparable ~~the~~revenues ~~second~~in ~~quarter~~the ofyear-to-date ~~2005,~~fiscal ~~our~~year ~~Board of~~2006 ~~Directors~~ period increased ~~our~~7.1% ~~quarterly~~compared ~~cash~~to ~~dividend~~the prior year-to-date $0period.15 ~~per~~Comparable ~~share from~~revenues $0increased 6.132% ~~per~~for ~~share~~Specialty inRetail ~~the~~Stores, ~~prior year quarter~~13. We4% ~~declared~~for ~~dividends~~Direct onMarketing ~~April 29,~~and ~~2005 aggregating $7~~0.49% ~~million. These~~for ~~dividends~~the ~~were~~Brand ~~paid~~Development Companies in ~~May 2005~~the year-to-date fiscal year 2006 period.

InNew ~~prior~~stores ~~years,~~generated ~~our~~sales ~~Board~~ of ~~Directors~~$88.1 ~~authorized~~million ~~various~~in ~~stock repurchase~~the ~~programs~~year-to-date ~~and~~fiscal year ~~increases~~2006 inperiod. In the ~~number~~year-to-date offiscal ~~shares~~year ~~subject~~2006 toperiod, internet sales ~~repurchase~~by Direct Marketing were $310. We0 ~~did~~million, ~~not~~an ~~repurchase~~increase ~~any shares~~of in33.1% from the year-to-date ~~third~~fiscal ~~quarter~~year of 2005 period, excluding Chef’s Catalog. As Total revenues of ~~April 30,~~Chef’s ~~2005,~~Catalog ~~approximately~~(prior 1to its sale in November 2004) of $13.29 million ~~shares~~are included ~~remain~~in ~~available~~consolidated revenues for ~~repurchase~~ ~~under~~ the ~~stock~~year-to-date ~~repurchase~~fiscal ~~programs~~year 2005 period.

~~Off-Balance Sheet Arrangements~~31

~~Pursuant~~Cost ~~to a revolving Credit Card Facility, we transfer substantially all~~ of ~~our~~goods ~~credit~~sold ~~card~~including ~~receivables~~buying ~~to a wholly-owned subsidiary, Neiman Marcus~~and ~~Funding~~occupancy ~~Corporation,~~costs ~~which in turn sells such receivables to the Neiman Marcus Credit Card Master Trust~~ (~~Trust~~excluding depreciation). At ~~the inception~~COGS ~~of the Credit Card Facility in September 2000, the Trust issued~~for ~~certificates representing undivided interests in~~ the ~~credit card receivables~~ year-to ~~third~~-~~party~~date ~~investors~~fiscal inyear ~~the~~2006 ~~face~~period ~~amount~~and ~~of $225 million (Sold Interests). We hold certificates representing interests in~~ the ~~credit card portfolio equal~~ year-to-date ~~the~~fiscal ~~excess~~year ~~of the balance of the credit~~2005 ~~card~~period portfolio over $225 million (Retained Interests). In order to maintain the committed level of securitized assets, the Trust uses cash collections on the securitized receivables to purchase new credit card balances from us in accordance with the terms of the Credit Card Facility.were:

From the inception of the Credit Card Facility until December 2003, our transfers and sales of credit card receivables pursuant to the terms of the Credit Card Facility were accounted for as sales (Off-Balance Sheet Accounting). As a result, we removed the $225 million of credit card receivables sold from our balance sheet at the inception of the Credit Card Facility and our $225 million repayment obligation to the holders of the certificates representing the Sold Interests was not required to be shown as a liability on our consolidated balance sheet.

	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	%

AsWe ~~more~~present ~~fully described in Note 6 of~~ the ~~Notes~~non-GAAP tofinancial ~~Condensed Consolidated~~measure ~~Financial Statements~~COGS, ~~beginning~~before inpurchase accounting ~~December 2003,~~adjustments ~~subsequent transfers~~because towe ~~the~~use ~~Trust~~this ~~ceased~~measure to ~~qualify~~monitor ~~for~~and ~~Off-Balance~~evaluate ~~Sheet~~the performance ~~Accounting. Rather,~~of ~~credit~~our ~~card~~business ~~receivables~~and ~~transferred to~~believe the ~~Trust~~presentation ~~after~~of ~~November 2003~~this ~~remain~~measure ~~on our balance sheet and are~~will ~~recorded~~enhance asinvestors’ ~~secured~~ability ~~borrowings. Our entire~~to ~~credit~~analyze ~~card~~trends ~~portfolio is now included~~ in ~~accounts~~our ~~receivable~~business and ~~the~~evaluate our ~~outstanding~~performance ~~borrowings~~relative ~~under~~to ~~the~~other ~~Credit~~companies ~~Card Facility are shown as a liability~~ in our ~~condensed consolidated balance sheet~~industry.

~~Beginning~~The increase in ~~March 2005,~~COGS ~~cash~~as ~~collections~~reported ~~were~~under ~~used~~GAAP ~~by the Trust~~ to ~~begin~~62.2% ~~repayment~~ of ~~the~~revenues ~~$225 million principal balance of the Class A~~from ~~Certificates in six monthly installments of $37~~61.52% ~~million. As~~ of ~~April 30,~~revenues ~~2005,~~in the ~~Trust~~prior ~~had~~year ~~made the~~fiscal ~~first~~period ~~installment~~primarily ~~repayment~~reflects of $3742.5 ~~million to reduce the principal~~ ~~balance of the Class A Certificates to $187.5~~ million~~. In~~ ~~addition, we held cash~~ of ~~$37.5~~purchase ~~million~~accounting ~~at April 30,~~adjustments ~~2005,~~recorded ~~generated from collections received~~ in ~~April 2005~~connection onwith the ~~our~~Transactions. ~~credit~~COGS ~~card~~before ~~receivables,~~purchase ~~restricted~~accounting toadjustments ~~the~~was ~~payment~~60.9% of ~~the second~~revenues ~~installment~~compared ~~repayment required~~ to be61.2% ~~made~~of byrevenues in the ~~Trust~~prior inyear ~~May 2005.~~reflecting:

22• a decrease in product costs by approximately 0.2% of revenues; and

~~OTHER~~• a ~~MATTERS~~decrease in buying and occupancy costs by approximately 0.1% of revenues, primarily due to leveraging payroll and rent expense on a higher level of revenues in the year-to-date fiscal year 2006 period.

~~Factors~~We had lower product costs as a percentage of revenues during the ~~That~~year-to-date ~~May Affect~~fiscal ~~Future~~year ~~Results~~2006 period compared to the year-to-date fiscal year 2005 period primarily due to:

~~Matters~~• a ~~discussed~~higher inlevel ~~MD&A~~of ~~include forward~~full-~~looking~~price ~~statements. Forward-looking~~sales ~~statements~~generated ~~generally can be identified~~ by the use of forward-looking terminology such as “may,” “will,” “plan,” “project,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,” “should,” “anticipate,” or “believe.” We make these forward-looking statements based on our ~~expectations~~Specialty ~~and~~Retail ~~beliefs~~Stores ~~concerning future events,~~ as well as ~~currently~~higher ~~available~~initial ~~data. These forward~~mark-~~looking~~ups ~~statements~~at ~~involve~~both ~~a number~~Specialty ofRetail ~~risks~~Stores and ~~uncertainties and, therefore, are not guarantees of future~~Direct performance. A variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in our forward-looking statements. Factors that could affect future performance include, but are not limited, to:Marketing;

~~Political~~• a lower level of net markdowns by our Specialty Retail Stores due to both a later markdown cadence and ~~General~~a ~~Economic~~higher ~~Conditions~~level of markdown allowances earned in the third quarter of fiscal year 2006 compared to the third quarter of fiscal year 2005; offset, in part, by

• ~~current~~an ~~political~~increase in the level of net markdowns at Direct Marketing for the year-to-date period and ~~general~~at ~~economic~~our ~~conditions~~Specialty orRetail ~~changes~~Stores infor ~~such~~the ~~conditions;~~first and second quarters of fiscal year 2006.

~~• terrorist~~Consistent with industry business practice, we receive allowances from ~~activities~~certain of our vendors in support of the ~~United~~merchandise ~~States;~~we purchase for resale. We receive certain allowances to reimburse us for markdowns taken and/or to support the gross margins realized in connection with the sales of the vendor’s merchandise. We recognize these allowances as a decrease in COGS when the allowances are earned and approved by the vendor. Other allowances we receive represent reductions to the amounts paid to acquire the merchandise. We recognize these allowances as a reduction in the cost of the acquired merchandise resulting in a decrease in COGS at the time 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 2005 period.

~~• political~~Selling, general and administrative expenses ~~social,~~(excluding ~~economic,~~depreciation). orSG&A ~~other~~expenses ~~events~~were 24.5% ~~resulting~~of revenues in the ~~short~~year-to-date orfiscal ~~long-term disruption~~year in2006 ~~business~~period atcompared ~~our~~to ~~stores,~~25.2% of ~~distribution~~revenues ~~centers~~in orthe ~~offices;~~prior year fiscal year period.

~~Customer~~The ~~Demographic~~net ~~Issues~~decrease in SG&A expenses as a percentage of revenues in the year-to-date fiscal year 2006 period was primarily due to:

• ~~changes~~a decrease in ~~the~~marketing ~~demographic~~and oradvertising ~~retail~~costs ~~environment~~of approximately 0.4% of revenues primarily due to higher internet sales by our Direct Marketing segment, which have a lower expense to revenue ratio than catalog sales;

• ~~changes~~a decrease in ~~consumer~~our ~~confidence~~payroll ~~resulting~~and inemployee abenefit ~~reduction~~costs, including medical and dental and workers’ compensation expense, by approximately 0.2% of ~~discretionary~~revenues ~~spending~~primarily due to the leveraging of these expenses on ~~goods~~ ~~that~~a ~~are,~~higher orlevel ~~are~~of ~~perceived~~revenues in the year-to-date ~~be,~~fiscal ~~“luxuries”~~year 2006 period;

~~• changes in consumer preferences or fashion trends;~~32

• ~~changes~~lower inexpected ~~our~~annual ~~relationships~~incentive ~~with~~compensation ~~key~~costs ~~customers~~of approximately 0.2% of revenues;

• ~~changes~~a decrease in ~~our~~costs ~~proprietary~~incurred to support our credit card ~~arrangement~~operations ~~that~~subsequent ~~adversely~~to the ~~impact~~Credit ~~our~~Card ~~ability~~Sale ~~to provide~~of ~~consumer~~approximately ~~credit~~0.1% of revenues; and

~~Merchandise~~• a decrease ~~Procurement~~in pension, SERP and ~~Supply~~post-retirement ~~Chain~~expenses ~~Considerations~~of approximately 0.1% of revenues primarily driven by both lower discount rates and the revaluation of our related benefit obligations in connection with purchase accounting adjustments required in connection with the Acquisition.

~~• changes in~~These ~~our~~decreases ~~relationships~~in ~~with~~SG&A ~~designers~~expenses, ~~vendors~~as ~~and~~a ~~other~~percentage ~~sources~~ of ~~merchandise~~revenues, were ~~including~~partially ~~adverse~~offset ~~changes in their financial viability;~~by:

• ~~delays~~an increase in ~~receipt~~preopening ofexpenses ~~merchandise~~and ~~ordered~~store ~~due~~remodeling toexpenses ~~work~~primarily ~~stoppages and/or~~incurred ~~other~~in ~~causes~~connection with the opening of ~~delay~~our San Antonio store in ~~connection~~September 2005 ~~with~~and ~~either~~our ~~the~~Boca ~~manufacture or~~Raton ~~shipment~~store ofin ~~such~~November ~~merchandise~~2005 by approximately 0.2% of revenues;

• ~~changes~~management inservices ~~foreign~~fees ~~currency~~of ~~exchange~~$6.4 ~~rates;~~million, or 0.2% of revenues, payable to the Sponsors as a result of the Acquisition.

~~• significant~~Income ~~increases~~from credit card operations, net. We received HSBC Program Income of $43.7 million, or 1.4% of revenues, in ~~paper~~the year-to-date fiscal year 2006 period compared to net finance charge income of $52.4 million, ~~printing~~or ~~and~~1.8% ~~postage~~of revenues, in the year-to-date fiscal year 2005 ~~costs;~~period.

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

~~• competitive~~Amortization expense. Amortization ~~responses~~of toacquisition ~~our~~related ~~marketing,~~intangibles ~~merchandising~~(customer lists and ~~promotional~~favorable ~~efforts~~lease commitments) ~~and/or~~recorded as a result of the application of purchase accounting in ~~inventory~~connection ~~liquidations~~with bythe ~~vendors~~Acquisition aggregated $42.0 million, or ~~other~~1.3% ~~retailers;~~of revenues, for the year-to-date fiscal year 2006 period. We had no amortization expense in the prior year period.

~~• seasonality~~Transaction and other costs. During the period July 30, 2005 to October 1, 2005, we expensed $23.5 million in connection with the Transactions. These costs consisted of $4.5 million of accounting, investment banking, legal and other costs associated with the Transactions ~~retail~~and ~~business;~~a $19.0 million non-cash charge for stock compensation resulting from the accelerated vesting of Predecessor stock options and restricted stock.

~~• adverse~~Segment operating earnings. Segment ~~weather~~operating ~~conditions~~earnings orfor ~~natural~~our ~~disasters,~~Specialty ~~particularly~~Retail ~~during~~Stores ~~peak~~and ~~selling~~Direct Marketing ~~seasons;~~segments do not reflect the impact of adjustments to revalue our assets and liabilities to estimated fair value at the Acquisition date. See Note 11 to our unaudited condensed consolidated financial statements.

~~• delays~~Operating earnings for our Specialty Retail Stores segment were $372.4 million, or 14.2% of Specialty Retail Stores revenues, for the year-to-date fiscal year 2006 period compared to $343.8 million, or 14.2% of Specialty Retail Stores revenues, for the prior year period. Operating margin for Specialty Retail Stores was positively impacted by 1) higher product margins, 2) lower SG&A expenses for compensation and related benefits, as a percentage of revenues, as a result of leveraging these expenses on a higher level of revenues in ~~anticipated~~the ~~store~~year-to-date ~~openings~~fiscal year 2006 period and ~~renovations;~~3) the leveraging of buying and occupancy costs on a higher level of revenues. These effects were offset, in part, by 1) a lower level of income from our credit card operations due to the sale of our credit card operations to HSBC in July 2005, 2) higher preopening costs and 3) higher depreciation charges as a result of higher levels of capital expenditures for new stores and store remodels in recent years.

~~Employee~~Operating ~~Considerations~~earnings for Direct Marketing increased to $75.5 million, or 15.0% of Direct Marketing revenues, in the year-to-date fiscal year 2006 period from $55.9 million, or 12.2% of Direct Marketing revenues, for the prior year period. The increase in operating earnings and operating margin for Direct Marketing was primarily the result of 1) higher product margins and 2) the decrease in advertising and marketing costs, as a percentage of revenues, incurred to support internet sales.

~~• changes in key management personnel;~~33

~~• changes~~Interest expense, net. Net interest expense was $149.8 million in ~~our~~the ~~relationships~~year-to-date ~~with~~fiscal ~~certain~~year 2006 period and $10.9 million for the prior year period. The significant components of ~~our~~interest ~~key~~expense ~~sales~~are ~~associates;~~as follows:

Legal and Regulatory Issues

(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

~~• changes~~The increase in interest expense is due to the $3.3 billion increase in debt incurred in ~~government~~connection orwith ~~regulatory~~the ~~requirements~~Transactions. ~~increasing~~The ~~our~~increase ~~costs~~in ofinterest income ~~operations;~~was due primarily to interest earned on higher average invested balances after the Credit Card Sale in July 2005 and prior to the Transactions.

23Income taxes. Our effective income tax rate was 38.5% for the thirty weeks ended April 29, 2006. Our effective income tax rate for the nine weeks ended October 1, 2005 was 37.0%, resulting in an effective tax rate of 37.9% for the combined year-to-date fiscal 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 income earned during the period on higher cash balances maintained subsequent to the Credit Card Sale. Our effective income tax rate was 38.5% for the thirty-nine weeks ended April 30, 2005 and was also favorably impacted by tax-exempt interest income.

~~• litigation~~The Company’s federal tax returns for fiscal years 2004 and 2003 are ~~that~~currently ~~may~~under ~~have~~examination anby ~~adverse~~the ~~effect~~Internal onRevenue Service (IRS). We believe our ~~financial~~recorded ~~results~~tax liabilities as of April 29, 2006 are sufficient to cover any potential assessments to be made by the IRS upon the completion of their examinations. We will continue to monitor the progress of the IRS examinations and review our recorded tax liabilities for potential audit assessments. Adjustments to increase or ~~reputation;~~decrease the recorded tax liabilities may be required in the future as additional facts become known.

~~Other~~Inflation ~~Factors~~and Deflation

~~• impact~~We believe changes in revenues and net earnings that have resulted from ofinflation ~~funding~~or ~~requirements~~deflation have not been material during the periods presented. In recent years, we have experienced certain inflationary conditions related to 1) increases in product costs due primarily to changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and 2) increases in SG&A. We purchase a substantial portion of our ~~noncontributory~~inventory ~~defined~~from foreign ~~benefit~~suppliers ~~pension~~whose costs are affected by the fluctuation of their local ~~plan~~currency against the dollar or who price their merchandise in currencies other than the dollar. Accordingly, changes in the value of the dollar relative to foreign currencies may increase our cost of goods sold and if we are unable to pass such cost increases to our customers, our gross margins, and ultimately our earnings, would decrease. Fluctuations in the euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in numerous currencies and, generally, by fluctuations in the U.S. dollar relative to such currencies. Although we hedge some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, foreign currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future. We attempt to offset the effects of inflation through price increases and control of expenses, although our ability to increase prices may be limited by competitive factors. We attempt to offset the effects of merchandise deflation, which has occurred on a limited basis in recent years, through control of expenses. There is no assurance, however, that inflation or deflation will not materially affect our operations in the future.

~~• the design and implementation of new information systems as well as enhancements of existing systems.~~34

~~We undertake no obligation to update or revise (publicly or~~LIQUIDITY ~~otherwise)~~AND ~~any~~CAPITAL ~~forward-looking statements to reflect subsequent events, new information or future circumstances.~~RESOURCES

~~Critical~~Our ~~Accounting~~cash requirements consist ~~Policies~~principally of:

The preparation of condensed financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions about future events. These estimates and assumptions affect amounts of assets, liabilities, revenues and expenses and • the ~~disclosure of gain and loss contingencies at the date of the~~ ~~Condensed~~funding Consolidated Financial Statements. While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of ~~future events were made. We evaluate~~ our ~~estimates~~merchandise and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates we used in preparing the accompanying Condensed Consolidated Financial Statements.purchases;

~~See Note 1 of the Notes to~~• capital ~~Condensed~~expenditures ~~Consolidated Financial Statements in Item 1~~ for anew ~~summary~~store ofconstruction, ~~our critical~~store ~~accounting~~renovations ~~policies. A~~and ~~complete description~~upgrades of our ~~critical accounting policies is included in our amendment to~~ ~~the~~management ~~Annual~~information ~~Report to Shareholders on Form 10-K/A for the fiscal year ended July 31, 2004.~~systems;

~~Reclassification – Loyalty Programs. As more fully described in Note 1, a~~• debt ~~substantial~~service portion of the points earned by customers in connection with our loyalty programs are redeemed for gift cards. At the time the qualifying sales giving rise to the loyalty program points are made, we defer the portion of the revenues on the qualifying sales transactions equal to our estimate of the retail value of the gift cards to be issued upon conversion of the points to gift cards. Beginning in the first quarter of 2005, we began to record the deferral of revenues related to gift card awards under our loyalty programs as a reduction of revenues. Previously, we charged such amounts to selling, general and administrative expenses. In addition, we now charge the cost of all other awards under our loyalty programs to cost of goods sold rather than SG&A. These changes in classification do not impact the previously reported operating earnings, net income or earnings per share amounts.requirements;

~~Changes in Comparable Revenues. As more fully described in Note 2, we have~~• income ~~sold~~tax ~~our~~payments; ~~Chef’s Catalog operations. The changes in comparable revenues have been adjusted 1) to exclude the revenues of Chef’s Catalog operations for all periods prior to the sale~~ and ~~2) to give recognition to the change in classification of revenues deferred in connection with our loyalty programs and are summarized below:~~

	Total		Specialty Retail Stores		Direct Marketing
Fiscal Year 2004:
First quarter	10.9	%	9.6	%	13.2	%
Second quarter	12.7	%	10.2	%	25.7	%
Third quarter	22.0	%	22.2	%	14.4	%
Fourth quarter	12.6	%	11.3	%	21.7	%
Fiscal year 2004	14.4	%	13.1	%	19.2	%
Fiscal Year 2003:
First quarter	6.3	%	5.0	%	15.7	%
Second quarter	0.9	%	(2.1	)%	18.7	%
Third quarter	1.6	%	(0.6	)%	14.8	%
Fourth quarter	9.0	%	6.3	%	22.3	%
Fiscal year 2003	4.1	%	1.8	%	17.8	%

• obligations related to our Pension Plan.

24Our primary sources of short-term liquidity are comprised of cash on hand and availability under our Asset-Based Revolving Credit Facility. The amounts of cash on hand and borrowings under the Asset-Based Revolving Credit Facility are influenced by a number of factors, including revenues, working capital levels, vendor terms, the level of capital expenditures, cash requirements related to financing instruments and debt service obligations following the Transactions, Pension Plan funding obligations and our tax payment obligations, among others.

Our working capital requirements fluctuate during the fiscal year, increasing substantially during the first and second quarters of each fiscal year as a result of higher seasonal levels of inventories and accounts receivable (prior to the Credit Card Sale in July 2005). We have typically financed the increases in working capital needs during the first and second fiscal quarters with cash flows from operations and cash provided from borrowings under our credit facilities. During year-to-date fiscal year 2006 period, we financed our seasonal increases in working capital with cash flows from operations and borrowings under our Asset-Based Revolving Credit Facility. During the first quarter of fiscal year 2006, we borrowed $150 million under our Asset-Based Revolving Credit Facility. We repaid these borrowings in the second quarter of fiscal year 2006.

We believe that operating cash flows, available vendor financing and amounts available pursuant to our senior secured Asset-Based Revolving Credit Facility will be sufficient to fund our operations and debt service requirements, including Pension Plan funding requirements, contractual obligations and commitments, anticipated capital expenditure requirements and our debt service obligations, through the end of 2006.

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 2006 compared to $190.0 million in 2005. Cash flows related to operating activities were higher in the year-to-date fiscal year 2006 period primarily due to the Credit 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 receivable of $114.3 million while in the year-to-date fiscal year 2006 period (subsequent to the Credit Card Sale), we funded an increase in accounts receivable of $26.9 million.

Net cash used for investing activities was $5,294.9 million in the year-to-date fiscal year 2006 period which consisted of 1) $5,156.4 million paid in connection with the Acquisition 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 $150.8 million of capital expenditures and $37.5 million cash restricted for the repayment of the outstanding indebtedness on our Credit Card Facility, offset by $14.4 million in cash proceeds from the sale of Chef’s Catalog. We incurred capital expenditures in the year-to-date fiscal year 2006 period related to the construction of new stores in San Antonio and Boca Raton and the remodels of our San Francisco, Houston, Beverly Hills, Newport Beach and Bergdorf Goodman stores. We opened our San Antonio store in September 2005 and opened our Boca Raton store in November 2005.

Net cash provided by financing activities was $4,266.6 million in the year-to-date fiscal year 2006 period as compared to net cash used for financing activities of $46.9 million in the year-to-date fiscal year 2005 period. Proceeds from debt incurred in connection with the Transactions, net of issuance costs, aggregated $3,222.1 million and cash equity contributions received in connection with the Transactions 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-Based Revolving Credit Facility, paid $134.7 million for the redemption of our 2008 Notes pursuant to our call of such notes for redemption in connection with the Transactions and repaid $100.0 million principal amount of borrowings on the Senior Term Loan Facility.

Financing Structure

Our major sources of funds are comprised of vendor financing, a $600.0 million Asset-Based Revolving Credit Facility, $1,975.0 million Senior Secured Term Loan Facility, $700.0 million Senior Notes, $500.0 million Senior Subordinated Notes, $125.0 million 2028 Debentures and operating leases.

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

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