UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q/A

(Amendment #1)

 

ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended January 29, 2005

 

OR

 

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
incorporation or organization)

 

(I.R.S. Employer
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 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.

 

 

 

YES ý

 

NO o

 

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

 

 

 

YES ý

 

NO o

 

 

As of March 2, 2005, the number of outstanding shares of each of the issuer’s classes of common stock was:

 

Class

 

Outstanding Shares

 

 

 

 

 

Class A Common Stock, $.01 Par Value

 

29,521,377

 

Class B Common Stock, $.01 Par Value

 

19,422,379

 

 

 



 

Explanatory Note

 

This amendment to the Quarterly Report on Form 10-Q for The Neiman Marcus Group, Inc. for the period ended January 29, 2005 is being filed to correct errors in previously issued financial statements related to 1) the classification of construction allowances in the balance sheets and statements of cash flows and 2) the classification of changes in undivided interests in the NMG Credit Card Master Trust in the statements of cash flows.  See Note 9 in the Notes to Condensed Consolidated Financial Statements for a discussion of these corrections and a reconciliation of amounts previously reported to those shown herein.  We have also revised our discussion in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Information not affected by the corrections as described in Note 9 remains unchanged and reflects the disclosures made at the time of the original filing of the Form 10-Q on March 7, 2005.  Our previously reported net earnings, earnings per share and shareholders’ equity are not impacted by these corrections.

 



 

THE NEIMAN MARCUS GROUP, INC.

 

INDEX

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Condensed Consolidated Balance Sheets as of January 29, 2005, July 31, 2004 and January 31, 2004 (As Restated)

 

 

 

 

 

Condensed Consolidated Statements of Earnings for the Thirteen Weeks and Twenty-Six Weeks Ended January 29, 2005 and January 31, 2004

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended January 29, 2005 and January 31, 2004 (As Restated)

 

 

 

 

 

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)

 

January 29,
2005

 

July 31,
2004

 

January 31,
2004

 

 

 

(As Restated, See Note 9)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

377,857

 

$

368,367

 

$

251,658

 

Undivided interests in NMG Credit Card Master Trust

 

 

 

164,652

 

Accounts receivable, net of allowance of $11,259, $10,078 and $5,091

 

659,015

 

551,687

 

321,005

 

Merchandise inventories

 

726,169

 

720,277

 

658,177

 

Other current assets

 

79,679

 

65,835

 

75,985

 

Total current assets

 

1,842,720

 

1,706,166

 

1,471,477

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

793,715

 

750,483

 

733,374

 

Other assets

 

119,327

 

160,999

 

127,664

 

Total assets

 

$

2,755,762

 

$

2,617,648

 

$

2,332,515

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

241,946

 

$

289,282

 

$

227,121

 

Accrued liabilities

 

327,435

 

286,833

 

304,103

 

Notes payable and current maturities of long-term liabilities

 

2,200

 

1,563

 

845

 

Current portion of borrowings under Credit Card Facility

 

225,000

 

150,000

 

 

Total current liabilities

 

796,581

 

727,678

 

532,069

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

Notes and debentures

 

249,768

 

249,757

 

249,745

 

Borrowings under Credit Card Facility

 

 

75,000

 

111,326

 

Deferred real estate credits

 

69,276

 

71,898

 

74,519

 

Other long-term liabilities

 

118,862

 

112,455

 

90,884

 

Total long-term liabilities

 

437,906

 

509,110

 

526,474

 

 

 

 

 

 

 

 

 

Minority interest

 

11,664

 

10,298

 

10,729

 

 

 

 

 

 

 

 

 

Common stocks

 

497

 

492

 

492

 

Additional paid-in capital

 

510,119

 

491,849

 

481,598

 

Accumulated other comprehensive loss

 

(1,996

)

(4,536

)

(25,326

)

Retained earnings

 

1,026,652

 

905,330

 

828,525

 

Treasury stock, at cost (768,731 shares, 710,227 shares and 699,777 shares)

 

(25,661

)

(22,573

)

(22,046

)

Total shareholders’ equity

 

1,509,611

 

1,370,562

 

1,263,243

 

Total liabilities and shareholders’ equity

 

$

2,755,762

 

$

2,617,648

 

$

2,332,515

 

 

See Notes to Condensed Consolidated Financial Statements.

 

1



 

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

(in thousands, except per share data)

 

January 29,
2005

 

January 31,
2004

 

January 29,
2005

 

January 31,
2004

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,129,225

 

$

1,048,367

 

$

2,037,161

 

$

1,867,136

 

Cost of goods sold including buying and occupancy costs

 

761,989

 

718,986

 

1,316,699

 

1,229,336

 

Selling, general and administrative expenses

 

247,576

 

239,380

 

475,539

 

450,511

 

Loss on disposition of Chef’s Catalog

 

 

 

15,348

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

119,660

 

90,001

 

229,575

 

187,289

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

3,978

 

3,764

 

8,015

 

7,225

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and minority interest

 

115,682

 

86,237

 

221,560

 

180,064

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

44,326

 

26,132

 

85,301

 

62,724

 

 

 

 

 

 

 

 

 

 

 

Earnings before minority interest

 

71,356

 

60,105

 

136,259

 

117,340

 

 

 

 

 

 

 

 

 

 

 

Minority interest in net earnings of subsidiaries

 

(769

)

(934

)

(1,556

)

(1,944

)

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

70,587

 

$

59,171

 

$

134,703

 

$

115,396

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common and common equivalent shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

48,309

 

47,954

 

48,268

 

47,789

 

Diluted

 

49,454

 

48,897

 

49,293

 

48,647

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.46

 

$

1.23

 

$

2.79

 

$

2.41

 

Diluted

 

$

1.43

 

$

1.21

 

$

2.73

 

$

2.37

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



 

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Twenty-Six Weeks Ended

 

(in thousands)

 

January 29,
2005

 

January 31,
2004

 

 

 

(As Restated, See Note 9)

 

CASH FLOWS - OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

134,703

 

$

115,396

 

Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:

 

 

 

 

 

Depreciation

 

51,724

 

48,811

 

Loss on disposition of Chef’s Catalog

 

15,348

 

 

Minority interest

 

1,556

 

1,944

 

Other – primarily costs related to defined benefit pension and other long-term benefit plans

 

17,119

 

20,125

 

 

 

220,450

 

186,276

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease in undivided interests

 

 

77,913

 

Increase in accounts receivable

 

(106,830

)

(298,410

)

(Increase) decrease in merchandise inventories

 

(16,209

)

28,885

 

Decrease (increase) in other assets

 

15,187

 

(4,550

)

Decrease in accounts payable and accrued liabilities

 

(1,970

)

(3,410

)

Contribution to defined benefit pension plan

 

 

(30,000

)

(Decrease) increase in deferred real estate credits

 

(2,622

)

4,177

 

Other

 

(17,797

)

7,023

 

Net cash provided by (used for) operating activities

 

90,209

 

(32,096

)

 

 

 

 

 

 

CASH FLOWS - INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(95,121

)

(48,392

)

Proceeds from sale of Chef’s Catalog

 

14,419

 

 

Net cash used for investing activities

 

(80,702

)

(48,392

)

 

 

 

 

 

 

CASH FLOWS - FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from borrowings

 

4,750

 

1,000

 

Repayment of debt

 

(4,113

)

(1,000

)

Borrowings under Credit Card Facility

 

 

111,326

 

Acquisitions of treasury stock

 

(3,088

)

(7,026

)

Proceeds from stock-based compensation awards

 

16,273

 

21,560

 

Cash dividends paid

 

(12,664

)

 

Distribution paid

 

(1,175

)

(664

)

Net cash (used for) provided by financing activities

 

(17

)

125,196

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Increase during the period

 

9,490

 

44,708

 

Beginning balance

 

368,367

 

206,950

 

Ending balance

 

$

377,857

 

$

251,658

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

10,250

 

$

8,918

 

Income taxes

 

$

72,151

 

$

51,935

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



 

THE NEIMAN MARCUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.               Basis of Presentation

 

We have prepared the Condensed Consolidated Financial Statements of The Neiman Marcus Group, Inc. and its subsidiaries 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.

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter of 2005 relate to the thirteen weeks ended January 29, 2005 and all references to the second quarter of 2004 relate to the thirteen weeks ended January 31, 2004.  All references to 2005 relate to the twenty-six weeks ended January 29, 2005 and all references to 2004 related to the twenty-six weeks ended January 31, 2004.

 

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 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.

 

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 assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the Condensed Consolidated Financial Statements.  We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments 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 Condensed Consolidated Financial Statements.

 

We believe the following critical accounting policies, among others, encompass the more significant judgments and estimates used in the preparation of our financial statements:

 

                            Revenue recognition;

                            Valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage, and determination of cost of goods sold;

                            Determination of impairment of long-lived assets;

                            Recognition of income and expenses related to our previous securitization program;

                            Recognition of advertising and catalog costs;

                            Measurement of liabilities related to our loyalty programs;

                            Recognition of income taxes; and

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

 

A description of our critical accounting policies is included in our amendment to the Annual Report on Form 10-K/A for the fiscal year ended July 31, 2004.

 

4



 

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 purchase 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.

 

The following table illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation using the Black-Scholes option-pricing model for 2005 and 2004:

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

(in thousands, except per share data)

 

January 29,
2005

 

January 31,
2004

 

January 29,
2005

 

January 31,
2004

 

 

 

 

 

 

 

 

 

 

 

Net earnings:

 

 

 

 

 

 

 

 

 

As reported

 

$

70,587

 

$

59,171

 

$

134,703

 

$

115,396

 

Add: stock-based employee Compensation recorded under intrinsic value method, net of related taxes

 

1,371

 

843

 

2,303

 

1,367

 

Less: stock-based employee compensation expense determined under fair value based method, net of related taxes

 

(3,518

)

(3,001

)

(6,413

)

(5,568

)

Pro forma

 

$

68,440

 

$

57,013

 

$

130,593

 

$

111,195

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

1.46

 

$

1.23

 

$

2.79

 

$

2.41

 

Pro forma

 

$

1.42

 

$

1.19

 

$

2.71

 

$

2.33

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

1.43

 

$

1.21

 

$

2.73

 

$

2.37

 

Pro forma

 

$

1.38

 

$

1.17

 

$

2.65

 

$

2.29

 

 

The effects on pro forma net earnings and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net earnings for future periods due to such factors as the vesting periods of stock options and the potential issuance of additional stock options in future years.  In addition, the Black-Scholes option-pricing model has inherent limitations in calculating the fair value of stock options for which no active market exists since the model does not consider the inability to sell or transfer options, vesting requirements and a reduced exercise period upon termination of employment - all of which would reduce the fair value of the options.

 

5



 

Reclassification – Loyalty Programs.  A substantial 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 (SG&A).  In addition, we now charge the cost of all other awards under our loyalty programs to cost of goods sold (COGS) rather than SG&A.  These changes in classification do not impact the previously reported operating earnings, net income or earnings per share amounts.

 

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

 

(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

 

 

Recent Accounting Pronouncements.  In December 2003, the U.S. Congress enacted the Medicare Prescription Drug, Improvement and 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.  Additional legislation is anticipated that will clarify whether a company is eligible for the subsidy, the amount of the subsidy available and the procedures to be followed in obtaining the subsidy.  In May 2004, the FASB issued Staff Position 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” that provides guidance on the accounting and disclosure for the effects of the Act.  The legislation providing the final statutory definition of “actuarially equivalent” prescription drug benefits was enacted in January 2005.  We have not yet been able to determine whether the prescription drug benefits offered by our Postretirement Plan meet the statutory requirements related to actuarial equivalence.  We are currently finalizing the determination of actuarial equivalence as well as the impact, if any, on our Postretirement Plan.

 

2.               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 kitchenware with revenues of approximately $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 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 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.

 

6



 

3.               Operating Segments

 

We have identified two reportable 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, Horchow and Bergdorf Goodman brand 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).

 

Both the Specialty Retail Stores and Direct Marketing segments, as well as Kate Spade LLC and Gurwitch Products, LLC, derive their revenues from the sales 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:

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

(in thousands)

 

January 29,
2005

 

January 31,
2004

 

January 29,
2005

 

January 31,
2004

 

REVENUES:

 

 

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

911,982

 

$

831,775

 

$

1,648,872

 

$

1,496,249

 

Direct Marketing

 

188,183

 

191,484

 

327,982

 

319,490

 

Other

 

29,060

 

25,108

 

60,307

 

51,397

 

Total

 

$

1,129,225

 

$

1,048,367

 

$

2,037,161

 

$

1,867,136

 

 

 

 

 

 

 

 

 

 

 

OPERATING EARNINGS:

 

 

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

98,688

 

$

72,799

 

$

218,877

 

$

163,909

 

Direct Marketing

 

27,893

 

24,760

 

39,251

 

35,383

 

Other

 

2,809

 

3,403

 

5,669

 

7,070

 

Subtotal

 

129,390

 

100,962

 

263,797

 

206,362

 

Corporate expenses

 

(9,730

)

(10,961

)

(18,874

)

(19,073

)

Loss on disposition of Chef’s Catalog

 

 

 

(15,348

)

 

Total

 

$

119,660

 

$

90,001

 

$

229,575

 

$

187,289

 

 

4.               Stock Repurchase Program

 

In prior years, our Board of Directors authorized various stock repurchase programs and increases in the number of shares subject to repurchase.  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 January 29, 2005, approximately 1.2 million shares remain available for repurchase under our stock repurchase programs.

 

7



 

5.               Earnings per Share

 

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

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

(in thousands of shares)

 

January 29,
2005

 

January 31,
2004

 

January 29,
2005

 

January 31,
2004

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

48,865

 

48,304

 

48,798

 

48,191

 

Less: shares of non-vested restricted stock

 

(556

)

(350

)

(530

)

(402

)

Shares for computation of basic EPS

 

48,309

 

47,954

 

48,268

 

47,789

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options and restricted stock

 

1,145

 

943

 

1,025

 

858

 

Shares for computation of diluted EPS

 

49,454

 

48,897

 

49,293

 

48,647

 

 

 

 

 

 

 

 

 

 

 

Shares represented by antidilutive stock options

 

 

 

285

 

14

 

 

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.

 

6.               Undivided Interests in NMG Credit Card Master Trust

 

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.

 

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 $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.  During the period the transfers and sales qualified for Off-Balance Sheet Accounting, our Retained Interests were shown as “Undivided interests in NMG Credit Card Master Trust” on our consolidated balance sheets.

 

Beginning in December 2003, our subsequent 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.

 

8



 

As of the start of the Transition Period in December 2003, the carrying value of the Sold and Retained Interests exceeded face value by approximately $7.6 million as a result of the application of the provisions of current accounting rules related to the calculation of the gains on sale of the previous Sold Interests and the valuation of both Sold and Retained Interests.  During the Transition Period, the $7.6 million premium was amortized as a reduction of our net earnings from our credit card portfolio (recorded as a reduction of selling, general and administrative expenses in the consolidated statements of earnings).  Of the $7.6 million premium, $5.3 million was amortized in the second quarter of 2004.

 

A reconciliation of the outstanding balance of our accounts receivable to the balances recorded at January 29, 2005 and January 31, 2004 is as follows:

 

(in millions)

 

January 29,
2005

 

January 31,
2004

 

 

 

 

 

 

 

Credit card receivables, net

 

$

631.4

 

$

570.6

 

Other receivables

 

27.6

 

28.8

 

 

 

659.0

 

599.4

 

Less: Sold Interests originally qualifying for Off-Balance Sheet Accounting

 

 

(225.0

)

Add: debt brought back onto the balance sheet

 

 

111.3

 

Net balance

 

$

659.0

 

$

485.7

 

 

 

 

 

 

 

Amounts reflected in the balance sheet:

 

 

 

 

 

Undivided interests in NMG Credit Card Master Trust

 

$

 

$

164.7

 

Accounts receivable, net

 

659.0

 

321.0

 

 

 

$

659.0

 

$

485.7

 

 

 

 

 

 

 

Current portion of borrowings under Credit Card Facility

 

$

225.0

 

$

 

Borrowings under Credit Card Facility

 

$

 

$

111.3

 

 

After the Transition Period, our entire credit card portfolio is included in accounts receivable in our consolidated balance sheet and the $225 million repayment obligation is shown as a liability.

 

7.               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.

 

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.

 

9



 

 

Costs of Benefits.  The components of the expenses incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:       

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

(in thousands)

 

January 29,
2005

 

January 31,
2004

 

January 29,
2005

 

January 31,
2004

 

 

 

 

 

 

 

 

 

 

 

Pension Plan:

 

 

 

 

 

 

 

 

 

Service cost

 

$

3,196

 

$

2,935

 

$

6,392

 

$

6,103

 

Interest cost

 

4,636

 

4,469

 

9,271

 

9,292

 

Expected return on plan assets

 

(4,712

)

(4,481

)

(9,425

)

(9,316

)

Net amortization of losses and prior service costs

 

1,208

 

866

 

2,418

 

1,799

 

Pension Plan expense

 

$

4,328

 

$

3,789

 

$

8,656

 

$

7,878

 

 

 

 

 

 

 

 

 

 

 

SERP Plan:

 

 

 

 

 

 

 

 

 

Service cost

 

$

361

 

$

342

 

$

722

 

$

682

 

Interest cost

 

1,014

 

979

 

2,028

 

1,953

 

Net amortization of losses and prior service costs

 

384

 

367

 

768

 

733

 

SERP Plan expense

 

$

1,759

 

$

1,688

 

$

3,518

 

$

3,368

 

 

 

 

 

 

 

 

 

 

 

Postretirement Plan:

 

 

 

 

 

 

 

 

 

Service cost

 

$

15

 

$

20

 

$

29

 

$

40

 

Interest cost

 

318

 

386

 

636

 

770

 

Net amortization of losses

 

26

 

111

 

53

 

220

 

Postretirement Plan expense

 

$

359

 

$

517

 

$

718

 

$

1,030

 

 

Funding Policy and Plan Assets.  Our policy is to fund the Pension Plan at or above the minimum required by law.  In 2004, we made voluntary contributions of $30.0 million in the second quarter for the plan year ended July 31, 2003 and $15.0 million in the fourth quarter 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 2004 or 2005 plan years.

 

8.               Commitments and Contingencies

 

We are involved in various suits and claims in the ordinary course of business.  We do not believe that the disposition of any such suits or claims will have a material adverse effect upon our consolidated results of operations, cash flows or financial position.

 

10



 

9.     Restatements

 
Subsequent to the issuance of the second quarter 2005 financial statements, we corrected errors in our previously issued financial statements related to 1) the classification of construction allowances in our balance sheets and statements of cash flows and 2) the classification of the changes in our Retained Interests in connection with the Credit Card Facility in our statements of cash flows.  Previously reported operating earnings, net income, earnings per share and shareholders’ equity were not impacted by these corrections.
 
Construction Allowances.  On February 7, 2005, the Chief Accountant of the Securities and Exchange Commission (SEC) released a letter regarding various lease accounting issues and the application of generally accepted accounting principles to such issues.  Following the issuance of the letter by the SEC, we reviewed our accounting policies related to construction allowances and determined that our classification of construction allowances in our balance sheets and statements of cash flows was not in accordance with generally accepted accounting principles.
 
We periodically receive allowances from developers related to the construction of our stores.  Historically, we recorded these allowances as a reduction of capital expenditures and, as result, the carrying values of property and equipment.  After our review related to the accounting for construction allowances, we have corrected the classification of these construction allowances from a reduction of property and equipment to deferred real estate credits on our balance sheets.  These deferred real estate credits are amortized over the lease term which is consistent with the amortization period for the constructed assets.
 
In addition, capital expenditures, as presented in the statements of cash flows, were previously presented net of the construction allowances received.  We have corrected the error in the classification of the cash receipts of construction allowances to cash flows from operating activities and, as a result, restated the statements of cash flows.

 

Retained Interests.  Pursuant to the terms of the Credit Card Facility, as more fully described in Note 6, our Retained Interests fluctuate monthly based on the underlying balance of our credit card receivables.  We previously reflected the changes in our Retained Interests in the determination of cash flows from investing activities.  We have determined that 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.

 
The following table summarizes the impact of these restatements in our previously issued financial statements:

 

 

 

 

 

Restatements

 

 

 

 

 

As
Originally
Reported

 

Construction
Allowances

 

Changes in
Retained
Interests

 

As
Restated

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2005

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

793,146

 

$

569

 

$

 

$

793,715

 

Total assets

 

2,755,193

 

569

 

 

2,755,762

 

Deferred real estate credits

 

68,707

 

569

 

 

69,276

 

Total long-term liabilities

 

437,337

 

569

 

 

437,906

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flow:

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

76,087

 

$

14,122

 

$

 

$

90,209

 

Net cash used for investing activities

 

(66,580

)

(14,122

)

 

(80,702

)

 

11



 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Second Quarter 2004

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

$

674,139

 

$

59,235

 

$

 

$

733,374

 

Other assets

 

112,380

 

15,284

 

 

127,664

 

Total assets

 

2,257,996

 

74,519

 

 

2,332,515

 

Deferred real estate credits

 

 

74,519

 

 

74,519

 

Total long-term liabilities

 

451,955

 

74,519

 

 

526,474

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flow:

 

 

 

 

 

 

 

 

 

Net cash (used for) provided by operating activities

 

$

(112,255

)

$

2,246

 

$

77,913

 

$

(32,096

)

Net cash provided by (used for) investing activities

 

31,767

 

(2,246

)

(77,913

)

(48,392

)

 

12



 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

 

EXECUTIVE OVERVIEW

 

The following discussion and analysis gives effect to the restatements described in Note 9 of the Notes to Condensed Consolidated Financial Statements.

 

Company Profile

 

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.

 

We own a 51 percent interest in Gurwitch Products, LLC, which distributes and markets the Laura Mercier cosmetic line, and a 56 percent interest in Kate Spade LLC, a manufacturer and retailer of high-end designer handbags and accessories.  Gurwitch Products, LLC and Kate Spade LLC are hereafter referred to collectively as the “Brand Development Companies.”

 

Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter of 2005 relate to the thirteen weeks ended January 29, 2005 and all references to the second quarter of 2004 relate to the thirteen weeks ended January 31, 2004.  All references to 2005 relate to the twenty-six weeks ended January 29, 2005 and all references to 2004 relate to the twenty-six weeks ended January 31, 2004.

 

The information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) 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.  Unless otherwise specified, the meanings of all defined terms in MD&A are consistent with the meanings of such terms as defined in the Notes to the Condensed Consolidated Financial Statements.

 

Overview of the Business

 

We believe that our unique 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.

 

We conduct our selling activities in two primary selling seasons, Fall and Spring.  Sales and margins fluctuate during each selling season due to the results of in-store marketing and full-price selling towards the beginning of each season and sales on a marked down basis towards the end of each season.  As a result of the seasonality of our selling activities, inventory management is critical to our success.

 

Inherent in the successful execution of our business plans, particularly our inventory management strategy, is our ability both to predict the fashion trends that will be of interest to our customers and to anticipate the future spending patterns of our customer base.  Accordingly, we monitor the sales performance of our inventories throughout each season.  We seek 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 goods can be limited.  This can result in lost sales in the event of higher than anticipated demand for the fashion goods offered or a higher than anticipated level of consumer spending.  Conversely, in the event we buy fashion goods that are not accepted by our customer or the level of consumer spending is less than we anticipated, we typically incur a higher than anticipated level of markdowns, net of vendor allowances, to sell the 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 inherent risk in predicting fashion trends and related demand.

 

13



 

Second Quarter Fiscal Year 2005 Highlights

 

Diluted earnings per share for the second quarter of 2005 increased 18.2 percent to $1.43 from $1.21 in the prior year period. Other significant highlights for the second quarter of 2005 include:

 

      Revenues – Our revenues for the second quarter of 2005 were $1,129.2 million compared to $1,048.4 million in the prior year period.  Revenues increased 7.7 percent in the second quarter of 2005 while comparable revenues increased 10.4 percent.  Year to date, revenues have increased 9.1 percent while comparable revenues have increased 10.8 percent.  We have experienced double digit percentage increases in comparable store sales in each of our last six consecutive quarters.  For Specialty Retail Stores, our sales per square foot for the last twelve trailing months increased to $555 as of January 2005 compared to $494 as of January 2004.

 

      Margins – Margins increased to 32.5 percent of revenues in the second quarter of 2005 from 31.4 percent in the second quarter of 2004.  Year to date, margins have increased to 35.4 percent of revenues from 34.2 percent in the prior year period.  These increases are reflective of the high level of acceptance and demand for the fashion goods we offer as well as our efforts to more closely align purchases and customer demand.

 

      Selling, general and administrative expenses – Selling, general and administrative (SG&A) expenses decreased to 21.9 percent of revenues in the second quarter of 2005 from 22.8 percent in the second quarter 2004 and to 23.3 percent of revenues year-to-date from 24.1 percent in the prior year period.

 

      Operating earnings – Operating earnings increased 33.0 percent in the second quarter of 2005, representing 10.6 percent of our revenues compared to 8.6 percent in the second quarter of 2004.  Year to date, operating earnings increased 22.6 percent, representing 11.3 percent of our revenues for 2005 compared to 10.0 percent in 2004.  Operating earnings were 10.8 percent of revenues in the second quarter and 13.3 percent year to date for our Specialty Retail Stores and 14.8 percent of revenues in the second quarter and 12.0 percent year to date for Direct Marketing.

 

OPERATING RESULTS

 

Performance Summary

 

The following table sets forth certain items expressed as percentages of net sales for the periods indicated.

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

 

January 29,
2005

 

January 31,
2004

 

January 29,
2005

 

January 31,
2004

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of goods sold including buying and occupancy costs

 

67.5

 

68.6

 

64.6

 

65.8

 

Selling, general and administrative expenses

 

21.9

 

22.8

 

23.3

 

24.1

 

Loss on disposition of Chef’s Catalog

 

 

 

0.8

 

 

Operating earnings

 

10.6

 

8.6

 

11.3

 

10.0

 

Interest expense, net

 

0.4

 

0.4

 

0.4

 

0.4

 

Earnings before income taxes and minority interest

 

10.2

 

8.2

 

10.9

 

9.6

 

Income taxes

 

3.9

 

2.5

 

4.2

 

3.3

 

Earnings before minority interest

 

6.3

 

5.7

 

6.7

 

6.3

 

Minority interest in net earnings of subsidiaries

 

(0.1

)

(0.1

)

(0.1

)

(0.1

)

Net earnings

 

6.3

%

5.6

%

6.6

%

6.2

%

 

14



 

Set forth in the following table is certain summary information with respect to our operations for the periods indicated.

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

(dollars in millions)

 

January 29, 2005

 

January 31, 2004

 

January 29, 2005

 

January 31, 2004

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

912.0

 

$

831.8

 

$

1,648.9

 

$

1,496.2

 

Direct Marketing

 

188.2

 

191.5

 

328.0

 

319.5

 

Other (1)

 

29.0

 

25.1

 

60.3

 

51.4

 

Total

 

$

1,129.2

 

$

1,048.4

 

$

2,037.2

 

$

1,867.1

 

 

 

 

 

 

 

 

 

 

 

OPERATING EARNINGS

 

 

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

98.7

 

$

72.8

 

$

218.9

 

$

163.9

 

Direct Marketing

 

27.9

 

24.8

 

39.3

 

35.4

 

Other (1)

 

2.8

 

3.4

 

5.7

 

7.1

 

Corporate expenses

 

(9.7

)

(11.0

)

(19.0

)

(19.1

)

Loss on disposition of Chef’s Catalog

 

 

 

(15.3

)

 

Total

 

$

119.7

 

$

90.0

 

$

229.6

 

$

187.3

 

 

 

 

 

 

 

 

 

 

 

OPERATING PROFIT MARGIN

 

 

 

 

 

 

 

 

 

Specialty Retail Stores

 

10.8

%

8.8

%

13.3

%

11.0

%

Direct Marketing

 

14.8

%

12.9

%

12.0

%

11.1

%

Total

 

10.6

%

8.6

%

11.3

%

10.0

%

 

 

 

 

 

 

 

 

 

 

COMPARABLE REVENUES (2)

 

 

 

 

 

 

 

 

 

Specialty Retail Stores (3)

 

9.6

%

10.2

%

10.3

%

10.0

%

Direct Marketing (4)

 

15.8

%

25.7

%

14.7

%

20.3

%

Total (3), (4)

 

10.4

%

12.7

%

10.8

%

11.9

%

 

 

 

 

 

 

 

 

 

 

SALES PER SQUARE FOOT

 

 

 

 

 

 

 

 

 

Specialty Retail Stores

 

$

168

 

$

154

 

$

305

 

$

278

 

 

 

 

 

 

 

 

 

 

 

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

 

14

 

14

 

14

 

14

 

Opened during the period

 

1

 

 

1

 

 

Open at end of period

 

15

 

14

 

15

 

14

 

 


(1)   Other includes the operations of the Brand Development Companies.

 

(2)   Comparable revenues include 1) revenues derived from our retail stores open for more than 52 weeks, including stores that have been relocated or expanded, 2) revenues from our Direct Marketing operations and 3) wholesale revenues from our Brand Development Companies.

 

(3)   The calculation 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.

 

(4)   The calculation of the changes in comparable revenues has been adjusted to exclude the revenues of Chef’s Catalog for all periods prior to our sale of these operations in November 2004, as more fully described in Note 2 to the Condensed Consolidated Financial Statements.

 

15



 

Thirteen Weeks Ended January 29, 2005 Compared to Thirteen Weeks Ended January 31, 2004

 

Revenues.  Our revenues for the second quarter of 2005 of $1,129.2 million increased $80.8 million, or 7.7 percent, from $1,048.4 million in the second quarter of 2004.

 

Comparable revenues in the second quarter of 2005 increased 10.4 percent compared to the prior year period.  Comparable revenues increased 9.6 percent for Specialty Retail Stores and 15.8 percent for Direct Marketing.  Comparable revenues in the second quarter of 2004 increased by 12.7 percent.

 

Revenues increased in the second quarter of 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 the second quarter of 2005, internet sales by Direct Marketing, excluding Chef’s Catalog, were $98.5 million, an increase of 49.0 percent from the second quarter of 2004.

 

Gross margin.  Due to promotional events and the markdowns incurred in the second quarter related to the clearance of Fall Season merchandise, we generate a lower gross margin in the second quarter compared to the first quarter of each year.  Our gross margin was 32.5 percent of revenues for the second quarter of 2005 compared to 31.4 percent in the prior year period.  The increase in gross margin from the prior year period was due primarily to:

 

      higher product margins;

 

      a decrease in buying and occupancy costs as a percentage of revenues.

 

We generated higher product margins at our Specialty Retail Stores during the second quarter of 2005.  We believe this increase in product margins was due to the higher level of full-price sales generated during the quarter and our continued emphasis on inventory management.  We incurred a higher level of net markdowns in our Direct Marketing operations due to lower than anticipated sales in our catalog operations during the December holiday season.

 

Consistent 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.  While the dollar value of the vendor reimbursements we received decreased slightly as a percentage of revenues in the second quarter of 2005 compared to the prior year period, primarily due to a higher level of full-price selling, this decrease did not have a significant impact on the year-over-year change in the gross margin we realized in the second quarter of 2005.

 

A significant portion of our buying and occupancy costs are fixed in nature.  Buying and occupancy costs decreased as a percentage of revenues during the second quarter of 2005 compared to the prior year period primarily due to the leveraging of fixed expenses, including payroll expenses and depreciation, over the higher level of revenues we generated during the second quarter of 2005.

 

Selling, general and administrative expenses.  SG&A expenses were 21.9 percent of revenues in the second quarter of 2005 compared to 22.8 percent of revenues in the prior year period.

 

The net decrease in SG&A expenses as a percentage of revenues in the second quarter of 2005 was primarily due to:

 

    lower marketing and advertising costs for Direct Marketing consistent with a planned shift in spending to the first quarter of 2005;

 

    lower costs for incentive compensation;

 

    lower professional fees;

 

    productivity improvements for our Specialty Retail Stores in various expense categories, including payroll and advertising, as a result of the higher level of revenues in the second quarter of 2005.

 

16



 

In addition, SG&A expense in the second quarter of 2004 included a $5.3 million reduction in the income generated by the Company’s credit card portfolio due to the required amortization during the Transition Period of the premium associated with the carrying value of the Retained Interests, as more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.

 

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

 

      the increase in preopening costs incurred in the second quarter of 2005 in connection with the remodel of our stores in San Francisco, Newport Beach, Los Angeles and Houston;

 

      increases in payroll for our Direct Marketing and the Brand Development Companies in support of new business initiatives and the expansion of Kate Spade operations.

 

In addition, SG&A expenses were reduced in the second quarter of 2004 by the favorable impact of conclusions of certain sales tax and unclaimed property examinations for which the agreed-on settlements were less than the amounts previously estimated by the Company.

 

Segment operating earnings.  Operating earnings for our Specialty Retail Stores segment were $98.7 million for the second quarter of 2005 compared to $72.8 million for the prior year period.  This 35.6 percent increase was primarily the result of increased sales and gross margin and net decreases in both buying and occupancy expenses and SG&A expenses as a percentage of revenues.

 

Operating earnings for Direct Marketing increased to $27.9 million in the second quarter of 2005 from $24.8 million for the prior year period, primarily as a result of increased revenues and net decreases in both buying and occupancy costs and SG&A expenses as a percentage of revenues.

 

Interest expense, net.  Net interest expense was $4.0 million in the second quarter of 2005 and $3.8 million for the prior year period.

 

Income taxes.  Our effective income tax rate was 38.3 percent for the second quarter of 2005 and 30.3 percent for the prior year period.  In the second quarter of 2004, the Company recognized 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 percent for the second quarter of 2004.

 

 

Twenty-Six Weeks Ended January 29, 2005 Compared to Twenty-Six Weeks Ended January 31, 2004

 

Revenues.  Our revenues for 2005 of $2,037.2 million increased $170.1 million, or 9.1 percent, from $1,867.1 million in 2004.

 

Comparable revenues in 2005 increased 10.8 percent compared to the prior year period.  Comparable revenues increased 10.3 percent for Specialty Retail Stores and 14.7 percent for Direct Marketing.  Comparable revenues in 2004 increased by 11.9 percent.

 

Excluding the revenues from our 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 $159.2 million, an increase of 46.5 percent from 2004.

 

17



 

Gross margin.  Gross margin was 35.4 percent of revenues for 2005 compared to 34.2 percent in the prior year period.  The increase in gross margin was due primarily to:

 

      higher product margins;

 

      a decrease in buying and occupancy costs as a percentage of revenues.

 

We generated higher product margins at our Specialty Retail Stores during 2005.  We believe this increase in product margins was due to the higher level of full-price sales generated for the period and our continued emphasis on inventory management.  We incurred a higher level of net markdowns in 2005 for Direct Marketing due to lower than anticipated sales in our catalog operations during the December holiday season.

 

Consistent 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.  While the dollar value of the vendor reimbursements we received decreased slightly as a percentage of revenues in 2005 compared to the prior year period, primarily due to a higher level of full-price selling, this decrease did not have a significant impact on the year-over-year change in the gross margin we realized in 2005.

 

A significant portion of our buying and occupancy costs are fixed in nature.  Buying and occupancy costs decreased as a percentage of revenues during 2005 compared to the prior year period primarily due to the leveraging of fixed expenses, including payroll expenses and depreciation, over the higher level of revenues we generated during 2005.

 

Selling, general and administrative expenses.  SG&A expenses were 23.3 percent of revenues in 2005 compared to 24.1 percent of revenues in the prior year period.

 

The net decrease in SG&A expenses as a percentage of revenues in 2005 was primarily due to:

 

      lower costs for incentive compensation;

 

      productivity improvements for our Specialty Retail Stores in various expense categories, including payroll and advertising, and for Direct Marketing, primarily advertising, as a result of the higher level of revenues in 2005.

 

In addition, SG&A expense in 2004 included a $5.3 million reduction in the income generated by the Company’s credit card portfolio due to the required amortization during the Transition Period of the premium associated with the carrying value of the Retained Interests, as more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.

 

These decreases in SG&A expenses as a percentage of revenues were partially offset by increases in payroll for our Direct Marketing and Brand Development Companies in support of new business initiatives and the expansion of Kate Spade operations.  In addition, SG&A expenses were reduced in the second quarter of 2004 for the favorable impact of conclusions of certain sales tax and unclaimed property examinations for which the agreed-on settlements were less than the amounts previously estimated by the Company.

 

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 kitchenware with revenues of approximately $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 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 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.

 

Segment operating earnings.  Operating earnings for our Specialty Retail Stores segment were $218.9 million for 2005 compared to $163.9 million for the prior year period.  This 33.6 percent increase was primarily the result of increased sales and margins and net decreases in both buying and occupancy expenses and SG&A expenses as a percentage of revenues.

 

Operating earnings for Direct Marketing increased to $39.3 million in 2005 from $35.4 million for the prior year period,

 

18



 

primarily as a result of increased revenues and net decreases in both buying and occupancy costs and SG&A expenses as a percentage of revenues.

 

Interest expense, net.  Net interest expense was $8.0 million in 2005 and $7.2 million for the prior year period.

 

Income taxes.  Our effective income tax rate was 38.5 percent for 2005 and 34.8 percent for the prior year period.  In the second quarter of 2004, the Company recognized 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 percent for 2004.

 

Outlook

 

Based on current estimates, we anticipate increases in comparable store revenues of 3 to 5 percent for our third quarter ending April 30, 2005.  Comparable revenues increased by 22.0 percent in our quarter ended May 1, 2004.  The accuracy of our assumptions and forecasts is subject to uncertainties and circumstances beyond our control.  Consequently, actual results could differ materially from the forecasted results.  See “Factors That May Affect Future Results” for a discussion of items and events that could cause our actual results to vary from our expectations.

 

Inflation and Deflation

 

We believe changes in revenues and net earnings that have resulted from inflation 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 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 attempt to offset the effects of inflation through control of expenses and price increases, 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.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our cash requirements consist principally of:

 

      the funding of our accounts receivable and merchandise purchases;

 

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

 

      debt service requirements;

 

      obligations related to our Pension Plan.

 

Our working capital requirements fluctuate during the year, increasing substantially during the first and second quarters of each fiscal year as a result of higher seasonal levels of accounts receivable and inventory.   We typically finance the increases in working capital needs during the first and second fiscal quarters with cash flows from operations, cash provided from the Credit Card Facility and borrowings under our $350 million unsecured Credit Agreement.

 

Our primary sources of short-term liquidity are comprised of cash on hand and availability under our Credit Agreement.  As of January 29, 2005, we had cash and cash equivalents of $377.9 million and no outstanding borrowings under our Credit Agreement.  Our cash and cash equivalents consisted principally of invested cash and store operating cash.  At January 31, 2004, we had cash and cash equivalents of $251.7 million and no outstanding borrowings under a previous $300 million unsecured revolving credit facility.  The amount of cash on hand and borrowings under the credit facility are influenced by a number of factors, including revenues, accounts receivable and inventory levels, vendor terms, the level of capital expenditures, cash requirements related to financing instruments, Pension Plan funding obligations and tax payment obligations, among others.

 

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

 

19



 

anticipated capital expenditure requirements through the end of 2005.  In addition, we are evaluating our options regarding the possible replacement of the Credit Card Facility which expires in September 2005.

 

We generated cash from operations, prior to changes in operating assets and liabilities, of $220.5 million in 2005 compared to $186.3 million in prior year period.  This $34.2 million increase in cash generated from operations was due to higher sales and earnings levels realized in 2005.  Net cash provided by operating activities was $90.2 million in 2005, reflecting the funding of a $123.0 million seasonal increase in our accounts receivable and merchandise inventories.  Both accounts receivable and inventories were higher at the end of the second quarter of 2005 compared to 2004 consistent with our higher sales levels.  In the presentation of net cash flows used by operating activities in 2004 of $32.1 million in the accompanying statement of cash flows, the cash generated from operations was reduced by the net increase in our undivided interests in the NMG Credit Card Master Trust and accounts receivable from $265.7 million at August 2, 2003 to $485.7 million at January 31, 2004.  This increase in accounts receivable is attributable to both a higher investment in accounts receivable due to higher revenues in 2004 and the discontinuance of Off-Balance Sheet Accounting beginning in December 2003, as more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.

 

Net cash used for investing activities was $80.7 million in 2005 compared to $48.4 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, offset by $14.4 million of proceeds from the sale of Chef’s Catalog in 2005.

 

Capital expenditures were $95.1 million in 2005 and $48.4 million in the prior year period.  We incurred capital expenditures in the second 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 $170 million to $180 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 system.  We are currently remodeling our stores in Newport Beach, Los Angeles, San Francisco and Houston.  We expect to complete the expansion and renovation of the Newport Beach and Los Angeles stores in the spring of fiscal year 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.

 

Financing Structure

 

Our major sources of funds are comprised of vendor financing, the $350 million unsecured Credit Agreement, the $225 million Credit Card Facility, $125 million senior unsecured notes, $125 million senior unsecured debentures, operating leases and capital leases.

 

At January 29, 2005, we had $225.0 million borrowings under our Credit Card Facility.  Repayment of this obligation begins in April 2005 in six monthly installments of $37.5 million.  Borrowings pursuant to the Credit Card Facility bear interest at the contractually-defined rate of one month LIBOR plus 0.27 percent (2.75 percent at January 29, 2005) and are payable monthly to the holders of the Class A Certificates.  We are evaluating our options regarding the possible replacement of the Credit Card Facility which expires in September 2005.

 

In the second quarter of 2005, our Board of Directors increased our quarterly cash dividend to $0.15 per share from $0.13 per share in the prior year quarter.  We declared dividends on January 28, 2005 aggregating $7.3 million.  These dividends were paid in February 2005.

 

In prior years, our Board of Directors authorized various stock repurchase programs and increases in the number of shares subject to repurchase.  In the second quarter of 2005, we repurchased 4,100 shares at an average price of $57.60. As of January 29, 2005, approximately 1.2 million shares remain available for repurchase under the stock repurchase programs.

 

Off-Balance Sheet Arrangements

 

Pursuant to a revolving 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

 

20



 

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.  Beginning in April 2005, cash collections will be used by the Trust to repay the $225 million principal balance of the Class A Certificates in six monthly installments of $37.5 million.

 

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.  During the period the transfers and sales qualified for Off-Balance Sheet Accounting, the Retained Interests were shown as “Undivided interests in NMG Credit Card Master Trust” on our consolidated balance sheets.

 

Beginning in December 2003, our subsequent 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 are recorded as secured borrowings (Financing Accounting).  Our entire credit card portfolio is now included in accounts receivable and the $225 million of outstanding borrowings under the Credit Card Facility are shown as a liability in our condensed consolidated balance sheet.

 

Our securitization of credit card receivables is more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.

 

OTHER MATTERS

 

Factors That May Affect Future Results

 

Matters discussed in MD&A include forward-looking statements.  We make these forward-looking statements based on our expectations and beliefs concerning future events, as well as currently available data.  These forward-looking statements involve a number of risks and uncertainties and, therefore, are not guarantees of future 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:

 

Political and General Economic Conditions

 

      current political and general economic conditions or changes in such conditions;

      terrorist activities in the United States;

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

 

Customer Demographic Issues

 

      changes in the demographic or retail environment;

      changes in consumer confidence resulting in a reduction of discretionary spending on goods that are, or are perceived to be, “luxuries”;

      changes in consumer preferences or fashion trends;

      changes in our relationships with key customers;

      changes in our proprietary credit card arrangement that adversely impact our ability to provide consumer credit;

 

Merchandise Procurement and Supply Chain Considerations

 

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

      delays in receipt of merchandise ordered due to work stoppages and/or other causes of delay in connection with either the manufacture or shipment of such merchandise;

 

21



 

      changes in foreign currency exchange rates;

      significant increases in paper, printing and postage costs;

 

Industry and Competitive Factors

 

      competitive responses to our marketing, merchandising and promotional efforts and/or inventory liquidations by vendors or other retailers;

      seasonality of the retail business;

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

      delays in anticipated store openings and renovations;

 

Employee Considerations

 

      changes in key management personnel;

      changes in our relationships with certain of our key sales associates;

 

Legal and Regulatory Issues

 

      changes in government or regulatory requirements increasing our costs of operations;

      litigation that may have an adverse effect on our financial results or reputation;

 

Other Factors

 

      impact of funding requirements related to our noncontributory defined benefit pension plan;

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

 

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

 

Critical Accounting Policies

 

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 Consolidated Financial Statements.  Our current estimates are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates 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.

 

See Note 1 of the Notes to Condensed Consolidated Financial Statements in Item 1 for a summary of our critical accounting policies.  A complete description of our critical accounting policies is included in our amendment to the Annual Report to Shareholders on Form 10-K/A for the fiscal year ended July 31, 2004.

 

 

Reclassification – Loyalty Programs.  As more fully described in Note 1, a substantial 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

 

22



 

in classification do not impact the previously reported operating earnings, net income or earnings per share amounts.

 

Changes in Comparable Revenues.  As more fully described in Note 2, we have sold our 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

%

 

Restatements.  Subsequent to the issuance of the second quarter 2005 financial statements, we corrected errors in our previously issued financial statements related to 1) the classification of construction allowances in our balance sheets and statements of cash flows and 2) the classification of the changes in our Retained Interests in connection with the Credit Card Facility in our statements of cash flows.  Previously reported operating earnings, net income, earnings per share and shareholders’ equity were not impacted by these corrections.  See Note 9 to the Condensed Consolidated Financial Statements.

 

Recent Accounting Pronouncements

 

In December 2003, the U.S. Congress enacted the Medicare Prescription Drug, Improvement and 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.  Additional legislation is anticipated that will clarify whether a company is eligible for the subsidy, the amount of the subsidy available and the procedures to be followed in obtaining the subsidy.  In May 2004, the FASB issued Staff Position 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” that provides guidance on the accounting and disclosure for the effects of the Act.  The legislation providing the final statutory definition of “actuarially equivalent” prescription drug benefits was enacted in January 2005.  We have not yet been able to determine whether the prescription drug benefits offered by our Postretirement Plan meet the statutory requirements related to actuarial equivalence.  We are currently finalizing the determination of actuarial equivalence as well as the impact, if any, on our Postretirement Plan.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates.  We do not enter into derivative financial instruments for trading purposes.  We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. We are exposed to interest rate risk through our securitization and borrowing activities, which are described in Notes 2 and 5 to our Consolidated Financial Statements in our amendment to the Annual Report on Form 10-K/A for the fiscal year ended July 31, 2004.

 

As of January 29, 2005, we had no borrowings outstanding under our Credit Agreement.  Future borrowings under our Credit Agreement, to the extent of outstanding borrowings, would be affected by interest rate changes.

 

23



 

Our outstanding long-term debt as of January 29, 2005 is at fixed interest rates and would not be affected by interest rate changes.  Based upon quoted prices, the fair value of our senior notes and debentures (face value of $250 million) was $276.4 million as of January 29, 2005.

 

Pursuant to our proprietary credit card securitization program that begins to expire in September 2005, we have sold substantially all of our credit card receivables through a subsidiary in exchange for certificates representing undivided interests in such receivables.  We sold the Class A Certificates, which have an aggregate principal value of $225 million, to investors. The holders of the Class A Certificates are entitled to monthly interest distributions from the Trust at the contractually-defined rate of one month LIBOR plus 0.27 percent annually.  The distributions to the Class A Certificate holders are payable from the finance charge income generated by the credit card receivables held by the Trust.  At January 29, 2005, we estimate a 100 basis point increase in LIBOR would result in an approximate annual increase of $2.25 million in the interest distributions to the Class A Certificate Holders.

 

We use derivative financial instruments to manage foreign currency risk related to the procurement of merchandise inventories from foreign sources.  We enter into foreign currency contracts denominated in the euro and British pound. We had foreign currency contracts in the form of forward exchange contracts in the amount of approximately $42.3 million as of January 29, 2005.  The market risk inherent in these instruments was not material to our consolidated financial position, results of operations or cash flows in the second quarter of 2005.

 

The effects of changes in the U.S. equity and bond markets serve to increase or decrease the value of Pension Plan assets, resulting in an increase or decrease in our cash funding obligation.  We seek to manage exposure to adverse equity and bond returns by maintaining diversified investment portfolios and utilizing professional investment managers.

 

Based on a review of our financial instruments outstanding at January 29, 2005 that are sensitive to market risks, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations, or cash flows as of such date.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, to provide reasonable assurance that information we are required to disclose in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems.  No change in our internal controls occurred during the quarter ended January 29, 2005 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

In coming to the conclusion that our internal controls over financial reporting were effective as of January 29, 2005, we considered, among other things, the control deficiencies related to both the accounting and classification of construction allowances and the classification of cash flows in the statements of cash flows, which resulted in the restatements of our previously issued financial statements as disclosed in Note 9 of this Form 10-Q/A.  After reviewing and analyzing applicable authoritative guidance (including the Securities and Exchange Commission’s Staff Accounting Bulletin No. 99, “Materiality,” Accounting Principle Board Opinion No. 20, “Accounting Changes” and Public Company Accounting Oversight Board Auditing Standard No. 2, “An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements”) and taking into consideration that the restatements did not impact previously reported amounts for revenues, net earnings, earnings per share, total cash flows or shareholder’s equity, we concluded that the control deficiencies that resulted in the restatements of the previously issued financial statements were not a material weakness.  Following the identification of the control deficiencies, we corrected the processes for evaluating, accounting and classifying construction allowances received and the classification of cash flows in the preparation of our financial statements.

 

24



 

THE NEIMAN MARCUS GROUP, INC.

 

PART II

 

ITEM 1.     LEGAL PROCEEDINGS

 

We are involved in various suits and claims in the ordinary course of business.  We do not believe that the disposition of any such suits or claims will have a material adverse effect upon our consolidated results of operations, cash flows or financial position.  This belief is subject to the risks and uncertainties discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Results.”

 

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table indicates our repurchases of equity securities in the second quarter of 2005:

 

Second Quarter 2005

 

Total Number
of Shares
Purchased

 

Average
Price Paid
Per Share

 

Total Number
of Shares
Purchased as
Part of
Publicly Announced
Plans or
Programs (1)

 

Maximum
Number of
Shares that
May Yet Be
Purchased
under the
Plans or
Programs

 

 

 

 

 

 

 

 

 

 

 

November 2004 (10/31/04 to 11/27/04)

 

4,100

 

$

57.60

 

4,100

 

1,155,869

 

 

 

 

 

 

 

 

 

 

 

December 2004 (11/28/04 to 1/1/05)

 

 

 

 

1,155,869

 

 

 

 

 

 

 

 

 

 

 

January 2005 (1/2/05 to 1/29/05)

 

 

 

 

1,155,869

 

 


(1)  In April 2000, the Board of Directors authorized up to 4.0 million shares to be repurchased, with no expiration date.

 

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The 2005 Annual Meeting of Shareholders of the Company was held on January 14, 2005.

 

A total of 40,092,938 of the Company’s shares were present or represented by proxy at the meeting.  This represented more than 82 percent of the Company’s total shares outstanding including 23,832,013 shares of Class A Common Stock and 16,260,925 shares of Class B Common Stock.

 

Four Class B directors stood for re-election at the Company’s 2005 Annual Meeting.  Only holders of the Company’s Class B Common Stock are entitled to vote for Class B directors.  In all other matters submitted to a vote of the shareholders at the annual meeting, holders of Class A Common Stock and Class B Common Stock voted as a single class.

 

The individuals named below were re-elected to a three-year term as Class II Directors:

 

Name

 

Votes
Cast For

 

Votes
Withheld

 

 

 

 

 

 

 

Walter J. Salmon

 

15,998,036

 

45,498

 

Matina S. Horner

 

15,998,164

 

45,370

 

Brian J. Knez

 

15,986,501

 

57,033

 

Carl Sewell

 

16,003,301

 

40,233

 

 

25



 

Richard A. Smith, Robert A. Smith, Paula Stern, Gary L. Countryman, Vincent M. O’Reilly, John R. Cook, and Burton M. Tansky all continue as directors of the Company.

 

The election of Deloitte & Touche, LLP as independent registered public accountants was ratified, with 39,831,525 shares voting for, 220,934 shares voting against, and 40,477 shares abstaining.

 

The Company’s 2005 Stock Incentive Plan was approved with 32,266,271 shares voting for, 4,488,490 shares voting against, 348,727 shares abstaining, and 2,989,450 broker non-votes.

 

The shareholder proposal concerning cumulative voting was defeated, with 13,977,286 voting for, 20,980,193 shares voting against, 2,146,372 shares abstaining, and 2,989,087 broker non-votes.

 

ITEM 6.     EXHIBITS

 

3.1

 

Restated Certificate of Incorporation of the Company, incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 26, 2002.

 

 

 

3.2

 

Bylaws of the Company, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended August 2, 2003.

 

 

 

4.1

 

Certificates of Designation with respect to Series A Junior Participating Preferred Stock, Series B Junior Participating Preferred Stock and Series C Junior Participating Preferred Stock, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

 

 

 

4.2

 

Indenture, dated as of May 27, 1998, between the Company and The Bank of New York, as trustee (the “Indenture”), incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

 

 

 

4.3

 

Form of 6.65 percent Senior Note Due 2008, dated May 27, 1998, issued by the Company pursuant to the Indenture, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

 

 

 

4.4

 

Form of 7.125 percent Senior Note Due 2008, dated May 27, 1998, issued by the Company pursuant to the Indenture, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.

 

 

 

4.5

 

Amended and Restated Rights Agreement, dated as of August 8, 2002, between the Company and Mellon Investor Services LLC, as Rights Agent, incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended August 3, 2002.

 

 

 

10.42*

 

Base salaries of named executive officers for fiscal year 2005, incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 29, 2005.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)

 

 

 

32

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

 


(1)

 

Filed herewith

 

 

 

*

 

Management contract or compensatory plan or arrangement.

 

26



 

SIGNATURES

 

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

 

 

THE NEIMAN MARCUS GROUP, INC.

(Registrant)

 

Signature

 

Title

 

Date

 

 

 

 

 

/s/ T. Dale Stapleton

 

 

Vice President and Controller

 

May 27, 2005

T. Dale Stapleton

 

and Duly Authorized Officer

 

 

 

 

(principal accounting officer)

 

 

 

27