**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q/A**

**(Amendment #1)**

 

**ý****          ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

### **For the Quarterly PeriodEnded January 29, 2005**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file no. 1-9659**

 

**TheNeiman Marcus Group, Inc.**

(Exact name of registrant as specified in itscharter)

 
| **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, includingarea code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

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

 

 

As of March 2, 2005, the number of outstanding shares of each of theissuer’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**

 

Thisamendment 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 inpreviously issued financial statements related to 1) the classification ofconstruction allowances in the balance sheets and statements of cash flows and2) the classification of changes in undivided interests in the NMG Credit CardMaster Trust in the statements of cash flows. See Note 9 in the Notes to Condensed Consolidated Financial Statementsfor a discussion of these corrections and a reconciliation of amountspreviously reported to those shown herein. We have also revised our discussion in Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations. Information notaffected by the corrections as described in Note 9 remains unchanged andreflects the disclosures made at the time of the original filing of the Form10-Q on March 7, 2005.  Our previouslyreported net earnings, earnings per share and shareholders’ equity are notimpacted by these corrections.

 

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**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 |                                                                                                                                    |

 

----

 

**THENEIMAN 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 FinancialStatements.*

 

1

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**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 FinancialStatements.*

 

2

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** **

**THE NEIMAN MARCUS GROUP, INC.**

**CONDENSEDCONSOLIDATED 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 FinancialStatements.*

 

3

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** **

**THE NEIMAN MARCUS GROUP, INC.**

**NOTES****TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.               Basis of Presentation

 

We have prepared the Condensed Consolidated FinancialStatements of The Neiman Marcus Group, Inc. and its subsidiaries in accordancewith generally accepted accounting principles for interim financial informationand the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements donot include all of the information and footnotes required by accountingprinciples generally accepted for complete financial statements. Therefore,these financial statements should be read in conjunction with our amendment tothe Annual Report on Form 10-K/A for the fiscal year ended July 31, 2004.

 

Our fiscal year ends on the Saturday closestto July 31.  All references to the secondquarter of 2005 relate to the thirteen weeks ended January 29, 2005 and allreferences to the second quarter of 2004 relate to the thirteen weeks endedJanuary 31, 2004.  All references to 2005relate to the twenty-six weeks ended January 29, 2005 and all references to2004 related to the twenty-six weeks ended January 31, 2004.

 

In our opinion,the accompanying unaudited Condensed Consolidated Financial Statements containall adjustments, consisting of normal recurring adjustments, necessary topresent fairly our financial position, results of operations and cash flows forthe applicable interim periods.  Theresults of operations for these periods are not necessarily comparable to, orindicative of, results of any other interim period or for the fiscal year as awhole.

 

**We arerequired to make estimates and assumptions about future events in preparingfinancial statements in conformity with generally accepted accountingprinciples.  These estimates andassumptions affect the amounts of assets, liabilities, revenues and expensesand the disclosure of gain and loss contingencies at the date of the CondensedConsolidated Financial Statements.  Weevaluate our estimates and judgments on an ongoing basis and predicate those estimatesand judgments on historical experience and on various other factors that webelieve to be reasonable under the circumstances.  We make adjustments to our assumptions andjudgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolutecertainty, actual results may differ from the estimates used in preparing theaccompanying Condensed Consolidated Financial Statements.**

** **

**Webelieve the following critical accounting policies, among others, encompass themore significant judgments and estimates used in the preparation of ourfinancial statements:**

 

•                            Revenuerecognition;

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

•                            Determinationof impairment of long-lived assets;

•                            Recognitionof income and expenses related to our previous securitization program;

•                            Recognitionof advertising and catalog costs;

•                            Measurementof liabilities related to our loyalty programs;

•                            Recognition of income taxes; and

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

 

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

 

4

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***Stock-BasedCompensation***. We account for stock-based compensation awards to employees inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Accordingly, wehave recognized compensation expense on our restricted stock and purchaserestricted stock awards but have not recognized compensation expense for stockoptions since all options granted had an exercise price equal to the marketvalue of our common stock on the grant date.

 

The following table illustrates the effect on net earnings and earningsper share as if we had applied the fair value recognition provisions of SFASNo. 123 to stock-based employee compensation using the Black-Scholesoption-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 ofexpensing the estimated fair value of stock options are not necessarilyrepresentative of the effects on reported net earnings for future periods dueto such factors as the vesting periods of stock options and the potentialissuance of additional stock options in future years.  In addition, the Black-Scholes option-pricingmodel has inherent limitations in calculating the fair value of stock optionsfor which no active market exists since the model does not consider theinability to sell or transfer options, vesting requirements and a reducedexercise period upon termination of employment - all of which would reduce thefair value of the options.

 

5

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***Reclassification – Loyalty Programs*.**  A substantial portion of the points earned bycustomers in connection with our loyalty programs are redeemed for gift cards.  At the time the qualifying sales giving riseto the loyalty program points are made, we defer the portion of the revenues onthe qualifying sales transactions equal to our estimate of the retail value ofthe gift cards to be issued upon conversion of the points to gift cards.   Beginning in the first quarter of 2005, webegan to record the deferral of revenues related to gift card awards under ourloyalty programs as a reduction of revenues. Previously, we charged suchamounts to selling, general and administrative expenses (SG&A).  In addition, we now charge the cost of allother awards under our loyalty programs to cost of goods sold (COGS) ratherthan SG&A.  These changes inclassification do not impact the previously reported operating earnings, netincome or earnings per share amounts.

 

The following table presents quarterly and annual information givingrecognition 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 December2003, the U.S. Congress enacted the Medicare Prescription Drug, Improvement andModernization Act of 2003 (Act) that will provide a prescription drug subsidy,beginning in 2006, to companies that sponsor postretirement health care plansthat provide drug benefits.  Additionallegislation is anticipated that will clarify whether a company is eligible forthe subsidy, the amount of the subsidy available and the procedures to befollowed in obtaining the subsidy.  InMay 2004, the FASB issued Staff Position 106-2 “Accounting and DisclosureRequirements Related to the Medicare Prescription Drug, Improvement andModernization Act of 2003” that provides guidance on the accounting anddisclosure for the effects of the Act. The legislation providing the final statutory definition of “actuariallyequivalent” prescription drug benefits was enacted in January 2005.  We have not yet been able to determinewhether the prescription drug benefits offered by our Postretirement Plan meetthe statutory requirements related to actuarial equivalence.  We are currently finalizing the determinationof actuarial equivalence as well as the impact, if any, on our PostretirementPlan.

 

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

** **

In November 2004, we sold our Chef’s Catalog direct marketing businessto a private equity firm.  Chef’s Catalogis a multi-channel retailer of professional-quality kitchenware with revenuesof approximately $73 million in fiscal year 2004.  At October 30, 2004, Chef’s Catalog had nettangible assets, primarily inventory, of $12.5 million and net intangibleassets of $17.2 million.  We receivedproceeds, net of selling costs, of $14.4 million from the sale.  As the carrying value of the Chef’s Catalogassets 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’sCatalog.

 

6

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3.               Operating Segments

 

We have identified two reportablesegments: Specialty Retail Stores and Direct Marketing.  Our Specialty Retail Stores segment includesall of our Neiman Marcus and Bergdorf Goodman retail stores, including NeimanMarcus clearance stores.  Our DirectMarketing segment conducts both print catalog and online operations under theNeiman Marcus, Horchow and Bergdorf Goodman brand names and, until itsdisposition in November 2004, the Chef’s Catalog brand name.  Other includes the operations of Kate SpadeLLC and Gurwitch Products, LLC (the Brand Development Companies).

 

Both the Specialty Retail Stores andDirect 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 andfashion jewelry and decorative home accessories.

 

 

The following table sets forth theinformation 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 stockrepurchase programs and increases in the number of shares subject torepurchase.  In the second quarter of2005, we repurchased 4,100 shares at an average price of $57.60.  In the first quarter of 2005, we repurchased54,404 shares at an average price of $52.40. As of January 29, 2005, approximately 1.2 million shares remainavailable for repurchase under our stock repurchase programs.

 

7

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5.               Earnings per Share

 

The weighted average shares used in computing basic and dilutedearnings per share (EPS) are presented in the table below.  We made no adjustments to net earnings forthe 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 dilutedEPS because the exercise price of those options is greater than the averagemarket price of the common shares.

 

6.               Undivided Interests in NMG CreditCard Master Trust

 

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

 

From the inception of the Credit Card Facility until December 2003, ourtransfers and sales of credit card receivables pursuant to the terms of theCredit Card Facility were accounted for as sales (Off-Balance SheetAccounting).  As a result, we removed$225 million of credit card receivables from our balance sheet at the inceptionof the Credit Card Facility and the Trust’s $225 million repayment obligationto the holders of the certificates representing the Sold Interests was notshown as a liability on our consolidated balance sheet.  During the period the transfers and salesqualified for Off-Balance Sheet Accounting, our Retained Interests were shownas “Undivided interests in NMG Credit Card Master Trust” on our consolidatedbalance sheets.

 

Beginning in December 2003, our subsequent transfers to the Trustceased to qualify for Off-Balance Sheet Accounting. Rather, credit cardreceivables transferred to the Trust after November 2003 remain on our balancesheet and our borrowings collateralized by those accounts receivable arerecorded as liabilities on our balance sheet (Financing Accounting).  Thetransition period from Off-Balance Sheet Accounting to Financing Accounting(Transition Period) lasted approximately four months (December 2003 to March2004).  During the Transition Period, weallocated cash collections on our credit card receivables to the previous SoldInterests and Retained Interests until such time as those balances were reducedto zero and we recorded a liability for our repayment obligation to the holdersof the $225 million of certificates representing the Sold Interests.

 

8

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

 

A reconciliation of the outstanding balance of our accounts receivableto the balances recorded at January 29, 2005 and January 31, 2004 is asfollows:

 
| **(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 isincluded in accounts receivable in our consolidated balance sheet and the $225million 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 supplementalexecutive retirement plan (SERP Plan) that provides additional pension benefitsto certain employees.  Benefits underboth plans are based on the employees’ years of service and compensation overdefined periods of employment.  PensionPlan assets consist primarily of equity and fixed income securities.

 

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

 

9

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** **

 

***Costs of Benefits. ***The componentsof the expenses incurred under our Pension Plan, SERP Plan and PostretirementPlan 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 orabove the minimum required by law.  In2004, we made voluntary contributions of $30.0 million in the second quarterfor the plan year ended July 31, 2003 and $15.0 million in the fourth quarterfor the plan year ended July 31, 2004. Based upon currently available information, we will not be required tomake 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 ordinarycourse of business.  We do not believethat the disposition of any such suits or claims will have a material adverseeffect upon our consolidated results of operations, cash flows or financialposition.**

 

10

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** **

9**.****    **Restatements

##### ** **

##### **Subsequentto the issuance of the second quarter 2005 financial statements, we correctederrors in our previously issued financial statements related to 1) theclassification of construction allowances in our balance sheets and statementsof cash flows and 2) the classification of the changes in our RetainedInterests in connection with the Credit Card Facility in our statements of cashflows.  Previously reported operatingearnings, net income, earnings per share and shareholders’ equity were notimpacted by these corrections.**

##### ** **

##### ***Construction Allowances***.  On February7, 2005, the Chief Accountant of the Securities and Exchange Commission (SEC)released a letter regarding various lease accounting issues and the applicationof generally accepted accounting principles to such issues.  Following the issuance of the letter by theSEC, we reviewed our accounting policies related to construction allowances anddetermined that our classification of construction allowances in our balancesheets and statements of cash flows was not in accordance with generallyaccepted accounting principles.

##### ** **

##### **Weperiodically receive allowances from developers related to the construction ofour stores.  Historically, we recordedthese allowances as a reduction of capital expenditures and, as result, thecarrying 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 areduction of property and equipment to deferred real estate credits on ourbalance sheets.  These deferred realestate credits are amortized over the lease term which is consistent with theamortization period for the constructed assets.**

##### ** **

##### **Inaddition, 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 theclassification of the cash receipts of construction allowances to cash flowsfrom operating activities and, as a result, restated the statements of cashflows.**

 

***Retained Interests. ***Pursuant tothe terms of the Credit Card Facility, as more fully described in Note 6, ourRetained Interests fluctuate monthly based on the underlying balance of ourcredit card receivables.  We previouslyreflected the changes in our Retained Interests in the determination of cashflows from investing activities.  We havedetermined that such presentation is not in accordance with generally acceptedaccounting principles and have corrected such error by restating our statementsof cash flows to include the changes in the Retained Interests in thedetermination of cash flows from operating activities.

##### ** **

##### **Thefollowing table summarizes the impact of these restatements in our previouslyissued 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

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##### ** **

| ** **                                            | ** ** | ** **                    | ** ** | **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

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

 

**EXECUTIVE OVERVIEW**

 

**Thefollowing discussion and analysis gives effect to the restatements described inNote 9 of the Notes to Condensed Consolidated Financial Statements.**

 

**Company Profile**

 

The Neiman Marcus Group, Inc., together with its operating divisionsand subsidiaries, is a high-end specialty retailer.  Our operations include the Specialty RetailStores segment and the Direct Marketing segment.  Our Specialty Retail Stores segment consistsprimarily of Neiman Marcus and Bergdorf Goodman stores.  Our Direct Marketing segment conducts bothprint catalog and online operations under the brand names of Neiman Marcus,Horchow and Bergdorf Goodman and until its disposition in November 2004, theChef’s Catalog brand name.  In November2004, we sold our Chef’s Catalog operations, as more fully described in Note 2to the Condensed Consolidated Financial Statements.

** **

We own a 51 percent interest in Gurwitch Products, LLC, whichdistributes and markets the Laura Mercier cosmetic line, and a 56 percentinterest in Kate Spade LLC, a manufacturer and retailer of high-end designerhandbags and accessories.  GurwitchProducts, LLC and Kate Spade LLC are hereafter referred to collectively as the “BrandDevelopment Companies.”

 

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

 

The information containedin this “Management’s Discussion and Analysis of Financial Condition andResults of Operations” (MD&A) should be read in conjunction with ouramendment to the Annual Report on Form 10-K/A for the fiscal year ended July31, 2004.  Unless otherwise specified,the meanings of all defined terms in MD&A are consistent with the meaningsof such terms as defined in the Notes to the Condensed Consolidated FinancialStatements.

 

**Overview of the Business**

 

We believe that our unique product assortment of luxury, designer andfashion merchandise, coupled with our sales promotion activities and ourcommitment to superior customer service, have been critical to our success inthe past.  In addition, we believe thesefactors are critical to our future growth and success.

 

We conduct our selling activities in two primary selling seasons, Falland Spring.  Sales and margins fluctuateduring each selling season due to the results of in-store marketing andfull-price selling towards the beginning of each season and sales on a markeddown basis towards the end of each season. As a result of the seasonality of our selling activities, inventorymanagement is critical to our success.

 

Inherent in the successful execution of our business plans,particularly our inventory management strategy, is our ability both to predictthe fashion trends that will be of interest to our customers and to anticipatethe future spending patterns of our customer base.  Accordingly, we monitor the sales performanceof our inventories throughout each season. We seek to order additional goods to supplement our original purchasingdecisions when the level of customer demand is higher than originallyanticipated.  However, in certainmerchandise categories, particularly fashion apparel, our ability to purchaseadditional goods can be limited.  Thiscan result in lost sales in the event of higher than anticipated demand for thefashion goods offered or a higher than anticipated level of consumer spending.  Conversely, in the event we buy fashion goodsthat are not accepted by our customer or the level of consumer spending is lessthan we anticipated, we typically incur a higher than anticipated level ofmarkdowns, net of vendor allowances, to sell the goods that remain at the endof the season, resulting in lower operating profits.  We believe that the experience of ourmerchandising and selling organizations helps to minimize the inherent risk inpredicting fashion trends and related demand.

 

13

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**Second Quarter Fiscal Year 2005 Highlights**

 

Diluted earnings per share for the second quarter of 2005 increased18.2 percent to $1.43 from $1.21 in the prior year period. Other significanthighlights 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 secondquarter of 2005 while comparable revenues increased 10.4 percent.  Year to date, revenues have increased 9.1percent while comparable revenues have increased 10.8 percent.  We have experienced double digit percentageincreases in comparable store sales in each of our last six consecutivequarters.  For Specialty Retail Stores,our sales per square foot for the last twelve trailing months increased to $555as of January 2005 compared to $494 as of January 2004.

 

•      **Margins** – Margins increased to 32.5 percent of revenues inthe second quarter of 2005 from 31.4 percent in the second quarter of2004.  Year to date, margins haveincreased to 35.4 percent of revenues from 34.2 percent in the prior yearperiod.  These increases are reflectiveof the high level of acceptance and demand for the fashion goods we offer aswell 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 ofrevenues in the second quarter of 2005 from 22.8 percent in the second quarter2004 and to 23.3 percent of revenues year-to-date from 24.1 percent in theprior year period.

 

•      **Operating earnings**– Operating earnings increased 33.0percent in the second quarter of 2005, representing 10.6 percent of ourrevenues compared to 8.6 percent in the second quarter of 2004.  Year to date, operating earnings increased22.6 percent, representing 11.3 percent of our revenues for 2005 compared to10.0 percent in 2004.  Operating earningswere 10.8 percent of revenues in the second quarter and 13.3 percent year todate for our Specialty Retail Stores and 14.8 percent of revenues in the secondquarter and 12.0 percent year to date for Direct Marketing.

 

**OPERATING RESULTS**

 

**Performance Summary**

 

Thefollowing table sets forth certain items expressed as percentages of net salesfor 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

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Set forth in the following table is certain summary information withrespect 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 |   |

 

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

 

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

 

**(3)**   The calculation of the changes in comparablerevenues has been adjusted to give recognition to the change in classificationof revenues deferred in connection with our loyalty programs, as more fullydescribed in Note 1 to the Condensed Consolidated Financial Statements.

 

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

 

15

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**Thirteen Weeks Ended January 29, 2005 Compared toThirteen Weeks Ended January 31, 2004**

 

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

 

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

 

Revenues increased in the second quarter of 2005 compared to the prioryear at all our operating companies, consistent with a higher level of consumerspending, in general, with a higher increase coming from the affluent luxurycustomer served by the Company.  Inaddition, we believe the increases in comparable revenues were driven by salesevents conducted by our Specialty Retail Stores and by the growth of internetsales for Direct Marketing.  In thesecond quarter of 2005, internet sales by Direct Marketing, excluding Chef’sCatalog, were $98.5 million, an increase of 49.0 percent from the secondquarter of 2004.

 

***Gross margin.***  Due to promotional events and the markdownsincurred in the second quarter related to the clearance of Fall Seasonmerchandise, we generate a lower gross margin in the second quarter compared tothe first quarter of each year.  Ourgross margin was 32.5 percent of revenues for the second quarter of 2005compared to 31.4 percent in the prior year period.  The increase in gross margin from the prioryear period was due primarily to:

 

•      higherproduct margins;

 

•      adecrease in buying and occupancy costs as a percentage of revenues.

 

We generated higher product margins at our Specialty Retail Storesduring the second quarter of 2005.  Webelieve this increase in product margins was due to the higher level offull-price sales generated during the quarter and our continued emphasis oninventory management.  We incurred ahigher level of net markdowns in our Direct Marketing operations due to lowerthan anticipated sales in our catalog operations during the December holidayseason.

 

Consistent with industry business practice, we receive allowances fromcertain of our vendors in support of the merchandise we purchase forresale.  We receive certain allowances toreimburse us for markdowns taken and/or to support the gross margins earned inconnection with the sales of the vendor’s merchandise.  We recognize these allowances as an increaseto gross margin when the allowances are earned and approved by the vendor.  Other allowances we receive representreductions to the amounts paid to acquire the merchandise.  We recognize these allowances as a reductionin the cost of the acquired merchandise resulting in an increase to grossmargin at the time the goods are sold. While the dollar value of the vendor reimbursements we receiveddecreased slightly as a percentage of revenues in the second quarter of 2005compared to the prior year period, primarily due to a higher level offull-price selling, this decrease did not have a significant impact on theyear-over-year change in the gross margin we realized in the second quarter of2005.

 

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

 

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

 

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

 

•    lowermarketing and advertising costs for Direct Marketing consistent with a plannedshift in spending to the first quarter of 2005;

 

•    lowercosts for incentive compensation;

 

•    lowerprofessional fees;

 

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

 

16

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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 cardportfolio due to the required amortization during the Transition Period of thepremium associated with the carrying value of the Retained Interests, as morefully described in Note 6 of the Notes to Condensed Consolidated FinancialStatements.

 

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

 

•      theincrease in preopening costs incurred in the second quarter of 2005 inconnection with the remodel of our stores in San Francisco, Newport Beach, LosAngeles and Houston;

 

•      increasesin payroll for our Direct Marketing and the Brand Development Companies insupport of new business initiatives and the expansion of Kate Spade operations.

 

In addition, SG&A expenses were reduced in the second quarter of2004 by the favorable impact of conclusions of certain sales tax and unclaimedproperty examinations for which the agreed-on settlements were less than theamounts previously estimated by the Company.

 

***Segment operating earnings.***  Operating earnings for our Specialty RetailStores 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 salesand gross margin and net decreases in both buying and occupancy expenses andSG&A expenses as a percentage of revenues.

 

Operating earnings for Direct Marketing increased to $27.9 million inthe 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 buyingand occupancy costs and SG&A expenses as a percentage of revenues.

 

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

 

***Income taxes.***  Our effective income tax rate was 38.3percent for the second quarter of 2005 and 30.3 percent for the prior yearperiod.  In the second quarter of 2004,the Company recognized a net income tax benefit of $7.5 million related tofavorable settlements associated with previous state tax filings.  Excluding this benefit, the effective taxrate was 39.0 percent for the second quarter of 2004.

 

 

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

 

***Revenues.**** *Our revenues for2005 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 theprior year period.  Comparable revenuesincreased 10.3 percent for Specialty Retail Stores and 14.7 percent for DirectMarketing.  Comparable revenues in 2004increased 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 operatingcompanies, consistent with a higher level of consumer spending, in general,with a higher increase coming from the affluent luxury customer served by thecompany.  In addition, we believe theincreases in comparable revenues were driven by sales events conducted by ourSpecialty Retail Stores and by the growth of internet sales for DirectMarketing.  In 2005, internet sales byDirect Marketing, excluding Chef’s Catalog, were $159.2 million, an increase of46.5 percent from 2004.

 

17

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***Gross margin.***  Gross margin was 35.4 percent of revenues for2005 compared to 34.2 percent in the prior year period.  The increase in gross margin was dueprimarily to:

 

•      higherproduct margins;

 

•      adecrease in buying and occupancy costs as a percentage of revenues.

 

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

 

Consistent with industry business practice, we receive allowances fromcertain of our vendors in support of the merchandise we purchase forresale.  We receive certain allowances toreimburse us for markdowns taken and/or to support the gross margins earned inconnection with the sales of the vendor’s merchandise.  We recognize these allowances as an increaseto gross margin when the allowances are earned and approved by the vendor.  Other allowances we receive representreductions to the amounts paid to acquire the merchandise.  We recognize these allowances as a reductionin the cost of the acquired merchandise resulting in an increase to grossmargin at the time the goods are sold. While the dollar value of the vendor reimbursements we receiveddecreased slightly as a percentage of revenues in 2005 compared to the prioryear period, primarily due to a higher level of full-price selling, thisdecrease did not have a significant impact on the year-over-year change in thegross margin we realized in 2005.

 

A significant portion of our buying and occupancy costs are fixed innature.  Buying and occupancy costsdecreased as a percentage of revenues during 2005 compared to the prior yearperiod primarily due to the leveraging of fixed expenses, including payrollexpenses and depreciation, over the higher level of revenues we generatedduring 2005.

 

***Selling, general and administrative expenses*.**  SG&A expenses were 23.3 percent ofrevenues 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 in2005 was primarily due to:

 

•      lowercosts for incentive compensation;

 

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

 

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

 

These decreases in SG&A expenses as a percentage of revenues werepartially offset by increases in payroll for our Direct Marketing and BrandDevelopment Companies in support of new business initiatives and the expansionof Kate Spade operations.  In addition,SG&A expenses were reduced in the second quarter of 2004 for the favorableimpact of conclusions of certain sales tax and unclaimed property examinationsfor which the agreed-on settlements were less than the amounts previouslyestimated by the Company.

 

***Loss on disposition of Chef’s Catalog*.**   In November 2004, we sold our Chef’s Catalogdirect marketing business to a private equity firm.  Chef’s Catalog is a multi-channel retailer ofprofessional-quality kitchenware with revenues of approximately $73 million infiscal year 2004.  At October 30, 2004,Chef’s Catalog had net tangible assets, primarily inventory, of $12.5 millionand net intangible assets of $17.2 million. We received proceeds, net of selling costs, of $14.4 million from thesale. As the carrying value of the Chef’s Catalog assets exceeded the netproceeds from the sale, we incurred a pre-tax loss of $15.3 million in thefirst quarter of 2005 related to the disposition of Chef’s Catalog.

 

***Segment operating earnings.***  Operating earnings for our Specialty RetailStores segment were $218.9 million for 2005 compared to $163.9 million for theprior year period.  This 33.6 percentincrease was primarily the result of increased sales and margins and netdecreases in both buying and occupancy expenses and SG&A expenses as apercentage of revenues.

 

Operating earnings for Direct Marketing increased to $39.3 million in2005 from $35.4 million for the prior year period, 

 

18

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

 

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

 

***Income taxes.***  Our effective income tax rate was 38.5percent for 2005 and 34.8 percent for the prior year period.  In the second quarter of 2004, the Companyrecognized a net income tax benefit of $7.5 million related to favorablesettlements associated with previous state tax filings.  Excluding this benefit, the effective taxrate was 39.0 percent for 2004.

 

**Outlook**

 

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

 

**Inflation and Deflation**

 

We believe changes in revenues and net earnings that have resulted frominflation or deflation have not been material during the periodspresented.  In recent years, we haveexperienced certain inflationary conditions related to 1) increases in productcosts due primarily to changes in foreign currency exchange rates that havereduced the purchasing power of the U.S. dollar and 2) increases inSG&A.  We attempt to offset theeffects of inflation through control of expenses and price increases, althoughour ability to increase prices may be limited by competitive factors.  We attempt to offset the effects ofmerchandise deflation, which has occurred on a limited basis in recent years,through control of expenses.  There is noassurance, however, that inflation or deflation will not materially affect ouroperations in the future.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

Our cash requirements consist principally of:

 

•      thefunding of our accounts receivable and merchandise purchases;

 

•      capitalexpenditures for new store growth, store renovations and upgrades of ourmanagement information systems;

 

•      debtservice requirements;

 

•      obligationsrelated to our Pension Plan.

 

Our working capital requirements fluctuate during the year, increasingsubstantially during the first and second quarters of each fiscal year as aresult of higher seasonal levels of accounts receivable and inventory.   We typically finance the increases inworking capital needs during the first and second fiscal quarters with cashflows from operations, cash provided from the Credit Card Facility andborrowings under our $350 million unsecured Credit Agreement.

 

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

 

We believe thatoperating cash flows, currently available vendor financing and amountsavailable pursuant to our Credit Agreement should be sufficient to fund ouroperations and debt service requirements, including repayment of the $225million Credit Card Facility, Pension Plan funding requirements, contractualobligations and commitments and currently 

 

19

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anticipated capitalexpenditure requirements through the end of 2005.  In addition, we are evaluating our optionsregarding the possible replacement of the Credit Card Facility which expires inSeptember 2005.

 

We generated cash from operations, prior to changes in operating assetsand liabilities, of $220.5 million in 2005 compared to $186.3 million in prioryear period.  This $34.2 million increasein cash generated from operations was due to higher sales and earnings levelsrealized in 2005.  Net cash provided byoperating activities was $90.2 million in 2005, reflecting the funding of a$123.0 million seasonal increase in our accounts receivable and merchandiseinventories.  Both accounts receivableand inventories were higher at the end of the second quarter of 2005 comparedto 2004 consistent with our higher sales levels.  In the presentation of net cash flows used byoperating activities in 2004 of $32.1 million in the accompanying statement ofcash flows, the cash generated from operations was reduced by the net increasein our undivided interests in the NMG Credit Card Master Trust and accountsreceivable from $265.7 million at August 2, 2003 to $485.7 million at January31, 2004.  This increase in accountsreceivable is attributable to both a higher investment in accounts receivabledue to higher revenues in 2004 and the discontinuance of Off-Balance SheetAccounting beginning in December 2003, as more fully described in Note 6 of theNotes to Condensed Consolidated Financial Statements.

 

Net cash used for investing activities was $80.7 million in 2005compared to $48.4 million in the prior year period.  The increase in cash used for investingactivities in 2005 was primarily due to a higher level of capital expendituresin 2005, offset by $14.4 million of proceeds from the sale of Chef’s Catalog in2005.

 

Capital expenditures were $95.1 million in 2005 and $48.4 million inthe prior year period.  We incurredcapital expenditures in the second quarter of 2005 related to the ongoingconstruction of new stores in San Antonio, Texas and Boca Raton, Florida andthe remodels of our San Francisco, Houston, Los Angeles and Newport Beachstores.  We currently project capitalexpenditures for 2005 to be approximately $170 million to $180 millionprimarily for new store construction, store renovations and upgrades toinformation systems, including warehousing systems to support our DirectMarketing operation and a new human capital management system.  We are currently remodeling our stores inNewport Beach, Los Angeles, San Francisco and Houston.  We expect to complete the expansion andrenovation of the Newport Beach and Los Angeles stores in the spring of fiscalyear 2005 and the San Francisco and Houston stores in the spring of fiscal year2006.  We expect to open our San Antonioand Boca Raton stores in the first quarter of fiscal year 2006.

 

**Financing Structure**

 

Ourmajor sources of funds are comprised of vendor financing, the $350 millionunsecured Credit Agreement, the $225 million Credit Card Facility, $125 millionsenior unsecured notes, $125 million senior unsecured debentures, operatingleases and capital leases.

 

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

 

Inthe second quarter of 2005, our Board of Directors increased our quarterly cashdividend to $0.15 per share from $0.13 per share in the prior yearquarter.  We declared dividends onJanuary 28, 2005 aggregating $7.3 million. These dividends were paid in February 2005.

 

In prior years, our Board of Directors authorized various stockrepurchase programs and increases in the number of shares subject torepurchase.  In the second quarter of2005, we repurchased 4,100 shares at an average price of $57.60. As of January29, 2005, approximately 1.2 million shares remain available for repurchaseunder the stock repurchase programs.

 

**Off-Balance Sheet Arrangements**

 

Pursuant to a revolving Credit Card Facility, we transfer substantiallyall of our credit card receivables to a wholly-owned subsidiary, Neiman MarcusFunding Corporation, which in turn sells such receivables to the Neiman MarcusCredit Card Master Trust (Trust).  At theinception of the Credit Card Facility in September 2000, the Trust issued certificatesrepresenting undivided interests in the credit card receivables to third-partyinvestors in the face amount of $225 million (Sold Interests).  We hold certificates representing interestsin the credit card portfolio equal to the excess of the balance of 

 

20

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the credit card portfolio over $225 million (Retained Interests).  In order to maintain the committed level ofsecuritized assets, the Trust uses cash collections on the securitizedreceivables to purchase new credit card balances from us in accordance with theterms of the Credit Card Facility. Beginning in April 2005, cash collections will be used by the Trust torepay the $225 million principal balance of the Class A Certificates in six monthlyinstallments of $37.5 million.

 

From the inception of the Credit Card Facility until December 2003, ourtransfers and sales of credit card receivables pursuant to the terms of theCredit Card Facility were accounted for as sales (Off-Balance Sheet Accounting).  As a result, we removed the $225 million ofcredit card receivables sold from our balance sheet at the inception of theCredit Card Facility and our $225 million repayment obligation to the holdersof the certificates representing the Sold Interests was not required to beshown as a liability on our consolidated balance sheet.  During the period the transfers and salesqualified for Off-Balance Sheet Accounting, the Retained Interests were shownas “Undivided interests in NMG Credit Card Master Trust” on our consolidatedbalance sheets.

 

Beginning in December 2003, our subsequent transfers to the Trustceased to qualify for Off-Balance Sheet Accounting.  Rather, credit card receivables transferredto the Trust after November 2003 remain on our balance sheet and are recordedas secured borrowings (Financing Accounting). Our entire credit card portfolio is now included in accounts receivableand the $225 million of outstanding borrowings under the Credit Card Facilityare shown as a liability in our condensed consolidated balance sheet.

 

Oursecuritization of credit card receivables is more fully described in Note 6 ofthe Notes to Condensed Consolidated Financial Statements.

 

**OTHER MATTERS**

 

**FactorsThat May Affect Future Results**

 

**Mattersdiscussed in MD&A include forward-looking statements.  We make these forward-looking statementsbased on our expectations and beliefs concerning future events, as well ascurrently available data.  Theseforward-looking statements involve a number of risks and uncertainties and,therefore, are not guarantees of future performance.  A variety of factors could cause our actualresults to differ materially from the anticipated or expected results expressedin our forward-looking statements. Factors that could affect future performance include, but are notlimited, to:**

** **

**Politicaland General Economic Conditions**

 

**•**      currentpolitical and general economic conditions or changes in such conditions;

**•**      terroristactivities in the United States;

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

 

**CustomerDemographic Issues**

 

**•**      changes in thedemographic or retail environment;

**•**      changes inconsumer confidence resulting in a reduction of discretionary spending on goodsthat are, or are perceived to be, “luxuries”;

**•**      changes inconsumer preferences or fashion trends;

**•**      changes in ourrelationships with key customers;

**•**      changes in ourproprietary credit card arrangement that adversely impact our ability toprovide consumer credit;

 

**MerchandiseProcurement and Supply Chain Considerations**

 

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

**•**      delays inreceipt of merchandise ordered due to work stoppages and/or other causes ofdelay in connection with either the manufacture or shipment of suchmerchandise;

 

21

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**•**      changes inforeign currency exchange rates;

**•**      significantincreases in paper, printing and postage costs;

 

**Industryand Competitive Factors**

 

**•**      competitiveresponses to our marketing, merchandising and promotional efforts and/orinventory liquidations by vendors or other retailers;

**•**      seasonality ofthe retail business;

**•**      adverse weatherconditions or natural disasters, particularly during peak selling seasons;

**•**      delays inanticipated store openings and renovations;

** **

**EmployeeConsiderations**

 

**•**      changes in keymanagement personnel;

**•**      changes in ourrelationships with certain of our key sales associates;

 

**Legaland Regulatory Issues**

 

**•**      changes ingovernment or regulatory requirements increasing our costs of operations;

**•**      litigation thatmay have an adverse effect on our financial results or reputation;

** **

**OtherFactors**

 

**•**      impact offunding requirements related to our noncontributory defined benefit pensionplan;

**•**      the design andimplementation of new information systems as well as enhancements of existingsystems.

** **

**Weundertake no obligation to update or revise (publicly or otherwise) anyforward-looking statements to reflect subsequent events, new information orfuture circumstances.**

** **

**Critical Accounting Policies**

 

The preparation of condensed financial statements in conformity withgenerally accepted accounting principles requires us to make estimates andassumptions about future events.  Theseestimates and assumptions affect amounts of assets, liabilities, revenues andexpenses and the disclosure of gain and loss contingencies at the date of theCondensed Consolidated Financial Statements. Our current estimates are subject to change if different assumptions asto the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis andpredicate those estimates and judgments on historical experience and on variousother factors that we believe are reasonable under the circumstances.  We make adjustments to our assumptions andjudgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolutecertainty, actual results may differ from the estimates we used in preparingthe accompanying Condensed Consolidated Financial Statements.

 

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

 

 

***Reclassification – Loyalty Programs*.**  As more fully described in Note 1, asubstantial portion of the points earned by customers in connection with ourloyalty programs are redeemed for gift cards. At the time the qualifying sales giving rise to the loyalty programpoints are made, we defer the portion of the revenues on the qualifying salestransactions equal to our estimate of the retail value of the gift cards to beissued upon conversion of the points to gift cards.   Beginning in the first quarter of 2005, webegan to record the deferral of revenues related to gift card awards under ourloyalty programs as a reduction of revenues. Previously, we charged suchamounts to selling, general and administrative expenses.  In addition, we now charge the cost of allother awards under our loyalty programs to cost of goods sold rather thanSG&A.  These changes 

 

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

 

***Changes in Comparable Revenues.***  As more fully described in Note 2, we havesold our Chef’s Catalog operations.  Thechanges in comparable revenues have been adjusted 1) to exclude the revenues ofChef’s Catalog operations for all periods prior to the sale and 2) to giverecognition to the change in classification of revenues deferred in connectionwith 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 quarter2005 financial statements, we corrected errors in our previously issuedfinancial statements related to 1) the classification of constructionallowances in our balance sheets and statements of cash flows and 2) theclassification of the changes in our Retained Interests in connection with theCredit Card Facility in our statements of cash flows.  Previously reported operating earnings, netincome, earnings per share and shareholders’ equity were not impacted by thesecorrections.  See Note 9 to the CondensedConsolidated Financial Statements.

 

**Recent Accounting Pronouncements**

 

In December 2003, the U.S. Congress enacted the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 (Act) that will provide aprescription drug subsidy, beginning in 2006, to companies that sponsorpostretirement health care plans that provide drug benefits.  Additional legislation is anticipated thatwill clarify whether a company is eligible for the subsidy, the amount of thesubsidy available and the procedures to be followed in obtaining thesubsidy.  In May 2004, the FASB issuedStaff Position 106-2 “Accounting and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003” thatprovides guidance on the accounting and disclosure for the effects of theAct.  The legislation providing the finalstatutory definition of “actuarially equivalent” prescription drug benefits wasenacted in January 2005.  We have not yetbeen able to determine whether the prescription drug benefits offered by ourPostretirement Plan meet the statutory requirements related to actuarialequivalence.  We are currently finalizingthe determination of actuarial equivalence as well as the impact, if any, onour Postretirement Plan.

 

**ITEM 3****.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in our financial instruments represents thepotential loss arising from adverse changes in interest rates and foreigncurrency exchange rates.  We do not enterinto derivative financial instruments for trading purposes.  We seek to manage exposure to adverseinterest rate changes through our normal operating and financing activities. Weare exposed to interest rate risk through our securitization and borrowingactivities, which are described in Notes 2 and 5 to our Consolidated FinancialStatements in our amendment to the Annual Report on Form 10-K/A for the fiscalyear ended July 31, 2004.

 

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

 

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

 

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

 

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

** **

**Theeffects of changes in the U.S. equity and bond markets serve to increase ordecrease the value of Pension Plan assets, resulting in an increase or decreasein our cash funding obligation.  We seekto manage exposure to adverse equity and bond returns by maintainingdiversified investment portfolios and utilizing professional investmentmanagers.**

** **

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

 

**ITEM 4.****  CONTROLS AND PROCEDURES**

 

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

 

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

 

In coming to the conclusion that our internal controls over financialreporting were effective as of January 29, 2005, we considered, among otherthings, the control deficiencies related to both the accounting andclassification of construction allowances and the classification of cash flowsin the statements of cash flows, which resulted in the restatements of ourpreviously issued financial statements as disclosed in Note 9 of this Form10-Q/A.  After reviewing and analyzingapplicable authoritative guidance (including the Securities and ExchangeCommission’s Staff Accounting Bulletin No. 99, “Materiality,” AccountingPrinciple Board Opinion No. 20, “Accounting Changes” and Public CompanyAccounting Oversight Board Auditing Standard No. 2, “An Audit of InternalControl over Financial Reporting Performed in Conjunction with an Audit ofFinancial Statements”) and taking into consideration that the restatements didnot impact previously reported amounts for revenues, net earnings, earnings pershare, total cash flows or shareholder’s equity, we concluded that the controldeficiencies that resulted in the restatements of the previously issuedfinancial statements were not a material weakness.  Following the identification of the controldeficiencies, we corrected the processes for evaluating, accounting andclassifying construction allowances received and the classification of cashflows in the preparation of our financial statements.

 

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**THE NEIMAN MARCUS GROUP, INC.**

 

**PART II**

 

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

 

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

 

###### **ITEM 2**.     UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Thefollowing table indicates our repurchases of equity securities in the secondquarter 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                                                                                      |       |
|                                      |            |                                          |            |                                      |            |                                                                                                     |            |                                                                                                |            |  |

 

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(1)  In April 2000, the Board ofDirectors authorized up to 4.0 million shares to be repurchased, with noexpiration date.

 

###### **ITEM 4.**     SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS

 

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

 

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

 

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

 

The individuals named below were re-elected to a three-year term asClass 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               |       |

 

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

 

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

 

The Company’s 2005 Stock Incentive Plan was approved with 32,266,271shares 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 sharesabstaining, 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)                                                                                                                                                                                      |

 

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

 

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SIGNATURES

 

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

 

 

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) |                          |     |
|                       |            |                                |                               |          |  |

 

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