**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

### **For the Quarterly Period Ended November 1, 2003**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file no. 1-9659**

 

**The NeimanMarcus 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, including  area code)         |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YES  ý                                                        NO  o

 

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

 

YES  ý                                                        NO  o

 

As of December 1, 2003, 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 |   | 28,979,575              |
| Class B Common Stock, $.01 Par Value |   | 19,941,833              |

 

 

----

 

**THENEIMAN MARCUS GROUP, INC.**

 

#### **INDEX**

 
| Part I.    | Financial Information                                                                                               |                                                                                              |
|------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|       |                                                                                                                |                                                                                              |
|       | Item 1.                                                                                                             | Condensed Consolidated Balance Sheets as of  November 1, 2003,August 2, 2003 and November 2, 2002 |   |
|       |                                                                                                                |                                                                                              |
|       | Condensed Consolidated Statements of Earnings  for the Thirteen Weeks Ended November 1, 2003 and November 2, 2002   |                                                                                              |
|       |                                                                                                                |                                                                                              |
|       | Condensed Consolidated Statements of Cash  Flows for the Thirteen Weeks Ended November 1, 2003 and November 2, 2002 |                                                                                              |
|       |                                                                                                                |                                                                                              |
|       | 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 6.                                                                                                             | Exhibits and Reports on Form 8-K                                                                  |   |
|       |                                                                                                                |                                                                                              |
| Signatures |                                                                                                                |                                                                                              |

 

----

 

**THENEIMAN MARCUS GROUP, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| **(in thousands)**                                                                                           |   | **November  1,  2003** |      | **August 2,  2003** |   | **November  2,  2002** |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------------------|-----------|---------------------|--------|------------------------|--------|
|                                                                                                         |   |                   |      |                |   |                   |   |
| **ASSETS**                                                                                                   |   |                   |      |                |   |                   |   |
| Current assets:                                                                                              |   |                   |      |                |   |                   |   |
| Cash and cash equivalents                                                                                    |   | $                      | 127,524   |                | $      | 206,950                |   | $ | 67,278 |   |
| Undivided interests in NMG Credit Card  Master Trust                                                         |   | 314,138                |      | 243,145             |   | 270,303                |   |
| Accounts receivable                                                                                          |   | 33,075                 |      | 22,595              |   | 29,040                 |   |
| Merchandise inventories                                                                                      |   | 830,319                |      | 687,062             |   | 821,040                |   |
| Other current assets                                                                                         |   | 73,345                 |      | 86,369              |   | 61,240                 |   |
| Total current assets                                                                                         |   | 1,378,401              |      | 1,246,121           |   | 1,248,901              |   |
|                                                                                                         |   |                   |      |                |   |                   |   |
| Property and equipment, net                                                                                  |   | 674,970                |      | 674,185             |   | 677,680                |   |
| Other assets                                                                                                 |   | 112,655                |      | 114,124             |   | 105,822                |   |
| Total assets                                                                                                 |   | $                      | 2,166,026 |                | $      | 2,034,430              |   | $ | 2,032,403 |   |
|                                                                                                         |   |                   |      |                |   |                   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                |   |                   |      |                |   |                   |   |
| Current liabilities:                                                                                         |   |                   |      |                |   |                   |   |
| Notes payable and current maturities of  long-term liabilities                                               |   | $                      | 2,252     |                | $      | 1,241                  |   | $ | 1,163 |   |
| Accounts payable                                                                                             |   | 266,889                |      | 262,909             |   | 266,366                |   |
| Accrued liabilities                                                                                          |   | 323,188                |      | 266,259             |   | 292,947                |   |
| Total current liabilities                                                                                    |   | 592,329                |      | 530,409             |   | 560,476                |   |
|                                                                                                         |   |                   |      |                |   |                   |   |
| Long-term liabilities:                                                                                       |   |                   |      |                |   |                   |   |
| Revolving credit facility borrowings                                                                         |   | —                 |      | —              |   | 50,000                 |   |
| Notes and debentures                                                                                         |   | 249,739                |      | 249,733             |   | 249,716                |   |
| Other long-term liabilities                                                                                  |   | 114,463                |      | 108,234             |   | 80,506                 |   |
| Total long-term liabilities                                                                                  |   | 364,202                |      | 357,967             |   | 380,222                |   |
|                                                                                                         |   |                   |      |                |   |                   |   |
| Minority interest                                                                                            |   | 9,700                  |      | 8,206               |   | 7,796                  |   |
|                                                                                                         |   |                   |      |                |   |                   |   |
| Common stocks                                                                                                |   | 488                    |      | 479                 |   | 480                    |   |
| Additional paid-in capital                                                                                   |   | 471,328                |      | 458,520             |   | 444,577                |   |
| Accumulated other comprehensive income                                                                       |   | (25,642                | )         | (25,573             | )      | 189                    |   |
| Retained earnings                                                                                            |   | 775,667                |      | 719,442             |   | 638,663                |   |
| Treasury stock, at cost (699,777 shares at  November 1, 2003 and 524,177 shares at August 2, 2003) |   | (22,046                | )         | (15,020             | )      | —                 |   |
| Total shareholders’ equity                                                                              |   | 1,199,795              |      | 1,137,848           |   | 1,083,909              |   |
| Total liabilities and shareholders’ equity                                                              |   | $                      | 2,166,026 |                | $      | 2,034,430              |   | $ | 2,032,403 |   |

 

*See Notes toCondensed Consolidated Financial Statements.*

 

1

----

 

**THENEIMAN MARCUS GROUP, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS**

**(UNAUDITED)**

 
|                                                                                |   | **Thirteen  Weeks Ended** |          |
|-------------------------------------------------------------------------------------|--------|---------------------------|---------------|
| **(in thousands, except per share data)**                                           |   | **November  1,  2003**    |          | **November  2,  2002** |   |
|                                                                                |   |                      |          |   |   |
| Revenues                                                                            |   | $                         |  824,863 |   | $ |  734,083 |   |
| Cost of goods sold including buying and occupancy  costs                            |   | 508,412                   |          | 453,931 |   |
| Selling, general and administrative  expenses                                       |   | 219,162                   |          | 204,908 |   |
|                                                                                |   |                      |          |   |   |
| Operating earnings                                                                  |   | 97,289                    |          | 75,244 |   |
|                                                                                |   |                      |          |   |   |
| Interest expense, net                                                               |   | 3,462                     |          | 3,594 |   |
|                                                                                |   |                      |          |   |   |
| Earnings before income taxes, minority  interest and change in accounting principle |   | 93,827                    |          | 71,650 |   |
| Income taxes                                                                        |   | 36,592                    |          | 27,585 |   |
| Earnings before minority interest and  change in accounting principle               |   | 57,235                    |          | 44,065 |   |
| Minority interest in net earnings of  subsidiaries                                  |   | (1,010                    | )             | (740 | ) |
|                                                                                |   |                      |          |   |   |
| Earnings before change in accounting  principle                                     |   | 56,225                    |          | 43,325 |   |
| Change in accounting principle – writedown  of intangible assets, net of taxes |   | —                    |          | (14,801 | ) |
| Net earnings                                                                        |   | $                         |  56,225  |   | $ |  28,524 |   |
|                                                                                |   |                      |          |   |   |
| Weighted average number of common and  common equivalent shares outstanding:        |   |                      |          |   |   |
| Basic                                                                               |   | 47,624                    |          | 47,696 |   |
| Diluted                                                                             |   | 48,396                    |          | 47,970 |   |
|                                                                                |   |                      |          |   |   |
| Basic earnings per share:                                                           |   |                      |          |   |   |
| Earnings before change in accounting  principle                                     |   | $                         | 1.18          |   | $ | 0.91 |   |
| Change in accounting principle                                                      |   | —                    |          | (0.31 | ) |
| Basic earnings per share                                                            |   | $                         | 1.18          |   | $ | 0.60 |   |
|                                                                                |   |                      |          |   |   |
| Diluted earnings per share:                                                         |   |                      |          |   |   |
| Earnings before change in accounting  principle                                     |   | $                         | 1.16          |   | $ | 0.90 |   |
| Change in accounting principle                                                      |   | —                    |          | (0.31 | ) |
| Diluted earnings per share                                                          |   | $                         | 1.16          |   | $ | 0.59 |   |

 

*See Notes to CondensedConsolidated Financial Statements.*

 

2

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**THENEIMAN MARCUS GROUP, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
|                                                                                               |   | **Thirteen  Weeks Ended** |    |
|----------------------------------------------------------------------------------------------------|--------|---------------------------|---------|
| **(in thousands)**                                                                                 |   | **November  1,  2003**    |    | **November 2,  2002** |   |
|                                                                                               |   |                      |    |   |   |
| **CASH FLOWS - OPERATING ACTIVITIES**                                                              |   |                      |    |   |   |
| Net earnings                                                                                       |   | $                         | 56,225  |   | $ | 28,524 |   |
| Change in accounting – non-cash writedown  of intangible assets, net of taxes                 |   | —                    |    | 14,801 |   |
| Earnings before change in accounting  principle                                                    |   | 56,225                    |    | 43,325 |   |
| Adjustments to reconcile net earnings to  net cash provided by (used for) operating activities:    |   |                      |    |   |   |
| Depreciation                                                                                       |   | 21,288                    |    | 19,735 |   |
| Minority interest                                                                                  |   | 1,010                     |    | 740 |   |
| Other – primarily costs related to defined  benefit pension and other long-term benefit plans |   | 8,645                     |    | 3,680 |   |
| Changes in operating assets and  liabilities:                                                      |   |                      |    |   |   |
| Increase in accounts receivable                                                                    |   | (10,480                   | )       | (9,262 | ) |
| Increase in merchandise inventories                                                                |   | (143,257                  | )       | (164,196 | ) |
| Increase in accounts payable and accrued  liabilities                                              |   | 61,566                    |    | 47,625 |   |
| Other                                                                                              |   | 13,118                    |    | 2,757 |   |
| **NET CASH PROVIDED BY (USED FOR) OPERATING  ACTIVITIES**                                          |   | 8,115                     |    | (55,596 | ) |
|                                                                                               |   |                      |    |   |   |
| **CASH FLOWS - INVESTING ACTIVITIES**                                                              |   |                      |    |   |   |
| Capital expenditures                                                                               |   | (22,073                   | )       | (44,249 | ) |
| Transactions related to undivided interests  in NMG Credit Card Master Trust:                      |   |                      |    |   |   |
| Purchases of held-to-maturity securities                                                           |   | (303,326                  | )       | (244,663 | ) |
| Maturities of held-to-maturity securities                                                          |   | 231,753                   |    | 182,962 |   |
| **NET CASH USED FOR INVESTING ACTIVITIES**                                                         |   | (93,646                   | )       | (105,950 | ) |
|                                                                                               |   |                      |    |   |   |
| **CASH FLOWS - FINANCING ACTIVITIES**                                                              |   |                      |    |   |   |
| Proceeds from borrowings                                                                           |   | 1,000                     |    | 50,000 |   |
| Acquisitions of treasury stock                                                                     |   | (7,026                    | )       | — |   |
| Proceeds from exercises of stock options  and restricted stock grants                              |   | 12,293                    |    | 186 |   |
| Distribution  paid                                                                                 |   | (162                      | )       | — |   |
| **NET CASH PROVIDED  BY FINANCING ACTIVITIES**                                                     |   | 6,105                     |    | 50,186 |   |
|                                                                                               |   |                      |    |   |   |
| **CASH AND CASH EQUIVALENTS**                                                                      |   |                      |    |   |   |
| Decrease during the period                                                                         |   | (79,426                   | )       | (111,360 | ) |
| Beginning balance                                                                                  |   | 206,950                   |    | 178,638 |   |
| Ending balance                                                                                     |   | $                         | 127,524 |   | $ | 67,278 |   |
|                                                                                               |   |                      |    |   |   |
| **SUPPLEMENTAL  SCHEDULE OF CASH FLOW INFORMATION**                                                |   |                      |    |   |   |
| Cash paid during the period for:                                                                   |   |                      |    |   |   |
| Interest                                                                                           |   | $                         | 174     |   | $ | 156 |   |
| Income taxes                                                                                       |   | $                         | 586     |   | $ | 290 |   |

 

*See Notes toCondensed Consolidated Financial Statements.*

 

3

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**THENEIMAN MARCUS GROUP, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.                                       Basisof Presentation

 

The Condensed Consolidated Financial Statements of The Neiman MarcusGroup, Inc. and subsidiaries (the Company) have been prepared in accordancewith generally accepted accounting principles for interim financial informationand the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedfor complete financial statements. Therefore, the financial statements should be read in conjunction withthe Company’s Annual Report on Form 10-K for the fiscal year endedAugust 2, 2003.

 

The Company’s fiscal year ends on the Saturday closest to July 31.  All references to the first quarter of 2004relate to the thirteen weeks ended November 1, 2003 and all references to thefirst quarter of 2003 relate to the thirteen weeks ended November 2, 2002.  All references to 2004 relate to thefifty-two weeks ending July 31, 2004.

 

In the opinion of management, the accompanying unaudited condensedconsolidated financial statements contain all adjustments, consisting of normalrecurring adjustments (as well as a change in accounting principle made in thefirst quarter of 2003 as more fully described in Note 7) necessary to presentfairly the financial position, results of operations and cash flows of theCompany for the applicable interim periods. The results of operations for these periods are not necessarilycomparable to, or indicative of, results of any other interim period or for thefiscal year as a whole.

 

Certain prior period balances have been reclassified to conform to thecurrent period presentation.

 

**The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions about future events. These estimates and assumptions affect the amounts of assets,liabilities, revenues and expenses and the disclosure of gain and losscontingencies at the date of the condensed consolidated financial statements.**

 

**The Company evaluates its estimates and judgments on anongoing basis and predicates those estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances.  Managementmakes adjustments to its assumptions and judgments when facts and circumstancesdictate.  Since future events and theireffects cannot be determined with absolute certainty, actual results may differfrom the estimates used by the Company in preparing the accompanying condensedconsolidated financial statements.**

 

**Management of the Company believes the following criticalaccounting policies, among others, encompass the more significant judgments andestimates used in preparation of its financial statements:**

 

•                  Revenuerecognition;

 

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

 

•                  Recognition ofincome and expenses related to the Company’s securitization program;

 

•                  Determination ofimpairment of long-lived assets;

 

•                  Recognition ofadvertising and catalogue costs;

 

•                  Recognition ofcosts related to the Company’s loyalty programs;

 

•                  Recognition ofincome taxes; and

 

•                  Measurement ofaccruals for litigation, general liability, workers’ compensation and healthinsurance as well as short-term disability, pension and postretirement healthcare benefits.

 

A description of the Company’s critical accounting policies is includedin the Company’s Annual Report on Form 10-K for the fiscal year ended August 2, 2003.

 

4

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***Stock-BasedCompensation***. The Company accounts for stock-based compensation awards to employees inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. Accordingly, nocompensation expense has been recognized for stock options since all optionsgranted had an exercise price equal to the market value of the Company’s commonstock on the grant date.

 

The following table illustrates the effect on net earnings and earningsper share as if the Company had applied the fair value recognition provisionsof SFAS No. 123 to stock-based employee compensation using theBlack-Scholes option-pricing model for the first quarter of 2004 and 2003:

 
|                                                                                                            |   | **Thirteen  Weeks Ended** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|
| **(in thousands, except per share data)**                                                                       |   | **November  1,  2003**    |   | **November  2,  2002** |   |
|                                                                                                            |   |                      |   |   |   |
| Net earnings:                                                                                                   |   |                      |   |   |   |
| As reported                                                                                                     |   | $                         | 56,225 |   | $ | 28,524 |   |
| Less: stock-based employee compensation  expense determined under fair value based method, net of related taxes |   | (2,042                    | )      | (1,984 | ) |
| Pro forma                                                                                                       |   | $                         | 54,183 |   | $ | 26,540 |   |
|                                                                                                            |   |                      |   |   |   |
| Basic earnings per share:                                                                                       |   |                      |   |   |   |
| As reported                                                                                                     |   | $                         | 1.18   |   | $ | 0.60 |   |
| Pro forma                                                                                                       |   | $                         | 1.14   |   | $ | 0.56 |   |
|                                                                                                            |   |                      |   |   |   |
| Diluted earnings per share:                                                                                     |   |                      |   |   |   |
| As reported                                                                                                     |   | $                         | 1.16   |   | $ | 0.59 |   |
| Pro forma                                                                                                       |   | $                         | 1.12   |   | $ | 0.55 |   |

 

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-pricing model has inherentlimitations in calculating the fair value of stock options for which no activemarket exists since the model does not consider the inability to sell or transferoptions, vesting requirements and a reduced exercise period upon termination ofemployment - all of which would reduce the fair value of the options.

 

5

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2.                                       OperatingSegments

 

The Company has identified two reportable segments: Specialty RetailStores and Direct Marketing.  TheSpecialty Retail Stores segment includes all Neiman Marcus and Bergdorf Goodmanretail stores, including Neiman Marcus clearance stores.  The Direct Marketing segment conducts bothprint catalogue and online operations under the Neiman Marcus, Horchow andChef’s Catalogue brand names.  Otherincludes the operations of Kate Spade LLC and Gurwitch Products, LLC (the BrandDevelopment Companies) and corporate expenses.

 

The following table sets forth the information for the Company’sreportable segments:

 
|                    |   | **Thirteen  Weeks Ended** |    |
|-------------------------|--------|---------------------------|---------|
| **(in thousands)**      |   | **November  1,  2003**    |    | **November  2,  2002** |   |
| REVENUES:               |   |                      |    |   |   |
| Specialty Retail Stores |   | $                         | 670,568 |   | $ | 601,121 |   |
| Direct Marketing        |   | 128,006                   |    | 114,365 |   |
| Other                   |   | 26,289                    |    | 18,597 |   |
| Total                   |   | $                         | 824,863 |   | $ | 734,083 |   |
|                    |   |                      |    |   |   |
| OPERATING  EARNINGS:    |   |                      |    |   |   |
| Specialty Retail Stores |   | $                         | 91,109  |   | $ | 73,845 |   |
| Direct Marketing        |   | 10,624                    |    | 7,417 |   |
| Other                   |   | (4,444                    | )       | (6,018 | ) |
| Total                   |   | $                         | 97,289  |   | $ | 75,244 |   |

 

3.                                       StockRepurchase Program

 

In prior years, the Company’s Board of Directors authorized variousstock repurchase programs and increases in the number of shares subject torepurchase.  During the first quarter of2004, the Company repurchased 175,600 shares at an average purchase price of$40.01.  As of November 1, 2003,approximately 1.2 million shares remain authorized for repurchase under theCompany’s stock repurchase programs.

 

4.                                       Earningsper Share

 

The weighted average shares used in computing basic and diluted earningsper share (EPS) are presented in the table below.  No adjustments were made to net earnings for the computations ofbasic and diluted EPS during the periods presented.

 
|                                                   |   | **Thirteen  Weeks Ended** |   |
|--------------------------------------------------------|--------|---------------------------|--------|
| **(in thousands of shares)**                           |   | **November  1,  2003**    |   | **November 2,  2002** |   |
|                                                   |   |                      |   |   |   |
| Weighted average shares outstanding                    |   | 48,078                    |   | 47,981 |   |
| Less: shares of non-vested restricted stock            |   | (454                      | )      | (285 | ) |
| Shares for computation of basic EPS                    |   | 47,624                    |   | 47,696 |   |
|                                                   |   |                      |   |   |   |
| Effect of dilutive stock options and  restricted stock |   | 772                       |   | 274 |   |
| Shares for computation of diluted EPS                  |   | 48,396                    |   | 47,970 |   |
|                                                   |   |                      |   |   |   |
| Shares represented by antidilutive stock  options      |   | 28                        |   | 1,957 |   |

 

Antidilutive stock options were not included in the computation ofdiluted EPS because the exercise price of those options was greater than theaverage market price of the common shares.

 

6

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5.                                       UndividedInterests in NMG Credit Card Master Trust

 

Pursuant to a revolving credit card securitization program, the Companytransfers substantially all of its credit card receivables to a wholly-ownedsubsidiary, Neiman Marcus Funding Corporation, which in turn sells suchreceivables to the Neiman Marcus Credit Card Master Trust (Trust).  The Trust issued $225 million certificatesrepresenting undivided interests in the credit card receivables to boththird-party investors (Sold Interests) and to the Company (RetainedInterests).  The Retained Interests areshown as “Undivided interests in NMG Credit Card Master Trust” on the Company’scondensed consolidated balance sheets. In order to maintain the committed level of securitized assets, cashcollections on the securitized receivables are used by the Trust to purchasenew credit card balances from the Company in accordance with the terms of therevolving credit card securitization program.

 

Beginning in April 2005, cash collections will be used by the Trust torepay the principal balance of the Class A Certificates in six monthlyinstallments of $37.5 million (Amortization Period).  As a result of certain provisions in the securitizationagreement, the Company holds certain rights to repurchase the Class ACertificates (Repurchase Option) subsequent to the commencement of theAmortization Period and, therefore, has the ability to regain effective controlover the credit card receivables held by the Trust at the time the RepurchaseOption becomes exercisable.  The Companycurrently believes that the Repurchase Option will become exercisable in September2005 and that the revolving transfers of credit card receivables to the Trustwill cease to qualify for off-balance sheet sales type treatment beginning inDecember 2003, the date when the contractual life of the transferredreceivables is estimated to extend to September 2005 when the Repurchase Optionbecomes exercisable.

 

As a result, transfers to the Trust subsequent to December 2003 will beaccounted for as secured borrowings. Based upon historical information, the Company believes that the $225million of receivables representing the Sold Interests and the $225 millionobligation for the Class A certificates will be brought back onto the Company’scondensed consolidated balance sheet over a four month period beginning inDecember 2003.  During a transitionperiod of approximately six to seven months beginning in December 2003, theCompany expects an adverse effect on earnings as it ceases to record gains onsale and must amortize into earnings the excess of the carrying amount of theSold Interests and Retained Interests over the face amount of the underlyingreceivables.  Based on historicalinformation, the Company estimates the adverse effect on earnings will rangefrom $5 to $7 million.

 

6.                                      EmployeeBenefit Plans

 

The Company sponsors a defined benefit pension plan (Pension Plan)covering substantially all full-time employees. The Company also sponsors anunfunded supplemental executive retirement plan (SERP Plan) which providescertain employees additional pension benefits. Benefits under both plans are based on the employees’ years of serviceand compensation over defined periods of employment.  Pension Plan assets consist primarily of equity and fixed incomesecurities.

 

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

 

Expenses associated with the Company’semployee benefit plans are as follows:

 
|                |   | **Thirteen  Weeks Ended** |   |
|---------------------|--------|---------------------------|--------|
| **(in thousands)**  |   | **November  1,  2003**    |   | **November  2,  2002** |   |
|                |   |                      |   |   |   |
| Pension Plan        |   | $                         | 4,089  |   | $ | 2,435 |   |
| SERP Plan           |   | $                         | 1,680  |   | $ | 859 |   |
| Postretirement Plan |   | $                         | 514    |   | $ | 543 |   |

 

7

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At August 1, 2003, the funded status of theCompany’s employee benefit plans was as follows:

 
| **(in thousands)**             |   | **Pension  Plan** |    | **SERP  Plan** |   | **Postretirement  Plan** |   |
|--------------------------------|--------|-------------------|---------|----------------|--------|--------------------------|--------|
|                           |   |              |    |           |   |                     |   |
| Projected  benefit obligations |   | $                 | 244,997 |           | $      | 57,638                   |   | $ | 24,907 |   |
| Fair value  of assets          |   | 183,044           |    | —         |   | —                   |   |
| Underfunded  status            |   | $                 | 61,953  |           | $      | 57,638                   |   | $ | 24,907 |   |

 

The Company had cumulative unrecognized expense for the Pension Plan of$76.5 million at August 1, 2003 primarily related to the delayed recognition ofdifferences between the Company’s actuarial assumptions and actual results,which has contributed to the $62.0 million underfunded status of the PensionPlan at August 1, 2003.  In addition,the Company had cumulative unrecognized expense for the SERP Plan andPostretirement Plan aggregating $25.1 million at August 1, 2003.

 

The Company’s policy is to fund the Pension Plan at or above theminimum required by law.  In the thirdquarter of 2003, the Company made a required contribution of $11.5 million anda voluntary contribution of $13.5 million to the Pension Plan for the plan yearended July 31, 2002.  In addition, theCompany made contributions of $5.8 million in 2003 for the plan year endingJuly 31, 2003.  Based upon currentlyavailable information, the Company will not be required to make an additionalcontribution in 2004 to the Pension Plan for the plan year ending July 31, 2003and anticipates making payments of $5.4 million in 2004 and $6.3 million in2005 for the plan year ending July 31, 2004.

 

7.                                       Commitments and Contingencies

 

The Company is involved in various suits andclaims in the ordinary course of business. Management does not believe that the disposition of any such suits orclaims will have a material adverse effect upon the consolidated results ofoperations, cash flows or the financial position of the Company.

 

8.                                       Change in Accounting Principle – Writedown ofIntangible Assets

 

As of the beginning of the first quarter of2003, the Company adopted the provisions of Statement of Financial AccountingStandards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 142 established a new fairvalue-based accounting model for the valuation of goodwill and indefinite-livedintangible assets recorded in connection with business combinations.  Pursuant to the provisions of SFAS No. 142,goodwill and indefinite-lived intangible assets are measured for impairment byapplying a fair value-based test at least annually and are not amortized.

 

8

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In connection with the adoption of theprovisions of SFAS No. 142, the Company engaged third party appraisal expertsto assist with the determination of the fair value of its goodwill andintangible assets.  For each of theCompany’s operating segments, a summary of the intangible assets recorded bythe Company as of the beginning of the first quarter of 2003 in accordance withthe cost-based accounting model established by previous accounting principlesand the adjustment required to adopt the fair value model of SFAS No. 142 is asfollows:

 
| **(in  thousands)**          |   | **Carrying  Value at  August 4, 2002** |    | **SFAS  No. 142  Adjustment** |   | **Adjusted  Carrying  Value** |   |
|------------------------------|--------|----------------------------------------|---------|-------------------------------|--------|-------------------------------|--------|
|                         |   |                                   |    |                          |   |                          |   |
| **Direct Marketing**         |   |                                   |    |                          |   |                          |   |
| Goodwill                     |   | $                                      | 23,747  |                          | $      | —                        |   | $ | 23,747 |   |
| Indefinite-lived  tradenames |   | 60,732                                 |    | (24,066                       | )      | 36,666                        |   |
|                         |   |                                   |    |                          |   |                          |   |
| **Other**                    |   |                                   |    |                          |   |                          |   |
| Indefinite-lived  tradenames |   | 32,945                                 |    | —                        |   | 32,945                        |   |
|                         |   | $                                      | 117,424 |                          | $      | (24,066                       | )      | $ | 93,358 |   |

 

The $24.1 million writedown in the carryingvalue of the indefinite-lived assets of the Company’s Direct Marketing segmentis reflected as a change in accounting principle ($14.8 million, net of taxes)in the accompanying Condensed Consolidated Statements of Earnings for the firstquarter of 2003.

 

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**ITEM 2.****                    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FACTORSTHAT MAY AFFECT FUTURE RESULTS**

Matters discussed in Management’s Discussionand Analysis of Financial Condition and Results of Operations includeforward-looking statements, including statements regarding the Company’sobjectives and expectations concerning, among other things, its:

 

•                  productivity and profitability;

 

•                  merchandising and marketing strategies;

 

•                  inventory performance;

 

•                  store renovation and expansion plans;

 

•                  capital expenditures;

 

•                  liquidity; and

 

•                  development of management informationsystems.

 

These forward-looking statements are madebased on management’s expectations and beliefs concerning future events, aswell as on assumptions made by and data currently available to management.  These forward-looking statements involve anumber of risks and uncertainties and are not guarantees of futureperformance.  A variety of factors couldcause the Company’s actual results to differ materially from the anticipated orexpected results expressed in these forward-looking statements.  Factors that could affect future performanceinclude, but are not limited, to:

 

•                  current political and economic conditions;

 

•                  changes in political and economic conditionsthat may occur in the future;

 

•                  terrorist activities in the United States, aswell as the potential escalation in the international war on terrorism;

 

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

 

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

 

•                  changes in demographic or retailenvironments;

 

•                  changes in consumer preferences or fashiontrends;

 

•                  competitive responses to the Company’smarketing, merchandising and promotional efforts and/or inventory liquidationsby vendors or other retailers;

 

•                  changes in the Company’s relationships withits key customers;

 

•                  delays in the receipt of merchandise orderedby the Company due to work stoppages and/or other causes of delay in connectionwith either the manufacture or shipment of such merchandise;

 

•                  seasonality of the retail business;

 

•                  adverse weather conditions, particularlyduring peak selling seasons;

 

•                  delays in anticipated store openings;

 

•                  natural disasters;

 

•                  significant increases in paper, printing andpostage costs;

 

•                  litigation that may have an adverse effect onthe financial results or reputation of the Company;

 

•                  changes in the Company’s relationships withdesigners, vendors and other sources of merchandise;

 

•                  the financial viability of the Company’sdesigners, vendors and other sources of merchandise;

 

•**                 **the design and implementation of newinformation systems as well as enhancement of existing systems;

 

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•                  changes in foreign currency exchange rates;

 

•                  impact of funding requirements related to theCompany’s noncontributory defined benefit pension plan;

 

•                  changes in the Company’s relationships withcertain of its key sales associates;

 

•                  changes in key management personnel;

 

•                  changes in the Company’s proprietary creditcard arrangement that adversely impact its ability to provide consumer credit;or

 

•                  changes in government or regulatoryrequirements increasing the Company’s costs of operations.

 

The Company undertakes no obligation toupdate or revise (publicly or otherwise) any forward-looking statements toreflect subsequent events, new information or future circumstances.

 

**CRITICALACCOUNTING POLICIES**

 

The preparation of condensed financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions about future events. These estimates and assumptions affect amounts of assets, liabilities,revenues and expenses and the disclosure of gain and loss contingencies at thedate of the condensed consolidated financial statements.  The amounts currently estimated by theCompany are subject to change if different assumptions as to the outcome offuture events were made.  The Companyevaluates its estimates and judgments on an ongoing basis and predicates thoseestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances.  Management makes adjustments to itsassumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannotbe determined with absolute certainty, actual results may differ from theestimates used by the Company in preparing the accompanying condensedconsolidated financial statements.

 

See Note 1 of the Notes toCondensed Consolidated Financial Statements in Item 1 for a summary of theCompany’s critical accounting policies. A description of the Company’s critical accounting policies is also includedin the Company’s Annual Report to Shareholders on Form 10-K for the fiscal yearended August 2, 2003.

 

**OVERVIEW**

 

The Neiman Marcus Group, Inc., together with its operating divisionsand subsidiaries, is a high-end specialty retailer.  The Company’s operations include the Specialty Retail Storessegment and the Direct Marketing segment. The Specialty Retail Stores segment consists primarily of Neiman Marcusand Bergdorf Goodman stores.  The DirectMarketing segment conducts both print catalogue and online operations under theNeiman Marcus, Horchow and Chef’s Catalogue brand names.

 

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

 
|                                                                                |   | **Thirteen  Weeks Ended** |   |
|-------------------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                                |   | **November  1,  2003**    |   | **November  2,  2002** |   |
|                                                                                |   |                      |   |   |   |
| Revenues                                                                            |   | 100.0                     | %      | 100.0 | % |
| Cost of goods sold including buying and  occupancy costs                            |   | 61.6                      |   | 61.8 |   |
| Selling, general and administrative  expenses                                       |   | 26.6                      |   | 27.9 |   |
| Operating earnings                                                                  |   | 11.8                      |   | 10.3 |   |
| Interest expense, net                                                               |   | 0.4                       |   | 0.5 |   |
| Earnings before income taxes, minority  interest and change in accounting principle |   | 11.4                      |   | 9.8 |   |
| Income taxes                                                                        |   | 4.4                       |   | 3.8 |   |
| Earnings before minority interest and  change in accounting principle               |   | 6.9                       |   | 6.0 |   |
| Minority interest in net earnings of  subsidiaries                                  |   | (0.1                      | )      | (0.1 | ) |
| Earnings before change in accounting  principle                                     |   | 6.8                       |   | 5.9 |   |
| Change in accounting principle – writedown  of intangible assets, net of taxes |   | —                    |   | (2.0 | ) |
| Net earnings                                                                        |   | 6.8                       | %      | 3.9 | % |

** **

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**Operating Results**

 

Set forth in the following table is certain summary information withrespect to the Company’s operations for the periods indicated.

 
|                                       |   | **Thirteen  Weeks Ended** |   |
|--------------------------------------------|--------|---------------------------|--------|
| **(dollars in millions)**                  |   | **November  1,  2003**    |   | **November  2,  2002** |   |
|                                       |   |                      |   |   |   |
| REVENUES                                   |   |                      |   |   |   |
| Specialty Retail Stores                    |   | $                         | 670.6  |   | $ | 601.1 |   |
| Direct Marketing                           |   | 128.0                     |   | 114.4 |   |
| Other (1)                                  |   | 26.3                      |   | 18.6 |   |
| Total                                      |   | $                         | 824.9  |   | $ | 734.1 |   |
|                                       |   |                      |   |   |   |
| OPERATING EARNINGS                         |   |                      |   |   |   |
| Specialty Retail Stores                    |   | $                         | 91.1   |   | $ | 73.8 |   |
| Direct Marketing                           |   | 10.6                      |   | 7.4 |   |
| Other (1)                                  |   | (4.4                      | )      | (6.0 | ) |
| Total                                      |   | $                         | 97.3   |   | $ | 75.2 |   |
|                                       |   |                      |   |   |   |
| OPERATING PROFIT MARGIN                    |   |                      |   |   |   |
| Specialty Retail Stores                    |   | 13.6                      | %      | 12.3 | % |
| Direct Marketing                           |   | 8.3                       | %      | 6.5 | % |
| Total                                      |   | 11.8                      | %      | 10.3 | % |
|                                       |   |                      |   |   |   |
| COMPARABLE REVENUES (2)                    |   |                      |   |   |   |
| Specialty Retail Stores                    |   | 9.5                       | %      | 4.8 | % |
| Direct Marketing                           |   | 11.9                      | %      | 12.3 | % |
| Total                                      |   | 10.7                      | %      | 5.8 | % |
|                                       |   |                      |   |   |   |
| STORE COUNT (3)                            |   |                      |   |   |   |
| Neiman Marcus and Bergdorf Goodman stores: |   |                      |   |   |   |
| Open at beginning of period                |   | 37                        |   | 35 |   |
| Opened during the period                   |   | —                    |   | 2 |   |
| Open at end of period                      |   | 37                        |   | 37 |   |
| Clearance centers:                         |   |                      |   |   |   |
| Open at beginning of period                |   | 14                        |   | 12 |   |
| Opened during the period                   |   | —                    |   | — |   |
| Open at end of period                      |   | 14                        |   | 12 |   |

 

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

 

(2) Comparable revenues include 1) revenuesderived from the Company’s retail stores open for more than 52 weeks, includingstores that have been relocated or expanded, 2) revenues from the Company’sDirect Marketing operations and 3) revenues from the Company’s BrandDevelopment Companies.

 

(3) The Company’s Neiman Marcus Galleriesstores have been excluded.

 

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**THIRTEEN WEEKS ENDED NOVEMBER 1, 2003COMPARED TO THIRTEEN WEEKS ENDED NOVEMBER 2, 2002**

 

*Revenues. *Revenues for thefirst quarter of 2004 of $824.9 million increased $90.8 million, or 12.4percent, from $734.1 million in the prior year period.  The increase in revenues was attributable toboth an increase in comparable revenues and the revenues generated by newstores.  Sales derived from new storeswere $12.7 million in the first quarter of 2004.

 

Comparable revenues in 2004 increased 10.7 percent compared to theprior year period.  Comparable revenuesincreased 9.5 percent for Specialty Retail Stores and 11.9 percent for DirectMarketing.  The Company believes the increasesin comparable revenues were driven, in part, by sales events conducted by itsSpecialty Retail Stores and by the growth of internet sales and an increase incatalog productivity for Direct Marketing.  Comparable revenues in the first quarter of 2003 increased by 5.8percent.

 

Comparable revenues for the Brand Development Companies increased inthe first quarter of 2004, with increases for both Kate Spade LLC and GurwitchProducts, LLC.

 

*Gross margin.*  Gross margin was 38.4 percent of revenuesfor the first quarter of 2004 compared to 38.2 percent for the first quarter of2003.  The increase in gross margin wasprimarily due to a decrease in buying and occupancy costs as a percentage ofrevenues.  A significant portion of theCompany’s buying and occupancy costs are fixed in nature.  Buying and occupancy costs decreased as apercentage of revenues in the first quarter of 2004 compared to the prior yearperiod primarily due to an increase in revenues.

 

Consistent with industry business practice, the Company receivesallowances from certain of its vendors in support of the merchandise purchasedby the Company for resale.  The Companyreceives the majority of the allowances at the end of its second and fourthquarters.  The amounts of vendorreimbursements received by the Company did not have a significant impact on theyear-over-year change in gross margin in the first quarter of 2004.

 

*Selling, general andadministrative expenses*.  Selling, general and administrative expenses (SG&A) were 26.6percent of revenues in the first quarter of 2004 compared to 27.9 percent ofrevenues in the first quarter of 2003.  The net decrease in SG&A as a percentage of revenues in the firstquarter of 2004 was primarily due to 1) lower payroll costs due to productivityimprovements associated with the higher level of sales during the quarter, 2)reduced preopening costs and 3) lower professional fee expenses.  In the first quarter of 2003, the Companyincurred preopening expenses of $4.0 million in connection with the opening oftwo stores.

 

The decreases in SG&A were partially offset by 1) higher costsrelated to incentive compensation, 2) higher advertising and marketing costsincurred by the Specialty Retail segment primarily due to a decrease in vendoradvertising allowances recorded as a reduction to advertising expenses as aresult of adopting new accounting rules effective beginning in the thirdquarter of 2003 and 3) higher expenses related to the Company’s employeebenefit plans.

 

*Segment operatingearnings*. Operating earnings for the Specialty Retail Stores segment were $91.1million in the first quarter of 2004 compared to $73.8 million in the firstquarter of 2003.  This increase wasprimarily the result of increased sales, reduced markdowns and net decreases inboth buying and occupancy expenses and SG&A expenses as percentages ofrevenues.

 

Operating earnings for Direct Marketing increased to $10.6 million inthe first quarter of 2004 from $7.4 million in the first quarter of 2003,primarily as a result of increased sales and net decreases in both buying andoccupancy expenses and SG&A expenses as percentage of revenues offset, inpart, by higher markdowns.

 

*Interest expense,net*.  Netinterest expense was $3.5 million for 2004 compared to $3.6 million for2003.  As a result of a higher level ofcash generated by operations, the Company incurred no borrowings on itsrevolving credit facility to fund seasonal working capital requirements in thefirst quarter of 2004.  The Companyborrowed $50 million on its revolving credit facility during the first quarterof 2003.

 

*Income taxes.*  The Company’s effective income tax rate was39.0 percent for 2004 and 38.5 percent for 2003.  The increase in the effective tax rate is primarily due to higherstate income taxes.

 

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**SEASONALITY**

 

The Company’s business, like that of most retailers, is subject toseasonal influences, with a disproportionately higher level of revenues and netearnings realized during the fall season, which includes the second quarterholiday selling season.  In light ofthese patterns, SG&A expenses are typically higher as a percentage of netrevenues during the first, third and fourth quarters of each year, and workingcapital needs are greater in the first and second quarters of each year.  The increases in working capital needsduring the first and second quarter have typically been financed with cashflows from operations, borrowings under the Company’s revolving credit facilityand cash provided from the Company’s proprietary credit card securitizationprogram.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company’s cash requirements consist principally of 1) the fundingof its merchandise purchases, 2) capital expenditures for new store growth,store renovations and upgrades of its management information systems, 3) debtservice requirements and 4) obligations related to its pension plan.  The Company’s working capital requirementsfluctuate during the year, increasing substantially during the fall season as aresult of higher planned seasonal inventory levels.

 

During the first quarter of 2004, cash provided by operating activitieswas $8.1 million compared to cash used for operating activities of $55.6million in the first quarter of 2003. Cash provided by operating activities increased in the first quarter of2004 by approximately $63.7 million compared to the prior year period.  This increase was primarily the result of anincrease in net earnings and lower net cash requirements to fund the Company’sinventory purchases during the first quarter of 2004.

 

As of November 1, 2003, the Company had cash and cash equivalents of$127.5 million and no outstanding borrowings under the Company’s $300 millionunsecured revolving credit facility.  AtNovember 2, 2002, the Company had cash and cash equivalents of $67.3 millionand outstanding borrowings of $50 million under the Company’s $300 millionunsecured revolving credit facility. The amount of cash on hand and borrowings under the credit facility areinfluenced by a number of factors, including sales, retained accountsreceivable, inventory levels, vendor terms, the level of capital expenditures,cash requirements related to financing instruments, pension plan fundingobligations and the Company’s tax obligations, among others.

 

Based upon currently available information, the Company will not berequired to make an additional contribution in 2004 to the Pension Plan for theplan year ending July 31, 2003 and anticipates making payments of $5.4 millionin 2004 and $6.3 million in 2005 for the plan year ending July 31, 2004.

 

The Company currently projects capital expenditures for 2004 to beapproximately $150 million to $160 million, primarily for store renovations andupgrades to information systems, with the majority of the expendituresanticipated for the latter half of 2004.

 

**FINANCING STRUCTURE**

 

In prior years, the Company’s Board of Directors authorized variousstock repurchase programs and increases in the number of shares subject torepurchase.  During the first quarter of2004, the Company repurchased 175,600 shares at an average purchase price of$40.01.  As of November 1, 2003,approximately 1.2 million shares remained authorized for repurchase under theCompany’s stock repurchase programs.

 

The Company’s principal commercial obligations are comprised of seniornotes, senior debentures, capital lease obligations, operating leaseobligations, construction commitments, pension plan funding obligations,short-term merchandise purchase commitments, common area maintenance costs, taxand insurance obligations and contingent rent payments.

 

Management believes that operating cash flows, currently availablevendor financing and amounts available pursuant to its revolving creditfacility and its credit card securitization program should be sufficient tofund the Company’s operations, debt service, Pension Plan funding requirements,contractual obligations and currently anticipated capital expenditurerequirements through the end of 2004.

 

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**OFF-BALANCE SHEET ARRANGEMENTS**

 

Pursuant to a revolving credit card securitization program, the Companytransfers substantially all of its credit card receivables to a wholly-ownedsubsidiary, Neiman Marcus Funding Corporation, which in turn sells suchreceivables to the Neiman Marcus Credit Card Master Trust (Trust).  The Trust issued $225 million certificatesrepresenting undivided interests in the credit card receivables to boththird-party investors (Sold Interests) and to the Company (RetainedInterests).  The Retained Interests areshown as “Undivided interests in NMG Credit Card Master Trust” on the Company’sconsolidated balance sheets.  In orderto maintain the committed level of securitized assets, cash collections on thesecuritized receivables are used by the Trust to purchase new credit cardbalances from the Company in accordance with the terms of the revolving creditcard securitization program.

 

Beginning in April 2005, cash collections will be used by the Trust torepay the principal balance of the Class A Certificates in six monthlyinstallments of $37.5 million (Amortization Period).  As a result of certain provisions in the securitizationagreement, the Company holds certain rights to repurchase the Class ACertificates (Repurchase Option) subsequent to the commencement of theAmortization Period and, therefore, has the ability to regain effective controlover the credit card receivables held by the Trust at the time the RepurchaseOption becomes exercisable.  The Companycurrently believes that the Repurchase Option will become exercisable inSeptember 2005 and that the revolving transfers of credit card receivables tothe Trust will cease to qualify for off-balance sheet sales type treatmentbeginning in December 2003, the date when the contractual life of thetransferred receivables is estimated to extend to September 2005 when theRepurchase Option becomes exercisable.

 

As a result, transfers to the Trust subsequent to December 2003 will beaccounted for as secured borrowings. Based upon historical information, the Company believes that the $225million of receivables representing the Sold Interests and the $225 millionobligation for the Class A certificates will be brought back onto the Company’scondensed consolidated balance sheet over a four month period beginning inDecember 2003.  During a transitionperiod of approximately six to seven months beginning in December 2003, theCompany expects an adverse effect on earnings as it ceases to record gains onsale and must amortize into earnings the excess of the carrying amount of theSold Interests and Retained Interests over the face amount of the underlyingreceivables.  Based on historicalinformation, the Company estimates the adverse effect on earnings will rangefrom $5 to $7 million.

 

**OUTLOOK**

 

Based on current estimates, the Company anticipates comparable storerevenues to increase in the 7 to 9 percent range for its second quarter endingJanuary 31, 2004.  The accuracy of theseassumptions and of the resulting forecasts is subject to uncertainties andcircumstances beyond the Company’s 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 actualresults to vary from the Company’s expectations.

 

**INFLATIONAND DEFLATION**

 

The Company believes changes in revenues andnet earnings that have resulted from inflation or deflation have not beenmaterial during the periods presented. The Company attempts to offset the effects of inflation, which hasoccurred in recent years in SG&A, through control of expenses and priceincreases, although the Company’s ability to increase prices may be limited bycompetitive factors.  The Companyattempts to offset the effects of merchandise deflation, which has occurred ona limited basis in recent years, through control of expenses.  There is no assurance, however, thatinflation or deflation will not materially affect the Company in the future.

 

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**ITEM 3.****                 QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherent in the Company’s financial instrumentsrepresents the potential loss arising from adverse changes in interest ratesand foreign currency exchange rates. The Company does not enter into derivative financial instruments fortrading purposes.  The Company seeks tomanage exposure to adverse interest rate changes through its normal operatingand financing activities.  The Companyis exposed to interest rate risk through its securitization and borrowingactivities, which are described in Notes 2 and 5 to the Consolidated FinancialStatements in the Company’s Annual Report on Form 10-K for the fiscal yearended August 2, 2003.

 

As of November 1, 2003, the Company had no borrowings outstanding underits revolving credit agreement.  Futureborrowings under the Company’s revolving credit facility, to the extent ofoutstanding borrowings, would be affected by interest rate changes.

 

The Company’s outstanding long-term debt as of November 1, 2003 is atfixed interest rates and would not be affected by interest rate changes.  Based upon quoted prices, the fair value ofthe Company’s senior notes and debentures was $273.1 million as of November 1,2003.

 

Pursuant to a proprietary credit card securitization program thatbegins to expire in September 2005, the Company sold substantially all of itscredit card receivables through a subsidiary in exchange for certificatesrepresenting undivided interests in such receivables.  The Class A Certificates, which have an aggregate principal valueof $225 million, were sold to investors. The holders of the Class ACertificates are entitled to monthly interest distributions from the Trust atthe contractually-defined rate of one month LIBOR plus 0.27 percentannually.  The distributions to theClass A Certificate holders are payable from the finance charge incomegenerated by the credit card receivables held by the Trust.  At November 1, 2003, the Company estimates a100 basis point increase in LIBOR would result in an approximate annualdecrease of $2.25 million in pretax income to the Company from its RetainedInterests in the credit card portfolio held by the Trust.

 

The Company uses derivative financial instruments to manage foreigncurrency risk related to the procurement of merchandise inventories fromforeign sources.  The Company entersinto foreign currency contracts denominated in the euro and British pound. TheCompany had foreign currency contracts in the form of forward exchangecontracts in the amount of approximately $32.8 million as of November 1,2003.  The market risk inherent in theseinstruments was not material to the Company’s consolidated financial condition,results of operations, or cash flows during the first quarter of 2004.

 

The effects of changes in the U.S. equity andbond markets serve to increase or decrease the value of pension plan assets,resulting in increased or decreased cash funding by the Company.  The Company seeks to manage exposure toadverse equity and bond returns by maintaining diversified investmentportfolios and utilizing professional investment managers.

 

Based on a review of the Company’s financial instruments outstanding atNovember 1, 2003 that are sensitive to market risks, the Company has determinedthat there was no material market risk exposure to the Company’s consolidatedfinancial position, results of operations, or cash flows as of such date.

 

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**ITEM4.****                 CONTROLSAND PROCEDURES**

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Companycarried out an evaluation, under the supervision and with the participation ofthe Chief Executive Officer and Chief Financial Officer, as well as other keymembers of the Company’s management, of the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this report.Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this report, to provide reasonableassurance that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

In the ordinary course of business, the Company routinely enhances itsinformation systems by either upgrading its current systems or implementing newsystems.  No change occurred in theCompany’s internal controls concerning financial reporting during the quarterended November 1, 2003 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

 

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**THENEIMAN MARCUS GROUP, INC.**

 

PART II

 

Item 1.             Legal Proceedings

 

Note 7 of the Notes to Condensed Consolidated Financial Statements inPart I, Item 1 is incorporated herein by reference as if fully restatedherein.  Note 7 contains forward-lookingstatements that are subject to the risks and uncertainties discussed in“Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Factors That May Affect Future Results.”

 

Item 6.             Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits.

 

10.1*                    Employment Agreement effectiveAugust 3, 2003 between the Company and Burton M. Tansky. (1)

 

31.1                           Certification of ChiefExecutive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.(1)

 

31.2                           Certification of ChiefFinancial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002.(1)

 

32                                    Certifications ofChief Executive Officer and Chief Financial Officer pursuant to Section 906 ofthe Sarbanes Oxley Act of 2002. (1)

 

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(1)                                  Filed herewith.

*                                         Managementcontract or compensatory plan or arrangement.

 

(b)                                 Reports on Form 8-K

 

On August 7, 2003, the Company filed a Current Report on Form 8-K underItem 9 to disclose under Regulation FD the Company’s press release dated August7, 2003 announcing revenue results for the four weeks, thirteen weeks andfiscal year ended August 2, 2003.

 

On September 4, 2003, the Company filed a Current Report on Form 8-Kunder Item 9 to disclose under Regulation FD the Company’s press release datedSeptember 4, 2003 announcing revenue results for the four weeks ended August30, 2003.

 

On September 9, 2003, the Company filed a Current Report on Form 8-Kunder Item 9 to disclose under Regulation FD the Company’s press release datedSeptember 9, 2003 announcing financial results for the fiscal fourth quarterand fiscal year ended August 2, 2003.

 

On October 9, 2003, the Company filed a Current Report on Form 8-Kunder Item 9 to disclose under Regulation FD the Company’s press release datedOctober 9, 2003 announcing revenue results for the five weeks ended October 4,2003.

 

On November 6, 2003, the Company filed a Current Report on Form 8-Kunder Item 9 to disclose under Regulation FD the Company’s press release datedNovember 6, 2003 announcing revenue results for the four weeks and thirteenweeks ended November 1, 2003.

 

On December 3, 2003, the Company filed a Current Report on Form 8-Kunder Item 9 to disclose under Regulation FD the Company’s press release datedDecember 3, 2003 announcing financial results for the fiscal first quarterended November 1, 2003.

 

On December 3, 2003, the Company filed a Current Report on Form 8-Kunder Item 9 to disclose under Regulation FD the Company’s press release datedDecember 3, 2003 announcing revenue results for the four weeks ended November29, 2003.

 

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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. |
|-------------------------------|
|                          |
|                          |
| **Signature**                 |   | **Title** |   | **Date** |   |
|                          |   |   |   |   |   |
|                          |   |   |   |   |   |
| /s/ T. Dale Stapleton         |   |   | Vice President and Controller |   | December 8, 2003 |   |
| T. Dale Stapleton             |   | (principal accounting officer) |   |   |   |
|                               |  |  |  |  |  |  |

 

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