**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

| **ý****QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------------------------------------------------|
|                                                                                                   |
| **For  the Quarterly Period Ended February 1, 2003**                                                   |
|                                                                                                   |   |   |
| **OR**                                                                                                 |
|                                                                                                   |
| **o****TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                   |
| **Commission  file no. 1-9659**                                                                        |

 

**The Neiman Marcus Group, Inc.**

(Exactname of registrant as specified in its charter)

** **

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

 

Indicate by check mark whether the registrant (1) has filed all 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 anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

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

 

As of February 28, 2003, the number of outstandingshares of each of the issuer’s classes of common stock was:

 

| **Class**                            |   | **Outstanding Shares** |
|--------------------------------------|--------|------------------------|
| Class A Common Stock, $.01 Par Value |   | 27,859,314             |
| Class B Common Stock, $.01 Par Value |   | 19,666,933             |
|                                      |        |                        |  |  |

 

 

----

 

**THE NEIMAN MARCUS GROUP, INC.**

 

**INDEX**

 
| Part I.                                                                      | Financial Information |                                                                                                                                    |
|------------------------------------------------------------------------------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------|
|                                                                         |                  |
|                                                                         | Item 1.               | Condensed  Consolidated Balance Sheets as of February 1, 2003, August 3, 2002 and  January 26, 2002                                     |   |
|                                                                         |                  |                                                                                                                                    |   |
|                                                                         |                  | Condensed  Consolidated Statements of Earnings for the Thirteen  Weeks and Twenty-Six Weeks Ended February 1, 2003 and January 26, 2002 |   |
|                                                                         |                  |                                                                                                                                    |   |
|                                                                         |                  | Condensed  Consolidated Statements of Cash Flows for the Twenty-Six  Weeks Ended February 1, 2003 and January 26, 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  4.              | Submission  of Matters to a Vote of Security Holders                                                                                    |
|                                                                         |                  |                                                                                                                                    |
|                                                                         | Item 6.               | Exhibits and  Reports on Form 8-K                                                                                                       |
|                                                                         |                  |
| Signatures                                                                   |                  |
|                                                                         |                  |
| Certifications  Required by Section 302(a) of the Sarbanes-Oxley Act of 2002 |                  |
|                                                                              |                       |                                                                                                                                         |  |  |

 

----

 

**THE NEIMAN MARCUS GROUP, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

** **
| **(in thousands, except shares)**                              |   | **February 1,  2003** |      | **August 3,  2002** |   | **January 26,  2002** |   |
|----------------------------------------------------------------|--------|-----------------------|-----------|---------------------|--------|-----------------------|--------|
|                                                           |   |                  |      |                |   |                  |   |
| **ASSETS**                                                     |   |                  |      |                |   |                  |   |
| Current assets:                                                |   |                  |      |                |   |                  |   |
| Cash and cash  equivalents                                     |   | $                     | 161,229   |                | $      | 178,638               |   | $ | 137,213 |   |
| Undivided  interests in NMG Credit Card Master Trust           |   | 295,321               |      | 208,602             |   | 284,727               |   |
| Accounts  receivable, net                                      |   | 22,271                |      | 19,778              |   | 21,493                |   |
| Merchandise  inventories                                       |   | 654,309               |      | 656,844             |   | 584,132               |   |
| Other current  assets                                          |   | 70,964                |      | 63,764              |   | 72,470                |   |
| Total current  assets                                          |   | 1,204,094             |      | 1,127,626           |   | 1,100,035             |   |
|                                                           |   |                  |      |                |   |                  |   |
| Property and equipment, net                                    |   | 678,131               |      | 653,166             |   | 633,635               |   |
| Other assets                                                   |   | 119,405               |      | 126,754             |   | 131,705               |   |
| Total assets                                                   |   | $                     | 2,001,630 |                | $      | 1,907,546             |   | $ | 1,865,375 |   |
|                                                           |   |                  |      |                |   |                  |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                 |   |                  |      |                |   |                  |   |
| Current liabilities:                                           |   |                  |      |                |   |                  |   |
| Notes payable  and current maturities of long-term liabilities |   | $                     | 2,246     |                | $      | 1,098                 |   | $ | 4,098 |   |
| Accounts payable                                               |   | 258,360               |      | 257,560             |   | 232,694               |   |
| Accrued  liabilities                                           |   | 282,259               |      | 259,800             |   | 281,272               |   |
| Total current  liabilities                                     |   | 542,865               |      | 518,458             |   | 518,064               |   |
|                                                           |   |                  |      |                |   |                  |   |
| Long-term liabilities:                                         |   |                  |      |                |   |                  |   |
| Notes and  debentures                                          |   | 249,722               |      | 249,710             |   | 249,698               |   |
| Other long-term  liabilities                                   |   | 109,206               |      | 77,473              |   | 95,474                |   |
| Total long-term  liabilities                                   |   | 358,928               |      | 327,183             |   | 345,172               |   |
|                                                           |   |                  |      |                |   |                  |   |
| Minority interest                                              |   | 9,044                 |      | 6,592               |   | 9,202                 |   |
|                                                           |   |                  |      |                |   |                  |   |
| Common stock                                                   |   | 482                   |      | 480                 |   | 479                   |   |
| Additional paid-in capital                                     |   | 446,461               |      | 443,788             |   | 435,052               |   |
| Accumulated other comprehensive (loss) income                  |   | (12,270               | )    | 906                 |   | (454                  | )      |
| Retained earnings                                              |   | 671,140               |      | 610,139             |   | 557,860               |   |
| Treasury stock (524,177 shares, at cost)                       |   | (15,020               | )         | —              |   | —                |   |
| Total shareholders’ equity                                |   | 1,090,793             |      | 1,055,313           |   | 992,937               |   |
| Total liabilities and shareholders’ equity                |   | $                     | 2,001,630 |                | $      | 1,907,546             |   | $ | 1,865,375 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

1

----

 

**THE NEIMAN MARCUS GROUP, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(UNAUDITED)**

 
|                                                                                |   | **Thirteen  Weeks Ended** |    | **Twenty-Six  Weeks Ended** |   |
|-------------------------------------------------------------------------------------|--------|---------------------------|---------|-----------------------------|--------|
| **(in thousands, except per share data)**                                           |   | **February  1,  2003**    |    | **January  26,  2002**      |   | **February  1,  2003** |   | **January  26,  2002** |   |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Revenues                                                                            |   | $                         | 938,467 |                        | $      | 908,086 |   | $ | 1,672,550 |   | $ | 1,589,235 |   |
| Cost of goods  sold including buying and occupancy costs                            |   | 654,578                   |    | 645,766                     |   | 1,108,509 |   | 1,081,656 |   |
| Selling, general  and administrative expenses                                       |   | 225,485                   |    | 215,503                     |   | 430,393 |   | 418,490 |   |
| Impairment and  other charges                                                       |   | —                    |    | 2,000                       |   | — |   | 2,000 |   |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Operating  earnings                                                                 |   | 58,404                    |    | 44,817                      |   | 133,648 |   | 87,089 |   |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Interest  expense, net                                                              |   | 4,345                     |    | 4,260                       |   | 7,939 |   | 8,246 |   |
| Earnings before  income taxes, minority interest and change in accounting principle |   | 54,059                    |    | 40,557                      |   | 125,709 |   | 78,843 |   |
| Income taxes                                                                        |   | 20,813                    |    | 15,411                      |   | 48,398 |   | 29,960 |   |
| Earnings before  minority interest and change in accounting principle               |   | 33,246                    |    | 25,146                      |   | 77,311 |   | 48,883 |   |
| Minority  interest in net earnings of subsidiaries                                  |   | (769                      | )       | (844                        | )      | (1,509 | ) | (1,588 | ) |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Earnings before  change in accounting principle                                     |   | 32,477                    |    | 24,302                      |   | 75,802 |   | 47,295 |   |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Change in  accounting principle – writedown ofintangible assets, net of taxes  |   | —                    |    | —                      |   | (14,801 | ) | — |   |
| Net earnings                                                                        |   | $                         | 32,477  |                        | $      | 24,302 |   | $ | 61,001 |   | $ | 47,295 |   |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Weighted average  number of common and common equivalent shares outstanding:        |   |                      |    |                        |   |   |   |   |   |
| Basic                                                                               |   | 47,558                    |    | 47,431                      |   | 47,627 |   | 47,379 |   |
| Diluted                                                                             |   | 47,850                    |    | 47,763                      |   | 47,910 |   | 47,698 |   |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Basic earnings  per share:                                                          |   |                      |    |                        |   |   |   |   |   |
| Earnings before change in accounting principle                                      |   | $                         | 0.68    |                        | $      | 0.51 |   | $ | 1.59 |   | $ | 1.00 |   |
| Change in  accounting principle – writedown of intangible assets, net of taxes |   | —                    |    | —                      |   | (0.31 | ) | — |   |
| Basic earnings  per share                                                           |   | $                         | 0.68    |                        | $      | 0.51 |   | $ | 1.28 |   | $ | 1.00 |   |
|                                                                                |   |                      |    |                        |   |   |   |   |   |
| Diluted earnings  per share:                                                        |   |                      |    |                        |   |   |   |   |   |
| Earnings before  change in accounting principle                                     |   | $                         | 0.68    |                        | $      | 0.51 |   | $ | 1.58 |   | $ | 0.99 |   |
| Change in  accounting principle – writedown of intangible assets, net of taxes |   | —                    |    | —                      |   | (0.31 | ) | — |   |
| Diluted earnings  per share                                                         |   | $                         | 0.68    |                        | $      | 0.51 |   | $ | 1.27 |   | $ | 0.99 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

2

----

 

**THENEIMAN MARCUS GROUP, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
|                                                                                 |   | **Twenty-Six  Weeks Ended** |    |
|--------------------------------------------------------------------------------------|--------|-----------------------------|---------|
| **(in thousands)**                                                                   |   | **February  1,  2003**      |    | **January  26,  2002** |   |
|                                                                                 |   |                        |    |   |   |
| **CASH FLOWS – OPERATING ACTIVITIES**                                           |   |                        |    |   |   |
| Net earnings                                                                         |   | $                           | 61,001  |   | $ | 47,295 |   |
| Change in  accounting **–** writedown of intangible assets, net of taxes        |   | 14,801                      |    | — |   |
| Earnings before  change in accounting principle                                      |   | 75,802                      |    | 47,295 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |   |                        |    |   |   |
| Depreciation and  amortization                                                       |   | 39,749                      |    | 40,882 |   |
| Minority  interest                                                                   |   | 1,509                       |    | 1,588 |   |
| Other                                                                                |   | 5,480                       |    | 10,914 |   |
| Changes in current  assets and liabilities:                                          |   |                        |    |   |   |
| Increase in  accounts receivable                                                     |   | (2,493                      | )       | (786 | ) |
| Decrease in  merchandise inventories                                                 |   | 2,535                       |    | 64,735 |   |
| Increase in  accounts payable and accrued liabilities                                |   | 27,910                      |    | 16,785 |   |
| Other                                                                                |   | (5,638                      | )       | 3,277 |   |
| **NET CASH PROVIDED BY OPERATING  ACTIVITIES**                                       |   | 144,854                     |    | 184,690 |   |
|                                                                                 |   |                        |    |   |   |
| **CASH FLOWS – INVESTING ACTIVITIES**                                           |   |                        |    |   |   |
| Capital  expenditures                                                                |   | (64,715                     | )       | (85,003 | ) |
| Transactions  related to undivided interests in NMG Credit Card Master Trust:        |   |                        |    |   |   |
| Purchases of  held-to-maturity securities                                            |   | (553,355                    | )       | (555,937 | ) |
| Maturities of  held-to-maturity securities                                           |   | 468,489                     |    | 491,927 |   |
| **NET CASH USED FOR INVESTING  ACTIVITIES**                                          |   | (149,581                    | )       | (149,013 | ) |
|                                                                                 |   |                        |    |   |   |
| **CASH FLOWS – FINANCING ACTIVITIES**                                           |   |                        |    |   |   |
| Proceeds from  borrowings                                                            |   | 81,051                      |    | 133,240 |   |
| Repayment of  debt                                                                   |   | (80,000                     | )       | (130,000 | ) |
| Acquisition of treasury stock                                                        |   | (15,020                     | )       | — |   |
| Proceeds from exercises of stock options and restricted stock grants                 |   | 1,309                       |    | 1,005 |   |
| Other equity activities                                                              |   | (22                         | )       | — |   |
| **NET  CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES**                            |   | (12,682                     | )       | 4,245 |   |
|                                                                                 |   |                        |    |   |   |
| **CASH AND CASH EQUIVALENTS**                                                        |   |                        |    |   |   |
| (Decrease)  increase during the period                                               |   | (17,409                     | )       | 39,922 |   |
| Beginning  balance                                                                   |   | 178,638                     |    | 97,291 |   |
| Ending balance                                                                       |   | $                           | 161,229 |   | $ | 137,213 |   |
|                                                                                 |   |                        |    |   |   |
| **SUPPLEMENTAL  SCHEDULE OF CASH  FLOW INFORMATION**                            |   |                        |    |   |   |
| Cash paid during  the period for:                                                    |   |                        |    |   |   |
| Interest                                                                             |   | $                           | 9,197   |   | $ | 9,783 |   |
| Income taxes                                                                         |   | $                           | 31,791  |   | $ | 11,113 |   |

 

*SeeNotes to Condensed Consolidated Financial Statements.*

 

3

----

 

**THE NEIMAN MARCUS GROUP, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

1.                                       Basisof Presentation

 

The Condensed Consolidated Financial Statements of TheNeiman Marcus Group, Inc. and subsidiaries (the Company) have been prepared inaccordance with generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by accounting principles generallyaccepted for 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 ended August 3,2002.

 

In the opinion of management, the accompanying unauditedcondensed consolidated financial statements contain all adjustments, consistingonly of normal recurring adjustments (as well as a change in accountingprinciple as more fully described in Note 3), necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theapplicable interim periods.  The resultsof operations for these periods are not necessarily comparable to, orindicative of, results of any other interim period or for the fiscal year as awhole.

 

Certain prior period balances have been reclassifiedto conform to the current period presentation.

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets,liabilities, revenues and expenses and the disclosure of gain and losscontingencies at the date of the condensed consolidated financial statements.

 

Since future events and their effects cannot bedetermined with absolute certainty, actual results will differ from thoseestimates.  The amounts currentlyestimated by the Company are subject to change if different assumptions as tothe outcome of future events were made. The Company evaluates its estimates and judgments on an ongoing basisand predicates those estimates and judgments on historical experience and onvarious other factors that are believed to be reasonable under thecircumstances.  Management makes adjustmentsto its assumptions and judgments when facts and circumstances dictate.

 

Management of the Company believes the followingcritical accounting policies, among others, encompass the more significantjudgments and estimates used in preparation of its financial statements:

 

•                                          Revenuerecognition;

 

•                                          Valuationof merchandise inventories, including determination of original retail values,recognition of markdowns and vendor allowances, estimation of inventoryshrinkage, and determination of cost of sales;

 

•                                          Recognitionof income and expenses related to the Company’s securitization program;

 

•                                          Determinationof impairment of long-lived assets;

 

•                                          Recognitionof advertising and catalogue costs;

 

•                                          Recognitionof costs related to the Company’s loyalty programs;

 

•                                          Recognitionof income taxes; and

 

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

 

A description of the Company’s critical accountingpolicies is included in the Company’s Annual Report on Form 10-K for the fiscalyear ended August 3, 2002.

 

4

----

 

2.                                       OperatingSegments

 

The Company has identified two reportable segments:Specialty Retail Stores and Direct Marketing. The Specialty Retail Stores segment includes all Neiman Marcus andBergdorf Goodman retail stores, including Neiman Marcus clearance stores.  Direct Marketing includes the operations ofNeiman Marcus Direct, which publishes NM by Mail, the Neiman Marcus Christmascatalogue, the Horchow catalogue and the Chef’s Catalogue, and the Company’sonline operations.  Other includes theoperations of Kate Spade LLC and Gurwitch Bristow Products, LLC (the BrandDevelopment Companies) and corporate expenses.

 

The following table sets forth the information for theCompany’s reportable segments:

 
|                       |   | **Thirteen  Weeks Ended** |    | **Twenty-Six  Weeks Ended** |   |
|----------------------------|--------|---------------------------|---------|-----------------------------|--------|
| **(in thousands)**         |   | **February  1,  2003**    |    | **January  26,  2002**      |   | **February  1,  2003** |   | **January  26,  2002** |   |
| REVENUES:                  |   |                      |    |                        |   |   |   |   |   |
| Specialty Retail Stores    |   | $                         | 756,097 |                        | $      | 745,714 |   | $ | 1,357,218 |   | $ | 1,306,661 |   |
| Direct Marketing(1)        |   | 161,269                   |    | 144,394                     |   | 275,634 |   | 246,192 |   |
| Other                      |   | 21,101                    |    | 17,978                      |   | 39,698 |   | 36,382 |   |
| Total                      |   | $                         | 938,467 |                        | $      | 908,086 |   | $ | 1,672,550 |   | $ | 1,589,235 |   |
|                       |   |                      |    |                        |   |   |   |   |   |
| OPERATING EARNINGS:        |   |                      |    |                        |   |   |   |   |   |
| Specialty Retail Stores(2) |   | $                         | 43,826  |                        | $      | 41,232 |   | $ | 115,539 |   | $ | 89,144 |   |
| Direct Marketing(1)        |   | 17,984                    |    | 8,279                       |   | 25,401 |   | 5,954 |   |
| Other                      |   | (3,406                    | )       | (2,694                      | )      | (7,292 | ) | (6,009 | ) |
| Total                      |   | $                         | 58,404  |                        | $      | 46,817 |   | $ | 133,648 |   | $ | 89,089 |   |

 

----

(1)               Direct Marketingincludes the operations of Neiman Marcus Direct and the Company’s onlineoperations.  During fiscal year 2002,the Company reclassified its Neiman Marcus Online operations to the Direct    Marketing segment from Other.  Prior year amounts have been reclassified toconform to the current year presentation*.*

 

(2)               Segment operatingearnings for the thirteen weeks and twenty-six weeks ended January 26, 2002exclude a $2.0 million pretax charge in connection with certain cost reductionstrategies consisting primarily of severance costs and lease terminationexpenses incurred in connection with the closing of the Galleries of NeimanMarcus store in Seattle, Washington.

 

3.                                       Changein Accounting Principle – Writedown of Intangible Assets

 

The Company adopted the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, “Goodwill and Other IntangibleAssets” as of the beginning of the first quarter of fiscal year 2003.  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.

 

5

----

 

In connection with the adoption of the provisions ofSFAS No. 142, the Company engaged third party appraisal experts to assist withthe determination of the fair value of its goodwill and intangible assets.  For each of the Company’s operatingsegments, a summary of the intangible assets recorded by the Company as of thebeginning of the first quarter of fiscal year 2003 in accordance with thecost-based accounting model established by previous accounting principles andthe 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 carrying value ofthe indefinite-lived intangible assets of the Company’s Direct Marketingsegment is reflected as a change in accounting principle ($14.8 million, net oftaxes) in the accompanying Condensed Consolidated Statements of Earnings forthe twenty-six weeks ended February 1, 2003.

 

The Company ceased amortization of its goodwill andindefinite-lived intangible assets as of the beginning of fiscal year2003.  Amortization expense for thesecond quarter of fiscal year 2002 was approximately $1.4 million and reduceddiluted earnings per share by $0.02 for the period.  Amortization expense for the twenty-six weeks ended January 26,2002 was approximately $2.9 million and reduced diluted earnings per share by$0.04 for the period.

 

4.                                       DefinedBenefit Pension Plan

 

The Company has a noncontributory defined benefitpension plan (Pension Plan) covering substantially all full-timeemployees.  Benefits under the PensionPlan are based on the employees’ years of service and compensation over definedperiods of employment.  Pension Planassets consist primarily of equity and fixed income securities.

 

The Company received the final valuation of thePension Plan for the 2002 plan year from its outside actuarial firm in March2003.  A summary of the assets held bythe Pension Plan and the Company’s obligations, as calculated by its actuaries,as of the beginning of fiscal year 2003 are as follows:

 
| **(in  thousands)**                   |   |   |    |
|---------------------------------------|--------|--------|---------|
|                                  |   |   |    |
| Fair value of  plan assets            |   | $      | 145,945 |   |
| Accumulated  benefit obligation (ABO) |   | $      | 175,903 |   |
| Projected  benefit obligation (PBO)   |   | $      | 210,024 |   |
|                                  |   |   |    |
| Minimum  liability                    |   | $      | 29,958  |   |
| Less:  accrued pension cost      |   | (6,108 | )       |
| Additional  minimum liability         |   | $      | 23,850  |   |

 

Upon receipt of the actual calculation of the minimumliability by the Company’s actuaries, the Company increased its pensionliability by $23.8 million to record the additional minimum liability in thesecond quarter of fiscal year 2003 which resulted in a decrease, net of tax, of$14.1 million to accumulated other comprehensive loss.

 

Pension expense is based on information provided bythe Company’s actuaries that uses assumptions to estimate the total benefitsultimately payable to associates and allocates this cost to service periods.The actuarial assumptions used to calculate pension costs are reviewedannually.  The Company recorded pensionexpense of $2.6 million for the second quarter of fiscal year 2003 and $1.5million for the second quarter of fiscal year 2002.  The Company recorded pension expense of $5.2 million for thetwenty-six weeks ended February 1, 2003 and $3.0 million for the twenty-sixweeks ended January 26, 2002.

 

When funding is required, the Company’s policy is tocontribute amounts that are deductible for federal income tax purposes.  The Company anticipates making acontribution of $11.5 million to the Pension Plan for the plan year ended July2001 in the third quarter of fiscal year 2003. The Company’s contribution for the plan year ended July 2002 isestimated to be $17.3 million and will be funded in quarterly installmentsduring fiscal year 2003 and fiscal year 2004.

 

5.                                       TreasuryStock

 

In prior years, the Company’s Board of Directors hasauthorized various stock repurchase programs and increases in the number ofshares subject to repurchase.  Duringthe second quarter of fiscal year 2003, the Company repurchased 524,177 sharesat an average purchase price of $28.65. As of February 1, 2003, approximately 1.4 million shares remainedavailable for repurchase under the Company’s stock repurchase programs.

 

6

----

 

6.                                       Earningsper Share

 

The weighted average shares used in computing basicand diluted earnings per share (EPS) are presented in the table below.  No adjustments were made 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)**                          |   | **February  1,  2003**    |   | **January  26,  2002**      |   | **February  1,  2003** |   | **January  26,  2002** |   |
|                                                   |   |                      |   |                        |   |   |   |   |   |
| Weighted average  shares outstanding                   |   | 47,855                    |   | 47,716                      |   | 47,918 |   | 47,699 |   |
|                                                   |   |                      |   |                        |   |   |   |   |   |
| Less: non-vested  restricted stock                     |   | (297                      | )      | (285                        | )      | (291 | ) | (320 | ) |
|                                                   |   |                      |   |                        |   |   |   |   |   |
| Shares for  computation of basic EPS                   |   | 47,558                    |   | 47,431                      |   | 47,627 |   | 47,379 |   |
|                                                   |   |                      |   |                        |   |   |   |   |   |
| Effect of  dilutive stock options and restricted stock |   | 292                       |   | 332                         |   | 283 |   | 319 |   |
| Shares for  computation of diluted EPS                 |   | 47,850                    |   | 47,763                      |   | 47,910 |   | 47,698 |   |
|                                                   |   |                      |   |                        |   |   |   |   |   |
| Shares  represented by antidilutive stock options      |   | 1,955                     |   | 1,260                       |   | 1,956 |   | 1,265 |   |

 

Antidilutive stock options were not included in thecomputation of diluted EPS because the exercise price of those options wasgreater than the average market price of the common shares.

 

7.                                       Stock-BasedCompensation

 

The Company accounts for stock-based compensationawards to employees using the intrinsic value method in accordance withAccounting Principles Board Opinion No. 25 “Accounting for Stock Issued toEmployees” and related interpretations.

 

8.                                       UndividedInterests in NMG Credit Card Master Trust

 

Pursuant to a revolving credit card securitizationprogram, the Company transfers substantially all of its credit card receivablesto a wholly-owned subsidiary, Neiman Marcus Funding Corporation, which in turnsells such receivables to the Neiman Marcus Credit Card Master Trust (theTrust).  The Trust issued 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.

 

7

----

 

9.                                       DerivativeFinancial Instruments

 

As of February 1, 2003, the Company had foreigncurrency contracts in the form of forward exchange contracts in the amount ofapproximately $39.4 million. The contracts have varying maturity dates throughFebruary 2004.  The settlement terms ofthe forward contracts, including amount, currency and maturity, correspond withthe payment terms for purchases of merchandise inventories.  These contracts have been designated andaccounted for as cash flow hedges.

 

At February 1, 2003, the fair value of the Company’soutstanding foreign currency exchange contracts was an asset of approximately$1.3 million. This amount, net of taxes, is reflected in accumulated othercomprehensive loss.

 

10.                                 Commitmentsand Contingencies

 

The Company is involved in various suits and claims inthe 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.

** **

11.                                 RecentAccounting Pronouncements

** **

In June 2002, the Financial Accounting Standards Board(FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies the guidance previously provided in EmergingIssues Task Force Issue (EITF) No. 94-3, “Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with anexit or disposal activity is recognized at fair value when the liability isincurred rather than at the date of a commitment to an exit or disposalplan.  The provisions of SFAS No. 146will be effective for disposal activities initiated after December 31, 2002.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure.”  SFAS No. 148 amends SFAS No. 123, “Accountingfor Stock-Based Compensation” to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,this Statement amends the disclosure requirements of Statement No. 123 torequire prominent disclosures in both annual and interim financial statementsabout the method of accounting for stock-based employee compensation and theeffect of the method used on reported results. SFAS No. 148 is effective for periods beginning after December 15,2002.  Accordingly, the Company willbegin making the disclosures required by SFAS No. 148 beginning in the third quarter of fiscal year 2003.

 

In November 2002, the EITF reached a consensus onIssue No. 02-16, “Accounting by a Customer (Including a Reseller) for CashConsideration Received from a Vendor.” EITF Issue No. 02-16 provides guidance on how cash considerationreceived by the Company, as a reseller of others’ goods, should be classifiedin its statement of earnings.  TheCompany does not expect EITF Issue No. 02-16 to have a material impact on itsconsolidated financial position or operating results.

 

8

----

 

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

 

**FACTORS THAT MAY AFFECT FUTURERESULTS**

 

Matters discussed in Management’s Discussion and Analysis of FinancialCondition and Results of Operations include forward-looking statements,including statements regarding the Company’s objectives and expectationsconcerning, among other things, its:

 

•                       productivityand profitability;

 

•                       merchandisingand marketing strategies;

 

•                       inventoryperformance;

 

•                       storerenovation and expansion plans;

 

•                       capitalexpenditures;

 

•                       liquidity;and

 

•                       developmentof management information systems.

 

These forward-looking statements are made based on management’sexpectations and beliefs concerning future events, as well as on assumptionsmade by and data currently available to management.  These forward-looking statements involve a number of risks anduncertainties and, therefore, are not guarantees of future performance.  A variety of factors could cause theCompany’s actual results to differ materially from the anticipated or expectedresults expressed in these forward-looking statements.  Factors that could affect future performanceinclude, but are not limited, to:

 

•                       currentpolitical and economic conditions;

 

•                       changes inpolitical and economic conditions that may occur in the future;

 

•                       continuedterrorist activities in the United States, as well as the potential escalationin the international war on terrorism;

 

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

 

•                       changes indemographic or retail environments;

 

•                       changes inconsumer preferences or fashion trends;

 

•                       competitiveresponses to the Company’s marketing, merchandising and promotional effortsand/or inventory liquidations by vendors or other retailers;

 

•                       delays inthe receipt of merchandise ordered by the Company due to work stoppages and/orother causes of delay in connection with either the manufacture or shipment ofsuch merchandise;

 

•                       seasonalityof the retail business;

 

•                       adverse weatherconditions, particularly during peak selling seasons;

 

•                       delays inanticipated store openings;

 

•                       political,social, economic or other events resulting in the short or long-term disruptionin business at the Company’s stores, distribution centers or offices;

 

•                       naturaldisasters;

 

•                       significantincreases in paper, printing and postage costs;

 

•                       litigationthat may have an adverse effect on the financial results or reputation of theCompany;

 

•                       changes inthe Company’s relationships with designers, vendors and other sources ofmerchandise;

 

9

----

 

•                       thefinancial viability of the Company’s designers, vendors and other sources ofmerchandise;

 

•                       changes inforeign currency exchange rates;

 

•                       impact offunding requirements related to the Company’s noncontributory defined benefitpension plan;

 

•                       changes inthe Company’s relationships with certain of its key sales associates;

 

•                       changes inkey management personnel;

 

•                       changes inthe Company’s proprietary credit card arrangement that adversely impact itsability to provide consumer credit; or

 

•                       changes ingovernment or regulatory requirements increasing the Company’s costs ofoperations.

 

The Company undertakes no obligation to update or revise (publicly orotherwise) any forward-looking statements to reflect subsequent events, newinformation or future circumstances.

 

**CRITICAL ACCOUNTING POLICIES**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions about future events.  Sincefuture events and their effects cannot be determined with absolute certainty,actual results will differ from those estimates.  The amounts currently estimated by the Company are subject to changeif different assumptions as to the outcome of future events were made.  The Company evaluates its estimates andjudgments on an ongoing basis and predicates those estimates and judgments onhistorical experience and on various other factors that are believed to bereasonable under the circumstances. Management makes adjustments to its assumptions and judgments when factsand circumstances dictate.  See Note 1of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1for a summary of the Company’s critical accounting policies.  A description of the Company’s criticalaccounting policies is included in the Company’s Annual Report to Shareholderson Form 10-K for the fiscal year ended August 3, 2002.

 

10

----

 

**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.

 

For purposes of the following discussion, all references to the “secondquarter of 2003” and “second quarter of 2002” are to the Company’s thirteenweek fiscal periods ended February 1, 2003 and January 26, 2002,respectively.  All references to “2003”and “2002” are to the Company’s twenty-six week fiscal periods ended February1, 2003 and January 26, 2002, respectively.

 

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

 
|                                                                                |   | **Thirteen Weeks Ended** |   | **Twenty-Six Weeks Ended** |   |
|-------------------------------------------------------------------------------------|--------|--------------------------|--------|----------------------------|--------|
|                                                                                |   | **February 1,  2003**    |   | **January 26,  2003**      |   | **February 1,  2002** |   | **January 26,  2002** |   |
|                                                                                |   |                     |   |                       |   |   |   |   |   |
| Revenues                                                                            |   | 100.0                    | %      | 100.0                      | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold including buying and occupancy  costs                            |   | 69.7                     |   | 71.1                       |   | 66.3 |   | 68.1 |   |
| Selling, general and administrative expenses                                        |   | 24.0                     |   | 23.7                       |   | 25.7 |   | 26.3 |   |
| Impairment and other charges                                                        |   | —                   |   | 0.2                        |   | — |   | 0.1 |   |
| Operating earnings                                                                  |   | 6.3                      |   | 5.0                        |   | 8.0 |   | 5.5 |   |
| Interest expense, net                                                               |   | 0.5                      |   | 0.5                        |   | 0.5 |   | 0.5 |   |
| Earnings before  income taxes, minority interest and change in accounting principle |   | 5.8                      |   | 4.5                        |   | 7.5 |   | 5.0 |   |
| Income taxes                                                                        |   | 2.2                      |   | 1.7                        |   | 2.9 |   | 1.9 |   |
| Earnings before  minority interest and change in accounting principle               |   | 3.6                      |   | 2.8                        |   | 4.6 |   | 3.1 |   |
| Minority interest in net earnings of subsidiaries                                   |   | (0.1                     | )      | (0.1                       | )      | (0.1 | ) | (0.1 | ) |
| Earnings before change in accounting principle                                      |   | 3.5                      |   | 2.7                        |   | 4.5 |   | 3.0 |   |
| Change in  accounting principle – writedown of intangible assets, net of taxes |   | —                   |   | —                     |   | (0.9 | ) | — |   |
| Net earnings                                                                        |   | 3.5                      | %      | 2.7                        | %      | 3.6 | % | 3.0 | % |

 

11

----

 

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

 

**OPERATING RESULTS**

 
|                        |   | **Thirteen  Weeks Ended** |   | **Twenty-Six  Weeks Ended** |   |
|-----------------------------|--------|---------------------------|--------|-----------------------------|--------|
| **(dollars in millions)**   |   | **February  1,  2003**    |   | **January  26,  2002**      |   | **February  1,  2003** |   | **January  26,  2002** |   |
|                        |   |                      |   |                        |   |   |   |   |   |
| REVENUES                    |   |                      |   |                        |   |   |   |   |   |
| Specialty Retail Stores     |   | $                         | 756.1  |                        | $      | 745.7 |   | $ | 1,357.2 |   | $ | 1,306.6 |   |
| Direct  Marketing(1)        |   | 161.3                     |   | 144.4                       |   | 275.6 |   | 246.2 |   |
| Other(2)                    |   | 21.1                      |   | 18.0                        |   | 39.7 |   | 36.4 |   |
| Total                       |   | $                         | 938.5  |                        | $      | 908.1 |   | $ | 1,672.5 |   | $ | 1,589.2 |   |
|                        |   |                      |   |                        |   |   |   |   |   |
| OPERATING  EARNINGS         |   |                      |   |                        |   |   |   |   |   |
| Specialty Retail Stores(3)  |   | $                         | 43.8   |                        | $      | 41.2 |   | $ | 115.5 |   | $ | 89.1 |   |
| Direct  Marketing(1)        |   | 18.0                      |   | 8.3                         |   | 25.4 |   | 6.0 |   |
| Other(2)                    |   | (3.4                      | )      | (2.7                        | )      | (7.3 | ) | (6.0 | ) |
| Total                       |   | $                         | 58.4   |                        | $      | 46.8 |   | $ | 133.6 |   | $ | 89.1 |   |
|                        |   |                      |   |                        |   |   |   |   |   |
| OPERATING PROFIT  MARGIN    |   |                      |   |                        |   |   |   |   |   |
| Specialty Retail  Stores(3) |   | 5.8                       | %      | 5.6                         | %      | 8.6 | % | 6.9 | % |
| Direct  Marketing(1)        |   | 11.2                      | %      | 5.8                         | %      | 9.3 | % | 2.5 | % |
| Total                       |   | 6.3                       | %      | 5.2                         | %      | 8.0 | % | 5.6 | % |
|                        |   |                      |   |                        |   |   |   |   |   |
| COMPARABLE  REVENUES(4)     |   |                      |   |                        |   |   |   |   |   |
| Specialty Retail  Stores    |   | (2.1                      | )%     | (3.3                        | )%     | 0.9 | % | (7.3 | )% |
| Direct  Marketing(1)        |   | 11.7                      | %      | 1.2                         | %      | 12.0 | % | (0.5 | )% |
| Total                       |   | 0.5                       | %      | (3.0                        | )%     | 2.8 | % | (6.5 | )% |

 

----

(1)               Direct Marketingincludes the operations of Neiman Marcus Direct and the Company’s onlineoperations.  During fiscal year 2002,the Company reclassified its Neiman Marcus Online operations to the DirectMarketing segment from Other.  Prioryear amounts have been reclassified to conform to the current year presentation*.*

 

(2)               Other includes theoperations of the Brand Development Companies and corporate expenses.

 

(3)               Segment operatingearnings for the second quarter of 2002 exclude a $2.0 million pretax charge inconnection  with certain cost reductionstrategies consisting primarily of severance costs and lease terminationexpenses incurred in connection with the closing of the Galleries of NeimanMarcus store in Seattle, Washington.

 

(4)               Comparable revenuesinclude 1) revenues derived from the Company’s retail stores open for more than52 weeks, including stores that have been relocated or expanded, 2) revenuesfrom the Company’s Direct Marketing operations and 3) revenues from theCompany’s Brand Development Companies.

 

12

----

 

**THIRTEEN WEEKS ENDED FEBRUARY 1, 2003COMPARED TO THIRTEEN WEEKS ENDED JANUARY 26, 2002**

 

*Revenues. *Revenues for the secondquarter of 2003 of $938.5 million increased $30.4 million, or 3.3 percent, from$908.1 million in the prior year period. The increase in revenues was attributable to both an increase incomparable revenues and revenues generated by new stores.

 

Comparable revenues in the second quarter of 2003 increased 0.5 percentcompared to the second quarter of 2002. Comparable revenues decreased 2.1 percent for Specialty Retail Storesand increased 11.7 percent for Direct Marketing. The increase in comparablerevenues for Direct Marketing was attributable to increased sales in both theCompany’s catalogue and online businesses. Comparable revenues in the second quarter of 2002 declined by 3.0percent.

 

Comparable revenues for the Brand Development Companies increased inthe second quarter of 2003, with increases for both Kate Spade LLC and GurwitchBristow Products, LLC.

 

The Company opened a new clearance store in the Denver, Colorado areain November 2002 and completed a 60,000 square foot expansion and remodel ofthe Las Vegas Neiman Marcus store during the second quarter of 2003.

 

*Grossmargin.*  Gross marginwas 30.3 percent of revenues for the second quarter of 2003 compared to 28.9percent for the second quarter of 2002. The increase in gross margin was primarily due to a decrease inmarkdowns offset, in part, by an increase in buying and occupancy costs as apercentage of revenues.

 

Markdowns decreased as a percentage of revenues for the second quarterof 2003 compared to the prior year period. The Company incurred a higher level of markdowns in the second quarterof 2002 in connection with additional and more aggressive promotional eventsnecessary to clear inventories in response to declines in retail sales.

 

Consistent with industry business practice, the Company receivesreimbursement from certain vendors for markdowns related to the vendor’smerchandise and/or to support the gross margins earned by the Company inconnection with the sale of the vendor’s merchandise.  These reimbursements are included as a reduction to cost of goodssold, including buying and occupancy costs in the period in which the markdownsare incurred or when the Company otherwise earns such reimbursements.  A substantial portion of these vendorreimbursements are received at the end of the Company’s second and fourthfiscal quarters.  The amounts of vendorreimbursements received by the Company did not have a significant impact on theyear-over-year improvement in gross margin in the second quarter of 2003.

 

Buying and occupancy costs increased as a percentage of revenues duringthe second quarter of  2003 compared tothe prior year period primarily due to a higher ratio of buying and occupancyexpenses to revenues for the Company’s less mature stores.

 

*Selling,general and administrative expenses*.  Selling, general and administrative expenses(SG&A) were 24.0 percent of revenues in the second quarter of 2003 comparedto 23.7 percent of revenues in the second quarter of 2002.

 

The net increase in SG&A as a percentage of revenues in the secondquarter of 2003 was primarily due to 1) a higher ratio of SG&A to revenuesfor the Company’s less mature stores, 2) increased preopening costs incurred inconnection with the opening of two Neiman Marcus stores in the first quarter of2003, the opening of a new clearance store in the second quarter of 2003, andthe completion of the remodel of the Las Vegas Neiman Marcus store in thesecond quarter of 2003, and 3) higher health care and other benefit expenses.

 

The increases in SG&A were partially offset by 1) lower catalogueproduction and circulation costs due primarily to a planned reduction incatalogue circulation and the leveraging of the fixed-cost component of DirectMarketing expenses, 2) lower SG&A as a percentage of revenues for theCompany’s more mature stores, and 3) the elimination of amortization of theCompany’s intangible assets upon implementation of a new accounting principle inthe first quarter of 2003.

 

13

----

 

*Segmentoperating earnings*. Operating earnings for the Specialty Retail Stores segment were $43.8million in the second quarter of  2003compared to $41.2 million in the second quarter of 2002.  This increase was primarily the result ofincreased sales and reduced markdowns offset, in part, by increased buying andoccupancy expenses and increased SG&A expenses as percentages of revenues.

 

Operating earnings for Direct Marketing increased to $18.0 million inthe second quarter of 2003 from  $8.3million in the second quarter of 2002, primarily as a result of an improvementin the operating performance of the Company’s online operations and lowercatalogue production and circulation costs due to planned reduction incatalogue circulation.

 

*Interestexpense, net*.  Netinterest expense was $4.3 million for both the second quarter of 2003 and thesecond quarter of 2002.  Net interestexpense for the second quarter of 2003 reflects a decrease in capitalizedinterest charges associated with store construction offset, in part, by reducedinterest costs associated with lower borrowings on the Company’s revolvingcredit facility compared to the prior year period.  Seasonal borrowings under the Company’s revolving credit facilityreached $80 million in the second quarter of 2003 compared to $130 million inthe prior year.

 

*Incometaxes.*  The Company’seffective income tax rate was 38.5 percent for the second quarter of 2003 and38.0 percent for the second quarter of 2002.

 

14

----

 

**TWENTY-SIX WEEKS ENDED FEBRUARY 1,2003 COMPARED TO TWENTY-SIX WEEKS ENDED JANUARY 26, 2002**

 

*Revenues. *Revenues for 2003 of$1,672.6 million increased $83.3 million, or 5.2 percent, from $1,589.2 millionin the prior year period.  The increasein revenues was attributable to both an increase in comparable revenues andrevenues generated by new stores.

 

Comparable revenues in 2003 increased 2.8 percent compared to the prioryear period.  Comparable revenuesincreased 0.9 percent for Specialty Retail Stores and 12.0 percent for DirectMarketing.  The increase in comparablerevenues for Direct Marketing was attributable to increased sales in both theCompany’s catalogue and online businesses. Sales in September and October 2001 were significantly impacted by adecrease in consumer spending subsequent to the September 11, 2001 terroristattacks in the United States. Comparable revenues in 2002 declined by 6.5 percent.

 

Comparable revenues for the Brand Development Companies increased in2003, with the increase for Gurwitch Bristow Products, LLC being offset, inpart, by a decrease for Kate Spade LLC.

 

The Company opened a new Neiman Marcus store in Coral Gables, Floridaduring September 2002 and a new Neiman Marcus store in Orlando, Florida duringOctober 2002.  During November 2002, theCompany opened a new clearance store in the Denver, Colorado area and duringthe second quarter of 2003 completed a 60,000 square foot expansion and remodelof the Las Vegas Neiman Marcus store.

 

*Grossmargin.*  Gross marginwas 33.7 percent of revenues in 2003 compared to 31.9 percent for the prioryear period.  The increase in grossmargin was primarily due to a decrease in markdowns offset, in part, by anincrease in buying and occupancy costs as percentages of revenues.

 

Markdowns decreased as a percentage of revenues compared to the prioryear period.  The Company incurred ahigher level of markdowns in the first and second quarters of 2002 inconnection with additional and more aggressive promotional events necessary toclear inventories in response to declines in retail sales.

 

Consistent with industry business practice, the Company receivesreimbursement from certain vendors for markdowns related to the vendor’smerchandise and/or to support the gross margins earned by the Company inconnection with the sale of the vendor’s merchandise.  These reimbursements are included as a reduction to cost of goodssold, including buying and occupancy costs in the period in which the markdownsare incurred or when the Company otherwise earns such reimbursements.  A substantial portion of these vendorreimbursements are received at the end of the Company’s second and fourthfiscal quarters.  The amounts of vendorreimbursements received by the Company did not have a significant impact on theyear-over-year improvement in gross margin in 2003.

 

Buying and occupancy costs increased as a percentage of revenues in2003 compared to the prior year period primarily due to a higher ratio ofbuying and occupancy expenses to revenues for the Company’s less mature storesoffset, in part, by reduced buying and occupancy costs as a percentage ofrevenues for mature stores.

 

*Selling,general and administrative expenses*.  SG&A expenses were 25.7 percent ofrevenues in 2003 compared to 26.3 percent of revenues in the prior year period.

 

The net decrease in SG&A as a percentage of revenues in 2003 wasprimarily due to 1) a lower level of SG&A as a percentage of revenues forthe Company’s more mature stores, 2) lower catalogue production and circulationcosts due primarily to a planned reduction in catalogue circulation and theleveraging of the fixed-cost component of Direct Marketing expenses, and 3) theelimination of amortization of the Company’s intangible assets in the firstquarter of fiscal year 2003 upon implementation of a new accounting principle.

 

The decreases in SG&A were partially offset by 1) a higher ratio ofSG&A to revenues for the Company’s less mature stores, 2) higher healthcare and other benefit expenses and higher professional fee expenses, 3)increased preopening costs incurred in connection with the opening of twoNeiman Marcus stores in the first quarter of 2003, the opening of a newclearance store in the second quarter of 2003, and the completion of theremodel of the Las Vegas Neiman Marcus store in the second quarter of 2003, and4) certain officer separation and retirement costs.

 

15

----

 

*Segmentoperating earnings*. Operating earnings for the Specialty Retail Stores segment were $115.5million in 2003 compared to $89.1 million in the prior year period.  This increase was primarily the result ofincreased sales and  reduced markdownsoffset, in part, by increased buying and occupancy expenses and increasedSG&A expenses as percentages of revenues.

 

Operating earnings for Direct Marketing increased to $25.4 million in2003 from $6.0 million in the prior year period, primarily as a result of animprovement in the operating performance of the Company’s online operations andlower catalogue production and circulation costs due to planned reduction incatalogue circulation.

 

*Interestexpense, net*.  Netinterest expense was $7.9 million in 2003 compared to $8.2 million for theprior year period.  The decrease in netinterest expense of $0.3 million was primarily due to reduced interest costsassociated with lower borrowings on the Company’s revolving credit facilityoffset, in part, by a decrease in capitalized interest charges associated withstore construction.  Seasonal borrowingsunder the Company’s revolving credit facility reached $80 million in the secondquarter of 2003 compared to $130 million in the prior year.

 

*Incometaxes.*  The Company’seffective income tax rate was 38.5 percent in 2003 and 38.0 percent in theprior year period.

 

*Changein accounting principle – writedown of intangible assets, net of taxes. *The Company adopted theprovisions of Statement of Financial Accounting Standards (SFAS) No. 142,“Goodwill and Other Intangible Assets” as of the beginning of the first quarterof fiscal year 2003.  SFAS No. 142established a new fair value-based accounting model for the valuation ofgoodwill and indefinite-lived intangible assets recorded in connection withbusiness combinations.  Pursuant to theprovisions of SFAS No. 142, goodwill and indefinite-lived intangible assets aremeasured for impairment by applying a fair value-based test at least annuallyand are not amortized.  Based upon itsreview procedures and the valuation results of its independent third partyappraisal experts, the Company recorded a $24.1 million writedown in thecarrying value of the indefinite-lived intangible assets of its DirectMarketing segment.  The writedown ($14.8million, net of taxes) is reflected as a change in accounting principle in theaccompanying Condensed Consolidated Statements of Earnings.

 

16

----

 

**QUARTERLY DATA AND SEASONALITY**

 

The specialty retail industry is seasonal in nature and adisproportionately higher level of the Company’s revenues and earnings aregenerated in the fall and holiday selling seasons.  The Company’s working capital requirements and inventories increasesubstantially in the first fiscal quarter in anticipation of the holidayselling season.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company’s cash requirements consist principally of the funding ofits merchandise purchases, capital expenditures for new store growth, storerenovations, upgrades of its management information systems, debt servicerequirements and funding of the Company’s obligations related to its definedbenefit pension plan.  The Company’sworking capital requirements fluctuate during the year, increasingsubstantially during the fall season as a result of higher planned seasonalinventory levels.

 

In 2003, cash provided by operating activities was $144.9 millioncompared to cash provided by operating activities of $184.7 million for theprior year period.  Despite an increasein net earnings (before the non-cash impact of the accounting change in thefirst quarter of 2003), cash provided by operating activities decreased in 2003by approximately $39.8 million compared to the prior year period.  This decrease was primarily the result of ahigher net investment in inventory (inventory less accounts payables) comparedto the prior year period.  A significantportion of the higher net investment in inventories in the current year relatesto the two new Neiman Marcus stores and two new clearance stores opened sincethe end of the first quarter of 2002.

 

As of February 1, 2003, the Company had cash and cash equivalents of$161.2 million and no outstanding borrowings under the Company’s $300 millionunsecured revolving credit facility.  Duringthe second quarter of fiscal year 2003, the Company repaid the $80 millionpreviously borrowed to fund seasonal working capital requirements.  At January 26, 2002, the Company had cashand cash equivalents of $137.2 million and no outstanding borrowings under theCompany’s $450 million unsecured revolving credit facility.  The $450 million revolving credit facilitywas replaced by the $300 million credit facility on August 26, 2002.

 

In prior years, the Company’s Board of Directors has authorized variousstock repurchase programs and increases in the number of shares subject torepurchase.  During the second quarterof fiscal year 2003, the Company repurchased 524,177 shares at an averagepurchase price of $28.65.  As ofFebruary 1, 2003, approximately 1.4 million shares remained available forrepurchase under the Company’s stock repurchase programs.

 

The Company has a noncontributory defined benefit pension plan (PensionPlan) covering substantially all full-time employees.  Benefits under the Pension Plan are based on the employees’ yearsof service and compensation over defined periods of employment.  Pension Plan assets consist primarily ofequity and fixed income securities. When funding is required, the Company’s policy is to contribute amountsthat are deductible for federal income tax purposes.    The Company anticipates making a contribution of $11.5 millionto the Pension Plan for the plan year ended July 2001 in the third quarter of2003.  The Company’s contribution forthe plan year ended July 2002 is estimated to be $17.3 million and will befunded in quarterly installments during 2003 and 2004.

 

Pension expense is based on information provided by the Company'sactuaries that uses assumptions to estimate the total benefits ultimatelypayable to associates and allocates this cost to service periods. The actuarialassumptions used to calculate pension costs are reviewed annually.  The Company recorded pension expense of $2.6million for the second quarter of 2003 and $1.5 million for the second quarterof 2002.  The Company recorded pensionexpense of $5.2 million for 2003 and $3.0 million for 2002.

 

The Company currently plans to open two new Neiman Marcus stores overthe next three fiscal years and has consistently focused on renovating and modernizingits existing stores to improve productivity. The Company anticipates capitalexpenditures for fiscal year 2003 to be approximately $120 million to $130million.

 

17

----

 

**OUTLOOK**

 

Based on current assumptions, the Company anticipates comparable storerevenues to be in the negative 1.0 percent to positive 1.0 percent range forthe third quarter of 2003.  The accuracyof these assumptions and of the resulting forecasts is subject to uncertaintiesand circumstances beyond the Company’s control.  Consequently, actual results could differ materially from theforecasted results. See “Factors That May Affect Future Results” for adiscussion of items and events that could cause actual results to vary from theCompany’s expectations.

 

Management believes that operating cash flows, currently availablevendor financing and amounts available pursuant to its $300 million revolvingcredit facility and its credit card securitization program should be sufficientto fund the Company’s operations, debt service, pension funding requirementsand currently anticipated capital expenditure requirements through the end of2003.

 

**IMPACT OF INFLATION**

 

The Company believes changes in revenues and net earnings that haveresulted from inflation and changing prices have not been material during theperiods presented.  The Company adjustsselling prices to maintain certain profit levels and will continue to do so inthe future as economic conditions permit. There is no assurance, however, that inflation will not materiallyaffect the Company in the future.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In June 2002, the Financial Accounting Standards Board (FASB) issuedSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies the guidance previously provided in Emerging IssuesTask Force Issue (EITF) No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with anexit or disposal activity is recognized at fair value when the liability isincurred rather than at the date of a commitment to an exit or disposalplan.  The provisions of SFAS No. 146will be effective for disposal activities initiated after December 31, 2002.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation - Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-BasedCompensation” to provide alternative methods of transition for a voluntarychange to the fair value based method of accounting for stock-based employeecompensation.  In addition, thisStatement amends the disclosure requirements of Statement No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results. SFAS No. 148 is effective for periods beginning after December 15,2002.  Accordingly, the Company willbegin making the disclosures required by SFAS No. 148 beginning in the third quarter of fiscal year 2003.

 

In November 2002, the EITF reached a consensus on Issue No. 02-16,“Accounting by a Customer (Including a Reseller) for Cash ConsiderationReceived from a Vendor.”  EITF Issue No.02-16 provides guidance on how cash consideration received by the Company, as areseller of others’ goods, should be classified in its statement ofearnings.  The Company does not expectEITF Issue No. 02-16 to have a material impact on its consolidated financialposition or operating results.

 

18

----

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES 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.

 

Future borrowings under the Company’s revolving credit facility, to theextent of outstanding borrowings, would be affected by interest ratechanges.  As of February 1, 2003, theCompany had no borrowings outstanding under this facility.

 

The Company’s outstanding long-term debt as of February 1, 2003 is atfixed interest rates and would not be affected by interest rate changes.

 

Pursuant to a revolving credit card securitization program that beginsto expire in September 2005, the Company sold substantially all of its creditcard receivables through a subsidiary in exchange for certificates representingundivided interests in such receivables. The Class A Certificates, which have an aggregate principal value of$225 million, were sold to investors. The holders of the Class A Certificatesare entitled to monthly interest distributions from the Trust at thecontractually-defined rate of one month LIBOR plus 0.27 percent annually.  The distributions to the Class A Certificateholders are payable from the finance charge income generated by the credit cardreceivables held by the Trust.  At     February 1, 2003, the Company estimates a100 basis point increase in LIBOR would result in an approximate annualdecrease of $2.25 million in income to the Company from its Retained Interestsin 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 $39.4 million as of February 1, 2003and approximately $35.0 million as of January 26, 2002.  The market risk inherent in theseinstruments was not material to the Company’s consolidated financial position,results of operations, or cash flows for the thirteen weeks and twenty-sixweeks ended February 1, 2003 and January 26, 2002.

 

Based on a review of the Company’s financial instruments outstanding atFebruary 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.

 

19

----

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

(a)               Evaluation ofDisclosure Controls and Procedures

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in its reports filed under the Securities Exchange Act of 1934(Exchange Act) is recorded, processed, summarized and reported within requiredtime periods. The Company’s Chief Executive Officer and Chief FinancialOfficer, as well as other key members of the Company’s management, evaluatedthe effectiveness of the disclosure controls and procedures (as such term isdefined in Rules 13a-14(c) and 15d-14(c) of the Exchange Act) of the Company asof a date within 90 days before the filing of this quarterly report (theEvaluation Date).  Based on thatevaluation, such officers have concluded that, as of the Evaluation Date, suchcontrols and procedures are effective to ensure that required information willbe disclosed on a timely basis in the Company’s reports filed under theExchange Act.

 

(b)              Changes inInternal Controls

 

There have been no significant changes to theCompany’s internal controls or in other factors that could significantly affectthe disclosure controls and procedures since the Evaluation Date.

 

20

----

 

**THE NEIMAN MARCUS GROUP, INC.**

 

PART II

 

Item 1.             Legal Proceedings

 

Note 10 of the Notes to Condensed Consolidated Financial Statements inPart I, Item 1 is incorporated herein by reference as if fully restatedherein.  Note 10 containsforward-looking statements that are subject to the risks and uncertaintiesdiscussed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations – Factors That May Affect Future Results.”

 

Item 4.   Submissionof Matters to a Vote of Security Holders

 

1.                                       TheAnnual Meeting of Shareholders of the Company was held on January 21,2003.  One Class A director and twoClass B directors were elected to serve for three-year terms expiring at the2006 Annual Meeting of Shareholders as follows:

 
|                      |   | **Votes  Cast For** |   | **Votes  Withheld** |   | **Broker  Non-Votes** |   |
|---------------------------|--------|---------------------|--------|---------------------|--------|-----------------------|--------|
| CLASS A Director          |   |                |   |                |   |                  |   |
| Vincent M.  O’Reilly |   | 20,321,398          |   | 3,768,615           |   | 0                     |   |
|                      |   |                |   |                |   |                  |   |
| CLASS B Directors         |   |                |   |                |   |                  |   |
| John R. Cook              |   | 16,052,152          |   | 1,168,897           |   | 0                     |   |
| Burton M. Tansky          |   | 16,051,485          |   | 1,169,564           |   | 0                     |   |

 

Only holders of Class A Common Stock are entitled tovote on the election of the Class A director and only holders of Class B CommonStock are entitled to vote on the election of the Class B directors.  There were no abstentions with respect tothe election of directors.

 

Richard A. Smith, Robert A. Smith, Brian J. Knez,Walter J. Salmon, Matina S. Horner, Paula Stern, Gary L. Countryman and CarlSewell continued as directors of the Company*.*

 

2.                                       Ratificationof the appointment by the Board of Directors of Deloitte & Touche LLP asthe Company’s independent auditors for the 2003 fiscal year:

 
| For     |   | 35,682,556 |   |
|---------|--------|------------|--------|
| Against |   | 5,579,246  |   |
| Abstain |   | 49,260     |   |

 

3.                                       Stockholderproposal concerning cumulative voting in the election of directors:

 
| For              |   | 9,132,809  |   |
|------------------|--------|------------|--------|
| Against          |   | 29,304,201 |   |
| Abstain          |   | 91,526     |   |
| Broker Non-Votes |   | 2,782,526  |   |

 

Item 6.             Exhibitsand Reports on Form 8-K

 

(a)                                  Exhibits.

 

**10.25  Separation Agreement and General Release by and between Gerald A.Sampson and The Neiman Marcus Group, Inc. dated January 1, 2003.**

 

(b)                                 Reportson Form 8-K

 

None.

 

21

----

 

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 |     | March 17, 2003 |
| T. Dale Stapleton     |   | (principal accounting officer) |                          |     |
|                       |        |                                |                               |          |  |

 

22

----

 

CERTIFICATION REQUIRED BYSECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002

 

 
| I, Burton M. Tansky, certify that: |
|------------------------------------|
|                               |
| 1.                                 |   | I have reviewed this Quarterly Report on Form 10-Q  of The Neiman Marcus Group, Inc.; |
|                               |   |   |
| 2.                                 |   | Based on my knowledge, this Quarterly Report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this Quarterly Report; |
|                               |   |   |
| 3.                                 |   | Based on my knowledge, the financial statements, and  other financial information included in this Quarterly Report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  Quarterly Report; |
|                               |   |   |
| 4.                                 |   | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have: |
|                               |
|                               |   | (a) | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this Quarterly Report is  being prepared; |
|                               |   |   |   |
|                               |   | (b) | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this Quarterly Report (the “Evaluation Date”); and |
|                               |   |   |   |
|                               |   | (c) | presented in this Quarterly Report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|                               |
| 5.                                 |   | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of the registrant’s board of directors (or persons  performing the equivalent function): |
|                               |
|                               |   | (a) | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|                               |   |   |   |
|                               |   | (b) | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and; |
|                               |
| 6.                                 |   | The registrant’s other certifying officer and I have  indicated in this Quarterly Report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |

 

 

 
| /s/ Burton M. Tansky                   |   | March 17, 2003 |
|----------------------------------------|--------|----------------|
| Burton M. Tansky                       |   |
| President and Chief  Executive Officer |   |

 

23

----

 

CERTIFICATION REQUIRED BYSECTION 302(A) OF THE SARBANES-OXLEY ACT OF 2002

 

 
| I, James E. Skinner, certify that: |   |                                                                                                                                                                                                                                                                                                                                                                                               |
|------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |
| 1.                                 |   | I have reviewed this Quarterly Report on Form 10-Q  of The Neiman Marcus Group, Inc.;                                                                                                                                                                                                                                                                                                              |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.                                 |   | Based on my knowledge, this Quarterly Report does  not contain any untrue statement of a material fact or omit to state a  material fact necessary to make the statements made, in light of the  circumstances under which such statements were made, not misleading with  respect to the period covered by this Quarterly Report;                                                                 |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.                                 |   | Based on my knowledge, the financial statements, and  other financial information included in this Quarterly Report, fairly present  in all material respects the financial condition, results of operations and  cash flows of the registrant as of, and for, the periods presented in this  Quarterly Report;                                                                                    |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.                                 |   | The registrant’s other certifying officer and I are  responsible for establishing and maintaining disclosure controls and  procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant and we have:                                                                                                                                                                   |
|                               |
|                               |   | (a)                                                                                                                                                                                                                                                                                                                                                                                                | designed such disclosure controls and procedures to  ensure that material information relating to the registrant, including its  consolidated subsidiaries, is made known to us by others within those  entities, particularly during the period in which this Quarterly Report is  being prepared; |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                               |   | (b)                                                                                                                                                                                                                                                                                                                                                                                                | evaluated the effectiveness of the registrant’s  disclosure controls and procedures as of a date within 90 days prior to the  filing date of this Quarterly Report (the “Evaluation Date”); and |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                               |   | (c)                                                                                                                                                                                                                                                                                                                                                                                                | presented in this Quarterly Report our conclusions  about the effectiveness of the disclosure controls and procedures based on  our evaluation as of the Evaluation Date; |
|                               |
| 5.                                 |   | The registrant’s other certifying officer and I have  disclosed, based on our most recent evaluation, to the registrant’s auditors  and the audit committee of the registrant’s board of directors (or persons  performing the equivalent function):                                                                                                                                |
|                               |
|                               |   | (a)                                                                                                                                                                                                                                                                                                                                                                                                | all significant deficiencies in the design or  operation of internal controls which could adversely affect the registrant’s  ability to record, process, summarize and report financial data and have  identified for the registrant’s auditors any material weaknesses in internal  controls; and |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|                               |   | (b)                                                                                                                                                                                                                                                                                                                                                                                                | any fraud, whether or not material, that involves  management or other employees who have a significant role in the registrant’s  internal controls; and; |
|                               |
| 6.                                 |   | The registrant’s other certifying officer and I have  indicated in this Quarterly Report whether or not there were significant  changes in internal controls or in other factors that could significantly  affect internal controls subsequent to the date of our most recent  evaluation, including any corrective actions with regard to significant  deficiencies and material weaknesses. |
|                                    |        |                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |  |  |  |

 

 

 
| /s/ James E. Skinner                              |   | March 17, 2003 |
|---------------------------------------------------|--------|----------------|
| James E. Skinner                                  |   |
| Senior Vice President and Chief Financial Officer |   |

 

24

----