EXHIBIT 13.1
[BEGIN PAGE 29]
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
The Company's operations include specialty retail stores, which
consist of Neiman Marcus Stores and Bergdorf Goodman, and a
direct marketing operation, Neiman Marcus Direct. The Company's
revenues rose to $2.85 billion in fiscal 2000, representing a
22.1% increase over revenues of $2.34 billion in fiscal 1998.
Net earnings increased 26.4% to $134.0 million in fiscal 2000
from $106.0 million in fiscal 1998.
Approximately 85% of the Company's revenues are generated by
its specialty retail stores, Neiman Marcus and Bergdorf
Goodman, with the balance generated primarily by Neiman Marcus
Direct. Revenue growth over the last three fiscal years at
specialty retail stores can be attributed principally to
increases in overall comparable store sales and new store
openings. Since August 1996 the Company has opened three new
Neiman Marcus stores, including most recently a new store in
Honolulu, Hawaii in September 1998. The Company currently also
plans to open five new Neiman Marcus stores in the next four
years, one of which will be a replacement store. In fiscal
2000, average store sales per gross square foot reached a
record high of $490, representing an increase of 11.4% over
three years. The Company has consistently focused on renovating
and modernizing its stores to improve productivity. The Company
also aims to improve average transaction amounts and comparable
sales growth with carefully edited assortments and marketing
and sales programs which are designed to increase its
customers' awareness of merchandise offerings in the stores.
The Company launched its Brand Development Initiative in fiscal
1999, a strategy designed to create shareholder value by
investing in designer resources that serve affluent customers.
In February 1999, the Company acquired a 56% interest in Kate
Spade LLC, a manufacturer of high-end leather handbags and
accessories, for $33.6 million. In November 1998, the Company
acquired a 51% interest in Gurwitch Bristow Products, which
manufactures and markets the Laura Mercier cosmetic lines, for
$6.7 million.
In addition to opening new stores, the Company continues to
make significant capital investments in an effort to increase
productivity. During fiscal 1998, 1999 and 2000, the Company
invested a total of approximately $261.2 million to remodel its
existing stores, to construct a new Neiman Marcus store in
Hawaii and to purchase a building adjacent to its existing San
Francisco store as part of a plan to enlarge and remodel that
store. In fiscal 2000, major projects included the commencement
of multi-year construction projects to build new stores, to
remodel and expand Neiman Marcus stores in San Francisco and
Las Vegas, as well as to continue remodeling the plaza level of
the main store of Bergdorf Goodman.
On October 22, 1999, Harcourt General, Inc. (Harcourt General)
completed the spin-off of its controlling equity position in
the Company in a tax-free distribution to its shareholders.
Harcourt General distributed approximately 21.4 million of its
approximately 26.4 million shares of the Company. Harcourt
General retained approximately 5.0 million shares. Each common
shareholder of Harcourt General received .3013 of a share of
Class B Common Stock of the Company for every share of Harcourt
General Common Stock and Class B Stock held on October 12,
1999, which was the record date for the distribution. This
transaction had no impact on the reported equity of the
Company.
[END PAGE 29]
[BEGIN PAGE 30]
OPERATING RESULTS
Fiscal years ended
--------------------------------
July 29, July 31, August 1,
(Dollars in Millions) 2000 1999 1998
--------------------------------
REVENUES
(RESTATED)(3)(RESTATED)(3)
Specialty Retail Stores $2,424.9 $2,171.0 $2,053.9
Direct Marketing 363.8 321.8 283.8
Other (1) 65.9 22.2 -
--------------------------------
Total $2,854.6 $2,515.0 $2,337.7
================================
OPERATING EARNINGS
Specialty Retail Stores $ 248.5 $ 180.2 $ 197.6
Direct Marketing 24.4 14.5 15.6
Other (1) (24.5) (12.1) (14.6)
--------------------------------
Total $ 248.4 $ 182.6 $ 198.6
================================
OPERATING PROFIT MARGIN
Specialty Retail Stores 10.2% 8.3% 9.6%
Direct Marketing 6.7% 4.5% 5.5%
Total (2) 8.7% 7.3% 8.5%
================================
(1) Other includes the operations of Kate Spade LLC and Gurwitch Bristow
Products, corporate expenses, and e-commerce expenses incurred to launch the
Company's Web site.
(2) Includes Other.
(3) Amounts restated for change from last-in, first-out (LIFO) method of
accounting for inventories to the first-in, first-out (FIFO) method as well as
restated for leased department sales.
FISCAL 2000 COMPARED TO FISCAL 1999
Revenues in fiscal 2000 increased $339.6 million to $2.85
billion from $2.52 billion in fiscal 1999. The 13.5% increase
was primarily attributable to higher overall comparable sales.
Total comparable sales increased 11.8%. Comparable sales
increased 10.4% at Neiman Marcus Stores, 14.6% at Bergdorf
Goodman, and 13.1% at Neiman Marcus Direct.
Cost of goods sold including buying and occupancy costs
increased 9.7% to $1.87 billion in fiscal 2000 from $1.70
billion in fiscal 1999, primarily due to increased sales. As a
percentage of revenues, cost of goods sold was 65.3% in fiscal
2000 compared to 67.6% in fiscal 1999. The proportionate
decrease in fiscal 2000 resulted primarily from higher gross
margins at both Neiman Marcus Stores and Bergdorf Goodman in
comparison to the prior year, principally as a result of lower
markdowns and, to a lesser extent, higher gross margins at
Neiman Marcus Direct.
Selling, general and administrative expenses increased 17.8% in
fiscal 2000 to $725.4 million from $615.9 million in fiscal
1999. As a percentage of revenues, selling, general and
administrative expenses increased to 25.4% in fiscal 2000 from
24.5% in fiscal 1999. The proportionate increase in fiscal 2000
was primarily due to approximately $24.0 million of costs
incurred to launch the Company's e-commerce initiative.
[END PAGE 30]
[BEGIN PAGE 31]
Corporate expenses, which consist primarily of charges for
salaries, benefits and overhead for the individuals who provide
services under the intercompany services agreement with
Harcourt General and professional fees, decreased 3.3% to $15.9
million from $16.4 million in the prior year. The decrease
resulted primarily from expenses incurred in the prior year in
connection with the Company's recapitalization.
Operating earnings increased by 36.0% to $248.4 million from
$182.6 million in the prior year. This increase was
attributable to higher sales and higher gross margins.
Interest expense increased 1.6% in fiscal 2000 to $25.4 million
from $25.0 million in the prior year. The increase resulted
from higher average borrowings which resulted primarily from
borrowings incurred to repay the Company's securitization upon
maturities during the second half of fiscal 2000.
The Company's effective income tax rate was 38% in fiscal 2000,
as compared to 39% in fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues in fiscal 1999 increased $177.3 million to $2.52
billion from $2.34 billion in fiscal 1998. The 7.6% increase
was primarily attributable to higher overall comparable sales,
sales from Chef's Catalog, acquired in January 1998, and the
new Neiman Marcus store in Hawaii which opened in September
1998. Total comparable sales increased 2.6%. Comparable sales
increased 3.4% at Neiman Marcus Stores, decreased 2.3% at
Bergdorf Goodman, and increased 2.0% at Neiman Marcus Direct.
Cost of goods sold including buying and occupancy costs
increased 8.4% to $1.70 billion in fiscal 1999 from $1.57
billion in fiscal 1998, primarily due to increased sales. As a
percentage of revenues, cost of goods sold was 67.6% in fiscal
1999 compared to 67.1% in fiscal 1998. The increase in fiscal
1999 resulted primarily from lower gross margins at both Neiman
Marcus Stores and Bergdorf Goodman in comparison to the prior
year, principally as a result of higher markdowns.
Selling, general and administrative expenses increased 10.8% in
fiscal 1999 to $615.9 million from $556.1 million in fiscal
1998. As a percentage of revenues, selling, general and
administrative expenses increased to 24.5% in fiscal 1999 from
23.8% in fiscal 1998. The proportionate increase in 1999 was
primarily due to higher selling and sales promotion expenses.
Corporate expenses, which consist primarily of charges for
salaries, benefits and overhead for the individuals who provide
services under the intercompany services agreement with
Harcourt General and professional fees, increased 12.2% to
$16.4 million from $14.6 million in the prior year. The
increase resulted primarily from expenses incurred in
connection with the Company's recapitalization.
Operating earnings decreased by 8.0% to $182.6 million from
$198.6 million in the prior year. This decrease was
attributable to lower gross margins, higher selling and sales
promotion costs and Bergdorf Goodman's decline in comparable
sales.
Interest expense increased 14.2% in fiscal 1999 to $25.0
million from $21.9 million in the prior year. The increase
resulted from higher average borrowings as well as a higher
effective interest rate, which resulted from the issuance of
fixed rate debt in May 1998.
The Company's effective income tax rate was 39% in fiscal 1999,
as compared to 40% in fiscal 1998.
[END PAGE 31]
[BEGIN PAGE 32]
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 2000, the Company had sufficient cash flows from
operations and its revolving credit facility to finance its
working capital needs, capital expenditures, repayments under
the Company's securitization, and stock repurchases. Operating
activities provided net cash of $255.1 million in fiscal 2000.
The Company's capital expenditures in fiscal 2000 included the
construction of new stores and existing store renovations.
Capital expenditures were $89.0 million in fiscal 2000, $91.0
million in fiscal 1999 and $81.2 million in fiscal 1998. The
Company opened a new Neiman Marcus store in Honolulu's Ala
Moana Center in September 1998. Capital expenditures are
currently estimated to approximate $175 million for fiscal
2001.
In February 1999, the Company acquired a 56% interest in Kate
Spade LLC for approximately $33.6 million in cash. In November
1998, the Company acquired a 51% interest in Gurwitch Bristow
Products for approximately $6.7 million in cash. Both
acquisitions were funded primarily through borrowings under the
Company's revolving credit facility. In January 1998 the
Company acquired Chef's Catalog for approximately $31.0 million
in cash, which was also funded primarily through borrowings
under the Company's revolving credit facility.
In April 2000, the Company's Board of Directors authorized the
repurchase of an additional two million shares under the
Company's stock repurchase program. During the year ended July
29, 2000, the Company repurchased 2,075,400 shares at an
average price of $24.06 per share, and 1,924,600 shares were
remaining under this program at July 29, 2000. During the years
ended July 31, 1999 and August 1, 1998, the Company repurchased
827,000 and 160,100 shares at average prices of $18.57 and
$29.32 per share, respectively.
In May 1998, the Company issued $250 million of senior notes
and debentures to the public, the proceeds from which were used
to repay borrowings outstanding on the Company's revolving
credit facility. The debt is comprised of $125 million 6.65%
senior notes due 2008 and $125 million 7.125% senior debentures
due 2028. Interest on the securities is payable semiannually.
At July 29, 2000, the Company had $370.0 million available
under its $450.0 million revolving credit facility, which
expires in October 2002.
The Company's five year revolving securitization of its
accounts receivable matured during fiscal 2000. The Company
primarily financed the repayment of the Class A and B
certificates, which were sold to investors and had an aggregate
principal value of $246 million, with a new securitization.
Under the new securitization, the Company sold substantially
all of the Neiman Marcus and Bergdorf Goodman credit card
receivables through a subsidiary to a trust in exchange for
certificates representing undivided interests in such
receivables. The Class A Certificates, which have an aggregate
principal value of $225 million, were sold to investors.
The Company believes that it will have sufficient resources to
fund its planned capital growth and operating requirements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The market risk inherent in the Company's financial instruments
represents the potential loss arising from adverse changes in
interest rates. The Company does not enter into financial
instruments for trading purposes.
At July 29, 2000 and July 31,1999 the fair values of the
Company's fixed rate debt were estimated at $215.2 million and
$230.4 million, respectively, using quoted market prices and
comparable publicly-traded issues. Such fair values were less
than carrying value by approximately $34.5 million and $22.3
million at July 29, 2000 and July 31, 1999, respectively.
Market risk is estimated as the potential change in fair value
resulting from a hypothetical 10% adverse change in interest
rates and amounted to approximately $14.4 million at July 29,
2000.
[END PAGE 32]
[BEGIN PAGE 33]
At July 29, 2000 and July 31, 1999, the Company had $80.0
million and $25.0 million, respectively, of variable rate
borrowings outstanding under its revolving credit facility,
which approximate fair value. A hypothetical 10% adverse change
in interest rates for this variable rate debt would have an
approximate $.7 million negative effect on the Company's
earnings and cash flows.
The Company uses derivative financial instruments to manage
foreign currency risk related to merchandise inventories. The
effect of such instruments was not material to the Company's
financial condition, results of operations, or cash flows.
SEASONALITY
The specialty retail industry is seasonal in nature, and a
disproportionately higher level of the Company's sales and
earnings are generated in the fall and holiday selling seasons.
The Company's working capital requirements and inventories
increase substantially in the first quarter in anticipation of
the holiday selling season.
IMPACT OF INFLATION
The Company has adjusted selling prices to maintain certain
profit levels and will continue to do so as economic conditions
permit. In general, management believes that the impact of
inflation or of changing prices has not had a material effect
on the Company's results of operations during the last three
fiscal years.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133), which will require recognition of all derivatives
as either assets or liabilities on the balance sheet at fair
value. In June 1999, the issuance of SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities," delayed the
provisions of SFAS 133 to be effective for fiscal 2001. The
Company believes that the effect of adopting these new
standards relates primarily to its use of forward foreign
currency contracts. The Company expects that such contracts,
used to manage foreign currency risk related to the purchase of
merchandise inventories, will meet the criteria for hedge
accounting and, as a result, the changes in fair values of
these contracts will be reported in other comprehensive income
rather than in results of operations. The Company does not
expect such amounts to be material.
FORWARD-LOOKING STATEMENTS
Statements in this report referring to the expected future
plans and performance of the Company are forward-looking
statements. Actual future results may differ materially from
such statements. Factors that could affect future performance
include, but are not limited to: changes in economic conditions
or consumer confidence; changes in consumer preferences or
fashion trends; delays in anticipated store openings; adverse
weather conditions, particularly during peak selling seasons;
changes in demographic or retail environments; competitive
influences; significant increases in paper, printing and
postage costs; and changes in the Company's relationships with
designers and other resources.
[END PAGE 33]
[BEGIN PAGE 34]
CONSOLIDATED BALANCE SHEETS
July 29, July 31,
(Dollar Amounts in Thousands) 2000 1999
----------------------
ASSETS (Restated)
CURRENT ASSETS
Cash and equivalents $ 175,385 $ 29,191
Undivided interests in NMG Credit Card Master Trust 211,581 133,151
Accounts receivable, less allowance for doubtful accounts of
$200 and $2,300 19,279 59,317
Merchandise inventories 575,344 545,252
Deferred income taxes 26,078 21,815
Other current assets 61,671 53,102
----------------------
TOTAL CURRENT ASSETS 1,069,338 841,828
----------------------
PROPERTY AND EQUIPMENT
Land, buildings and improvements 527,153 486,862
Fixtures and equipment 391,714 364,757
Construction in progress 69,440 47,656
----------------------
988,307 899,275
Less accumulated depreciation and amortization 448,572 385,836
----------------------
PROPERTY AND EQUIPMENT, NET 539,735 513,439
----------------------
OTHER ASSETS
Trademarks and other intangible assets, net 128,581 134,853
Other, net 24,403 28,730
----------------------
152,984 163,583
----------------------
$ 1,762,057 $ 1,518,850
======================
LIABILITIES AND SHAREHOLDERS` EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term
liabilities $ 787 $ 921
Accounts payable 270,957 203,071
Accrued liabilities 220,562 192,188
----------------------
TOTAL CURRENT LIABILITIES 492,306 396,180
----------------------
LONG-TERM LIABILITIES
Notes and debentures 329,663 274,640
Other long-term liabilities 73,954 74,664
Deferred income taxes 31,510 32,038
----------------------
TOTAL LONG-TERM LIABILITIES 435,127 381,342
----------------------
MINORITY INTEREST 8,882 4,485
COMMITMENTS AND CONTINGENCIES
COMMON STOCKS
Common Stock-$.01 par value - 490
Class A Common Stock-$.01 par value
Authorized-100 million shares; issued and
outstanding-27,531,797 shares 275 -
Class B Common Stock-$.01 par value
Authorized-100 million shares; issued and
outstanding-19,941,432 shares 200 -
ADDITIONAL PAID-IN CAPITAL 422,186 467,283
RETAINED EARNINGS 403,081 269,070
----------------------
TOTAL SHAREHOLDERS' EQUITY 825,742 736,843
----------------------
$ 1,762,057 $ 1,518,850
======================
See Notes to Consolidated Financial Statements.
[END PAGE 34]
[BEGIN PAGE 35]
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended
------------------------------------
July 29, July 31, August 1,
(In Thousands, Except for Per Share Data) 2000 1999 1998
------------------------------------
(Restated) (Restated)
Revenues $ 2,854,629 $ 2,515,008 $ 2,337,684
Cost of goods sold including buying and
occupancy costs 1,865,008 1,700,098 1,568,439
Selling, general and administrative expenses 725,399 615,890 556,051
Corporate expenses 15,868 16,406 14,620
------------------------------------
Operating earnings 248,354 182,614 198,574
Interest expense 25,375 24,972 21,862
------------------------------------
Earnings before income taxes and
minority interest 222,979 157,642 176,712
Income taxes 84,732 61,480 70,685
------------------------------------
Earnings before minority interest 138,247 96,162 106,027
Minority interest in net earnings
of subsidiaries (4,236) (1,310) -
------------------------------------
Net earnings $ 134,011 $ 94,852 $ 106,027
====================================
Weighted average number of common
and common equivalent shares outstanding:
Basic 48,460 49,129 49,808
====================================
Diluted 48,721 49,237 49,981
====================================
Earnings per share:
Basic $ 2.77 $ 1.93 $ 2.13
====================================
Diluted $ 2.75 $ 1.93 $ 2.12
====================================
See Notes to Consolidated Financial Statements.
[END PAGE 35]
[BEGIN PAGE 36]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
-----------------------------------
July 29, July 31, August 1,
(In Thousands) 2000 1999 1998
-----------------------------------
(Restated) (Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 134,011 $ 94,852 $ 106,027
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 68,878 64,921 60,097
Deferred income taxes (4,791) 3,702 228
Minority interest 4,236 1,310 -
Other 4,457 (5,680) 1,299
Changes in current assets and liabilities:
Accounts receivable (11,103) (1,999) 2,431
Merchandise inventories (30,092) (27,842) (32,506)
Accounts payable and accrued liabilities 98,035 (18,784) 48,641
Other (8,569) 8,151 (3,985)
-----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 255,062 118,631 182,232
===================================
CASH FLOWS USED FOR INVESTING ACTIVITIES
Additions to property and equipment (89,032) (91,026) (81,176)
Purchases of held-to-maturity securities (969,393) (641,364) (636,342)
Maturities of held-to-maturity securities 963,104 647,080 625,816
Acquisitions, net of cash acquired - (36,754) (31,000)
-----------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (95,321) (122,064) (122,702)
===================================
CASH FLOWS USED FOR FINANCING ACTIVITIES
Proceeds from borrowings 55,000 - 249,617
Repayment of debt - (10,000) (265,000)
Repayment of receivables securitization (246,000) - -
Proceeds from receivables securitization 225,000 - -
Repurchase of common stock (49,930) (15,356) (4,694)
Distribution paid (2,435) - -
Other equity activities 4,818 1,336 330
-----------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (13,547) (24,020) (19,747)
===================================
CASH AND EQUIVALENTS
Increase (decrease) during the year 146,194 (27,453) 39,783
Beginning balance 29,191 56,644 16,861
-----------------------------------
Ending balance $ 175,385 $ 29,191 $ 56,644
===================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 24,777 $ 26,098 $ 20,932
===================================
Income taxes $ 88,784 $ 62,626 $ 59,656
===================================
See Notes to Consolidated Financial Statements.
[END PAGE 36]
[BEGIN PAGE 37]
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional
Common Stock Paid-in Retained
(In Thousands) Shares Amount Capital Earnings
------------------------------------------
BALANCE-AUGUST 3, 1997 49,873 $ 499 $ 485,658 $ 68,571
Adjustment for sales returns reserve,
net - - - (9,440)
Adjustment for change of accounting
method for inventories, net - - - 9,060
------------------------------------------
RESTATED BALANCE-AUGUST 3, 1997 49,873 499 485,658 68,191
Net earnings - - - 106,027
Repurchase of common stock (160) (2) (4,692) -
Other equity transactions 47 1 329 -
------------------------------------------
BALANCE-AUGUST 1, 1998 49,760 498 481,295 174,218
Net earnings - - - 94,852
Repurchase of common stock (827) (11) (15,345) -
Other equity transactions 106 3 1,333 -
------------------------------------------
BALANCE-JULY 31, 1999 49,039 490 467,283 269,070
Net earnings - - - 134,011
Repurchase of common stock (2,075) (21) (49,909) -
Other equity transactions 495 6 4,812 -
------------------------------------------
BALANCE-JULY 29, 2000 47,459 $ 475 $ 422,186 $ 403,081
==========================================
See Notes to Consolidated Financial Statements.
[END PAGE 37]
[BEGIN PAGE 38]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING
The Company's businesses consist of specialty retail stores,
which include Neiman Marcus Stores and Bergdorf Goodman, and
Neiman Marcus Direct, the Company's direct marketing operation.
The consolidated financial statements include the accounts of
all of the Company's majority-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated. The Company's fiscal year ends on the Saturday
closest to July 31.
Prior year amounts have been restated and reclassified to
conform with the current presentation.
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and highly liquid
investments with maturities of three months or less from the
date of purchase.
UNDIVIDED INTERESTS IN NMG CREDIT CARD MASTER TRUST
The Company's five year revolving securitization of its
accounts receivable matured in July 2000. During the year ended
July 29, 2000, the Company used its credit facility to repay
the $246 million of certificates which matured under the 1995
securitization. In July 2000, the Company ultimately financed
the repayment of the certificates primarily with the proceeds
from a new five year, floating rate securitization transaction.
Under the new securitization, the Company sold substantially
all of its Neiman Marcus and Bergdorf Goodman credit card
receivables through a subsidiary to The Neiman Marcus Group
Master Trust (the "Trust") in exchange for certificates
representing undivided interests in such receivables. The
undivided interests in the Trust include the interests retained
by the Company's subsidiary which are represented by the Class
B Certificate ($23.8 million), Class C Certificate ($68.2
million) and the Seller's Certificate (the excess of the total
receivables transferred to the Trust over the portion
represented by $225 million Class A Certificates sold to
investors and the Class B and Class C Certificates). The
undivided interests in the Trust represent securities which the
Company intends to hold to maturity in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Due to
the short-term revolving nature of the credit card portfolio,
the carrying value of the Company's undivided interests in the
Trust approximates fair value.
MERCHANDISE INVENTORIES
In fiscal 2000, the Company changed its method of determining
the cost of inventories from the last-in, first-out (LIFO)
method to the first-in, first-out (FIFO) method. Management
believes that the FIFO method better measures the current value
of such inventories and provides a more appropriate matching of
revenues and expenses. Under the current low-inflationary
environment, the use of the FIFO method more accurately
reflects the Company's financial position.
[END PAGE 38]
[BEGIN PAGE 39]
The change to the FIFO method has been applied by retroactively
restating the accompanying consolidated financial statements.
The effect of this change was to increase merchandise
inventories, taxes payable and retained earnings by $15.1
million, $6.0 million and $9.1 million, respectively, as of
August 2, 1997. For the years ended July 31, 1999 and August 1,
1998, the effect of the change increased net earnings by $1.3
million and decreased net earnings by $.3 million,
respectively. For the years ended July 31, 1999 and August 1,
1998, the effect of the change increased diluted earnings per
share by $.03 and decreased diluted earnings per share by $.01.
OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist primarily of certain
employee benefit obligations, postretirement health care
benefits and the liability for scheduled rent increases.
DERIVATIVES
The Company uses treasury lock agreements (a derivative) as a
means of managing interest-rate risk associated with current
debt or anticipated debt transactions. The differentials to be
received or paid under these contracts designated as hedges are
deferred and amortized to interest expense over the remaining
life of the associated debt. The Company also enters into
forward foreign currency exchange contracts to minimize foreign
currency exposure related to purchases of inventory. Gains and
losses related to such contracts which qualify as hedges are
deferred and recognized in the period the hedge settles. Gains
and losses which do not qualify as hedges are marked to market
and recognized currently. Derivative financial instruments are
not held for trading purposes.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on a straight-line
basis over the shorter of the estimated useful lives of the
related assets or the lease term. Buildings and improvements
are depreciated over 10 to 30 years while fixtures and
equipment are depreciated over two to 15 years.
When property and equipment are retired or have been fully
depreciated, the cost and the related accumulated depreciation
are eliminated from the respective accounts. Gains or losses
arising from dispositions are reported as income or expense.
Intangibles are amortized on a straight-line basis over their
estimated useful lives, ranging from four to 40 years.
Amortization expense was $6.3 million in 2000, $6.4 million in
1999 and $4.8 million in 1998.
Upon occurrence of an event or a change in circumstances, the
Company compares the carrying value of its long-lived assets
against projected undiscounted cash fiows to determine whether
any impairment exists and to evaluate the reasonableness of the
depreciation or amortization periods.
INCOME TAXES
Income taxes are calculated in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109) "Accounting
for Income Taxes." SFAS 109 requires the asset and liability
method of accounting for income taxes.
[END PAGE 39]
[BEGIN PAGE 40]
REVENUE RECOGNITION
The Company recognizes revenue at point-of-sale or upon
shipment. Sales from leased departments were previously
recorded on a gross basis, with separate presentation of sales
and cost of goods sold. In accordance with the provisions of
Staff Accounting Bulletin No.101, "Revenue Recognition in
Financial Statements," the current year presentation has been
changed and previous years restated. As restated, commissions
from leased departments are included in total revenues. Such
restatements had no impact on previously reported gross profit,
operating earnings, net earnings, shareholders' equity or cash
fiows.
Prior to fiscal 2000, the Company did not record sales returns
on the accrual basis of accounting because the difference
between the cash and accrual basis was not material. In fiscal
2000, the Company began accruing sales returns. Accordingly,
the Company restated prior periods to adjust the opening
balance sheet as of August 2, 1997 to establish a returns
reserve of $16.0 million (classified in current liabilities),
record a corresponding increase in deferred tax assets of $6.6
million and a decrease in retained earnings of $9.4 million. In
fiscal 2000, the Company recorded a charge of $4.3 million or
$.06 per share. Such charge included $1.9 million, or $.02 per
share, which related to fiscal years 1999 and 1998. The 1999
and 1998 net income was not restated as such amounts were not
material.
FINANCE CHARGE INCOME AND CREDIT RISK
The Company's credit operations generate finance charge income,
which is recognized as income when earned and is recorded as a
reduction of selling, general and administrative expenses.
Finance charge income amounted to $51.9 million in 2000, $45.8
million in 1999 and $47.8 million in 1998. The securitization
of the Company's credit card receivables had the effect of
reducing finance change income by $13.2 million in 2000 and
$19.0 million in each of 1999 and 1998.
Concentration of credit risk with respect to trade receivables
is limited due to the large number of customers to whom the
Company extends credit. Ongoing credit evaluation of customers'
financial positions is performed, and collateral is not
required as a condition of extending credit. The Company
maintains reserves for potential credit losses.
PREOPENING EXPENSES
Costs associated with the opening of new stores are expensed as
incurred.
ADVERTISING AND CATALOGUE COSTS
Direct response advertising relates primarily to the production
and distribution of the Company's catalogues and is amortized
over the estimated life of the catalogue. The estimated lives
of catalogues are based on their expected revenue streams,
which range from three to six months. All other advertising
costs are expensed in the period incurred. Advertising expenses
were $140.4 million, $125.0 million and $114.4 million in 2000,
1999 and 1998, respectively. Direct response advertising
amounts included in other current assets in the consolidated
balance sheets as of July 29, 2000 and July 31, 1999 were $12.7
million and $10.6 million, respectively.
SIGNIFICANT ESTIMATES
The Company estimates the appropriate carrying value of certain
assets and liabilities which are not readily apparent from
other sources. The primary estimates underlying the Company's
consolidated financial statements include allowances for
doubtful accounts and sales returns, accruals for pension and
postretirement benefits, accruals for loyalty programs and
other matters. Actual results could differ from these
estimates. Management bases its estimates on historical
experience and on various assumptions which are believed to be
reasonable under the circumstances.
[END PAGE 40]
[BEGIN PAGE 41]
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," which will require recognition and
measurement of all derivatives as either assets or liabilities
on the balance sheet at fair value. In June 1999, the issuance
of SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities," delayed the provisions of SFAS 133 to be effective
for fiscal 2001. The Company believes that the effect of
adopting these new standards relates primarily to its use of
forward foreign currency contracts. The Company expects that
such contracts, used to manage foreign currency risk related to
the purchase of merchandise inventories, will meet the criteria
for hedge accounting and, as a result, the changes in fair
values of these contracts will be reported in other
comprehensive income rather than in results of operations. The
Company does not expect such amounts to be material.
NOTE 2. ACQUISITIONS
On February 1, 1999, the Company acquired a 56% interest in
Kate Spade LLC for approximately $33.6 million in cash. Kate
Spade is a manufacturer and marketer of high-end fabric and
leather handbags and accessories. The acquisition has been
accounted for by the purchase method of accounting and,
accordingly, the results of operations of Kate Spade for the
period from February 1, 1999 are included in the accompanying
consolidated financial statements. The excess of cost over the
estimated fair value of net assets acquired of $32.7 million
was allocated to trademarks which are amortized on a straight-
line basis over 25 years. Assets acquired and liabilities
assumed have been recorded at their estimated fair values.
On November 2, 1998, the Company acquired a 51% interest in
Gurwitch Bristow Products for approximately $6.7 million in
cash. Gurwitch Bristow Products manufactures and markets the
Laura Mercier cosmetic line. The acquisition has been accounted
for by the purchase method of accounting and, accordingly, the
results of operations of Gurwitch Bristow Products for the
period from November 2, 1998 are included in the accompanying
consolidated financial statements. The excess of cost over the
estimated fair value of net assets acquired of $5.3 million was
allocated to trademarks, which is amortized on a straight-line
basis over 25 years. Assets acquired and liabilities assumed
have been recorded at their estimated fair values.
On January 5, 1998, the Company acquired Chef's Catalog for
approximately $31.0 million in cash. Chef's Catalog is a direct
marketer of gourmet cookware and high-end kitchenware, and its
operations have been integrated with Neiman Marcus Direct. The
acquisition has been accounted for by the purchase method of
accounting and, accordingly, the results of operations of
Chef's Catalog for the period from the date of acquisition are
included in the accompanying consolidated financial statements.
The excess of cost over the estimated fair value of net assets
acquired of $30.3 million was allocated to goodwill, customer
lists, and trademarks, which are amortized on a straight-line
basis over lives of 30 years, four years and 30 years,
respectively.
These acquisitions did not materially impact consolidated
results, and therefore no pro forma information is provided.
[END PAGE 41]
[BEGIN PAGE 42]
NOTE 3. OTHER ASSETS
July 29, July 31,
(In Thousands) 2000 1999
----------------------
Trademarks $ 126,654 $ 126,654
Goodwill 33,202 33,202
Other 18,600 18,600
----------------------
178,456 178,456
Accumulated amortization (49,875) (43,603)
----------------------
Trademarks and other intangible
assets, net $ 128,581 $ 134,853
======================
Trademarks and goodwill are amortized using the straight-line
method over their estimated useful lives, ranging from 25 to 40
years. Customer lists (which are included in Other) are
amortized using the straight-line method over their estimated
useful lives, ranging from four to 11 years.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
July 29, July 31,
(In Thousands) 2000 1999
----------------------
Accrued salaries and related liabilities $ 46,314 $ 33,698
Self-insurance reserves 23,472 25,436
Income taxes payable 24,837 27,474
Other 125,939 105,580
----------------------
$ 220,562 $ 192,188
======================
NOTE 5. NOTES AND DEBENTURES
Notes and debentures consisted of the following:
Interest July 29, July 31,
(In Thousands) Rate 2000 1999
--------------------------------
Revolving credit facility Variable $ 80,000 $ 25,000
Senior notes 6.65% 124,879 124,863
Senior debentures 7.125% 124,784 124,777
--------------------
$329,663 $ 274,640
====================
The Company has a revolving credit facility with 21 banks,
pursuant to which the Company may borrow up to $450 million. In
September 1999, the Company reduced the revolving credit facility
from $650 million to reflect its current and anticipated cash
flow requirements. The facility, which expires in October 2002,
may be terminated by the Company at any time on three business
days' notice. The rate of interest payable (6.9% at July 29,
2000) varies according to one of four pricing options selected by
the Company. The revolving credit facility contains covenants
which require the Company to maintain certain leverage and fixed
charge ratios.
In May 1998, the Company issued $250 million of senior notes
and debentures to the public. The proceeds of the debt offering
were used to repay borrowings outstanding on the Company's
revolving credit facility. The debt is comprised of $125
million 6.65% senior notes due 2008 and $125 million 7.125%
senior debentures due 2028. Interest on the securities is
payable semiannually.
The aggregate maturities of notes and debentures are $0 in
fiscal 2001 and fiscal 2002, $80.0 million in fiscal 2003, $0
in fiscal 2004 and fiscal 2005 and $249.7 million thereafter.
[END PAGE 42]
[BEGIN PAGE 43]
NOTE 6. SHAREHOLDERS' EQUITY
SPIN-OFF FROM HARCOURT GENERAL, INC.
On October 22, 1999, Harcourt General, Inc. (Harcourt General)
completed the spin-off of its controlling equity position in
the Company in a tax-free distribution to its shareholders.
Harcourt General distributed approximately 21.4 million of its
approximately 26.4 million shares of the Company.
Harcourt General retained approximately 5.0 million shares.
Each common shareholder of Harcourt General received .3013 of a
share of Class B Common Stock of the Company for every share of
Harcourt General Common Stock and Class B Stock held on October
12, 1999, which was the record date for the distribution. This
transaction had no impact on the reported equity of the
Company.
The Company and Harcourt General are parties to an agreement
pursuant to which Harcourt General provides certain management,
accounting, financial, legal, tax and other corporate services
to the Company. The fees for these services are based on
Harcourt General's costs and are subject to the approval of a
committee of directors of the Company who are independent of
Harcourt General. This agreement may be terminated by either
party on 180 days' notice. Charges to the Company under this
agreement were $6.2 million in 2000, $6.0 million in 1999 and
$5.4 million in 1998.
Most of the senior officers of the Company serve in similar
capacities with Harcourt General. Three of such officers also
serve as directors of both companies.
AUTHORIZED CAPITAL
On September 15, 1999, shareholders of the Company approved a
proposal to amend the Company's Restated Certificate of
Incorporation to increase the Company's authorized capital to
250 million shares of common stock (consisting of 100 million
shares of Class A Common Stock, 100 million shares of Class B
Common Stock and 50 million shares of a new Class C Common
Stock (having one-tenth (1/10) of one vote per share)) and 50
million shares of preferred stock.
STOCKHOLDER RIGHTS PLAN
On October 6, 1999, the Company's Board of Directors adopted a
stockholder rights plan. The rights plan is designed to improve
the ability of the Company's board to protect and advance the
interests of the Company's stockholders in the event of an
unsolicited proposal to acquire a significant interest in the
Company.
EXECUTIVE STOCK PURCHASE LOAN PLAN
In accordance with the provisions of the Loan Plan, outstanding
loans were used to acquire shares of common stock either in the
open market or pursuant to stock option exercises and to
discharge certain tax liabilities incurred in connection with
the exercise of stock options and the release of restrictions
on previous grants of restricted common stock. The loans are
secured by a pledge of the purchased shares and bear interest
at an annual rate of 5%, payable quarterly. Pursuant to the
terms of the Loan Plan, each executive officer's loan will
become due and payable seven months after his or her employment
with the Company terminates. Loans outstanding as of July 29,
2000 were $1.7 million.
[END PAGE 43]
[BEGIN PAGE 44]
COMMON STOCK
Common stock is entitled to dividends if and when declared by
the Board of Directors, and each share of Class A and Class B
Common Stock outstanding carries one vote. Holders of common
stock have no cumulative voting, conversion, redemption or
preemptive rights.
COMMON STOCK INCENTIVE PLANS
The Company has established common stock incentive plans
allowing for the granting of stock options, stock appreciation
rights (SARs) and stock-based awards to its employees. The
Company applies Accounting Principles Board (APB) Opinion No.
25 and related interpretations in accounting for its plans.
Compensation cost for restricted stock is recognized on a
straight-line basis over the expected life of the award with
the offsetting entry to additional paid-in capital. For
performance accelerated restricted stock, the expected life is
determined based on management's best estimate of the number of
years from the grant date to the date at which it is probable
that the performance targets will be met (four or five years,
depending on the grant). Compensation cost is calculated as if
all instruments granted that are subject only to a service
requirement will vest. The effect of actual forfeitures is
recognized, prospectively, upon occurrence.
The Company has adopted the disclosure-only provision of the
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). Had the
fair-value based method of accounting been applied at grant
date to the Company's stock incentive plans, net earnings and
earnings per share would have been reduced to pro forma amounts
for the years ended July 29, 2000, July 31, 1999 and August 1,
1998 as follows:
(In Thousands, Except for Per Share Amounts)
2000 1999 1998
----------------------------------
Net earnings: (Restated) (Restated)
As reported $ 134,011 $ 94,852 $ 106,027
Pro forma $ 129,914 $ 93,028 $ 105,039
Basic earnings per share:
As reported $ 2.77 $ 1.93 $ 2.13
Pro forma $ 2.68 $ 1.89 $ 2.11
Diluted earnings per share:
As reported $ 2.75 $ 1.93 $ 2.12
Pro forma $ 2.67 $ 1.89 $ 2.10
The effects on pro forma net earnings and earnings per share of
expensing the estimated fair value of stock options are not
necessarily representative of the effects on reported net
earnings for future years due to such factors as the vesting
period of the stock options and the potential for issuance of
additional stock options in future years. In addition, the
disclosure requirements of SFAS 123 are applicable only to
options granted subsequent to July 30, 1995.
The Company has adopted the 1997 Incentive Plan (the "1997
Plan") which is currently used for grants of equity-based
awards to employees. All outstanding equity-based awards at
July 29, 2000 were granted under the Company's 1997 Plan and
the 1987 Stock Incentive Plan. At July 29, 2000, there were 2.2
million shares of common stock available for grants under the
1997 Plan.
[END PAGE 44]
[BEGIN PAGE 45]
In fiscal years 2000, 1999 and 1998, the Company granted
453,500 restricted shares, 58,300 restricted shares and 46,650
restricted shares, respectively, at weighted-average grant date
fair values of $23.50, $24.81 and $32.94. The Company records
compensation expense on a straight-line basis over the expected
life of the restricted stock granted. Compensation expense
related to restricted stock grants was $2.6 million, $1.1
million and $0.8 million in fiscal years 2000, 1999 and 1998,
respectively.
Options outstanding at July 29, 2000 were granted at prices
(not less than 100% of the fair market value on the date of the
grant) varying from $11.63 to $33.38. Options generally vest
ratably over five years and expire after ten years. There were
127 employees with options outstanding at July 29, 2000. For
all outstanding options at July 29, 2000, the weighted-average
exercise price was $24.28 and the weighted -average remaining
contractual life was approximately 7.9 years. The fair value of
each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following
assumptions used for grants in 2000, 1999 and 1998,
respectively:
2000 1999 1998
-----------------------------
Expected life (years) 7 7 8
Expected volatility 40.8% 45.6% 29.4%
Risk-free interest rate 6.0% 6.0% 5.5%
=============================
A summary of the status of the Company's 1997 and 1987 Stock
Incentive Plans as of July 29, 2000, July 31, 1999 and August 1,
1998 and changes during the years ending on those dates is
presented below:
2000 1999 1998
--------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------
Options outstanding
at beginning of year 1,179,700 $ 24.36 847,960 $ 23.83 660,780 $ 17.95
Granted 1,410,150 23.93 468,000 24.82 325,800 32.87
SAR Surrenders - - - - (107,240) 17.75
Exercised (80,800) 15.08 (47,400) 14.62 (2,300) 14.90
Canceled (231,950) 25.22 (88,860) 26.98 (29,080) 24.92
--------- --------- -------
Outstanding at
end of year 2,277,100 $ 24.28 1,179,700 $ 24.36 847,960 $ 23.83
========= ========= =======
Options exercisable
at year-end 515,180 $ 22.06 403,150 $ 19.23 286,700 $ 15.53
========= ========= =======
[END PAGE 45]
[BEGIN PAGE 46]
The weighted-average fair value of options granted in 2000, 1999 and 1998 was
$12.83, $14.17 and $15.94, respectively.
The following summarizes information about the Company's stock options as of
July 29, 2000.
Options Outstanding Options Exercisable
----------------------------------------- -----------------------
Weighted- Weighted- Weighted-
Shares Average Average Shares Average
Outstanding Remaining Exercise Outstanding Exercise
Range of Exercise Prices At 7/29/00 Contractual Life Price At 7/29/00 Price
----------------------------------------- -----------------------
$11.63 - $15.38 275,350 3.1 $ 14.23 260,850 $ 14.17
$22.94 - $24.94 1,384,750 8.9 $ 23.61 89,000 $ 24.82
$25.94 - $29.19 282,100 9.4 $ 27.00 2,200 $ 29.19
$32.94 - $33.38 334,900 6.5 $ 33.05 163,130 $ 33.08
- ---------------- --------- -------
$11.63 - $33.38 2,277,100 7.9 $ 24.28 515,180 $ 22.06
================ ========= =======
NOTE 7. STOCK REPURCHASE PROGRAM
In September 1998, the Company's Board of Directors authorized
an increase in the stock repurchase program to 1.5 million
shares. In October 1999, the Company's Board of Directors
authorized an increase in the stock repurchase program to two
million shares. In April 2000, the Company's Board of Directors
authorized the repurchase of an additional two million shares.
During the year ended July 29, 2000, the Company repurchased
2,075,400 shares at an average price of $24.06 per share under
this stock repurchase program; 1,924,600 shares were remaining
under this program at July 29, 2000. During the years ended
July 31, 1999 and August 1, 1998, the Company repurchased
827,000 and 160,100 shares at an average price of $18.57 and
$29.32 per share, respectively.
NOTE 8. INCOME TAXES
Income tax expense was as follows:
Years ended
----------------------------------
July 29, July 31, August 1,
(In Thousands) 2000 1999 1998
----------------------------------
Current: (Restated) (Restated)
Federal $ 82,371 $ 57,167 $ 61,925
State 7,152 7,309 8,532
----------------------------------
89,523 64,476 70,457
----------------------------------
Deferred:
Federal (4,328) (1,993) (101)
State (463) (1,003) 329
----------------------------------
(4,791) (2,996) 228
----------------------------------
Income tax expense $ 84,732 $ 61,480 $ 70,685
==================================
The Company's effective income tax rate was 38% in 2000, 39% in
1999 and 40% in 1998. The difference between the statutory
federal tax rate and the effective tax rate is due primarily to
state income taxes.
[END PAGE 46]
[START PAGE 47]
Significant components of the Company's net deferred income tax
liability stated on a gross basis were as follows:
July 29, July 31,
(In Thousands) 2000 1999
----------------------
Gross deferred income tax assets: (Restated)
Financial accruals and reserves $ 26,444 $ 23,871
Employee benefits 26,166 25,640
Inventories 2,238 2,667
Deferred lease payments 1,658 2,003
Other 572 493
----------------------
Total deferred tax assets 57,078 54,674
Gross deferred income tax liabilities:
Excess tax depreciation (54,042) (55,610)
Pension accrual (1,590) (1,273)
Other assets previously deducted on
tax return (6,878) (8,014)
----------------------
Total deferred tax liabilities (62,510) (64,897)
----------------------
Net deferred income tax liability ($ 5,432) ($ 10,223)
======================
NOTE 9. PENSION PLANS AND POSTRETIREMENT HEALTH CARE BENEFITS
The Company has a noncontributory defined benefit pension plan
covering substantially all full-time employees. The Company
also sponsors an unfunded supplemental executive retirement
plan which provides certain employees additional pension
benefits. Benefits under the plans are based on the employees'
years of service and compensation over defined periods of
employment. When funding is required, the Company's policy is
to contribute amounts that are deductible for federal income
tax purposes. Pension plan assets consist primarily of equity
and fixed income securities.
Retirees and active employees hired prior to March 1, 1989 are
eligible for certain limited postretirement health care
benefits if they have met certain service and minimum age
requirements. The cost of these benefits is accrued during the
years in which an employee provides services. The Company paid
postretirement health care benefit claims of $1.6 million
during 2000, $1.2 million during 1999 and $1.3 million during
1998.
Components of net pension expense were as follows:
Years Ended
--------------------------------
July 29, July 31, August 1,
(In Thousands) 2000 1999 1998
--------------------------------
Service cost $ 7,696 $ 7,160 $ 5,527
Interest cost on projected
benefit obligation 13,760 12,641 10,843
Expected return on assets (13,637) (11,826) (9,270)
Net amortization and deferral 1,036 1,208 1,178
--------------------------------
Net pension expense $ 8,855 $ 9,183 $ 8,278
=================================
[END PAGE 47]
[START PAGE 48]
The periodic postretirement health care benefit cost was as follows:
Years Ended
--------------------------------
July 29, July 31, August 1,
(In Thousands) 2000 1999 1998
--------------------------------
Service cost $ 75 136 $ 155
Interest cost on accumulated benefit
obligation 856 1,151 1,282
Net amortization and deferral (342) (17) (30)
--------------------------------
Net periodic cost $ 589 $ 1,270 $ 1,407
=================================
The changes in the benefit obligations and the reconciliations of the funded
status of the Company's plans to the consolidated balance sheets were as
follows:
CHANGE IN BENEFIT OBLIGATIONS: Pension Benefits Postretirement Benefits
---------------------- -----------------------
(In Thousands) 2000 1999 2000 1999
---------------------- -----------------------
Benefit obligations at
beginning of year $ 183,772 $ 179,427 $ 13,642 $16,942
Service cost 7,696 7,160 75 136
Interest 13,760 12,641 856 1,151
Benefits paid (7,495) (5,710) (1,574) (1,247)
Actuarial gain (7,965) (9,746) (2,035) (3,340)
---------------------- -----------------------
Benefit obligations at end of year $ 189,768 $ 183,772 $ 10,964 $ 13,642
====================== =======================
CHANGE IN PLAN ASSETS:
Pension Plans
-----------------------
(In Thousands) 2000 1999
-----------------------
Fair value of plan assets at beginning of year $ 163,665 $159,093
Actual return on assets 21,011 9,302
Company contributions 2,243 980
Benefits paid (7,495) (5,710)
-----------------------
Fair value of plan assets at end of year $ 179,424 $163,665
=======================
FUNDED STATUS: Pension Plans Postretirement Plans
---------------------- -----------------------
(In Thousands) 2000 1999 2000 1999
---------------------- -----------------------
Fair value of plan assets
less than benefit obligation ($ 10,344) ($ 20,107) ($ 10,964)($ 13,642)
Unrecognized net actuarial gain (25,027) (9,195) (7,036) (5,343)
Unrecognized prior service cost 4,794 4,845 - -
Unrecognized net obligation at transition 1,815 2,305 - -
---------------------- -----------------------
Liability recognized in the
consolidated balance sheets ($ 28,762) ($ 22,152) ($ 18,000)($ 18,985)
====================== =======================
WEIGHTED-AVERAGE ASSUMPTIONS: Pension Benefits
--------------------------------
2000 1999 1998
--------------------------------
Discount rate 7.75% 7.5% 7.0%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
Rate of future compensation increases 5.0% 5.0% 5.0%
The weighted average assumptions for postretirement health care
benefits included a discount rate of 7.75% in 2000, 7.5% in
1999 and 7.0% in 1998.
[END PAGE 48]
[BEGIN PAGE 49]
For measurement purposes, a 6.0% annual rate of increase in the
per capita cost of covered care benefits was assumed for fiscal
2001, and a 5.0% annual rate was assumed for fiscal 2002 and
beyond.
If the health care trend rate was increased one percentage
point, postretirement benefit costs for the year ended July 29,
2000 would have been $.1 million higher, and the accumulated
postretirement benefit obligation as of July 29, 2000 would
have been $1.1 million higher. If the health care trend rate
was decreased one percentage point, postretirement benefit
costs for the year ended July 29, 2000 would have been $.1
million lower, and the accumulated postretirement benefit
obligations as of July 29, 2000 would have been $.9 million
lower.
The Company has a qualified defined contribution 401(k) plan,
which covers substantially all employees. Employees make
contributions to the plan, and the Company matches 65% of the
first 2% and 25% of the next 4% of an employee's contribution
up to a maximum of 6% of the employee's compensation. Company
contributions for the years ended July 29, 2000, July 31, 1999
and August 1, 1998 were $4.3 million, $2.9 million, and $2.9
million, respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company's operations are conducted primarily in leased
properties which include retail stores, distribution centers
and other facilities. Substantially all leases are for periods
of up to thirty years with renewal options at fixed rentals,
except that certain leases provide for additional rent based on
revenues in excess of predetermined levels.
Rent expense under operating leases was as follows:
Years Ended
---------------------------------
July 29, July 31, August 1,
(In Thousands) 2000 1999 1998
---------------------------------
Minimum rent $ 36,100 $ 34,000 $ 31,800
Rent based on revenues 16,000 14,500 13,300
---------------------------------
Total rent expense $ 52,100 $ 48,500 $ 45,100
=================================
Future minimum lease payments, excluding renewal options, under
operating leases are as follows: fiscal 2001-$38.6 million;
fiscal 2002-$38.3 million; fiscal 2003-$36.9 million; fiscal
2004-$40.0 million; fiscal 2005-$39.3 million; all years
thereafter-$527.4 million.
LITIGATION
The Company is involved in various suits and claims in the
ordinary course of business. Management does not believe that
the disposition of any such suits and claims will have a
material adverse effect upon the consolidated results of
operations, cash fiows or the financial position of the
Company.
[END PAGE 49]
[BEGIN PAGE 50]
LETTERS OF CREDIT
The Company had approximately $12.9 million of outstanding
irrevocable letters of credit relating to purchase commitments
and insurance liabilities at July 29, 2000.
FORWARD FOREIGN CURRENCY CONTRACTS
At July 29, 2000, the Company had forward foreign currency
contracts outstanding, which mature at various dates through
August 2001, to buy the equivalent of $52.4 million of
inventory. The fair value of such contracts was approximately
$3.0 million lower than their contractual value, with such
difference included in results of operations in fiscal 2000.
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial
instruments are as reported and disclosed in the consolidated
financial statements, and as discussed below.
DEBT
The fair values of the Company's senior notes and debentures
were $215.2 million and $230.4 million, as of July 29, 2000 and
July 31, 1999, respectively, and were based upon quoted prices
and comparable publicly traded issues. The corresponding book
values of the Company's senior notes and debentures were $249.7
million and $249.6 million as of July 29, 2000 and July 31,
1999, respectively.
NOTE 12. EARNINGS PER SHARE
Pursuant to the provisions of SFAS 128, the weighted-average
shares used in computing basic and diluted earnings per share
(EPS) are presented in the table below. No adjustments were
made to net earnings applicable to common shareholders for the
computations of basic and diluted EPS during the periods
presented.
Options to purchase 614,500 shares and 395,910 shares of common
stock were not included in the computations of diluted EPS for
the years ended July 29, 2000 and July 31, 1999, respectively,
because the exercise price of those options was greater than
the average market price of the common shares. All options were
included in the computation of diluted EPS for the year ended
August 1, 1998 because the exercise price of those options was
less than the average market price of the common shares.
Year Ended
-------------------------------
July 29, July 31, August 1,
(In Thousands of Shares) 2000 1999 1998
-------------------------------
Shares for computation of
basic EPS 48,460 49,129 49,808
Effect of dilutive stock options
and nonvested stock under
common stock incentive plans 261 108 173
-------------------------------
Shares for computation of
diluted EPS 48,721 49,237 49,981
==============================
[END PAGE 50]
[BEGIN PAGE 51]
NOTE 13. SEGMENT REPORTING
In 1999, the Company adopted SFAS 131, "Disclosure about
Segments of an Enterprise and Related Information," which
established reporting and disclosure standards for an
enterprise's operating segments. Operating segments are defined
as components of an enterprise for which separate financial
information is available and regularly reviewed by the
Company's senior management. The accounting policies of the
operating segments are the same as those described in the
summary of significant accounting policies. The Company's
senior management evaluates the performance of the Company's
assets on a consolidated basis. Therefore, separate financial
information for the Company's assets on a segment basis is not
available. Interest expense is not allocated by segment, and
neither interest expense nor depreciation and amortization by
segment is regularly reviewed by senior management.
In applying SFAS 131, the Company identified two reportable
segments, which are as follows: specialty retail stores and
direct marketing. The specialty retail stores segment includes
all Neiman Marcus and Bergdorf Goodman retail stores. Direct
marketing includes the operations of Neiman Marcus Direct,
which publishes NM by Mail, the Horchow catalogues, Chef's
Catalog and the Neiman Marcus Christmas Catalogue. Other
includes corporate expenses, costs incurred to launch the
Company's e-commerce business, and operations which do not meet
the quantitative thresholds of SFAS 131, including Kate Spade
and Gurwitch Bristow Products.
The following tables set forth the information for the
Company's reportable segments:
Year ended
-----------------------------------
July 29, July 31, August 1,
(In Thousands) 2000 1999 1998
-----------------------------------
REVENUES: (RESTATED) (RESTATED)
Specialty Retail Stores $ 2,424,909 $ 2,171,038 $ 2,053,890
Direct Marketing 363,815 321,747 283,794
Other 65,905 22,223 -
-----------------------------------
Total $ 2,854,629 $ 2,515,008 $ 2,337,684
===================================
OPERATING EARNINGS:
Specialty Retail Stores $ 248,452 $ 180,182 $ 197,623
Direct Marketing 24,369 14,543 15,571
Other (24,467) (12,111) (14,620)
-----------------------------------
Total $ 248,354 $ 182,614 $ 198,574
===================================
CAPITAL EXPENDITURES:
Specialty Retail Stores $ 73,234 $ 89,296 $ 79,920
Direct Marketing 3,298 970 1,256
Other 12,500 760 -
-----------------------------------
Total $ 89,032 $ 91,026 $ 81,176
===================================
[END PAGE 51]
[BEGIN PAGE 52]
NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended July 29, 2000
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------
(Restated) (Restated) (Restated)
(In Millions, Except for Per Share Data)
Revenues $ 668.3 $ 878.1 $ 683.8 $ 624.4 $ 2,854.6
==========================================================
Gross profit $ 252.0 $ 288.7 $ 256.7 $ 192.2 $ 989.6
==========================================================
Net earnings $ 37.4 $ 41.3 $ 45.2 $ 10.1 $ 134.0
==========================================================
Earnings per share:
Basic $ 0.76 $ 0.85 $ 0.94 $ 0.22 $ 2.77
==========================================================
Diluted $ 0.76 $ 0.84 $ 0.94 $ 0.21 $ 2.75
==========================================================
Year Ended July 31, 1999 (Restated)
-----------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------
Revenues $ 578.7 $ 779.6 $ 602.6 $ 554.1 $ 2,515.0
==========================================================
Gross profit $ 203.2 $ 242.4 $ 215.3 $ 154.0 $ 814.9
==========================================================
Net earnings $ 25.6 $ 31.2 $ 35.8 $ 2.3 $ 94.9
==========================================================
Earnings per share:
Basic $ 0.52 $ 0.64 $ 0.73 $ 0.05 $ 1.93
==========================================================
Diluted $ 0.52 $ 0.64 $ 0.73 $ 0.05 $ 1.93
==========================================================
[END PAGE 52]
[BEGIN PAGE 53]
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDERS
THE NEIMAN MARCUS GROUP, INC.
CHESTNUT HILL, MASSACHUSETTS
We have audited the accompanying consolidated balance sheets of
The Neiman Marcus Group, Inc. and subsidiaries as of July 29,
2000 and July 31, 1999, and the related consolidated statements
of earnings, shareholders' equity and cash flows for each of the
three fiscal years in the period ended July 29, 2000. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of The Neiman Marcus Group, Inc. and subsidiaries as of
July 29, 2000 and July 31, 1999, and the results of their
operations and their cash flows for each of the three fiscal
years in the period ended July 29, 2000, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1, the accompanying financial statements
have been restated to reflect an accrual for sales returns and to
change the method of accounting for inventories.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 31, 2000
STATEMENT OF MANAGEMENT'S
RESPONSIBILITY FOR
FINANCIAL STATEMENTS
The management of The Neiman Marcus Group, Inc. and its
subsidiaries is responsible for the integrity and objectivity of
the financial and operating information contained in this Annual
Report, including the consolidated financial statements covered
by the Independent Auditors' Report. These statements were
prepared in conformity with generally accepted accounting
principles and include amounts that are based on the best
estimates and judgments of management.
The Company maintains a system of internal controls which
provides management with reasonable assurance that transactions
are recorded and executed in accordance with its authorizations,
that assets are properly safeguarded and accounted for, and that
records are maintained so as to permit preparation of financial
statements in accordance with generally accepted accounting
principles. This system includes written policies and procedures,
an organizational structure that segregates duties, financial
reviews and a comprehensive program of periodic audits by the
internal auditors. The Company also has instituted policies and
guidelines which require employees to maintain a high level of
ethical standards.
In addition, the Audit Committee of the Board of Directors,
consisting solely of outside directors, meets periodically with
management, the internal auditors and the independent auditors to
review internal accounting controls, audit results and accounting
principles and practices and annually recommends to the Board of
Directors the selection of independent auditors.
/s/ John R. Cook
JOHN R. COOK
Senior Vice President and
Chief Financial Officer
/s/ Catherine N. Janowski
CATHERINE N. JANOWSKI
Vice President and Controller
[END PAGE 53]
[BEGIN PAGE 54]
Years Ended
--------------------------------------------------------
July 29, July 31, August 1, August 2, August 3,
2000 1999 1998 1997 1996(a)
--------------------------------------------------------
(In Millions, Except for Per Share Data)
OPERATING RESULTS: (Restated) (Restated) (Restated) (Restated)
Revenues $ 2,854.6 $ 2,515.0 $ 2,337.7 $ 2,180.6 $ 2,042.4
=========================================================
Net earnings $ 134.0 $ 94.9 $ 106.0 $ 92.1 $ 77.0
=========================================================
Net earnings
applicable to common
shareholders $ 134.0 $ 94.9 $ 106.0 $ 63.6 $ 47.9
=========================================================
Basic amounts per share
applicable to common
shareholders:
Basic net earnings $ 2.77 $ 1.93 $ 2.13 $ 1.35 $ 1.26
=========================================================
Diluted amounts per share
applicable to common
shareholders:
Diluted net earnings $ 2.75 $ 1.93 $ 2.12 $ 1.34 $ 1.25
=========================================================
FINANCIAL POSITION:
Total assets $ 1,762.1 $ 1,518.9 $ 1,459.0 $ 1,309.5 $ 1,272.4
Long-term liabilities $ 435.1 $ 381.3 $ 392.8 $ 401.6 $ 395.3
The selected financial data should be read in conjunction with the
Consolidated Financial Statements contained elsewhere in this report.
(a) Fiscal 1996 was a 53-week year.
[END PAGE 54]
[BEGIN PAGE 55]
SHAREHOLDER INFORMATION
Requests for general information or published financial
information should be made in writing to:
CORPORATE RELATIONS DEPARTMENT
The Neiman Marcus Group, Inc.
Post Office Box 9187
Chestnut Hill, MA 02467-9187
(617) 232-0760
TRANSFER AGENT AND REGISTRAR
Fleet National Bank
c/o EquiServe
Post Office Box 8040
Boston, MA 02266-8040
(800) 730-4001
FORM 10-K
The Company's Form 10-K as filed with the Securities and Exchange
Commission is available upon written request to the Corporate
Relations Department of the Company.
STOCK INFORMATION
The Neiman Marcus Group's Class A Common Stock and Class B Com
mon Stock are currently traded on the New York Stock Exchange
under the symbols NMG.A and NMG.B, respectively. Class B Common
Stock was distributed by Harcourt General to its shareholders
in October 1999.
The following table indicates for the past two fiscal years the
quarterly price range of the Common Stock, traded under the
symbol NMG prior to the Company's recapitalization during the
first quarter of fiscal 2000.
NMG.A 2000 NMG.B 2000 1999
-------------- -------------- --------------
Quarter High Low High Low High Low
-------------- -------------- --------------
First $25.06 $21.31 $24.75 $21.06 $33.50 $16.08
Second $28.69 $23.00 $27.00 $21.13 $26.75 $22.08
Third $28.50 $20.00 $28.31 $19.25 $27.00 $22.00
Fourth $33.19 $24.00 $32.00 $23.13 $31.00 $24.18
============== ============== ==============
The Neiman Marcus Group is an Equal Opportunity Employer.
Visit The Neiman Marcus Group Web site at
www.NeimanMarcusGroup.com.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Friday,
January 19, 2001 at 10:00 a.m. at the Company's Corporate
Headquarters, 27 Boylston Street, Chestnut Hill, Massachusetts.
SHARES OUTSTANDING
The Neiman Marcus Group had 27.5 million shares of Class A Common
Stock and 19.9 million shares of Class B Common Stock
outstanding, and 11,355 and 4,126 common shareholders of record,
respectively, at July 29, 2000.
CORPORATE ADDRESS
The Neiman Marcus Group, Inc.
27 Boylston Street
Post Office Box 9187
Chestnut Hill, MA 02467-9187
(617) 232-0760
[END PAGE 55]