[START PAGE 25]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
Overview
The Company's financial performance reflects a continuing favorable
environment for the sale of high-end merchandise as well as the strong
competitive position of its three operating entities: Neiman Marcus Stores,
Bergdorf Goodman and NM Direct. Management believes that the Company's success
can be attributed to its business strategy, which is designed to increase
productivity, sales and operating earnings. Key elements of the strategy
include: (i) offering an extensive and carefully edited assortment of high-end
fashion merchandise based on strong relationships with designer resources;
(ii) providing a high level of customer service and utilizing a variety of
clienteling tools; (iii) investing in the Company's store base and supporting
infrastructure; (iv) opening new stores; and (v) expanding its customer base
by broadening the Company's reach through creative marketing techniques as
well as through NM Direct. As a result of the Company's successful
implementation of this strategy, revenues rose to $2.2 billion in fiscal 1997,
representing a 17.0% increase over revenues of $1.9 billion in fiscal 1995.
Net earnings from continuing operations increased 35.5% from $67.3 million to
$91.2 million during the same period.
Approximately 75% of the Company's revenues are generated by Neiman Marcus
Stores with the balance split between Bergdorf Goodman and NM Direct. In
fiscal 1995, the Company solidified its focus on the high-end specialty retail
market with the sale of its Contempo Casuals operations, which is reflected in
the Company s financial statements as a discontinued operation.
Revenue growth over the last three fiscal years at Neiman Marcus Stores and
Bergdorf Goodman can be attributed primarily to increases in comparable store
sales and new store openings. Since August 1995, the Company has opened three
new Neiman Marcus stores, adding 430,000 gross square feet in the Northeast
market. The Company has a new Neiman Marcus store under construction in
Honolulu's Ala Moana Center (160,000 gross square feet) which the Company
expects to open in November 1998. The Company also plans to open new Neiman
Marcus stores in Coral Gables, Florida, in 2000 (120,000 gross square feet),
in Oyster Bay, New York, in 2001 (140,000 gross square feet), and in Plano,
Texas, in 2001 (150,000 gross square feet). The Plano, Texas store will
replace an existing store in Prestonwood, Texas. In fiscal 1997, average sales
per gross square foot reached an all-time high of $392 at Neiman Marcus Stores
and $803 at Bergdorf Goodman, representing increases of 8.9% and 5.1%,
respectively, over fiscal 1995 levels. The Company has consistently focused on
renovating and modernizing its stores to improve productivity, while
concurrently aiming to improve average transaction amounts and comparable
sales growth with programs which are designed to increase the customers'
awareness of other merchandise offerings in the store and serve more of their
merchandise needs. In addition, to meet the demand of their customers for fine
merchandise, over the past three fiscal years Neiman Marcus Stores and
Bergdorf Goodman have placed a greater emphasis on higher quality merchandise
at higher opening price points.
In fiscal 1997, the Company's operating earnings rose to $181.0 million from
$159.5 million in fiscal 1996 and $150.1 million in fiscal 1995. The
comparability of these results, however, is affected by the Company's
securitization of its credit card receivables in fiscal 1995 as part of the
Company's overall financing strategy. The sale of these credit card
receivables resulted in a decrease in finance charge income (which is recorded
as an offset to selling, general and administrative expenses) and a resulting
decrease in the Company's operating earnings. This reduction amounted to $19.0
million in both fiscal 1997 and 1996 and $7.1 million in fiscal 1995.
Management believes that the fiscal 1998 reduction will be comparable to the
reductions experienced in fiscal 1997 and 1996. The securitization, however,
also reduced interest expense during these periods as the proceeds were used
to repay outstanding debt.
[END PAGE 25]
[START PAGE 26]
The Company utilizes the LIFO method of accounting for valuing its
inventories, which provides a better matching of revenues with expenses than
the FIFO method which is used by some specialty retail companies. The most
important factors contributing to differences between the LIFO and FIFO
methods include the rate of inflation, inventory levels and markdowns. As a
result of these factors, operating earnings were $1.5 million lower in fiscal
1997, $0.7 million higher in fiscal 1996 and $10.4 million higher in fiscal
1995 than they would have been using the FIFO method.
Because a substantial portion of the Company's selling, general and
administrative expenses consists of fixed charges, comparable sales increases
improve the Company's operating profit margin. Management believes that
various programs designed to increase sales, coupled with improved
technologies in merchandising and selling information systems, have
contributed to the Company's increased operating earnings, and will continue
to improve productivity and profitability in the future.
NM Direct increased its revenues and operating earnings in both fiscal 1996
and 1997, in large part due to the successful implementation of certain
initiatives established in fiscal 1995, when revenues at NM Direct were
adversely affected by weak demand for its apparel merchandise. As a result, NM
Direct repositioned its merchandise assortment, placing greater emphasis on
hard goods and home furnishings and less emphasis on its Horchow apparel
offerings. NM Direct's results are also significantly affected by fluctuation
in the costs of paper and postage. In particular, in fiscal 1995, increased
paper and postage cost had a significant effect on the operating results of NM
Direct. In response, NM Direct reduced the page count and number of its
catalogues and repositioned its merchandise mix as discussed above. NM Direct
may increase its revenues by selectively entering international markets. NM
Direct entered the catalogue market in Japan in fiscal 1995 with its Horchow
catalogue and successfully introduced the Neiman Marcus Christmas Catalogue in
Japan in the fiscal 1997 holiday season.
In addition to opening new stores, the Company continues to make significant
capital investments that it believes will result in increased productivity. In
particular, during fiscal 1995, 1996 and 1997, the Company invested
approximately $88 million in remodeling its existing store base. In fiscal
1998, major projects will include (i) continuing construction of a new Neiman
Marcus store in Hawaii; (ii) remodeling projects at the Fashion Island
(Newport Beach, CA) and Palo Alto Neiman Marcus stores; and (iii) remodeling
of the plaza level of the main store of Bergdorf Goodman.
In addition, in fiscal 1996, the Company began operating a new distribution
center for Neiman Marcus Stores, which consolidated the distribution function
previously provided by several older facilities in the Dallas area. In fiscal
1995, the Company completed the expansion of its direct marketing distribution
and fulfillment center for NM Direct and closed its other NM Direct
distribution centers. The Company expects that these facilities will continue
to provide future cost savings and operational efficiencies.
In connection with the repurchase of its redeemable preferred stock in fiscal
1997, the Company incurred a nonrecurring, non-cash charge to earnings
applicable to common shareholders of approximately $22.4 million, or
approximately $.48 per share.
[END PAGE 26]
[START PAGE 27]
Operating Results
In fiscal 1996, the reporting period included 53 weeks as compared to 52 weeks
in each of fiscal years 1997 and 1995.
Fiscal Years Ended
..............................................
August 2, August 3, July 29,
(Dollars in Millions) 1997 1996 1995
REVENUES ---------- ---------- ----------
Neiman Marcus Stores $ 1,696.8 $ 1,566.7 $ 1,398.8
Bergdorf Goodman 253.7 251.9 241.5
NM Direct 259.4 256.4 247.9
---------- ---------- ----------
Total $ 2,209.9 $ 2,075.0 $ 1,888.2
========== ========== ==========
OPERATING EARNINGS (1)
Neiman Marcus Stores $ 151.7 $ 134.0 $ 132.3
Bergdorf Goodman 18.2 16.5 16.6
NM Direct 25.5 22.7 13.7
Corporate expenses (14.4) (13.7) (12.5)
---------- ---------- ----------
Total $ 181.0 $ 159.5 $ 150.1
========== =========== ==========
OPERATING PROFIT MARGINS (1)
Neiman Marcus Stores 8.9% 8.6% 9.5%
Bergdorf Goodman 7.2% 6.6% 6.9%
NM Direct 9.8% 8.9% 5.5%
Total (2) 8.2% 7.7% 7.9%
========== =========== ==========
(1) Operating earnings and operating profit margins include the impact of the
Company's credit card receivables securitization. For comparison purposes,
excluding the impact of the Company's credit card receivables securitization,
operating earnings for Neiman Marcus Stores and NM Direct would have been
$168.2 and $28.0 in fiscal 1997, $150.4 and $25.4 in fiscal 1996 and $138.3
and $14.8 in fiscal 1995, respectively. See "Review of Financial Condition."
(2) After corporate expenses.
[END PAGE 27]
[START PAGE 28]
Fiscal 1997 versus Fiscal 1996
Revenues in fiscal 1997 increased to $2.21 billion from $2.08 billion in
fiscal 1996. The 6.5% increase was primarily attributable to comparable sales
growth of 5.3% at Neiman Marcus Stores, and to new Neiman Marcus stores opened
in King of Prussia, Pennsylvania in February 1996 and Paramus, New Jersey in
August 1996. Comparable sales increases at Bergdorf Goodman and NM Direct were
2.1% and 2.9%, respectively.
Cost of goods sold increased 6.3% to $1.50 billion in fiscal 1997, primarily
due to incremental merchandise sold. As a percentage of revenues, cost of
goods sold was 68.1% in fiscal 1997 compared to 68.3% in fiscal 1996. The
decrease in fiscal 1997 resulted primarily from improved gross margins across
all divisions, and proportionately lower buying and occupancy costs.
Selling, general and administrative expenses increased 5.0% in fiscal 1997 to
$509.7 million. As a percentage of revenues, selling, general and
administrative expenses decreased to 23.1% in fiscal 1997 from 23.4% in fiscal
1996. The proportionate decrease was primarily due to higher revenues.
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, legal fees and professional fees,
increased 4.7% to $14.4 million in fiscal 1997 compared to fiscal 1996. This
increase was primarily due to higher professional fees.
Operating earnings increased to $181.0 million from $159.5 million in the
prior year. This increase is attributed to higher sales volume, particularly
at Neiman Marcus Stores, and improved gross margins.
Interest expense decreased 6.7% in fiscal 1997 to $26.3 million. Higher
average borrowings were offset by a lower effective interest rate which
resulted from the repayment at maturity of the Company's fixed rate senior
notes with borrowings under its revolving credit agreement.
The Company's effective income tax rate was unchanged at 41% in fiscal 1997.
Fiscal 1996 versus Fiscal 1995
Revenues in fiscal 1996 increased 9.9% to $2.08 billion from $1.89 billion in
fiscal 1995. The revenue growth was primarily attributable to a 5.4% increase
in comparable sales and, to a lesser extent, the opening of two new Neiman
Marcus stores during the year. Additionally, fiscal 1996 included 53 weeks,
while fiscal 1995 consisted of 52 weeks. The 53rd week is not included in
comparable sales.
Cost of goods sold increased 10.9% to $1.42 billion in fiscal 1996, primarily
due to higher sales volume. As a percentage of revenues, cost of goods sold
was 68.3% in fiscal 1996 compared to 67.6% in fiscal 1995. The higher
percentage is primarily due to higher markdowns during the holiday season.
[END PAGE 28]
[START PAGE 29]
Selling, general and administrative expenses increased 8.1% to $485.5 million
in fiscal 1996 from $449.0 million in fiscal 1995, primarily due to new store
openings, higher selling costs and lower finance charge income. As a
percentage of revenues, selling, general and administrative expenses were
23.4% in fiscal 1996 compared to 23.8% in fiscal 1995. The Company's
securitization of its credit card receivables, which was completed in March
1995, reduced finance charge income, and thereby increased selling, general
and administrative expenses, by approximately $19.0 million in fiscal 1996 and
$7.1 million in fiscal 1995.
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, legal fees and professional fees,
increased $1.2 million in fiscal 1996 to $13.7 million, compared to $12.5
million in the prior year. The increase is primarily attributable to higher
compensation expense resulting from the Company's employees accepting the cash
value of certain stock options rather than exercising such options for shares
of Common Stock.
Operating earnings increased to $159.5 million in fiscal 1996 from $150.1
million in the prior year. The increase is attributable to higher sales volume
at each of the Company's operating entities, partially offset by the full year
impact of the credit card receivables securitization. Operating earnings at NM
Direct improved significantly in comparison to fiscal 1995, due to increased
revenues and lower paper and postage expenses.
Interest expense decreased 16.9% to $28.2 million in fiscal 1996, primarily
due to lower debt levels resulting from the use of the proceeds from the
Company's credit card receivables securitization in March 1995 to pay down
outstanding debt.
The Company's effective income tax rate decreased to 41% in fiscal 1996 from
42% in fiscal 1995. The decrease was attributable to lower state income taxes.
Review of Financial Condition
In fiscal 1997, the Company had sufficient cash flows from operations and its
revolving credit agreement to finance its working capital needs, capital
expenditures and preferred dividend requirements. Operating activities
provided net cash of $109.2 million in fiscal 1997 compared to $52.7 million
in fiscal 1996.
The Company's capital expenditures in fiscal 1997 consisted principally of
renovations of existing stores. Capital expenditures were $53.0 million in
fiscal 1997, $85.7 million in fiscal 1996 and $93.5 million in fiscal 1995.
The Company opened new Neiman Marcus stores in Short Hills, New Jersey in
August 1995, in King of Prussia, Pennsylvania in February 1996 and in Paramus,
New Jersey in August 1996. The Company has a new Neiman Marcus store under
construction in Honolulu's Ala Moana Center which is expected to open in
November 1998 (160,000 gross square feet), and also plans to open new Neiman
Marcus stores in Coral Gables, Florida, in 2000 (120,000 gross square feet),
in Oyster Bay, New York, in 2001 (140,000 gross square feet), and in Plano,
Texas in 2001 (150,000 gross square feet). The Plano, Texas store will replace
an existing store in Prestonwood, Texas. Capital expenditures are currently
estimated to approximate $100.0 million for fiscal 1998.
[END PAGE 29]
[START PAGE 30]
In October 1996, the Company issued 8.0 million shares of common stock to the
public at $35.00 per share. The net proceeds were used in November 1996,
together with 3.9 million shares of the Company's common stock and borrowings
of approximately $20.0 million, to purchase all of its outstanding redeemable
preferred stock from Harcourt General and pay accrued and unpaid dividends.
The repurchase of the preferred stock resulted in a reduction of dividend
payments of $21.3 million in fiscal 1997 compared to fiscal 1996 and
eliminated all related future preferred dividend and sinking fund
requirements.
During fiscal 1997, the Company increased its bank borrowings by $113.5
million which included borrowings made in August 1996 and December 1996 to
repay $52 million and $80 million, respectively, of senior notes at maturity.
At August 2, 1997, the Company had $200.0 million available under its $500.0
million revolving credit facility, which expires in April 2000. The Company is
presently evaluating an increase in this revolving credit agreement for
approximately $150.0 million. The Company believes that it will have
sufficient resources to fund its planned capital growth and operating
requirements.
The Company declared and paid the final dividends on its preferred stock in
the first quarter of fiscal 1997 in the amount of $5.8 million on November 12,
1996 concurrent with the repurchase of this preferred stock. Beginning with
the third quarter of fiscal 1995, the Company eliminated its quarterly cash
dividend on common stock (previously $.05 per share per quarter).
As discussed above, in March 1995, the Company sold all of its Neiman Marcus
credit card receivables through a subsidiary to a trust in exchange for
certificates representing undivided interests in such receivables.
Certificates representing an undivided interest in $246.0 million of these
receivables were sold to third parties in a public offering of $225.0 million
7.60% Class A certificates and $21.0 million 7.75% Class B certificates. The
Company's subsidiary will retain the remaining undivided interest in the
receivables not represented by the Class A and Class B certificates. A portion
of that interest is subordinated to the Class A and Class B certificates. The
Company will continue to service all receivables for the trust. This sale had
the effect of decreasing accounts receivable and outstanding debt by $246.0
million.
Seasonality
The specialty retail industry is seasonal in nature, and a disproportionately
high 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 competitive 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, except as discussed above in "Overview" with respect to
the LIFO method of inventory valuation.
[END PAGE 30]
[START PAGE 31]
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share" (SFAS
128). Under the new standard, which must be adopted for periods ending after
December 15, 1997, the Company will be required to change the method used to
compute earnings per share and to restate prior periods presented. A dual
presentation of basic and diluted earnings per share will be required. The
basic earnings per share calculation, which will replace primary earnings per
share, will exclude the dilutive impact of stock options and other common
share equivalents. The diluted earnings per share calculation, which will
replace fully diluted earnings per share, will include common share
equivalents. The adoption of SFAS 128 will not have a material impact on
earnings per share for the three years ended August 2, 1997.
In February 1997, the FASB issued Statement of Financial Accounting Standard
No. 129, "Disclosure of Information about Capital Structure" (SFAS 129), which
must be adopted for periods ending after December 15, 1997. The Statement
makes disclosure requirements regarding capital structure applicable to all
entities. The Statement contains no change in disclosure requirements for the
Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income"(SFAS 130). The Statement, which must be
adopted for periods beginning after December 15, 1997, establishes standards
for reporting and display of comprehensive income and its components in
consolidated financial statements. The effect of adopting SFAS 130 is not
expected to be material to the Company's financial position or results of
operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which must be adopted for periods beginning after December 15,
1997. Under the new standard, companies will be required to report certain
information about operating segments in consolidated financial statements.
Operating segments will be determined based on the method that management
organizes its businesses for making operating decisions and assessing
performance. The standard also requires that companies report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. The Company is currently evaluating
the effect, if any, of implementing SFAS 131.
[END PAGE 31]
[START PAGE 32]
Consolidated Balance Sheets
August 2, August 3,
(Dollar Amounts in Thousands) 1997 1996
---------- ----------
Assets
CURRENT ASSETS
Cash and equivalents $ 16,861 $ 12,659
Undivided interests in NMG Credit Card Master Trust 128,341 114,392
Accounts receivable, less allowance
for doubtful accounts of $1,700 and $1,300 55,041 51,050
Merchandise inventories 460,412 443,948
Deferred income taxes 19,049 21,666
Other current assets 54,339 45,368
---------- ----------
TOTAL CURRENT ASSETS 734,043 689,083
========== ==========
PROPERTY AND EQUIPMENT
Land, buildings and improvements 428,325 396,541
Fixtures and equipment 300,579 271,852
Construction in progress 26,029 36,431
---------- ----------
754,933 704,824
Less accumulated depreciation and amortization 300,800 247,199
---------- ----------
PROPERTY AND EQUIPMENT, NET 454,133 457,625
---------- ----------
OTHER ASSETS 99,684 105,642
---------- ----------
$1,287,860 $1,252,350
========== ==========
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Notes payable and current maturities of long-term liabilities $ 8,810 $ 35,576
Accounts payable 174,952 192,146
Accrued liabilities 147,730 146,326
---------- ----------
TOTAL CURRENT LIABILITIES 331,492 374,048
---------- ----------
LONG-TERM LIABILITIES
Notes and debentures 300,000 292,000
Other long-term liabilities 69,738 69,940
---------- ----------
TOTAL LONG-TERM LIABILITIES 369,738 361,940
---------- ----------
DEFERRED INCOME TAXES 31,902 33,329
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCKS
(redeemed for $416,425) -- 407,426
COMMON STOCK
Common stock -- $.01 par value
Authorized -- 100,000,000 shares
Issued and outstanding -- 49,873,347 and 38,003,702 shares 499 380
ADDITIONAL PAID-IN CAPITAL 485,658 83,106
RETAINED EARNINGS (ACCUMULATED DEFICIT) 68,571 (7,879)
---------- ----------
$1,287,860 $1,252,350
========== ==========
See Notes to Consolidated Financial Statements.
[END PAGE 32]
[START PAGE 33]
Consolidated Statements of Earnings
.............Years Ended.............
August 2, August 3, July 29,
(In Thousands Except for Per Share Data) 1997 1996 1995
---------- ---------- ----------
Revenues $2,209,891 $2,075,003 $1,888,249
Cost of goods sold including buying and occupancy costs 1,504,858 1,416,296 1,276,776
Selling, general and administrative expenses 509,687 485,533 448,956
Corporate expenses 14,364 13,719 12,465
---------- ---------- ----------
Operating earnings 180,982 159,455 150,052
Interest expense 26,330 28,228 33,958
---------- ---------- ----------
Earnings from continuing operations before income taxes 154,652 131,227 116,094
Income taxes 63,407 53,803 48,759
---------- ---------- ----------
Earnings from continuing operations 91,245 77,424 67,335
Loss from discontinued operations, net of taxes
(including loss on disposal of $9,873) -- -- (11,727)
---------- ---------- ----------
Net earnings 91,245 77,424 55,608
Loss on redemption of redeemable
preferred stocks (see Note 2) (22,361) -- --
Dividends and accretion on redeemable preferred stocks (6,201) (29,104) (29,092)
---------- ---------- ----------
Net earnings applicable to common shareholders $ 62,683 $ 48,320 $ 26,516
========== ========== ==========
Weighted average shares outstanding 47,335 38,218 37,999
========== ========== ==========
Amounts per share applicable to common shareholders:
Earnings from continuing operations $ 1.32 $ 1.26 $ 1.01
Loss from discontinued operations -- -- (.31)
---------- ---------- ----------
Net earnings per share $ 1.32 $ 1.26 $ .70
========== ========== ==========
See Notes to Consolidated Financial Statements.
[END PAGE 33]
[START PAGE 34]
Consolidated Statements of Cash Flows
.............Years Ended.............
August 2, August 3, July 29,
(In Thousands) 1997 1996 1995
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 91,245 $ 77,424 $ 55,608
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 59,820 56,305 48,397
Deferred income taxes 1,190 (2,047) 259
Change in net assets of discontinued operations -- -- 8,317
Other 2,199 2,447 (3,479)
Changes in current assets and liabilities:
Accounts receivable (3,991) (5,401) 5,877
Merchandise inventories (16,464) (84,856) (38,709)
Accounts payable and accrued liabilities (15,790) 15,751 63,005
Other (8,971) (6,958) 6,846
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 109,238 52,665 146,121
--------- --------- ---------
CASH FLOWS FOR INVESTING ACTIVITIES
Additions to property and equipment (53,037) (85,736) (93,514)
Purchases of held-to-maturity securities (461,791) (502,604) (210,995)
Maturities of held-to-maturity securities 447,842 492,673 170,534
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (66,986) (95,667) (133,975)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 113,500 109,917 17,065
Repayment of debt (132,000) (41,571) (247,276)
Payment of redemption of preferred stock (281,426) -- --
Proceeds from receivables securitization -- -- 245,965
Common stock issued 267,672 740 112
Dividends paid (5,796) (27,120) (30,917)
--------- --------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (38,050) 41,966 (15,051)
--------- --------- ---------
CASH AND EQUIVALENTS
Increase/(Decrease) during the year 4,202 (1,036) (2,905)
Beginning balance 12,659 13,695 16,600
--------- --------- ---------
Ending balance $ 16,861 $ 12,659 $ 13,695
========= ========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 28,441 $ 27,816 $ 34,466
========= ========= =========
Income taxes $ 63,951 $ 56,523 $ 17,614
========= ========= =========
See Notes to Consolidated Financial Statements.
[END PAGE 34]
[START PAGE 35]
Consolidated Statements of Common Shareholders' Equity
Additional Retained Earnings
.....Common Stock..... Paid-In (Accumulated
(In Thousands) Shares Amount Capital Deficit)
-------- --------- ---------- -----------
BALANCE -- JULY 31, 1994 37,951 $ 380 $ 82,254 $ (78,918)
Net earnings -- -- -- 55,608
Accretion of redeemable preferred stock -- -- -- (1,972)
Common dividends -- -- -- (3,797)
Preferred dividends -- -- -- (27,120)
Other equity transactions 9 -- 112 --
-------- --------- ---------- -----------
BALANCE -- JULY 29, 1995 37,960 380 82,366 (56,199)
Net earnings -- -- -- 77,424
Accretion of redeemable preferred stock -- -- -- (1,984)
Preferred dividends -- -- -- (27,120)
Other equity transactions 44 -- 740 --
-------- --------- ---------- ------------
BALANCE -- AUGUST 3, 1996 38,004 380 83,106 (7,879)
Net earnings -- -- -- 91,245
Accretion of redeemable preferred stock -- -- -- (405)
Preferred dividends -- -- -- (5,796)
Loss on redemption of redeemable
preferred stock -- -- -- (8,594)
Issuance of common stock 11,857 119 402,161 --
Other equity transactions 12 -- 391 --
-------- ---------- ----------- -------------
BALANCE -- AUGUST 2, 1997 49,873 $ 499 $ 485,658 $ 68,571
======== ========== ========== =============
See Notes to Consolidated Financial Statements.
[END PAGE 35]
[START PAGE 36]
Notes to Consolidated Financial Statements
NOTE 1 Summary of Significant Accounting Policies
Basis of Reporting
The Company's specialty retailing businesses include Neiman Marcus Stores, NM
Direct and Bergdorf Goodman. The consolidated financial statements include the
accounts of all of the Company's wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company's
fiscal year ends on the Saturday closest to July 31. In fiscal 1996, the
reporting period included 53 weeks as compared to 52 weeks in each of fiscal
years 1997 and 1995.
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
In March 1995, the Company sold all of its Neiman Marcus credit card
receivables through a subsidiary to The Neiman Marcus Group Credit Card Master
Trust (the "Trust") in exchange for certificates representing undivided
interests in such receivables. During the quarter ended May 3, 1997 the
Company began to segregate its undivided interests in the Trust from its
accounts receivable on the consolidated balance sheets. The undivided
interests in the Trust include the interests retained by the Company's
subsidiary which are represented by the Class C Certificate ($54.0 million)
and the Seller's Certificate (the excess of the total receivables transferred
to the Trust over the portion represented by certificates sold to investors
and the Class C Certificate). 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
Inventories are stated at the lower of cost or market. Substantially all of
the Company's inventories are valued using the retail method on the last-in,
first-out (LIFO) basis. While the Company believes that the LIFO method
provides a better matching of costs and revenues, some specialty retailers use
the first-in, first-out (FIFO) method and, accordingly, the Company has
provided the following data for comparative purposes.
If the FIFO method of inventory valuation had been used to value all
inventories, merchandise inventories would have been $15.0 million and $13.5
million higher than reported at August 2, 1997 and August 3, 1996,
respectively. As a result of using the LIFO valuation method, net earnings
were $0.9 million lower in 1997, $0.4 million higher in 1996, and $6.0 million
higher in 1995 than they would have been using the FIFO method.
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 15 to 30 years while fixtures
and equipment are depreciated over 2 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.
[END PAGE 36]
[START PAGE 37]
Intangibles are amortized on a straight-line basis over their estimated useful
lives, not exceeding 40 years. Amortization expense was $3.7 million in 1997,
1996 and 1995.
In 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and determined that no impairment loss need be
recognized.
On an annual basis the Company compares the carrying value of its long-lived
assets against projected undiscounted cash flows to determine any impairment
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.
Revenue Recognition
The Company recognizes revenue at point-of-sale or upon shipment.
Receivables and Finance Charge Income
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 $47.0
million in 1997, $47.7 million in 1996 and $55.9 million in 1995. The
securitization of the Company's credit card receivables, which was completed
in March 1995, had the effect of reducing finance charge income by $19.0
million in each of 1997 and 1996, and $7.1 million in 1995.
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 position is performed, and
collateral is not required as a condition of extending credit. The Company
maintains reserves for potential credit losses.
In 1997, the Company adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125). The effect of adopting SFAS 125
was not material to the Company's financial position or results of operations.
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. All other advertising costs are expensed in the period
incurred. Advertising expenses were $108.7 million, $104.2 million and $105.6
million in fiscal 1997, fiscal 1996 and fiscal 1995, respectively. Direct
response advertising amounts included in other current assets in the
consolidated balance sheets of August 2, 1997 and August 3, 1996 were $6.9
million and $6.0 million, respectively.
[END PAGE 37]
[START PAGE 38]
Earnings Per Common and Common Equivalent Share
Earnings per share information reflects the earnings of the Company applicable
to common shareholders. The dividend and accretion requirements of the
redeemable preferred stocks were deducted from the earnings from continuing
operations of the Company to arrive at net earnings applicable to common
shareholders.
Earnings per common share is based upon the weighted average number of common
and, when dilutive, common equivalent shares outstanding during the year.
Significant Estimates
In the process of preparing its consolidated financial statements, 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, accruals for pension and postretirement benefits 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.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
NOTE 2 Company Public Offering
In October 1996, the Company completed a public offering of 8.0 million shares
of its common stock at a price of $35.00 per share. The net proceeds from the
offering ($267.3 million) were used by the Company to partially fund the
repurchase of all of the Company's issued and outstanding preferred stock from
Harcourt General, Inc., the Company's majority shareholder. In addition to the
net proceeds, on November 12, 1996 the Company issued Harcourt General 3.9
million shares of the Company's common stock (valued at $135.0 million at
$35.00 per share) and completed the exchange for all of the Company's issued
and outstanding preferred stock. The total consideration paid by the Company
to Harcourt General in connection with the repurchase was $416.4 million,
representing 98% of the aggregate stated value of the preferred stock, plus
accrued and unpaid dividends through the date of the closing of the public
offering.
In connection with the transaction, the Company incurred a non-recurring
charge to net earnings applicable to common shareholders of $22.4 million,
comprised of two components: (i) $8.6 million representing the difference
between the book value of the preferred stock and the total purchase price,
and (ii) $13.8 million representing the fair value of shares issued to
Harcourt General in excess of the number of shares that would have been issued
in accordance with the conversion terms of the 6% Preferred Stock.
Had the public offering and repurchase of the preferred stock taken place at
the beginning of the three years ending August 2, 1997, net earnings per share
applicable to common shareholders for those periods would have been $1.82,
$1.55, and $1.35 in 1997, 1996 and 1995, respectively.
[END PAGE 38]
[START PAGE 39]
NOTE 3 Discontinued Operations
On June 30, 1995, the Company sold its Contempo Casuals operations to The Wet
Seal, Inc. for approximately $1.0 million of Wet Seal Class A Common Stock and
$100,000 in cash. The consolidated financial statements have been restated to
present Contempo Casuals as a discontinued operation.
The loss from discontinued operations in 1995 is net of applicable income tax
benefits of $1.3 million. The loss on disposal in 1995 of $9.9 million is net
of $7.1 million of applicable income tax benefits.
Revenues related to the discontinued Contempo Casuals operations were $207.2
million in 1995.
NOTE 4 Other Assets
Other assets consisted of the following:
August 2, August 3,
(In Thousands) 1997 1996
---------- ----------
Trademarks $ 73,000 $ 73,000
Goodwill 22,729 22,729
Other 36,394 38,677
---------- ----------
132,123 134,406
Accumulated amortization (32,439) (28,764)
---------- ----------
$ 99,684 $ 105,642
========== ==========
Trademarks and goodwill are amortized over 40 years. Mailing lists (which are
included in Other) are amortized over 11 years.
NOTE 5 Accrued Liabilities
Accrued liabilities consisted of the following:
August 2, August 3,
(In Thousands) 1997 1996
---------- ----------
Accrued salaries and related liabilities $ 29,322 $ 26,336
Self-insurance reserves 23,478 27,860
Income taxes payable 15,551 17,285
Other 79,379 74,845
---------- ----------
$ 147,730 $ 146,326
========== ==========
[END PAGE 39}
[START PAGE 40]
NOTE 6 Long-Term Liabilities
Long-term liabilities consisted of the following:
Interest August 2, August 3,
(In Thousands) Rate 1997 1996
-------- ---------- ----------
Revolving credit agreement (a) Variable $ 300,000 $ 186,500
Senior notes (b) Various -- 132,000
Capital lease obligations (c) 7.63--10.25% 6,142 6,697
Other long-term liabilities (d) Various 72,406 72,319
-------- ---------- ----------
Total long-term liabilities 378,548 397,516
Less current maturities (8,810) (35,576)
---------- ----------
$ 369,738 $ 361,940
========== ==========
(a) The Company has a five year, $500 million revolving credit facility which
expires in April, 2000. The Company may terminate this agreement at any time
on three business days' notice. The rate of interest payable (6.02% at August
2, 1997) varies according to one of four pricing options selected by the
Company. The revolving credit facility contains, among other restrictions,
provisions limiting the issuance of additional debt, the amount and type of
investments and the payment of dividends.
In addition to its revolving credit facility, the Company borrows from other
banks on an uncommitted basis. Such borrowings are included in notes payable
and current maturities of long-term liabilities and amounted to $26.5 million
at August 3, 1996. No such borrowings were outstanding at August 2, 1997.
(b) Senior notes consisted of the following at August 3, 1996:
Principal Amount
Interest Rate Due (In Thousands)
------------- ----------------
9.59% August 1996 $ 52,000
9.24% December 1996 $ 40,000
Variable December 1996 $ 40,000
============= ================
The notes were repaid at maturity with borrowings under the revolving credit
facility.
(c) The amount of assets under capital leases included in property and
equipment net of amortization was $3.1 million at August 2, 1997 and $3.5
million at August 3, 1996.
(d) Other long-term liabilities consisted primarily of certain employee
benefit obligations, postretirement health care benefits and the liability for
scheduled rent increases.
[END PAGE 40]
[START PAGE 41]
The aggregate maturities of all long-term liabilities and capital lease
obligations are $8.8 million in 1998, $4.1 million in 1999, $304.1 million in
2000, $4.3 million in 2001, $4.6 million in 2002 and $52.6 million thereafter.
NOTE 7 Redeemable Preferred Stocks
The Company is authorized to issue up to 50,000,000 shares of preferred stock.
In fiscal 1997, the Company repurchased its issued and outstanding preferred
stocks which consisted of 1,000,000 shares of 6% Cumulative Convertible
Preferred Stock and 500,000 shares of 9 1/4% Cumulative Redeemable Preferred
Stock, all of which were owned by Harcourt General.
NOTE 8 Common Shareholders' Equity
Ownership by and Relationship with Harcourt General
Harcourt General owns approximately 26.4 million shares of Common Stock, or
approximately 53% of the issued and outstanding shares of Common Stock 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 $5.7 million in 1997, $6.9 million in
1996 and $6.5 million in 1995.
The Company's Chairman of the Board and Chief Executive Officer; President and
Chief Operating Officer; Senior Vice President and Chief Financial Officer;
Senior Vice President and General Counsel; as well as certain other officers,
serve in similar capacities with Harcourt General. The first two named
officers also serve as directors of both companies.
Common Stock
Common Stock is entitled to dividends if and when declared by the Board of
Directors, and each share 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. The
Company has adopted the disclosure-only provision of the Statement of
Financial Accounting Standards No. 123, "Accounting for
[END PAGE 41]
[START PAGE 42]
Stock-Based Compensation" (SFAS 123). Accordingly, no compensation cost
has been recognized for its common stock incentive plans. Had compensation
cost for the Company's common stock incentive plans been determined based
on the fair value at the grant dates for awards under the plans consistent
with the method of SFAS 123, the Company's net earnings and earnings per
share would be essentially unchanged.
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 presently applicable only to options granted
subsequent to July 30, 1995.
The Company has adopted the 1997 Incentive Plan (the "1997 Plan") which will
be used for all future grants of equity-based awards to employees. All
outstanding equity-based awards at August 2, 1997 were granted under the
Company's 1987 Stock Incentive Plan. At August 2, 1997, there were 2.5 million
shares of Common Stock available for grants under the 1997 Plan.
Options outstanding at August 2, 1997 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. There were 100 employees with options outstanding at August 2, 1997.
For all outstanding options at August 2, 1997, the weighted average exercise
price was $18.21 and the weighted average remaining contractual life was
approximately 4.9 years.
The Company has allowed SAR treatment in connection with the exercise of
certain options. Optionees allowed SAR treatment surrender an exercisable
option in exchange for an amount of cash equal to the excess of the market
price of the Common Stock at the time of the surrender over the option
exercise price.
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 1997 and 1996, respectively:
1997 1996
------- -------
Expected life (years) 7 7
Expected volatility 31.1% 24.4%
Risk-free interest rate 7.0% 7.0%
======= =======
[END PAGE 42]
[START PAGE 43]
A summary of the status of the Company's 1987 Stock Incentive Plan as of
August 2, 1997, and August 3, 1996, and changes during the years ending on
those dates is presented below:
.........1997......... .........1996........ ..........1995.........
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- --------- ---------- ---------- ---------
OPTIONS
Outstanding at
beginning of year 653,077 $ 14.41 784,864 $ 14.47 666,348 $ 14.47
Granted 131,050 33.38 128,600 15.38 228,050 14.38
SAR Surrenders (82,207) 14.45 (202,192) 14.95 (13,470) 12.61
Exercised (1,200) 14.53 (2,900) 15.28 (1,644) 12.29
Canceled (39,940) 17.85 (55,295) 15.63 (94,420) 14.47
--------- --------- --------- --------- ---------- --------
Outstanding at
end of year 660,780 $ 18.21 653,077 $ 14.41 784,864 $ 14.47
========= ========= ========= ========= ========== =========
Options
exercisable
at year-end 273,090 $ 14.21 239,247 $ 14.34 356,064 $ 15.12
========= ========= ========= ========= ========== =========
NOTE 9 Income Taxes
Income tax expense was as follows:
..............Years Ended............
August 2, August 3, July 29,
(In Thousands) 1997 1996 1995
Current: --------- ---------- ---------
Federal $ 53,292 $ 47,517 $ 39,965
State 8,925 8,333 9,136
--------- ---------- ---------
62,217 55,850 49,101
========= ========== =========
Deferred:
Federal 836 (1,588) 668
State 354 (459) (1,010)
--------- ---------- ---------
1,190 (2,047) (342)
--------- ---------- ---------
Income tax expense $ 63,407 $ 53,803 $ 48,759
========= ========== =========
[END PAGE 43]
[START PAGE 44]
The Company's effective income tax rate was 41% in 1997 and 1996 and 42% in
1995. The difference between the statutory federal tax rate and the effective
tax rate is due primarily to state income taxes.
Significant components of the Company's net deferred income tax liability
stated on a gross basis were as follows:
August 2, August 3,
(In Thousands) 1997 1996
Gross deferred income tax assets: ----------- -----------
Financial accruals and reserves $ 19,578 $ 19,468
Employee benefits 23,630 25,941
Inventories 8,276 8,006
Deferred lease payments 3,066 3,481
Other 754 3,566
----------- -----------
Total deferred tax assets 55,304 60,462
----------- -----------
Gross deferred income tax liabilities:
Excess tax depreciation (57,429) (59,128)
Pension accrual (4,581) (7,178)
Other assets previously deducted on tax return (6,147) (5,819)
----------- -----------
Total deferred tax liabilities (68,157) (72,125)
----------- -----------
Net deferred income tax liability $ (12,853) $ (11,663)
=========== ===========
NOTE 10 Pension Plans
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.
Components of net pension expense were as follows:
............ Years Ended.............
August 2, August 3, July 29,
(In Thousands) 1997 1996 1995
--------- --------- ---------
Service cost $ 5,591 $ 5,700 $ 5,800
Interest cost on projected benefit obligation 10,055 8,300 7,900
Actual return on assets (40,235) (12,100) (7,500)
Net amortization and deferral 33,770 5,700 1,200
--------- --------- ---------
Net pension expense $ 9,181 $ 7,600 $ 7,400
========= ========= =========
[END PAGE 44]
[START PAGE 45]
The accounting assumptions used in the computation of pension expense were as
follows:
1997 1996 1995
--------- ---------- ----------
Discount rate 7.5% 7.5% 7.5%
Long-term rate of return on plan assets 9.0% 9.0% 9.0%
Rate of increases in future compensation levels 5.0% 5.0% 5.0%
========= ========== ==========
The plans' funded status and amounts recognized in the consolidated balance
sheets were as follows:
.....August 2, 1997.... .....August 3, 1996.....
Funded Unfunded Funded Unfunded
(In Thousands) Plan Plan Plan Plan
----------- ---------- ---------- ----------
Vested benefit obligation $ 99,591 $ 15,447 $ 90,500 $ 13,200
========== ========== ========== ==========
Accumulated benefit obligation $ 103,100 $ 19,922 $ 94,000 $ 15,300
========== ========== ========== ==========
Projected benefit obligation $ 119,477 $ 25,199 $ 108,000 $ 25,200
Pension plan assets at fair value 144,288 -- 106,600 --
---------- ---------- ---------- ----------
Funded (underfunded) projected obligation 24,811 (25,199) (1,400) (25,200)
Net amortization and deferral (14,123) 804 16,200 3,100
Unrecognized net obligation at transition
and unrecognized prior service cost 1,579 3,156 1,900 3,500
Pension asset (liability) recognized ---------- ---------- ---------- ----------
in the consolidated balance sheets $ 12,267 $ (21,239) $ 16,700 $ (18,600)
========== ========== ========== ==========
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 25% of an employee's contribution up to a maximum of 6% of the
employee s compensation. Company contributions for the years ended August 2,
1997, August 3, 1996 and July 29, 1995 were $2.6 million, $2.3 million, and
$2.2 million, respectively.
NOTE 11 Postretirement Health Care Benefits
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 $1.2 million during 1997, $1.2
million during 1996 and $1.4 million during 1995.
[END PAGE 45]
[START PAGE 46]
The actuarial present value of accumulated postretirement health care benefit
obligations and the amounts recognized in the consolidated balance sheets were
as follows:
......Years Ended.......
August 2, August 3,
(In Thousands) 1997 1996
---------- ----------
Retirees $ 11,202 $ 11,692
Fully eligible active plan participants 3,409 3,488
Other active plan participants 2,944 3,587
---------- ----------
Accumulated postretirement benefit obligation 17,555 18,767
Unrecognized net gain 1,276 1,003
---------- ----------
Total $ 18,831 $ 19,770
========== ==========
The periodic postretirement health care benefit cost was as follows:
.............Years Ended.............
August 2, August 3, July 29,
(In Thousands) 1997 1996 1995
Net periodic cost: --------- ---------- ----------
Service cost $ 48 $ 222 $ 300
Interest cost on accumulated benefit obligation 819 1,621 1,249
Net amortization and deferral (563) -- --
--------- ---------- ----------
Total $ 304 $ 1,843 $ 1,549
========= ========== ==========
A health care cost trend rate of 10% was assumed in measuring the accumulated
postretirement health care benefit obligation at August 2, 1997, gradually
declining to 5% by the year 2002. Measurement of the accumulated
postretirement health care benefit obligation was based on an assumed 7.5%
discount rate in 1997, 1996 and 1995. An increase of 1% in the health care
cost trend rate would increase the accumulated postretirement health care
benefit obligation as of August 2, 1997 by $2.2 million. The effect of this
change on the annual net periodic postretirement health care benefit cost
would be an increase of approximately $180,000.
NOTE 12 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.
[END PAGE 46]
[START PAGE 47]
Rent expense under operating leases was as follows:
.............Years Ended..............
August 2, August 3, July 29,
(In Thousands) 1997 1996 1995
---------- ---------- ----------
Minimum rent $ 31,200 $ 29,200 $ 29,300
Rent based on revenues 11,600 10,700 8,400
---------- ---------- ----------
Total rent expense $ 42,800 $ 39,900 $ 37,700
========== ========== ===========
Future minimum lease payments, excluding renewal options, under operating
leases are as follows: 1998 -- $31.6 million; 1999 -- $30.5 million; 2000 --
$30.2 million; 2001 -- $29.2 million; 2002 -- $29.0 million; all years
thereafter -- $515.2 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 or the financial position of the Company.
Letters of Credit
The Company had approximately $2.6 million of outstanding irrevocable letters
of credit relating to purchase commitments at August 2, 1997.
NOTE 13 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.
Securitization of Credit Card Receivables
In March 1995, the Company sold all of its Neiman Marcus credit card
receivables through a subsidiary to The Neiman Marcus Group Credit Card Master
Trust (the "Trust") in exchange for certificates representing undivided
interests in such receivables. Certificates representing undivided interests
in $246.0 million of these receivables were sold to third parties in a public
offering of $225.0 million of 7.60% Class A certificates and $21.0 million of
7.75% Class B certificates. The Company used the proceeds from this offering
to pay down existing debt. The Company's subsidiary will retain the remaining
undivided interests in the receivables not represented by the Class A and
Class B certificates. A portion of these interests is subordinated to the
Class A and Class B certificates. The Company will continue to service all
receivables for the Trust.
In anticipation of the securitization, the Company entered into several
forward interest rate lock agreements. The agreements allowed the Company to
establish a weighted average effective interest rate of approximately 8.0% on
the certificates issued as part of the securitization. During March 1995, the
Company paid $5.4 million to settle all of its interest rate lock agreements.
[END PAGE 47]
[START PAGE 48]
NOTE 14 Quarterly Financial Information (unaudited)
..................Year Ended August 2, 1997...............
First Second Third Fourth
(In Millions Except for Per Share Data) Quarter Quarter Quarter Quarter Total
-------- -------- --------- --------- ----------
Revenues $ 544.1 $ 661.9 $ 506.5 $ 497.3 $ 2,209.8
======== ======== ========= ========= ==========
Gross profit $ 193.5 $ 201.3 $ 162.7 $ 147.5 $ 705.0
======== ======== ========= ========= ==========
Net earnings 30.9 25.6 20.7 14.0 91.2
Loss on redemption of
redeemable preferred stocks (22.4) -- -- -- (22.4)
Preferred dividends and accretion (6.2) -- -- -- (6.2)
Net earnings applicable to -------- -------- --------- --------- ----------
common shareholders $ 2.3 $ 25.6 $ 20.7 $ 14.0 $ 62.6
======== ======== ========= ========= ===========
Amounts per share applicable
to common shareholders:
Net earnings $ .06 $ .52 $ .41 $ .28 $ 1.32
======== ======== ========= ========= ==========
...................Year Ended August 3, 1996................
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
--------- -------- --------- --------- ----------
Revenues $ 489.9 $ 625.4 $ 474.1 $ 485.6 $ 2,075.0
======== ======== ========= ========= ==========
Gross profit $ 171.8 $ 186.5 $ 153.3 $ 147.1 $ 658.7
======== ======== ========= ========= ==========
Net earnings 25.0 22.8 18.8 10.8 77.4
Preferred dividends and accretion (7.3) (7.3) (7.3) (7.2) (29.1)
Net earnings applicable to -------- -------- ---------- --------- ----------
common shareholders $ 17.7 $ 15.5 $ 11.5 $ 3.6 $ 48.3
======== ======== ========= ========= ==========
Amounts per share applicable
to common shareholders:
Net earnings $ .47 $ .41 $ .30 $ .09 $ 1.26
======== ======== ========= ========= ===========
In the fourth quarter, the effect of adjusting the LIFO reserve for
inventories to actual amounts increased net earnings by $2.7 million in 1997
and $3.9 million in 1996.
[END PAGE 48]
[START PAGE 49]
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 August 2, 1997 and August 3, 1996,
and the related consolidated statements of earnings, common shareholders'
equity and cash flows for each of the three fiscal years in the period ended
August 2, 1997. 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 generally accepted auditing
standards. 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 August 2, 1997 and August 3, 1996,
and the results of their operations and their cash flows for each of the three
fiscal years in the period ended August 2, 1997, in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 28, 1997
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/ Stephen C. Richards
STEPHEN C. RICHARDS
Vice President and Controller
[END PAGE 49]
[START PAGE 50]
Selected Financial Data (unaudited)
......................Years Ended.......................
August 3, August 3, July 29, July 30, July 31,
(In Millions Except for Per Share Data) 1997 1996 (a) 1995 1994 1993
OPERATING RESULTS: --------- --------- --------- --------- ---------
Revenues $ 2,209.9 $ 2,075.0 $ 1,888.2 $ 1,789.5 $ 1,667.8
========= ========= ========= ========= =========
Earnings from continuing operations
before accounting change $ 91.2 $ 77.4 $ 67.3 $ 65.7 $ 67.0
Loss from discontinued operations -- -- (11.7) (49.8) (8.4)
--------- --------- --------- --------- ---------
Earnings before accounting change 91.2 77.4 55.6 15.9 58.6
Cumulative effect of
accounting change (b) -- -- -- - (11.2)
--------- --------- --------- --------- ---------
Net earnings $ 91.2 $ 77.4 $ 55.6 $ 15.9 $ 47.4
========= ========= ========= ========= =========
Net earnings (loss) applicable to
common shareholders $ 62.7 $ 48.3 $ 26.5 $ (13.2) $ 18.3
========= ========= ========= ========= =========
Amounts per share applicable
to common shareholders:
Continuing operations $ 1.32 $ 1.26 $ 1.01 $ .96 $ 1.00
Discontinued operations -- -- (.31) (1.31) (.22)
Accounting change (b) -- -- -- -- (.30)
--------- --------- --------- --------- --------
Net earnings (loss) $ 1.32 $ 1.26 $ .70 $ (.35) $ .48
========= ========= ========= ========= ========
Common dividends -- $ -- $ .10 $ .20 $ .20
========= ========= ========= ========= ========
FINANCIAL POSITION:
Total assets $ 1,287.9 $ 1,252.4 $ 1,108.4 $ 1,323.1 $1,278.6
Long-term liabilities $ 369.7 $ 361.9 $ 311.1 $ 443.6 $ 449.4
Redeemable preferred stocks $ -- $ 407.4 $ 405.4 $ 403.5 $ 401.5
========= ========= ========= ========= ========
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.
(b) The cumulative effect of accounting change reflects the change in
accounting for postretirement health care benefits, net of applicable
income taxes.
[END PAGE 50]
[START PAGE 51]
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 02167-9187
(617) 232-0760.
Transfer Agent and Registrar
BankBoston, N.A.
c/o Boston EquiServe Limited Partnership
Shareholder Services Division
Post Office Box 644, Mail Stop 45-01-05
Boston, MA 02102-0644
(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.
Annual Meeting
The Annual Meeting of Stockholders will be
held on Friday, January 16, 1998 at 10:00 a.m.
at the Company's Corporate Headquarters,
27 Boylston Street, Chestnut Hill, Massachusetts.
Shares Outstanding
The Neiman Marcus Group has 50.0 million common shares outstanding. Harcourt
General, Inc. owns approximately 53% of NMG's outstanding common equity. The
Neiman Marcus Group had 11,944 common shareholders of record at August 2,
1997.
Corporate Address
The Neiman Marcus Group, Inc.
27 Boylston Street
Post Office Box 9187
Chestnut Hill, MA 02167-9187
(617) 232-0760
Stock Information
The Neiman Marcus Group's Common Stock is traded on the New York Stock
Exchange under the symbol NMG. The following table indicates the quarterly
price range of the Common Stock for the past two fiscal years.
........1997........ .........1996.........
Quarter High Low High Low
-------- -------- -------- --------
First $ 35.88 $ 27.13 $ 18.88 $ 14.63
Second $ 36.00 $ 22.75 $ 23.50 $ 17.13
Third $ 28.13 $ 23.88 $ 23.13 $ 17.25
Fourth $ 29.25 $ 24.50 $ 30.13 $ 23.63
======== ======== ======== ========
[END PAGE 51]