EXHIBIT 13.1
[BEGIN PAGE 16]
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, NM Direct. The Company's revenues
rose to $2.55 billion in fiscal 1999, representing a 15.6%
increase over revenues of $2.21 billion in fiscal 1997. Net
earnings increased 2.5% from $91.2 million in fiscal 1997.
Approximately 86% of the Company's revenues are generated by
its specialty retail stores with the balance generated
primarily by NM Direct. Revenue growth over the last three
fiscal years at Neiman Marcus Stores and Bergdorf Goodman 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 six new Neiman
Marcus stores in the next five years, two of which will be
replacement stores. In fiscal 1999, average store sales per
gross square foot reached a record high of $453, representing
an increase of 7.9% 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 opened The Galleries of Neiman Marcus stores in
Cleveland, Ohio, in November 1998 and in Phoenix, Arizona, in
December 1998. The Galleries concept is a smaller retail store
of approximately 10,000 to 15,000 square feet focusing on
precious and fine jewelry, gifts and home accessories. The
Company plans to open the next Galleries store in Seattle,
Washington, in October 1999. In January 1998, the Company
acquired Chef's Catalog, a direct marketer of gourmet cookware
and high-end kitchenware.
The Company also 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 fabric and leather
handbags and accessories. In November 1998, the Company
acquired a 51% interest in Gurwitch Bristow Products, which
manufactures and markets the Laura Mercier cosmetic lines.
In addition to opening new stores, the Company continues to
make significant capital investments in an effort to increase
productivity. In particular, during fiscal 1997, 1998 and 1999,
the Company invested a total of approximately $225.2 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 will include
the commencement of multiyear construction projects to remodel
and expand Neiman Marcus stores in San Francisco and Las Vegas,
as well as the continued remodeling of the plaza level of the
main store of Bergdorf Goodman.
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[BEGIN PAGE 17]
In fiscal 1999, a committee of independent directors of the
Company, and the Boards of Directors of the Company and of
Harcourt General, Inc. ("Harcourt General"), approved a series
of transactions (the "Transactions") relating to a plan by
Harcourt General to spin off to the holders of Harcourt
General's common stock approximately 21.4 million of the
approximately 26.4 million shares of the Company's common stock
held by Harcourt General in a distribution to be tax-free to
Harcourt General and its shareholders. On September 15, 1999,
the shareholders of the Company approved a recapitalization in
which, among other things, the approximately 21.4 million
shares of the Company's common stock to be distributed will be
exchanged for a new class of common stock of the Company that
will have the right to elect approximately 82% of the Company's
Board of Directors, with the remaining shares having the right
to elect approximately 18% of the Company's Board of Directors
( the "Recapitalization"). The Transactions are expected to be
completed in October 1999.
OPERATING RESULTS
Fiscal years ended
---------------------------------
July 31, August 1, August 2,
(Dollars in Millions) 1999 1998 1997
---------------------------------
REVENUES
Specialty Retail Stores $2,209.5 $2,089.5 $1,950.5
Direct Marketing 321.7 283.8 259.4
Other(1) 22.2 _ _
---------------------------------
Total $2,553.4 $2,373.3 $2,209.9
=================================
OPERATING EARNINGS
Specialty Retail Stores $ 178.0 $ 198.1 $ 169.9
Direct Marketing 14.5 15.6 25.5
Other(1) (12.1) (14.6) (14.4)
---------------------------------
Total $ 180.4 $ 199.1 $ 181.0
=================================
OPERATING PROFIT MARGIN
Specialty Retail Stores 8.1% 9.5% 8.7%
Direct Marketing 4.5% 5.5% 9.8%
---------------------------------
Total(2) 7.1% 8.4% 8.2%
=================================
(1) OTHER INCLUDES UNALLOCATED CORPORATE EXPENSES, KATE SPADE AND GURWITCH BRISTOW PRODUCTS.
(2) INCLUDES OTHER.
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues in fiscal 1999 increased $180.1 million to $2.55
billion from $2.37 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 NM Direct.
Cost of goods sold including buying and occupancy costs
increased 8.6% to $1.74 billion in fiscal 1999 from $1.60
billion in fiscal 1998, primarily due to increased sales. As a
percentage of revenues, cost of goods sold was 68.2% in fiscal
1999 compared to 67.6% 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 24.1% in
[END PAGE 17]
[BEGIN PAGE 18]
fiscal 1999 from 23.4% 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 9.4% to $180.4 million from
$199.1 million in the prior year. This decrease was
attributable to lower gross margins, higher selling and sales
promotion expenses 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.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues in fiscal 1998 increased to $2.37 billion from $2.21
billion in fiscal 1997. The 7.4% increase was primarily
attributable to comparable sales growth of 7.0% and 8.0% at
Neiman Marcus Stores and Bergdorf Goodman, respectively. NM
Direct revenues increased in comparison to the prior year
period as a result of sales from Chef's Catalog, which was
acquired in January 1998. On a comparable basis, revenues at NM
Direct decreased 2.3%.
Cost of goods sold increased 6.6% to $1.60 billion in fiscal
1998, primarily due to increased sales. As a percentage of
revenues, cost of goods sold was 67.6% in fiscal 1998 compared
to 68.1% in fiscal 1997. The decrease in fiscal 1998 resulted
primarily from proportionately lower buying and occupancy
costs. Gross margins at both Neiman Marcus Stores and Bergdorf
Goodman were essentially unchanged, while gross margins at NM
Direct decreased in comparison to the prior year primarily as a
result of higher markdowns.
Selling, general and administrative expenses increased 9.1% in
fiscal 1998 to $556.1 million. As a percentage of revenues,
selling, general and administrative expenses increased to 23.4%
in fiscal 1998 from 23.1% in fiscal 1997. The proportionate
increase in 1998 was primarily due to higher catalogue
circulation costs at NM Direct and pre-opening expenses
associated with the new Neiman Marcus store in Hawaii.
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 1.8% to $14.6
million in fiscal 1998 compared to fiscal 1997. The increase
was primarily due to higher professional fees.
Operating earnings increased by 10% to $199.1 million from
$181.0 million in the prior year. This increase is attributed to
higher sales volume, particularly the comparable sales increases at
Neiman Marcus stores and Bergdorf Goodman.
Interest expense decreased 17.0% in fiscal 1998 to $21.9 million.
The decrease resulted from lower average borrowings as well as 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 facility.
The Company's effective income tax rate was 40% in fiscal 1998,
as compared to 41% in fiscal 1997.
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[BEGIN PAGE 19]
REVIEW OF FINANCIAL CONDITION
In fiscal 1999, the Company had sufficient cash flows from
operations and its revolving credit facility to finance its
working capital needs, capital expenditures, stock repurchases
and the acquisitions of Gurwitch Bristow Products and Kate
Spade LLC. Operating activities provided net cash of $120.0
million in fiscal 1999.
The Company's capital expenditures in fiscal 1999 included the
purchase of a building adjacent to the Neiman Marcus store in
Union Square in San Francisco for a future expansion of this store,
existing store renovations and completion of the construction of
the new Neiman Marcus store in Honolulu, Hawaii opened in
September 1998. Capital expenditures were $91.0 million in fiscal
1999, $81.2 million in fiscal 1998 and $53.0 million in fiscal
1997. Capital expenditures are currently estimated to approximate
$115 million for fiscal 2000.
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 September 1998, the Company's Board of Directors authorized
an increase in the stock repurchase program to 1.5 million
shares. In fiscal 1999 the Company repurchased 827,000 shares
at an average price of $18.57; in fiscal 1998 the Company
repurchased 160,100 shares at an average price of $29.32. At
July 31, 1999 there were 512,900 shares remaining under this
program.
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 31, 1999, the Company had $625.0 million available
under its $650.0 million revolving credit facility, which
expires in October 2002. In September 1999 the Company reduced
the revolving credit facility to $450 million, to reflect its
current and anticipated cash flow requirements. Additionally,
the Company's five year revolving securitization of its
accounts receivable matures in the year 2000. The Company
expects to finance with similar securities the repayment of the
Class A and B certificates, which were sold to third parties
under the securitization and which have an aggregate principal
value of $246 million. The Company believes that it will have
sufficient resources to fund its planned capital growth,
operating requirements and the maturities of the Class A and B
certificates.
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 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.
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 31, 1999 and August 1, 1998, the fair values of the
Company's fixed-rate debt were estimated at $230.4 million and
$251.6 million, respectively, using quoted market prices and
comparable publicly-traded issues. Such fair values were less
than carrying value by approximately $22.3 million at July 31,
1999 and greater than the carrying value by approximately $1.2
million at August 1, 1998. 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 $15.2 million at July 31, 1999.
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[BEGIN PAGE 20]
At July 31, 1999 and August 1, 1998, the Company had $25.0
million and $35.0 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 $1.7 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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB 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. The Company is currently
evaluating the additional disclosures required in implementing
SFAS 133, which will be effective for fiscal 2001.
YEAR 2000 DATE CONVERSION
The Company has completed its assessment of its hardware and
software systems, including the embedded systems in the
Company's buildings, property and equipment, and is
implementing plans to ensure that the operation of such systems
will not be adversely affected by the Year 2000 date change.
The Company is presently in the process of renovating
noncompliant systems and implementing converted and replaced
systems for substantially all of its hardware and software
systems. The Company estimates that its efforts to make these
systems Year 2000 compliant are approximately 90% complete,
with substantial completion of the Year 2000 project currently
anticipated for October 1999.
The Company has established an ongoing program to communicate
with its significant suppliers and vendors to determine the
extent to which the Company's systems and operations are
vulnerable to those third parties' failures to rectify their
own Year 2000 issues. Based on responses to the Company's
inquiries, the Company has identified those suppliers and
vendors most at risk for failing to achieve Year 2000
compliance on a timely basis and is following up to monitor
their continuing progress. The Company is not presently aware
of any significant exposure arising from potential third party
failures. However, there can be no assurance that the systems
of other companies on which the Company's systems or operations
rely will be timely converted or that any failure of such
parties to achieve Year 2000 compliance would not have an
adverse effect on the Company's results of operations.
The Company has engaged both internal and external resources to
assess, reprogram, test and implement its systems for Year 2000
compliance. Based on management's current estimates, the costs
of Year 2000 remediation, including system renovation,
modifications and enhancements, which have been and will be
expensed as incurred, are not expected to be material to the
results of operations or the financial position of the Company.
Additionally, such expenditures have not adversely affected the
Company's ability to continue its investment in new technology
in connection with its ongoing systems development plans.
[END PAGE 20]
[BEGIN PAGE 21]
Management presently believes the Company's most reasonably
likely worst case Year 2000 scenario could arise from a
business interruption caused by governmental agencies, utility
companies, telecommunication service companies, shipping
companies or other service providers outside the Company's
control. There can be no assurance that such providers will not
suffer business interruption caused by a Year 2000 issue. Such
an interruption could have a material adverse effect on the
Company's results of operations.
The Company is in the process of developing a contingency plan
for continuing operations in the event of Year 2000 failures,
and the current target for completing that plan is October
1999.
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; failure of the Company or third parties to be Year
2000 compliant; significant increases in paper, printing and
postage costs; and changes in the Company's relationships with
designers and other resources.
[END PAGE 21]
[BEGIN PAGE 22]
Consolidated Balance Sheets
July 31, August 1,
(Dollar Amounts in Thousands) 1999 1998
----------------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 29,191 $ 56,644
Undivided interests in NMG Credit Card Master Trust 133,151 138,867
Accounts receivable, less allowance for
doubtful accounts of $2,300 and $1,800 59,317 53,571
Merchandise inventories 528,452 499,068
Deferred income taxes 21,953 24,058
Other current assets 53,102 61,188
----------------------
TOTAL CURRENT ASSETS 825,166 833,396
----------------------
PROPERTY AND EQUIPMENT
Land, buildings and improvements 486,862 435,166
Fixtures and equipment 364,757 310,726
Construction in progress 47,656 66,927
----------------------
899,275 812,819
Less accumulated depreciation and amortization 385,836 333,563
----------------------
PROPERTY AND EQUIPMENT, NET 513,439 479,256
----------------------
OTHER ASSETS 163,583 125,140
----------------------
$1,502,188 $1,437,792
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current maturities of long-term
liabilities $ 921 $ 5,963
Accounts payable 203,071 201,490
Accrued liabilities 176,188 180,809
----------------------
TOTAL CURRENT LIABILITIES 380,180 388,262
----------------------
LONG-TERM LIABILITIES
Notes and debentures 274,640 284,617
Other long-term liabilities 74,664 71,083
Deferred income taxes 32,038 37,139
----------------------
TOTAL LONG-TERM LIABILITIES 381,342 392,839
----------------------
MINORITY INTEREST 4,485 -
COMMITMENTS AND CONTINGENCIES
COMMON STOCK
Common stock - $.01 par value
Authorized - 100,000,000 shares
Issued and outstanding - 49,039,035 and
49,759,686 shares 490 498
ADDITIONAL PAID-IN CAPITAL 467,283 481,295
RETAINED EARNINGS 268,408 174,898
----------------------
$1,502,188 $1,437,792
======================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[END PAGE 22]
[BEGIN PAGE 23]
Consolidated Statements of Earnings
Years Ended
-----------------------------------
July 31, August 1, August 2,
(In Thousands Except for Per Share Data) 1999 1998 1997
-----------------------------------
Revenues $2,553,421 $2,373,347 $2,209,891
Cost of goods sold including buying and occupancy costs 1,740,711 1,603,602 1,504,858
Selling, general and administrative expenses 615,890 556,051 509,687
Corporate expenses 16,406 14,620 14,364
-----------------------------------
Operating earnings 180,414 199,074 180,982
Interest expense 24,972 21,862 26,330
-----------------------------------
Earnings before income taxes and minority interest 155,442 177,212 154,652
Income taxes 60,622 70,885 63,407
-----------------------------------
Earnings before minority interest 94,820 106,327 91,245
Minority interest in net earnings of subsidiaries (1,310) - -
-----------------------------------
Net earnings 93,510 106,327 91,245
Loss on redemption of redeemable preferred stocks - - (22,361)
Dividends and accretion on redeemable preferred stocks - - (6,201)
-----------------------------------
Net earnings applicable to common shareholders $ 93,510 $ 106,327 $ 62,683
-----------------------------------
Weighted average number of common and
common equivalent shares outstanding:
Basic 49,129 49,808 47,162
===================================
Diluted 49,237 49,981 47,335
===================================
Earnings per share applicable to common shareholders:
Basic $ 1.90 $ 2.13 $ 1.33
===================================
Diluted $ 1.90 $ 2.13 $ 1.32
===================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[END PAGE 23]
[BEGIN PAGE 24]
Consolidated Statements of Cash Flows
Years Ended
-----------------------------------
July 31, August 1, August 2,
(In Thousands) 1999 1998 1997
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 93,510 $ 106,327 $ 91,245
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 64,921 60,097 59,820
Deferred income taxes (2,996) 228 1,190
Minority interest 1,310 - -
Other (4,344) 1,629 2,199
Changes in current assets and liabilities:
Accounts receivable (1,999) 2,431 (3,991)
Merchandise inventories (25,642) (33,006) (16,464)
Accounts payable and accrued liabilities (12,944) 48,841 (15,790)
Other 8,151 (3,985) (8,971)
-----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 119,967 182,562 109,238
-----------------------------------
CASH FLOWS USED FOR INVESTING ACTIVITIES
Additions to property and equipment (91,026) (81,176) (53,037)
Purchases of held-to-maturity securities (641,364) (636,342) (461,791)
Maturities of held-to-maturity securities 647,080 625,816 447,842
Acquisitions, net of cash acquired (36,754) (31,000) -
-----------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (122,064) (122,702) (66,986)
-----------------------------------
CASH FLOWS USED FOR FINANCING ACTIVITIES
Proceeds from borrowings - 249,617 113,500
Repayment of debt (10,000) (265,000) (132,000)
Payment of redemption of preferred stock - - (281,426)
Issuance (repurchase) of common stock (15,356) (4,694) 267,672
Dividends paid - - (5,796)
-----------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (25,356) (20,077) (38,050)
-----------------------------------
CASH AND EQUIVALENTS
Increase (decrease) during the year (27,453) 39,783 4,202
Beginning balance 56,644 16,861 12,659
-----------------------------------
Ending balance $ 29,191 $ 56,644 $ 16,861
===================================
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 26,098 $ 20,932 $ 28,441
===================================
Income taxes $ 62,626 $ 59,656 $ 63,951
===================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[END PAGE 24]
[BEGIN PAGE 25]
Consolidated Statements of Common Shareholder's Equity
Retained
Additional Earnings
Common Stock Paid-in (Accumulated
(In Thousands) Shares Amount Capital Decit)
------------------------------------------------
BALANCE - AUGUST 4, 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
Net earnings - - - 106,327
Repurchase of common stock (160) (2) (4,692) -
Other equity transactions 47 1 329 -
------------------------------------------------
BALANCE - AUGUST 1, 1998 49,760 498 481,295 174,898
Net earnings - - - 93,510
Repurchase of common stock (827) (11) (15,345) -
Other equity transactions 106 3 1,333 -
------------------------------------------------
BALANCE - JULY 31, 1999 49,039 $ 490 $ 467,283 $ 268,408
================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
[END PAGE 25]
[BEGIN PAGE 26]
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 includes Neiman Marcus Stores and Bergdorf Goodman, and
NM 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.
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. 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. 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
$16.7 million and $14.5 million higher than reported at July
31, 1999 and August 1, 1998, respectively. As a result of using
the LIFO valuation method, net earnings were $1.3 million lower
in 1999, $0.3 million higher in 1998, and $0.9 million lower in
1997 than they would have been using the FIFO method.
[END PAGE 26]
[BEGIN PAGE 27]
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. 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 15 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 $6.4 million in 1999, $4.8 million in
1998 and $3.7 million in 1997.
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 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 $45.8 million in 1999, $47.8
million in 1998 and $47.0 million in 1997.
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 consolidated financial position or results of
operations.
PREOPENING EXPENSES
Costs associated with the opening of new stores are expensed as
incurred.
[END PAGE 27]
[BEGIN PAGE 28]
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 $125.0 million, $114.4 million and $108.7 million in 1999,
1998 and 1997, respectively. Direct response advertising
amounts included in other current assets in the consolidated
balance sheets of July 31, 1999 and August 1, 1998 were $10.6
million and $9.5 million, respectively.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings per Share." All
earnings per share amounts for all periods presented have been
restated to conform to the requirements of SFAS 128.
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.
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. The Company is currently
evaluating the effect of implementing SFAS 133, which will be
effective for fiscal 2001.
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 lines. 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 NM 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 ranging from four to 30 years.
These acquisitions did not materially impact consolidated
results, and therefore no pro forma information is provided.
[END PAGE 28]
[BEGIN PAGE 29]
NOTE 3 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 stocks from
Harcourt General, Inc. 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 stocks. 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 period, diluted net earnings per share applicable to
common shareholders would have been $1.82 in 1997.
NOTE 4 Other Assets
Other assets consisted of the following:
July 31, August 1,
(In Thousands) 1999 1998
---------------------
Trademarks $ 126,654 $ 88,300
Goodwill 33,202 33,202
Other 47,460 40,894
---------------------
207,316 162,396
Accumulated amortization (43,733) (37,256)
---------------------
$ 163,583 $ 125,140
=====================
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 5 Accrued Liabilities
Accrued liabilities consisted of the following:
July 31, August 1,
(In Thousands) 1999 1998
---------------------
Accrued salaries and related liabilities $ 33,698 $ 37,857
Self-insurance reserves 25,436 24,694
Income taxes payable 27,474 26,552
Other 90,294 91,706
---------------------
$ 176,902 $ 180,809
=====================
[END PAGE 29]
[BEGIN PAGE 30]
NOTE 6 Notes and Debentures
Notes and debentures consisted of the following:
Interest July 31, August 1,
(In Thousands) Rate 1999 1998
---------------------------------
Revolving credit facility(a) Variable $ 25,000 $ 35,000
Senior notes(b) 6.65% 124,863 124,848
Senior debentures(b) 7.125% 124,777 124,769
---------------------
$ 274,640 $ 284,617
=====================
(a) The Company has a revolving credit facility with 21 banks,
pursuant to which the Company may borrow up to $650 million at
July 31,1999. 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 (5.4% at July 31, 1999)
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.
(b) 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 million
in fiscal 2000, fiscal 2001 and fiscal 2002, $25.0 million in
fiscal 2003, $0 million in fiscal 2004 and $249.6 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
At July 31, 1999, Harcourt General owned approximately 26.4
million shares of Common Stock, representing approximately 54%
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 $6.0 million in 1999, $5.4 million in 1998 and
$5.7 million in 1997.
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.
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.
[END PAGE 30]
[BEGIN PAGE 31]
COMMON STOCK INCENTIVE PLANS
The Company has established common stock incentive plans
allowing for the granting of stock options, restricted stock
and other 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 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 31, 1999, August 1, 1998 and
August 2, 1997 as follows:
(In Thousands, Except Per Share Amounts) 1999 1998 1997
---------------------------------
Net earnings:
As reported $ 93,510 $ 106,327 $ 62,683
Pro forma $ 91,686 $ 105,339 $ 62,320
Basic earnings per share:
As reported $ 1.90 $ 2.13 $ 1.33
Pro forma $ 1.87 $ 2.11 $ 1.32
Diluted earnings per share:
As reported $ 1.90 $ 2.13 $ 1.32
Pro forma $ 1.86 $ 2.11 $ 1.32
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 is currently used for grants of equity-based
awards to employees. All outstanding equity-based awards at
July 31, 1999 were granted under the Company's 1997 Plan and
the 1987 Stock Incentive Plan. At July 31, 1999, there were 1.7
million shares of Common Stock available for grants under the
1997 Plan.
Options outstanding at July 31, 1999 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
116 employees with options outstanding at July 31, 1999. For
all outstanding options at July 31, 1999, the weighted average
exercise price was $24.36, and the weighted average remaining
contractual life was approximately 7.1 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 1999, 1998 and 1997,
respectively:
1999 1998 1997
------------------------------
Expected life (years) 7 8 7
Expected volatility 45.6% 29.4% 31.1%
Risk-free interest rate 6.0% 5.5% 7.0%
==============================
[END PAGE 31]
[BEGIN PAGE 32]
A summary of the status of the Company's 1997 and 1987 Stock
Incentive Plans as of July 31, 1999, August 1, 1998 and August
2, 1997 and changes during the years ended on those dates is
presented below:
1999 1998 1997
-------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------
Options outstanding at
beginning of year 847,960 $ 23.83 660,780 $ 17.95 653,077 $ 14.41
Granted 468,000 24.82 325,800 32.87 131,050 33.38
SAR Surrenders - - (107,240) 17.75 (82,207) 14.45
Exercised (47,400) 14.62 (2,300) 14.90 (1,200) 14.53
Canceled (88,860) 26.98 (29,080) 24.92 (39,940) 17.85
--------- -------- -------
Outstanding at
end of year 1,179,700 $ 24.36 847,960 $ 23.83 660,780 $ 17.95
========= ======== =======
Options exercisable
at year-end 403,150 $ 19.23 286,700 $ 15.53 273,090 $ 14.21
========= ======= =======
The weighted-average fair value of options granted in 1999, 1998 and 1997 was
$14.17, $15.94 and $16.32, respectively.
The following summarizes information about the Company's stock options as of
July 31, 1999.
Options Outstanding Options Exercisable
------------------------------------------------------------------
Weighted- Weighted- Weighted-
Shares Average Average Shares Average
Outstanding Remaining Exercise Outstanding Exercise
Range of Exercise Prices At 7/31/99 Contractual Life Price At 7/31/99 Price
-----------------------------------------------------------------------------------------------------
$11.63 - $12.75 60,070 2.9 $ 12.15 60,070 $ 12.15
$13.38 - $16.75 297,720 4.5 $ 14.69 234,600 $ 14.63
$24.81 - $24.94 426,000 9.1 $ 24.82 - -
$29.19 - $33.38 395,910 7.6 $ 33.00 108,480 $ 33.08
--------------- --------- -------
$11.63 - $33.38 1,179,700 7.1 $ 24.36 403,150 $ 19.23
============== ========= =======
NOTE 9 Stock Repurchase Program
In December 1997, the Board of Directors of the Company
authorized the repurchase of up to 1 million shares of common
stock in the open market. In September 1998, the Company's
Board of Directors authorized an increase in the stock
repurchase program to 1.5 million shares.
During the year ended July 31, 1999, the Company repurchased
827,000 shares at an average price of $18.57 per share under
this stock repurchase program; 512,900 shares were remaining
under this program at July 31, 1999. During the year ended
August 1, 1998, the Company repurchased 160,100 shares at an
average price of $29.32 per share.
[END PAGE 32]
[BEGIN PAGE 33]
NOTE 10 Income Taxes
Income tax expense was as follows:
Years Ended
---------------------------------
July 31, August 1, August 2,
(In Thousands) 1999 1998 1997
---------------------------------
Current:
Federal $ 56,397 $ 62,100 $ 53,292
State 7,221 8,557 8,925
---------------------------------
63,618 70,657 62,217
---------------------------------
Deferred:
Federal (1,993) (101) 836
State (1,003) 329 354
---------------------------------
(2,996) 228 1,190
---------------------------------
Income tax expense $ 60,622 $ 70,885 $ 63,407
=================================
The Company's effective income tax rate was 39% in 1999, 40% in
1998 and 41% 1997. 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:
July 31, August 1,
(In Thousands) 1999 1998
--------------------
Gross deferred income tax assets:
Financial accruals and reserves $ 17,311 $ 19,901
Employee benefits 25,640 25,472
Inventories 9,219 12,068
Deferred lease payments 2,003 2,618
Other 639 537
--------------------
Total deferred tax assets 54,812 60,596
--------------------
Gross deferred income tax liabilities:
Excess tax depreciation (55,610) (63,092)
Pension accrual (1,273) (4,087)
Other assets previously deducted on tax return (8,014) (6,498)
--------------------
Total deferred tax liabilities (64,897) (73,677)
--------------------
Net deferred income tax liability $ (10,085) $ (13,081)
====================
NOTE 11 Pension Plans and Postretirement Health Care Benefits
In fiscal 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits."
The provisions of SFAS No. 132 provide new disclosure
requirements for pensions and other postretirement benefit
plans but do not change the measurement or recognition of these
plans. SFAS No. 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent
practicable and requires additional information on the changes
in benefit obligations and fair values of plan assets.
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.
[END PAGE 33]
[BEGIN PAGE 34]
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 1999, $1.3 million during 1998 and $1.2 million during
1997.
Components of net pension expense were as follows:
Years Ended
---------------------------------
July 31, August 1, August 2,
(In Thousands) 1999 1998 1997
---------------------------------
Service cost $ 7,160 $ 5,527 $ 5,591
Interest cost on projected benefit obligation 12,641 10,843 10,055
Expected return on assets (11,826) (9,270) (8,592)
Net amortization and deferral 1,208 1,178 2,127
---------------------------------
Net pension expense $ 9,183 $ 8,278 $ 9,181
=================================
The periodic postretirement health care benefit cost was as follows:
Years Ended
---------------------------------
July 31, August 1, August 2,
(In Thousands) 1999 1998 1997
---------------------------------
Net periodic cost:
Service cost $ 136 $ 155 $ 48
Interest cost on accumulated
benefit obligation 1,151 1,282 819
Net amortization and deferral (17) (30) (563)
---------------------------------
Total $ 1,270 $ 1,407 $ 304
=================================
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) 1999 1998 1999 1998
---------------------- ---------------------
Benefit obligations at
beginning of year $ 179,427 $ 144,676 $ 16,942 $ 17,554
Service cost 7,160 5,527 136 155
Interest 12,641 10,844 1,151 1,282
Benefits paid (5,710) (5,249) (1,247) (1,276)
Actuarial loss (gain) (9,746) 23,629 (3,340) (773)
---------------------- ---------------------
Benefit obligation at end of year $ 183,772 $ 179,427 $ 13,642 $ 16,942
====================== =====================
CHANGE IN PLAN ASSETS: Pension Plans
--------------------
(In Thousands) 1999 1998
--------------------
Fair value of plan assets
at beginning of year $ 159,093 $ 144,288
Actual return on assets 9,302 16,750
Company contributions 980 3,304
Benefits paid (5,710) (5,249)
--------------------
Fair value of plan assets at
end of year $ 163,665 $ 159,093
=====================
[END PAGE 34]
[BEGIN PAGE 35]
FUNDED STATUS: Pension Plans Postretirement Plans
---------------------- -----------------------
(In Thousands) 1999 1998 1999 1998
---------------------- -----------------------
Fair value of plan assets
less than benefit obligation $ (20,107) $ (20,334) $ (13,642) $ (16,942)
Unrecognized net actuarial gain (9,195) (1,058) (5,343) (2,020)
Unrecognized prior service cost 4,845 4,650 - -
Unrecognized net obligation
at transition 2,305 2,796 - -
------------------------------------------------
Liability recognized in the
consolidated balance sheets $ (22,152) $ (13,946) $ (18,985) $ (18,962)
================================================
Pension Benefits
----------------------
WEIGHTED AVERAGE ASSUMPTIONS: 1999 1998
----------------------
Discount rate 7.5% 7.0%
Expected long-term rate of return on
plan assets 9.0% 9.0%
Rate of future compensation increases 5.0% 5.0%
The weighted average assumptions for postretirement health care
benefits included a discount rate of 7.5% in 1999 and 7.0% in
1998.
For measurement purposes, a 7.0% annual rate of increase in the
per capita cost of covered care benefits was assumed for fiscal
2000. The rate was assumed to decrease gradually to 5.0% in
fiscal 2002 and remain at that level beyond.
If the health care trend rate was increased one percentage
point, postretirement benefit costs for the year ended July 31,
1999 would have been $0.1 million higher, and the accumulated
postretirement benefit obligation as of July 31, 1999 would
have been $1.4 million higher. If the health care trend rate
was decreased one percentage point, postretirement benefit
costs for the year ended July 31, 1999 would have been $0.1
million lower, and the accumulated postretirement benefit
obligations as of July 31, 1999 would have been $1.2 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 25% of an
employee's contribution up to a maximum of 6% of the employee's
compensation. Company contributions for the years ended July
31, 1999, August 1, 1998 and August 2, 1997 were $2.9 million,
$2.9 million and $2.6 million, respectively.
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 35]
[BEGIN PAGE 36]
Rent expense under operating leases was as follows:
Years Ended
---------------------------------
July 31, August 1, August 2,
(In Thousands) 1999 1998 1997
---------------------------------
Minimum rent $ 34,000 $ 31,800 $ 31,200
Rent based on revenues 14,500 13,300 11,600
---------------------------------
Total rent expense $ 48,500 $ 45,100 $ 42,800
=================================
Future minimum lease payments, excluding renewal options, under
operating leases are as follows: fiscal 2000 - $37.7 million;
fiscal 2001 - $36.8 million; fiscal 2002 - $36.1 million;
fiscal 2003 - $34.4 million; fiscal 2004 - $37.0 million; all
years thereafter - $528.8 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 flows or the financial position of the
Company.
LETTERS OF CREDIT
The Company had approximately $21.4 million of outstanding
irrevocable letters of credit relating to purchase commitments
and insurance liabilities at July 31, 1999.
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 continues 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.
NOTE 14 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 395,910 shares of common stock
were not included in the computation of diluted EPS for the
year ended July 31, 1999, 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 years ended August 1, 1998 and August 2, 1997,
because the exercise price of those options was less than the
average market price of the common shares.
[END PAGE 36]
[BEGIN PAGE 37]
Years Ended
---------------------------------
July 31, August 1, August 2,
(In Thousands of Shares) 1999 1998 1997
---------------------------------
Shares for computation of basic EPS 49,129 49,808 47,162
Effect of assumed option exercises 108 173 173
---------------------------------
Shares for computation of diluted EPS 49,237 49,981 47,335
=================================
NOTE 15 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
presented.
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 specialty retail stores which the Company operates. Direct
marketing includes the operations of NM Direct, which publishes
NM by Mail, the Horchow catalogues, Chef's Catalog and the
Neiman Marcus Christmas Catalogue. Other includes unallocated
corporate expenses 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:
Years Ended
------------------------------------
July 31, August 1, August 2,
(In Thousands) 1999 1998 1997
------------------------------------
REVENUES
Specialty Retail Stores $ 2,209,451 $ 2,089,553 $ 1,950,544
Direct Marketing 321,747 283,794 259,347
Other 22,223 - -
------------------------------------
Total $ 2,553,421 $ 2,373,347 $ 2,209,891
====================================
OPERATING EARNINGS
Specialty Retail Stores $ 177,982 $ 198,123 $ 169,877
Direct Marketing 14,543 15,571 25,469
Other (12,111) (14,620) (14,364)
------------------------------------
Total $ 180,414 $ 199,074 $ 180,982
====================================
CAPITAL EXPENDITURES
Specialty Retail Stores $ 89,296 $ 79,920 $ 48,301
Direct Marketing 970 1,256 4,736
Other 760 _ _
------------------------------------
Total $ 91,026 $ 81,176 $ 53,037
====================================
[END PAGE 37]
[BEGIN PAGE 38]
NOTE 16 Subsequent Event
On May 14, 1999, a committee of independent directors of the
Company, and the Boards of Directors of the Company and of
Harcourt General approved a series of transactions (the
"Transactions") relating to a plan by Harcourt General to spin
off to the holders of Harcourt General's common stock
approximately 21.4 million of the approximately 26.4 million
shares of the Company's common stock held by Harcourt General
in a distribution to be tax-free to Harcourt General and its
shareholders (the "Distribution"). The Transactions were
approved by the shareholders of the Company and Harcourt
General on September 15, 1999. Harcourt General received a
favorable ruling from the Internal Revenue Service dated
September 22, 1999 that the Distribution could be completed on
a tax-free basis. The approximately 21.4 million shares to be
distributed are shares of Class B common stock of the Company
that will have the right to elect approximately 82% of the
Company's Board of Directors, and the remaining shares,
designated Class A common stock, will have the right to elect
approximately 18% of the Company's Board of Directors. The
Distribution is expected to be completed in October 1999.
NOTE 17 Quarterly Financial Information (unaudited)
Year Ended July 31, 1999
-------------------------------------------------
First Second Third Fourth
(In Millions, Except for Per Share Data) Quarter Quarter Quarter Quarter Total
-------------------------------------------------
Revenues $ 587.1 $ 789.2 $ 611.8 $ 565.3 $ 2,553.4
=================================================
Gross profit $ 202.2 $ 241.4 $ 214.3 $ 154.8 $ 812.7
=================================================
Net earnings applicable
to common shareholders $ 25.0 $ 30.6 $ 35.2 $ 2.7 $ 93.5
=================================================
Earnings per share applicable
to common shareholders:
Basic $ 0.50 $ 0.62 $ 0.72 $ .06 $ 1.90
=================================================
Diluted $ 0.50 $ 0.62 $ 0.72 $ .06 $ 1.90
=================================================
Year Ended August 1, 1998
--------------------------------------------------
First Second Third Fourth
(In Millions, Except for Per Share Data) Quarter Quarter Quarter Quarter Total
--------------------------------------------------
Revenues $ 580.5 $ 708.4 $ 547.7 $ 536.7 $ 2,373.3
=================================================
Gross profit $ 204.4 $ 221.4 $ 179.3 $ 164.6 $ 769.7
=================================================
Net earnings applicable
to common shareholders $ 32.6 $ 33.5 $ 24.0 $ 16.2 $ 106.3
=================================================
Earnings per share applicable
to common shareholders:
Basic $ .65 $ .67 $ .48 $ .33 $ 2.13
=================================================
Diluted $ .65 $ .67 $ .48 $ .33 $ 2.13
=================================================
In the fourth quarter, the effect of adjusting the LIFO reserve
for inventories to actual amounts increased net earnings by $.5
million in 1999 and $3.9 million in 1998.
[END PAGE 38]
[BEGIN PAGE 39]
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 31,
1999 and August 1, 1998, and the related consolidated
statements of earnings, common shareholders' equity and cash
flows for each of the three fiscal years in the period ended
July 31, 1999. 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 July 31, 1999 and August 1, 1998, and the
results of their operations and their cash flows for each of
the three fiscal years in the period ended July 31, 1999, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
August 31, 1999
(September 22, 1999 as to Note 16)
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.
JOHN R. COOK
Senior Vice President and
Chief Financial Officer
CATHERINE N. JANOWSKI
Vice President and Controller
[END PAGE 39]
[BEGIN PAGE 40]
Selected Financial Data (Unaudited)
Years Ended
--------------------------------------------------------
July 31, August 1, August 2, August 3, July 29,
(In Millions, Except for Per Share Data) 1999 1998 1997 1996(A) 1995
--------------------------------------------------------
OPERATING RESULTS
Revenues $ 2,553.4 $ 2,373.3 $ 2,209.9 $ 2,075.0 $ 1,888.2
========================================================
Earnings from continuing operations $ 93.5 $ 106.3 $ 91.2 $ 77.4 $ 67.3
Loss from discontinued operations - - - - (11.7)
--------------------------------------------------------
Net earnings $ 93.5 $ 106.3 $ 91.2 $ 77.4 $ 55.6
========================================================
Net earnings
applicable to common
shareholders $ 93.5 $ 106.3 $ 62.7 $ 48.3 $ 26.5
========================================================
Basic amounts per share
applicable to common
shareholders:
Continuing operations $ 1.90 $ 2.13 $ 1.33 $ 1.27 $ 1.01
Discontinued operations - - - - (.31)
--------------------------------------------------------
Basic net earnings $ 1.90 $ 2.13 $ 1.33 $ 1.27 $ .70
========================================================
Diluted amounts per share
applicable to common shareholders:
Continuing operations $ 1.90 $ 2.13 $ 1.32 $ 1.26 $ 1.01
Discontinued operations - - - - (.31)
--------------------------------------------------------
Diluted net earnings $ 1.90 $ 2.13 $ 1.32 $ 1.26 $ .70
========================================================
Common dividends $ - $ - $ - $ - $ .10
========================================================
FINANCIAL POSITION
Total assets $ 1,503.1 $ 1,437.8 $ 1,287.9 $ 1,252.4 $ 1,108.4
Long-term liabilities $ 381.6 $ 392.8 $ 401.6 $ 395.3 $ 341.9
Redeemable preferred stocks $ - $ - $ - $ 407.4 $ 405.4
========================================================
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 40]
[BEGIN PAGE 41]
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
BankBoston, N.A.
c/o EquiServe Limited Partnership
Post Office Box 8040, Mail Stop 45-01-05
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.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Friday,
January 21, 2000 at 10:00 a.m. at the Company's Corporate
Headquarters, 27 Boylston Street, Chestnut Hill, Massachusetts.
SHARES OUTSTANDING
The Neiman Marcus Group had 49.0 million common shares
outstanding and 11,463 common shareholders of record at July
31, 1999.
CORPORATE ADDRESS
The Neiman Marcus Group, Inc.
27 Boylston Street
Post Office Box 9187
Chestnut Hill, MA 02467-9187
(617) 232-0760
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.
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.
1999 1998
----------------------------------------
Quarter High Low High Low
----------------------------------------
First $ 33.50 $ 16.08 $ 35.56 $ 27.88
Second $ 26.75 $ 22.08 $ 35.36 $ 28.81
Third $ 27.00 $ 22.00 $ 41.00 $ 34.63
Fourth $ 31.00 $ 24.18 $ 43.44 $ 33.00
================= =================
[END PAGE 41]