0001104659-03-028082.txt : 20031209 0001104659-03-028082.hdr.sgml : 20031209 20031209102059 ACCESSION NUMBER: 0001104659-03-028082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031101 FILED AS OF DATE: 20031209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEIMAN MARCUS GROUP INC CENTRAL INDEX KEY: 0000819539 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 954119509 STATE OF INCORPORATION: DE FISCAL YEAR END: 0801 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09659 FILM NUMBER: 031043785 BUSINESS ADDRESS: STREET 1: ONE MARCUS SQUARE STREET 2: 1618 MAIN STREET CITY: DALLAS STATE: TX ZIP: 75201 BUSINESS PHONE: 214-741-6911 MAIL ADDRESS: STREET 1: ONE MARCUS SQUARE STREET 2: 1618 MAIN STREET CITY: DALLAS STATE: TX ZIP: 75201 10-Q 1 a03-5939_110q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended November 1, 2003

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file no. 1-9659

The Neiman Marcus Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		95-4119509
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Marcus Square 1618 Main Street Dallas, Texas 75201
(Address of principal executive offices)

(214) 741-6911
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý NO o

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

YES ý NO o

As of December 1, 2003, the number of outstanding shares of each of the issuer’s classes of common stock was:

Class		Outstanding Shares
Class A Common Stock, $.01 Par Value		28,979,575
Class B Common Stock, $.01 Par Value		19,941,833

THE NEIMAN MARCUS GROUP, INC.

INDEX

Part I.		Financial Information

	Item 1.	Condensed Consolidated Balance Sheets as of November 1, 2003,August 2, 2003 and November 2, 2002

		Condensed Consolidated Statements of Earnings for the Thirteen Weeks Ended November 1, 2003 and November 2, 2002

		Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended November 1, 2003 and November 2, 2002

		Notes to Condensed Consolidated Financial Statements

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk

	Item 4.	Controls and Procedures

Part II.		Other Information

	Item 1.	Legal Proceedings

	Item 6.	Exhibits and Reports on Form 8-K

Signatures

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands)	November 1, 2003			August 2, 2003			November 2, 2002

ASSETS
Current assets:
Cash and cash equivalents	$	127,524		$	206,950		$	67,278
Undivided interests in NMG Credit Card Master Trust	314,138			243,145			270,303
Accounts receivable	33,075			22,595			29,040
Merchandise inventories	830,319			687,062			821,040
Other current assets	73,345			86,369			61,240
Total current assets	1,378,401			1,246,121			1,248,901

Property and equipment, net	674,970			674,185			677,680
Other assets	112,655			114,124			105,822
Total assets	$	2,166,026		$	2,034,430		$	2,032,403

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term liabilities	$	2,252		$	1,241		$	1,163
Accounts payable	266,889			262,909			266,366
Accrued liabilities	323,188			266,259			292,947
Total current liabilities	592,329			530,409			560,476

Long-term liabilities:
Revolving credit facility borrowings	—			—			50,000
Notes and debentures	249,739			249,733			249,716
Other long-term liabilities	114,463			108,234			80,506
Total long-term liabilities	364,202			357,967			380,222

Minority interest	9,700			8,206			7,796

Common stocks	488			479			480
Additional paid-in capital	471,328			458,520			444,577
Accumulated other comprehensive income	(25,642		)	(25,573		)	189
Retained earnings	775,667			719,442			638,663
Treasury stock, at cost (699,777 shares at November 1, 2003 and 524,177 shares at August 2, 2003)	(22,046		)	(15,020		)	—
Total shareholders’ equity	1,199,795			1,137,848			1,083,909
Total liabilities and shareholders’ equity	$	2,166,026		$	2,034,430		$	2,032,403

See Notes to Condensed Consolidated Financial Statements.

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

	Thirteen Weeks Ended
(in thousands, except per share data)	November 1, 2003			November 2, 2002

Revenues	$	824,863		$	734,083
Cost of goods sold including buying and occupancy costs	508,412			453,931
Selling, general and administrative expenses	219,162			204,908

Operating earnings	97,289			75,244

Interest expense, net	3,462			3,594

Earnings before income taxes, minority interest and change in accounting principle	93,827			71,650
Income taxes	36,592			27,585
Earnings before minority interest and change in accounting principle	57,235			44,065
Minority interest in net earnings of subsidiaries	(1,010		)	(740		)

Earnings before change in accounting principle	56,225			43,325
Change in accounting principle – writedown of intangible assets, net of taxes	—			(14,801		)
Net earnings	$	56,225		$	28,524

Weighted average number of common and common equivalent shares outstanding:
Basic	47,624			47,696
Diluted	48,396			47,970

Basic earnings per share:
Earnings before change in accounting principle	$	1.18		$	0.91
Change in accounting principle	—			(0.31		)
Basic earnings per share	$	1.18		$	0.60

Diluted earnings per share:
Earnings before change in accounting principle	$	1.16		$	0.90
Change in accounting principle	—			(0.31		)
Diluted earnings per share	$	1.16		$	0.59

See Notes to Condensed Consolidated Financial Statements.

THE NEIMAN MARCUS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Thirteen Weeks Ended
(in thousands)	November 1, 2003			November 2, 2002

CASH FLOWS - OPERATING ACTIVITIES
Net earnings	$	56,225		$	28,524
Change in accounting – non-cash writedown of intangible assets, net of taxes	—			14,801
Earnings before change in accounting principle	56,225			43,325
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Depreciation	21,288			19,735
Minority interest	1,010			740
Other – primarily costs related to defined benefit pension and other long-term benefit plans	8,645			3,680
Changes in operating assets and liabilities:
Increase in accounts receivable	(10,480		)	(9,262		)
Increase in merchandise inventories	(143,257		)	(164,196		)
Increase in accounts payable and accrued liabilities	61,566			47,625
Other	13,118			2,757
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES	8,115			(55,596		)

CASH FLOWS - INVESTING ACTIVITIES
Capital expenditures	(22,073		)	(44,249		)
Transactions related to undivided interests in NMG Credit Card Master Trust:
Purchases of held-to-maturity securities	(303,326		)	(244,663		)
Maturities of held-to-maturity securities	231,753			182,962
NET CASH USED FOR INVESTING ACTIVITIES	(93,646		)	(105,950		)

CASH FLOWS - FINANCING ACTIVITIES
Proceeds from borrowings	1,000			50,000
Acquisitions of treasury stock	(7,026		)	—
Proceeds from exercises of stock options and restricted stock grants	12,293			186
Distribution paid	(162		)	—
NET CASH PROVIDED BY FINANCING ACTIVITIES	6,105			50,186

CASH AND CASH EQUIVALENTS
Decrease during the period	(79,426		)	(111,360		)
Beginning balance	206,950			178,638
Ending balance	$	127,524		$	67,278

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	174		$	156
Income taxes	$	586		$	290

See Notes to Condensed Consolidated Financial Statements.

THE NEIMAN MARCUS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

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

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments (as well as a change in accounting principle made in the first quarter of 2003 as more fully described in Note 7) necessary to present fairly the financial position, results of operations and cash flows of the Company for the applicable interim periods. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

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

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

The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used by the Company in preparing the accompanying condensed consolidated financial statements.

Management of the Company believes the following critical accounting policies, among others, encompass the more significant judgments and estimates used in preparation of its financial statements:

• Revenue recognition;

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

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

• Determination of impairment of long-lived assets;

• Recognition of advertising and catalogue costs;

• Recognition of costs related to the Company’s loyalty programs;

• Recognition of income taxes; and

• Measurement of accruals for litigation, general liability, workers’ compensation and health insurance as well as short-term disability, pension and postretirement health care benefits.

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

Stock-Based Compensation. The Company accounts for stock-based compensation awards to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense has been recognized for stock options since all options granted had an exercise price equal to the market value of the Company’s common stock on the grant date.

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

	Thirteen Weeks Ended
(in thousands, except per share data)	November 1, 2003			November 2, 2002

Net earnings:
As reported	$	56,225		$	28,524
Less: stock-based employee compensation expense determined under fair value based method, net of related taxes	(2,042		)	(1,984		)
Pro forma	$	54,183		$	26,540

Basic earnings per share:
As reported	$	1.18		$	0.60
Pro forma	$	1.14		$	0.56

Diluted earnings per share:
As reported	$	1.16		$	0.59
Pro forma	$	1.12		$	0.55

The effects on pro forma net earnings and earnings per share of expensing the estimated fair value of stock options are not necessarily representative of the effects on reported net earnings for future periods due to such factors as the vesting periods of stock options and the potential issuance of additional stock options in future years. In addition, the Black-Scholes option-pricing model has inherent limitations in calculating the fair value of stock options for which no active market exists since the model does not consider the inability to sell or transfer options, vesting requirements and a reduced exercise period upon termination of employment - all of which would reduce the fair value of the options.

2. Operating Segments

The Company has identified two reportable segments: Specialty Retail Stores and Direct Marketing. The Specialty Retail Stores segment includes all Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus clearance stores. The Direct Marketing segment conducts both print catalogue and online operations under the Neiman Marcus, Horchow and Chef’s Catalogue brand names. Other includes the operations of Kate Spade LLC and Gurwitch Products, LLC (the Brand Development Companies) and corporate expenses.

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

	Thirteen Weeks Ended
(in thousands)	November 1, 2003			November 2, 2002
REVENUES:
Specialty Retail Stores	$	670,568		$	601,121
Direct Marketing	128,006			114,365
Other	26,289			18,597
Total	$	824,863		$	734,083

OPERATING EARNINGS:
Specialty Retail Stores	$	91,109		$	73,845
Direct Marketing	10,624			7,417
Other	(4,444		)	(6,018		)
Total	$	97,289		$	75,244

3. Stock Repurchase Program

In prior years, the Company’s Board of Directors authorized various stock repurchase programs and increases in the number of shares subject to repurchase. During the first quarter of 2004, the Company repurchased 175,600 shares at an average purchase price of $40.01. As of November 1, 2003, approximately 1.2 million shares remain authorized for repurchase under the Company’s stock repurchase programs.

4. Earnings per Share

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 for the computations of basic and diluted EPS during the periods presented.

	Thirteen Weeks Ended
(in thousands of shares)	November 1, 2003		November 2, 2002

Weighted average shares outstanding	48,078		47,981
Less: shares of non-vested restricted stock	(454	)	(285	)
Shares for computation of basic EPS	47,624		47,696

Effect of dilutive stock options and restricted stock	772		274
Shares for computation of diluted EPS	48,396		47,970

Shares represented by antidilutive stock options	28		1,957

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

5. Undivided Interests in NMG Credit Card Master Trust

Pursuant to a revolving credit card securitization program, the Company transfers substantially all of its credit card receivables to a wholly-owned subsidiary, Neiman Marcus Funding Corporation, which in turn sells such receivables to the Neiman Marcus Credit Card Master Trust (Trust). The Trust issued $225 million certificates representing undivided interests in the credit card receivables to both third-party investors (Sold Interests) and to the Company (Retained Interests). The Retained Interests are shown as “Undivided interests in NMG Credit Card Master Trust” on the Company’s condensed consolidated balance sheets. In order to maintain the committed level of securitized assets, cash collections on the securitized receivables are used by the Trust to purchase new credit card balances from the Company in accordance with the terms of the revolving credit card securitization program.

Beginning in April 2005, cash collections will be used by the Trust to repay the principal balance of the Class A Certificates in six monthly installments of $37.5 million (Amortization Period). As a result of certain provisions in the securitization agreement, the Company holds certain rights to repurchase the Class A Certificates (Repurchase Option) subsequent to the commencement of the Amortization Period and, therefore, has the ability to regain effective control over the credit card receivables held by the Trust at the time the Repurchase Option becomes exercisable. The Company currently believes that the Repurchase Option will become exercisable in September 2005 and that the revolving transfers of credit card receivables to the Trust will cease to qualify for off-balance sheet sales type treatment beginning in December 2003, the date when the contractual life of the transferred receivables is estimated to extend to September 2005 when the Repurchase Option becomes exercisable.

As a result, transfers to the Trust subsequent to December 2003 will be accounted for as secured borrowings. Based upon historical information, the Company believes that the $225 million of receivables representing the Sold Interests and the $225 million obligation for the Class A certificates will be brought back onto the Company’s condensed consolidated balance sheet over a four month period beginning in December 2003. During a transition period of approximately six to seven months beginning in December 2003, the Company expects an adverse effect on earnings as it ceases to record gains on sale and must amortize into earnings the excess of the carrying amount of the Sold Interests and Retained Interests over the face amount of the underlying receivables. Based on historical information, the Company estimates the adverse effect on earnings will range from $5 to $7 million.

6. Employee Benefit Plans

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

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

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

	Thirteen Weeks Ended
(in thousands)	November 1, 2003		November 2, 2002

Pension Plan	$	4,089	$	2,435
SERP Plan	$	1,680	$	859
Postretirement Plan	$	514	$	543

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

(in thousands)	Pension Plan		SERP Plan		Postretirement Plan

Projected benefit obligations	$	244,997	$	57,638	$	24,907
Fair value of assets	183,044		—		—
Underfunded status	$	61,953	$	57,638	$	24,907

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

The Company’s policy is to fund the Pension Plan at or above the minimum required by law. In the third quarter of 2003, the Company made a required contribution of $11.5 million and a voluntary contribution of $13.5 million to the Pension Plan for the plan year ended July 31, 2002. In addition, the Company made contributions of $5.8 million in 2003 for the plan year ending July 31, 2003. Based upon currently available information, the Company will not be required to make an additional contribution in 2004 to the Pension Plan for the plan year ending July 31, 2003 and anticipates making payments of $5.4 million in 2004 and $6.3 million in 2005 for the plan year ending July 31, 2004.

7. Commitments and Contingencies

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 or claims will have a material adverse effect upon the consolidated results of operations, cash flows or the financial position of the Company.

8. Change in Accounting Principle – Writedown of Intangible Assets

As of the beginning of the first quarter of 2003, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 established a new fair value-based accounting model for the valuation of goodwill and indefinite-lived intangible assets recorded in connection with business combinations. Pursuant to the provisions of SFAS No. 142, goodwill and indefinite-lived intangible assets are measured for impairment by applying a fair value-based test at least annually and are not amortized.

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

(in thousands)	Carrying Value at August 4, 2002		SFAS No. 142 Adjustment			Adjusted Carrying Value

Direct Marketing
Goodwill	$	23,747	$	—		$	23,747
Indefinite-lived tradenames	60,732		(24,066		)	36,666

Other
Indefinite-lived tradenames	32,945		—			32,945
	$	117,424	$	(24,066	)	$	93,358

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

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

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

• productivity and profitability;

• merchandising and marketing strategies;

• inventory performance;

• store renovation and expansion plans;

• capital expenditures;

• liquidity; and

• development of management information systems.

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

• current political and economic conditions;

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

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

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

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

• changes in demographic or retail environments;

• changes in consumer preferences or fashion trends;

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

• changes in the Company’s relationships with its key customers;

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

• seasonality of the retail business;

• adverse weather conditions, particularly during peak selling seasons;

• delays in anticipated store openings;

• natural disasters;

• significant increases in paper, printing and postage costs;

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

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

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

• the design and implementation of new information systems as well as enhancement of existing systems;

• changes in foreign currency exchange rates;

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

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

• changes in key management personnel;

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

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

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

CRITICAL ACCOUNTING POLICIES

The preparation of condensed financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events. These estimates and assumptions affect amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the condensed consolidated financial statements. The amounts currently estimated by the Company are subject to change if different assumptions as to the outcome of future events were made. The Company evaluates its estimates and judgments on an ongoing basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Management makes adjustments to its assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used by the Company in preparing the accompanying condensed consolidated financial statements.

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

OVERVIEW

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

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

	Thirteen Weeks Ended
	November 1, 2003		November 2, 2002

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

Operating Results

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

	Thirteen Weeks Ended
(dollars in millions)	November 1, 2003			November 2, 2002

REVENUES
Specialty Retail Stores	$	670.6		$	601.1
Direct Marketing	128.0			114.4
Other (1)	26.3			18.6
Total	$	824.9		$	734.1

OPERATING EARNINGS
Specialty Retail Stores	$	91.1		$	73.8
Direct Marketing	10.6			7.4
Other (1)	(4.4		)	(6.0		)
Total	$	97.3		$	75.2

OPERATING PROFIT MARGIN
Specialty Retail Stores	13.6		%	12.3		%
Direct Marketing	8.3		%	6.5		%
Total	11.8		%	10.3		%

COMPARABLE REVENUES (2)
Specialty Retail Stores	9.5		%	4.8		%
Direct Marketing	11.9		%	12.3		%
Total	10.7		%	5.8		%

STORE COUNT (3)
Neiman Marcus and Bergdorf Goodman stores:
Open at beginning of period	37			35
Opened during the period	—			2
Open at end of period	37			37
Clearance centers:
Open at beginning of period	14			12
Opened during the period	—			—
Open at end of period	14			12

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

(2) Comparable revenues include 1) revenues derived from the Company’s retail stores open for more than 52 weeks, including stores that have been relocated or expanded, 2) revenues from the Company’s Direct Marketing operations and 3) revenues from the Company’s Brand Development Companies.

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

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

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

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

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

Gross margin. Gross margin was 38.4 percent of revenues for the first quarter of 2004 compared to 38.2 percent for the first quarter of 2003. The increase in gross margin was primarily due to a decrease in buying and occupancy costs as a percentage of revenues. A significant portion of the Company’s buying and occupancy costs are fixed in nature. Buying and occupancy costs decreased as a percentage of revenues in the first quarter of 2004 compared to the prior year period primarily due to an increase in revenues.

Consistent with industry business practice, the Company receives allowances from certain of its vendors in support of the merchandise purchased by the Company for resale. The Company receives the majority of the allowances at the end of its second and fourth quarters. The amounts of vendor reimbursements received by the Company did not have a significant impact on the year-over-year change in gross margin in the first quarter of 2004.

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

The decreases in SG&A were partially offset by 1) higher costs related to incentive compensation, 2) higher advertising and marketing costs incurred by the Specialty Retail segment primarily due to a decrease in vendor advertising allowances recorded as a reduction to advertising expenses as a result of adopting new accounting rules effective beginning in the third quarter of 2003 and 3) higher expenses related to the Company’s employee benefit plans.

Segment operating earnings. Operating earnings for the Specialty Retail Stores segment were $91.1 million in the first quarter of 2004 compared to $73.8 million in the first quarter of 2003. This increase was primarily the result of increased sales, reduced markdowns and net decreases in both buying and occupancy expenses and SG&A expenses as percentages of revenues.

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

Interest expense, net. Net interest expense was $3.5 million for 2004 compared to $3.6 million for 2003. As a result of a higher level of cash generated by operations, the Company incurred no borrowings on its revolving credit facility to fund seasonal working capital requirements in the first quarter of 2004. The Company borrowed $50 million on its revolving credit facility during the first quarter of 2003.

Income taxes. The Company’s effective income tax rate was 39.0 percent for 2004 and 38.5 percent for 2003. The increase in the effective tax rate is primarily due to higher state income taxes.

SEASONALITY

The Company’s business, like that of most retailers, is subject to seasonal influences, with a disproportionately higher level of revenues and net earnings realized during the fall season, which includes the second quarter holiday selling season. In light of these patterns, SG&A expenses are typically higher as a percentage of net revenues during the first, third and fourth quarters of each year, and working capital needs are greater in the first and second quarters of each year. The increases in working capital needs during the first and second quarter have typically been financed with cash flows from operations, borrowings under the Company’s revolving credit facility and cash provided from the Company’s proprietary credit card securitization program.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

The Company currently projects capital expenditures for 2004 to be approximately $150 million to $160 million, primarily for store renovations and upgrades to information systems, with the majority of the expenditures anticipated for the latter half of 2004.

FINANCING STRUCTURE

In prior years, the Company’s Board of Directors authorized various stock repurchase programs and increases in the number of shares subject to repurchase. During the first quarter of 2004, the Company repurchased 175,600 shares at an average purchase price of $40.01. As of November 1, 2003, approximately 1.2 million shares remained authorized for repurchase under the Company’s stock repurchase programs.

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

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

OFF-BALANCE SHEET ARRANGEMENTS

Pursuant to a revolving credit card securitization program, the Company transfers substantially all of its credit card receivables to a wholly-owned subsidiary, Neiman Marcus Funding Corporation, which in turn sells such receivables to the Neiman Marcus Credit Card Master Trust (Trust). The Trust issued $225 million certificates representing undivided interests in the credit card receivables to both third-party investors (Sold Interests) and to the Company (Retained Interests). The Retained Interests are shown as “Undivided interests in NMG Credit Card Master Trust” on the Company’s consolidated balance sheets. In order to maintain the committed level of securitized assets, cash collections on the securitized receivables are used by the Trust to purchase new credit card balances from the Company in accordance with the terms of the revolving credit card securitization program.

OUTLOOK

Based on current estimates, the Company anticipates comparable store revenues to increase in the 7 to 9 percent range for its second quarter ending January 31, 2004. The accuracy of these assumptions and of the resulting forecasts is subject to uncertainties and circumstances beyond the Company’s control. Consequently, actual results could differ materially from the forecasted results. See “Factors That May Affect Future Results” for a discussion of items and events that could cause actual results to vary from the Company’s expectations.

INFLATION AND DEFLATION

The Company believes changes in revenues and net earnings that have resulted from inflation or deflation have not been material during the periods presented. The Company attempts to offset the effects of inflation, which has occurred in recent years in SG&A, through control of expenses and price increases, although the Company’s ability to increase prices may be limited by competitive factors. The Company attempts to offset the effects of merchandise deflation, which has occurred on a limited basis in recent years, through control of expenses. There is no assurance, however, that inflation or deflation will not materially affect the Company in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s financial instruments represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. The Company does not enter into derivative financial instruments for trading purposes. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities. The Company is exposed to interest rate risk through its securitization and borrowing activities, which are described in Notes 2 and 5 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended August 2, 2003.

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

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

Pursuant to a proprietary credit card securitization program that begins to expire in September 2005, the Company sold substantially all of its credit card receivables through a subsidiary in exchange for certificates representing undivided interests in such receivables. The Class A Certificates, which have an aggregate principal value of $225 million, were sold to investors. The holders of the Class A Certificates are entitled to monthly interest distributions from the Trust at the contractually-defined rate of one month LIBOR plus 0.27 percent annually. The distributions to the Class A Certificate holders are payable from the finance charge income generated by the credit card receivables held by the Trust. At November 1, 2003, the Company estimates a 100 basis point increase in LIBOR would result in an approximate annual decrease of $2.25 million in pretax income to the Company from its Retained Interests in the credit card portfolio held by the Trust.

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, as well as other key members of the Company’s management, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

THE NEIMAN MARCUS GROUP, INC.

PART II

Item 1. Legal Proceedings

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

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

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

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

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

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

(1) Filed herewith.

* Management contract or compensatory plan or arrangement.

(b) Reports on Form 8-K

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

On September 4, 2003, the Company filed a Current Report on Form 8-K under Item 9 to disclose under Regulation FD the Company’s press release dated September 4, 2003 announcing revenue results for the four weeks ended August 30, 2003.

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

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

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

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

On December 3, 2003, the Company filed a Current Report on Form 8-K under Item 9 to disclose under Regulation FD the Company’s press release dated December 3, 2003 announcing revenue results for the four weeks ended November 29, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

THE NEIMAN MARCUS GROUP, INC.


Signature	Title	Date


/s/ T. Dale Stapleton	Vice President and Controller	December 8, 2003
T. Dale Stapleton	(principal accounting officer)

EX-10.1 3 a03-5939_1ex10d1.htm EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

This Employment Agreement (this “Agreement”) is effective August 3, 2003, and is between The Neiman Marcus Group, Inc., a Delaware corporation (“NMG”), and Burton M. Tansky (the “Executive”).

1. Definitions. As used in this Agreement, the following terms have the following meanings:

(a) “Affiliate” means, with respect to any entity, any other corporation, organization, association, partnership, sole proprietorship or other type of entity, whether incorporated or unincorporated, directly or indirectly controlling or controlled by or under direct or indirect common control with such entity.

(b) “Annual Period” means NMG’s fiscal year.

(d) “Cause” means a finding by the Board of one or more of the following: (i) a breach of duty by the Executive in the course of his employment involving fraud, acts of dishonesty (other than inadvertent acts or omissions), disloyalty, or moral turpitude; (ii) conduct by the Executive that is materially detrimental to NMG, monetarily or otherwise, or reflects unfavorably on NMG or the Executive to such an extent that NMG’s best interests reasonably require the termination of the Executive’s employment; (iii) material acts or omissions of the Executive in violation of his obligations under this Agreement; (iv) the Executive’s material failure to comply with or unreasonable failure to enforce NMG’s policies concerning equal employment opportunity, including engaging in sexually or otherwise harassing conduct; (v) the Executive’s repeated insubordination; or (vi) the Executive’s conviction of or entry of a plea agreement or consent decree or similar arrangement with respect to a felony or any violation of federal or state securities laws.

(e) “Change of Control” means, and shall be deemed to have occurred, on or after the effective date of this Agreement:

(i) upon the consummation of any transaction or series of transactions under which NMG is merged or consolidated with any other company, other than a merger or consolidation that would result in the stockholders of NMG immediately prior thereto owning voting securities immediately thereafter (either by the securities such stockholders owned immediately prior thereto remaining outstanding or by the securities such stockholders owned immediately prior thereto being converted into voting securities of the surviving entity) representing more than 50% of the combined voting power of the voting securities of NMG, the acquiring entity or such surviving entity, as the case may be, outstanding immediately after such merger or consolidation;

(ii) if any person or group (as used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than NMG, any trustee or other fiduciary holding securities under an employee benefit plan of NMG, or any company owned, directly or indirectly, by the stockholders of NMG in substantially the same proportions as their ownership of

stock of NMG) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of NMG representing more than 40% of (A) the shares of NMG’s Class B Common Stock then outstanding or (B) the combined voting power (other than in the election of directors) of all voting securities of NMG then outstanding;

(iii) if, during any period of 24 consecutive months, individuals who at the beginning of such period constituted the Board, and any director whose election or nomination for election by NMG’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason (other than death or disability) to constitute at least a majority thereof; or

(iv) upon the complete liquidation of NMG or the sale or disposition by NMG of all or substantially all of NMG’s assets, other than a liquidation of NMG into a wholly-owned subsidiary.

(f) “Competitor” means (i) any person or entity (other than NMG or an Affiliate of NMG) that owns or operates a luxury specialty retail store; (ii) Saks Incorporated, Nordstrom, Inc., Barneys New York, Inc., or, if those corporate names are not correct, the businesses commonly referred to as “Saks,” “Nordstrom’s,” and “Barneys”; and (iii) the successors to and assigns of the persons or entities described in (ii).

(g) “Confidential Information” means, without limitation, all documents or information, in whatever form or medium, concerning or evidencing sales; costs; pricing; strategies; forecasts and long range plans; financial and tax information; personnel information; business, marketing and operational projections, plans and opportunities; and customer, vendor, and supplier information; but excluding any such information that is or becomes generally available to the public other than as a result of any breach of this Agreement or other unauthorized disclosure by the Executive.

(h) “Eligible Retirement,” for purposes of the special vesting rules of Paragraph 5(c)(iii), means the termination of the Executive’s employment with NMG or any Affiliate of NMG on or after the date as of which the Executive is eligible for a normal retirement benefit on account of reaching normal retirement age under the terms of The Neiman Marcus Group, Inc. Retirement Plan (or any successor plan); provided, however, that the Executive’s termination of employment shall not be an “Eligible Retirement” if the Executive was terminated by NMG for Cause.

(i) “Employment Termination Date” means the effective date of termination of the Executive’s employment as established under Paragraph 6(g).

(j) “Equity Incentive Award” means a stock option, restricted stock grant, restricted stock unit, or other equity-based incentive award granted pursuant to The Neiman Marcus Group, Inc. 1997 Incentive Plan (or any successor plan) or any other equity incentive plan, program or arrangement of NMG or its Affiliates.

(k) “Good Reason” means any of the following actions if taken without the Executive’s prior consent: (i) any material failure by NMG to comply with its obligations under Paragraph 5 (Compensation and Related Matters); (ii) any material failure by NMG to comply with its obligations under Paragraph 20 (Assumption by Successor); (iii) a material reduction in the Executive’s responsibilities or duties except in accordance with the terms of this Agreement; (iv) any material failure by NMG to comply with its obligations under Paragraph 4(b) (Executive’s responsibilities during the Senior Executive Term); (v) any permanent relocation of the Executive’s place of business to a location 50 miles or more from the current location; (vi) the reduction in title of the Executive as Chief Executive Officer except in accordance with the terms of this Agreement; (vii) following a Change of Control, the failure of the parties to reach an agreement regarding the Executive’s responsibilities during the Senior Executive Term after a reasonable period of negotiation in accordance with Paragraph 4(b) unless NMG offers to retain the Executive in the position of Chief Executive Officer of NMG; or (viii) a material breach of this Agreement by NMG; provided that (iii) and (vi) shall not apply after the end of the CEO Term.

(l) “Inability to Perform” means and shall be deemed to have occurred if the Executive has been determined under NMG’s long-term disability plan to be eligible for long-term disability benefits. In the absence of the Executive’s participation in such plan, “Inability to Perform” means that, in the Board’s sole judgment, the Executive is unable to perform any of the material duties of his regular position because of an illness or injury for (i) 80% or more of the normal working days during six consecutive calendar months or (ii) 50% or more of the normal working days during twelve consecutive calendar months.

(m) “Target Bonus” means the target bonus under NMG’s annual incentive bonus program(s).

(n) “Work Product” means all ideas, works of authorship, inventions and other creations, whether or not patentable, copyrightable, or subject to other intellectual-property protection, that are made, conceived, developed or worked on in whole or in part by the Executive while employed by NMG and/or any of its Affiliates, that relate in any manner whatsoever to the business, existing or proposed, of NMG and/or any of its Affiliates, or any other business or research or development effort in which NMG and/or any of its Affiliates engages during the Executive’s employment. Work Product includes any material previously conceived, made, developed or worked on during the Executive’s employment with NMG prior to the effective date of this Agreement.

2. Employment. NMG agrees to continue to employ the Executive (who previously was employed at-will), and the Executive agrees to continue to be employed, for the period set forth in Paragraph 3, in the position and with the duties and responsibilities set forth in Paragraph 4, and upon the other terms and conditions set out in this Agreement.

3. Term. The employment of the Executive as provided in Paragraph 2 shall be for five consecutive Annual Periods, commencing on August 3, 2003 (the “Employment Term”), unless

sooner terminated as provided in this Agreement. The Employment Term is divided into two periods, the “CEO Term” and the “Senior Executive Term,” as defined in Paragraph 4. The Executive’s employment will end upon the expiration of the Employment Term, but the end of the Executive’s employment in that circumstance shall not constitute a termination of employment by either party under this Agreement or give rise to any of the obligations of NMG that arise under this Agreement as a result of a termination of employment.

4. Position and Duties.

(a) During the first three Annual Periods of the Employment Term (the “CEO Term”), the Executive shall serve as the Chief Executive Officer of NMG. In such capacity, the Executive, subject to the ultimate control and direction of the Board, shall have and exercise direct charge of and general supervision over the business and affairs of NMG. In addition, the Executive shall have such other duties, functions, responsibilities, and authority as are from time to time delegated to the Executive by the Board; provided, however, that such duties, functions, responsibilities, and authority are reasonable and customary for a person serving in the same or similar capacity of an enterprise comparable to NMG. The Executive shall report and be accountable to the Board. The Executive and NMG acknowledge that one purpose of this Agreement is to provide for a smooth and orderly transition to a new chief executive officer in the future. Accordingly, during the CEO Term the Executive agrees to work with reasonable diligence to identify a successor to the position of Chief Executive Officer of NMG. Nothing in this Agreement, however, prohibits the Board from undertaking its own search for a successor to the position.

(b) During the last two Annual Periods of the Employment Term (the “Senior Executive Term”), the Executive shall be employed in a meaningful executive or consulting role as determined by the Board; provided, however, that in the event that a Change of Control occurs prior to or during the Senior Executive Term, then during the period of the Senior Executive Term following the Change of Control, the Executive shall be employed in such senior executive, advisory, or consulting capacity or capacities as may be mutually agreed on in good faith from time to time by the Executive and the Board.

(c) During the Employment Term, the Executive shall devote his full time, skill, and attention and his best efforts to the business and affairs of NMG to the extent necessary to discharge fully, faithfully, and efficiently the duties and responsibilities delegated and assigned to the Executive in or pursuant to this Agreement, except for usual, ordinary, and customary periods of vacation and absence due to illness or other disability. Notwithstanding the foregoing, the Executive may (i) subject to the approval of the Board, serve as a director or as a member of an advisory board of a noncompeting company, (ii) serve as an officer or director or otherwise participate in non-profit educational, welfare, social, religious and civil organizations, including, without limitation, all such positions and participation in effect as of the effective date of this Agreement, and (iii) manage personal and family investments; provided, however, that any such activities as described in (i), (ii) or (iii) of the preceding provisions of this paragraph do not significantly interfere with the

performance and fulfillment of the Executive’s duties and responsibilities as an executive of NMG in accordance with this Agreement.

(d) In connection with the Executive’s employment by NMG under this Agreement, the Executive shall be based at the principal executive offices of NMG in Dallas, Texas, except for such reasonable travel as the performance of the Executive’s duties in the business of NMG may require.

(e) All services that the Executive may render to NMG or any of its Affiliates in any capacity during the Employment Term shall be deemed to be services required by this Agreement and the consideration for such services is that provided for in this Agreement.

5. Compensation and Related Matters.

(a) Base Salary. During each Annual Period of the Employment Term, NMG shall pay to the Executive for his services under this Agreement an annual base salary (“Base Salary”). The Base Salary on the effective date of this Agreement shall be at least $1,200,000.00. The Base Salary will be reviewed annually and is subject to adjustment at the discretion of the Board, but in no event shall NMG pay the Executive a Base Salary less than that set forth above. The Base Salary shall be payable in installments in accordance with the general payroll practices of NMG, or as otherwise mutually agreed upon.

(b) Annual Incentives. The Executive will participate in NMG’s annual incentive bonus program(s) applicable to the Executive’s position, in accordance with the terms of such program(s). The Executive’s Target Bonus on the effective date of this Agreement is 65% of his Base Salary. The Target Bonus percentage may be adjusted but may not be reduced below 65% of the Executive’s Base Salary. The actual amount of any annual incentive bonus paid to the Executive will be determined according to the terms of the annual incentive bonus program(s), including any such terms that place the amount of any annual incentive bonus within the discretion of the Board.

(i) CEO Term. With respect to the CEO Term, the Executive shall participate in The Neiman Marcus Group, Inc. 1997 Incentive Plan (or any successor plan) in a manner that is consistent with the participation of other senior executives of NMG.

(ii) Senior Executive Term. With respect to the Senior Executive Term, any participation of the Executive in The Neiman Marcus Group, Inc. 1997 Incentive Plan (or any successor plan) will be at the sole discretion of the Board.

(iii) Special Vesting. The provisions of any Equity Incentive Award to the contrary notwithstanding, in the event the Executive’s employment with NMG or any of its Affiliates is terminated by NMG for reasons other than Cause, is terminated because of the Executive’s death, or terminates on account of the Executive’s Eligible Retirement, then:

(A) with respect to any stock option granted to the Executive by NMG or any of its Affiliates that is outstanding as of the effective date of this Agreement or granted to the Executive by NMG or any of its Affiliates on or after such effective date, such stock options will not terminate on account of such termination of employment and will remain outstanding and will continue to vest and/or become exercisable in accordance with the schedule set forth in the option agreement or other instrument governing the option as if the Executive’s employment had not terminated, until the earlier of ten years after the date the option was granted or five years after the date of such termination of employment;

(B) with respect to any restricted stock issued to the Executive by NMG or any of its Affiliates as of the effective date of this Agreement or issued to the Executive by NMG or any of its Affiliates on or after such effective date that has not yet vested as of the date of such termination of employment, such restricted stock will not be forfeited on account of such termination of employment and will continue to vest so that the restrictions imposed on such restricted stock shall continue to lapse in accordance with the vesting schedule set forth in the restricted stock agreement or other governing instrument as if the Executive’s employment had not terminated, until five years after the date of such termination of employment; and

(C) with respect to any restricted stock units granted to the Executive by NMG or any of its Affiliates on or after the effective date of this Agreement that have not yet vested as of the date of such termination of employment, such restricted stock units will not be forfeited on account of such termination of employment and will continue to vest in accordance with the vesting schedule set forth in the restricted stock unit agreement or other governing instrument as if the Executive’s employment had not terminated, until five years after the date of such termination of employment.

The provisions of this Paragraph 5(c)(iii) are not intended to supersede or override any noncompetition, confidentiality, nondisparagement, nonsolicitation or similar obligations set forth in any Equity Incentive Award.

(iv) SERP Enhancement. At the time of the Executive’s termination of employment with NMG and all of its Affiliates, the Executive’s years of service for purposes of calculating his benefit under The Neiman Marcus Group, Inc. Supplemental Executive Retirement Plan (or any successor plan) (the “SERP”) shall be determined by multiplying his actual service for purposes of the SERP by 2, subject to the 25-year maximum set forth in the SERP.

(d) Employee Benefits. During the Employment Term, the Executive shall be entitled to participate in all employee benefit plans, programs, and arrangements that are generally made available by NMG to its senior executives, including without limitation NMG’s life insurance, long-term disability, and health plans. The Executive agrees to cooperate and participate in any medical or physical examinations as may be required by any insurance company in connection with the

applications for such life and/or disability insurance policies.

(e) Fringe Benefits. The Executive will be entitled to the perquisites and other fringe benefits that are made available by NMG to its senior executives generally and to such perquisites and fringe benefits that are made available by NMG to the Executive in particular, subject to any applicable terms and conditions of any specific perquisite or other fringe benefit.

(f) Expenses. The Executive shall be entitled to receive reimbursement for all reasonable expenses incurred by the Executive in performing his duties and responsibilities under this Agreement, consistent with NMG’s policies or practices for reimbursement of expenses incurred by other NMG senior executives.

(g) Vacations. During the Employment Term, the Executive shall be eligible for vacation, sick pay, and other paid and unpaid time off in accordance with the policies and practices of NMG. The Executive agrees to use his vacation and other paid time off at such times that are (i) consistent with the proper performance of his duties and responsibilities and (ii) mutually convenient for NMG and the Executive.

(h) Indemnification. The Executive will be entitled to indemnification on the same terms as indemnification is made available by NMG to its other senior executives, whether through NMG’s bylaws or otherwise.

6. Termination of Employment.

(a) Death. The Executive’s employment shall terminate automatically upon his death.

(b) Inability to Perform. In the event of the Executive’s Inability to Perform during the Employment Term, NMG may notify the Executive of NMG’s termination of the Executive’s employment.

(c) Termination by NMG for Cause. NMG may terminate the Executive’s employment for Cause. To exercise its right to terminate the Executive pursuant to provision (iii) or provision (v) of the definition of Cause, however, NMG must first provide the Executive with a reasonable period of time to correct the circumstances or events, to the extent that they may reasonably be corrected, that NMG contends give rise to the existence of Cause under such provision. Prior to terminating the Executive’s employment for Cause under this Paragraph 6(c), NMG must provide the Executive with a written notice of its intent to terminate his employment for Cause. Such written notice must specify the particular act or acts or failure(s) to act that form(s) the basis for the decision to so terminate the Executive’s employment for Cause. The Executive will be given the opportunity within 30 calendar days of his receipt of such notice to meet with the Board to defend himself with regard to the alleged act or acts or failure(s) to act. If at the conclusion of or following such a meeting, the Board decides to proceed with the termination of the Executive’s employment for Cause, such a termination will be effected by providing the Executive with a Notice of Termination

under Paragraph 6(f). Upon or after NMG’s issuance of the notice of intent to terminate the Executive’s employment for Cause, NMG may suspend the Executive with pay pending the Board’s decision whether to proceed with the termination.

(d) Termination by the Executive for Good Reason. The Executive may terminate his employment for Good Reason. To exercise his right to terminate for Good Reason, the Executive must provide written notice to NMG of his belief that Good Reason exists, and that notice shall describe the circumstance believed to constitute Good Reason. If that circumstance may reasonably be remedied, NMG shall have 30 days to effect that remedy. If not remedied within that 30-day period, the Executive may submit a Notice of Termination; provided, however, that the Notice of Termination invoking the Executive’s right to terminate his employment for Good Reason must be given no later than 60 days after the later of (i) the first date the Executive knew or should have known that Good Reason existed, and (ii) the end of NMG’s 30-day cure period, if applicable; otherwise, the Executive is deemed to have accepted the circumstance(s) that may have given rise to the existence of Good Reason.

(e) Termination by Either Party Without Cause or Without Good Reason. Either NMG or the Executive may terminate the Executive’s employment without Cause or Good Reason upon at least six months’ prior written notice to the other party.

(f) Notice of Termination. Any termination of the Executive’s employment by NMG or by the Executive (other than a termination pursuant to Paragraph 6(a)) shall be communicated by a Notice of Termination. A “Notice of Termination” is a written notice that must (i) indicate the specific termination provision in this Agreement relied upon; (ii) in the case of a termination for Inability to Perform, Cause, or Good Reason, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision invoked, including the particular act or acts or failure(s) to act that is or are the basis of any termination for Cause or Good Reason; and (iii) if the termination is by the Executive under Paragraph 6(e), or by NMG for any reason, specify the Employment Termination Date. The failure by NMG to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Cause shall not waive any right of NMG or preclude NMG from asserting such fact or circumstance in enforcing NMG’s rights.

(g) Employment Termination Date. The Employment Termination Date shall be as follows: (i) if the Executive’s employment is terminated by his death, the date of his death; (ii) if the Executive’s employment is terminated by NMG because of his Inability to Perform or for Cause, the date specified in the Notice of Termination, which date shall be no earlier than the date such notice is given; (iii) if the Executive’s employment is terminated by the Executive for Good Reason, the date on which the Notice of Termination is given; or (iv) if the termination is under Paragraph 6(e), the date specified in the Notice of Termination, which date shall be no earlier than six months after the date such notice is given.

(h) Resignation. In the event of termination of the Executive’s employment (for any

reason other than the death of the Executive), the Executive agrees that if at such time he is a member of the Board or is an officer of NMG or a director or officer of any of its Affiliates, he shall be deemed to have resigned from such position(s) effective on the Employment Termination Date.

7. Compensation Upon Termination of Employment.

(a) Death. If the Executive’s employment is terminated by reason of the Executive’s death, NMG shall pay to the Executive’s estate (i) any unpaid portion of the Executive’s Base Salary through the Employment Termination Date (the “Compensation Payment”), (ii) any accrued but unused vacation days (the “Vacation Payment”), (iii) any reimbursement for business travel and other expenses to which the Executive is entitled (the “Reimbursement”), and (iv) an amount of annual incentive pay, as described in Paragraph 5(b), equal to a prorated portion of the Target Bonus amount for the Annual Period in which the Employment Termination Date occurs (the “Prorated Bonus”). This Paragraph 7(a) does not limit the entitlement of the Executive’s estate or beneficiaries to any death or other benefits to which the Executive may be entitled under any life insurance, stock ownership, stock options, or other benefit plan or policy that is maintained by NMG for the Executive’s benefit.

(b) Inability to Perform. If the Executive’s employment is terminated by reason of the Executive’s Inability to Perform, NMG shall pay to the Executive (i) the Compensation Payment, (ii) the Vacation Payment, (iii) the Reimbursement, and (iv) the Prorated Bonus. This Paragraph 7(b) does not limit the entitlement of the Executive to any amounts payable pursuant to the terms of any applicable disability insurance plan, policy, or similar arrangement that is maintained by NMG for the Executive’s benefit.

(c) Termination by the Executive Without Good Reason. If the Executive’s employment is terminated by the Executive pursuant to and in compliance with Paragraph 6(e), NMG shall pay to the Executive (i) the Compensation Payment, (ii) the Vacation Payment, (iii) the Reimbursement, and (iv) the Prorated Bonus.

(d) Termination for Cause. If the Executive’s employment is terminated by NMG for Cause, NMG shall pay to the Executive (i) the Compensation Payment, (ii) the Vacation Payment, and (iii) the Reimbursement.

(e) Termination Without Cause or With Good Reason. If the Executive’s employment is terminated by NMG for any reason other than death, Inability to Perform, or Cause, or is terminated by the Executive for Good Reason, NMG shall pay to the Executive (i) the Compensation Payment, (ii) the Vacation Payment, and (iii) the Reimbursement. In addition, NMG will continue to pay to the Executive the Base Salary provided for in Paragraph 5(a) and the Target Bonus under Paragraph 5(b), at the level in effect as of the Employment Termination Date and at the time and in the manner such compensation would have been paid had the Executive’s employment not been terminated, for the greater of (A) the period of time remaining after the Employment Termination Date and before the expiration of the Employment Term, but not to exceed three years, or (B) one year (collectively,

the “Continuing Payments”); provided, however, that NMG’s obligation to make the Continuing Payments is limited as follows:

(i) if, in the reasonable judgment of NMG, the Executive engages in any conduct that violates Paragraph 8 or engages in any of the Restricted Activities described in Paragraph 9, NMG’s obligation to provide the Continuing Payments, if any such obligation remains, shall end as of the date NMG so notifies the Executive in writing; provided, however, that NMG shall reinstate such payments if within 30 days of the date NMG so notifies the Executive in writing, the Executive provides information to NMG that NMG determines is sufficient to establish that the Executive did not engage in any conduct that violated Paragraph 8 or engage in any of the Restricted Activities described in Paragraph 9;

(ii) if the Executive is arrested or indicted for any felony, other serious criminal offense, or any violation of federal or state securities laws, or has any civil enforcement action brought against him by any regulatory agency, for actions or omissions related to his employment with NMG or any of its Affiliates, or if NMG reasonably believes that the Executive has committed any act or omission, either during his employment under this Agreement or if related to such employment thereafter, that during his employment would have entitled NMG to terminate his employment for Cause under provisions (i), (ii), (iv), or (vi) of the definition of Cause, then NMG may suspend any remaining Continuing Payments under this Paragraph 7(e) until the final resolution of such criminal or civil proceedings or until the Board has made a final determination as to whether the Executive committed such an act or omission. If the Executive is found guilty or enters into a plea agreement, consent decree or similar arrangement with respect to any such criminal or civil proceedings, or if the Board makes a finding that the Executive has committed such an act or omission, (1) NMG’s obligation to provide the Continuing Payments shall immediately end, and (2) the Executive shall repay to NMG, within 30 days after a written request by NMG, any Continuing Payments paid to him. If any such criminal or civil proceedings do not result in a finding of guilt or the entry of a plea agreement or consent decree or similar arrangement, or if the Board makes a finding that the Executive has not committed such an act or omission, NMG shall pay to the Executive any Continuing Payments that it has suspended, with interest on such suspended Continuing Payments at its cost of funds, and shall make any remaining Continuing Payments due under this Paragraph 7(e).

(f) Termination Following Change of Control. If, within the two-year period following a Change of Control, the Executive’s employment with NMG or an Affiliate or successor of NMG is terminated for any reason other than death, Inability to Perform, or Cause, or is terminated by the Executive for Good Reason, NMG shall pay to the Executive, in lieu of any payments under Paragraph 7(e), the following: (i) the Compensation Payment; (ii) the Vacation Payment; (iii) the Reimbursement; (iv) a lump-sum amount equivalent to two times the Executive’s then-current Base Salary; and (v) a lump-sum amount equivalent to two times the Executive’s then-current Target Bonus. The amounts specified in (iv) and (v) of this Paragraph 7(f) shall be paid to the Executive within five business days after the Employment Termination Date.

(g) Medical and Dental Insurance. If the Executive’s employment with NMG or any Affiliate of NMG ends on account of (i) a termination by NMG for any reason other than for death or Cause, or (ii) a termination by the Executive for Good Reason, the Executive will receive, in addition to any other payments due under this Agreement, the following benefit: if, at the time his employment ends, the Executive participates in one or more health plans offered by NMG and the Executive is eligible for and elects to receive continued coverage under such plans in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) or any successor law, NMG will reimburse the Executive during the 18-month period following the Employment Termination Date or, if shorter, the period of such actual COBRA continuation coverage, for the total amount of the monthly COBRA premiums actually paid by the Executive for such continued health plan benefits.

(h) No Mitigation. The Executive will not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will the amount of any payment provided for under this Agreement be reduced by any profits, income, earnings, or other benefits received by the Executive from any source other than NMG or its successor.

(i) Offset. The Executive agrees that NMG may set off against, and he authorizes NMG to deduct from, any payments due to the Executive, or to his heirs, legal representatives, or successors, as a result of the termination of the Executive’s employment any amounts which may be due and owing to NMG by the Executive, whether arising under this Agreement or otherwise.

8. Confidential Information.

(a) The Executive acknowledges and agrees that (i) NMG is engaged in a highly competitive business; (ii) NMG has expended considerable time and resources to develop goodwill with its customers, vendors, and others, and to create, protect, and exploit Confidential Information; (iii) NMG must continue to prevent the dilution of its goodwill and unauthorized use or disclosure of its Confidential Information to avoid irreparable harm to its legitimate business interests; (iv) in the luxury specialty retail business, his participation in or direction of NMG’s day-to-day operations and strategic planning are an integral part of NMG’s continued success and goodwill; (v) given his position and responsibilities, he necessarily will be creating Confidential Information that belongs to NMG and enhances NMG’s goodwill, and in carrying out his responsibilities he in turn will be relying on NMG’s goodwill and the disclosure by NMG to him of Confidential Information; (vi) he will have access to Confidential Information that could be used by any Competitor of NMG in a manner that would irreparably harm NMG’s competitive position in the marketplace and dilute its goodwill; and (vii) he necessarily would use or disclose Confidential Information if he were to engage in competition with NMG.

(b) NMG acknowledges and agrees that the Executive must have and continue to have throughout his employment the benefits and use of its and its Affiliates’ goodwill and Confidential Information in order to properly carry out his responsibilities. NMG accordingly promises upon

execution and delivery of this Agreement to provide the Executive immediate access to new and additional Confidential Information and authorize him to engage in activities that will create new and additional Confidential Information.

(c) NMG and the Executive thus acknowledge and agree that during the Executive’s employment with NMG and upon execution and delivery of this Agreement he (i) has received, will receive, and will continue to receive, Confidential Information that is unique, proprietary, and valuable to NMG and/or its Affiliates; (ii) has created, will create, and will continue to create, Confidential Information that is unique, proprietary, and valuable to NMG and/or its Affiliates; and (iii) has benefited, will benefit, and will continue to benefit, including without limitation by way of increased earnings and earning capacity, from the goodwill NMG and its Affiliates have generated and from the Confidential Information.

(d) Accordingly, the Executive acknowledges and agrees that at all times during his employment by NMG and/or any of its Affiliates and thereafter:

(i) all Confidential Information shall remain and be the sole and exclusive property of NMG and/or its Affiliates;

(ii) he will protect and safeguard all Confidential Information;

(iii) he will hold all Confidential Information in strictest confidence and not, directly or indirectly, disclose or divulge any Confidential Information to any person other than an officer, director, or employee of, or legal counsel for, NMG or its Affiliates, to the extent necessary for the proper performance of his responsibilities unless authorized to do so by NMG or compelled to do so by law or valid legal process;

(iv) if he believes he is compelled by law or valid legal process to disclose or divulge any Confidential Information, he will notify NMG in writing within 24 hours after receipt of legal process or other writing that causes him to form such a belief, or as soon as practicable if he receives less than 24 hours’ notice, so that NMG may defend, limit, or otherwise protect its interests against such disclosure;

(v) at the end of his employment with NMG for any reason or at the request of NMG at any time, he will return to NMG all Confidential Information and all copies thereof, in whatever tangible form or medium, including electronic; and

(vi) absent the promises and representations of the Executive in this Paragraph 8 and in Paragraph 9, NMG would require him immediately to return any tangible Confidential Information in his possession, would not provide the Executive with new and additional Confidential Information, would not authorize the Executive to engage in activities that will create new and additional Confidential Information, and would not enter or have entered into this Agreement.

9. Noncompetition and Nondisparagement Obligations. In consideration of NMG’s promises to provide the Executive with new and additional Confidential Information and to authorize him to engage in activities that will create new and additional Confidential Information upon execution and delivery of this Agreement, and the other promises and undertakings of NMG in this Agreement, the Executive agrees that, while he is employed by NMG and/or any of its Affiliates and for a three-year period following the end of that employment for any reason, he shall not engage in any of the following activities (the “Restricted Activities”):

(a) He will not directly or indirectly disparage NMG or its Affiliates, any products, services, or operations of NMG or its Affiliates, or any of the former, current, or future officers, directors, or employees of NMG or its Affiliates;

(b) He will not, whether on his own behalf or on behalf of any other individual, partnership, firm, corporation or business organization, either directly or indirectly solicit, induce, persuade, or entice, or endeavor to solicit, induce, persuade, or entice, any person who is then employed by or otherwise engaged to perform services for NMG or its Affiliates to leave that employment or cease performing those services;

(c) He will not, whether on his own behalf or on behalf of any other individual, partnership, firm, corporation or business organization, either directly or indirectly solicit, induce, persuade, or entice, or endeavor to solicit, induce, persuade, or entice, any person who is then a customer, supplier, or vendor of NMG or any of its Affiliates to cease being a customer, supplier, or vendor of NMG or any of its Affiliates or to divert all or any part of such person’s or entity’s business from NMG or any of its Affiliates; and

(d) He will not associate directly or indirectly, as an employee, officer, director, agent, partner, stockholder, owner, member, representative, or consultant, with any Competitor of NMG or any of its Affiliates, unless (i) he has advised NMG in writing in advance of his desire to undertake such activities and the specific nature of such activities; (ii) NMG has received written assurances (that will be designed, among other things, to protect NMG’s and its Affiliates’ goodwill, Confidential Information, and other important commercial interests) from the Competitor and the Executive that are, in NMG’s sole discretion, adequate to protect its interests; (iii) NMG, in its sole discretion, has approved in writing such association; and (iv) the Executive and the Competitor adhere to such assurances. This restriction (i) extends to the performance by the Executive, directly or indirectly, of the same or similar activities the Executive has performed for NMG or any of its Affiliates or such other activities that by their nature are likely to lead to the disclosure of Confidential Information, and (ii) with respect to the post-employment restriction, applies to any Competitor that has a retail store within 50 miles of, or in the same Metropolitan Statistical Area as, any retail store of NMG or any of its Affiliates. The Executive shall not be in violation of this Paragraph 9(d) solely as a result of his investment in stock or other securities of a Competitor or any of its Affiliates listed on a national securities exchange or actively traded in the over-the-counter market if he and the members of his immediate family do not, directly or indirectly, hold more than a total of one percent of all such shares of stock or other securities issued and outstanding. The

Executive acknowledges and agrees that engaging in the activities restricted by this Paragraph 9(d) would result in the inevitable disclosure or use of Confidential Information for the Competitor’s benefit or to the detriment of NMG or its Affiliates.

The Executive acknowledges and agrees that the restrictions contained in this Paragraph 9 are ancillary to an otherwise enforceable agreement, including without limitation the mutual promises and undertakings set forth in Paragraph 8; that NMG’s promises and undertakings set forth in Paragraph 8, the Executive’s position and responsibilities with NMG, and NMG granting to the Executive ownership in NMG in the form of NMG stock, give rise to NMG’s interest in restricting the Executive’s post-employment activities; that such restrictions are designed to enforce the Executive’s promises and undertakings set forth in this Paragraph 9 and his common-law obligations and duties owed to NMG and its Affiliates; that the restrictions are reasonable and necessary, are valid and enforceable under Texas law, and do not impose a greater restraint than necessary to protect NMG’s goodwill, Confidential Information, and other legitimate business interests; that he will immediately notify NMG in writing should he believe or be advised that the restrictions are not, or likely are not, valid or enforceable under Texas law or the law of any other state that he contends or is advised is applicable (the “Enforceability Notification”); that the mutual promises and undertakings of NMG and the Executive under Paragraphs 8 and 9 are not contingent on the duration of the Executive’s employment with NMG; and that absent the promises and representations made by the Executive in this Paragraph 9 and Paragraph 8, NMG would require him to return any Confidential Information in his possession, would not provide the Executive with new and additional Confidential Information, would not authorize the Executive to engage in activities that will create new and additional Confidential Information, and would not enter or have entered into this Agreement. Notwithstanding the foregoing, NMG agrees that the Executive’s conduct in providing the Enforceability Notification under this Paragraph 9(d) shall not constitute a waiver of any attorney-client privilege between the Executive and his attorney(s).

10. Intellectual Property.

(a) In consideration of NMG’s promises and undertakings in this Agreement, the Executive agrees that all Work Product will be disclosed promptly by the Executive to NMG, shall be the sole and exclusive property of NMG, and is hereby assigned to NMG, regardless of whether (i) such Work Product was conceived, made, developed or worked on during regular hours of his employment or his time away from his employment, (ii) the Work Product was made at the suggestion of NMG; or (iii) the Work Product was reduced to drawing, written description, documentation, models or other tangible form. Without limiting the foregoing, the Executive acknowledges that all original works of authorship that are made by the Executive, solely or jointly with others, within the scope of his employment and that are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act (17 U.S.C., Section 101), and are therefore owned by NMG from the time of creation.

(b) The Executive agrees to assign, transfer, and set over, and the Executive does hereby assign, transfer, and set over to NMG, all of his right, title and interest in and to all Work Product,

without the necessity of any further compensation, and agrees that NMG is entitled to obtain and hold in its own name all patents, copyrights, and other rights in respect of all Work Product. The Executive agrees to (i) cooperate with NMG during and after his employment with NMG in obtaining patents or copyrights or other intellectual-property protection for all Work Product; (ii) execute, acknowledge, seal and deliver all documents tendered by NMG to evidence its ownership thereof throughout the world; and (iii) cooperate with NMG in obtaining, defending and enforcing its rights therein.

(c) The Executive represents that there are no other contracts to assign inventions or other intellectual property that are now in existence between the Executive and any other person or entity. The Executive further represents that he has no other employment or undertakings that might restrict or impair his performance of this Agreement. The Executive will not in connection with his employment by NMG, use or disclose to NMG any confidential, trade secret, or other proprietary information of any previous employer or other person that the Executive is not lawfully entitled to disclose.

11. Reformation. If the provisions of Paragraphs 8, 9, or 10 are ever deemed by a court to exceed the limitations permitted by applicable law, the Executive and NMG agree that such provisions shall be, and are, automatically reformed to the maximum limitations permitted by such law.

12. Assistance in Litigation. After the Employment Term, the Executive shall, upon reasonable notice, furnish such information and assistance to NMG or any of its Affiliates as may reasonably be requested by NMG in connection with any litigation in which NMG or any of its Affiliates is, or may become, a party. NMG shall reimburse the Executive for all reasonable out-of-pocket expenses, including travel expenses, incurred by the Executive in rendering such assistance, but shall have no obligation to compensate the Executive for his time in providing information and assistance in accordance with this Paragraph 12.

13. No Obligation to Pay. With regard to any payment due to the Executive under this Agreement, it shall not be a breach of any provision of this Agreement for NMG to fail to make such payment to the Executive if (i) NMG is legally prohibited from making the payment; (ii) NMG would be legally obligated to recover the payment if it was made; or (iii) the Executive would be legally obligated to repay the payment if it was made.

14. Legal Fees and Expenses. NMG will reimburse the Executive for all reasonable legal fees and expenses incurred by the Executive in connection with the preparation, review, and negotiation of this Agreement prior to its execution.

15. Survival. The expiration or termination of the Employment Term will not impair the rights or obligations of any party hereto that accrue hereunder prior to such expiration or termination, except to the extent specifically stated herein. In addition to the foregoing, NMG’s obligations under Paragraphs 5(h), 7, and 14, and the Executive’s obligations under Paragraphs 8, 9, 10 and 12, will survive the expiration or termination of Executive’s employment.

16. Withholding Taxes. NMG shall withhold from any payments to be made to the Executive pursuant to this Agreement such amounts (including social security contributions and federal income taxes) as shall be required by federal, state, and local withholding tax laws.

17. Notices. All notices, requests, demands, and other communications required or permitted to be given or made by either party shall be in writing and shall be deemed to have been duly given or made (a) when delivered personally, or (b) when deposited in the United States mail, first class registered or certified mail, postage prepaid, return receipt requested, to the party for which intended at the following addresses (or at such other addresses as shall be specified by the parties by like notice, except that notices of change of address shall be effective only upon receipt):

	(i)	If to NMG, at:

		The Neiman Marcus Group, Inc.
		Attn: General Counsel
		1618 Main Street
		Dallas, TX 75201

	(ii)	If to the Executive, at the Executive’s then-current home address on file with NMG.

18. Injunctive Relief. The Executive acknowledges and agrees that NMG would not have an adequate remedy at law and would be irreparably harmed in the event that any of the provisions of Paragraphs 8, 9, and 10 were not performed in accordance with their specific terms or were otherwise breached. Accordingly, the Executive agrees that NMG shall be entitled to equitable relief, including preliminary and permanent injunctions and specific performance, in the event the Executive breaches or threatens to breach any of the provisions of such Paragraphs, without the necessity of posting any bond or proving special damages or irreparable injury. Such remedies shall not be deemed to be the exclusive remedies for a breach or threatened breach of this Agreement by the Executive, but shall be in addition to all other remedies available to NMG at law or equity.

19. Binding Effect; No Assignment by the Executive; No Third Party Benefit. This Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legal representatives, successors, and assigns; provided, however, that the Executive shall not assign or otherwise transfer this Agreement or any of his rights or obligations herein. NMG is authorized to assign or otherwise transfer this Agreement or any of its rights or obligations herein to an Affiliate of NMG. The Executive shall not have any right to pledge, hypothecate, anticipate, or in any way create a lien upon any payments or other benefits provided under this Agreement; and no benefits payable under this Agreement shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or pursuant to the laws of descent and distribution. Nothing in this Agreement, express or implied, is intended to or shall confer upon any person other than the parties, and their respective heirs, legal representatives, successors, and

permitted assigns, any rights, benefits, or remedies of any nature whatsoever under or by reason of this Agreement.

20. Assumption by Successor. NMG shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all the business and/or assets of NMG, by agreement in writing in form and substance reasonably satisfactory to the Executive, expressly, absolutely, and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that NMG would be required to perform it if no such succession or assignment had taken place. If NMG fails to obtain such agreement by the effective time of any such succession or assignment, such failure shall be considered Good Reason; provided, however, that the compensation to which the Executive would be entitled upon a termination for Good Reason pursuant to Paragraph 7(e) shall be the sole remedy of the Executive for any failure by NMG to obtain such agreement. As used in this Agreement, “NMG” shall include any successor or assignee (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all the business and/or assets of NMG that executes and delivers the agreement provided for in this Paragraph 20 or that otherwise becomes obligated under this Agreement by operation of law.

21. Governing Law; Venue. This Agreement and the employment of the Executive shall be governed by the laws of the State of Texas except for its laws with respect to conflict of laws. The exclusive forum for any lawsuit arising from or related to the Executive’s employment or this Agreement shall be a state or federal court in Dallas County, Texas. This provision does not prevent NMG from removing to an appropriate federal court any action brought in state court. THE EXECUTIVE HEREBY CONSENTS TO, AND WAIVES ANY OBJECTIONS TO, REMOVAL TO FEDERAL COURT BY NMG OF ANY ACTION BROUGHT AGAINST IT BY THE EXECUTIVE.

22. JURY TRIAL WAIVER. IN THE EVENT THAT ANY DISPUTE ARISING FROM OR RELATED TO THIS AGREEMENT OR THE EXECUTIVE’S EMPLOYMENT WITH NMG RESULTS IN A LAWSUIT, BOTH NMG AND THE EXECUTIVE MUTUALLY WAIVE ANY RIGHT THEY MAY OTHERWISE HAVE FOR A JURY TO DECIDE THE ISSUES IN THE LAWSUIT, REGARDLESS OF THE PARTY OR PARTIES ASSERTING CLAIMS IN THE LAWSUIT OR THE NATURE OF SUCH CLAIMS. NMG AND THE EXECUTIVE IRREVOCABLY AGREE THAT ALL ISSUES IN SUCH A LAWSUIT SHALL BE DECIDED BY A JUDGE RATHER THAN A JURY.

23. Entire Agreement. This Agreement contains the entire agreement between the parties concerning the subject matter hereof and supersedes all prior agreements and understandings, written and oral, between the parties with respect to the subject matter of this Agreement. In particular, but without limitation, this Agreement supersedes and replaces in its entirety that certain Termination and Change of Control Agreement between the Executive and NMG dated October 6, 1999, as well as that certain letter, dated November 11, 1999, from Gerald T. Hughes of NMG to the Executive, both of which are hereby terminated.

24. Modification; Waiver. No person, other than pursuant to a resolution duly adopted by the members of the Board, shall have authority on behalf of NMG to agree to modify, amend, or waive any provision of this Agreement. Further, this Agreement may not be changed orally, but only by a written agreement signed by the party against whom any waiver, change, amendment, modification or discharge is sought to be enforced. Each party to this Agreement acknowledges and agrees that no breach of this Agreement by the other party or failure to enforce or insist on its or his rights under this Agreement shall constitute a waiver or abandonment of any such rights or defense to enforcement of such rights.

25. Construction. This Agreement is to be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties.

26. Severability. If any provision of this Agreement shall be determined by a court to be invalid or unenforceable, the remaining provisions of this Agreement shall not be affected thereby, shall remain in full force and effect, and shall be enforceable to the fullest extent permitted by applicable law.

27. Counterparts. This Agreement may be executed by the parties in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement.

IN WITNESS WHEREOF, NMG has caused this Agreement to be executed on its behalf by its duly authorized officer, and the Executive has executed this Agreement, effective as of the date first set forth above.

THE NEIMAN MARCUS GROUP, INC.

By:	/s/ NELSON A. BANGS	/s/ BURTON M. TANSKY
Printed Name: Nelson A. Bangs		Burton M. Tansky
Title: Senior Vice President

EX-31.1 4 a03-5939_1ex31d1.htm EX-31.1

EXHIBIT 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Burton M. Tansky, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Neiman Marcus Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s first fiscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2003

	/s/ BURTON M. TANSKY
	Burton M. Tansky President and Chief Executive Officer

EX-31.2 5 a03-5939_1ex31d2.htm EX-31.2

EXHIBIT 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, James E. Skinner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Neiman Marcus Group, Inc.;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2003

	/s/ JAMES E. SKINNER
	James E. Skinner Senior Vice President and Chief Financial Officer

EX-32 6 a03-5939_1ex32.htm EX-32

EXHIBIT 32

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the following certifications are being made to accompany the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended November 1, 2003:

Certification of Chief Executive Officer(1)

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of The Neiman Marcus Group, Inc. (the Company) hereby certifies, to such officer’s knowledge, that:

(i) the Quarterly Report on Form 10-Q of the Company for the fiscal quarter ended November 1, 2003 (the Report) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: December 8, 2003		/s/	Burton M. Tansky
	Burton M. Tansky
	President and Chief Executive Officer

Certification of Chief Financial Officer(1)

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: December 8, 2003		/s/	James E. Skinner
	James E. Skinner
	Senior Vice President and Chief Financial Officer

(1) A signed original for this written statement required by Section 906 has been provided to The Neiman Marcus Group, Inc. and will be retained by The Neiman Marcus Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.