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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934 for the fiscal year ended
May 30, 2002 of
THE MARCUS CORPORATION
250 East Wisconsin Avenue - Suite 1700
Milwaukee, Wisconsin 53202-4220
(414) 905-1000
A Wisconsin corporation
IRS Employer Identification No. 39-1139844
Commission File No. 1-12609
We have one class of securities registered pursuant to Section 12(b) of the Act:
our Common Stock, $1 par value, which is registered on the New York Stock
Exchange.
We do not have any securities registered pursuant to Section 12(g) of the Act.
We have 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.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in our definitive proxy statement incorporated by reference in Part
III of this Form 10-K.
The aggregate market value of the voting common equity held by non-affiliates as
of August 20, 2002 was $262,591,930. This value includes all shares of our
voting and non-voting common equity, except for shares beneficially owned by our
directors and executive officers listed in Part I below.
As of August 20, 2002, there were 19,749,998 shares of our Common Stock, $1 par
value, and 9,595,879 shares of our Class B, Common Stock, $1 par value,
outstanding.
Portions of our definitive Proxy Statement for our 2002 annual meeting of
shareholders, which will be filed with the Commission under Regulation 14A
within 120 days after the end of our fiscal year and, upon such filing, will be
incorporated by reference into Part III to the extent indicated therein.
PART I
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K and the
accompanying annual report to shareholders, particularly in the Shareholders'
Letter and Management's Discussion and Analysis, are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements may generally be identified as such because the context of such
statements will include words such as we "believe," "anticipate," "expect" or
words of similar import. Similarly, statements that describe our future plans,
objectives or goals are also forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties which may cause
results to differ materially from those expected, including, but not limited to,
the following: (i) our ability to successfully define and build the Baymont
brand within the "limited-service, mid-price without food and beverage" segment
of the lodging industry; (ii) the availability, in terms of both quantity and
audience appeal, of motion pictures for our theatre division; (iii) the effects
of increasing depreciation expenses and pre-opening and start-up costs due to
the capital intensive nature of our businesses; (iv) the effects of adverse
economic conditions in our markets, particularly with respect to our
limited-service lodging and hotels and resorts divisions; (v) the effects of
adverse weather conditions, particularly during the winter in the Midwest and in
our other markets; (vi) the effects on our occupancy and room rates from the
relative industry supply of available rooms at comparable lodging facilities in
our markets; (vii) the effects of competitive conditions in the markets served
by us; (viii) our ability to identify properties to acquire, develop and/or
manage and continuing availability of funds for such development; (ix) the
adverse impact on business and consumer spending on travel, leisure and
entertainment resulting from the September 11, 2001 terrorist attacks on the
United States, the United States' responses thereto and subsequent related
hostilities; and (x) our lack of comprehensive terrorist attack insurance.
Shareholders, potential investors and other readers are urged to consider these
factors carefully in evaluating the forward-looking statements and are cautioned
not to place undue reliance on such forward-looking statements. The
forward-looking statements made herein are made only as of the date of this Form
10-K and we undertake no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Item 1. Business.
General
We are engaged primarily in three business segments: limited-service
lodging; movie theatres; and hotels and resorts. (As a result of the May 2001
sale of our KFC restaurants, our former restaurant business segment is presented
as discontinued operations in our financial statements.)
As of May 30, 2002, our limited-service lodging operations included a chain
of 186 Baymont Inns & Suites limited-service facilities in 31 states, seven
Woodfield Suites all-suite hotels in Wisconsin, Colorado, Ohio, Illinois and
Texas and one Budgetel Inn in Wisconsin. A total of 85 of our Baymont Inns &
Suites were owned and operated by us, nine were operated under joint venture
agreements or management contracts and 92 were franchised.
As of May 30, 2002, our theatre operations included 47 movie theatres with
490 screens throughout Wisconsin, Ohio, Illinois and Minnesota, including three
Illinois movie theatres with 34 screens owned by a third party but managed by
us. We also operate a family entertainment center, Funset Boulevard, that is
adjacent to one of our theatres in Appleton, Wisconsin.
As of May 30, 2002, our hotels and resorts operations included six owned
and operated hotels and resorts in Wisconsin, California and Missouri. We also
manage five hotels for third parties in Wisconsin, Minnesota, Texas and
California and a vacation ownership development in Wisconsin.
Each of these business segments is discussed in detail below.
2
Strategic Plan
Our current strategic plans include the following goals and strategies:
o Continuing to define and build our Baymont Inns & Suites brand, with a goal
to be the "best in class" in the mid-price without food and beverage
segment of the lodging industry. We currently believe that most of our
limited-service lodging division's anticipated future growth in earnings
will ultimately come as a result of revenue growth at our Company-owned
inns (as the brand captures a greater share of its segment of the industry)
and from our emphasis on opening new franchised Baymont Inns and Baymont
Inns & Suites. As of the end of fiscal 2002, 11 new franchised properties
were under development, two to four of which are expected to open during
fiscal 2003. As a result of the reduced demand for lodging and a
constrained financing market for new hotel development in the aftermath of
September 11, industry supply growth has also slowed considerably.
Accordingly, we currently have significantly fewer new franchised inns in
development than we would have expected at this time. As conditions
improve, we hope to approve 25 to 35 new franchised properties per year
over the next few fiscal years. By emphasizing franchising, we believe the
Baymont brand may grow more rapidly, conserving our capital for other
strategic purposes. We also anticipate exploring additional growth of the
Baymont brand through potential acquisitions and joint venture investments,
focusing on selected key strategic urban and suburban markets. Our first
such planned joint venture involves the development of our first location
in an important California market. We are also currently in the early
stages of developing our first urban Baymont Inn & Suites in downtown
Chicago, Illinois, with an opening expected sometime in fiscal 2004.
o Maximizing the return on our significant recent investments in movie
theatres through both revenue and cost improvements. We have invested over
$200 million in our theatre division over the last six fiscal years, more
than doubling our number of Company-owned movie theatre screens from 219 at
the end of fiscal 1996 to 456 screens at the end of fiscal 2002. We also
offer stadium seating in approximately 85% of our first-run screens, the
highest percentage in the industry. We also entered the theatre management
business during fiscal 2002, signing an agreement to manage 34 screens for
another owner, bringing the total number of screens owned or managed by our
theatre division to 490 screens at year-end. With several of our smaller
theatres scheduled for closing and several selected screen additions
planned for existing locations, we do not anticipate our total screen count
to significantly change during fiscal 2003, unless attractive acquisition
opportunities present themselves.
o Maximizing the return on our significant recent investments in hotel
projects and doubling the number of rooms either managed or owned by our
hotels and resorts division to 6,000 rooms over the next three to five
years. Many of the recent growth opportunities for our hotels and resorts
division (Marcus Vacation Club, Hilton Madison, Hotel Phillips, Timber
Ridge Lodge and Hilton Milwaukee improvements) required a lengthy
development period during which significant capital was committed and the
related pre-opening costs and early start-up losses reduced division
operating income. We expect these recent development projects to provide
earnings growth opportunities during fiscal 2003 and beyond. We anticipate
that the majority of the potential growth in rooms managed will come from
management contracts for other owners. In some cases, we may own a partial
interest in the new managed properties. One strategy that we are currently
exploring involves the creation of an equity fund that would invest in
existing hotel properties. Under this strategy, we would make limited
equity investments and would enter into management contracts to manage the
properties for the fund.
The actual number, mix and timing of potential future new facilities and
expansions will depend in large part on industry and economic conditions, our
financial performance and available capital, the competitive environment,
evolving customer needs and trends, customer acceptance of the new Baymont
brand, our ability to increase the number of franchised Baymont locations at a
pace consistent with our current plans and the availability of attractive
opportunities. It is likely that our growth goals will continue to evolve and
change in response to these and other factors, and there can be no assurance
that these current goals will be achieved. The terrorist attacks of September
11, 2001 were unprecedented. We are unable to predict with certainty if or when
lodging demand will return to pre-September 11 levels. We believe that the
uncertainty associated with the war on terrorism and possible future terrorist
attacks will continue to hamper the travel and lodging industries during some or
all of fiscal 2003. Any additional terrorist attacks may have a similar or worse
effect on the lodging industry than that experienced as a result of the
September 11 attacks.
3
Limited-Service Lodging Operations
Baymont Inns & Suites
We own, operate or franchise a total of 186 limited-service facilities,
with over 17,000 available guest rooms, under the name "Baymont Inns & Suites"
in 31 states. A total of 92 of these Baymont Inns & Suites are owned and
operated by franchisees, 85 are owned and operated by us and nine are operated
by us under joint venture agreements or management contracts. During fiscal
2002, seven new properties owned and operated by our franchisees were opened. In
addition, 11 new franchised properties and one new owned property were under
construction or in development at fiscal year-end. During fiscal 2002, we sold
one joint venture Baymont Inn & Suites to a franchisee.
Targeted at the business traveler, Baymont Inns & Suites feature an
upscale, contemporary exterior appearance, are generally located in high traffic
commercial areas in close proximity to interstate highway exits and major
thoroughfares and vary in size between 53 and 186 guest rooms. We believe that
providing amenities usually associated with full-service hotels distinguishes
Baymont Inns & Suites from many of their competitors. These amenities include
executive conference centers, king-sized beds, free local telephone calls,
incoming fax transmissions, non-smoking rooms, in-room coffee makers, remote
control multi-channel televisions, extra-long telephone cords, large working
desks, lobby breakfasts, two-room suites, 25-inch televisions, fitness
facilities, voice mail, hair dryers, irons and ironing boards, complimentary
copies of USA Today, name brand soap and shampoo, fluffy towels and a frequent
stay reward program, Guest OvationsTM. To enhance customer security, all Baymont
Inns & Suites feature "card key" room locking systems, well-lighted parking
areas and all-night front desk staffing. The interior of each Baymont Inn &
Suites is refurbished in accordance with a strict periodic schedule.
In February 2002, we enhanced our Guest OvationsTM program by offering
program members complimentary upgrades to our "Ovations Rooms." Our Ovations
Rooms feature plush pillow-top mattresses, Down LiteTM pillows, free in-room
bottled water, enhanced workstations with executive-sized desks, comfortable
ergonomic chairs and task lamps with data ports. Ovations Rooms are also
available to guests who are not members of our Guest OvationsTM program at an
additional charge.
Baymont Inns & Suites has a national franchise program and we have placed
an increased emphasis on opening more franchised Baymont Inns & Suites, either
by opening new facilities or by selling existing facilities to franchisees. Our
franchisees pay an initial franchise fee and annual marketing assessments,
reservation system assessments and royalty fees based on room revenues. We are
qualified to sell, and anticipate ultimately selling, franchises in all 50
states. We have identified 15 to 20 owned Baymont Inns & Suites that we may sell
to new and existing franchisees. We believe that this strategy gives our
franchise partners the opportunity to develop a significant market presence
while allowing us to use the sales proceeds for other growth opportunities,
including developing Baymont Inns & Suites properties in new markets. Although
this strategy will result in reduced revenues until the sales proceeds are
reinvested, we expect that this strategy will ultimately increase our
profitability.
Woodfield Suites
We operate seven mid-priced, all-suite hotels under the name "Woodfield
Suites" in Illinois, Wisconsin, Colorado, Ohio and Texas. Woodfield Suites
offers all of its guests the use of a centrally-located swimming pool, whirlpool
and game room. Most suites have a bedroom and separate living room and feature
an extra-length bed, sleeper sofa for additional guests, microwave,
refrigerator, wet bar, television and hair dryer and some suites have a
kitchenette. All Woodfield Suites' guests receive a complimentary continental
breakfast and are invited to a complimentary cocktail hour. Meeting rooms and
two-line telephones equipped with dataports in every suite enhance Woodfield
Suites' appeal to business travelers.
Budgetel Inn
During fiscal 2002, we converted a Baymont Inn & Suites in Appleton,
Wisconsin to a Budgetel Inn. This was done in order to preserve certain legal
rights regarding the Budgetel name.
4
Hotels and Resorts Operations
The Pfister Hotel
We own and operate the Pfister Hotel, which is located in downtown
Milwaukee. The Pfister Hotel is a full service luxury hotel and has 307 guest
rooms (including 82 luxury suites and 176 tower rooms that we renovated during
fiscal 2002), three restaurants, two cocktail lounges and a 275-car parking
ramp. The Pfister also has 24,000 square feet of banquet and convention
facilities. The Pfister's banquet and meeting rooms accommodate up to 3,000
people and the hotel features two large ballrooms, including one of the largest
ballrooms in the Milwaukee metropolitan area, with banquet seating for 1,200
people. A portion of the Pfister's first-floor space is leased for use by retail
tenants. In fiscal 2002, the Pfister Hotel earned its 26th consecutive
four-diamond award from the American Automobile Association. The Pfister is also
a member of Preferred Hotels and Resorts Worldwide Association, an organization
of independent luxury hotels and resorts, and the Association of Historic Hotels
of America.
The Hilton Milwaukee City Center
We also own and operate the 729-room Hilton Milwaukee City Center. Several
aspects of Hilton's franchise program have benefited this hotel, including
Hilton's international centralized reservation and marketing system, advertising
cooperatives and frequent stay programs. The Hilton Milwaukee City Center has an
indoor water park and family fun center that features water slides, swimming
pools, a sand beach, lounge and restaurant. The hotel also has two cocktail
lounges, two restaurants, including a new steak house opened during fiscal 2002
and a new 870-car parking ramp that opened in July 2002.
Hilton Madison at Monona Terrace
We own and operate the 240-room Hilton Madison at Monona Terrace, which
opened in 2001. The Hilton Madison, which also benefits from the aspects of
Hilton's franchise program noted above, is connected by skywalk to the new
Monona Terrace Convention Center, has four meeting rooms totaling 2,400 square
feet, an indoor swimming pool, a fitness center, a lounge and a restaurant.
The Grand Geneva Resort & Spa
We also own and operate the Grand Geneva Resort & Spa in Lake Geneva,
Wisconsin, which is the largest convention resort in Wisconsin. This
full-facility destination resort is located on 1,300 acres and includes 355
guest rooms, 50,000 square feet of banquet, meeting and exhibit space, 6,600
square feet of ballroom space, three specialty restaurants, two cocktail
lounges, two championship golf courses, several ski-hills, two indoor and five
outdoor tennis courts, three swimming pools, a spa and fitness complex, horse
stables and an on-site airport.
We began selling units of a vacation ownership development that is adjacent
to The Grand Geneva Resort & Spa during fiscal 2000 and operate 30 timeshare
units and a timeshare sales center. An additional 32 units are expected to be
built during fiscal 2003. Our timeshare owners can participate in exchange
programs through Resort Condominiums International.
Miramonte Resort
We own and operate the Miramonte Resort in Indian Wells, California, a
boutique luxury resort located on 11 landscaped acres. The resort includes 14
two-story Tuscan style buildings with a total of 226 guest rooms, one
restaurant, one lounge and 9,500 square feet of banquet, meeting and exhibit
space, including a 5,000 square foot grand ballroom, a fully equipped fitness
center and two outdoor swimming pools, each with an adjacent jacuzzi spa and
sauna, outdoor meeting facilities and a golf concierge. During fiscal 2002, the
Miramonte Resort earned its 4th consecutive four-diamond award from the American
Automobile Association.
Hotel Phillips
We purchased the Hotel Phillips, a 217-room hotel in Kansas City, Missouri,
in fiscal 2000. We closed the property during fall of 2000 and undertook a
complete restoration of this landmark hotel. The hotel, which reopened
5
in September 2001, has conference rooms totaling 5,600 square feet of meeting
space, a 2,300 square foot ballroom, a restaurant and a lounge.
Operated and Managed Hotels
We operate the Crowne Plaza-Northstar Hotel in Minneapolis, Minnesota. The
Crowne Plaza-Northstar Hotel is located in downtown Minneapolis and has 226
guest rooms, 13 meeting rooms, 6,370 square feet of ballroom and convention
space, a restaurant, a cocktail lounge and an exercise facility.
We manage the Hotel Mead in Wisconsin Rapids, Wisconsin. The Hotel Mead has
157 guest rooms, 10 meeting rooms totaling 14,000 square feet of meeting space,
two cocktail lounges, two restaurants and an indoor pool with a sauna and
whirlpool.
We operate Beverly Garland's Holiday Inn in North Hollywood, California.
The Beverly Garland has 257 guest rooms, including 12 suites, meeting space for
up to 600, including an amphitheater and ballroom, an outdoor swimming pool and
lighted tennis courts. The mission-style hotel is located on seven acres near
Universal Studios.
We also manage the Timber Ridge Lodge, an indoor/outdoor waterpark and
condominium complex in Lake Geneva, Wisconsin. The Timber Ridge Lodge, which
opened in 2001, is a 225-unit condominium hotel adjacent to our Grand Geneva
Resort & Spa. The Timber Ridge Lodge has meeting rooms totaling 3,640 square
feet, a general store, a restaurant-cafe, a snack bar and lounge, a
state-of-the-art fitness center and an entertainment arcade.
Finally, we operate the Hilton Garden Inn Houston NW/Chateau in Houston,
Texas, which opened in May 2002. The Hilton Garden Inn has 171 guest rooms, a
ballroom, a restaurant, a fitness center, a convenience mart and a swimming
pool. The hotel is a part of Chateau Court, a 13 acre, European-style mixed-use
development that also includes retail space and an office village.
Theatre Operations
At the end of fiscal 2002, we owned or operated 47 movie theatre locations
with a total of 490 screens in Wisconsin, Illinois, Minnesota and Ohio for an
average of 10.4 screens per location, compared to an average of 9.8 screens per
location at the end of fiscal 2001 and 9.4 at the end of fiscal 2000. Included
in the fiscal 2002 totals are three theatres with 34 screens we manage for
another owner. Our facilities include 18 megaplex theatres (12 or more screens),
representing 58% of our total screens, 27 multiplex theatres (two to 11 screens)
and two single-screen theatres. Our long-term growth strategy for the theatre
division is to focus on megaplex theatres having between 12 and 20 screens,
which typically vary in seating capacity from 150 to 450 seats per screen.
Multi-screen theatres allow us to offer a more diversified selection of films to
attract additional customers, exhibit movies in larger or smaller auditoriums
within the same theatre depending on the popularity of the movie and benefit
from having common box office, concession, projection and lobby facilities.
We increased our total screen count by eight screens during fiscal 2002 due
to the new managed theatres. During fiscal 2002, five theatres with a total of
26 screens were closed. We believe that we may close approximately five to seven
theatres with 20 to 28 screens over the next three years with minimal impact on
operating results. At fiscal year-end, we operated 469 first-run screens and 21
budget-oriented screens.
Revenues for the theatre business, and the motion picture industry in
general, are heavily dependent on many factors over which we have no control,
including the general audience appeal of available films and studio marketing,
advertising and support campaigns. Movie production has been stimulated by
additional demand from ancillary markets such as home video, pay-per-view and
cable television, as well as increased demand from foreign film markets. Fiscal
2002 featured such box office hits as Harry Potter and the Sorcerer's Stone,
Lord of the Rings, Monsters, Inc., Spider-Man, Star Wars II: Attack of the
Clones, Ice Age, A Beautiful Mind, Ocean's Eleven, Rush Hour 2 and Jurassic Park
3.
6
We obtain our films from several national motion picture production and
distribution companies and are not dependent on any single motion picture
supplier. Our booking, advertising, concession purchases and promotional
activities are handled centrally by our administrative staff.
We strive to provide our movie patrons with high-quality picture and sound
presentation in clean, comfortable, attractive and contemporary theatre
environments. Substantially all of our movie theatre complexes feature either
digital sound, Dolby or other stereo sound systems; acoustical ceilings; side
wall insulation; engineered drapery folds to eliminate sound imbalance,
reverberation and distortion; tiled floors; loge seats; cup-holder chair-arms;
and computer-controlled heating, air conditioning and ventilation. We offer
stadium seating, a tiered seating system that permits unobstructed viewing, at
over 85% of our first-run screens. Computerized box offices permit all of our
movie theatres to sell tickets in advance. Our theatres are accessible to
persons with disabilities and provide wireless headphones for hearing-impaired
moviegoers. Other amenities at certain theatres include THX auditoriums, which
allow customers to hear the softest and loudest sounds and touch-screen,
computerized, self-service ticket kiosks, which simplify advance ticket
purchases. We also operate the Marcus Movie Hitline, which is a satellite-based
automated telephone ticketing system that allows moviegoers to buy tickets to
movies at any of 12 Marcus first-run theatres in the metropolitan Milwaukee area
and our two theatres in Columbus, Ohio using a credit card. We own a minority
interest in MovieTickets.com, a joint venture of movie and entertainment
companies that was created to sell movie tickets over the internet and
represents nearly 5,500 screens throughout the United States and Canada. As a
result of our association with MovieTickets.com, moviegoers can buy tickets to
movies at any of our first-run theatres via the internet and print them at home.
We sell food and beverage concessions in all of our movie theatres. We
believe that a wide variety of food and beverage items, properly merchandised,
increases concession revenue per patron. Although popcorn and soda remain the
traditional favorite with moviegoers, we continue to upgrade our available
concessions by offering varied choices. For example, some of our theatres offer
hot dogs, pizza, ice cream, pretzel bites, frozen yogurt, coffee, mineral water
and juices.
We also own a family entertainment center, Funset Boulevard, adjacent to
our 11-screen movie theatre in Appleton, Wisconsin. Funset Boulevard features a
40,000 square foot Hollywood-themed indoor amusement facility that includes a
restaurant, party room, laser tag center, virtual reality games, arcade, outdoor
miniature golf course and batting cages.
Competition
Each of our businesses experiences intense competition from national,
regional and local chain and franchise operations, some of which have
substantially greater financial and marketing resources than we have. Most of
our facilities are located in close proximity to competing facilities.
Our Baymont Inns & Suites compete with national limited-service lodging
chains such as Hampton Inn (which is owned by Hilton Hotels Corporation),
Fairfield Inn (which is owned by Marriott Corporation), Holiday Inn Express,
Comfort Inn, as well as a large number of regional and local chains. Our
Woodfield Suites compete with national chains such as Embassy Suites, Comfort
Suites, AmeriSuites and Courtyard by Marriott as well as other regional and
local all-suite facilities.
Our hotels and resorts compete with the hotels and resorts operated by
Hyatt Corporation, Marriott Corporation, Ramada Inns, Holiday Inns, Wyndham
Hotels and others, along with other regional and local hotels and resorts.
Our movie theatres compete with large national movie theatre operators,
such as AMC Entertainment, Cinemark, Regal Cinemas, Loews Cineplex and Carmike
Cinemas, as well as with a wide array of smaller first-run and discount
exhibitors. Although movie exhibitors also generally compete with the home
video, pay-per-view and cable television markets, we believe that such ancillary
markets have assisted the growth of the movie theatre industry by encouraging
the production of first-run movies released for initial movie theatre
exhibition, which establishes the demand for such movies in these ancillary
markets.
7
We believe that the principal factors of competition in each of our
businesses, in varying degrees, are the price and quality of the product,
quality and location of our facilities and customer service. We believe that we
are well positioned to compete on the basis of these factors.
Seasonality
Historically, our first fiscal quarter has produced the strongest operating
results because this period coincides with the typical summer seasonality of the
movie theatre industry and the summer strength of our lodging businesses. Our
third fiscal quarter has historically produced the weakest operating results
primarily due to the effects of reduced travel during the winter months on our
lodging businesses.
Research and Development
Our research and development expenditures are not material.
Environmental Regulation
We do not expect federal, state or local environmental legislation to have
a material effect on our capital expenditures, earnings or competitive position.
However, our activities in acquiring and selling real estate for business
development purposes have been complicated by the continued emphasis our
personnel must place on properly analyzing real estate sites for potential
environmental problems. This circumstance has resulted in, and is expected to
continue to result in, greater time and increased costs involved in acquiring
and selling properties associated with our various businesses.
Employees
As of the end of fiscal 2002, we had approximately 8,000 employees, a
majority of whom were employed on a part-time basis. A majority of our hotel
employees in Milwaukee, Wisconsin are covered by a collective bargaining
agreement which expired June 15, 2002. Negotiations are continuing in a
satisfactory manner with the union representing these employees and no impact
upon our business is anticipated. A number of our hotel employees in
Minneapolis, Minnesota are covered by collective bargaining agreements which
expire in April 2005. Relations with employees have been satisfactory and we
have not experienced any material work stoppages due to labor disputes.
Item 2. Properties.
We own the real estate of a substantial portion of our facilities,
including, as of May 30, 2002, the Pfister Hotel, the Hilton Milwaukee City
Center, the Hilton Madison at Monona Terrace, the Grand Geneva Resort & Spa, the
Miramonte Resort and the Hotel Phillips, all of our company-owned Baymont Inns &
Suites, all of the Woodfield Suites and the majority of our theatres. We lease
the remainder of our facilities. As of May 30, 2002, we also managed five hotel
properties and three theatres that are owned by third parties. Additionally, we
own properties acquired for the future construction and operation of new
facilities. All of our properties are suitably maintained and adequately
utilized to cover the respective business segment served.
8
Our owned, leased and franchised properties are summarized, as of May 30,
2002, in the following table:
Total Number Leased from Managed Managed for
of Facilities Unrelated for Related Unrelated Owned By
Business Segment in Operation Owned(1) Parties Parties Parties Franchisees(2)
- --------------------------------------------------------------------------------------------------------------------
Theatres:
Movie Theatres 47 34 10 0 3 0
Family Entertainment Center 1 1 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Hotels and Resorts:
Hotels 9 4 0 0 5 0
Resorts 2 2 0 0 0 0
Vacation Ownership 1 0 0 0 1 0
- --------------------------------------------------------------------------------------------------------------------
Limited-Service Lodging:
Baymont Inns & Suites 186 85 0 8 1 92
Woodfield Suites 7 7 0 0 0 0
Budgetel Inns 1 1 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------
Total 254 134 10 8 10 92
====================================================================================================================
(1) Two of the movie theatres and two of the Baymont Inns & Suites are on land
leased from unrelated parties under long-term leases. One of the Baymont
Inns & Suites and one of the Woodfield Suites are located on land leased
from related parties. Our partnership interests in eight Baymont Inns &
Suites that we manage are not included in this column.
(2) We own a partial interest in two franchised Baymont Inns & Suites, one of
which we manage.
Certain of the above individual properties or facilities are subject to
purchase money or construction mortgages or commercial lease financing
arrangements, but we do not consider these encumbrances, individually or in the
aggregate, to be material.
Over 90% of our operating property leases expire on various dates after the
end of fiscal 2003 (assuming we exercise all of our renewal and extension
options).
Item 3. Legal Proceedings.
We do not believe that any pending legal proceedings involving us are
material to our business. No legal proceeding required to be disclosed under
this item was terminated during the fourth quarter of our 2002 fiscal year.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of our shareholders during the fourth
quarter of our 2002 fiscal year.
EXECUTIVE OFFICERS OF COMPANY
Each of our executive officers is identified below together with
information about each officer's age, position and employment history for at
least the past five years:
Name Position Age
- --------------------------------------------------------------------------------
Stephen H. Marcus Chairman of the Board, President 67
and Chief Executive Officer
Bruce J. Olson Group Vice President 52
H. Fred Delmenhorst Vice President-Human Resources 61
Thomas F. Kissinger General Counsel and Secretary 42
Douglas A. Neis Chief Financial Officer and Treasurer 43
- --------------------------------------------------------------------------------
Stephen H. Marcus has been our Chairman of the Board since December 1991
and our President and Chief Executive Officer since December 1988. Mr. Marcus
has worked at the company for 40 years.
9
Bruce J. Olson has been employed in his present position with us since July
1991. He was elected to serve on our Board of Directors in April 1996. Mr. Olson
previously served as our Vice President-Administration and Planning from
September 1987 until July 1991 and as Executive Vice President and Chief
Operating Officer of Marcus Theatres Corporation from August 1978 until October
1988, when he was appointed President of that corporation. Mr. Olson joined the
company in 1974.
H. Fred Delmenhorst has been our Vice President-Human Resources since he
joined the company in December 1984.
Thomas F. Kissinger joined the company in August 1993 as Secretary and
Director of Legal Affairs and in August 1995, he was promoted to General Counsel
and Secretary. Prior thereto, Mr. Kissinger was associated with the law firm of
Foley & Lardner for five years.
Douglas A. Neis joined the company in February 1986 as Controller of the
Marcus Theatres division and in November 1987, he was promoted to Controller of
Marcus Restaurants. In July 1991, Mr. Neis was appointed Vice President of
Planning and Administration for Marcus Restaurants. In September 1994, Mr. Neis
was also named as our Director of Technology and in September 1995 he was
elected as our Corporate Controller. In September 1996, Mr. Neis was promoted to
our Chief Financial Officer and Treasurer.
Our executive officers are generally elected annually by the Board of
Directors after the annual meeting of shareholders. Each executive officer holds
office until his successor has been duly qualified and elected or until his
earlier death, resignation or removal.
PART II
Item 5. Market for the Company's Common Equity and Related Shareholder
Matters.
Our Common Stock, $1 par value, is listed and traded on the New York Stock
Exchange under the ticker symbol "MCS." Our Class B Common Stock, $1 par value,
is neither listed nor traded on any exchange. During each quarter of fiscal 2001
and 2002, we paid a dividend of $0.055 per share of our Common Stock and $0.05
per share of our Class B Common Stock. On August 20, 2002, there were 2,082
shareholders of record of our Common Stock and 42 shareholders of record of our
Class B Common Stock. The following table lists the high and low sale prices of
our Common Stock for the periods indicated:
Fiscal 2002 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- --------------------------------------------------------------------------------
High $15.72 $14.21 $15.80 $17.98
Low 13.45 10.59 13.45 13.02
- --------------------------------------------------------------------------------
Fiscal 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- --------------------------------------------------------------------------------
High $12.88 $15.25 $15.42 $15.42
Low 10.13 10.13 11.13 13.32
- --------------------------------------------------------------------------------
10
Item 6. Selected Financial Data.
Eleven-Year Financial Summary
2002 2001(2) 2000 1999 1998(3) 1997 1996(4) 1995 1994(5) 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results
(in thousands)
Revenues(7) $389,833 375,335 348,130 332,179 303,881 273,693 234,325 201,472 169,680 151,662 146,117
Earnings from
continuing
operations(7) $ 22,460 12,740 21,238 20,958 26,343 29,254 27,885 -- -- -- --
Net earnings $ 22,460 21,776 22,622 23,144 28,444 30,881 42,307 24,136 22,829 16,482 13,289
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Data(1)
Earnings per share -
continuing
operations(7) $ .76 .43 .71 .70 .87 .98 .94 -- -- -- --
Net earnings per
share $ .76 .74 .76 .77 .94 1.04 1.42 .82 .77 .63 .52
Cash dividends per
share $ .22 .22 .22 .22 .22 .20 .23(6) .15 .13 .11 .10
Weighted average
shares outstanding
(in thousands) 29,470 29,345 29,828 30,105 30,293 29,745 29,712 29,537 29,492 26,208 25,325
Book value per share $ 12.07 11.57 11.03 10.48 10.00 9.37 8.51 7.29 6.61 5.95 4.97
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Position
(in thousands)
Total assets $774,786 758,659 725,149 676,116 608,504 521,957 455,315 407,082 361,606 309,455 274,394
Long-term debt $299,761 310,239 286,344 264,270 205,632 168,065 127,135 116,364 107,681 78,995 100,032
Shareholders' equity $354,068 337,701 325,247 313,574 302,531 277,293 251,248 214,464 193,918 173,980 124,874
Capital expenditures
and other $ 48,899 96,748 99,492 111,843 115,880 107,514 83,689 77,083 75,825 47,237 27,238
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Current ratio .51 .40 .41 .45 .43 .39 .62 .41 .67 .90 .73
Debt/capitalization
ratio .48 .49 .48 .47 .42 .39 .35 .37 .37 .34 .46
Return on average
shareholders' equity 6.5% 6.6% 7.1% 7.5% 9.8% 11.7% 18.2% 11.8% 12.4% 11.0% 11.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Return on
Average
Shareholders' Shareholders' Book Value Dividends
Equity Equity Per Share(1) Total Assets Per Share(1)
- ------------- ------------- ------------ ------------- ------------
(in millions) (in millions)
[OBJECT OMITTED]
(1) All per share and shares outstanding data is on a diluted basis and has
been adjusted to reflect stock splits in 1998, 1996 and 1993.
(2) Includes gain of $7.8 million or $0.27 per share on sale of discontinued
operations and impairment charge of $2.1 million or $0.07 per share.
(3) Includes charge of $2.3 million or $0.08 per share for costs associated
with the Baymont name change.
(4) Includes gain of $14.8 million or $0.49 per share on sale of certain
restaurant locations.
(5) Includes gain of $1.8 million or $0.06 per share for cumulative effect of
change in accounting for income taxes.
(6) Includes annual dividend of $0.18 per share and one quarterly dividend of
$0.05 per share.
(7) Restated to present restaurant operations as discontinued operations and to
reflect early adoption of EITF No. 00-14, "Accounting for Certain Sales
Incentives."
11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
General
We report our consolidated and individual segment results of operations on
a 52-or-53-week fiscal year ending on the last Thursday in May. Fiscal 2002 and
fiscal 2000 were 52-week years, while fiscal 2001 was a 53-week year. Our
upcoming fiscal 2003 will be a 52-week year.
We divide our fiscal year into three 13-week quarters and a final quarter
consisting of 13 or 14 weeks. Our primary operations are reported in three
business segments: limited-service lodging, theatres and hotels/resorts. As a
result of the sale of our KFC restaurants during fiscal 2001, the restaurant
business segment has been presented as discontinued operations in the
accompanying financial statements and in this discussion.
Historically, our first fiscal quarter has produced the strongest operating
results because this period coincides with the typical summer seasonality of the
movie theatre industry and the summer strength of our lodging businesses. Our
third fiscal quarter has historically produced the weakest operating results
primarily due to the effects of reduced travel during the winter months on our
lodging businesses.
An outstanding year for our movie theatres, reduced interest rates and the
favorable impact of historic tax credits related to our Kansas City Hotel
Phillips project contributed to increased net earnings during fiscal 2002,
despite a difficult year for our two lodging divisions. The economic downturn,
which actually started during the latter half of fiscal 2001 and was accentuated
by the aftermath of the September 11 terrorist attacks, resulted in a
significant decline in lodging demand during fiscal 2002, particularly from our
core business customers. In fact, the lodging industry's decline in demand
during this time period was the worst the industry has experienced in the past
30 years. As a result, the operating results of our lodging divisions were
adversely impacted during this past year, particularly during our fiscal second
quarter (September through November).
Consolidated Financial Comparisons
The following table sets forth revenues, operating income, earnings from
continuing operations, net earnings and earnings per share for the past three
fiscal years (in millions, except for per share and percentage change data):
- ---------------------------------------------------------------------------------------------
Change F02 v. F01 Change F01 v. F00
- ---------------------------------------------------------------------------------------------
2002 2001(1) Amt. Pct. 2000 Amt. Pct.
- ---------------------------------------------------------------------------------------------
Revenues $389.8 $375.3 $14.5 3.9% $348.1 $27.2 7.8%
Operating income 47.5 38.8 8.7 22.2% 48.1 (9.3) -19.3%
Earnings from
continuing operations 22.5 12.7 9.8 76.3% 21.2 (8.5) -40.0%
Net earnings 22.5 21.8 0.7 3.1% 22.6 (0.8) -3.7%
Earnings per share -
Diluted:
Continuing operations $ .76 $ .43 $ .33 76.7% $.71 $(.28) -39.4%
Net earnings per share .76 .74 .02 2.7% .76 (.02) -2.6%
- ---------------------------------------------------------------------------------------------
(1) Fiscal 2001 operating results include a $2.1 million after-tax, non-cash
impairment charge ($3.5 million before-tax) related to our theatre division
IMAX(R) operations (a detailed discussion of this item is included under
the Theatres section). Excluding the asset impairment charge, operating
income from continuing operations during fiscal 2001 totaled $42.3 million,
earnings from continuing operations totaled $14.8 million and diluted
earnings per share from continuing operations totaled $.50 per share.
Our theatre and hotels/resorts divisions contributed to the increase in
revenues during both fiscal years. Our limited-service lodging division revenues
decreased during fiscal 2002 after increasing slightly during fiscal 2001.
Comparisons to our fiscal 2001 revenues are impacted by the additional week of
operations that we reported during that year. The extra week during fiscal 2001
contributed $8.6 million in revenues to our fourth quarter and year-end results.
Effective June 1, 2001, we elected to early adopt Emerging Issues Task
Force (EITF) No. 00-14, "Accounting for Certain Sales Incentives." For
comparison purposes, certain discounts previously accounted for as a marketing
12
expense in fiscal 2001 and fiscal 2000 have been reclassified as a reduction of
revenues (see Note 1 to the consolidated financial statements, New Accounting
Pronouncements).
A record operating performance from our theatre division resulted in an
increase in overall operating income (earnings before other income/expense and
income taxes), despite decreases in operating income from our two lodging
divisions. Comparisons to last year's results are adversely impacted by the
additional week of operations that we reported during fiscal 2001. The extra
week contributed $2.4 million in operating income to last year's fourth quarter
and year-end results. On the other hand, significantly reduced utility and snow
removal costs during fiscal 2002 compared to last year favorably impacted each
of our divisions by a total of $1.9 million and $690,000, respectively. These
same utility and snow removal costs increased during fiscal 2001 and negatively
impacted each of our divisions by an aggregate of $2.1 million and $600,000,
respectively, compared to fiscal 2000. Overall, reduced operating income from
our limited-service lodging division accounted for the majority of the decrease
in our operating income during fiscal 2001 compared to fiscal 2000 results
(excluding the impact of the asset impairment charge).
In addition to our increased fiscal 2002 operating income, reduced interest
expense, increased gains on the disposition of property, equipment and
investments in joint ventures and a reduced effective income tax rate
contributed to our increased earnings from continuing operations and net
earnings during fiscal 2002. Comparisons of our fiscal 2002 earnings from
continuing operations and net earnings to prior year results are negatively
impacted by a non-taxable gain of $1.6 million recognized during fiscal 2001
from insurance contracts on the life of the Company's founder, Ben Marcus.
Increased interest expense and reduced gains on disposition of property and
equipment, offset by the gain on insurance contracts, contributed to our
decreased earnings from continuing operations during fiscal 2001 compared to
fiscal 2000.
Our net interest expense, net of investment income, totaled $16.4 million
for fiscal 2002. This represented a decrease of $4.0 million, or 19.4%, from
fiscal 2001 net interest expense of $20.4 million. This decrease was primarily
the result of lower short-term interest rates, in addition to decreased
long-term debt levels. Our total long-term debt was lower than last year
throughout this year due to the receipt of proceeds from the sale of our KFC
restaurants in May 2001, increased cash generated from operations and reduced
capital expenditures during fiscal 2002. Fiscal 2001 net interest expense
increased $3.9 million, or 23.6%, over fiscal 2000 net interest expense of $16.5
million. This increase was the result of additional borrowings in fiscal 2001
and fiscal 2000 used to help finance our capital expansion program and stock
repurchase program, partially offset by increased investment income and
capitalized interest.
We recognized gains on disposition of property, equipment and investments
in joint ventures from continuing operations of $2.5 million during fiscal 2002,
compared to gains on disposition of property and equipment of $300,000 and $4.3
million during fiscal 2001 and 2000, respectively. The majority of the fiscal
2002 gain was the result of a sale of a joint venture Baymont Inn & Suites
property during the first quarter of the year, with the remainder of the gain
arising from the sale of excess land at our Grand Geneva property to the
developer of the Timber Ridge Lodge project. The timing of our periodic sales of
property and equipment results in variations in the gains or losses that we
report on disposition of property and equipment each year. We had plans during
fiscal 2002 to sell additional selected Baymont Inns & Suites and other assets,
but a tight financing environment resulting from the deteriorating economic
conditions in the aftermath of the September 11 terrorist attacks made it
difficult to sell these assets during the year. If economic conditions and the
financing environment for potential buyers improves during fiscal 2003, we
believe that additional gains on disposition of property and equipment may be
recognized during the coming year.
We reported income tax expense on continuing operations for fiscal 2002 of
$11.0 million, an increase of $3.5 million over fiscal 2001. Our effective tax
rate for fiscal 2002 was 33.0%, compared to 37.2% in fiscal 2001 and 40.7% in
fiscal 2000. The significantly lower effective tax rate during the current year
was the result of the favorable impact of federal and state historic tax credits
related to the renovation of the Hotel Phillips in Kansas City, Missouri.
Without these historic tax credits, our fiscal 2002 net earnings would have been
approximately $2.6 million or $.09 per share lower than we reported. Our
effective income tax rate for fiscal 2001 declined as a result of the
non-taxable gain on insurance contracts. We anticipate that our effective tax
rate during fiscal 2003 will return to levels more closely approximating the
fiscal 2000 tax rate.
13
Net earnings during fiscal 2001 included after-tax income from discontinued
operations of $1.2 million, or $.04 per share, and an after-tax gain on the
disposal of our discontinued restaurant operations during the fourth quarter of
$7.8 million, or $.27 per share (a detailed discussion of this item is included
in the Discontinued Operations section). Fiscal 2000 net earnings included
after-tax income from discontinued operations of $1.4 million, or $.05 per
share. Weighted average shares outstanding were 29.5 million for fiscal 2002,
29.3 million for fiscal 2001 and 29.8 million for fiscal 2000. All per share
data is presented on a diluted basis.
We adopted Statement of Financial Standard (SFAS) No. 142, "Goodwill and
Other Intangible Assets," effective June 1, 2001. Under SFAS No. 142, goodwill
is no longer amortized but reviewed for impairment annually, or more frequently
if certain indicators arise. We completed the required transitional impairment
test and deemed that no impairment loss was necessary. Any subsequent impairment
losses will be reflected in our operating income in the income statement. With
the adoption of SFAS No. 142, we ceased amortization of goodwill with a book
value of $11.8 million as of June 1, 2001. The majority of this goodwill
resulted from prior theatre acquisitions. Had amortization of goodwill not been
recorded in fiscal 2001 and 2000, net earnings would have increased by
approximately $564,000, net of taxes, and earnings per share would have
increased by $.02 for each year.
Current Plans
We incurred approximately $49 million in aggregate capital expenditures
during fiscal 2002 after averaging over $100 million per year during the prior
six fiscal years. We entered this year with plans to spend approximately $65 to
$75 million, but we took steps to reduce non-essential capital spending in
response to the September 11 terrorist attacks. We currently anticipate that our
capital expenditures during fiscal 2003 will again be in the $65 to $75 million
range, but we will continue to monitor our operating results and economic
conditions so that we can respond appropriately.
Our current strategic plans include the following goals and strategies:
o Continuing to define and build our Baymont Inns & Suites brand, with a goal
to be the "best in class" in the mid-price without food and beverage
segment of the lodging industry. We currently believe that most of our
limited-service lodging division's anticipated future growth in earnings
will ultimately come as a result of revenue growth at our Company-owned
inns (as the brand captures a greater share of its segment of the industry)
and from our emphasis on opening new franchised Baymont Inns and Baymont
Inns & Suites. As of the end of fiscal 2002, 11 new franchised properties
were under development, two to four of which are expected to open during
fiscal 2003. As a result of the reduced demand for lodging and a
constrained financing market for new hotel development in the aftermath of
September 11, industry supply growth has also slowed considerably.
Accordingly, we currently have significantly fewer new franchised inns in
development than we would have expected at this time. As conditions
improve, we hope to approve 25 to 35 new franchised properties per year
over the next few fiscal years. By emphasizing franchising, we believe the
Baymont brand may grow more rapidly, conserving our capital for other
strategic purposes. We also anticipate exploring additional growth of the
Baymont brand through potential acquisitions and joint venture investments,
focusing on selected key strategic urban and suburban markets. Our first
such planned joint venture involves the development of our first location
in an important California market. We are also currently in the early
stages of developing our first urban Baymont Inn & Suites in downtown
Chicago, Illinois, with an opening expected sometime in fiscal 2004.
o Maximizing the return on our significant recent investments in movie
theatres through both revenue and cost improvements. We have invested over
$200 million in our theatre division over the last six fiscal years, more
than doubling our number of Company-owned movie theatre screens from 219 at
the end of fiscal 1996 to 456 screens at the end of fiscal 2002. We also
offer stadium seating in approximately 85% of our first-run screens, the
highest percentage in the industry. We also entered the theatre management
business during fiscal 2002, signing an agreement to manage 34 screens for
another owner, bringing the total number of screens owned or managed by our
theatre division to 490 screens at year-end. With several of our smaller
theatres scheduled for closing and several selected screen additions
planned for existing locations, we do not anticipate our total screen count
to significantly change during fiscal 2003, unless attractive acquisition
opportunities present themselves.
14
o Maximizing the return on our significant recent investments in hotel
projects and doubling the number of rooms either managed or owned by our
hotels and resorts division to 6,000 rooms over the next three to five
years. Many of the recent growth opportunities for our hotels and resorts
division (Marcus Vacation Club, Hilton Madison, Hotel Phillips, Timber
Ridge Lodge and Hilton Milwaukee improvements) required a lengthy
development period during which significant capital was committed and the
related pre-opening costs and early start-up losses reduced division
operating income. We expect these recent development projects to provide
earnings growth opportunities during fiscal 2003 and beyond. We anticipate
that the majority of the potential growth in rooms managed will come from
management contracts for other owners. In some cases, we may own a partial
interest in the new managed properties. One strategy that we are currently
exploring involves the creation of an equity fund that would invest in
existing hotel properties. Under this strategy, we would make limited
equity investments and would enter into management contracts to manage the
properties for the fund.
The actual number, mix and timing of potential future new facilities and
expansions will depend in large part on industry and economic conditions, our
financial performance and available capital, the competitive environment,
evolving customer needs and trends, customer acceptance of the new Baymont
brand, our ability to increase the number of franchised Baymont locations at a
pace consistent with our current plans and the availability of attractive
opportunities. It is likely that our growth goals will continue to evolve and
change in response to these and other factors, and there can be no assurance
that these current goals will be achieved. The terrorist attacks of September
11, 2001 were unprecedented. We are unable to predict with certainty if or when
lodging demand will return to pre-September 11 levels. We believe that the
uncertainty associated with the war on terrorism and possible future terrorist
attacks will continue to hamper the travel and lodging industries during some or
all of fiscal 2003. Any additional terrorist attacks may have a similar or worse
effect on the lodging industry than that experienced as a result of the
September 11 attacks.
Theatres
Our oldest and largest division is our theatre division. The theatre
division contributed 37.8% of our consolidated revenues and 63.7% of our
consolidated operating income, excluding corporate items, during fiscal 2002.
The theatre division operates motion picture theatres in Wisconsin, Illinois,
Ohio and Minnesota, and a family entertainment center in Wisconsin. The
following tables set forth revenues, operating income, operating margin, screens
and theatres for the last three fiscal years:
- --------------------------------------------------------------------------------
Change F02 v. F01 Change F01 v. F00
- --------------------------------------------------------------------------------
2002 2001 Amt. Pct. 2000 Amt. Pct.
- --------------------------------------------------------------------------------
(in millions, except percentages)
Revenues $147.3 $127.5 $19.8 15.6% $122.3 $5.2 4.3%
Operating income 34.7 22.1(1) 12.6 57.0% 22.0 0.1 0.4%
Operating margin 23.5% 17.3%(1) 18.0%
- --------------------------------------------------------------------------------
(1) Excludes $3.5 million before-tax impairment charge
Number of screens and locations at fiscal year-end
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Theatre screens 490(1) 482 470
Theatre locations 47(1) 49 50
- --------------------------------------------------------------------------------
Average screens per location 10.4 9.8 9.4
- --------------------------------------------------------------------------------
(1) Includes 34 screens at three locations managed for another owner.
The significant increase in theatre division revenues during fiscal 2002
compared to the prior year occurred despite the fact that fiscal 2001 results
included an additional week of operations. The additional week of operations
included in the theatre division's fiscal 2001 results contributed $3.8 million
to total theatre division revenues, accounting for the majority of the fiscal
2001 revenue increase compared to fiscal 2000. The additional week of operations
included the traditionally strong Memorial Day holiday weekend. New screens
added during fiscal 2001 and fiscal 2000 also contributed to the revenue
increases during each year. Consistent with our long-term strategic plan to
focus on operating large multi-screen theatres, we added 17 new screens to five
existing theatres during fiscal 2001, including our second large
UltraScreen(TM), which opened at a Madison, Wisconsin location. No new
15
screens were added during fiscal 2002. The new screens added during fiscal 2001
generated additional revenues of $300,000 to fiscal 2002 revenues compared to
fiscal 2001 and $9.3 million to fiscal 2001 revenues compared to fiscal 2000. As
of May 30, 2002, we operated 469 first-run screens and 21 budget screens.
Compared to first-run theatres, budget theatres generally have lower box office
revenues and associated film costs, but higher concession sales as a percentage
of box office revenue.
Five theatres with a total of 26 screens were closed during fiscal 2002,
negatively impacting this year's theatre division revenues by $1.3 million with
minimal impact on operating income. One theatre with a total of six screens was
closed during fiscal 2001. In addition, a four-screen theatre in Stevens Point,
Wisconsin was sold and a five-screen theatre in Wausau, Wisconsin was purchased.
These transactions had minimal impact on operations in fiscal 2001. We have
identified approximately five to seven theatres with 20-28 screens that we may
close over the next three years with minimal impact on operating results.
The following table further breaks down revenues for the theatre division
for the last three fiscal years:
- --------------------------------------------------------------------------------
Change F02 v. F01 Change F01 v. F00
- --------------------------------------------------------------------------------
2002 2001 Amt. Pct. 2000 Amt. Pct.
- --------------------------------------------------------------------------------
(in millions, except percentages)
Box office receipts $ 96.5 $ 84.5 $12.0 14.2% $ 81.6 $2.9 3.5%
Concession revenues 45.3 38.1 7.2 18.8% 36.5 1.6 4.6%
Other revenues 5.5 4.9 0.6 14.2% 4.2 0.7 16.0%
- --------------------------------------------------------------------------------
Total revenues $147.3 $127.5 $19.8 15.6% $122.3 $5.2 4.3%
================================================================================
Revenues for the theatre business and the motion picture industry in
general are heavily dependent on the general audience appeal of available films,
together with studio marketing, advertising and support campaigns, factors over
which we have no control. This was particularly evident during the last two
fiscal years. Total theatre attendance increased 9.9% during fiscal 2002
compared to the prior year. This compares to a 0.3% decrease in total attendance
during fiscal 2001 compared to fiscal 2000. Attendance at our comparable
locations increased 11.2% during fiscal 2002 and decreased 7.3% during fiscal
2001, compared to the previous years. While additional competitive theatre
screens in several of our markets had some negative impact on our attendance
during both fiscal years, the primary factor contributing to the increase in
attendance during fiscal 2002 and decrease in attendance during fiscal 2001 was
the quality and quantity of film product during each respective year.
Fiscal 2002 was a record year at the box office both nationally and for our
theatre division. In a year of multiple blockbusters, our top 15 performing
films accounted for 37% of our total box office receipts, compared to 34% for
our top 15 films during fiscal 2001. Four fiscal 2002 films produced box office
receipts in excess of $3 million. Surprisingly, not one of our top eight
performing films during fiscal 2002 was a summer movie, a time during which
blockbuster films are often showcased. The following 10 fiscal 2002 films
produced box office receipts in excess of $2 million: Harry Potter and the
Sorcerer's Stone, Lord of the Rings, Monsters, Inc., Spider-Man, Star Wars II:
Attack of the Clones, Ice Age, A Beautiful Mind, Ocean's Eleven, Rush Hour 2 and
Jurassic Park 3. Only five films topped the $2 million level for box office
receipts during fiscal 2001: How the Grinch Stole Christmas, Cast Away, What
Women Want, The Perfect Storm and Meet the Parents. We played 183, 170 and 172
films at our theatres during fiscal years 2002, 2001 and 2000, respectively.
Included in the total films played were 2, 6 and 10 new IMAX(R) films during
each fiscal year, respectively.
Our average ticket price increased 3.8% and 3.9% during fiscal 2002 and
fiscal 2001, respectively, compared to the prior year. Ticket prices were
increased during each fiscal year in order to reflect the significant
investments in stadium seating and digital sound that have been made in the
majority of our theatres. First-run theatre average ticket prices increased 3.1%
during fiscal 2002 and 3.7% during fiscal 2001, compared to the respective prior
years.
Our average concession sales per person increased 7.9% and 4.8% during
fiscal years 2002 and 2001, respectively. Average concession sales per person
are impacted by changes in concession pricing, types of films played and changes
in our geographic mix of theatre locations. Many of the top films during fiscal
2002 were excellent family fare, which traditionally produce better than average
concession sales.
16
Our theatre division's operating margin increased to 23.5% during fiscal
2002, compared to 17.3% and 18.0% in fiscal 2001 and 2000, respectively.
Contributing to the improved fiscal 2002 operating margin were increased
concession revenues, reduced utility and snow removal costs and reduced
advertising costs. The fiscal 2001 operating margin declined despite the
additional week of operations included in the theatre division's fiscal 2001
results, which contributed approximately $1.3 million to fiscal 2001 operating
income. Fiscal 2001 and fiscal 2000 operating margins were impacted by the
disappointing film product and increased occupancy expenses associated with
recent capital investments. Fiscal 2001 operating results were also negatively
impacted by high utility costs, unusually high snow removal costs during
December 2000, and significant losses from our two IMAX(R) theatre screens.
Under the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during fiscal
2001, we evaluated the recoverability of the assets related to our two IMAX(R)
theatre screens, and determined that the estimated future undiscounted cash
flows were less than the carrying value of these assets. Based upon discounted
estimated cash flows, we believe that the IMAX(R) related assets have minimal
fair value and, accordingly, the approximately $3.5 million carrying value of
the assets was written off during fiscal 2001. We believe that the performance
of our IMAX(R) theatres has not met expectations because of the lack of
commercially viable film product for this format. As a result, we will
occasionally feature traditional 35 millimeter film product on these screens
when viable IMAX(R) film product is not available. We currently plan to continue
operating our two IMAX(R) theatres for the foreseeable future and we are
encouraged by recent film releases and announcements for future film
development.
During the fourth quarter of fiscal 2002, we entered the theatre management
contract business by signing an agreement to manage 34 screens at three
inner-city Chicago locations for another owner. Having experience with
management contracts in our hotels and resorts division, we believe that
providing theatre management expertise to third party owners for a fee can be a
profitable business strategy for our theatre division, increasing the number of
screens managed by our existing management team without a capital investment on
our part. We are currently pursuing additional management contract
opportunities.
During fiscal 2003 and beyond, we expect to make additional selected
investments in new screens at existing strategic locations. We believe that our
long-term competitive position has been strengthened as a result of our
significant capital investments over the past few years. Although it is
difficult to predict future box office performance, film product for the
remainder of calendar 2002 appears very strong, with the first half of the
summer outperforming our prior year and much anticipated sequels to Harry Potter
and Lord of the Rings due to be released later in 2002. Unless film product
during the second half of fiscal 2003 significantly underperforms compared to
fiscal 2002 third and fourth quarter films, we expect fiscal 2003 to be another
strong year for our theatre division.
Limited-Service Lodging
Our second largest division is the limited-service lodging division, which
contributed 32.2% of our consolidated revenues and 24.8% of our consolidated
operating income, excluding corporate items, during fiscal 2002. The division's
business consists of owning and franchising Baymont Inns & Suites and Woodfield
Suites, which respectively operate in the segments of the lodging industry
designated as "limited-service mid-price without food and beverage" and
"limited-service all-suites." We also own and operate one Budgetel Inn. During
fiscal 2002, we converted a Baymont Inn & Suites in Appleton, Wisconsin back to
a Budgetel Inn in order to preserve certain legal rights regarding the Budgetel
name. The following tables set forth revenues, operating income, operating
margin, number of units and rooms data for the limited-service lodging division
for the last three fiscal years:
- --------------------------------------------------------------------------------
Change F02 v. F01 Change F01 v. F00
- --------------------------------------------------------------------------------
2002 2001 Amt. Pct. 2000 Amt. Pct.
- --------------------------------------------------------------------------------
(in millions, except percentages)
Revenues $125.7 $136.6 $(10.9) -8.0% $134.2 $2.4 1.8%
Operating income 13.5 16.3 (2.8) -17.2% 21.0 (4.7) -22.3%
Operating margin 10.7% 11.9% 15.6%
- --------------------------------------------------------------------------------
17
Number of units at fiscal year-end
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Baymont Inns & Suites
Company-owned 85 86 85
Managed for joint ventures/others 9 10 10
Franchised 92 88 76
- --------------------------------------------------------------------------------
Total Baymont Inns & Suites 186 184 171
================================================================================
Budgetel Inns 1 - -
- --------------------------------------------------------------------------------
Woodfield Suites 7 7 7
- --------------------------------------------------------------------------------
Total number of units 194 191 178
================================================================================
Available rooms at fiscal year-end
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Baymont Inns & Suites
Company-owned 8,681 8,802 8,756
Managed for joint ventures/others 1,012 1,119 1,121
Franchised 7,988 7,782 6,775
- --------------------------------------------------------------------------------
Total Baymont Inns & Suites 17,681 17,703 16,652
================================================================================
Budgetel Inns 82 - -
- --------------------------------------------------------------------------------
Woodfield Suites 889 889 889
- --------------------------------------------------------------------------------
Total available rooms 18,652 18,592 17,541
================================================================================
The additional week of operations included in our limited-service lodging
division's fiscal 2001 results contributed $2.4 million to total fiscal 2001
revenues, negatively impacting fiscal 2002 comparisons to prior year revenues
and accounting for the entire increase in revenues during fiscal 2001. The
average daily room rate ("ADR") at comparable Baymont Inns & Suites decreased
2.5% during fiscal 2002 and increased 10.0% during fiscal 2001 compared to the
respective prior year. Our ADR for fiscal 2002 was just over $54, which is
relatively low compared to other competing lodging chains within the mid-price
lodging segment. Baymont's occupancy percentage (number of occupied rooms as a
percentage of available rooms) decreased 2.5 and 5.7 percentage points during
fiscal 2002 and fiscal 2001, respectively. The result of the ADR changes and
occupancy declines was a 6.7% and 0.1% decrease in Baymont Inns & Suites revenue
per available room, or RevPAR, for comparable Inns for fiscal 2002 and 2001,
respectively. RevPAR for comparable Woodfield Suites decreased 9.8% during
fiscal 2002 and 1.3% during fiscal 2001 compared to the prior fiscal year,
respectively.
The primary factor contributing to the declines in our occupancy and RevPAR
was reduced business travel, as companies reacted to the slowing economic
environment. This trend dramatically accelerated as a result of the events of
September 11. Our ADR, which had increased dramatically over the past two years
in conjunction with our repositioning of the Baymont Inns & Suites brand from
the lower-priced economy segment of the lodging industry to the mid-price
segment, declined as a result of competitive pressures from the significantly
reduced room demand. The division's quarterly RevPAR trends (percentage change
in RevPAR for the quarter compared to the prior year's same quarter) for the
last three fiscal years have been as follows:
RevPAR % Change
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
1st Quarter -2.7% +3.5% -2.9%
2nd Quarter -12.5% +0.3% -0.6%
3rd Quarter -6.7% -3.6% +5.9%
4th Quarter -7.2% -2.3% +7.2%
- --------------------------------------------------------------------------------
As the table indicates, at the end of fiscal 2000, the percentage change in
RevPAR at comparable Baymont Inns & Suites had been improving, due primarily to
increased market awareness of the Baymont brand and the addition of lobby
breakfasts at the majority of the Company-owned Baymont locations. Inns with
lobby breakfasts
18
consistently performed significantly better than Inns without the lobby
breakfast, due to favorable guest response to the new amenity and increased
average rates realized as a result of offering that amenity. We offered the
lobby breakfasts at all of our owned Inns by the end of the third quarter of
fiscal 2000. During fiscal 2001, we continued to aggressively increase our room
rates, positioning the Baymont brand at a price point that we believed was
consistent with comparable properties in the mid-price segment of the lodging
industry. However, beginning in the winter of 2000, the economic environment
weakened and our occupancy declined, resulting in small decreases in RevPAR
during the third and fourth quarters of fiscal 2001.
The performance of our Baymont Inns & Suites during fiscal 2002 tracked
fairly consistently with the results of the majority of the properties in this
limited-service, mid-priced lodging industry segment. Industry wide occupancy
rates were generally declining prior to September 11 as a result of the then
slowing economy, as evidenced by our RevPAR decline during the first fiscal
quarter. In the first full week after September 11, industry wide occupancy
rates for the mid-scale without food and beverage segment declined by
approximately 17% compared to the same period last year. Industry and Baymont
occupancy rates have improved considerably in the subsequent months, but our
RevPAR declines remained at 6-7% during the third and fourth quarters of fiscal
2002. As indicated earlier, an overall reduction in business travel as a result
of the economic environment continues to be the primary reason for the reduced
occupancies. In general, we believe that limited-service lodging properties have
performed better than their full-service counterparts as a result of travelers
"trading down" from higher priced hotels. We also believe that Baymont, in
particular, may be benefiting from the fact that it derives a large portion of
its occupancies from the over-the-road traveler and the majority of its inns are
not in urban and destination resort locations, which have been most severely
impacted by the aftermath of September 11.
We responded to the current environment by focusing on reducing our costs,
reducing operational payroll and corporate overhead and restructuring our
operational management and supervisory teams. The majority of the division's
decrease in operating income during fiscal 2002 occurred during September and
October, when occupancy declines were greatest and cost control measures had not
been fully implemented. In fact, the division's operating income during the
second half of fiscal 2002 was substantially better than the same period last
year, despite the additional week of operations reported in our fiscal 2001
results. The additional week of operations included in the limited-service
lodging division's fiscal 2001 results contributed approximately $1.1 million to
fiscal 2001 operating income. In addition to the various cost control measures
and reduced utility costs described earlier, the division's operating results
during the second half of fiscal 2002 compared to fiscal 2001 were favorably
impacted by the fact that we incurred approximately $1.7 million in one-time
costs during fiscal 2001 related to our introduction of our new Guest
Ovations(TM) frequent stay reward program, the development of new interior
design packages and the implementation of a new systemwide training program.
Increased franchise revenues also helped to offset the reduced income from
Company-owned properties in each of the last two years.
We opened one new Company-owned Baymont Inn & Suites and purchased one
Baymont Inn & Suites from a franchisee during fiscal 2001. No Company-owned
properties were opened during fiscal 2002 and fiscal 2000. We have not opened a
new Woodfield Suites during the past two years after opening one during fiscal
2000. Our newly opened and acquired Baymont Inn & Suites and Woodfield Suites
contributed additional revenues of $1.1 million and $2.9 million during fiscal
2002 and fiscal 2001, respectively, with nominal operating income. One joint
venture Baymont Inn & Suites managed by us was sold to a franchisee during the
year. Our share of the gain on sale was $1.5 million. We sold one Baymont Inn &
Suites to a franchisee during fiscal 2001 and sold four Baymont Inns during
fiscal 2000, including one to a franchisee. A pre-tax loss of approximately
$600,000 and pre-tax gains of approximately $2.4 million were recognized during
fiscal 2001 and fiscal 2000, respectively, as a result of the sale of these
Inns. In addition, selling these properties negatively impacted fiscal 2002
revenues by $600,000 compared to fiscal 2001 and negatively impacted fiscal 2001
revenues by $1.7 million compared to fiscal 2000. We have identified 15-20
additional Baymont Inns & Suites that will be considered for sale to new and
existing franchisees. We believe that this strategy will give our franchise
partners the opportunity to develop a significant market presence while allowing
us to utilize the sales proceeds for other growth opportunities, including
developing Baymont properties in new markets. Although this strategy will result
in reduced revenues until after the sales proceeds are reinvested in other
revenue-generating facilities, we expect a resulting increase in profitability
over time.
19
Although the near-term outlook for the industry and Baymont in particular
is uncertain given the current economic climate, we continue to believe that our
long-term strategy to build our Baymont brand will result in increased RevPAR in
the future. The significantly reduced supply growth throughout the industry,
while slowing our franchising growth, should also favorably impact our operating
results of existing hotels as an economic recovery ultimately occurs. We have
introduced several new features during the past two years which are designed to
build the Baymont brand, including a new 110% Satisfaction Guarantee, new sales
and marketing programs and a new frequent stay reward program, Guest
Ovations(TM). We also continue to update the exterior of many of our
Company-owned Baymonts with a fresh, new exterior renovation package that has
typically resulted in improved operating performance at our older locations. We
are encouraged by the fact that at the end of fiscal 2002, our frequent stay
program had approximately 130,000 members and was contributing approximately 20%
of our total room revenues. In general, properties that have one of our
prototypical exterior designs, or have undergone an exterior renovation, and
have had a full-year of our dedicated property-specific sales effort are
performing better than those without these key elements.
The division's current strategies focus on increasing occupancy and brand
awareness. The division outsourced its reservation center during the second
quarter of fiscal 2002, which we believe should result in reduced costs and
increased reservation system contributions to occupancy in the future. Our
reservations from the central reservation center increased over 20% during the
second half of fiscal 2002, compared to the same period last year. During the
second quarter of fiscal 2003, we will further enhance our reservation
technology by introducing full two-way connectivity between the reservation
center and the individual property, increasing our ability to offer all
available rooms over every available sales channel, including our rapidly
growing internet and travel agent sales. At the beginning of the fiscal 2002
fourth quarter, we introduced and began marketing our new Ovations Rooms, which
feature additional amenities not normally found in the limited-service lodging
sector, including pillow-top mattresses, Down Lite(TM) pillows and complimentary
in-room bottled water, an industry first. As a result of all of these efforts,
subject to economic and industry conditions, we believe that we can successfully
position the Baymont brand to capture additional market share and increase our
RevPAR and profitability in the future.
Hotels and Resorts
The hotels and resorts division contributed 29.5% of our consolidated
revenues and 11.5% of our consolidated operating income, excluding corporate
items, during fiscal 2002. The hotels and resorts division owns and operates two
full-service hotels in downtown Milwaukee, Wisconsin, a full-facility
destination resort in Lake Geneva, Wisconsin, a boutique luxury resort in Indian
Wells, California, and full-service hotels in Madison, Wisconsin, and downtown
Kansas City, Missouri. In addition, we managed four hotels during fiscal 2002
and three hotels during the previous two years for other owners. A fifth managed
hotel was added at the end of fiscal 2002. We also manage a vacation ownership
development in Lake Geneva, Wisconsin. The following table sets forth revenues,
operating income, operating margin and rooms data for the hotels and resorts
division for the last three fiscal years:
- --------------------------------------------------------------------------------
Change F02 v. F01 Change F01 v. F00
- --------------------------------------------------------------------------------
2002 2001 Amt. Pct. 2000 Amt. Pct.
- --------------------------------------------------------------------------------
(in millions, except percentages)
Revenues $114.9 $109.7 $5.2 4.8% $89.9 $19.8 22.1%
Operating income 6.3 10.7 (4.4) -41.6% 10.8 (0.1) -0.7%
Operating margin 5.5% 9.8% 12.0%
- --------------------------------------------------------------------------------
Available rooms at fiscal year-end
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Company-owned 2,074 2,074 1,683
Management contracts 1,036 640 640
- --------------------------------------------------------------------------------
Total available rooms 3,110 2,714 2,323
================================================================================
The additional week of operations included in the hotels and resorts
division's fiscal 2001 results contributed approximately $2.4 million to fiscal
2001 revenues and approximately $400,000 to fiscal 2001 operating income.
Division revenues increased during fiscal 2002 due to the added revenues from
our newly opened hotels, the Hotel Phillips in Kansas City, Missouri and the
Hilton Madison at Monona Terrace, in addition to revenues from our
20
management of the Timber Ridge Lodge. Our revenues increased during fiscal 2001
due to increased RevPAR at Company-owned properties, a full year of sales of
vacation ownership units at the Grand Geneva Resort & Spa in Lake Geneva,
Wisconsin, and the opening of the Hilton Milwaukee room addition and water park
and the Hilton Madison. Our hotels and resorts division operating income during
fiscal 2002 declined compared to the prior year entirely as a result of the
September 11 terrorist attacks, challenging economic environment and resulting
reduced business travel. Operating margins were further negatively impacted
during fiscal 2002 and 2001 by $1.1 million and $1.9 million, respectively, in
pre-opening expenses related to our new hotel projects.
The events of September 11 and the ensuing further economic downturn had a
significant negative impact on the operating results of our hotels and resorts
division during the second quarter of fiscal 2002 (September through November).
In fact, our entire decrease in fiscal 2002 hotels and resorts division
operating income compared to the prior year occurred during the second quarter.
Historically, higher-priced upscale hotels have always experienced more
challenges during difficult economic environments than lower-priced,
limited-service properties. The negative impact on this division was most severe
during September and October, when a significant number of group cancellations
occurred. According to data from Smith Travel Research, during the first full
week after September 11, industry wide occupancy rates for "upper upscale"
hotels dropped approximately 53% and RevPAR declined over 70% compared to the
same period during the prior year. Similar to limited-service lodging, results
in this industry segment have since improved, but are still not approaching
pre-September 11 levels. Industrywide RevPAR declines compared to the prior
year's period for the "upper upscale" segment leveled off at 18-24% during
November, December and January, before improving to declines of approximately
10-13% during May.
Our hotels and resorts have outperformed the industry during this time
period, we believe due at least partially to our particular property mix. Our
properties are generally located in mid-size cities and resort areas within
driving distance from major Midwest population centers, which have not been
affected as significantly by the downturn as major East and West Coast
destinations. Excluding the recently opened Hotel Phillips and Hilton Madison at
Monona Terrace, the division's total RevPAR for comparable Company-owned
properties decreased 8.3% during fiscal 2002 compared to last year. Given that
our fiscal 2002 second quarter RevPAR was down 27.1% compared to the second
quarter of fiscal 2001, we are encouraged by the fact that our third and fourth
quarter RevPAR declines were only 10.4% and 1.2%, respectively. The entire
decrease in RevPAR during fiscal 2002 was the result of reduced occupancies, as
our division-wide ADR actually increased slightly during the year. This was the
result of our intentional strategy to maintain the integrity of our rate
structure during this difficult time period.
During the first half of fiscal 2001, our RevPAR at comparable properties
increased 10.7% over the same period in fiscal 2000. The second half of fiscal
2001, however, was impacted by a weakening economic climate, resulting in
reduced business travel and reduced occupancy at our hotels and resorts. By the
time our fiscal 2001 year ended, the division's comparable properties had
reported only a 3.8% increase in RevPAR, compared to the prior year.
We have responded to the current economic circumstances by focusing on
controlling costs and, as a result, we reported slightly improved operating
losses during the second half of fiscal 2002 despite the reduction in RevPAR and
the extra week of operations included in fiscal 2001. We also continue to
maintain our properties consistent with our traditional high standards,
including taking advantage of the seasonal lower occupancies during winter and
spring to undertake previously planned major room renovations at two of our
premier properties, the Pfister and the Grand Geneva.
As noted in the limited-service lodging discussion, while we are encouraged
by the overall improvement we have seen in our RevPAR in recent months, we still
anticipate some residual negative impact on the revenues of our hotels and
resorts division during fiscal 2003. In particular, properties such as the
Pfister and the Hotel Phillips, which rely more heavily on the individual
business traveler, will continue to be affected until revenues from this segment
of our customer base return to previous levels. Group and leisure business, on
the other hand, has improved since the initial cancellations after September 11.
Occupancy rates at properties that cater to group and leisure guests, such as
the Grand Geneva Resort and Spa and Timber Ridge Lodge and to a certain extent
the Hilton Milwaukee and Hilton Madison, have improved considerably, with all
four of these properties contributing positively to year-over-year comparisons
during the second half of fiscal 2002. A full year of maturation at our
21
newer properties, as well as a reduction in preopening expenses, should
contribute to improved operating margins and overall operating income for this
division during fiscal 2003.
The Hilton Milwaukee City Center opened an addition during the first
quarter of fiscal 2001, making it the largest hotel in Wisconsin with 729 rooms.
The addition also included a family water park fun center, which opened during
the fiscal 2001 second quarter. A skywalk to Milwaukee's new Midwest Express
Convention Center and a new restaurant were added during fiscal 2002 and a new
parking structure was completed and opened during the first quarter of fiscal
2003. With all major projects completed at this hotel for the first time in
several years, we expect the Hilton Milwaukee to contribute to earnings growth
in the years ahead. The division's new Hilton Madison at Monona Terrace, a
240-room hotel connected by skywalk to the Monona Terrace Convention Center in
Madison, Wisconsin opened during the fourth quarter of fiscal 2001. Taking the
events of September 11 and resulting economic downturn into account, we are very
pleased with the operating performance of this property during its first year.
Late during fiscal 2000, we purchased the Hotel Phillips, a downtown Kansas
City, Missouri landmark property. We closed the property during the fall of 2000
in order to undertake a complete restoration of the hotel. The 217-room hotel
had the unfortunate timing of reopening on September 13, 2001 and thus got off
to a slower than anticipated start. The hotel has received excellent reviews
from the community and our guests and we look forward to steady improvement,
particularly when the economic environment improves and business travel returns
to prior levels. We also began management in July 2001 of the Timber Ridge
Lodge, a condominium-hotel project adjacent to the Grand Geneva Resort & Spa in
Lake Geneva, Wisconsin and began management of a new Hilton Garden Inn in
Houston, Texas in May 2002.
During fiscal 2001, our vacation ownership development at the Grand Geneva
Resort & Spa contributed revenues of $8.7 million and negatively impacted
operating income by approximately $600,000. The weakened economy during fiscal
2002 contributed to a slight reduction in timeshare sales to $8.0 million, but
reduced sales and marketing expenses contributed to a $900,000 improvement in
operating income from this business during fiscal 2002. We expect our operating
performance from this development to continue to improve and we anticipate
building additional ownership units during fiscal 2003.
Discontinued Operations
On May 24, 2001, we sold our 30 KFC and KFC/Taco Bell 2-in-1 restaurants to
H&K Partners, LLC (H&K). The assets sold consisted primarily of land, buildings
and equipment. Proceeds from the sale of approximately $26.3 million consisted
of $25.8 million in cash and a $500,000 promissory note. We realized a net
before-tax gain of $13.1 million ($7.8 million after-tax) during fiscal 2001 as
a result of the sale. The asset purchase agreement with H&K provided for a
potential additional future purchase price payment if certain performance
conditions were met. Shortly after the fiscal 2002 year-end, H&K elected to
terminate this provision of the agreement by paying us an additional $2.1
million of proceeds. As a result, an additional gain on sale of discontinued
operations, net of tax, of approximately $1.2 million or $.04 per share will be
reported during the first quarter of fiscal 2003.
Prior to the sale, we had non-exclusive franchise rights to operate KFC
restaurants in the Milwaukee metropolitan area and in northeast Wisconsin. We
operated 27 KFC restaurants and three KFC/Taco Bell 2-in-1 restaurants during
the fiscal years 2001 and 2000. The following table sets forth revenues,
operating income, and operating margin for the discontinued operations for the
last three fiscal years.
- --------------------------------------------------------------------------------
Change F02 v. F01 Change F01 v. F00
- --------------------------------------------------------------------------------
2002 2001 Amt. Pct. 2000 Amt. Pct.
- --------------------------------------------------------------------------------
(in millions, except percentages)
Revenues - $23.7 $(23.7) -100% $24.4 $0.7 -2.8%
Operating income - 2.1 (2.1) -100% 2.3 (0.2) -12.1%
Operating margin - 8.7% 9.6%
- --------------------------------------------------------------------------------
22
Financial Condition
Liquidity and Capital Resources
Our lodging and movie theatre businesses each generate significant and
relatively consistent daily amounts of cash because each segment's revenue is
derived predominantly from consumer cash purchases. We believe that these
relatively consistent and predictable cash sources, together with the
availability of $109 million of unused credit lines at fiscal 2002 year-end,
should be adequate to support the ongoing operational liquidity needs of our
businesses.
Early in the third quarter of fiscal 2002, we replaced an expiring 364-day
revolving credit agreement with a new $40 million, 364-day revolving credit
agreement with several banks. Any borrowings under the new credit line will bear
interest at LIBOR plus a margin which adjusts based on our borrowing levels. In
addition, on April 2, 2002, we issued $75 million in senior unsecured long-term
notes privately placed with six institutional lenders. The notes, which bear
interest at an average rate of 7.74%, were issued under a previously announced
private placement program and mature in 2009 and 2012. Proceeds from the senior
notes were used to pay off existing short-term debt and fund our capital
expenditure program. Based upon current debt levels and interest rates in effect
at the end of fiscal 2002, we expect our annual interest expense to increase by
approximately $3.9 million during fiscal 2003 as a result of the issuance of
these senior notes in lieu of existing short-term borrowings. The actual
increase in interest expense may differ due to changing debt levels during the
year. We believe that our long-term interests are best served by having a
significant portion of our outstanding debt with longer maturities, due to the
significant real estate component of our total assets. Freeing up our borrowing
capacity under our credit lines also provides us with significantly more
flexibility in the future, giving us readily available capital if attractive
opportunities present themselves.
Net cash provided by operating activities increased by $20.2 million, or
38.3%, to $73.1 million during fiscal 2002, compared to $52.8 million during
fiscal 2001. The increase was primarily the result of increased earnings from
continuing operations, a reduction in real estate and development costs and
timing differences in payments of accounts payable.
Net cash used in investing activities during fiscal 2002 decreased by $17.5
million, or 24.9%, to $52.7 million. The reduction in net cash used in investing
activities was primarily the result of reduced capital expenditures, offset by
decreased net proceeds from disposals of property, equipment and other assets.
Cash proceeds from the disposals of property, equipment and other assets totaled
$1.7 million and $29.3 million during fiscal 2002 and 2001, respectively. The
cash proceeds received during fiscal 2002 were primarily the result of the sale
of several parcels of land. The cash proceeds received during fiscal 2001 were
primarily the result of the sale of our discontinued restaurant operations, in
addition to the sale of one Baymont Inn & Suites, two former restaurant
locations and the sale of a parcel of land adjacent to the Grand Geneva Resort &
Spa to the developers of the new Timber Ridge Lodge.
Total capital expenditures (including normal continuing capital maintenance
projects and business acquisitions) of $48.9 million and $96.7 million were
incurred in fiscal 2002 and 2001, respectively. Capital expenditures during
fiscal 2002 included $33.4 million incurred in the hotels and resorts division,
including the renovation of the Hotel Phillips, our investment in the common
areas of the Timber Ridge Lodge, construction of a new parking garage at the
Hilton Milwaukee City Center, and room renovations at the Grand Geneva Resort &
Spa and Pfister Hotel. In addition, capital expenditures of $12.8 million were
incurred in the limited-service lodging division and $2.2 million were incurred
by the theatre division to fund ongoing maintenance capital projects. We have
not altered our maintenance capital expenditure plans as a result of the current
economic environment, but we did delay the start of some non-critical capital
projects, many of which are now scheduled for completion during fiscal 2003.
During fiscal 2001, $45.8 million was incurred for hotels and resorts division
projects, $37.2 million for limited-service lodging division projects and $13.1
million for theatre division projects. Total capital expenditures in fiscal 2003
are currently expected to be approximately $65 to $75 million and are expected
to be funded by cash generated from operations, net proceeds from the disposal
of selected assets and borrowings under our revolving credit facilities. The
only new Company-owned location currently included in the fiscal 2003 capital
expenditure plans is the anticipated development of our first urban Baymont Inn
& Suites in downtown Chicago. The remaining capital is
23
expected to be divided fairly evenly across all three divisions and will include
selected theatre screen additions, potential strategic equity investments in
hotel or limited-service lodging projects, and maintenance and project capital.
Principally as a result of our reduced capital spending during fiscal 2002,
our total debt decreased to $320.5 million at the close of fiscal 2002, compared
to $328.4 million at the end of fiscal 2001. Net cash used in financing
activities in fiscal 2002 totaled $16.3 million, compared to net cash provided
by financing activities of $15.9 million in fiscal 2001. During fiscal 2002, we
received $75.0 million of net proceeds from the issuance of notes payable and
long-term debt, compared to $42.1 million during fiscal 2001. As indicated
earlier, the fiscal 2002 proceeds were from the issuance of senior unsecured
notes. The majority of our borrowings during fiscal 2001 were from commercial
paper and our revolving credit facilities. We made total principal payments on
notes payable and long-term debt of $83.6 million during fiscal 2002,
representing the payment of current maturities and payment of borrowings on
commercial paper and revolving credit facilities with the proceeds from our
senior note issuance. Total principal payments totaled $16.3 million during
fiscal 2001. Our debt-capitalization ratio was 0.48 at May 30, 2002, compared to
0.49 at the prior fiscal year end. Based upon our current expectations for
fiscal 2003 capital expenditure levels and potential asset sales proceeds, we
anticipate our long-term debt total and debt-capitalization ratio to continue to
decline during fiscal 2003.
During fiscal 2002, we repurchased 16,000 of our common shares for
approximately $225,000 in conjunction with the exercise of stock options,
compared to 370,000 of common shares repurchased for approximately $4.2 million
primarily in the open market during fiscal 2001. Our Board of Directors has
authorized the repurchase of up to 2.0 million additional shares of our
outstanding Common Stock. As of May 30, 2002, approximately 1.96 million shares
remained available under this authorization for repurchase. Any such repurchases
are expected to be executed on the open market or in privately negotiated
transactions depending upon a number of factors, including prevailing market
conditions.
Contractual Obligations
We have obligations and commitments to make future payments under debt and
operating leases. The following schedule details these obligations at May 30,
2002 (in thousands):
- --------------------------------------------------------------------------------
Payments Due by Period
- --------------------------------------------------------------------------------
Total Less Than After
1 Year 1-3 Years 4-5 Years 5 Years
- --------------------------------------------------------------------------------
Long-term debt $320,538 $20,777 $123,043 $54,164 $122,554
Operating lease
obligations 40,040 2,878 4,461 4,357 28,344
- --------------------------------------------------------------------------------
Total contractual
obligations $360,578 $23,655 $127,504 $58,521 $150,898
================================================================================
Included in our long-term debt totals are commercial paper borrowings
issued through agreements with two banks. We have included these borrowings with
long-term debt because we have the ability and intent to replace the borrowings
with long-term borrowings under our credit lines. Additional detail describing
our long-term debt is included in Note 5 to our consolidated financial
statements.
We guarantee debt of our 50% unconsolidated joint ventures and other
entities. Our joint venture partners also guarantee all or a portion of this
same debt. The following schedule details our guarantee obligations at May 30,
2002 (in thousands):
- --------------------------------------------------------------------------------
Expiration by Period
- --------------------------------------------------------------------------------
Total Less Than After
1 Year 1-3 Years 4-5 Years 5 Years
- --------------------------------------------------------------------------------
Guarantee obligations $17,043 $1,227 $1,871 $7,027 $6,918
- --------------------------------------------------------------------------------
24
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates and we
manage our exposure to this market risk through the monitoring of available
financing alternatives.
Variable interest rate debt outstanding as of May 30, 2002 was $89.2
million, carried an average interest rate of 2.75%, and represented 27.8% of our
total debt portfolio. Our earnings are affected by changes in short-term
interest rates as a result of our borrowings under our revolving credit
agreements, floating-rate mortgages, industrial development revenue bonds and
unsecured term notes.
Fixed interest rate debt totaled $231.3 million as of May 30, 2002, carried
an average interest rate of 7.46% and represented 72.2% of our total debt
portfolio. Fixed interest rate debt included the following: senior notes bearing
interest monthly at 10.22%, maturing in 2005; senior notes which bear interest
semiannually at fixed rates ranging from 6.66% to 7.93%, maturing in 2008
through 2014; fixed rate mortgages and industrial development revenue bonds
bearing interest from 6.47 to 8.77%, maturing in 2005 through 2009; and
unsecured term notes with stated rates of 2.0% to 6.0%, maturing in 2003 and
2004. The fair value of our long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of our fixed interest rate
debt will increase as interest rates fall and decrease as interest rates rise.
The fair value of our $214.4 million of senior notes is approximately $209.1
million. Based upon the respective rates and prepayment provisions of our
remaining fixed interest rate senior notes and mortgages at May 30, 2002, the
carrying amounts of such debt approximates fair value.
The variable interest rate debt and fixed interest rate debt outstanding as
of May 30, 2002 matures as follows (in thousands):
- ------------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
- ------------------------------------------------------------------------------------------------
Variable interest rate $ 7,196 $81,433 $ 182 $ 243 $ 147 $ - $ 89,201
Fixed interest rate 13,581 15,127 26,301 25,470 28,304 122,554 231,337
- ------------------------------------------------------------------------------------------------
Total debt $20,777 $96,560 $26,483 $25,713 $28,451 $122,554 $320,538
================================================================================================
We periodically enter into interest rate swap agreements to manage our
exposure to interest rate changes. The swaps involve the exchange of fixed and
variable interest rate payments without exchanging the notional principal
amount. Payments or receipts on the agreements are recorded as adjustments to
interest expense. We had no outstanding interest rate swap agreements at May 30,
2002. On May 3, 2002, we terminated a swap agreement that had effectively
converted $25 million of our borrowings under revolving credit agreements from
floating-rate debt to a fixed-rate basis. The fair value of the swap on the date
of the termination was a liability of $2.8 million. The remaining loss in other
comprehensive income at May 30, 2002 of $2.5 million will be reclassified into
earnings as interest expense through November 15, 2005, the remaining life of
the original hedge, as interest payments affect earnings. We expect to
reclassify approximately $1.2 million of loss into earnings during fiscal 2003.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires us to make
estimates and judgments that affect our reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities.
On an on-going basis, we evaluate our estimates, including those related to
bad debts, insurance reserves, carrying value of investments in long-lived
assets, intangible assets, income taxes, pensions, and contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
25
We believe the following critical accounting policies affect the most
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o We review long-lived assets, including fixed assets and goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. In assessing the
recoverability of these assets, we must make assumptions regarding the
estimated future cash flows and other factors to determine the fair value
of the respective assets. The estimate of cash flow is based upon, among
other things, certain assumptions about expected future operating
performance. Our estimates of undiscounted cash flow may differ from actual
cash flow due to, among other things, economic conditions, changes to our
business model or changes in our operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying
value, we recognize an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset. During fiscal 2001, we
recorded a before-tax impairment charge of $3.5 million related to our two
IMAX(R)theatre screens.
o We sponsor an unfunded nonqualified defined-benefit pension plan covering
certain employees who meet eligibility requirements. Several statistical
and other factors which attempt to anticipate future events are used in
calculating the expense and liability related to the plans. These factors
include assumptions about the discount rate and rate of future compensation
increases as determined by us, within certain guidelines. In addition, our
actuarial consultants also use subjective factors such as withdrawal and
mortality rates to estimate these factors. The actuarial assumptions used
by us may differ materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates or longer or shorter
life spans of participants. These differences may impact the amount of
pension expense recorded by us.
o We maintain insurance coverage for workers compensation and general
liability claims utilizing a retroactive insurance policy. Under this
policy, we are responsible for all claims up to our stop loss limitation of
$250,000. It is not uncommon for insurance claims of this type to be filed
months or even years after the initial incident may have occurred. It also
can take many months or years before some claims are settled. As a result,
we must estimate our potential insurance liability based upon several
factors, including historical trends, our knowledge of the individual
claims and likelihood of success, and our insurance carrier's judgment
regarding the reserves necessary for individual claims. Actual claim
settlements may differ from our estimates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is set forth in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Quantitative and Qualitative Disclosures About Market Risk" above.
26
Item 8 Financial Statements and Supplementary Data.
REPORT OF ERNST & YOUNG LLP, Independent Auditors
The Board of Directors and Shareholders
of The Marcus Corporation
We have audited the accompanying consolidated balance sheets of The Marcus
Corporation (the Company) as of May 30, 2002 and May 31, 2001, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended May 30, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company at
May 30, 2002 and May 31, 2001, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended May 30, 2002,
in conformity with accounting principles generally accepted in the United
States.
As discussed in Notes 1 and 5 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and derivative financial
instruments effective June 1, 2001.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
July 19, 2002
27
THE MARCUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
May 30, 2002 May 31, 2001
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,614 $ 1,499
Accounts and notes receivable (Note 4) 16,044 14,207
Receivables from joint ventures (Note 10) 3,760 2,747
Refundable income taxes 4,947 121
Real estate and development costs 2,532 4,999
Other current assets 4,512 4,692
- --------------------------------------------------------------------------------
Total current assets 37,409 28,265
PROPERTY AND EQUIPMENT, net (Note 4) 683,639 680,346
OTHER ASSETS:
Investments in joint ventures
(Notes 9 and 10) 1,356 2,358
Goodwill 11,806 11,806
Other (Note 11) 40,576 35,884
- --------------------------------------------------------------------------------
Total other assets 53,738 50,048
- --------------------------------------------------------------------------------
Total assets $ 774,786 $ 758,659
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 10) $ 3,497 $ 4,222
Accounts payable 17,211 17,123
Taxes other than income taxes 13,947 13,230
Accrued compensation 6,555 5,569
Other accrued liabilities 11,265 12,273
Current maturities of long-term debt
(Note 5) 20,777 18,133
- --------------------------------------------------------------------------------
Total current liabilities 73,252 70,550
LONG-TERM DEBT (Note 5) 299,761 310,239
DEFERRED INCOME TAXES (Note 8) 36,529 30,759
DEFERRED COMPENSATION AND OTHER (Note 7) 11,176 9,410
COMMITMENTS, LICENSE RIGHTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY (Note 6):
Preferred Stock, $1 par; authorized
1,000,000 shares; none issued Common Stock:
Common Stock, $1 par; authorized 50,000,000
shares; issued 21,584,239 shares in 2002
and 19,617,564 shares in 2001 21,584 19,618
Class B Common Stock, $1 par; authorized
33,000,000 shares; issued and outstanding
9,605,274 shares in 2002 and 11,571,949
shares in 2001 9,606 11,572
Capital in excess of par 41,523 41,062
Retained earnings 300,623 284,402
Accumulated other comprehensive loss (1,866) (201)
- --------------------------------------------------------------------------------
371,470 356,453
Less cost of Common Stock in treasury
(1,863,027 shares in 2002 and 2,007,591
shares in 2001) (17,402) (18,752)
- --------------------------------------------------------------------------------
Total shareholders' equity 354,068 337,701
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 774,786 $ 758,659
================================================================================
See accompanying notes.
28
The Marcus Corporation
Consolidated Statements of Earnings
(in thousands, except per share data)
Year ended
- --------------------------------------------------------------------------------
May 30, May 31, May 25,
2002 2001 2000
- --------------------------------------------------------------------------------
REVENUES:
Rooms and telephone $ 170,332 $ 178,811 $ 166,609
Theatre admissions 96,502 84,535 81,637
Theatre concessions 45,332 38,144 36,482
Food and beverage 31,812 29,896 26,614
Other income 45,855 43,949 36,788
- --------------------------------------------------------------------------------
Total revenues 389,833 375,335 348,130
COSTS AND EXPENSES:
Rooms and telephone 79,359 82,348 71,238
Theatre operations 73,401 66,971 63,999
Theatre concessions 10,370 9,440 8,887
Food and beverage 25,995 22,975 20,363
Advertising and marketing 27,220 27,740 21,981
Administrative 39,963 40,412 39,654
Depreciation and amortization 44,887 43,329 40,458
Rent (Note 9) 2,958 3,410 2,954
Property taxes 16,339 14,539 14,066
Preopening expenses 1,143 2,040 1,004
Other operating expenses 20,740 19,759 15,438
Impairment charge (Note 2) - 3,541 -
- --------------------------------------------------------------------------------
Total costs and expenses 342,375 336,504 300,042
- --------------------------------------------------------------------------------
OPERATING INCOME 47,458 38,831 48,088
OTHER INCOME (EXPENSE):
Investment income 2,353 2,592 1,453
Interest expense (18,807) (23,019) (17,975)
Gain on insurance contracts - 1,582 -
Gain on disposition of property and
equipment and investments in joint
ventures 2,496 304 4,266
- --------------------------------------------------------------------------------
(13,958) (18,541) (12,256)
- --------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 33,500 20,290 35,832
INCOME TAXES (Note 8) 11,040 7,550 14,594
- --------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 22,460 12,740 21,238
DISCONTINUED OPERATIONS (Note 3):
Income from discontinued operations,
net of income taxes of $823 and $951
in 2001 and 2000, respectively - 1,219 1,384
Gain on sale of discontinued operations,
net of income taxes of $5,277 in 2001 - 7,817 -
- --------------------------------------------------------------------------------
EARNINGS FROM DISCONTINUED OPERATIONS - 9,036 1,384
- --------------------------------------------------------------------------------
NET EARNINGS $ 22,460 $ 21,776 $ 22,622
================================================================================
EARNINGS PER COMMON SHARE - BASIC:
Continuing operations $ .77 $ .44 $ .71
Discontinued operations .00 .31 .05
- --------------------------------------------------------------------------------
Net earnings per share $ .77 $ .75 $ .76
================================================================================
EARNINGS PER COMMON SHARE - DILUTED:
Continuing operations $ .76 $ .43 $ .71
Discontinued operations .00 .31 .05
- --------------------------------------------------------------------------------
Net earnings per share $ .76 $ .74 $ .76
================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 29,245 29,187 29,796
Diluted 29,470 29,345 29,828
================================================================================
See accompanying notes.
29
The Marcus Corporation
Consolidated Statements of Shareholders' Equity
(in thousands, except per share data)
Accumulated
Class B Capital Other
Common Common in Excess Retained Comprehensive Treasury
Stock Stock of Par Earnings Income (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 27, 1999 $18,681 $12,509 $40,685 $252,498 $ (214) $(10,585) $313,574
Cash dividends:
$.20 per share Class B Common Stock - - - (2,464) - - (2,464)
$.22 per share Common Stock - - - (3,848) - - (3,848)
Exercise of stock options - - 2 - - 107 109
Purchase of treasury stock - - - - - (5,565) (5,565)
Savings and profit-sharing contribution - - 6 - - 544 550
Reissuance of treasury stock - - 81 - - 231 312
Conversions of Class B Common Stock 392 (392) - - - - -
Components of comprehensive income (loss):
Net earnings - - - 22,622 - - 22,622
Change in unrealized loss on available
for sale investments, net of tax - - - - (43) - (43)
--------
Total comprehensive income - - - - - - 22,579
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 25, 2000 19,073 12,117 40,774 268,808 (257) (15,268) 325,247
Cash dividends:
$.20 per share Class B Common Stock - - - (2,377) - - (2,377)
$.22 per share Common Stock - - - (3,805) - - (3,805)
Exercise of stock options - - (6) - - 152 146
Purchase of treasury stock - - - - - (4,157) (4,157)
Savings and profit-sharing contribution - - 212 - - 338 550
Reissuance of treasury stock - - 82 - - 183 265
Conversions of Class B Common Stock 545 (545) - - - - -
Components of comprehensive income:
Net earnings - - - 21,776 - - 21,776
Change in unrealized loss on available
for sale investments, net of tax - - - - 56 - 56
--------
Total comprehensive income - - - - - - 21,832
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 31, 2001 19,618 11,572 41,062 284,402 (201) (18,752) 337,701
Cash dividends:
$.20 per share Class B Common Stock - - - (1,962) - - (1,962)
$.22 per share Common Stock - - - (4,277) - - (4,277)
Exercise of stock options - - 182 - - 1,085 1,267
Purchase of treasury stock - - - - - (225) (225)
Savings and profit-sharing contribution - - 189 - - 320 509
Reissuance of treasury stock - - 90 - - 170 260
Conversions of Class B Common Stock 1,966 (1,966) - - - - -
Components of comprehensive income (loss):
Net earnings - - - 22,460 - - 22,460
Change in unrealized loss on available
for sale investments, net of tax - - - - 22 - 22
Cumulative effect of change in
accounting for interest rate swap,
net of tax benefit of $732 (Note 5) - - - - (1,098) - (1,098)
Change in fair value of interest rate
swap, net of tax benefit of $384 - - - - (577) - (577)
(Note 5)
Amortization of loss on swap
agreement, net of tax effect of $131 - - - - 197 - 197
(Note 5)
Minimum pension liability, net of tax
benefit of $139 - - - - (209) - (209)
--------
Total comprehensive income - - - - - - 20,795
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 30, 2002 $21,584 $ 9,606 $41,523 $300,623 $(1,866) $(17,402) $354,068
====================================================================================================================================
See accompanying notes.
30
The Marcus Corporation
Consolidated Statements of Cash Flows
(in thousands)
Year ended
- --------------------------------------------------------------------------------
May 30, May 31, May 25,
2002 2001 2000
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 22,460 $ 21,776 $ 22,622
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Losses on investments in joint
ventures, net of distributions 2,551 618 20
Gain on disposition of property,
equipment and other assets (2,496) (13,398) (4,266)
Amortization of loss on swap agreement 328 - -
Impairment charge - 3,541 -
Depreciation and amortization 44,887 44,300 41,485
Deferred income taxes 5,984 176 1,197
Deferred compensation and other 1,170 298 1,631
Contribution of Company stock to
savings and profit-sharing plan 509 550 550
Changes in operating assets and
liabilities:
Accounts and notes receivable (1,837) (926) (2,222)
Real estate and development costs 2,467 (1,082) (3,917)
Other current assets 180 (713) 253
Accounts payable 88 (7,340) 1,505
Income taxes (3,916) 880 3,021
Taxes other than income taxes 717 2,011 1,644
Accrued compensation 986 1,262 1,690
Other accrued liabilities (1,008) 874 2,112
- --------------------------------------------------------------------------------
Total adjustments 50,610 31,051 44,703
- --------------------------------------------------------------------------------
Net cash provided by operating activities 73,070 52,827 67,325
INVESTING ACTIVITIES
Capital expenditures and other (48,899) (96,748) (99,492)
Net proceeds from disposals of property,
equipment and other assets 1,666 29,304 15,905
(Increase) decrease in other assets (4,422) (2,406) 302
Cash advanced to joint ventures (1,013) (279) (729)
- --------------------------------------------------------------------------------
Net cash used in investing activities (52,668) (70,129) (84,014)
FINANCING ACTIVITIES
Debt transactions:
Net proceeds from issuance of notes
payable and long-term debt 75,000 42,107 38,513
Principal payments on notes payable
and long-term debt (83,559) (16,313) (10,932)
Payment on swap agreement termination (2,791) - -
Equity transactions:
Treasury stock transactions, except for
stock options 35 (3,892) (5,253)
Exercise of stock options 1,267 146 109
Dividends paid (6,239) (6,182) (6,312)
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (16,287) 15,866 16,125
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,115 (1,436) (564)
Cash and cash equivalents at beginning
of year 1,499 2,935 3,499
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 5,614 $ 1,499 $ 2,935
================================================================================
31
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 30, 2002
1. Description of Business and Summary of Significant Accounting Policies
Description of Business - The Marcus Corporation and its subsidiaries (the
Company) operate principally in three business segments:
Limited-Service Lodging: Operates and franchises lodging facilities,
under the names Baymont Inns, Baymont Inns & Suites, Budgetel Inn and
Woodfield Suites, primarily located in the eastern half of the United
States.
Theatres: Operates multiscreen motion picture theatres in Wisconsin,
Illinois, Ohio and Minnesota and a family entertainment center in
Wisconsin.
Hotels/Resorts: Owns and operates full service hotels and resorts in
Wisconsin, Missouri and California, manages full service hotels in
Wisconsin, Minnesota, Texas and California and operates a vacation
ownership development in Wisconsin.
In addition, the Company operated KFC restaurants under a license agreement
for certain areas in the state of Wisconsin through May 24, 2001, at which time
the Restaurant division was sold. The Company has classified the restaurant
operations as discontinued (See Note 3).
Principles of Consolidation - The consolidated financial statements include
the accounts of The Marcus Corporation and all of its subsidiaries. Investments
in 50%-owned affiliates are accounted for on the equity method. All intercompany
accounts and transactions have been eliminated in consolidation.
Fiscal Year - The Company reports on a 52/53-week year ending the last
Thursday of May. All segments had a 52-week year in fiscal 2002, a 53-week year
in fiscal 2001 and a 52-week year in fiscal 2000.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash Equivalents - The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash equivalents. Cash
equivalents are carried at cost, which approximates market.
Long-Lived Assets - The Company periodically considers whether indicators
of impairment of long-lived assets held for use (including goodwill through
fiscal 2001) are present. If such indicators are present, the Company determines
whether the sum of the estimated undiscounted future cash flows attributable to
such assets is less than their carrying amounts. The Company recognizes any
impairment losses based on the excess of the carrying amount of the assets over
their value. The Company evaluated the ongoing value of its property and
equipment and other long-lived assets as of May 30, 2002, May 31, 2001 and May
25, 2000, and determined that there was no significant impact on the Company's
results of operations, other than the impairment charge taken for the IMAX(R)
related assets described in Note 2.
Intangible Assets - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective June
1, 2001. Under SFAS No. 142, goodwill is no longer amortized but reviewed for
impairment annually, or more frequently if certain indicators arise. The Company
completed the transitional impairment test and the annual impairment test and
deemed that no impairment loss was necessary. Any subsequent impairment losses
will be reflected in operating income in the statement of earnings.
With the adoption of SFAS No. 142, the Company ceased amortization of
goodwill with a net book value of $11,806,000 as of June 1, 2001. Had
amortization of goodwill not been recorded in fiscal 2001 and 2000, net earnings
would have increased by approximately $564,000, net of taxes, and diluted
earnings per share would have increased by $0.02 for each year.
32
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Capitalization of Interest - The Company capitalizes interest during
construction periods by adding such interest to the cost of property and
equipment. Interest of approximately $715,000, $1,242,000 and $2,161,000 was
capitalized in fiscal 2002, 2001 and 2000, respectively.
Investments - Available for sale securities are stated at fair market
value, with unrealized gains and losses reported as a component of shareholders'
equity. The cost of securities sold is based upon the specific identification
method. Realized gains and losses and declines in value judged to be other than
temporary are included in investment income.
Revenue Recognition - The Company recognizes revenue from its rooms as
earned on the close of business each day. Revenues from theatre admissions,
concessions and food and beverage sales are recognized at the time of sale.
Revenues from advanced ticket and gift certificate sales are recorded as
deferred revenue and are recognized when tickets or gift certificates are used
or expire.
The following are included in other income:
The Company has entered into franchise agreements that grant to
franchisees the right to own and operate a Baymont Inn or Baymont Inn &
Suites at a particular location for a specified term, as defined in the
license agreement. An initial franchise fee, as defined in the license
agreement, is also collected upon receipt of a prospective licensee's
application and is recognized as income when operations commence. Royalty
and marketing fee assessments are recognized when actually earned and are
receivable from the franchisee.
Management fees for hotels and resorts under management agreements are
recognized as earned based on the terms of the agreements and include both
base fees and incentive fees.
Sale of vacation intervals are recognized on an accrual basis after a
binding sales contract has been executed, a 10% minimum down payment is
received, the rescission period has expired, construction is substantially
complete and certain minimum sales levels have been reached. If all the
criteria are met except that construction is not substantially complete,
revenues are recognized on the percentage-of-completion basis. For sales
that do not qualify for either accrual or percentage-of-completion
accounting, all revenue is deferred using the deposit method. Deferred
revenue is included in other accrued liabilities. During the first three
quarters of fiscal 2000, the Company accounted for all sales using the
deposit method, since certain minimum sales levels had not been reached.
Since the fourth quarter of fiscal 2000, when minimum sales levels were
met, revenues have been recognized on the percentage-of-completion or
accrual methods. Development costs including construction costs, interest
and other carrying costs, which are allocated based on relative sales
values, are included as real estate and development costs in the
accompanying consolidated balance sheets.
Advertising and Marketing Costs - The Company generally expenses all
advertising and marketing costs as incurred.
Depreciation and Amortization - Depreciation and amortization of property
and equipment are provided using the straight-line method over the following
estimated useful lives:
Years
----------------------------------------------------------
Land improvements 15 - 39
Buildings and improvements 25 - 39
Leasehold improvements 3 - 39
Furniture, fixtures and equipment 3 - 20
----------------------------------------------------------
33
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Preopening Expenses - Costs incurred prior to opening new or remodeled
facilities are expensed as incurred.
Net Earnings Per Share - The numerator for the calculation of basic and
diluted earnings per share is net earnings and the denominator is the respective
weighted average shares outstanding. The difference between basic and diluted
weighted average shares outstanding is the dilutive effect of employee stock
options.
Options to purchase 396,002 shares, 393,102 shares and 961,403 shares of
common stock at prices ranging from $14.38 to $18.13 per share, $13.81 to $18.13
per share and $12.00 to $18.13 per share were outstanding at May 30, 2002, May
31, 2001 and May 25, 2000, respectively, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive.
Comprehensive Income - Accumulated other comprehensive loss presented in
the accompanying consolidated balance sheets consists of the following, all
presented net of tax:
May 30, 2002 May 31, 2001
- --------------------------------------------------------------------------------
(in thousands)
Unrealized loss on available for sale investments $ (179) $ (201)
Unrecognized loss on interest rate swap agreement (1,478) -
Minimum pension liability (209) -
- --------------------------------------------------------------------------------
$ (1,866) $ (201)
================================================================================
New Accounting Pronouncements - In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," effective for fiscal years beginning after December 15,
2001. SFAS No. 144 addresses financial accounting and reporting for impairment
or disposal of long-lived assets and supersedes SFAS No. 121. The Company does
not expect the adoption of SFAS No. 144 to have a significant impact on the
Company's results of operations or financial position.
The Company early adopted Emerging Issues Task Force (EITF) No.
00-14,"Accounting for Certain Sales Incentives," effective June 1, 2001. EITF
No. 00-14 requires certain sales discounts to be classified as a reduction of
revenue and prior periods presented to be reclassified for comparative purposes
to comply with the new presentation requirements. Historically, the Company has
recognized revenue on a gross basis at the time of the sale and certain sales
discounts were charged to advertising and marketing expense. Total sales
discounts earned by customers during 2002, 2001 and 2000 were approximately
$2,635,000, $3,797,000 and $3,988,000, respectively.
Reclassifications - Certain reclassifications have been made to the prior
year's financial statements to conform to the current year presentation.
2. Impairment Charge
During fiscal 2001, the Company evaluated the recoverability of the assets
related to its two IMAX(R) theatre screens and determined that the estimated
future undiscounted cash flows were less than the carrying value of these
assets. Based upon discounted estimated cash flows, the Company believes that
the IMAX(R)-related assets have minimal fair value, and accordingly, the entire
carrying value of the assets was written off. As a result, during the year ended
May 31, 2001, the Company recorded an impairment loss of $3,541,000.
34
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Discontinued Operations
On May 24, 2001, the Company sold its 30 KFC and KFC/Taco Bell 2-in-1
restaurants for $26,329,000, subject to adjustment as defined in the purchase
agreement, consisting of $25,829,000 in cash and a $500,000 promissory note. The
assets sold consisted primarily of land, buildings and equipment. The Company
recognized a gain on the sale of the assets of $7,817,000, net of income taxes
of $5,277,000. Proceeds from the sale were used to reduce outstanding debt. In
accordance with the provisions of Accounting Principles Board Opinion No. 30
concerning reporting the effect of disposal of a segment of a business, the
results of operations and the gain on disposal of the restaurants have been
classified as discontinued in the consolidated statements of earnings. The asset
purchase agreement provided for a potential additional future purchase price
payment to the Company if certain performance conditions were met. Subsequent to
May 30, 2002, the Company received additional proceeds of $2,050,000 pursuant to
this agreement and received full payment on the $500,000 promissory note. The
Company will recognize an additional gain on the sale of the restaurant segment
of $1,216,000, net of income taxes of $834,000, in the first quarter of fiscal
2003. Restaurant revenues for the years ended May 31, 2001 and May 25, 2000,
were $23,746,000 and $24,425,000, respectively.
4. Additional Balance Sheet Information
The composition of accounts and notes receivable is as follows:
May 30, 2002 May 31, 2001
- --------------------------------------------------------------------------------
(in thousands)
Trade receivables $ 6,741 $ 8,028
Notes receivable for interval ownership 843 588
Other notes receivables 2,753 1,804
Employee advances 54 97
Other receivables 5,653 3,690
- --------------------------------------------------------------------------------
$ 16,044 $ 14,207
================================================================================
The Company also has notes receivable for interval ownership totaling
$6,170,000 and $5,572,000, which are included in other long-term assets, net of
a reserve for uncollectible amounts of $505,000 and $255,000 as of May 30, 2002
and May 31, 2001, respectively. The notes bear fixed-rate interest between 11.9%
and 15.9% over the seven-year terms of the loans. The weighted average rate of
interest on outstanding notes receivable for interval ownership is 14.9%. The
notes are collateralized by the underlying vacation intervals.
The composition of property and equipment, which is stated at cost, is as
follows:
May 30, 2002 May 31, 2001
- --------------------------------------------------------------------------------
(in thousands)
Land and improvements $ 92,558 $ 94,156
Buildings and improvements 612,954 586,056
Leasehold improvements 9,082 7,583
Furniture, fixtures and equipment 266,872 245,500
Construction in progress 13,107 15,384
- --------------------------------------------------------------------------------
994,573 948,679
Less accumulated depreciation and amortization 310,934 268,333
- --------------------------------------------------------------------------------
$683,639 $680,346
================================================================================
35
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Long-Term Debt
Long-term debt is summarized as follows:
May 30, 2002 May 31, 2001
- --------------------------------------------------------------------------------
(in thousands
except payment data)
Mortgage notes due to 2009 $ 3,977 $ 4,430
Industrial Development Revenue Bonds due to 2006 2,668 5,219
Senior notes due May 31, 2005, with monthly
principal and interest payments of $362,000,
bearing interest at 10.22% 11,458 14,227
Senior notes 214,394 148,333
Unsecured term notes 26,612 29,273
Commercial paper 61,429 54,390
Revolving credit agreements - 72,500
- --------------------------------------------------------------------------------
320,538 328,372
Less current maturities 20,777 18,133
- --------------------------------------------------------------------------------
$299,761 $310,239
================================================================================
The mortgage notes, both fixed rate and adjustable, bear interest from
3.59% to 7.68% at May 30, 2002. The Industrial Development Revenue Bonds, both
fixed rate and adjustable, bear interest from 4.38% to 8.77%. The mortgage notes
and the Industrial Development Revenue Bonds are secured by the related land,
buildings and equipment.
The $214,394,000 of senior notes maturing in 2008 through 2014, require
annual principal payments in varying installments and bear interest payable
semiannually at fixed rates ranging from 6.66% to 7.93%, with a weighted-average
fixed rate of 7.32% at May 30, 2002.
The Company has unsecured term notes outstanding as follows:
May 30, May 31,
2002 2001
- --------------------------------------------------------------------------------
(in thousands
except payment data)
Note due May 31, 2004, with quarterly principal payments
of $781,000. The variable interest rate is based on the
LIBOR rate with an effective rate of 2.76% at May 30,
2002, and is payable quarterly. $ 6,250 $ 8,594
Note due January 31, 2004, with quarterly principal
payments of $714,000. The variable interest rate is based
on the LIBOR rate with an effective rate of 3.73% at
May 30, 2002, and is payable quarterly. 20,000 20,000
Note due April 28, 2003, with monthly payments of $20,000,
including interest at 2.00%. 201 438
Note due March 25, 2004, with monthly payments of $8,000,
including interest at 6.00%. 161 241
- --------------------------------------------------------------------------------
$26,612 $29,273
================================================================================
The Company issues commercial paper through an agreement with two banks, up
to a maximum of $65,000,000, which bears interest at rates ranging from 2.10% to
2.20% at May 30, 2002. The agreements require the Company to maintain unused
bank lines of credit at least equal to the principal amount of outstanding
commercial paper.
36
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Long-Term Debt (continued)
At May 30, 2002, the Company had credit lines totaling $170,000,000 in
place. No borrowings are outstanding on the $125,000,000 line, which bears
interest at LIBOR plus a margin which adjusts based on the Company's borrowing
levels. This agreement matures in 2004 and requires an annual facility fee of
..20% on the total commitment. No borrowings are outstanding on the $40,000,000
364-day revolving credit agreement, which bears interest at the bank's prime
reference rate (effectively 4.75% at May 30, 2002) or LIBOR plus a margin which
is adjusted based on the Company's borrowing levels. This revolving credit
agreement requires a facility fee of .30% and matures in December 2002. There
are also no borrowings outstanding on the remaining $5,000,000 line at May 30,
2002, which bears interest at the bank's prime reference rate. Based on
commercial paper outstanding, availability under the lines at May 30, 2002,
totaled $108,571,000.
The Company has the ability and intent to replace commercial paper
borrowings with long-term borrowings under its credit lines. Accordingly, the
Company has classified these borrowings at May 30, 2002, as long-term.
Scheduled annual principal payments on long-term debt for the five years
subsequent to May 30, 2002, are:
Fiscal Year (in thousands)
-----------------------------------------------------------
2003 $ 20,777
2004 96,560
2005 26,483
2006 25,713
2007 28,451
Thereafter 122,554
-----------------------------------------------------------
$ 320,538
===========================================================
Interest paid, net of amounts capitalized, in fiscal 2002, 2001 and 2000
totaled $18,090,000, $23,216,000 and $17,906,000, respectively.
On June 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires the Company to
recognize its derivatives as either assets or liabilities on the balance sheet
at fair value. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. Derivatives that are not hedges must be adjusted to fair value
through earnings.
The Company utilizes derivatives principally to manage market risks and
reduce its exposure resulting from fluctuations in interest rates. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objectives and strategies for undertaking
various hedge transactions. From June 1, 2001 to May 3, 2002, the Company had an
interest rate swap agreement that was considered effective and qualified as a
cash flow hedge. For derivatives that are designated and qualify as a cash flow
hedge, the effective portion of the gain or loss on the derivative is reported
as a component of other comprehensive loss and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings. The
Company's swap agreement effectively converted $25 million of the Company's
borrowings under revolving credit agreements from floating-rate debt to a
fixed-rate basis. The adoption of SFAS No. 133 on June 1, 2001, resulted in a
charge for the cumulative effect of an accounting change of $1,830,000
($1,098,000 net of tax) in other comprehensive loss. Through May 3, 2002, the
Company recorded the $961,000 ($577,000 net of tax) decrease in fair value
related to the cash flow hedge to other comprehensive loss. On May 3, 2002, the
Company terminated the swap, at which time cash flow hedge accounting ceased.
The fair value of the swap on the date of termination was a liability of
$2,791,000. The Company repaid borrowings under the revolving credit facility
previously hedged out of proceeds from its April 2002 issuance of additional
senior notes. From May 3, 2002 through May 30, 2002, the Company reclassified
$328,000 ($197,000 net of tax) from other comprehensive loss to interest
expense. The
37
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Long-Term Debt (continued)
remaining loss at May 30, 2002 in other comprehensive income will be
reclassified into earnings as interest expense through November 15, 2005, the
remaining life of the original hedge. The Company expects to reclassify
approximately $1,176,000 ($706,000 net of tax) of loss into earnings within the
next 12 months.
The fair value of the Company's $214,394,000 million of senior notes is
approximately $209,107,000. The carrying amounts of the Company's remaining
long-term debt, based on the respective rates and prepayment provisions of the
senior notes due May 31, 2005, approximate their fair value.
6. Shareholders' Equity
Shareholders may convert their shares of Class B Common Stock into shares
of Common Stock at any time. Class B Common Stock shareholders are substantially
restricted in their ability to transfer their Class B Common Stock. Holders of
Common Stock are entitled to cash dividends per share equal to 110% of all
dividends declared and paid on each share of the Class B Common Stock. Holders
of Class B Common Stock are entitled to ten votes per share while holders of
Common Stock are entitled to one vote per share on any matters brought before
the shareholders of the Company. Liquidation rights are the same for both
classes of stock.
Shareholders have approved the issuance of up to 3,237,500 shares of Common
Stock under various stock option plans. The options generally become exercisable
40% after two years, 60% after three years and 80% after four years. The
remaining options are exercisable five years after the date of the grant. At May
30, 2002, there were 1,674,520 shares available for grants under the plans.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), in accounting for
its employee stock options. Under APB No. 25, because the number of shares is
fixed and the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net earnings and earnings per share
required by SFAS No. 123, "Accounting for Stock Based Compensation," has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions: risk-free interest rates of 1.9%, 3.7% and 6.0% for
fiscal 2002, 2001 and 2000, respectively; a dividend yield of 1.5% for fiscal
2002 and 1.3% for fiscal 2001 and 2000; volatility factors of the expected
market price of the Company's Common Stock of 42% for fiscal 2002 and 49% for
fiscal 2001 and 2000, and an expected life of the option of approximately six
years in all years.
38
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Shareholders' Equity (continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Had
compensation cost been determined based upon the fair value at the grant date
for awards under the plans based on the provisions of SFAS No. 123, the
Company's pro forma earnings and earnings per share would have been as follows:
Year ended
- ---------------------------------------------------------------------------------------------------------------
May 30, 2002 May 31, 2001 May 25, 2000
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Pro forma earnings:
Pro forma earnings from continuing operations $ 21,371 $ 11,794 $ 20,440
Discontinued operations:
Income from discontinued operations, net of income taxes - 1,219 1,384
Gain on sale of discontinued operations, net of income taxes - 7,817 -
- ---------------------------------------------------------------------------------------------------------------
Pro forma earnings $ 21,371 $ 20,830 $ 21,824
===============================================================================================================
Pro forma earnings per common share - basic and diluted:
Continuing operations $.73 $.40 $.68
Discontinued operations - .31 .05
- ---------------------------------------------------------------------------------------------------------------
Pro forma earnings per common share - basic and diluted $.73 $.71 $.73
===============================================================================================================
A summary of the Company's stock option activity and related information
follows:
May 30, 2002 May 31, 2001 May 25, 2000
- ------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------
(options in thousands)
Outstanding at beginning of year 1,608 $12.79 1,202 $13.37 947 $14.17
Granted 517 14.05 539 11.54 404 12.06
Exercised (107) 11.78 (14) 10.09 (11) 9.61
Forfeited (146) 12.96 (119) 13.33 (138) 15.11
- -----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,872 $13.18 1,608 $12.79 1,202 $13.37
=======================================================================================================================
Exercisable at end of year 729 $13.55 619 $13.25 543 $12.53
=======================================================================================================================
Weighted average fair value of
options granted during year $5.14 $5.24 $5.89
- -----------------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of May 30, 2002, ranged from
$6.67 to $18.13. The weighted average remaining contractual life of those
options is 6.4 years. Additional information related to these options segregated
by exercise price range is as follows:
Exercise Price Range
$6.67 to $10.875 $10.8751 to $14.50 $14.51 to $18.125
- ----------------------------------------------------------------------------------------------------------------------
(options in thousands)
Options outstanding 132 1,387 353
Weighted average exercise price of options outstanding $9.15 $12.67 $16.71
Weighted average remaining contractual life of options
outstanding 3.4 7.2 4.5
Options exercisable 102 347 280
Weighted average exercise price of options exercisable $8.80 $12.37 $16.73
- ----------------------------------------------------------------------------------------------------------------------
39
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
6. Shareholders' Equity (continued)
Through May 30, 2002, the Company's Board of Directors has approved the
repurchase of up to 4,687,500 shares of Common Stock to be held in treasury. The
Company intends to reissue these shares upon the exercise of stock options and
for savings and profit-sharing plan contributions. The Company purchased 15,516,
369,713 and 527,617 shares pursuant to these authorizations during fiscal 2002,
2001 and 2000, respectively. At May 30, 2002, there were 1,959,267 shares
available for repurchase under these authorizations.
The Company's Board of Directors has authorized the issuance of up to
750,000 shares of Common Stock for The Marcus Corporation Dividend Reinvestment
and Associate Stock Purchase Plan. At May 30, 2002, there were 638,403 shares
available under this authorization.
The Company's loan agreements include, among other covenants, restrictions
on retained earnings and maintenance of certain financial ratios. At May 30,
2002, retained earnings of approximately $72,409,000 were unrestricted.
7. Employee Benefit Plans
The Company has a qualified profit-sharing savings plan (401(k) plan)
covering eligible employees. The 401(k) plan provides for a contribution of a
minimum of 1% of defined compensation for all plan participants and matching of
25% of employee contributions up to 6% of defined compensation. In addition, the
Company may make additional discretionary contributions. The Company also
sponsors unfunded nonqualified, defined-benefit and deferred compensation plans.
Pension and profit-sharing expense for all plans was $1,907,000, $1,838,000 and
$1,805,000 for fiscal 2002, 2001 and 2000, respectively.
The status of the Company's unfunded nonqualified, defined-benefit plan is
as follows:
May 30, 2002 May 31, 2001
- --------------------------------------------------------------------------------
(in thousands)
Change in benefit obligation:
Net benefit obligation at beginning of year $ 8,835 $ 7,268
Service cost 302 241
Interest cost 663 604
Actuarial loss 270 786
Benefits paid (128) (64)
- --------------------------------------------------------------------------------
Net benefit obligation at end of year $ 9,942 $ 8,835
================================================================================
Plan assets:
Funded status at end of year $(9,942) $(8,835)
Unrecognized net actuarial loss 2,123 1,918
Unrecognized prior service cost 23 27
Unrecognized transition obligation 225 301
- --------------------------------------------------------------------------------
Net amount recognized at end of year $(7,571) $(6,589)
================================================================================
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability $(7,571) $(6,589)
Additional minimum liability (596) -
Intangible asset 248 -
Accumulated other comprehensive income 348 -
- --------------------------------------------------------------------------------
Net amount recognized at end of year $(7,571) $(6,589)
================================================================================
Net periodic pension cost:
Service cost $ 302 $ 241
Interest cost 663 604
Net amortization of prior service cost
and transition obligation 144 107
- --------------------------------------------------------------------------------
$ 1,109 $ 952
================================================================================
40
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
7. Employee Benefit Plans (continued)
The benefit obligations were determined using an assumed discount rate
of 7.25% and an annual salary rate increase of 5.0% for both years.
8. Income Taxes
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under the liability method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates for the year in which the differences are expected to reverse.
The components of the net deferred tax liability were as follows:
May 30, 2002 May 31, 2001
- --------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 4,654 $ 3,593
Other 1,340 1,508
- --------------------------------------------------------------------------------
Total deferred tax assets 5,994 5,101
Deferred tax liability -
Depreciation and amortization 42,523 35,860
- --------------------------------------------------------------------------------
Net deferred tax liability included
in balance sheet $ 36,529 $ 30,759
================================================================================
Income tax expense consists of the following:
Year ended
- --------------------------------------------------------------------------------
May 30, May 31, May 25,
2002 2001 2000
- --------------------------------------------------------------------------------
(in thousands)
Currently payable:
Federal $ 4,517 $10,868 $11,031
State 539 2,606 3,317
Deferred 5,984 176 1,197
- --------------------------------------------------------------------------------
$11,040 $13,650 $15,545
================================================================================
Income tax expense is included in the accompanying consolidated statements of
earnings as follows:
Year ended
- --------------------------------------------------------------------------------
May 30, May 31, May 25,
2002 2001 2000
- --------------------------------------------------------------------------------
(in thousands)
Continuing operations $11,040 $ 7,550 $14,594
Discontinued operations - 6,100 951
- --------------------------------------------------------------------------------
$11,040 $13,650 $15,545
================================================================================
41
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
8. Income Taxes (continued)
A reconciliation of the statutory federal tax rate to the effective tax
rate for continuing operations follows:
Year ended
- --------------------------------------------------------------------------------
May 30, May 31, May 25,
2002 2001 2000
- --------------------------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 5.9 5.4 5.9
Other (7.9) (3.2) (.2)
- --------------------------------------------------------------------------------
33.0% 37.2% 40.7%
================================================================================
Included in other are historic federal and state tax credits for the year
ended May 30, 2002 and the nontaxable gain on insurance contracts for the year
ended May 31, 2001.
Income taxes paid, net of refunds received, in fiscal 2002, 2001 and 2000
totaled $12,552,000, $12,525,000 and $11,484,000, respectively.
9. Commitments, License Rights and Contingencies
Lease Commitments - The Company leases real estate under various
noncancellable operating leases with an initial term greater than one year.
Percentage rentals are based on the revenues at the specific rented property.
Certain sublease agreements include buyout incentives. Rent expense charged to
operations under these leases, including rent for discontinued operations, was
as follows:
Year ended
- --------------------------------------------------------------------------------
May 30, May 31, May 25,
2002 2001 2000
- --------------------------------------------------------------------------------
(in thousands)
Fixed minimum rentals $2,839 $3,339 $2,966
Percentage rentals 162 141 174
Sublease rental income (43) (7) (130)
- --------------------------------------------------------------------------------
$2,958 $3,473 $3,010
================================================================================
Payments to affiliated parties for lease obligations were approximately
$179,000 in fiscal 2002 and 2001 and $176,000 in fiscal 2000.
Aggregate minimum rental commitments at May 30, 2002, are as follows:
Fiscal Year (in thousands)
----------------------------------------------------------
2003 $ 2,878
2004 2,205
2005 2,256
2006 2,244
2007 2,113
Thereafter 28,344
----------------------------------------------------------
$ 40,040
==========================================================
Included in the above commitments is $2,382,000 in minimum rental
commitments to affiliated parties.
Commitments - The Company has commitments for the completion of
construction at various properties and the purchase of various properties
totaling approximately $5,157,000 at May 30, 2002.
42
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
9. Commitments, License Rights and Contingencies (continued)
License Rights - The Company has license rights to operate two hotels using
the Hilton trademark. Under the terms of the license, the Company is obligated
to pay fees based on defined gross sales.
Contingencies - The Company guarantees the debt of joint ventures and other
entities totaling approximately $17,043,000 at May 30, 2002. The debt of the
joint ventures is collateralized by the real estate, buildings and improvements
and all equipment of each joint venture.
10. Joint Venture Transactions
At May 30, 2002 and May 31, 2001, the Company held investments with
aggregate carrying values of $1,356,000 and $2,358,000, respectively, in various
approximately 50%-owned affiliates (joint ventures) which are accounted for
under the equity method.
The Company has receivables from the joint ventures of $3,760,000 and
$2,747,000 at May 30, 2002 and May 31, 2001, respectively. The Company earns
interest on $3,353,000 and $1,927,000 of the receivables at approximately prime
to prime plus 1.5% at May 30, 2002 and May 31, 2001, respectively.
Included in notes payable at May 30, 2002 and May 31, 2001, is $81,000 and
$176,000, respectively, due to joint ventures in connection with cash advanced
to the Company. The Company pays interest on the cash advances based on the
90-day certificate of deposit rates.
11. Related Party Transactions
On March 14, 2001, the Company acquired the lease rights for a property in
Chicago, Illinois, from a related party for $13.4 million. The purchase price
was based on independent appraisals and was approved by the Company's Board of
Directors. The Company expects to open this property as a Baymont Inn & Suites
in fiscal 2004, at which time the purchase price will be amortized on a
straight-line basis over the remaining lease term.
Included in notes payable at May 30, 2002 and May 31, 2001 is $2,086,000
and $2,716,000, respectively, due to certain entities owned by related parties.
The Company pays interest on the notes based on the prime rate (effectively
4.75% at May 30, 2002). The Company leases automobiles from Selig Executive
Leasing Company, whose President and Chief Executive Officer is a director of
the Company.
43
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. Business Segment Information
The Company evaluates performance and allocates resources based on the
operating income (loss) of each segment. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
Following is a summary of business segment information for 2000 through
2002:
Limited- Continuing
Service Hotels/ Corporate Operations Discontinued
Lodging Theatres Resorts Items Total Restaurants Total
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands)
2002
Revenues $125,711 $147,311 $114,914 $ 1,897 $389,833 $ - $389,833
Operating income (loss) 13,509 34,682 6,263 (6,996) 47,458 - 47,458
Depreciation and amortization 19,234 12,276 11,805 1,572 44,887 - 44,887
Assets 292,286 219,672 213,005 49,823 774,786 - 774,786
Capital expenditures and other 12,832 2,194 33,442 431 48,899 - 48,899
2001
Revenues $136,606 $127,476 $109,694 $ 1,559 $375,335 $23,746 $399,081
Operating income (loss) 16,309 18,549(1) 10,725 (6,752) 38,831 2,058 40,889
Depreciation and amortization 19,145 13,242 9,366 1,576 43,329 971 44,300
Assets 300,273 231,083 185,644 41,659 758,659 - 758,659
Capital expenditures and other 37,236 13,141 45,828 131 96,336 412 96,748
2000
Revenues $134,195 $122,254 $ 89,854 $ 1,827 $348,130 $24,425 $372,555
Operating income (loss) 20,993 22,007 10,806 (5,718) 48,088 2,342 50,430
Depreciation and amortization 19,041 11,696 7,962 1,759 40,458 1,027 41,485
Assets 284,698 234,317 142,400 51,979 713,394 11,755 725,149
Capital expenditures and other 21,215 39,559 33,562 4,204 98,540 952 99,492
- ------------------------------------------------------------------------------------------------------------------------------
(1) Includes a $3.5 million impairment charge.
Corporate items include amounts not allocable to the business segments.
Corporate revenues consist principally of rent and the corporate operating loss
includes general corporate expenses. Corporate information technology costs and
accounting shared services costs are allocated to the business segments based
upon several factors, including actual usage and segment revenues. Corporate
assets primarily include cash and cash equivalents, notes receivable,
receivables from joint ventures and land held for development.
44
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
13. Unaudited Quarterly Financial Information (in thousands except per share
data)
13 Weeks Ended
- --------------------------------------------------------------------------------
August 30, November 29, February 28, May 30,
Fiscal 2002 2001 2001 2002 2002
- --------------------------------------------------------------------------------
Revenues (1) $116,168 $83,984 $88,124 $101,557
Operating income 24,799 5,521 6,474 10,664
Net earnings 14,723 1,928 1,517 4,292
Net earnings per
diluted share $0.50 $0.07 $0.05 $0.14
- --------------------------------------------------------------------------------
14 Weeks
13 Weeks Ended Ended
- -------------------------------------------------------------------- --------
August 24, November 23, February 22, May 31,
Fiscal 2001 2000 2000 2001 2001
- -------------------------------------------------------------------- --------
Revenues (1) $107,630 $86,146 $86,152 $ 95,407
Operating income 23,052 10,244 3,109 2,426
Net earnings 11,449 4,096 341 5,890
Net earnings per
diluted share $0.39 $0.14 $0.01 $0.20
- -------------------------------------------------------------------- --------
(1) Revenues as previously reported in the Company's quarterly reports differ
from amounts set forth above because of the early adoption of EITF No.
00-14, "Accounting for Certain Sales Incentives" as more fully described in
Note 1 of the Notes to Consolidated Financial Statements. There was no
effect on previously reported operating income or net earnings.
13 Weeks Ended
--------------------------------------------------------------------------
August 30, November 29, February 28, May 30,
Fiscal 2002 2001 2001 2002 2002
--------------------------------------------------------------------------
Revenues as
previously reported $117,091 $84,633 $88,612 $102,132
Less certain sales
discounts (923) (649) (488) (575)
--------------------------------------------------------------------------
Revenues as restated $116,168 $83,984 $88,124 $101,557
==========================================================================
14 Weeks
13 Weeks Ended Ended
---------------------------------------------------------------- --------
August 24, November 23, February 22, May 31,
Fiscal 2001 2000 2000 2001 2001
---------------------------------------------------------------- --------
Revenues as
previously reported $108,828 $87,142 $86,876 $96,286
Less certain sales
discounts (1,198) (996) (724) (879)
---------------------------------------------------------------- -------
Revenues as restated $107,630 $86,146 $86,152 $95,407
================================================================ =======
45
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Company.
The information required by this item with respect to directors is
incorporated herein by reference to the information pertaining thereto set forth
under the caption entitled "Election of Directors" in the definitive Proxy
Statement for our 2002 Annual Meeting of Shareholders scheduled to be held on
October 10, 2002 (our "Proxy Statement"). The information required with respect
to executive officers appears at the end of Part I of this Form 10-K. The
required information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 by directors and executive officers is
incorporated by reference to the information pertaining thereto set forth under
the caption entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
in our Proxy Statement.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference
to the information pertaining thereto set forth under the caption entitled
"Executive Compensation" in our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table lists certain information about our two stock option
plans, our 1995 Equity Incentive Plan and our 1994 Nonemployee Director Stock
Option Plan, both of which were approved by our shareholders:
Number of securities
Number of securities remaining available for future
to be issued upon Weighted-average issuance under equity compensation
the exercise of exercise price of plans (excluding securities
outstanding options outstanding options reflected in the first column)
- -------------------- ------------------- ----------------------------------
1,872,000 $13.18 1,675,000
The other information required by this item is incorporated herein by
reference to the information pertaining thereto set forth under the caption
entitled "Stock Ownership of Management and Others" in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item, to the extent applicable, is
incorporated herein by reference to the information pertaining thereto set forth
under the caption entitled "Certain Transactions" in our Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements.
The information required by this item is set forth in "Item 8. Financial
Statements and Supplementary Data" above.
(a)(2) Financial Statement Schedules.
All schedules are omitted because they are inapplicable, not required under
the instructions or the financial information is included in the consolidated
financial statements or notes thereto.
(a)(3) Exhibits.
The exhibits filed herewith or incorporated by reference herein are set
forth on the attached Exhibit Index.*
(b) Reports on Form 8-K.
We did not file a Form 8-K with the Securities and Exchange Commission
during the fourth quarter of fiscal 2002.
- ------------------
* Exhibits to this Form 10-K will be furnished to shareholders upon advance
payment of a fee of $0.20 per page, plus mailing expenses. Requests for
copies should be addressed to Thomas F. Kissinger, General Counsel and
Secretary, The Marcus Corporation, 250 East Wisconsin Avenue, Suite 1700,
Milwaukee, Wisconsin 53202.
46
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, we have duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE MARCUS CORPORATION
Date: August 27, 2002 By: /s/ Stephen H. Marcus
-----------------------------------
Stephen H. Marcus,
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of us and in the
capacities as of the date indicated above.
By: /s/ Stephen H. Marcus By: /s/ Daniel F. McKeithan, Jr.
--------------------------------- -----------------------------------
Stephen H. Marcus, Chairman of Daniel F. McKeithan, Jr., Director
the Board, President and Chief
Executive Officer (Principal
Executive Officer)
By: /s/ Douglas A. Neis By: /s/ Diane Marcus Gershowitz
--------------------------------- -----------------------------------
Douglas A. Neis, Chief Financial Diane Marcus Gershowitz, Director
Officer and Treasurer (Principal
Financial Officer and Accounting
Officer)
By: /s/ Bruce J. Olson By: /s/ Timothy E. Hoeksema
--------------------------------- -----------------------------------
Bruce J. Olson, Director Timothy E. Hoeksema, Director
By: /s/ Philip L. Milstein By: /s/ Allan H. Selig
--------------------------------- -----------------------------------
Philip L. Milstein, Director Allan H. Selig, Director
By: /s/ Bronson J. Haase By: /s/ James D. Ericson
--------------------------------- -----------------------------------
Bronson J. Haase, Director James D. Ericson, Director
47
EXHIBIT INDEX
3.1 Restated Articles of Incorporation. [[Incorporated by reference to
Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly
period ended November 13, 1997.]]
3.2 Bylaws, as amended as of December 17, 1998. [[Incorporated by
reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the
quarterly period ended November 26, 1998.]]
4.1 Senior Note Purchase Agreement dated May 31, 1990, between the Company
and The Northwestern Mutual Life Insurance Company. [[Incorporated by
reference to Exhibit 4 to our Annual Report on Form 10-K for the
fiscal year ended May 31, 1990.]]
4.2 The Marcus Corporation Note Purchase Agreement dated October 25, 1996.
[[Incorporated by reference to Exhibit 4.1 to our Quarterly Report on
Form 10-Q for the quarterly period ended November 14, 1996.]]
4.3 First Supplement to Note Purchase Agreements dated May 15, 1998.
[[Incorporated by reference to Exhibit 4.3 to our Annual Report on
Form 10-K for the fiscal year ended May 28, 1998.]]
4.4 Second Supplement to Note Purchase Agreements dated May 7, 1999.
[[Incorporated by reference to Exhibit 4.4 to our Annual Report on
Form 10-K for the fiscal year ended May 27, 1999.]]
4.5 Credit Agreement dated as of December 28, 2001, among The Marcus
Corporation, Bank One, NA, as Administrative Agent, the other
financial institutions parties thereto and Banc One Capital Markets,
Inc., as Lead Arranger and Sole Book Runner. [[Incorporated by
reference to Exhibit 4.5 to our Quarterly Report on Form 10-Q for the
quarterly period ended November 29, 2001.]]
4.6 Third Supplement to Note Purchase Agreements dated April 1, 2002.
[[Incorporated by reference to Exhibit 4.6 to our Quarterly Report on
Form 10-Q for the quarterly period ended February 28, 2002.]]
Other than as set forth in Exhibits 4.1, 4.2, 4.3, 4.4, 4.5 and 4.6,
we have numerous instruments which define the rights of holders of
long-term debt. These instruments, primarily promissory notes, have
arisen from the purchase of operating properties in the ordinary
course of business. These instruments are not being filed with this
Annual Report on Form 10-K in reliance upon Item 601(b)(4)(iii) of
Regulation S-K. Copies of these instruments will be furnished to the
Securities and Exchange Commission upon request.
E-1
We are the guarantor and/or obligor under various loan agreements in
connection with operating properties (primarily Baymont Inns & Suites)
which were financed through the issuance of industrial development
bonds. These loan agreements and the additional documentation relating
to these projects are not being filed with this Annual Report on Form
10-K in reliance upon Item 601(b)(4)(iii) of Regulation S-K. Copies of
these documents will be furnished to the Securities and Exchange
Commission upon request.
10.1* The Marcus Corporation 1995 Equity Incentive Plan, as amended.
[[Incorporated by reference to Exhibit 10.4 to our Annual Report on
Form 10-K for the fiscal year ended May 27, 1999.]]
10.2* The Marcus Corporation 1994 Nonemployee Director Stock Option Plan.
[[Incorporated by reference to Exhibit A to our 1994 Proxy
Statement.]]
21 Our subsidiaries as of May 30, 2002.
23 Consent of Ernst & Young LLP.
99.1 Proxy Statement for our 2002 Annual Meeting of Shareholders. (Our
Proxy Statement for the 2002 Annual Meeting of Shareholders will be
filed with the Securities and Exchange Commission under Regulation 14A
within 120 days after the end of our fiscal year. Except to the extent
specifically incorporated by reference, the Proxy Statement for our
2002 Annual Meeting of Shareholders shall not be deemed to be filed
with the Securities and Exchange Commission as part of this Annual
Report on Form 10-K.)
99.2 Written Statements Pursuant to 189 U.S.C.ss.1350.
* This exhibit is a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item 14(c) of Form
10-K.
E-2