UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 27, 2003
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12604
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THE MARCUS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1139844
- ------------------------------------------ -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
250 East Wisconsin Avenue, Suite 1700
Milwaukee, Wisconsin 53202
- ------------------------------------------ -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 905-1000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AT APRIL 10, 2003 - 19,956,741
CLASS B COMMON STOCK OUTSTANDING AT APRIL 10, 2003 - 9,505,185
THE MARCUS CORPORATION
----------------------
INDEX
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PART I - FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Balance Sheets
(February 27, 2003 and May 30, 2002).............................. 3
Statements of Earnings
(Thirteen and thirty-nine weeks ended
February 27, 2003 and February 28, 2002).......................... 5
Statements of Cash Flows
(Thirty-nine weeks ended
February 27, 2003 and February 28, 2002).......................... 6
Condensed Notes to Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 17
Item 4. Procedures and Controls........................................... 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 18
Signatures.................................................................. S-1
Certifications.............................................................. S-2
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
February 27, May 30,
2003 2002
------------ ---------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 6,515 $ 5,614
Accounts and notes receivable 13,539 16,044
Receivables from joint ventures, net of reserves 3,422 3,760
Refundable income taxes 727 4,947
Real estate and development costs 2,742 2,532
Other current assets 5,309 4,512
--------- ---------
Total current assets 32,254 37,409
Property and equipment:
Land and improvements 89,476 92,558
Buildings and improvements 624,182 612,954
Leasehold improvements 7,450 9,082
Furniture, fixtures and equipment 270,211 266,872
Construction in progress 5,066 13,107
--------- ---------
Total property and equipment 996,385 994,573
Less accumulated depreciation and amortization 338,464 310,934
--------- ---------
Net property and equipment 657,921 683,639
Other assets:
Investments in joint ventures 2,154 1,356
Goodwill 11,772 11,806
Other 44,559 40,576
--------- ---------
Total other assets 58,485 53,738
--------- ---------
TOTAL ASSETS $ 748,660 $ 774,786
========= =========
See accompanying notes to consolidated financial statements.
3
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
February 27, May 30,
2003 2002
------------ ---------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,302 $ 3,497
Accounts payable 17,501 17,211
Taxes other than income taxes 12,273 13,947
Accrued compensation 5,003 6,555
Other accrued liabilities 15,772 11,265
Current maturities of long-term debt 20,015 20,777
----------- ----------
Total current liabilities 73,866 73,252
Long-term debt 254,417 299,761
Deferred income taxes 37,638 36,529
Deferred compensation and other 14,493 11,176
Shareholders' equity:
Preferred Stock, $1 par; authorized 1,000,000
shares; none issued
Common Stock, $1 par; authorized 50,000,000 shares;
issued 21,684,328 shares at February 27, 2003 and
21,584,239 shares at May 30, 2002 21,684 21,584
Class B Common Stock, $1 par; authorized 33,000,000 shares;
issued and outstanding 9,505,185 at February 27, 2003 and
9,605,274 at May 30, 2002 9,505 9,606
Capital in excess of par 41,447 41,523
Retained earnings 313,796 300,623
Accumulated other comprehensive loss (1,441) (1,866)
----------- ----------
384,991 371,470
Less cost of Common Stock in treasury (1,792,367 shares at
February 27, 2003 and 1,863,027 shares at May 30, 2002) (16,745) (17,402)
----------- ----------
Total shareholders' equity 368,246 354,068
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 748,660 $ 774,786
=========== ==========
See accompanying notes to consolidated financial statements.
4
THE MARCUS CORPORATION
Consolidated Statements of Earnings (Unaudited)
(in thousands, except per share data) February 27, 2003 February 28, 2002
-------------------------- -------------------------
13 Weeks 39 Weeks 13 Weeks 39 Weeks
-------- -------- -------- --------
Revenues:
Rooms and telephone $ 34,714 $129,106 $ 33,740 $126,419
Theatre admissions 26,854 76,737 25,329 71,616
Theatre concessions 12,388 35,420 11,891 33,269
Food and beverage 8,204 25,814 7,707 23,445
Other income 9,826 33,273 9,457 33,527
-------- -------- -------- --------
Total revenues 91,986 300,350 88,124 288,276
Costs and expenses:
Rooms and telephone 18,204 58,884 17,193 57,967
Theatre operations 20,199 58,699 18,575 53,577
Theatre concessions 2,651 7,925 2,675 7,773
Food and beverage 6,725 19,923 6,441 19,042
Advertising and marketing 6,744 21,439 6,560 19,710
Administrative 10,257 30,367 8,973 28,821
Depreciation and amortization 11,246 34,112 11,274 33,396
Rent 628 1,845 720 2,154
Property taxes 3,095 11,364 4,406 12,424
Preopening expenses 18 21 29 1,092
Other operating expenses 4,469 15,114 4,804 15,526
-------- -------- -------- --------
Total costs and expenses 84,236 259,693 81,650 251,482
-------- -------- -------- --------
Operating income 7,750 40,657 6,474 36,794
Other income (expense):
Investment income (loss) (1,577) (342) 432 1,548
Interest expense (4,809) (15,106) (4,295) (13,969)
Gain (loss) on disposition of property, equipment and
investments in joint ventures 1,539 2,859 (66) 1,965
-------- -------- -------- --------
(4,847) (12,589) (3,929) (10,456)
-------- -------- -------- --------
Earnings from continuing operations before income taxes 2,903 28,068 2,545 26,338
Income taxes 1,168 11,410 1,028 8,170
-------- -------- -------- --------
Earnings from continuing operations 1,735 16,658 1,517 18,168
-------- -------- -------- --------
Discontinued operations (Note 2):
Gain on sale of discontinued operations, net of applicable
income taxes - 1,216 - -
-------- -------- -------- --------
Net earnings $ 1,735 $ 17,874 $ 1,517 $ 18,168
======== ======== ======== ========
Earnings per share - basic and diluted:
Continuing operations $ 0.06 $ 0.57 $ 0.05 $ 0.62
Discontinued operations - 0.04 - -
-------- -------- -------- --------
Net earnings per share $ 0.06 $ 0.61 $ 0.05 $ 0.62
======== ======== ======== ========
Weighted average shares outstanding:
Basic 29,389 29,365 29,248 29,224
Diluted 29,542 29,533 29,505 29,414
See accompanying notes to consolidated financial statements.
5
THE MARCUS CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
39 Weeks Ended
------------------------------
February 27, February 28,
2003 2002
------------ ------------
(in thousands)
OPERATING ACTIVITIES:
Net earnings $ 17,874 $ 18,168
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Losses on loans to and investments in joint ventures, net of
distributions 3,030 684
Gain on disposition of property, equipment and other assets (4,909) (1,965)
Amortization of loss on swap agreement 937 -
Depreciation and amortization 34,112 33,396
Deferred income taxes 1,109 416
Deferred compensation and other 3,317 902
Changes in assets and liabilities:
Accounts and notes receivable 2,505 (159)
Real estate and development costs (210) 1,795
Other current assets (797) 245
Accounts payable 290 (5,958)
Income taxes 3,845 4,886
Taxes other than income taxes (1,674) (1,662)
Accrued compensation (1,552) (1,436)
Other accrued liabilities 4,507 3,990
---------- -----------
Total adjustments 44,510 35,134
---------- -----------
Net cash provided by operating activities 62,384 53,302
INVESTING ACTIVITIES:
Capital expenditures (15,529) (40,109)
Net proceeds from disposals of property, equipment and other assets 10,927 1,406
Purchase of interest in joint ventures (477) -
Increase in other assets (4,119) (1,691)
Cash advanced to joint ventures (1,862) (2,104)
---------- -----------
Net cash used in investing activities (11,060) (42,498)
FINANCING ACTIVITIES:
Debt transactions:
Net proceeds from issuance of notes payable and long-term debt 551 15,142
Principal payments on notes payable and long-term debt (46,852) (16,596)
Equity transactions:
Treasury stock transactions, except for stock options (185) 5
Exercise of stock options 765 957
Dividends paid (4,702) (4,674)
---------- -----------
Net cash used in financing activities (50,423) (5,166)
---------- -----------
Net increase in cash and cash equivalents 901 5,638
Cash and cash equivalents at beginning of year 5,614 1,499
---------- -----------
Cash and cash equivalents at end of period $ 6,515 $ 7,137
========== ===========
See accompanying notes to consolidated financial statements.
6
THE MARCUS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS FOR THE
THIRTEEN AND THIRTY-NINE WEEKS ENDED
FEBRUARY 27, 2003
(Unaudited)
1. General
Accounting Policies - Refer to the Company's audited financial statements
(including footnotes) for the fiscal year ended May 30, 2002, contained in
the Company's Form 10-K Annual Report for such year, for a description of
the Company's accounting policies.
Basis of Presentation - The consolidated financial statements for the
thirteen and thirty-nine weeks ended February 27, 2003 and February 28,
2002 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring accruals
necessary to present fairly the unaudited interim financial information at
February 27, 2003, and for all periods presented, have been made. The
results of operations during the interim periods are not necessarily
indicative of the results of operations for the entire year.
Comprehensive Income - Accumulated other comprehensive loss consists of the
change in fair value of hedging transactions, the accumulated net
unrealized losses on available for sale securities and the minimum pension
liability, net of tax. Accumulated other comprehensive loss was $1,441,000
and $1,866,000 as of February 27, 2003 and May 30, 2002, respectively.
Total comprehensive income for the thirteen and thirty-nine weeks ended
February 27, 2003 was $1,841,000 and $18,299,000, respectively. Total
comprehensive income for the thirteen and thirty-nine weeks ended February
28, 2002 was $1,646,000 and $15,603,000, respectively.
Reclassifications - Certain reclassifications have been made to the prior
year's financial statements to conform to the current year presentation.
2. Discontinued Operations
The restaurant business segment was sold on May 24, 2001 and is presented
as discontinued operations in the accompanying consolidated financial
statements. The asset purchase agreement provided for a potential
additional future purchase price payment to the Company if certain
performance conditions were met. The Company received additional proceeds
of $2,050,000 on July 9, 2002 pursuant to this agreement and recognized an
additional gain on the sale of the restaurant segment of $1,216,000, net of
income taxes of $834,000.
7
3. Business Segment Information
The Company's primary operations are reported in the following three
business segments: Limited-Service Lodging, Theatres and Hotels/Resorts.
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.
Following is a summary of business segment information for the thirteen and
thirty-nine weeks ended February 27, 2003 and February 28, 2002 (in
thousands):
13 Weeks Ended Limited-Service Corporate
February 27, 2003 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- --------- -----
Revenues $26,745 $40,852 $24,105 $ 284 $ 91,986
Operating income (loss) (425) 10,684 (636) (1,873) 7,750
13 Weeks Ended Limited-Service Corporate
February 28, 2003 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- --------- -----
Revenues $25,354 $38,346 $23,957 $ 467 $ 88,124
Operating income (loss) (316) 9,981 (1,548) (1,643) 6,474
39 Weeks Ended Limited-Service Corporate
February 27, 2003 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- --------- -----
Revenues $94,737 $116,225 $88,250 $ 1,138 $ 300,350
Operating income (loss) 9,841 28,416 7,885 (5,485) 40,657
39 Weeks Ended Limited-Service Corporate
February 28, 2003 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- --------- -----
Revenues $93,908 $108,248 $84,761 $ 1,359 $ 288,276
Operating income (loss) 11,506 25,498 4,958 (5,168) 36,794
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and Analysis of
Results of Operations and Financial Condition 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 could 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 preopening 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; and (ix) the adverse
impact on business and consumer spending on travel, leisure and entertainment
resulting from terrorist attacks in the United States, the United States'
responses thereto and subsequent related hostilities, including the current war
with Iraq. 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-Q and we undertake no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
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 2003 and
2002 are both 52-week years. 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 the following 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's fiscal
2003 results have been presented as discontinued operations in the accompanying
financial statements and in this discussion.
9
The following table sets forth revenues, operating income, earnings from
continuing operations, net earnings and earnings per share for the third quarter
and first three quarters of fiscal 2003 and 2002 (in millions, except for per
share and variance percentage data):
Third Quarter First Three Quarters
---------------------------------------- --------------------------------------
Variance Variance
------------------- ------------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------- -------- ----- ----- ------- -------
Revenues $92.0 $88.1 $ 3.9 4.4% $300.4 $288.3 $ 12.1 4.2%
Operating income 7.8 6.5 1.3 19.7% 40.7 36.8 3.9 10.5%
Earnings from continuing
operations 1.7 1.5 0.2 14.4% 16.7 18.2 (1.5) -8.3%
Net earnings 1.7 1.5 0.2 14.4% 17.9 18.2 (0.3) -1.6%
Earnings per share-Diluted:
Continuing operations $ .06 $ .05 $ .01 20.0% $ .57 $ .62 $ (.05) -8.1%
Net earnings per share $ .06 $ .05 $ .01 20.0% $ .61 $ .62 $ (.01) -1.6%
Revenues increased in each of our three operating divisions during the
third quarter of fiscal 2003 compared to the same quarter last year. Increases
in our theatre and hotels/resorts divisions' operating income (earnings before
other income/expense and income taxes) during the third quarter and first three
quarters of fiscal 2003 compared to the same periods last year were partially
offset by small operating income decreases from our limited-service lodging
division. During the third quarter of fiscal 2003, operating income from our two
lodging divisions (and the hotel industry in general) continued to be negatively
impacted by an overall reduction in business travel brought on by the economic
environment and the uncertainty surrounding a then-potential war with Iraq. Last
year's third quarter operating results from our lodging divisions were
negatively impacted by a recessionary economic environment accelerated by the
terrorist attacks on September 11, 2001.
Increased interest expense and an investment loss reported during the
fiscal 2003 third quarter negatively impacted earnings from continuing
operations and net earnings during our fiscal 2003 third quarter and first three
quarters compared to the same periods of fiscal 2002. Our interest expense, net
of investment income (and losses), totaled $6.4 million and $15.4 million for
the third quarter and first three quarters of fiscal 2003, respectively,
compared to $3.9 million and $12.4 million during the same periods last year.
During the third quarter of fiscal 2003, we reported a one-time $2.2 million
investment loss related to loans to and investments in a Baymont Inns & Suites
joint venture that has experienced significant financial difficulties in the
months following September 11, 2001. We have a limited number of joint ventures
and our exposure to additional losses related to these joint ventures is not
significant. In addition, the increase in interest expense is also the result of
our issuance of fixed rate long-term senior notes during the fourth quarter of
fiscal 2002 in lieu of lower cost variable interest rate borrowings in place
during these periods last year. The resulting increase in interest expense was
partially offset by an overall reduction in our long-term debt during the third
quarter and first three quarters of fiscal 2003 compared to last year's same
periods.
A lower than normal effective income tax rate during the first three
quarters of fiscal 2002 has also negatively impacted comparisons of fiscal 2003
earnings from continuing
10
operations and net earnings to fiscal 2002 results. Our effective income tax
rate during fiscal 2002 was significantly reduced as a result of the one-time
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 first three quarters earnings from
continuing operations and net earnings would have been approximately $2.5
million, or $.09 per share, lower than we reported. Income taxes during the
remaining quarter of fiscal 2003 are expected to be more comparable to fiscal
2002 income taxes for the same quarter.
We recognized gains on disposition of property and equipment totaling $1.5
million during the third quarter of fiscal 2003 compared to a loss of $66,000
during the prior year same period. The fiscal 2003 third quarter gain was
primarily the result of the sales of a redeveloped former theatre location and a
former restaurant location. Gains on disposition of property and equipment for
the first three quarters of fiscal 2003 of $2.9 million exceed gains of $2.0
million during the first three quarters of fiscal 2002. The timing of periodic
sales of our property and equipment vary from quarter to quarter, resulting in
variations in our gains or losses on disposition of property and equipment.
Theatres
The following table sets forth revenues, operating income and operating
margin for our theatre division for the third quarter and first three quarters
of fiscal 2003 and 2002 (in millions, except for variance percentage and
operating margin):
Third Quarter First Three Quarters
---------------------------------------- --------------------------------------
Variance Variance
------------------- ------------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------- -------- ----- ----- ------- -------
Revenues $40.9 $38.3 $ 2.6 6.5% $116.2 $108.2 $ 8.0 7.4%
Operating income 10.7 10.0 0.7 7.0% 28.4 25.5 2.9 11.4%
Operating margin 26.2% 26.0% 24.4% 23.6%
(% of revenues)
Consistent with the seasonal nature of the motion picture exhibition
industry, the third quarter of our fiscal year is typically one of the strongest
periods for our theatre division due to the traditionally strong holiday movie
season. Despite the fact that last year's third quarter results were very
strong, our fiscal 2003 third quarter theatre operating results represent our
seventh straight record quarter for this division. Contributing to the increased
third quarter and first three quarters operating margin were increased box
office, concession and other ancillary revenues and reduced advertising costs,
partially offset by increased film rental costs.
The following table breaks out revenues for the theatre division for the
third quarter and first three quarters of fiscal 2003 and 2002 (in millions,
except for variance percentage):
Third Quarter First Three Quarters
---------------------------------------- --------------------------------------
Variance Variance
------------------- ------------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------- -------- ----- ----- ------- -------
Box office receipts $26.9 $25.3 $ 1.6 6.0% $ 76.7 $ 71.6 $ 5.1 7.2%
Concession revenues 12.4 11.9 0.5 4.2% 35.4 33.3 2.1 6.5%
Other revenues 1.6 1.1 0.5 43.0% 4.1 3.3 0.8 21.0%
----- ----- ------- ----- ------ ------ ----- -----
Total revenues $40.9 $38.3 $ 2.6 6.5% $116.2 $108.2 $ 8.0 7.4%
11
The increases in box office receipts during the third quarter and first
three quarters of fiscal 2003 compared to the same periods last year were due to
both an increase in average ticket price and increased attendance, despite our
having fewer screens in operation during fiscal 2003 compared to the same
periods last year. Our average ticket price increased 3.6% and 3.3%,
respectively, during the third quarter and first three quarters of fiscal 2003
compared to the same periods last year. We ended the third quarter with two
fewer company-owned theatres, 10 fewer company-owned screens, three additional
managed theatres and 34 additional managed screens compared to the prior year.
Concession revenues during the fiscal 2003 third quarter increased as a result
of increased attendance and a 1.9% increase in our average concession sales per
person compared to the third quarter of fiscal 2002. For the first three
quarters of fiscal 2003, our average concession sales per person have increased
2.8% compared to last year's same period. Management fees and increased screen
advertising revenues have contributed to the increase in other revenues during
fiscal 2003 compared to the prior year same periods.
Total theatre attendance for the third quarter and first three quarters of
fiscal 2003 increased 2.2% and 3.6%, respectively, compared to the same periods
last year. Total theatre attendance at our comparable locations increased 4.8%
during the first three quarters of fiscal 2003, compared to last year's same
period. The increases in total attendance and the resulting increases in box
office receipts and concession revenues during the third quarter and first three
quarters of fiscal 2003 were primarily the result of increased consumer appeal
of the films compared to the same periods of fiscal 2002. During the third
quarter specifically, the entire increase in attendance compared to the prior
year occurred during the five-week holiday period between Thanksgiving Day and
New Years Day, and we ended the month of December with two consecutive record
box office weeks for our theatres. The third quarter of fiscal 2003 included
fifteen films that produced box office receipts in excess of $600,000 for us,
compared to only ten films reaching that amount during the third quarter of
fiscal 2002. Top films during the quarter included Lord of the Rings: Two
Towers, Catch Me If You Can, Harry Potter and the Chamber of Secrets, Maid in
Manhattan and Chicago. During the first three quarters of fiscal 2003, 13 films
have generated box office receipts in excess of $1.5 million for the division,
compared to only 9 films with box office receipts in excess of that amount
during the first three quarters of fiscal 2002.
The fiscal 2003 fourth quarter has started off slowly for this division,
due in part to the fact that Easter, a time period which historically has higher
theatre attendance, is three weeks later than the prior year and possibly
further negatively impacted by consumer interest in the initial television
coverage of the war in Iraq. Historically, however, movies have always performed
well during times of war and economic uncertainty, providing people with an
escape from the harsh realities of the world. Although April and May film
releases will include the very promising Anger Management, X-Men 2, Daddy Day
Care and The Matrix Reloaded, we do not anticipate that the theatre division
will match last year's fourth quarter operating results, which included three of
the top six films of fiscal 2002, including Ice Age, Spiderman and Star Wars:
the Attack of the Clones. The slate of movies for the summer looks strong and
will include sequels to the hits Charlie's Angels, Dumb and Dumber, Tomb Raider,
Fast and Furious, American Pie and The Terminator. In addition, two new animated
films from Disney and Dreamworks are scheduled for release, as well as
additional potential hits such as Hollywood Homicide and The Hulk. Revenues for
the theatre business and the motion picture industry in
12
general are heavily dependent upon the general audience appeal of available
films, together with studio marketing, advertising and support campaigns, all
factors over which we have no control.
We ended the third quarter of fiscal 2003 with a total of 454 company-owned
screens in 43 theatres and 34 managed screens in 3 theatres compared to 464
company-owned screens in 45 theatres at the end of the same period last year.
Five new screens at existing theatres are currently under development, with
several additional screens planned, all of which are expected to open during
fiscal 2004.
Limited-Service Lodging
The following table sets forth revenues, operating income and operating
margin for our limited-service lodging division for the third quarter and first
three quarters of fiscal 2003 and 2002 (in millions, except for variance
percentage and operating margin):
Third Quarter First Three Quarters
---------------------------------------- --------------------------------------
Variance Variance
------------------- ------------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------- -------- ----- ----- ------- -------
Revenues $26.7 $25.4 $ 1.3 5.5% $94.7 $ 93.9 $ 0.8 0.9%
Operating income (0.4) (0.3) (0.1) -34.5% 9.8 11.5 (1.7) -14.5%
Operating margin -1.6% -1.2% 10.4% 12.3%
(% of revenues)
Comparable Baymont Inns & Suites experienced an 8.0% and a 2.5% increase in
revenue per available room, or RevPAR, during the fiscal 2003 third quarter and
first three quarters, respectively, compared to the same periods last year. The
increase in RevPAR during the third quarter was the result of increased
occupancy, with our average daily rate decreasing during the quarter. The third
quarter of fiscal 2003 and 2002 each included a very difficult environment for
lodging. Fiscal 2002 results were negatively impacted by the challenging
post-September 11, 2001 economic climate. One year later, during the third
quarter of fiscal 2003, business travel remained below historical levels and
uncertainty related to the then-impending war with Iraq impacted both the
economy in general, and the travel industry in particular, during the period. We
are encouraged by the fact that, despite this challenging environment for
lodging, we were able to report significant increases in occupancy and RevPAR
during the fiscal 2003 third quarter.
In fact, the revenue increases of our limited-service, mid-priced Baymont
Inns & Suites properties during the third quarter of fiscal 2003 continue to be
better than the results of the majority of the properties in this lodging
industry segment. Data received from outside industry resources, such as Smith
Travel Research, indicates that our company-owned or operated Baymont Inns &
Suites realized gains in market share for the third consecutive quarter during
fiscal 2003. Specifically, our fiscal 2003 third quarter RevPAR increase of 8.0%
compares very favorably to a reported decrease of 0.3% for the mid-price without
food and beverage segment of the lodging industry and 0.1% decrease for our
specific set of competitors for the same period. We believe that our continued
sales and marketing efforts to increase brand awareness, including more
effectively utilizing all channels of distribution, have resulted in exposing
our brand to many new customers and differentiating it from our competitors,
contributing to the improved revenue performance relative to others in our
industry.
13
We owned and operated seven Woodfield Suites all-suite hotels during the
third quarters of fiscal 2003 and 2002. Although revenues increased slightly
during the third quarter of fiscal 2003 compared to the very challenging third
quarter of fiscal 2002, operating income from Woodfield Suites decreased during
the third quarter and first three quarters of fiscal 2003 compared to the same
periods of fiscal 2002. Reduced average rates at these properties resulted in
RevPAR decreases of 0.6% and 1.7% during the fiscal 2003 third quarter and first
three quarters, respectively, compared to the same periods last year. A
continued reduction in mid-week business travel has been the primary contributor
to the overall decline in Woodfield Suites' operating performance.
The limited-service lodging division's operating income and operating
margin decreased slightly during the fiscal 2003 third quarter compared to the
same period last year. The single biggest factor contributing to this decrease
was the fact that during last year's third quarter, our property in Salt Lake
City, Utah reported incremental profits of approximately $300,000 as a result of
business related to the Winter Olympics. In addition, several other factors,
including reduced Woodfield Suites' operating income and increased utility
costs, contributed to the slight decline in operating income during the third
quarter. Our division's operating income and operating margin during the first
three quarters of fiscal 2003 has decreased compared to the same period last
year due to the factors identified above along with a decline in revenues during
our historically busy summer first quarter.
Our current strategies for this division continue to focus on increasing
occupancy and brand awareness at our Baymont Inns & Suites. Our frequent stay
program, Guest OvationsTM, contributed approximately 29% of our revenues during
the fiscal 2003 third quarter compared to 13% during the same quarter last year,
a trend that we expect to continue. Room nights booked through our reservation
center are nearly 30% ahead of last year during the third quarter. Our positive
RevPAR trends in relation to others in our industry continued in March, although
bookings throughout the industry as a whole have declined during the initial
weeks of the war. We currently believe that we will continue to see better than
average RevPAR improvement during our fiscal 2003 fourth quarter compared to
others in our industry segment, although it is not likely that our RevPAR
increase will be as large as it was during the third quarter. Our relative lack
of dependence on the airline industry for our customer base and our lower price
point should continue to contribute to our better performance. We continue to
believe that a full recovery for the industry will not occur until the
uncertainties surrounding the war and economy dissipate and business travel
approaches previous levels.
At the end of the fiscal 2003 third quarter, we owned or operated 93
Baymont Inns & Suites and franchised an additional 89 Inns, bringing the total
number of Baymont Inns & Suites in operation to 182 compared to a total of 190
Baymont Inns & Suites (95 company-owned or operated and 95 franchised) at the
end of the third quarter of fiscal 2002. There were seven approved franchised
locations in development at the end of the fiscal 2003 third quarter. In
addition, one company-owned Baymont in downtown Chicago, Illinois and one
joint-venture property in Ontario, California are currently under construction.
We continue to believe that the current economic and financing environment will
constrain new hotel development in the near-term, which may limit the number of
new franchised locations approved in the coming months. Conversely, we also
continue to believe that the significantly reduced supply growth throughout
14
the industry should favorably impact operating results of existing hotels as an
economic recovery takes hold.
Hotels and Resorts
The following table sets forth revenues, operating income and operating
margin for our hotels and resorts division for the third quarter and first three
quarters of fiscal 2003 and 2002 (in millions, except for variance percentage
and operating margin):
Third Quarter First Three Quarters
---------------------------------------- --------------------------------------
Variance Variance
------------------- ------------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------- -------- ----- ----- ------- -------
Revenues $24.1 $24.0 $ 0.1 0.6% $88.3 84.8 $ 3.5 4.1%
Operating income (0.6) (1.5) 0.9 58.9% 7.9 5.0 2.9 59.0%
Operating margin -2.6% -6.5% 8.9% 5.8%
(% of revenues)
Total division revenues and operating income for the third quarter and
first three quarters of fiscal 2003 increased over the fiscal 2002 comparable
periods primarily due to additional revenues from our newest hotels (the Hotel
Phillips, the Hilton Madison at Monona Terrace, and our Timber Ridge Lodge
management contract) and improved results from our two Milwaukee hotels. In
addition, last year's second and third quarters included the very difficult
weeks and months immediately following September 11, 2001, resulting in
favorable comparisons during the fiscal 2003 comparable periods. Comparisons to
last year's first three quarters were also favorably impacted by the fact that
the division's fiscal 2002 operating results included approximately $1.1 million
of preopening expenses related to the Hotel Phillips and Timber Ridge Lodge.
Conversely, a temporary regulatory change in our accounting for timeshare
sales at our vacation ownership development at the Grand Geneva Resort & Spa and
the ongoing economic difficulties suppressing business travel have negatively
impacted operating results and comparisons to the prior year for the hotels and
resorts division during the fiscal 2003 third quarter. As indicated last
quarter, we have sold all available timeshare units in our original three
buildings at our Grand Geneva development and we are currently under
construction on a new building that will include 32 new units, doubling the size
of the existing development. While this new building is under construction, we
are required to account for current sales of timeshare units under the
percentage of completion method. At the end of the fiscal 2003 third quarter, we
had approximately $2.3 million in vacation ownership sales, along with related
costs of sales, deferred on our balance sheet. We currently anticipate that the
new building will be completed prior to the end of fiscal 2003 and that all
sales will be fully recognized by our fiscal year-end.
As noted in our limited-service lodging discussion, it continues to be a
very challenging environment for hotels, particularly those operating in the
upscale segments of the industry. Several of our hotels and resorts derive a
significant portion of their revenues from corporate group business, which
continues to be below historical levels and in some cases, even below last
year's levels. Our hotels and resorts have generally performed at or better than
others in our segment of the industry, likely due at least partially to our
property and location mix. The division's total RevPAR for comparable
company-owned properties increased 0.8% during the
15
fiscal 2003 third quarter compared to the same period last year, with all of the
increase resulting from increased occupancy. Excluding the Hotel Phillips, which
opened during the second quarter last year, the division's total RevPAR for
comparable company-owned properties during the fiscal 2003 first three quarters
increased 1.8%. Year to date, the increase in RevPAR compared to the same period
last year was the result of both slightly increased occupancy and an overall
1.4% increase in average daily rate for these comparable properties. We have
attempted to retain the integrity of our rate structure during a period when
others in the industry are heavily discounting, believing that this strategy is
in our best long-term interest.
Our outlook for the future performance of this division is unchanged. While
we were pleased with the improvement in operating results during the fiscal 2003
third quarter, they remain below operating results we would expect from this
division given the significant investments we have made over the last few years.
Based upon advance bookings, we expect our Milwaukee hotels to continue to
perform better than the prior year at least through the summer and we would
anticipate that the performance of our newest hotels will continue to improve.
Our fiscal 2003 fourth quarter operating results should also benefit from the
completion of our newest timeshare building and the resulting recognition of all
deferred revenues. On the other hand, we remain concerned about the current
economic climate and we have seen an overall reduction in advance reservations
at our hotels during the initial weeks of the war with Iraq. Thus, we continue
to expect reduced business travel and corporate group business compared to
historical levels in the near term. We will continue to make the necessary
investments needed to keep our hotel assets in top condition and we will
continue to monitor our operating costs very closely during this difficult
environment.
Discontinued Operations
We sold our KFC restaurant business segment on May 24, 2001. The asset
purchase agreement with the buyer of these restaurants provided for a potential
additional future purchase price payment if certain performance conditions were
met. During the first quarter of fiscal 2003, the buyer elected to terminate
this provision of the agreement by paying us an additional $2.1 million. As a
result, an additional gain on the sale of the restaurant segment of $1.2
million, net of income taxes, is included in the reported results for the first
three quarters of fiscal 2003.
FINANCIAL CONDITION
Our lodging and movie theatre businesses each generate significant and
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 $97
million of unused credit lines as of the end of the third quarter, should be
adequate to support the ongoing operational liquidity needs of our businesses.
During the fiscal 2003 third quarter, we allowed a $40 million, 364-day
revolving credit agreement with several banks to expire due to the significant
amount of available credit lines without this agreement.
Net cash provided by operating activities increased by $9.1 million during
the first three quarters of fiscal 2003 to $62.4 million, compared to $53.3
million during the prior year's first three quarters. The increase was due
primarily to favorable timing differences in collections of accounts and notes
receivable and payments of accounts payable.
16
Net cash used in investing activities during the fiscal 2003 first three
quarters totaled $11.1 million, compared to $42.5 million during the first three
quarters of fiscal 2002. The decrease in net cash used in investing activities
was primarily the result of decreased capital expenditures and increased cash
proceeds from disposals of property and equipment. Capital expenditures totaled
$15.5 million during the first three quarters of fiscal 2003 compared to $40.1
million during the prior year's first three quarters. Fiscal 2003 first three
quarters' capital expenditures included $5.2 million incurred in our hotels and
resorts division, $3.1 million incurred in our theatre division and $6.8 million
incurred in our limited-service lodging division to fund ongoing capital
projects. The increased cash proceeds are primarily due to proceeds from the
sale of a former theatre location, one company-owned Baymont Inn, several former
restaurant locations and the additional payment received on the sale of our KFC
restaurants.
Net cash used in financing activities during the first three quarters of
fiscal 2003 totaled $50.4 million compared to $5.2 million during the first
three quarters of fiscal 2002. As a result of increased cash provided by
operating activities and reduced capital expenditures compared to the same
period last year, excess cash available was used to reduce our outstanding
commercial paper borrowings during the quarter. Our principal payments on notes
payable and long-term debt totaled $46.9 million during the first three quarters
of fiscal 2003 compared to $16.6 million during the same period last year, with
minimal new debt added in fiscal 2003 compared to $15.1 million of new debt
added during the first three quarters of fiscal 2002.
Our overall debt levels continued to decrease during the fiscal 2003 third
quarter. Our debt capitalization ratio was 0.43 at February 27, 2003, compared
to 0.48 at the prior fiscal year end. Based upon our current expectations for
fiscal 2003 capital expenditure levels of approximately $30-$35 million, we
anticipate that our long-term debt total and debt-capitalization ratio will
remain near current levels for the remainder of fiscal 2003.
The actual timing and extent of the implementation of our current expansion
plans will depend in large part on industry and general economic conditions, our
financial performance and available capital, the competitive environment,
evolving customer needs and trends and the availability of attractive
opportunities. It is likely that our plans will continue to evolve and change in
response to these and other factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not experienced any material changes in our market risk exposures
since May 30, 2002.
17
Item 4. Procedures and Controls
a. Evaluation of disclosure controls and procedures
------------------------------------------------
Based on their evaluations, as of a date within 90 days of the filing
date of this Quarterly Report on Form 10-Q, our principal executive
officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms.
b. Changes in internal controls
----------------------------
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
--------
99.1 Written Statement of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350.
99.2 Written Statement of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350.
b. Reports on Form 8-K
-------------------
We did not file any Form 8-K during the quarter to which this Form
10-Q relates.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MARCUS CORPORATION
----------------------
DATE: April 14, 2003 By: /s/ Stephen H. Marcus
--------------------------------------
Stephen H. Marcus,
Chairman of the Board, President and
Chief Executive Officer
DATE: April 14, 2003 By: /s/ Douglas A. Neis
--------------------------------------
Douglas A. Neis
Chief Financial Officer and Treasurer
S-1
CERTIFICATIONS
I, Stephen H. Marcus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Marcus
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: April 14, 2003
By: /s/ Stephen H. Marcus
-------------------------------------
Stephen H. Marcus,
Chairman of the Board, President and
Chief Executive Officer
S-2
I, Douglas A. Neis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Marcus
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: April 14, 2003
By: /s/ Douglas A. Neis
-------------------------------------
Douglas A. Neis,
Chief Financial Officer and Treasurer
S-3