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 29, 2003 of
THE MARCUS CORPORATION
100 East Wisconsin Avenue - Suite 1900
Milwaukee, Wisconsin 53202-4125
(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.
We are an accelerated filer (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting common equity held by non-affiliates as
of November 28, 2002 was $299,727,339. 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 15, 2003, there were 20,073,325 shares of our Common Stock, $1 par
value, and 9,480,185 shares of our Class B, Common Stock, $1 par value,
outstanding.
Portions of our definitive Proxy Statement for our 2003 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 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 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; 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 hostilities. 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.
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General
We are engaged primarily in three business segments: movie theatres;
limited-service lodging; 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 29, 2003, our theatre operations included 46 movie theatres with
488 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 29, 2003, our limited-service lodging operations included a chain
of 180 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 84 of our Baymont Inns &
Suites were owned and operated by us, nine were operated under joint venture
agreements or management contracts and 87 were franchised.
As of May 29, 2003, 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.
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Strategic Plan
Our current strategic plans include the following goals and strategies:
o Continuing to maximize the return on our significant recent investments in
movie theatres through both revenue and cost improvements, while pursuing
selective screen additions and opportunities for additional growth in our
theatre and screen base. Our investment of over $200 million in our theatre
division in recent years, more than doubling our number of Company-owned
movie theatre screens from 219 at the end of fiscal 1996 to 454 screens at
the end of fiscal 2003 while adding stadium seating in approximately 87% of
our first-run screens (the highest percentage in the industry), has
contributed to two straight years of record operating performance. Our
operating plans include a continued emphasis on expanding ancillary
revenues, with a particular focus on pre-show advertising revenues, a
rapidly growing source of income for our theatres. Our capital plan for
fiscal 2004 anticipates screen addition projects that may ultimately add as
many as 20 new screens to existing locations, including two new large
UltraScreens(TM).
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 continue to 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 industry segment) and
from our emphasis on opening new franchised and joint venture Baymont Inns
& Suites. As of the end of fiscal 2003, six new franchised properties, one
joint venture and one Company-owned property were under development. The
joint venture location (our first in the important California market) and
the majority of the new franchised properties are expected to open during
fiscal 2004. The Company-owned property, our first urban Baymont Inn &
Suites, is being built in downtown Chicago, Illinois and is expected to
open sometime in fiscal 2005. As a result of the reduced demand for lodging
and a constrained financing market for new hotel development, industry
supply growth has also slowed considerably. Accordingly, we currently have
significantly fewer new franchised inns in development than previously
planned. As industry conditions improve, we hope to increase the pace of
our franchise growth. By emphasizing franchising, we hope that the Baymont
brand will grow more rapidly, conserving our capital for other strategic
purposes. Our current plans could also include exploring additional growth
of the Baymont brand through potential joint venture investments, focusing
on selected key strategic urban and suburban markets.
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 our 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 just
prior to a period of time (post September 11) that has been generally
regarded as one of the most difficult periods ever experienced by the hotel
industry. Despite this challenging environment, our hotels and resorts
division reported significant improvement in fiscal 2003, and we expect
these recent development projects, plus anticipated improvement at our core
properties as business travel improves, to provide continued earnings
growth opportunities during fiscal 2004 and beyond. We expect that the
majority of our anticipated 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. We continue to pursue a
strategy that would involve the use of third-party equity funds to 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 equity funds.
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, 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 and the subsequent war on terrorism,
combined with the economic downturn, have had an unprecedented impact on the
travel and lodging industry. We are unable to predict with certainty if or when
lodging demand, particularly from the business traveler, will return to
pre-September 11 levels. Although we are encouraged by recent signs that
business travel is beginning to increase, we believe that it is likely that the
travel and lodging industries will continue to be negatively impacted to some
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degree by reduced business travel during some or all of fiscal 2004. Any
additional domestic terrorist attacks may have a similar or worse effect on the
lodging industry than that experienced as a result of the September 11 attacks.
Theatre Operations
At the end of fiscal 2003, we owned or operated 46 movie theatre locations
with a total of 488 screens in Wisconsin, Illinois, Minnesota and Ohio for an
average of 10.6 screens per location, compared to an average of 10.4 screens per
location at the end of fiscal 2002 and 9.8 at the end of fiscal 2001. Included
in the fiscal 2003 totals are three theatres with 34 screens that we manage for
another owner. Our facilities include 19 megaplex theatres (12 or more screens),
representing 62% of our total screens, 25 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.
During fiscal 2003 we opened three new screens, including our third
UltraScreen(TM), at an existing theatre and closed one theatre with five
screens. We anticipate adding up to 20 additional screens, including two more
UltraScreens(TM), to existing theatres during fiscal 2004. We believe that we
may close approximately six to eight theatres with up to 31 screens over the
next three years with minimal impact on operating results. At fiscal year-end,
we operated 467 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
2003 featured such box office hits as Lord of the Rings: Two Towers, Harry
Potter and the Chamber of Secrets, My Big Fat Greek Wedding, Signs, Austin
Powers in Goldmember, Matrix Reloaded, Chicago and Catch Me If You Can.
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 87% 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 6,700 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.
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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.
Limited-Service Lodging Operations
Baymont Inns & Suites
We own, operate or franchise a total of 180 limited-service facilities,
with nearly 17,000 available guest rooms, under the name "Baymont Inns & Suites"
in 31 states. A total of 87 of these Baymont Inns & Suites are owned and
operated by franchisees, 84 are owned and operated by us and nine are operated
by us under joint venture agreements or management contracts. During fiscal
2003, three new properties owned and operated by our franchisees were opened. In
addition, six new franchised properties, one joint venture property and one new
owned property were under construction or in development at fiscal year-end.
During fiscal 2003, we sold one owned Baymont Inn & Suites. Additionally, eight
franchised properties left the system during fiscal 2003.
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 52 and 185 guest rooms. We believe that
providing amenities usually associated with full-service hotels distinguishes
Baymont Inns & Suites from many of its 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.
Our Guest OvationsTM program offers 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
dataports. 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. As a result of the reduced demand for lodging and a constrained
financing market for new hotel development, industry supply growth has also
slowed considerably. Accordingly, we currently have significantly fewer new
franchised inns in development than previously planned. As industry conditions
improve, we hope to increase the pace of our franchise growth.
Woodfield Suites
We operate seven mid-priced, all-suite hotels under the name "Woodfield
Suites" in Wisconsin, Colorado, Ohio, Illinois 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
We own one Budgetel Inn in Appleton, Wisconsin.
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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 recently renovated tower rooms), 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 2003,
the Pfister Hotel earned its 27th consecutive four-diamond award from the
American Automobile Association and was named one of the "World's Best Business
Hotels" by Travel & Leisure magazine. 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 and a new 870-car parking ramp that opened early in
fiscal 2003.
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 manage and sell units of a vacation ownership development that is
adjacent to the Grand Geneva Resort & Spa. The development includes 62 timeshare
units (32 of which were built in fiscal 2003) and a timeshare sales center. 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 2003, the
Miramonte Resort earned its 5th consecutive four-diamond award from the American
Automobile Association. We anticipate converting one of the buildings into a
world-class spa during fiscal 2004, reducing the number of available guest rooms
by six.
Hotel Phillips
We also own and operate the Hotel Phillips, a 217-room hotel in Kansas
City, Missouri. After purchasing and completely restoring this landmark hotel,
we reopened it in September 2001. The Hotel Phillips has conference rooms
totaling 5,600 square feet of meeting space, a 2,300 square foot ballroom, a
restaurant and a lounge.
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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 also 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 on the same campus as 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 also 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.
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 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.
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 and
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.
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.
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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 2003, we had approximately 7,000 employees, a
majority of whom were employed on a part-time basis. A number of our (i) hotel
employees in Minneapolis, Minnesota are covered by collective bargaining
agreements which expire in April 2005; (ii) operating engineers in the Hilton
Milwaukee City Center and Pfister Hotel are covered by collective bargaining
agreements which expire in November 2003 and April 2004, respectively; and (iii)
painters in the Pfister Hotel are covered by a collective bargaining agreement
which expires in May 2004. In addition, we are negotiating with operating
engineers in our Hilton Madison at Monona Terrance with respect to a collective
bargaining agreement.
Web Site Information
Our corporate web site is www.marcuscorp.com. All of our Form 10-Ks, Form
10-Qs and Form 8-Ks, and amendments thereto, are available on this web site as
soon as practical after they have been filed with the SEC.
Item 2. Properties.
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We own the real estate of a substantial portion of our facilities,
including, as of May 29, 2003, 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 29, 2003, 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.
Our owned, leased and franchised properties are summarized, as of May 29,
2003, in the following table:
Total Number Leased from Managed for Managed for
of Facilities Unrelated Related Unrelated Owned By
Business Segment in Operation Owned(1) Parties Parties Parties Franchisees(2)
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Theatres:
Movie Theatres 46 33 10 0 3 0
Family Entertainment Center 1 1 0 0 0 0
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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
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Limited-Service Lodging:
Baymont Inns & Suites 180 84 0 8 1 87
Woodfield Suites 7 7 0 0 0 0
Budgetel Inns 1 1 0 0 0 0
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Total 247 132 10 8 10 87
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(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.
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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 2004 (assuming we exercise all of our renewal and extension
options).
Item 3. Legal Proceedings.
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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 2003 fiscal year.
Item 4. Submission of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of our shareholders during the fourth
quarter of our 2003 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 and Chief Executive Officer 68
Bruce J. Olson Group Vice President and President of Marcus Theatres Corporation 53
H. Fred Delmenhorst Vice President-Human Resources 62
Thomas F. Kissinger General Counsel and Secretary 43
Douglas A. Neis Chief Financial Officer and Treasurer 44
William J. Otto President and Chief Operating Officer of Marcus Hotels, Inc. 47
James R. Abrahamson President and Chief Operating Officer of Baymont Inns, Inc. 48
- ---------------------------------------------------------------------------------------------------------------------
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 41 years.
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.
William J. Otto joined the company in 1993 as the Senior Vice President of
Operations of Marcus Hotels, Inc. In 1996, Mr. Otto was promoted to Senior Vice
President and Chief Operating Officer of Marcus Hotels, Inc. and in April 2001
he was further promoted to President and Chief Operating Officer of Marcus
Hotels, Inc.
James R. Abrahamson joined the company in April 2000 as President and Chief
Operating Officer of Baymont Inns, Inc. Mr. Abrahamson previously served as
Executive Vice President of the Franchise Hotel Group of Hilton Hotels
Corporation from January 1995 until April 2000.
9
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 2002
and 2003, 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 15, 2003, there were 2,384
shareholders of record of our Common Stock and 43 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:
1st 2nd 3rd 4th
Fiscal 2003 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
High $16.74 $15.13 $15.34 $15.34
Low 11.90 11.94 13.02 11.91
- -------------------------------------------------------------------------------
1st 2nd 3rd 4th
Fiscal 2002 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
High $15.72 $14.21 $15.80 $17.98
Low 13.45 10.59 13.45 13.02
10
Item 6. Selected Financial Data.
- ------ -----------------------
Eleven-Year Financial Summary
2003 2002 2001(2)(3) 2000 1999 1998(4) 1997 1996(5) 1995 1994(6) 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Results
(in thousands)
Revenues(8) $ 396,915 389,833 375,335 348,130 332,179 303,881 273,693 234,325 201,472 169,680 151,662
Earnings from continuing $ 19,307 22,460 12,740 21,238 20,958 26,343 29,254 27,885 -- -- --
operations(8)
Net earnings $ 20,556 22,460 21,776 22,622 23,144 28,444 30,881 42,307 24,136 22,829 16,482
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Data(1)
Earnings per share - $ .66 .76 .43 .71 .70 .87 .98 .94 -- -- --
continuing
operations(8)
Net earnings per share $ .70 .76 .74 .76 .77 .94 1.04 1.42 .82 .77 .63
Cash dividends per share $ .22 .22 .22 .22 .22 .22 .20 .23(7) .15 .13 .11
Weighted average shares 29,549 29,470 29,345 29,828 30,105 30,293 29,745 29,712 29,537 29,492 26,208
outstanding
(in thousands)
Book value per share $ 12.54 12.07 11.57 11.03 10.48 10.00 9.37 8.51 7.29 6.61 5.95
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Position
(in thousands)
Total assets $ 755,457 774,786 758,659 725,149 676,116 608,504 521,957 455,315 407,082 361,606 309,455
Long-term debt $ 203,307 299,761 310,239 286,344 264,270 205,632 168,065 127,135 116,364 107,681 78,995
Shareholders' equity $ 369,900 354,068 337,701 325,247 313,574 302,531 277,293 251,248 214,464 193,918 173,980
Capital expenditures and $ 26,004 48,899 96,748 99,492 111,843 115,880 107,514 83,689 77,083 75,825 47,237
other
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Current ratio .40 .51 .40 .41 .45 .43 .39 .62 .41 .67 .90
Debt/capitalization ratio .43 .48 .49 .48 .47 .42 .39 .35 .37 .37 .34
Return on average 5.7% 6.5% 6.6% 7.1% 7.5% 9.8% 11.7% 18.2% 11.8% 12.4% 11.0%
shareholders' equity
- ----------------------------------------------------------------------------------------------------------------------------------
[GRAPHIC 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.
(3) Includes impairment charge of $2.1 million or $0.07 per share.
(4) Includes charge of $2.3 million or $0.08 per share for costs associated with
the Baymont name change.
(5) Includes gain of $14.8 million or $0.49 per share on sale of certain
restaurant locations.
(6) Includes gain of $1.8 million or $0.06 per share for cumulative effect of
change in accounting for income taxes.
(7) Includes annual dividend of $0.18 per share and one quarterly dividend of
$0.05 per share.
(8) 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 2003 and
fiscal 2002 were 52-week years, while fiscal 2001 was a 53-week year. Our
upcoming fiscal 2004 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: theatres, limited-service lodging and hotels and 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.
Another record year for our movie theatres and significant year-over-year
improvement in our hotels and resorts division contributed to increased
operating income during fiscal 2003, despite another difficult year for the
lodging industry as a whole. Operating income from our two lodging divisions
during fiscal 2003 continued to be negatively impacted by an overall reduction
in business travel brought on by the economic environment and uncertainties
surrounding the war with Iraq. In addition, investment losses during fiscal 2003
and the favorable impact of historic tax credits related to our Kansas City
Hotel Phillips project during fiscal 2002 resulted in decreased net earnings
during fiscal 2003 compared to the prior year.
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 F03 v. F02 Change F02 v. F01
----------------------- ------------------------
2003 2002 Amt. Pct. 2001(1) Amt. Pct.
- --------------------------------------------------------------------------------------------------------------------
Revenues $396.9 $389.8 $ 7.1 1.8% $375.3 $14.5 3.9%
Operating income 49.4 47.5 1.9 4.1% 38.8 8.7 22.2%
Earnings from
continuing operations 19.3 22.5 (3.2) -14.0% 12.7 9.8 76.3%
Net earnings 20.6 22.5 (1.9) -8.5% 21.8 0.7 3.1%
Earnings per share - Diluted:
Continuing operations $ .66 $ .76 $ (.10) -13.2% $ .43 $ .33 76.7%
Net earnings per share .70 .76 (.06) -7.9% .74 .02 2.7%
- --------------------------------------------------------------------------------------------------------------------
(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. 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.
Fiscal 2003 versus Fiscal 2002
All three operating divisions contributed to the increase in revenues
during fiscal 2003. A second consecutive year of record operating performance
from our theatre division and significant improvement in operating results from
our hotels and resorts division resulted in an increase in overall operating
income (earnings before other income/expense and income taxes), despite
decreases in operating income from our limited-service lodging division and a
nearly $1.0 million, or 8.9%, increase in our total gas and electric costs for
the year. A slight increase in interest expense, investment losses reported
during fiscal 2003 and a significantly higher effective income tax rate
contributed to our decreased earnings from continuing operations and net
earnings during fiscal 2003.
12
We recognized a net investment loss of approximately $150,000 during fiscal
2003, compared to investment income of $2.4 million during the prior year.
Investment income has historically included interest earned on cash equivalents
and notes receivable, including notes related to the sale of timeshare units in
our hotels and resorts division. The significant decrease in investment income
during fiscal 2003 was primarily the result of a $2.6 million investment loss
related to loans to and investments in Baymont Inns & Suites joint ventures that
have 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, we also recognized a $494,000 pre-tax investment loss on securities
held during fiscal 2003, whose decline in fair value was deemed to be other than
temporary. Prior to this year, losses on these available for sale investments
had previously been included in other comprehensive loss in shareholders'
equity.
Our interest expense totaled $19.6 million for fiscal 2003, representing an
increase of $800,000, or 4.4%, over fiscal 2002 interest expense of $18.8
million. The increase in interest expense was 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 the
majority of fiscal 2002. The resulting increase in interest expense was
partially offset by an overall reduction in our long-term debt during fiscal
2003 compared to last year, due primarily to reduced capital expenditures during
fiscal 2003.
We recognized gains on disposition of property, equipment and investments
in joint ventures from continuing operations of $2.1 million during fiscal 2003,
compared to gains on disposition of property and equipment of $2.5 million
during fiscal 2002. The fiscal 2003 gains were primarily the result of the sales
of a redeveloped former theatre location, two former restaurant locations and
several parcels of excess land. 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 are actively attempting to
sell additional parcels of excess land and we believe that additional net gains
on disposition of property and equipment may be recognized during the coming
year.
We reported income tax expense on continuing operations for fiscal 2003 of
$12.4 million, an increase of $1.3 million over fiscal 2002 despite reduced
earnings before income taxes. Our effective tax rate for fiscal 2003 was 39.1%
compared to 33.0% in fiscal 2002. The significantly lower effective tax rate
during the prior 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. We anticipate that our effective tax rate during fiscal 2004
will likely remain in the 39-40% range.
Net earnings during fiscal 2003 included an after-tax gain on sale of
discontinued operations of $1.3 million, or $.04 per share (a detailed
discussion of this item is included in the Discontinued Operations section).
Weighted average shares outstanding were 29.5 million for both fiscal 2003 and
fiscal 2002. All per share data is presented on a diluted basis.
Fiscal 2002 versus Fiscal 2001
Our theatre and hotels and resorts divisions contributed to the increase in
revenues during fiscal 2002. 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
year-end results.
A record operating performance from our theatre division resulted in an
increase in overall operating income, despite decreases in operating income from
our two lodging divisions. Comparisons to prior year 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 our fiscal
2001 year-end results. On the other hand, significantly reduced utility and snow
removal costs during fiscal 2002 compared to the prior year favorably impacted
each of our divisions by a total of $1.9 million and $690,000, respectively.
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
13
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.
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 the prior year
throughout fiscal 2002 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.
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 only $300,000
during fiscal 2001. The majority of the fiscal 2002 gain was the result of a
sale of a joint venture Baymont Inn & Suites property, 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.
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. As previously
noted, the significantly lower effective tax rate during fiscal 2002 was the
result of the favorable impact of federal and state historic tax credits.
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 of $7.8 million, or $.27 per
share (a detailed discussion of this item is included in the Discontinued
Operations section). Weighted average shares outstanding were 29.5 million for
fiscal 2002 and 29.3 million for fiscal 2001.
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, net earnings would have increased by approximately
$564,000, net of taxes, and earnings per share would have increased by $.02 for
the year.
Current Plans
We incurred approximately $26 million in aggregate capital expenditures
during fiscal 2003 after averaging over $100 million per year during the 5-year
period from fiscal 1997 through 2001. We entered this year with plans to spend
up to $65 to $75 million, but delays on several projects and an intentional
effort to reduce capital spending during this challenging economic environment
resulted in the significantly reduced capital expenditures during the year. We
currently anticipate that our capital expenditures during fiscal 2004 may return
to the $65 to $75 million range, but we will continue to monitor our operating
results and economic conditions so that we can respond appropriately. Based upon
current capital projects approved or pending, it is likely that we will incur a
minimum of $50 million of capital expenditures during fiscal 2004.
Our current strategic plans include the following goals and strategies:
o Continuing to maximize the return on our significant recent investments in
movie theatres through both revenue and cost improvements, while pursuing
selective screen additions and opportunities for additional growth in our
theatre and screen base. Our investment of over $200 million in our theatre
division in recent years, more than doubling our number of Company-owned
movie theatre screens from 219 at the end of fiscal 1996 to 454 screens at
the end of fiscal 2003 while adding stadium seating in approximately 87% of
our first-
14
run screens (the highest percentage in the industry), has contributed to
two straight years of record operating performance. Our operating plans
include a continued emphasis on expanding ancillary revenues, with a
particular focus on pre-show advertising revenues, a rapidly growing source
of income for our theatres. Our capital plan for fiscal 2004 anticipates
screen addition projects that may ultimately add as many as 20 new screens
to existing locations, including two new large UltraScreens(TM).
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 continue to 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 industry segment) and
from our emphasis on opening new franchised and joint venture Baymont Inns
& Suites. As of the end of fiscal 2003, six new franchised properties, one
joint venture and one Company-owned property were under development. The
joint venture location (our first in the important California market) and
the majority of the new franchised properties are expected to open during
fiscal 2004. The Company-owned property, our first urban Baymont Inn &
Suites, is being built in downtown Chicago, Illinois and is expected to
open sometime in fiscal 2005. As a result of the reduced demand for lodging
and a constrained financing market for new hotel development, industry
supply growth has also slowed considerably. Accordingly, we currently have
significantly fewer new franchised inns in development than previously
planned. As industry conditions improve, we hope to increase the pace of
our franchise growth. By emphasizing franchising, we hope that the Baymont
brand will grow more rapidly, conserving our capital for other strategic
purposes. Our current plans could also include exploring additional growth
of the Baymont brand through potential joint venture investments, focusing
on selected key strategic urban and suburban markets.
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 our 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 just
prior to a period of time (post September 11) that has been generally
regarded as one of the most difficult periods ever experienced by the hotel
industry. Despite this challenging environment, our hotels and resorts
division reported significant improvement in fiscal 2003, and we expect
these recent development projects, plus anticipated improvement at our core
properties as business travel improves, to provide continued earnings
growth opportunities during fiscal 2004 and beyond. We expect that the
majority of our anticipated 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. We continue to pursue a
strategy that would involve the use of third-party equity funds to 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 equity funds.
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, 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 and the subsequent war on terrorism,
combined with the economic downturn, have had an unprecedented impact on the
travel and lodging industry. We are unable to predict with certainty if or when
lodging demand, particularly from the business traveler, will return to
pre-September 11 levels. Although we are encouraged by recent signs that
business travel is beginning to increase, we believe that it is likely that the
travel and lodging industries will continue to be negatively impacted to some
degree by reduced business travel during some or all of fiscal 2004. Any
additional domestic 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 37.9% of our consolidated revenues and 64.0% of our
consolidated operating income, excluding corporate items, during fiscal
15
2003. 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 F03 v. F02 Change F02 v. F01
------------------------ ----------------------
2003 2002 Amt. Pct. 2001 Amt. Pct.
- --------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Revenues $150.4 $147.3 $3.1 2.1% $127.5 $19.8 15.6%
Operating income 36.2 34.7 1.5 4.3% 22.1(1) 12.6 57.0%
Operating margin 24.0% 23.5% 17.3%(1)
- --------------------------------------------------------------------------------------------------------------------
(1) Excludes $3.5 million before-tax impairment charge.
Number of screens and locations at fiscal year-end 2003(1) 2002(1) 2001
- --------------------------------------------------------------------------------------------------------------------
Theatre screens 488 490 482
Theatre locations 46 47 49
- --------------------------------------------------------------------------------------------------------------------
Average screens per location 10.6 10.4 9.8
- --------------------------------------------------------------------------------------------------------------------
(1) Includes 34 screens at three locations managed for another owner.
The following table further breaks down revenues for the theatre division
for the last three fiscal years:
Change F03 v. F02 Change F02 v. F01
----------------------- ------------------------
2003 2002 Amt. Pct. 2001 Amt. Pct.
- --------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Box office receipts $ 98.8 $ 96.5 $2.3 2.4% $ 84.5 $12.0 14.2%
Concession revenues 45.6 45.3 0.3 0.6% 38.1 7.2 18.8%
Other revenues 6.0 5.5 0.5 9.2% 4.9 0.6 14.2%
- --------------------------------------------------------------------------------------------------------------------
Total revenues $ 150.4 $ 147.3 $3.1 2.1% $ 127.5 $19.8 15.6%
====================================================================================================================
Fiscal 2003 versus Fiscal 2002
The increase in theatre division revenues during fiscal 2003 compared to
the prior year occurred despite a slight decrease in overall attendance and a
reduction in the number of screens in operation throughout the year. We opened
three new screens, including our third UltraScreen(TM), at a theatre in
Appleton, Wisconsin during fiscal 2003, generating $500,000 of additional
revenues during the year. We closed one theatre with five screens during fiscal
2003. Closing that theatre and five other theatres during fiscal 2002 negatively
impacted comparisons of this year's theatre division revenues to prior year
results by $1.0 million, although our screen closings had a minimal impact on
operating income.
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 fiscal 2003.
Total theatre attendance at our comparable locations was up nearly 5% after the
first three quarters of the fiscal year, driven by a very good summer and an
outstanding holiday season that included two consecutive record box office weeks
for our theatre division. This attendance increase was offset during the fourth
quarter. Total theatre attendance decreased 1.3% during fiscal 2003 compared to
the prior year and attendance at our comparable locations decreased 0.3%. With
no significant change in the number of competitive theatre screens in our
markets, the primary factor contributing to the slight decrease in attendance
during fiscal 2003 was the quality and quantity of film product released during
the fourth quarter compared to the films that generated record performance
during the fourth quarter last year. We believe attendance during the fourth
quarter was further impacted by the fact that Easter (a time period which
historically has higher theatre attendance) was three weeks later than the prior
year, effectively shortening the spring film release season. In addition, we
believe that television coverage of the war in Iraq also had a negative impact
on theatre attendance.
Despite the factors noted above, fiscal 2003 still was a record year at the
box office for our theatre division. Contributing to our improved results was a
3.8% increase in our average ticket price during fiscal 2003 compared to
16
the prior year. The entire increase in average ticket price occurred at our
first-run theatres. As of May 29, 2003, we operated 467 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.
In a year of multiple blockbusters, our top 15 performing films accounted
for 36% of our total box office receipts, compared to 37% during fiscal 2002.
Three fiscal 2003 films produced box office receipts in excess of $3 million.
The following eight fiscal 2003 films produced box office receipts in excess of
$2 million: Lord of the Rings: Two Towers, Harry Potter and the Chamber of
Secrets, My Big Fat Greek Wedding, Signs, Austin Powers in Goldmember, Matrix
Reloaded, Chicago and Catch Me If You Can. We played 190 films at our theatres
during fiscal 2003 compared to 183 during fiscal 2002. Included in the total
films played were four and two new IMAX(R) films during each fiscal year,
respectively.
Our average concession sales per person increased 1.9% during fiscal 2003
compared to the prior year. 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. On average, films that appeal to families
and teenagers generally produce better than average concession sales compared to
more adult-orientated film product.
Our theatre division's operating margin increased to 24.0% during fiscal
2003, compared to 23.5% in fiscal 2002. Contributing to the improved fiscal 2003
operating margin was reduced concession and advertising costs and reduced fixed
occupancy costs as a percentage of revenues, partially offset by slightly higher
film rental costs. Increases in other revenues, which include management fees
and pre-show advertising income, also contributed to our improved operating
margin. We expect these ancillary revenues to continue to increase during fiscal
2004. If box office and concession revenues continue to improve as they have in
recent years, we anticipate that the expected improvements in other revenues and
other various cost controls may be enough to offset anticipated increases in
utility and health insurance costs, potentially resulting in continued
improvement in our theatre division operating margins.
We continue to use technology to further enhance our operating results.
During fiscal 2003, the number of tickets sold over the internet increased by
38%. In addition, we introduced a new stored-value entertainment card during
fiscal 2003 that contributed to a nearly 17% increase in gift certificate sales
for the year. Both of these programs are designed to differentiate our theatres
from competing theatres and increase customer loyalty.
We entered into our second management agreement contract during fiscal
2003, a new six-screen theatre in Tomah, Wisconsin that is being developed by
the Ho-Chunk Nation. This theatre is expected to open in time for the fiscal
2004 holiday season. During fiscal 2004 and beyond, we expect to make additional
selected investments in new screens at existing strategic locations. A four
screen addition is currently under construction at an existing theatre in
Menomonee Falls, Wisconsin and up to 16 additional screens are in the early
stages of development. We have also identified approximately six to eight
theatres with up to 31 screens that we may close over the next three years with
minimal impact on operating results.
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 2003 appears stable, with the first half of the
summer performing at a pace similar to last year and much anticipated sequels to
The Matrix and Lord of the Rings due to be released later in 2003.
Fiscal 2002 versus Fiscal 2001
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. Seventeen new screens added to five existing
theatres during fiscal 2001 also contributed to the revenue increase during
fiscal 2002. No new 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.
17
Five theatres with a total of 26 screens were closed during fiscal 2002,
negatively impacting that 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
during fiscal 2001. These transactions had minimal impact on operations in
fiscal 2001.
Total theatre attendance increased 9.9% during fiscal 2002 compared to the
prior year and attendance at our comparable locations increased 11.2%. While
additional competitive theatre screens in several of our markets had some
negative impact on our attendance during fiscal 2002, the primary factor
contributing to the increase in attendance was the quality and quantity of film
product during the year.
Fiscal 2002 was a record year at the box office both nationally and for our
theatre division. 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. We played 183 and 170
films at our theatres during fiscal years 2002 and 2001, respectively. Included
in the total films played were two and six new IMAX(R) films during each fiscal
year, respectively.
Our average ticket price increased 3.8% during fiscal 2002 compared to the
prior year. Ticket prices were increased during the 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 compared to the prior year. Our average
concession sales per person increased 7.9% during fiscal year 2002. Many of the
top films during fiscal 2002 were excellent family fare, which traditionally
produce better than average concession sales.
Our theatre division's operating margin increased to 23.5% during fiscal
2002, compared to 17.3% in fiscal 2001. 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
was lower than fiscal 2002 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 operating margins were
impacted by disappointing film product, high utility and snow removal costs and
increased occupancy expenses associated with recent capital investments. Fiscal
2001 operating results also included a $3.5 million before-tax impairment charge
related to the write-down of the value of our IMAX(R) related assets in
conjunction with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
During the fourth quarter of fiscal 2002, we entered the theatre management
contract business by signing an agreement to manage 34 screens at three Chicago
locations for another owner. Due to the timing of this transaction, the
management contract had minimal impact on fiscal 2002 operating results.
Limited-Service Lodging
Our second largest division is the limited-service lodging division, which
contributed 31.9% of our consolidated revenues and 20.4% of our consolidated
operating income, excluding corporate items, during fiscal 2003. 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. The
following
18
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 F03 v. F02 Change F02 v. F01
----------------------- ------------------------
2003 2002 Amt. Pct. 2001 Amt. Pct.
- --------------------------------------------------------------------------------------------------------------------
(in millions, except percentages)
Revenues $126.6 $125.7 $0.9 0.7% $136.6 $(10.9) -8.0%
Operating income 11.5 13.5 (2.0) -14.7% 16.3 (2.8) -17.2%
Operating margin 9.1% 10.7% 11.9%
Number of units at fiscal year-end 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Baymont Inns & Suites
Company-owned 84 85 86
Managed for joint ventures/others 9 9 10
Franchised 87 92 88
- --------------------------------------------------------------------------------------------------------------------
Total Baymont Inns & Suites 180 186 184
====================================================================================================================
Budgetel Inns 1 1 -
- --------------------------------------------------------------------------------------------------------------------
Woodfield Suites 7 7 7
- --------------------------------------------------------------------------------------------------------------------
Total number of units 188 194 191
====================================================================================================================
2003 2002 2001
Available rooms at fiscal year-end
- --------------------------------------------------------------------------------------------------------------------
Baymont Inns & Suites
Company-owned 8,544 8,681 8,802
Managed for joint ventures/others 1,016 1,012 1,119
Franchised 7,383 7,988 7,782
- --------------------------------------------------------------------------------------------------------------------
Total Baymont Inns & Suites 16,943 17,681 17,703
====================================================================================================================
Budgetel Inns 83 82 -
- --------------------------------------------------------------------------------------------------------------------
Woodfield Suites 889 889 889
- --------------------------------------------------------------------------------------------------------------------
Total available rooms 17,915 18,652 18,592
====================================================================================================================
Fiscal 2003 versus Fiscal 2002
The occupancy percentage (number of occupied rooms as a percentage of
available rooms) at comparable Baymont Inns & Suites increased 4.8 percentage
points during fiscal 2003 compared to the prior year and the average daily room
rate ("ADR") at comparable Baymont Inns & Suites decreased 5.7%. Our ADR for
fiscal 2003 was just over $51, which is approximately 10% lower than our
specific set of competitors for the same time period, according to data received
from outside industry resources, such as Smith Travel Research. The result of
the occupancy increase and ADR decline was a 2.6% increase in Baymont Inns &
Suites revenue per available room, or RevPAR, for comparable Inns for fiscal
2003. RevPAR for comparable Woodfield Suites decreased 4.5% during fiscal 2003
compared to the prior fiscal year.
We continue to operate in a very challenging environment for lodging, with
business travel remaining below historic levels. Fiscal 2003 results were
further impacted by the uncertainty related to the war with Iraq and the
uncertain timing of an economic recovery. These factors further dampened room
demand and created significant pricing pressure on existing hotels. Our overall
increase in Baymont Inns & Suites RevPAR during fiscal 2003 continued to be
better than the results of the majority of the properties in the
limited-service, mid-price segment of the lodging industry. Data received from
Smith Travel Research indicates that our Company-owned or operated Baymont Inns
& Suites realized gains in market share for all four quarters of fiscal 2003.
Our fiscal 2003 RevPAR increase of 2.6% compares very favorably to a reported
decrease of 0.2% for the mid-price without food and beverage segment of the
lodging industry and 2.0% 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
19
distribution, have resulted in introducing our brand and facilities to many new
customers and differentiating it from our competitors, contributing to the
improved revenue performance relative to others in our industry.
In general, we believe that limited-service lodging properties performed
better over the last year 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
significant portion of its occupancy 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 and the
subsequent economic downturn. Woodfield Suites, which operates at a higher price
point than Baymont Inns & Suites and whose results are very dependent upon the
mid-week business traveler, has been impacted more by the current environment,
consistent with others in its industry segment.
Our limited-service lodging division's operating income and operating
margin decreased during fiscal 2003 compared to the prior year due to several
factors. Reduced operating income from our Woodfield Suites and our Baymont
franchise operations contributed to the decline. In addition, increases to our
advertising, utility and insurance costs continued to put pressure on our
operating margin. The fact that our revenue increases were the result of
increased occupancy rather than our rates also contributed to our lower
operating margin, as payroll costs necessary to service the additional occupancy
increased. Comparisons of fiscal 2003 results to fiscal 2002 were also
negatively impacted by the fact that last year, our property in Salt Lake City,
Utah reported incremental operating profits of approximately $300,000 as a
result of the Winter Olympics. Our ability to overcome anticipated increases in
insurance, health and utility costs during fiscal 2004 and increase our
operating margin will likely be dependent upon a continued improvement in the
economy in general and business travel in particular, resulting in increased
room demand and reduced pricing pressure.
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 should result in increased RevPAR
in the future. The significantly reduced supply growth throughout the industry,
while slowing our franchising growth, should also favorably impact the operating
results of our existing hotels as an economic recovery occurs. 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
Ovations(TM), contributed approximately 25% of our revenues during fiscal 2003
compared to 20% during fiscal 2002. Room nights booked through our reservation
center were nearly 26% ahead of last year. During fiscal 2003, we further
enhanced our reservation technology by introducing full two-way connectivity
between the reservation center and the individual properties, increasing our
ability to offer all available rooms over every available sales channel,
including our rapidly growing internet and travel agent sales. In addition, our
new Ovations Rooms continue to be well received by our guests and we 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. 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.
Three franchised Baymont Inns & Suites were opened during fiscal 2003. One
Company-owned Baymont was sold during fiscal 2003 and eight franchised locations
left the system. Fiscal 2003 revenues were negatively impacted by $700,000
compared to fiscal 2002 as a result of the sale of the Company-owned property.
As we have previously disclosed, we had identified additional Baymont Inns &
Suites that were to be considered for sale to new and existing franchisees.
However, due to a difficult financing environment for potential franchisees and
an overall downturn in the property sales market, we have deferred this strategy
and will reevaluate our options regarding these properties at a later date.
Fiscal 2002 versus Fiscal 2001
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.
Baymont's occupancy percentage decreased 2.5 percentage points during fiscal
2002 and the ADR at comparable Baymont Inns & Suites decreased 2.5% compared to
the prior year. Our ADR for fiscal 2002 was just
20
over $54. The result of the occupancy and ADR declines was a 6.7% decrease in
Baymont Inns & Suites RevPAR for comparable Inns for fiscal 2002. RevPAR for
comparable Woodfield Suites decreased 9.8% during fiscal 2002 compared to the
prior fiscal year.
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 prior 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 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. 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 in the previous year. Industry and
Baymont occupancy rates 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 continued to be the primary reason for the reduced
occupancies.
We responded 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 in the previous 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.
No Company-owned properties were opened during fiscal 2002. Two Baymont Inn
& Suites opened or acquired during fiscal 2001 contributed additional revenues
of $1.1 million during fiscal 2002 with nominal operating income, compared to
the prior year. One joint venture Baymont Inn & Suites managed by us was sold to
a franchisee during fiscal 2002. Our share of the gain on sale was $1.5 million.
We sold one Baymont Inn & Suites to a franchisee during fiscal 2001, negatively
impacting fiscal 2002 revenues by $600,000 compared to fiscal 2001.
The division outsourced its reservation center during the second quarter of
fiscal 2002. Our reservations from the central reservation center increased over
20% during the second half of fiscal 2002, compared to the same period in the
prior year. 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.
Hotels and Resorts
The hotels and resorts division contributed 29.9% of our consolidated
revenues and 15.6% of our consolidated operating income, excluding corporate
items, during fiscal 2003. 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 five hotels during fiscal 2003,
four hotels during fiscal 2002 and three hotels during fiscal 2001 for other
owners. We also manage a vacation ownership development in Lake Geneva,
Wisconsin.
21
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 F03 v. F02 Change F02 v. F01
----------------------- ------------------------
2003 2002 Amt. Pct. 2001 Amt. Pct.
- ------------------------------ ----------- ------------ ----------- ----------- ----------- ------------ -----------
(in millions, except percentages)
Revenues $118.5 $114.9 $3.6 3.1% $109.7 $5.2 4.8%
Operating income 8.8 6.3 2.5 40.8% 10.7 (4.4) -41.6%
Operating margin 7.4% 5.5% 9.8%
Available rooms at fiscal year-end 2003 2002 2001
- ------------------------------------------------------------------------------- ----------- ------------ -----------
Company-owned 2,074 2,074 2,074
Management contracts 1,036 1,036 640
- ------------------------------------------------------------------------------- ----------- ------------ -----------
Total available rooms 3,110 3,110 2,714
====================================================================================================================
Fiscal 2003 versus Fiscal 2002
Division revenues and operating income increased during fiscal 2003
compared to the prior year due to the added revenues from our newest hotels (the
Hotel Phillips in Kansas City, Missouri, 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 results included the very
difficult weeks and months immediately following September 11, 2001, resulting
in favorable comparisons benefiting fiscal 2003. Fiscal 2003 comparisons to the
prior year were also favorably impacted by the fact that the division's fiscal
2002 operating results included approximately $1.1 million of pre-opening
expenses related to the Hotel Phillips and Timber Ridge Lodge.
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 and
individual business travel, both of which continue 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. Excluding the
Hotel Phillips, which opened during the second quarter last year, the division's
total RevPAR for comparable Company-owned properties during fiscal 2003
decreased 0.5% compared to the prior year. The slight decrease in RevPAR
compared to the same period last year was the result of the net effect of
slightly decreased occupancy and an overall 1.3% increase in ADR 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.
The near-term outlook for the future performance of this division remains
uncertain, but we are encouraged by recent trends. While we still anticipate
some residual negative impact on the revenues of our hotels and resorts division
during fiscal 2004 as a result of the reduced business travel, the summer season
has started off stronger than last year and advance bookings for the remainder
of the summer and into the fall also appear stronger. We also anticipate that
the performance of our newest hotels will continue to improve. As a result, with
cost controls remaining a high priority, subject to economic conditions, we
expect our operating margins to continue to improve in this division during
fiscal 2004.
We also continue to maintain our properties consistent with our traditional
high standards, making the investments necessary to improve operating results in
the future. Major room renovations were completed at two of our premier
properties, the Pfister and Grand Geneva, and a new parking structure at the
Hilton Milwaukee City Center was opened during the first quarter of fiscal 2003.
Plans are currently underway to develop a new spa at our Miramonte Resort in
time for the peak winter season. The plans include converting an existing guest
building into a full-service spa with several signature treatments designed to
distinguish it from other spas in the competitive desert market.
During fiscal 2003, we sold out all available ownership units of our first
three buildings at our vacation ownership development at the Grand Geneva Resort
& Spa and completed construction on a new building that includes 32 new units,
doubling the size of the existing development. Timeshare sales totaled $7.4
million during fiscal 2003 compared
22
to $8.0 million during the prior year and operating income from this business
was unchanged. We expect our operating performance from this development to
improve during fiscal 2004 as we sell into this new building.
Fiscal 2002 versus Fiscal 2001
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 and the Hilton Madison at Monona
Terrace, in addition to revenues from our management of the Timber Ridge Lodge.
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, 2001 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 subsequently improved during the remainder of fiscal
2002, but did not approach pre-September 11 levels.
Our hotels and resorts 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 were not 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 the prior year. This total
included a 27.1% decrease in RevPAR during the second quarter of fiscal 2002
alone. 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. Our response to the economic circumstances focused 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.
A skywalk to Milwaukee's new Midwest Airlines Convention Center and a new
restaurant were added to the Hilton Milwaukee City Center during fiscal 2002.
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 were very pleased with the
operating performance of this property during its first year. The newly
renovated Hotel Phillips had the unfortunate timing of reopening on September
13, 2001 and thus got off to a slower than anticipated start. 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.
Discontinued Operations
On May 24, 2001, we sold our 30 KFC and KFC/Taco Bell 2-in-1 restaurants.
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
23
with the buyer 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 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 is included in the reported results for 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
fiscal year 2001, reporting revenues of $23.7 million and operating income of
$2.1 million.
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 $92 million of unused credit lines at fiscal 2003 year-end,
should be adequate to support the ongoing operational liquidity needs of our
businesses.
During the third quarter of fiscal 2003, we allowed a $40 million, 364-day
revolving credit agreement with several banks to expire due to the significant
amount of other available credit lines. Our existing five-year, $125 million
credit facility with several banks and our $16.4 million term note with one of
the banks are both scheduled to expire in 2004. It is our intention to extend
the maturity dates of these credit agreements during fiscal 2004 and we do not
believe that we will have any difficulty doing so at continued favorable terms.
As of May 29, 2003, we classified $54.4 million of outstanding borrowings under
the term note and under commercial paper agreements backed by unused credit
lines as current, pending new agreements. We expect these borrowings to be
reclassified to long-term debt upon execution of the new agreements. We continue
to believe that it is appropriate to have a significant portion of our
outstanding debt with longer maturities and fixed interest rates, due to the
significant real estate component of our total assets.
Net cash provided by operating activities decreased by $1.5 million, or
2.1%, to $71.6 million during fiscal 2003, compared to $73.1 million during
fiscal 2002. The decrease was primarily the result of decreased earnings from
continuing operations and an increase in real estate and development costs.
Net cash used in investing activities during fiscal 2003 decreased by $32.9
million, or 62.6%, to $19.7 million. The reduction in net cash used in investing
activities was primarily the result of reduced capital expenditures and
increased net proceeds from disposals of property, equipment and other assets.
Cash proceeds from the disposals of property, equipment and other assets totaled
$11.8 million and $1.7 million during fiscal 2003 and 2002, respectively. The
cash proceeds received during fiscal 2003 were primarily the result of the sale
of a former theatre location, one Company-owned Baymont Inn, several former
restaurant locations, excess parcels of land and the additional payment received
on the sale of our KFC restaurants. The cash proceeds received during fiscal
2002 were primarily the result of the sale of several parcels of land.
Total capital expenditures (including normal continuing capital maintenance
projects) of $26.0 million and $48.9 million were incurred in fiscal 2003 and
2002, respectively. Capital expenditures during fiscal 2003 included $6.7
million incurred in the hotels and resorts division, including the 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 $12.0 million were incurred in the limited-service lodging
division, including several exterior renovations and construction at the
downtown Chicago Baymont project. Also, capital expenditures of $4.2 million
were incurred by the theatre division to fund the three-screen addition to the
Appleton, Wisconsin theatre and 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 2004.
During fiscal 2002, $33.4 million was incurred for hotels and resorts division
projects, $12.8 million for limited-service lodging division projects and $2.2
million for theatre division projects. Total capital expenditures in fiscal 2004
are currently expected to be as high as $65 to $75 million and are expected to
be funded by cash generated from operations, net proceeds from the disposal of
selected
24
assets and project-related borrowings. The only new Company-owned location
currently committed to in the fiscal 2004 capital expenditure plan is the
Baymont Inn & Suites being constructed in downtown Chicago. The remaining
capital is 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 2003,
our total debt decreased to $276.2 million at the close of fiscal 2003, compared
to $320.5 million at the end of fiscal 2002. Net cash used in financing
activities in fiscal 2003 totaled $51.4 million, compared to $16.3 million in
fiscal 2002. During fiscal 2003, we received only $551,000 of net proceeds from
the issuance of notes payable and long-term debt, compared to $75.0 million
during fiscal 2002. The fiscal 2002 proceeds were from the issuance of senior
unsecured notes. We made total principal payments on notes payable and long-term
debt of $46.9 million during fiscal 2003, representing the payment of current
maturities and payment of borrowings on commercial paper and revolving credit
facilities with the excess operating cash flow available as a result of the
reduced capital spending. Total principal payments totaled $83.6 million during
fiscal 2002 and included the payment of current maturities and payment of
borrowings on commercial paper and revolving credit facilities with the proceeds
of the senior notes. Our debt-capitalization ratio was 0.43 at May 29, 2003,
compared to 0.48 at the prior fiscal year end. Based upon our current
expectations for fiscal 2004 capital expenditure levels and potential asset
sales proceeds, we do not anticipate our long-term debt total or
debt-capitalization ratio to change significantly during fiscal 2004.
During fiscal 2003, we repurchased 26,000 of our common shares for
approximately $386,000 in conjunction with the exercise of stock options,
compared to 16,000 of common shares repurchased for approximately $225,000
during fiscal 2002. Our Board of Directors has authorized the repurchase of up
to 2.0 million shares of our outstanding Common Stock. As of May 29, 2003,
approximately 1.93 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 29,
2003 (in thousands):
Payments Due by Period
- --------------------------------------------------------------------------------------------------------------------
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
- --------------------------------------------------------------------------------------------------------------------
Long-term debt $276,213 $72,906 $52,210 $62,759 $ 88,338
Operating lease obligations 46,850 2,109 5,534 5,645 33,562
- --------------------------------------------------------------------------------------------------------------------
Total contractual obligations $323,063 $75,015 $57,744 $68,404 $121,900
====================================================================================================================
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. We have classified $38.0
million of outstanding commercial paper borrowings and a $16.4 million of term
note borrowing as due in less than one year because our current revolving credit
agreement and related term note currently expire late in fiscal 2004. We
anticipate executing new agreements during fiscal 2004 that will effectively
extend the maturity dates of these borrowings. 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 29,
2003 (in thousands):
Expiration by Period
- --------------------------------------------------------------------------------------------------------------------
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
- --------------------------------------------------------------------------------------------------------------------
Guarantee obligations $14,861 $709 $6,925 $3,346 $3,881
- --------------------------------------------------------------------------------------------------------------------
25
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 29, 2003 was $58.6
million, carried an average interest rate of 2.57%, and represented 21.2% 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 $217.6 million as of May 29, 2003, carried
an average interest rate of 7.42% and represented 78.8% 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, industrial development revenue bonds and
other debt instruments bearing interest from 6.15% to 8.77%, maturing in 2005
through 2009; and an unsecured term note with a stated rate of 6.0%, maturing in
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 $205.0 million of senior notes is approximately $214.8
million. Based upon the respective rates and prepayment provisions of our
remaining fixed interest rate senior notes and mortgages at May 29, 2003, the
carrying amounts of such debt approximates fair value.
The variable interest rate debt and fixed interest rate debt outstanding as
of May 29, 2003 matures as follows (in thousands):
2004 2005 2006 2007 2008 Thereafter Total
- --------------------------------------------------------------------------------------------------------------------
Variable interest rate $57,906 $ 353 $ 243 $ 147 $ --- $ --- $ 58,649
Fixed interest rate 15,000 26,150 25,464 28,396 34,216 88,338 217,564
- --------------------------------------------------------------------------------------------------------------------
Total debt $72,906 $ 26,503 $ 25,707 $ 28,543 $ 34,216 $ 88,338 $276,213
====================================================================================================================
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 29,
2003. 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 29, 2003 of $1.3 million ($773,000 net of tax) 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 $671,000 ($403,000 net of tax) of loss into
earnings during fiscal 2004.
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.
26
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, goodwill, investments
in joint ventures and receivables from joint ventures, 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 factors such as 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 2003, we
recorded a before-tax reserve for bad debts on receivables from joint
ventures of $2.0 million and a before-tax impairment charge of $600,000 on
investments in joint ventures. 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 self-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.
o We offer health insurance coverage to our associates under a variety of
different fully-insured HMO's and self-insured fee-for-service plans. Under
the fee-for-service plans, we are responsible for all claims up to our stop
loss limitation of $100,000. Our health insurance plans are set up on a
calendar year basis. As a result, we must estimate our potential health
self-insurance liability based upon several factors, including historical
trends, our knowledge of the potential impact of changes in plan structure
and our judgment regarding the portion of the total cost of claims that
will be shared with associates. Actual differences in any of these factors
may impact the amount of health insurance expense recorded by us.
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.
27
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 29, 2003 and May 30, 2002, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended May 29, 2003. 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
29, 2003 and May 30, 2002, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended May 29, 2003, 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 17, 2003
28
THE MARCUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
May 29, 2003 May 30, 2002
------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,039 $ 5,614
Accounts and notes receivable (Note 4) 26,059 16,044
Receivables from joint ventures (Note 10) 3,626 3,760
Refundable income taxes 4,032 4,947
Real estate and development costs 5,338 2,532
Other current assets 5,771 4,512
------------------------------------
Total current assets 50,865 37,409
PROPERTY AND EQUIPMENT, NET (Note 4) 655,803 683,639
OTHER ASSETS:
Investments in joint ventures (Notes 9 and 10) 1,880 1,356
Goodwill 11,773 11,806
Other (Note 11) 35,136 40,576
------------------------------------
Total other assets 48,789 53,738
------------------------------------
Total assets $755,457 $774,786
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 10) $ 1,465 $ 3,497
Accounts payable 20,723 17,211
Taxes other than income taxes 13,682 13,947
Accrued compensation 7,097 6,555
Other accrued liabilities 11,013 11,265
Current maturities of long-term debt (Note 5) 72,906 20,777
------------------------------------
Total current liabilities 126,886 73,252
LONG-TERM DEBT (Note 5) 203,307 299,761
DEFERRED INCOME TAXES (Note 8) 38,768 36,529
DEFERRED COMPENSATION AND OTHER (Note 7) 16,596 11,176
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
21,684,328 shares in 2003 and 21,584,239 shares in 2002 21,684 21,584
Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and
outstanding 9,505,185 shares in 2003
and 9,605,274 shares in 2002 9,506 9,606
Capital in excess of par 41,751 41,523
Retained earnings 314,903 300,623
Accumulated other comprehensive loss (2,181) (1,866)
------------------------------------
385,663 371,470
Less cost of Common Stock in treasury (1,687,595 shares in
2003 and 1,863,027 shares in 2002) (15,763) (17,402)
------------------------------------
Total shareholders' equity 369,900 354,068
------------------------------------
Total liabilities and shareholders' equity $ 755,457 $ 774,786
====================================
See accompanying notes.
29
THE MARCUS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
Year ended
------------------------------------------------------
May 29, May 30, May 31,
2003 2002 2001
------------------------------------------------------
REVENUES:
Rooms and telephone $172,002 $170,332 $178,811
Theatre admissions 98,811 96,502 84,535
Theatre concessions 45,590 45,332 38,144
Food and beverage 33,487 31,812 29,896
Other revenues 47,025 45,855 43,949
------------------------------------------------------
Total revenues 396,915 389,833 375,335
COSTS AND EXPENSES:
Rooms and telephone 79,816 79,359 82,348
Theatre operations 76,371 73,401 66,971
Theatre concessions 10,198 10,370 9,440
Food and beverage 26,465 25,995 22,975
Advertising and marketing 29,517 27,220 27,740
Administrative 40,781 39,963 40,412
Depreciation and amortization 45,365 44,887 43,329
Rent (Note 9) 2,407 2,958 3,410
Property taxes 15,204 16,339 14,539
Preopening expenses 60 1,143 2,040
Other operating expenses 21,346 20,740 19,759
Impairment charge (Note 2) - - 3,541
------------------------------------------------------
Total costs and expenses 347,530 342,375 336,504
------------------------------------------------------
OPERATING INCOME 49,385 47,458 38,831
OTHER INCOME (EXPENSE):
Investment income (loss) (158) 2,353 2,592
Interest expense (19,642) (18,807) (23,019)
Gain on insurance contracts - - 1,582
Gain on disposition of property and equipment and
investments in joint ventures 2,111 2,496 304
------------------------------------------------------
(17,689) (13,958) (18,541)
------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES 31,696 33,500 20,290
INCOME TAXES (Note 8) 12,389 11,040 7,550
------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 19,307 22,460 12,740
DISCONTINUED OPERATIONS (Note 3):
Income from discontinued operations, net of
income taxes of $823 in 2001 $ - $ - $ 1,219
Gain on sale of discontinued operations, net of
income taxes of $801 in 2003 and $5,277 in
2001 1,249 - 7,817
------------------------------------------------------
EARNINGS FROM DISCONTINUED OPERATIONS
1,249 - 9,036
------------------------------------------------------
NET EARNINGS $ 20,556 $ 22,460 $ 21,776
======================================================
earnings per Common share - BASIC:
Continuing operations $ .66 $ .77 $ .44
Discontinued operations .04 .00 .31
------------------------------------------------------
Net earnings per share $ .70 $ .77 $ .75
======================================================
EARNINGS PER COMMON SHARE - DILUTED:
Continuing operations $ .66 $ .76 $ .43
Discontinued operations .04 .00 .31
------------------------------------------------------
Net earnings per share $ .70 $ .76 $ .74
======================================================
See accompanying notes.
30
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 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
effect of $37
-------------
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
effect of $15
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
Cash dividends:
$.20 per share Class B Common Stock - - - (1,905) - - (1,905)
$.22 per share Common Stock - - - (4,371) - - (4,371)
Exercise of stock options - - (59) - - 1,408 1,349
Purchase of treasury stock - - - - - (386) (386)
Savings and profit-sharing contribution - - 208 - - 446 654
Reissuance of treasury stock - - 79 - - 171 250
Conversions of Class B Common Stock 100 (100) - - - - -
Components of comprehensive income (loss):
Net earnings - - - 20,556 - - 20,556
Change in unrealized loss on available
for sale investments, net of tax - - - - 179 - 179
effect of $118
Amortization of loss on swap
agreement, net of tax effect of $471 - - - - 706 - 706
(Note 5)
Minimum pension liability, net of tax
benefit of $787 - - - - (1,200) - (1,200)
-------------
Total comprehensive income 20,241
-------------------------------------------------------------------------------------
BALANCES AT MAY 29, 2003 $21,684 $ 9,506 $41,751 $314,903 $(2,181) $(15,763) $369,900
=====================================================================================
See accompanying notes.
31
THE MARCUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended
------------------------------------------------
May 29, May 30, May 31,
2003 2002 2001
------------------------------------------------
Operating activities
Net earnings $20,556 $22,460 $21,776
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Losses on loans to and investments in joint
ventures, net of distributions 3,229 2,551 618
Gain on disposition of property, equipment and other
assets (4,161) (2,496) (13,398)
Amortization of loss on swap agreement 1,177 328 -
Impairment charge - - 3,541
Depreciation and amortization 45,365 44,887 44,300
Deferred income taxes 460 5,984 176
Deferred compensation and other 3,513 1,170 298
Contribution of Company stock to savings and
profit-sharing plan 654 509 550
Loss on available for sale securities 494 - -
Changes in operating assets and liabilities:
Accounts and notes receivable (2,083) (1,837) (926)
Real estate and development costs (2,806) 2,467 (1,082)
Other current assets (1,259) 180 (713)
Accounts payable 3,512 88 (7,340)
Income taxes 2,892 (3,916) 880
Taxes other than income taxes (265) 717 2,011
Accrued compensation 542 986 1,262
Other accrued liabilities (252) (1,008) 874
------------------------------------------------
Total adjustments 51,012 50,610 31,051
------------------------------------------------
Net cash provided by operating activities 71,568 73,070 52,827
Investing activities
Capital expenditures and other (26,004) (48,899) (96,748)
Net proceeds from disposals of property, equipment and
other assets 11,752 1,666 29,304
Increase in other assets (3,003) (4,422) (2,406)
Purchase of interest in joint ventures (649) - -
Cash advanced to joint ventures (1,819) (1,013) (279)
------------------------------------------------
Net cash used in investing activities (19,723) (52,668) (70,129)
Financing activities
Debt transactions:
Net proceeds from issuance of notes payable and
long-term debt 551 75,000 42,107
Principal payments on notes payable and long-term debt (46,908) (83,559) (16,313)
Payment on swap agreement termination - (2,791) -
Equity transactions:
Treasury stock transactions, except for stock options (136) 35 (3,892)
Exercise of stock options 1,349 1,267 146
Dividends paid (6,276) (6,239) (6,182)
------------------------------------------------
Net cash provided by (used in) financing activities (51,420) (16,287) 15,866
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 425 4,115 (1,436)
Cash and cash equivalents at beginning of year 5,614 1,499 2,935
------------------------------------------------
Cash and cash equivalents at end of year $ 6,039 $ 5,614 $ 1,499
================================================
See accompanying notes.
32
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 29, 2003
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, located in 31 states.
Theatres: Operates multiscreen motion picture theatres in Wisconsin,
Illinois, Ohio and Minnesota and a family entertainment center in
Wisconsin.
Hotels and 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 2003 and 2002 and a
53-week year in fiscal 2001.
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.
Accounts and Notes Receivable - The Company evaluates the collectibility of
its accounts and notes receivable based on a number of factors. For larger
accounts, an allowance for doubtful accounts is recorded based on the applicable
parties' ability and likelihood to pay based on management's review of the
facts. For all other accounts, the Company recognizes an allowance based on
length of time the receivable is past due based on historical experience and
industry practice.
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 29, 2003, May 30, 2002 and May
31, 2001, and determined that there was no significant impact on the Company's
results of operations, other than the impairment charges taken for the IMAX(R)
related assets described in Note 2 and the joint venture investment charge
described in Note 10.
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 in fiscal 2002 and the annual
impairment test in fiscal 2003 and 2002 and deemed that no impairment loss was
necessary.
33
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
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, net earnings would
have increased by approximately $564,000, net of taxes, and diluted earnings per
share would have increased by $0.02.
Capitalization of Interest - The Company capitalizes interest during
construction periods by adding such interest to the cost of property and
equipment. Interest of approximately $91,000, $715,000 and $1,242,000 was
capitalized in fiscal 2003, 2002 and 2001, 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 (loss). The Company
evaluates securities for other-than-temporary impairment on a periodic basis and
principally considers the type of security, the severity of the decline in fair
value and the duration of the decline in fair value in determining whether a
security's decline in fair value is other-than-temporary. In fiscal 2003, the
Company recognized a $494,000 other-than-temporary investment loss on a security
whose market value was substantially below cost.
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 revenues:
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 theatres and hotels 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 recission 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. 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.
34
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
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
Preopening Expenses - Costs incurred prior to opening new or remodeled
facilities are expensed as incurred.
Earnings Per Share (EPS) - Basic earnings per share is computed by dividing
net earnings by the weighted-average number of common shares outstanding.
Diluted earnings per share is computed by dividing net earnings by the
weighted-average number of common shares outstanding, adjusted for the effect of
dilutive stock options.
The following table illustrates the computation of basic and dilutive
earnings per share for earnings from continuing operations and provides a
reconciliation of the number of weighted-average basic and diluted shares
outstanding:
May 29, 2003 May 30, 2002 May 31, 2001
-------------------------------------------------
(in thousands, except per share data)
Numerator:
Earnings from continuing operations $19,307 $22,460 $12,740
=================================================
Denominator:
Denominator for basic EPS 29,388 29,245 29,187
Effect of dilutive employee stock options 161 225 158
-------------------------------------------------
Denominator for diluted EPS 29,549 29,470 29,345
=================================================
Earnings per share from continuing operations:
Basic $.66 $.77 $.44
Diluted $.66 $.76 $.43
===========================================================================================================
Options to purchase 627,926 shares, 396,002 shares and 393,102 shares of
common stock at prices ranging from $14.25 to $18.13 per share, $14.38 to $18.13
per share and $13.81 to $18.13 per share were outstanding at May 29, 2003, May
30, 2002 and May 31, 2001, 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 29, 2003 May 30, 2002
------------------------------------
(in thousands)
Unrealized loss on available for sale investments $ - $ (179)
Unrecognized loss on interest rate swap agreement (772) (1,478)
Minimum pension liability (1,409) (209)
------------------------------------
$ (2,181) $ (1,866)
====================================
35
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Description of Business and Summary of Significant Accounting Policies
(continued)
Stock-Based Compensation - 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 1.1%, 1.9% and 3.7% for
fiscal 2003, 2002 and 2001, respectively; a dividend yield of 1.6%, 1.5% and
1.3% for fiscal 2003, 2002 and 2001, respectively; volatility factors of the
expected market price of the Company's Common Stock of 45%, 42% and 49% for
fiscal 2003, 2002 and 2001, respectively; and an expected life of the option of
approximately six years in all years.
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 29, 2003 May 30, 2002 May 31, 2001
-------------------------------------------------------
(in thousands, except per share data)
Net earnings, as reported $20,556 $22,460 $21,776
Deduct: Stock-based employee compensation expense
determined under the fair value method for all
option awards, net of related tax effects (1,123) (1,089) (946)
-------------------------------------------------------
Pro forma net earnings $19,433 $21,371 $20,830
=======================================================
Earnings per share:
Basic - as reported $ .70 $ .77 $ .75
Basic - pro forma $ .66 $ .73 $ .71
Diluted - as reported $ .70 $ .76 $ .74
Diluted - pro forma $ .66 $ .73 $ .71
=======================================================
New Accounting Pronouncements - In November 2002, the Financial Accounting
Standards Board (FASB) issued Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (the Interpretation), which expands on the guidance for
the accounting and disclosure of guarantees. Each guarantee meeting the
characteristics described in the Interpretation is to be recognized and
initially measured at fair value. In addition, guarantors will be required to
make significant new disclosures, even if the likelihood of the guarantor making
payments under the guarantee is remote, which represents another change from
general current practice. The Interpretation's disclosure requirements are
effective for financial statements ending after December 15, 2002, with the
initial recognition and initial measurement provisions applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
Company does not expect the Interpretation to have a material effect on the
results of operations.
Reclassifications - Certain reclassifications have been made to the prior
year's financial statements to conform to the current year presentation.
36
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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. 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. 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 $1,249,000, net of income taxes of $801,000. Restaurant revenue for
the year ended May 31, 2001 was $23,746,000.
4. Additional Balance Sheet Information
The composition of accounts and notes receivable is as follows:
May 29, 2003 May 30, 2002
------------------------------------
(in thousands)
Trade receivables, net of allowance of $610 and $341, respectively $ 5,299 $ 6,741
Notes receivable for interval ownership 1,112 843
Other notes receivables 9,915 2,753
Employee advances 26 54
Other receivables 9,707 5,653
------------------------------------
$26,059 $16,044
====================================
The Company also has notes receivable for interval ownership totaling
$6,664,000 and $6,170,000, which are included in other long-term assets, net of
a reserve for uncollectible amounts of $718,000 and $505,000 as of May 29, 2003
and May 30, 2002, 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 15.1%. The
notes are collateralized by the underlying vacation intervals.
The composition of property and equipment, which is stated at cost, is as
follows:
May 29, 2003 May 30, 2002
------------------------------------
(in thousands)
Land and improvements $ 88,997 $ 92,558
Buildings and improvements 623,156 612,954
Leasehold improvements 9,010 9,082
Furniture, fixtures and equipment 272,961 266,872
Construction in progress 6,850 13,107
------------------------------------
1,000,974 994,573
Less accumulated depreciation and amortization 345,171 310,934
------------------------------------
$655,803 $683,639
====================================
37
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Long-Term Debt
Long-term debt is summarized as follows:
May 29, 2003 May 30, 2002
------------------------------------
(in thousands,
except payment data)
Mortgage notes due to 2009 $ 3,602 $ 3,977
Industrial Development Revenue Bonds due to 2006 1,554 2,668
Senior notes due May 31, 2005, with monthly principal and interest
payments of $362,000, bearing interest at 10.22% 8,128 11,458
Senior notes 205,000 214,394
Unsecured term notes 19,629 26,612
Commercial paper 37,984 61,429
Other 316 -
------------------------------------
276,213 320,538
Less current maturities 72,906 20,777
------------------------------------
$203,307 $299,761
====================================
The mortgage notes, both fixed rate and adjustable, bear interest from
3.06% to 7.68% at May 29, 2003. The Industrial Development Revenue Bonds, both
fixed rate and adjustable, bear interest from 3.92% to 6.42%. The mortgage notes
and the Industrial Development Revenue Bonds are secured by the related land,
buildings and equipment.
The $205,000,000 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 29, 2003.
The Company has unsecured term notes outstanding as follows:
May 29, 2003 May 30, 2002
------------------------------------
(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 2.09% at May 29, 2003. $ 3,125 $ 6,250
Note due Janauary 31, 2004, with quarterly principal payments
of $714,000 and the remaining outstanding balance due at
maturity. The variable interest rate is based on the LIBOR
rate with an effective rate of 2.96% at May 29, 2003. 16,429 20,000
Note due April 28, 2003, with monthly payments of
$20,000, including interest at 2.00%. - 201
Note due March 25, 2004, with monthly payments of
$8,000, including interest at 6.00%. 75 161
------------------------------------
$19,629 $26,612
====================================
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 1.55% to
1.60% at May 29, 2003. The agreements require the Company to maintain unused
bank lines of credit at least equal to the principal amount of outstanding
commercial paper.
At May 29, 2003, the Company had credit lines totaling $130,000,000 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
..25% on the total commitment. It is the Company's intention to extend the
maturity date of this credit line and the unsecured term
38
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Long-Term Debt (continued)
note expiring in 2004, during fiscal 2004. There are no borrowings outstanding
on the remaining $5,000,000 line at May 29, 2003, which bears interest at the
bank's prime reference rate. Based on commercial paper outstanding, availability
under the lines at May 29, 2003, totaled $92,016,000.
As of May 29, 2003, the Company classified outstanding borrowings under
commercial paper agreements, backed by unused lines of credit, as current,
pending a new revolving credit agreement.
Scheduled annual principal payments on long-term debt for the years
subsequent to May 29, 2003, without consideration for the Company's anticipated
extension of the maturity dates of the credit line and unsecured note, are:
Fiscal Year (in thousands)
--------------------- --------------------
2004 $ 72,906
2005 26,503
2006 25,707
2007 28,543
2008 34,216
Thereafter 88,338
--------------------
$276,213
====================
Interest paid, net of amounts capitalized, in fiscal 2003, 2002 and 2001
totaled $18,450,000, $17,581,000 and $23,045,000, 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. In fiscal 2003, and from May 3, 2002 through May 30, 2002, the
Company reclassified $1,177,000 ($706,000 net of tax) and $328,000 ($197,000 net
of tax) from other comprehensive loss to interest expense, respectively. The
remaining loss at May 29, 2003, in accumulated other comprehensive loss 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 $671,000 ($403,000 net of tax) of loss into earnings during fiscal
2004.
39
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Long-Term Debt (continued)
The fair value of the Company's $205,000,000 of senior notes is
approximately $214,777,000. 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
29, 2003, there were 1,513,077 shares available for grants under the plans.
A summary of the Company's stock option activity and related information
follows:
May 29, 2003 May 30, 2002 May 31, 2001
-------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-------------------------------------------------------------------------
(options in thousands)
Outstanding at beginning of
year 1,872 $13.18 1,608 $12.79 1,202 $13.37
Granted 330 15.52 517 14.05 539 11.54
Exercised (135) 9.98 (107) 11.78 (14) 10.09
Forfeited (169) 14.05 (146) 12.96 (119) 13.33
-------------------------------------------------------------------------
Outstanding at end of year 1,898 $13.72 1,872 $13.18 1,608 $12.79
=========================================================================
Exercisable at end of year 788 $13.66 729 $13.55 619 $13.25
=========================================================================
Weighted-average fair value of
options granted during year
$5.78 $5.14 $5.24
Exercise prices for options outstanding as of May 29, 2003, ranged from
$9.22 to $18.13. The weighted-average remaining contractual life of those
options is 6.3 years. Additional information related to these options segregated
by exercise price range is as follows:
Exercise Price Range
$9.22 to $10.8751 to $14.51 to
$10.875 $14.50 $18.125
--------------------------------------
(options in thousands)
Options outstanding 49 1,245 604
Weighted-average exercise price of options outstanding $10.08 $12.69 $16.13
Weighted-average remaining contractual life of options
outstanding 2.8 6.3 6.6
Options exercisable 30 482 276
Weighted-average exercise price of options exercisable $ 9.92 $12.14 $16.71
40
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Shareholders' Equity (continued)
Through May 29, 2003, 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 25,758,
15,516 and 369,713 shares pursuant to these authorizations during fiscal 2003,
2002 and 2001, respectively. At May 29, 2003, there were 1,933,509 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 29, 2003, there were 623,104 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 29,
2003, retained earnings of approximately $74,537,000 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 $2,186,000, $1,907,000 and
$1,838,000 for fiscal 2003, 2002 and 2001, respectively.
The status of the Company's unfunded nonqualified, defined-benefit plan is
as follows:
May 29, May 30,
2003 2002
-----------------------------------
(in thousands)
Change in benefit obligation:
Net benefit obligation at beginning of year $ 9,942 $ 8,835
Service cost 306 302
Interest cost 746 663
Actuarial loss 2,358 270
Benefits paid (161) (128)
-----------------------------------
Net benefit obligation at end of year $ 13,191 $ 9,942
===================================
Funded status at end of year $(13,191) $(9,942)
Unrecognized net actuarial loss 4,435 2,123
Unrecognized prior service cost 18 23
Unrecognized transition obligation 150 225
-----------------------------------
Net amount recognized at end of year $ (8,588) $(7,571)
===================================
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability $ (8,588) $(7,571)
Additional minimum liability (2,503) (596)
Intangible asset 168 248
Accumulated other comprehensive income 1,409 209
Deferred tax asset 926 139
-----------------------------------
Net amount recognized at end of year $ (8,588) $(7,571)
===================================
Net periodic pension cost:
Service cost $ 306 $ 302
Interest cost 746 663
Net amortization of prior service cost and transition obligation 151 144
-----------------------------------
$ 1,203 $ 1,109
===================================
41
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
5.75% and 7.25% in 2003 and 2002, respectively, and an annual salary rate
increase of 5.00% 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 29, 2003 May 30, 2002
------------------------------------
(in thousands)
Deferred tax assets:
Accrued employee benefits $ 5,917 $ 4,654
Other 2,451 1,340
------------------------------------
Total deferred tax assets 8,368 5,994
Deferred tax liability:
Depreciation and amortization 47,136 42,523
------------------------------------
Net deferred tax liability included in balance sheet $38,768 $36,529
====================================
Income tax expense consists of the following:
Year ended
------------------------------------------------------
May 29, 2003 May 30, 2002 May 31, 2001
------------------------------------------------------
(in thousands)
Currently payable:
Federal $ 9,737 $ 4,517 $10,868
State 2,993 539 2,606
Deferred 460 5,984 176
------------------------------------------------------
$13,190 $11,040 $13,650
======================================================
Income tax expense is included in the accompanying consolidated statements
of earnings as follows:
Year ended
------------------------------------------------------
May 29, 2003 May 30, 2002 May 31, 2001
------------------------------------------------------
(in thousands)
Continuing operations $12,389 $11,040 $ 7,550
Discontinued operations 801 - 6,100
------------------------------------------------------
$13,190 $11,040 $13,650
======================================================
42
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 29, 2003 May 30, 2002 May 31, 2001
------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 4.7 5.9 5.4
Other (0.6) (7.9) (3.2)
------------------------------------------------------
39.1% 33.0% 37.2%
======================================================
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 2003, 2002 and 2001
totaled $13,456,000, $12,552,000 and $12,525,000, 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 29, 2003 May 30, 2002 May 31, 2001
------------------------------------------------------
(in thousands)
Fixed minimum rentals $2,279 $2,839 $3,339
Percentage rentals 170 162 141
Sublease rental income (42) (43) (7)
------------------------------------------------------
$2,407 $2,958 $3,473
======================================================
Payments to affiliated parties for lease obligations were $179,000 in
fiscal 2003, 2002 and 2001.
Aggregate minimum rental commitments at May 29, 2003, are as follows:
Fiscal Year (in thousands)
-------------- ------------------
2004 $ 2,109
2005 2,594
2006 2,940
2007 2,867
2008 2,778
33,562
Thereafter
------------------
$46,850
==================
Included in the above commitments is $2,203,000 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 $27,865,000 at May 29, 2003.
43
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 $14,861,000 at May 29, 2003. 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 29, 2003 and May 30, 2002, the Company held investments with
aggregate carrying values of $1,880,000 and $1,356,000, respectively, in various
approximately 50%-owned affiliates (joint ventures) which are accounted for
under the equity method. During fiscal 2003, the Company recorded an impairment
loss of $600,000, determined as the amount by which the carrying value exceeds
the fair value of these investments.
The Company has receivables from the joint ventures of $3,626,000 and
$3,760,000 at May 29, 2003 and May 30, 2002, respectively, net of a $1,953,000
allowance in fiscal 2003. The Company earns interest on $3,317,000 and
$3,353,000 of the net receivables at approximately prime to prime plus 1.5% at
May 29, 2003 and May 30, 2002, respectively.
Included in notes payable at May 29, 2003 and May 30, 2002, is $465,000 and
$81,000, 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 2005, 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, was $2,086,000 due to certain
entities owned by related parties. These notes were repaid in total in fiscal
2003. The Company leases automobiles from Selig Executive Leasing Company, whose
President and Chief Executive Officer is a director of the Company.
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.
44
THE MARCUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Business Segment Information (continued)
Following is a summary of business segment information for 2001 through
2003:
Continuing
Limited-Service Hotels/ Corporate Operations Discontinued
Lodging Theatres Resorts Items Total Restaurants Total
-----------------------------------------------------------------------------------------------
(in thousands)
2003
Revenues $126,612 $150,383 $118,490 $ 1,430 $396,915 $ - $396,915
Operating income (loss) 11,523 36,162 8,820 (7,120) 49,385 - 49,385
Depreciation and amortization 18,800 11,987 12,996 1,582 45,365 - 45,365
Assets 284,818 207,440 207,289 55,910 755,457 - 755,457
Capital expenditures and other 11,983 4,173 6,688 3,160 26,004 - 26,004
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
-----------------------------------------------------------------------------------------------
(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.
13. Unaudited Quarterly Financial Information (in thousands, except per share
data)
13 Weeks Ended
------------------------------------------------------------------
August 29, 2002 November 28, February 27, May 29,
Fiscal 2003 2002 2003 2003
------------------------------------------------------------------
Revenues $119,577 $88,787 $91,986 $96,565
Operating income 25,155 7,752 7,750 8,728
Net earnings 13,587 2,552 1,735 2,682
Net earnings per diluted share $ .46 $ .09 $ .06 $ .09
------------------------------------------------------------------
13 Weeks Ended
------------------------------------------------------------------
August 30, 2001 November 29, February 28, May 30,
Fiscal 2002 2001 2002 2002
------------------------------------------------------------------
Revenues $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 $ .50 $ .07 $ 0.05 $ .14
------------------------------------------------------------------
45
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
Not applicable.
Item 9(a). Controls and Procedures.
- --------- -----------------------
(a) Evaluation of disclosure controls and procedures.
Based on their evaluations, as of the end of the period covered by this
Annual Report on Form 10-K, 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 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 2003 Annual Meeting of Shareholders scheduled to be held on
October 8, 2003 (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.
We have adopted a written code of conduct that applies to all of our
employees, which is available on our corporate web site (www.marcuscorp.com). No
amendments to, or waivers from, our code of conduct have been made. If, in the
future, we amend, or grant waivers to, our code of conduct, we will make
information regarding such amendments or waivers available on our corporate web
site (www.marcuscorp.com) for a period of at least 12 months.
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 three stock option
plans, our 1987 Stock Option Plan, our 1995 Equity Incentive Plan and our 1994
Nonemployee Director Stock Option Plan, all of which were approved by our
shareholders:
Number of securities remaining available for
Weighted-average exercise Number of securities remaining available for
Number of securities to be issued price of outstanding options future issuance under equity compensation plans
upon the exercise Weighted-average exercise (excluding
of outstanding options price of outstanding options securities reflected in the first column)
---------------------- ---------------------------- -----------------------------------------
1,898,000 $13.72 1,513,000
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.
46
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 2003.
__________________
* 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, 100 East Wisconsin Avenue, Suite 1900,
Milwaukee, Wisconsin 53202-4125.
47
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, 2003 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
---------------------------------- ------------------------------
Stephen H. Marcus, Chairman of the Daniel F. McKeithan, Jr.,
Board, President and Chief Executive Director
Officer (Principal Executive Officer)
By: /s/ Douglas A. Neis By: /s/ Diane Marcus Gershowitz
---------------------------------- ------------------------------
Douglas A. Neis, Chief Financial Diane Marcus Gershowitz,
Officer and Treasurer (Principal Director
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/ Phillip 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
48
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 January 8, 2003. [[Incorporated by reference
to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarterly
period ended November 28, 2002.]]
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 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 and 4.5, 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.
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 29, 2003.
23 Consent of Ernst & Young LLP.
31.1 Certification by the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
E-1
31.2 Certification by the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32 Certification of Periodic Financial Report by the Chief Executive
Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99 Proxy Statement for our 2003 Annual Meeting of Shareholders. (Our
Proxy Statement for the 2003 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
2003 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.)
__________
* 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