Draft 10/13/03
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 28, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12604
THE MARCUS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1139844
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
100 East Wisconsin Avenue, Suite 1900
Milwaukee, Wisconsin 53202-4125
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 905-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes X No ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AT OCTOBER 10, 2003 - 20,207,322
CLASS B COMMON STOCK OUTSTANDING AT OCTOBER 10, 2003 - 9,430,185
THE MARCUS CORPORATION
----------------------
INDEX
-----
PART I - FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements:
Balance Sheets
(August 28, 2003 and May 29, 2003).............................................. 3
Statements of Earnings
(Thirteen weeks ended August 28, 2003 and August 29, 2002)...................... 5
Statements of Cash Flows
(Thirteen weeks ended August 28, 2003 and August 29, 2002)...................... 6
Condensed Notes to Financial Statements......................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................... 18
Item 4. Controls and Procedures......................................................... 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 18
Signatures...................................................................... S-1
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
August 28, May 29,
2003 2003
---------- ---------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 4,490 $ 6,039
Accounts and notes receivable 18,369 26,059
Receivables from joint ventures, net of reserves 4,149 3,626
Refundable income taxes - 4,032
Real estate and development costs 6,308 5,338
Other current assets 6,285 5,771
-------------- --------------
Total current assets 39,601 50,865
Property and equipment:
Land and improvements 89,220 88,997
Buildings and improvements 624,091 623,156
Leasehold improvements 9,121 9,010
Furniture, fixtures and equipment 278,123 272,961
Construction in progress 9,715 6,850
-------------- --------------
Total property and equipment 1,010,270 1,000,974
Less accumulated depreciation and amortization 356,480 345,171
-------------- --------------
Net property and equipment 653,790 655,803
Other assets:
Investments in joint ventures 1,616 1,880
Goodwill 11,773 11,773
Other 36,661 35,136
-------------- --------------
Total other assets 50,050 48,789
-------------- --------------
TOTAL ASSETS $ 743,441 $ 755,457
============== ==============
See accompanying notes to consolidated financial statements.
3
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
August 28, May 29,
2003 2003
---------- ---------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,076 $ 1,465
Accounts payable 15,838 20,723
Income taxes 5,110 -
Taxes other than income taxes 15,205 13,682
Accrued compensation 4,511 7,097
Other accrued liabilities 15,546 11,013
Current maturities of long-term debt 45,511 72,906
-------------- --------------
Total current liabilities 102,797 126,886
Long-term debt 202,220 203,307
Deferred income taxes 39,279 38,768
Deferred compensation and other 17,062 16,596
Shareholders' equity:
Preferred Stock, $1 par; authorized 1,000,000 shares; none issued Common
Stock, $1 par; authorized 50,000,000 shares; issued 21,709,328 shares
at August 28, 2003 and 21,684,328 shares at May 29, 2003 21,709 21,684
Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and
outstanding 9,480,185 at August 28, 2003 and 9,505,185 at May 29, 2003 9,480 9,506
Capital in excess of par 41,829 41,751
Retained earnings 326,271 314,903
Accumulated other comprehensive loss (2,041) (2,181)
-------------- --------------
397,248 385,663
Less cost of Common Stock in treasury (1,623,635 shares at August 28, 2003
and 1,687,595 shares at May 29, 2003) (15,165) (15,763)
-------------- --------------
Total shareholders' equity 382,083 369,900
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 743,441 $ 755,457
============== ==============
See accompanying notes to consolidated financial statements.
4
THE MARCUS CORPORATION
Consolidated Statements of Earnings (Unaudited)
(in thousands, except per share data) 13 Weeks Ending
-----------------------------------
Aug. 28, 2003 Aug. 29, 2002
-------------- --------------
Revenues:
Rooms and telephone $ 52,138 $ 52,796
Theatre admissions 29,961 29,211
Theatre concessions 13,853 13,692
Food and beverage 9,760 9,257
Other revenues 15,083 14,621
------------- -------------
Total revenues 120,795 119,577
Costs and expenses:
Rooms and telephone 21,439 20,986
Theatre operations 23,062 22,387
Theatre concessions 3,082 3,190
Food and beverage 7,239 6,927
Advertising and marketing 7,815 7,731
Administrative 10,537 10,330
Depreciation and amortization 11,308 11,438
Rent 616 602
Property taxes 4,070 4,344
Preopening expenses 102 3
Other operating expenses 5,884 6,484
------------- -------------
Total costs and expenses 95,154 94,422
------------- -------------
Operating income 25,641 25,155
Other income (expense):
Investment income 475 622
Interest expense (4,557) (5,324)
Gain on disposition of property and equipment 7 409
------------- -------------
(4,075) (4,293)
------------- -------------
Earnings from continuing operations before income taxes 21,566 20,862
Income taxes 8,621 8,491
------------- -------------
Earnings from continuing operations 12,945 12,371
Discontinued operations:
Gain on sale of discontinued operations, net of applicable income taxes - 1,216
------------- -------------
Net earnings $ 12,945 $ 13,587
============= =============
Earnings per share - basic and diluted:
Continuing operations $ 0.44 $ 0.42
Discontinued operations - 0.04
------------- -------------
Net earnings per share $ 0.44 $ 0.46
============= =============
See accompanying notes to consolidated financial statements.
5
THE MARCUS CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
13 Weeks Ending
-------------------------------------
August 28, 2003 August 29, 2002
--------------- ---------------
OPERATING ACTIVITIES:
Net earnings $ 12,945 $ 13,587
Adjustments to reconcile net earnings to net cash provided by operating activities:
Losses on loans to and investments in joint ventures, net of distributions 264 145
Gain on disposition of property, equipment and other assets (7) (2,459)
Amortization of loss on swap agreement 207 335
Depreciation and amortization 11,308 11,438
Deferred income taxes 500 355
Deferred compensation and other 466 373
Changes in assets and liabilities:
Accounts and notes receivable 7,690 (1,999)
Real estate and development costs (970) 938
Other current assets (514) (90)
Accounts payable (4,885) (3,957)
Income taxes 9,059 8,401
Taxes other than income taxes 1,523 1,185
Accrued compensation (2,586) (2,086)
Other accrued liabilities 4,533 4,247
------------- -------------
Total adjustments 26,588 16,826
------------- -------------
Net cash provided by operating activities 39,533 30,413
INVESTING ACTIVITIES:
Capital expenditures (9,262) (5,771)
Net proceeds from disposals of property, equipment and other assets 3 2,492
Increase in other assets (1,527) (4,179)
Cash advanced to joint ventures (523) (212)
------------- -------------
Net cash used in investing activities (11,309) (7,670)
FINANCING ACTIVITIES:
Debt transactions:
Net proceeds from issuance of notes payable and long-term debt - 554
Principal payments on notes payable and long-term debt (28,871) (22,579)
Equity transactions:
Treasury stock transactions, except for stock options (126) (220)
Exercise of stock options 802 428
Dividends paid (1,578) (1,565)
------------- -------------
Net cash used in financing activities (29,773) (23,382)
------------- -------------
Net decrease in cash and cash equivalents (1,549) (639)
Cash and cash equivalents at beginning of year 6,039 5,614
------------- -------------
Cash and cash equivalents at end of period $ 4,490 $ 4,975
============= =============
See accompanying notes to consolidated financial statements.
6
THE MARCUS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS FOR THE
THIRTEEN WEEKS ENDED
AUGUST 28, 2003
(Unaudited)
1. General
Accounting Policies - Refer to the Company's audited financial statements
(including footnotes) for the fiscal year ended May 29, 2003, contained in
the Company's Form 10-K Annual Report for such year, for a description of
the Company's accounting policies.
Basis of Presentation - The consolidated financial statements for the
thirteen weeks ended August 28, 2003 and August 29, 2002 have been prepared
by the Company without audit. In the opinion of management, all
adjustments, consisting only of normal recurring accruals necessary to
present fairly the unaudited interim financial information at August 28,
2003, and for all periods presented, have been made. The results of
operations during the interim periods are not necessarily indicative of the
results of operations for the entire year.
Comprehensive Income - Accumulated other comprehensive loss consists of the
unrecognized loss on hedging transactions, the accumulated net unrealized
losses on available for sale securities and the minimum pension liability,
all net of tax. Accumulated other comprehensive loss was $2,041,000 and
$2,181,000 as of August 28, 2003 and May 29, 2003, respectively. Total
comprehensive income for the thirteen weeks ended August 28, 2003 and
August 29, 2002 was $13,085,000 and $13,721,000, respectively.
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:
13 Weeks Ended 13 Weeks Ended
August 28, 2003 August 29, 2002
--------------- ---------------
(in thousands, except per share data)
Numerator:
Earnings from continuing operations $ 12,945 $ 12,371
===============================================================================================================
Denominator:
Denominator for basic EPS 29,534 29,333
Effect of dilutive employee stock options 152 227
- ---------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS 29,686 29,560
===============================================================================================================
Earnings per share from continuing operations:
Basic $ 0.44 $ 0.42
Diluted $ 0.44 $ 0.42
===============================================================================================================
7
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.
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 Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company's pro forma earnings and earnings per share
would have been as follows:
13 Weeks Ended 13 Weeks Ended
August 28, 2003 August 29, 2002
--------------- ---------------
(in thousands, except per share data)
Net earnings, as reported $ 12,945 $ 13,587
Deduct: Stock-based employee compensation expense determined
under the fair value method for all option awards, net of
related tax effects (229) (278)
- ---------------------------------------------------------------------------------------------------------------
Pro forma net earnings $ 12,716 $ 13,309
===============================================================================================================
Earnings per share:
Basic and diluted - as reported $ 0.44 $ 0.46
Basic and diluted - pro forma $ 0.43 $ 0.45
===============================================================================================================
New Accounting Pronouncements - In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 requires variable interest entities to
be consolidated by their primary beneficiaries. A primary beneficiary is
the party that absorbs a majority of the entity's expected losses or
residual benefits. FIN 46 is currently effective for all variable interest
entities created or modified after January 31, 2003 and is effective for
all variable interest entities, regardless of when created, in quarterly
periods ending after December 15, 2003. The Company is currently
determining if a limited number of the Company's arrangements are with
variable interest entities. If it is determined that FIN 46 is applicable,
the Company will conclude whether consolidation or disclosure would be
required upon full adoption of FIN 46 and would measure the impact, if any,
that this accounting change would have on its results of operations or
financial position.
2. Business Segment Information
The Company's primary operations are reported in the following three
business segments: Limited-Service Lodging, Theatres and Hotels/Resorts.
Corporate items include amounts not allocable to the business segments.
Corporate revenues consist principally of rent and the corporate operating
loss includes general corporate expenses. Corporate information
8
technology costs and accounting shared services costs are allocated to the
business segments based upon several factors, including actual usage and
segment revenues.
Following is a summary of business segment information for the thirteen
weeks ended August 28, 2003 and August 29, 2002 (in thousands):
13 Weeks Ended Limited-Service Corporate
August 28, 2003 Lodging Theatres Hotels/Resorts Items Total
--------------- --------------- -------- -------------- --------- -----
Revenues $36,754 $46,118 $37,640 $ 283 $ 120,795
Operating income (loss) 7,690 12,699 7,068 (1,816) 25,641
13 Weeks Ended Limited-Service Corporate
August 29, 2002 Lodging Theatres Hotels/Resorts Items Total
--------------- --------------- -------- -------------- --------- -----
Revenues $37,449 $44,262 $37,458 $ 408 $ 119,577
Operating income (loss) 8,558 11,341 7,137 (1,881) 25,155
9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and Analysis of
Results of Operations and Financial Condition are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements may generally be identified as such because the context of such
statements will include words such as we "believe," "anticipate," "expect" or
words of similar import. Similarly, statements that describe our future plans,
objectives or goals are also forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties which could cause
results to differ materially from those expected, including, but not limited to,
the following: (i) our ability to successfully define and build the Baymont
brand within the "limited-service, mid-price without food and beverage" segment
of the lodging industry; (ii) the availability, in terms of both quantity and
audience appeal, of motion pictures for our theatre division; (iii) the effects
of increasing depreciation expenses and preopening and start-up costs due to the
capital intensive nature of our businesses; (iv) the effects of adverse economic
conditions in our markets, particularly with respect to our limited-service
lodging and hotels and resorts divisions; (v) the effects of adverse weather
conditions, particularly during the winter in the Midwest and in our other
markets; (vi) the effects on our occupancy and room rates from the relative
industry supply of available rooms at comparable lodging facilities in our
markets; (vii) the effects of competitive conditions in the markets served by
us; (viii) our ability to identify properties to acquire, develop and/or manage
and continuing availability of funds for such development; and (ix) the adverse
impact on business and consumer spending on travel, leisure and entertainment
resulting from terrorist attacks in the United States, the United States'
responses thereto and subsequent 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-Q and we undertake no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.
RESULTS OF OPERATIONS
General
We report our consolidated and individual segment results of operations on
a 52-or-53-week fiscal year ending on the last Thursday in May. Fiscal 2004 and
2003 are both 52-week years. We divide our fiscal year into three 13-week
quarters and a final quarter consisting of 13 or 14 weeks. Our primary
operations are reported in the following three business segments: movie
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's fiscal 2003 results have been presented as discontinued operations in
the accompanying financial statements and in this discussion.
The following table sets forth revenues, operating income, earnings from
continuing operations, discontinued operations, net earnings and earnings per
share for the comparable first quarter of fiscal 2004 and 2003 (in millions,
except for per share and variance percentage data):
10
First Quarter
-------------------------------------------------------------------
Variance
----------------------------
F2004 F2003 Amt. Pct.
--------- --------- -------- ---------
Revenues $120.8 $119.6 $1.2 1.0%
Operating income 25.6 25.2 0.4 1.9%
Earnings from continuing operations 12.9 12.4 0.5 4.6%
Discontinued operations - 1.2 (1.2) -100.0%
Net earnings $12.9 $13.6 $(0.7) -4.7%
Earnings per share - diluted:
Continuing operations $.44 $.42 $ .02 4.8%
Net earnings per share $.44 $.46 $ (.02) -4.3%
An increase in our theatre division revenues and operating income (earnings
before other income/expense and income taxes) during the first quarter of fiscal
2004 compared to the same period last year was partially offset by revenue and
operating income decreases from our limited-service lodging division, with
hotels and resorts operating results essentially even for the comparative
quarters. Operating income from our two lodging divisions (and the hotel
industry in general) continues to be negatively impacted by an overall reduction
in business travel brought on by the economic environment.
Decreased interest expense, partially offset by reduced gains on the
disposition of property and equipment, favorably impacted earnings from
continuing operations during our fiscal 2004 first quarter compared to our first
quarter of fiscal 2003. Our interest expense, net of investment income, totaled
$4.1 million for the first quarter of fiscal 2004 compared to $4.7 million
during the same period last year. The decrease was primarily the result of a
$50.6 million, or 17.0%, reduction in our long-term debt at the end of the first
quarter of fiscal 2004 compared to last year's quarter-end.
We recognized gains on disposition of property and equipment totaling only
$7,000 during the first quarter of fiscal 2004 compared to $400,000 during the
prior year same period. The fiscal 2003 gain was the result of the sale of a
parcel of land adjacent to one of our theatres. The timing of periodic sales of
our property and equipment may vary from quarter to quarter, resulting in
variations in our gains or losses on disposition of property and equipment. We
anticipate periodic additional sales of non-revenue generating property and
equipment with the potential for additional gains on disposition from time to
time during the remainder of fiscal 2004.
During the first quarter of fiscal 2003, the buyer of our former KFC
restaurants elected to terminate a provision of the asset purchase agreement
that provided for potential additional future purchase price payments 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 $1.2 million or $.04 per share
was included in the reported results for the fiscal 2003 first quarter. Net
earnings during the first quarter of fiscal 2004 decreased compared to net
earnings during the prior year's same period because of this gain last year.
11
Theatres
The following table sets forth revenues, operating income and operating
margin for our theatre division for the first quarter of fiscal 2004 and 2003
(in millions, except for variance percentage and operating margin):
First Quarter
-------------------------------------------------------------------
Variance
----------------------------
F2004 F2003 Amt. Pct.
--------- --------- -------- ---------
Revenues $46.1 $44.3 $1.8 4.2%
Operating income 12.7 11.3 1.4 12.0%
Operating margin 27.5% 25.6%
(% of revenues)
Consistent with the seasonal nature of the motion picture exhibition
industry, the first and third quarters of our fiscal year are typically the
strongest periods for our theatre division. Our theatre division recognized
record operating results for our fiscal 2004 first quarter. Our first quarter
results were the eighth quarter out of the last nine with record results.
Contributing to the increased first quarter operating margin were increased box
office and concession revenues and reduced concession cost of sales, partially
offset by slightly increased film rental costs. Increases in other ancillary
revenues, including management fees and pre-show advertising income, also
contributed to the improved operating performance. In addition, our fiscal 2004
first quarter operating income and margin were favorably impacted by an
insurance settlement of approximately $400,000 related to a fire that occurred
several years ago at one of our Milwaukee-area theatres.
The following table breaks out revenues for the theatre division for the
first quarter of fiscal 2004 and 2003 (in millions, except for variance
percentage and operating margin):
First Quarter
-------------------------------------------------------------------
Variance
----------------------------
F2004 F2003 Amt. Pct.
--------- --------- -------- ---------
Box office receipts $30.0 $29.2 $0.8 2.6%
Concession revenues 13.8 13.7 0.1 1.2%
Other revenues 2.3 1.4 0.9 69.5%
----- ----- ---- ----
Total revenues $46.1 $44.3 $1.8 4.2%
The increase in our box office receipts for the first quarter of fiscal
2004 compared to the same period last year was due primarily to an increase in
our average ticket price, as attendance decreased slightly during the fiscal
2004 first quarter. Our average ticket price increased 5.6% during the first
quarter of fiscal 2004 compared to the same quarter last year. The increase is
attributable primarily to modest price increases and the fact that this year's
film product mix included an unusually high number of R-rated movies, which
typically appeal to a smaller audience but result in a higher average ticket
price due to fewer child admissions. Our average concession sales per person
during the fiscal 2004 first quarter increased 4.2% compared to the
12
same period last year, although our overall concession revenues only increased
1.2% due to the reduced attendance during the fiscal 2004 first quarter.
Total theatre attendance decreased 2.7% during the first quarter compared
to total attendance during the same period last year. The quarter opened with
two very strong weeks, went through nine weeks of generally under-performing
film product characterized by significant second week drops in box office
revenues for many films, only to end the quarter with two comparably strong
weeks. The first quarter of fiscal 2004 included several blockbuster films,
including Finding Nemo, Pirates of the Caribbean, Bruce Almighty and T3: Rise of
the Machines.
Scheduled film product for the second quarter has thus far performed well
and the outlook for the next two months appears to be very good. September,
which is typically our slowest month of the year, has outperformed last year.
October and November films such as Runaway Jury, Intolerable Cruelty, The Matrix
Revolutions, Master and Commander, Looney Tunes: Back in Action and Dr. Suess'
Cat in the Hat are expected to perform well. Anticipated hits during the holiday
season include The Haunted Mansion and the third installment of Lord of the
Rings. Revenues for the theatre business and the motion picture industry in
general are heavily dependent upon the general audience appeal of available
films, together with studio marketing, advertising and support campaigns, all
factors over which we have no control.
We ended the first quarter of fiscal 2004 with a total of 454 company-owned
screens in 43 theatres and 34 managed screens in 3 theatres compared to 456
company-owned screens in 44 theatres and 34 managed screens in 3 theatres at the
end of the same period last year. We anticipate opening four additional screens
at a theatre in Menomonee Falls, Wisconsin, in time for the holiday season and
we anticipate opening our fourth UltraScreen(TM) at a theatre in Elgin,
Illinois, in our fiscal 2004 third quarter. We are also overseeing the
construction of a new six-screen theatre in Tomah, Wisconsin, scheduled to open
in December. We will be managing this theatre for the Ho-Chunk Indian Nation
under a long-term contract. We continue to review additional opportunities to
add new screens to existing locations and to develop new locations in and around
our existing markets.
Limited-Service Lodging
The following table sets forth revenues, operating income and operating
margin for our limited-service lodging division for the first quarter of fiscal
2004 and 2003 (in millions, except for variance percentage and operating
margin):
First Quarter
-------------------------------------------------------------------
Variance
----------------------------
F2004 F2003 Amt. Pct.
--------- --------- -------- ---------
Revenues $36.8 $37.4 $(0.6) -1.9%
Operating income 7.7 8.6 (0.9) -10.1%
Operating margin 20.9% 22.9%
(% of revenues)
13
The overall decline in division revenues can be attributed primarily to a
decrease in Woodfield Suites revenues and the fact that we had one fewer
company-owned Baymont Inn & Suites open during the fiscal 2004 first quarter
compared to the same quarter last year. Comparable Baymont Inns & Suites
experienced a 1.5 percentage point increase in occupancy percentage (number of
occupied rooms as a percentage of available rooms) and a 1.4% decrease in
average daily room rate ("ADR") during the first quarter of fiscal 2004,
compared to the same quarter last year. Reduced business travel, as companies
continued to respond to the current economic environment, continues to dampen
room demand and create significant pricing pressure on existing hotels. The
result of the ADR decrease and occupancy increase was a 0.8% increase in Baymont
Inns & Suites revenue per available room, or RevPAR, for comparable Inns during
the fiscal 2004 first quarter compared to the same period last year.
We owned and operated seven Woodfield Suites all-suite hotels during the
first quarters of fiscal 2004 and 2003. Revenues and operating income from
Woodfield Suites decreased during the first quarter of fiscal 2004 compared to
the same period of fiscal 2003 due primarily to reduced occupancy and ADR, with
a resulting RevPAR decrease of 7.3% compared to the same period last year.
Woodfield Suites' dependence on the business traveler is generally greater than
that of Baymont Inns & Suites, contributing to the greater revenue decline.
Data received from outside industry resources, such as Smith Travel
Research, indicates that our company-owned or operated Baymont Inns & Suites
realized another gain in market share during the fiscal 2004 first quarter,
representing the fifth straight quarter of improved performance relative to our
specific competitive set in our markets. Our fiscal 2004 first quarter RevPAR
increase of 0.8%, with an even greater RevPAR increase for our franchised
locations, compares favorably to a reported increase of 0.4% for our specific
set of competitors for the same period. We believe that our continued sales and
marketing efforts to increase brand awareness, including more effectively
utilizing all channels of distribution, continuing to introduce our brand and
facilities to many new customers and differentiating it from our competitors,
contributed to the improved revenue performance relative to others in our
industry.
One indication that we are successfully reaching new customers is the fact
that the revenues generated from our reservation center continues to increase.
Revenues from the various internet reservation portals available to the hotel
industry continue to increase as well, and we expect continued growth from these
revenue sources in the future. In addition, members in our frequent stay
program, Guest Ovations(TM), contributed approximately 24% of our revenues
during the first quarter of fiscal 2004 compared to 19% during the same period
last year.
The limited-service lodging division's operating income decreased during
the fiscal 2004 first quarter compared to the same period last year due
primarily to the overall decline in revenues during this same period. In
addition, reduced operating income from our Woodfield Suites, lower telephone
revenues, and increased utility, supply and insurance costs have all contributed
to the overall decline in operating income. The fact that our RevPAR increases
were the result of increased occupancy rather than increased rates also
contributed to our lower operating margin, as payroll costs necessary to service
the additional occupancy increased.
The overall RevPAR trend improved throughout the course of the first
quarter of fiscal 2004, with August being the strongest month of the quarter.
Although these results may have
14
been aided by the traditional influx of leisure travelers during this time
period, we believe that the August improvement may also reflect an improved
business climate as a response to the strengthening economy. Our ability to
overcome anticipated increases in utility costs and property, liability and
health insurance 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.
At the end of the fiscal 2004 first quarter, we owned or operated 93
Baymont Inns & Suites and franchised an additional 89 Inns, bringing the total
number of Baymont Inns & Suites in operation to 182. Two franchised locations
opened during the first quarter of fiscal 2004. In addition, there are currently
five approved franchised locations, one joint venture and one company-owned
property under construction or in development. The joint venture location, which
will be our first Baymont Inn & Suites in the important California market, will
open during the second quarter of fiscal 2004. The company-owned property under
construction, our first urban Baymont Inn & Suites, is being built in downtown
Chicago, Illinois and is currently expected to open during the second quarter of
fiscal 2005. As a result of the reduced demand for lodging and a constrained
financing market for new hotel development, industry supply growth has 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. Conversely, we also continue
to believe that the significantly reduced supply growth throughout the industry
should favorably impact operating results of existing hotels if an economic
recovery takes hold.
Hotels and Resorts
The following table sets forth revenues, operating income and operating
margin for our hotels and resorts division for the first quarter of fiscal 2004
and 2003 (in millions, except for variance percentage and operating margin):
First Quarter
-------------------------------------------------------------------
Variance
----------------------------
F2004 F2003 Amt. Pct.
--------- --------- -------- ---------
Revenues $37.6 $37.5 $0.1 0.5%
Operating income 7.1 7.1 - -
Operating margin 18.8% 19.1%
(% of revenues)
If our timeshare operations are excluded, total division revenues and
operating income for the first quarter of fiscal 2004 increased 3.5% and 3.7%,
respectively, compared to the same period last year. Operating results at our
vacation ownership development at the Grand Geneva Resort & Spa were negatively
impacted during the fiscal 2004 first quarter by transition challenges
associated with the new Wisconsin telemarketing no-call rules. Continued
improvement at our newest properties, as well as a better summer for group
business at our group-oriented hotels and resorts, contributed to the improved
core operating results without timesharing. Comparisons to last year's first
quarter were negatively impacted by the fact that the division's fiscal 2004
first quarter operating results included approximately $100,000 of
15
preopening expenses related to the introduction of a new restaurant concept at
our Hilton Madison at Monona Terrace.
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. According to data received
from outside industry resources, such as Smith Travel Research, our hotels and
resorts have generally performed at or better than others in our segment of the
industry, likely due at least partially to our property and location mix. The
division's total RevPAR for company-owned properties increased 0.8% during the
fiscal 2004 first quarter compared to the same quarter last year. The small
increase in RevPAR was due to increased occupancy, offset by a 0.4% decrease in
ADR for these comparable properties. Increased food and beverage revenues
accounted for the majority of the overall division revenue increase (again,
excluding timeshare revenues) over and above the RevPAR increase noted above.
Encouraged by the success of our very popular Milwaukee Chop House
restaurant at our Hilton Milwaukee City Center, we have recently introduced the
Chop House concept to our Hilton Madison and Hotel Phillips properties. We also
began construction during the fiscal 2004 first quarter on a new spa at our
Miramonte Resort. Construction on the new spa, which will include several
signature treatments designed to distinguish it from other spas in the
competitive desert market, is currently scheduled to be completed in time for
the peak winter season.
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 the remainder of fiscal 2004 as a result of the reduced business travel,
the second quarter has started off stronger than last year, thanks to the added
business from Harley Davidson's 100th anniversary celebration held in Milwaukee
over the Labor Day weekend. The leisure customer segment has continued to
perform well for us and we are seeing some signs that our corporate group
business segment is improving. Group bookings continue to be made within a
relatively short lead-time and the groups generally continue to spend less on
ancillary items, such as banquets and golf outings. However, we are encouraged
by the advanced bookings for the remainder of the fall. We also anticipate that
the performance of our newest hotels will continue to improve. As a result,
subject to economic conditions, we currently expect our division operating
results to continue to improve during the remainder of fiscal 2004, with cost
controls remaining a high priority.
FINANCIAL CONDITION
Our lodging and movie theatre businesses each generate significant and
consistent daily amounts of cash because each segment's revenue is derived
predominantly from consumer cash purchases. We believe that these relatively
consistent and predictable cash sources, together with the availability of $118
million of unused credit lines as of the end of the first quarter, should be
adequate to support the near-term anticipated ongoing operational liquidity
needs of our businesses.
16
Our existing five-year, $125 million credit facility with several banks and
our $15.7 million term note with one of the banks are both scheduled to expire
later in fiscal 2004. It is our intention to execute new agreements that will
effectively extend the maturity dates of the current credit agreements during
fiscal 2004. We currently do not believe that we will have difficulty in
extending these agreements at continued favorable terms. As of August 28, 2003,
we classified $27.8 million of outstanding borrowings under the term note and
under commercial paper agreements backed by unused credit lines as current,
pending new credit agreements. We expect these borrowings to be reclassified to
long-term debt upon execution of the new agreements.
Net cash provided by operating activities increased by $9.1 million during
the first quarter of fiscal 2004 to $39.5 million, compared to $30.4 million
during the prior year's first quarter. The increase was due primarily to
improved operating results and favorable timing differences in collections of
accounts and notes receivable, partially offset by an unfavorable timing
difference in payments of accounts payable.
Net cash used in investing activities during the fiscal 2004 first quarter
totaled $11.3 million, compared to $7.7 million during the fiscal 2003 first
quarter. The increase in net cash used in investing activities was primarily the
result of increased capital expenditures and reduced cash proceeds from
disposals of property and equipment. Capital expenditures totaled $9.3 million
during the first quarter of fiscal 2004 compared to $5.8 million during the
prior year's first quarter. Fiscal 2004 first quarter capital expenditures
included $7.0 million incurred in our limited-service lodging division, $1.2
million incurred in our theatre division and $900,000 incurred in our hotels and
resorts division to fund ongoing capital projects. The decrease in cash proceeds
was primarily due to the additional payment on the sale of our KFC restaurants
received during last year's first quarter.
Net cash used in financing activities during the first quarter of fiscal
2004 totaled $29.8 million compared to $23.4 million during the first quarter of
fiscal 2003. As a result of increased cash provided by operating activities,
excess cash available was used to reduce our outstanding commercial paper
borrowings during the quarter. Our principal payments on notes payable and
long-term debt totaled $28.9 million during the first quarter of fiscal 2004
compared to $22.6 million during the same period last year, with minimal new
debt added in either year. Due to the seasonal nature of our businesses, it is
not unusual for us to reduce our overall debt levels during our typically strong
first quarter. Our debt capitalization ratio was 0.39 at August 28, 2003,
compared to 0.43 at the prior fiscal year end. Based upon our current
expectations for fiscal 2004 capital expenditure levels and potential asset
sales proceeds, we currently anticipate that our long-term debt total and
debt-capitalization ratio will remain at or below fiscal 2003 levels during
fiscal 2004.
The actual timing and extent of the implementation of our current expansion
plans will depend in large part on industry and general economic conditions, our
financial performance and available capital, the competitive environment,
evolving customer needs and trends and the availability of attractive
opportunities. It is likely that our plans will continue to evolve and change in
response to these and other factors.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not experienced any material changes in our market risk exposures
since May 29, 2003.
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures
------------------------------------------------
Based on their evaluations, as of the end of the period covered by
this Quarterly Report on Form 10-Q, our principal executive officer
and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the "Exchange Act")) are
effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
b. Changes in internal controls
----------------------------
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
--------
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
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.
b. Reports on Form 8-K
-------------------
We furnished a current report on Form 8-K dated September 18, 2003
pursuant to Item 9 with respect to our press release for the first
quarter ended August 28, 2003 and related disclosure requirements of
Regulation FD.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MARCUS CORPORATION
----------------------
DATE: October 13, 2003 By: /s/ Stephen H. Marcus
-------------------------------------
Stephen H. Marcus,
Chairman of the Board, President and
Chief Executive Officer
DATE: October 13, 2003 By: /s/ Douglas A. Neis
-------------------------------------
Douglas A. Neis
Chief Financial Officer and Treasurer
S-1