Management's Discussion and Analysis
Forward-Looking Statements
Certain matters discussed in this 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 the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties, including, but not limited to, the following:
(i) the Company's 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 the Company's theatre division; (iii) the effects
of increasing depreciation expenses and pre-opening and start-up costs due to
the capital intensive nature of the Company's businesses; (iv) the effects of
adverse economic conditions in the Company's markets, particularly with respect
to the Company's limited-service lodging and hotels and resorts divisions; (v)
the effects of adverse weather conditions, particularly during the winter in the
Midwest and in the Company's other markets; (vi) the effects on the Company's
occupancy and room rates from the relative industry supply of available rooms at
comparable lodging facilities in the Company's markets; (vii) the effects of
competitive conditions in the markets served by the Company; and (viii) the
effects of increased energy costs. 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 report and the Company undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances.
Results of Operations
General
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The Marcus Corporation reports consolidated and individual segment results of
operations on a 52-or-53-week fiscal year ending on the last Thursday in May.
Fiscal 2001 was a 53-week year and fiscal 2000 and fiscal 1999 were 52-week
years for the Company. Fiscal 2002 will be a 52-week year for the Company.
The Company divides its fiscal year into three 13-week quarters and a final
quarter consisting of 13 or 14 weeks. The Company's primary operations are
reported in the following three business segments: limited-service lodging,
theatres and hotels/resorts. As a result of the Company's recent disposal of its
KFC restaurants, the restaurant business segment has been presented as
discontinued operations in the accompanying financial statements and in this
discussion.
Total revenues for fiscal 2001 were $379.1 million, an increase of $27.0
million, or 7.7%, compared to fiscal 2000 revenues of $352.1 million. Fiscal
2000 revenues increased $16.1 million, or 4.8%, from fiscal 1999 revenues of
$336.0 million. The Company's theatre and hotels/resorts divisions contributed
to the increase in revenues during both fiscal years. The Company's
limited-service lodging division revenues increased slightly during fiscal 2001
and decreased during fiscal 2000. The additional week of operations reported for
the Company during fiscal 2001 contributed $8.6 million in revenues to the
Company's fourth quarter and fiscal 2001 results.
Operating income (earnings before other income/expense and income taxes) from
continuing operations totaled $38.8 million during fiscal 2001. As a result of
the Company's evaluation of the recoverability of assets related to its theatre
division IMAX(R) operations (a detailed discussion of this item is included
under the Theatres section), the Company recorded a $2.1 million after-tax,
non-cash impairment charge ($3.5 million before-tax) during the fourth quarter
of fiscal 2001. Excluding the asset impairment charge, operating income from
continuing operations during fiscal 2001 totaled $42.3 million, a decrease of
$5.8 million, or 11.9%, from comparable operating income from continuing
operations of $48.1 million during fiscal 2000. Reduced operating income from
the Company's limited-service lodging division accounted for the majority of the
decrease in operating income during fiscal 2001 compared to fiscal 2000 results.
Significantly increased utility and snow removal costs during fiscal 2001
negatively impacted each of the Company's divisions by an aggregate of $2.1
million and $600,000, respectively, compared to fiscal 2000. The additional week
of operations reported for the Company during fiscal 2001 contributed $2.4
million in operating income to the Company's fourth quarter and fiscal 2001
results. Operating income from continuing operations during fiscal 2000
decreased $400,000, or 0.9%, compared to operating income of $48.5 million
during fiscal 1999. Operating income increases from the Company's theatre and
hotels/resorts divisions during fiscal 2000 compared to fiscal 1999 were offset
by reduced operating income from the limited-service lodging division.
Earnings from continuing operations for fiscal 2001 were $12.7 million, or $.43
per share. Excluding the asset impairment charge, earnings from continuing
operations for fiscal 2001 were $14.8 million, or $.50 per share, a decrease of
30.0% and 29.6%, respectively, from earnings from continuing operations of $21.2
million, or $.71 per share, for fiscal 2000. Fiscal 2000 earnings from
continuing operations increased $280,000, or 1.3%, from fiscal 1999 earnings
from continuing operations of $21.0 million, or $.70 per share.
Increased interest expense and reduced gains on disposition of property and
equipment, offset by a gain on insurance contracts, contributed to the Company's
decreased earnings from continuing operations during fiscal 2001 compared to
fiscal 2000. The Company's net interest expense, net of investment income,
totaled $20.4 million for fiscal 2001. This represented an increase of $3.9
million, or 23.6%, over fiscal 2000 net interest expense of $16.5 million.
Fiscal 2000 net interest expense increased $459,000, or 2.9%, over fiscal 1999
net interest expense of $16.1 million. These increases were the result of
additional borrowings in fiscal 2001 and fiscal 2000 used to help finance the
Company's capital expansion program and stock repurchase program, partially
offset by increased investment income and capitalized interest. As a result of
lower short-term interest rates, reduced current debt levels due to the receipt
of proceeds from the sale of the Company's KFC restaurants late during the
fourth quarter of fiscal 2001 and the Company's expectation that its capital
expenditures will decrease during fiscal 2002, the Company anticipates that its
net interest expense during fiscal 2002 will likely remain constant or decline
slightly.
10
The Marcus Corporation
The Company recognized gains on disposition of property and equipment from
continuing operations of $300,000 during fiscal 2001, compared to gains on
disposition of property and equipment of $4.3 million during fiscal 2000. The
timing of periodic sales of Company property and equipment can vary from year to
year, resulting in variations in the Company's gains or losses on disposition of
property and equipment. As a result of the Company's plans to explore the sale
of selected Baymont Inns & Suites and other assets, the Company believes that
additional gains on disposition of property and equipment could be recognized
during fiscal 2002. The Company recognized a non-taxable gain of $1.6 million
during fiscal 2001 from insurance contracts on the life of the Company's
founder, Ben Marcus, who died in December 2000.
The Company's income tax expense on continuing operations for fiscal 2001 was
$7.6 million, a decrease of $7.0 million from fiscal 2000. The Company's
effective tax rate for fiscal 2001 was 37.2%, compared to 40.7% in fiscal 2000
and 40.5% in fiscal 1999. The Company's effective income tax rate for fiscal
2001 declined as a result of the non-taxable gain on insurance contracts. The
increased effective tax rate during fiscal 2000 was the result of increased
state income taxes, net of federal income tax benefits. The Company believes
that its effective tax rate during fiscal 2002, excluding the anticipated
favorable impact of federal historic tax credits related to the renovation
currently underway at the hotel division's Hotel Phillips in Kansas City,
Missouri, will approximate 40%.
Net earnings for fiscal 2001 were $21.8 million, or $.74 per share. Excluding
the asset impairment charge, net earnings for fiscal 2001 were $23.9 million, an
increase of $1.3 million, or 5.6%, over fiscal 2000 net earnings of $22.6
million, or $.76 per share. The increase in net earnings during fiscal 2001
compared to fiscal 2000 was due to an after-tax gain on disposal of the
Company's discontinued restaurant operations during the fourth quarter of fiscal
2001 totaling $7.8 million, or $.27 per share (a detailed discussion of this
item is included in the Discontinued Operations section). Fiscal 2000 net
earnings decreased $522,000, or 2.3%, from fiscal 1999 earnings of $23.1
million, or $.77 per share. Weighted average shares outstanding were 29.3
million for fiscal 2001, 29.8 million for fiscal 2000 and 30.1 million for
fiscal 1999. All per share data presented herein is on a diluted basis.
Historically, the Company's 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 the
Company's lodging businesses. The Company's third fiscal quarter has
historically produced the weakest operating results primarily due to the effects
of reduced travel during the winter months on the Company's lodging businesses.
The Company incurred approximately $97 million in aggregate capital expenditures
during fiscal 2001 and over $600 million during the last six fiscal years. The
Company believes that these investments will provide opportunities for earnings
growth over the next several years. The Company expects to reduce its capital
expenditures to approximately $65 to $75 million during fiscal 2002.
The Company's current strategic plans include the following goals:
o Continuing to define and build the 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. The Company currently believes that most of its
limited-service lodging division's anticipated future growth in earnings will
ultimately come as a result of revenue growth at its Company- owned inns (as
the brand captures a greater share of its segment of the industry) and from
its emphasis on opening new franchised Baymont Inns and Baymont Inns &
Suites. As of the end of fiscal 2001, 21 new franchised properties were under
development, approximately one-half of which are expected to open during
fiscal 2002. The Company hopes to approve 25 to 35 new franchised properties
per year over the next few fiscal years. By emphasizing franchising, the
Company believes the Baymont brand may grow more rapidly, conserving capital
for other strategic purposes. The Company also anticipates exploring
additional growth of the Baymont brand through potential acquisitions and
joint venture investments, focusing on selected key strategic urban and
suburban markets. The Company is currently in the early stages of developing
its first urban Baymont Inn & Suites in downtown Chicago, Illinois, with an
opening expected sometime in fiscal 2003.
o Maximizing the return on the Company's significant recent investments in its
theatres through both revenue and cost improvements. The Company has invested
over $200 million in its theatre division over the last five fiscal years,
more than doubling its number of movie theatre screens from 219 at the end of
fiscal 1996 to 482 screens at the end of fiscal 2001 and offering stadium
seating in approximately 84% of its first-run screens, the highest percentage
in the industry. The Company does not anticipate its total screen count
significantly changing during fiscal 2002 unless attractive acquisition
opportunities present themselves.
o Doubling the number of rooms either managed or owned by the hotels and
resorts division to 6,000 rooms over the next three to five years. The
Company anticipates that the majority of this potential growth will come from
management contracts for other owners. In some cases, the Company may own a
partial interest in the new managed properties. Many of the recent growth
opportunities for the hotels and resorts division required a lengthy
development period during which significant capital was committed and
pre-opening costs and early start-up losses reduced division operating
income. The Company expects its recent development projects to provide
earnings growth opportunities during fiscal 2002 and beyond.
The actual number, mix and timing of potential future new facilities and
expansions will depend in large part on favorable industry and economic
conditions, the Company's financial performance and available capital, the
competitive environment,
11
Management's Discussion and Analysis
evolving customer needs and trends, customer acceptance of the new Baymont
brand, the Company's ability to increase the number of franchised Baymont
locations at a pace consistent with the Company's current plans and the
availability of attractive opportunities. It is likely that the Company's 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.
Limited-Service Lodging
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The Company's largest division is its limited-service lodging division, which
contributed 37.0% of the Company's consolidated revenues and 33.2% of the
Company's consolidated operating income, excluding corporate items and the
impairment charge, during fiscal 2001. 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." The following tables set forth revenues, operating income,
operating margin, number of units and rooms data for the limited-service lodging
division for the last three fiscal years:
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in millions) 2001 2000 1999
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Revenues $140.4 $138.2 $141.6
Operating income 16.3 21.0 25.5%
Operating margin (% of revenues) 11.6% 15.2% 18.0%
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Number of units at fiscal year-end
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2001 2000 1999
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Baymont Inns & Suites
Company-owned or operated 96 95 99
Franchised 88 76 65
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Total Baymont Inns & Suites 184 171 164
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Woodfield Suites-Company-owned 7 7 6
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Total number of units 191 178 170
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Available rooms at fiscal year-end
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2001 2000 1999
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Baymont Inns & Suites
Company-owned or operated 9,921 9,877 10,380
Franchised 7,782 6,775 5,984
Total Baymont Inns & Suites 17,703 16,652 16,364
Woodfield Suites 889 889 737
Total available rooms 18,592 17,541 17,101
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Total revenues in the limited-service lodging division increased 1.6% during
fiscal 2001 compared to fiscal 2000. The additional week of operations included
in the limited-service lodging division's fiscal 2001 results accounted for the
entire increase, contributing $2.4 million to total fiscal 2001 revenues. Total
revenues in the limited-service lodging division decreased 2.4% during fiscal
2000 due primarily to the reduction in the number of Company-owned Baymont Inns
& Suites. Average daily room rates at Baymont Inns & Suites increased 10.0%
during fiscal 2001 and 7.9% during fiscal 2000 compared to the respective prior
years. Baymont's occupancy percentage decreased 5.7 and 2.5 percentage points
during fiscal 2001 and fiscal 2000, respectively. The result of the average
daily rate increases and occupancy declines was a 0.1% decrease and a 2.4%
increase in Baymont Inns & Suites revenue per available room, or RevPAR, for
comparable Inns for fiscal 2001 and 2000, respectively. RevPAR for comparable
Woodfield Suites decreased 1.3% during fiscal 2001 and increased 2.2% during
fiscal 2000 compared to the prior fiscal years, respectively.
The Company believes that a primary factor contributing to the decline in
occupancy in both fiscal years was the significant increase in the industry
supply of limited-service lodging rooms. Occupancy declines were largest at the
Company's Midwest properties, a result of the particularly challenging economic
environment in several manufacturing intensive cities with its resulting reduced
business travel and the fact that the increased room supply was especially
prevalent in the Midwest and Southern portions of the country. The Company also
anticipated some downward pressure on occupancy as the Company significantly
increased the average daily rate as it repositioned the Baymont Inns & Suites
brand from the lower-priced economy segment of the lodging industry to the
mid-price segment. The Company's marketing and sales efforts are now focused on
attracting more mid-market guests to Baymont. The Company expects these efforts
to increase occupancy in future periods, particularly during the second half of
fiscal 2002 if the economic climate improves. The Company does not anticipate
Baymont's average daily rate to increase as rapidly during fiscal 2002 as it has
during the last two years.
During the third quarter of fiscal 1999, the Company officially changed the name
of its Budgetel Inns to Baymont Inns and Baymont Inns & Suites. As the Company
expected, the Baymont introduction did not immediately alter the trends being
experienced by the Company and others in the limited-service segment of the
lodging industry and may have actually contributed to a decline in occupancy
during the name change transition, as customers were not yet familiar with the
new name. The division's quarterly RevPAR trends for the last three fiscal years
have been as follows:
RevPAR % Change
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2001 2000 1999
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1st Quarter +3.5% -2.9% +0.9%
2nd Quarter +0.3% -0.6% -0.9%
3rd Quarter -3.6% +5.9% -7.3%
4th Quarter -2.3% +7.2% -5.0%
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12
The Marcus Corporation
As the table indicates, at the end of fiscal 2000, the percentage change in
RevPAR at comparable Baymont Inns & Suites had improved each quarter since the
initial introduction of the new brand during the third quarter of fiscal 1999.
The improvement in RevPAR was attributable primarily to increased market
awareness of the Baymont brand and the addition of lobby breakfasts at the
majority of the Company-owned Baymont locations. Inns with lobby breakfasts
consistently performed significantly better than Inns without the lobby
breakfast, due to favorable guest response to the new amenity and increased
average rates realized as a result of offering that amenity. The Company offered
the lobby breakfasts at all of its Company-owned Inns by the end of the third
quarter of fiscal 2000. During fiscal 2001, the Company continued to
aggressively increase its room rates, positioning the Baymont brand at a price
point that the Company believes is consistent with comparable properties in the
mid-price segment of the lodging industry. However, beginning in the fall of
2000, the economic environment weakened and the Company's occupancy rates
declined, resulting in small decreases in RevPAR during the third and fourth
quarters of fiscal 2001. The Company believes that a potential positive result
of the overall economic slowdown impacting the lodging industry as a whole is an
expected reduction in the number of new competitive hotels being opened.
The Company continues to believe that its long-term strategy to build the
Baymont brand will result in significantly increased RevPAR in the future. The
Company's average daily rate at the end of fiscal 2001 was just under $56, which
is relatively low compared to other competing lodging chains within the
mid-price lodging segment. The Company has recently introduced or announced
plans to introduce several new features which are designed to build the Baymont
brand, including an enhanced lobby breakfast, upgrades to the bed and bath
amenities, a new satisfaction guarantee, additional services for business
travelers, new sales and marketing programs and a new frequent stay reward
program, Guest OvationsTM. Several of these programs will result in additional
one-time and ongoing costs, but are expected to increase occupancy and revenues
over the long term. The Company also continues to update the exterior of many of
its Company-owned Baymonts with a fresh, new exterior renovation package that
has typically resulted in improved operating performance at the Company's older
locations. As a result, subject to economic and industry conditions, the Company
believes that it can successfully position the Baymont brand to capture
additional market share and increase its RevPAR.
One new Company-owned Baymont Inn & Suites was opened during fiscal 2001 in New
Berlin, Wisconsin and is considered the prototype for future properties. In
addition, the Company purchased one Baymont Inn & Suites from a franchisee
during fiscal 2001. No Company-owned properties were opened during fiscal 2000
or fiscal 1999. No new Woodfield Suites were opened during fiscal 2001 after the
Company opened one each during fiscal 2000 and fiscal 1999. The Company's newly
opened and acquired Baymont Inn & Suites and Woodfield Suites contributed
additional revenues of $2.9 million and nominal operating income during fiscal
2001. Newly opened properties contributed additional revenue of $3.2 million and
nominal operating income during fiscal 2000. The Company sold one Baymont Inn &
Suites to a franchisee during fiscal 2001 and sold four Baymont Inns during
fiscal 2000, including one to a franchisee. A pre-tax loss of approximately
$600,000 and pre-tax gains of approximately $2.4 million were recognized during
fiscal 2001 and fiscal 2000, respectively, as a result of the sale of these
Inns. Late in fiscal 1999, the Company sold seven Baymont Inns & Suites,
including five to a new franchisee. As a result of the sale of these 12 Inns,
fiscal 2001 and fiscal 2000 revenues were negatively impacted by $1.7 million
and $7.9 million, respectively, compared to the prior years. The Company has
identified 15-20 additional Baymont Inns & Suites that will be considered for
sale to new and existing franchisees. In some cases, the Company may continue to
manage a disposed property for a new owner under the terms of a management
contract. The Company believes that this strategy will give its franchise
partners the opportunity to develop a significant market presence and will allow
the Company to utilize the sales proceeds for other growth opportunities,
including developing Baymont properties in new markets. Although this strategy
will result in reduced revenues until after the sales proceeds are reinvested in
other revenue-generating facilities, the Company expects that profitability will
increase over time as a result.
The limited-service lodging division's operating income decreased 22.3% and
17.7% during fiscal 2001 and fiscal 2000, respectively. 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.
Operating margins declined to 11.6%, compared to 15.2% and 18.0% in fiscal 2000
and 1999, respectively, due in part to the reductions in RevPAR during fiscal
1999, the first half of fiscal 2000 and last half of fiscal 2001. In addition,
increased payroll costs from a tight labor market, increased utility costs,
reduced telephone income and increased costs of additional guest amenities and
marketing costs associated with the rebranding effort contributed to the
operating margin declines. Fiscal 2001 operating income was negatively impacted
by approximately $1.7 million in costs recognized during the last half of the
fiscal year related to the introduction of the Company's new Guest OvationsTM
frequent stay reward program, the development of new interior design packages
and the implementation of a new systemwide training program. Each of these
programs is expected to provide benefits to the Baymont brand over the long
term. Partially offsetting the reduced operating income from Baymont Inns &
Suites operations were improved franchise revenues and increased operating
income from the division's Woodfield Suites properties. The Company has recently
significantly reduced its corporate overhead costs and has several cost-cutting
initiatives in place in order to help return the limited-service lodging
division's operating margins to previous levels. In addition, the Company
13
Management's Discussion and Analysis
will benefit in fiscal 2002 from the lack of several one-time expenses, such as
the Guest OvationsTM costs, incurred during fiscal 2001. Accordingly, the
Company currently expects its limited-service lodging division operating margins
to improve during fiscal 2002 if economic and industry conditions remain stable.
Theatres
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The Company's oldest and second largest division is its theatre division. The
theatre division contributed 33.6% of the Company's consolidated revenues and
45.0% of its consolidated operating income, excluding corporate items and the
impairment charge, during fiscal 2001. 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:
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(in millions) 2001 2000 1999
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Revenues $127.5 $122.3 $111.2
Operating income 22.1* 22.0 20.4%
Operating margin (% of revenues) 17.3%* 18.0% 18.3%
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* Excludes $3.5 million before-tax impairment charge
Number of screens and locations at fiscal year-end
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2001 2000 1999
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Theatre screens 482 470 428
Theatre locations 49 50 48
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Average screens per location 9.8 9.4 8.9
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Total revenues in the theatre division increased 4.3% and 9.9% during fiscal
years 2001 and 2000, respectively. New screens added during fiscal 2001 and
fiscal 2000 contributed to the revenue increases during each year. In addition,
the additional week of operations included in the theatre division's fiscal 2001
results contributed $3.8 million to total fiscal 2001 theatre division revenues.
The additional week of operations included the traditionally strong Memorial Day
holiday weekend. Consistent with the Company's long-term strategic plan to focus
on operating large multi-screen theatres, the Company added 17 new screens to
five existing theatres during fiscal 2001, including its second large
UltraScreenTM, which opened at a Madison, Wisconsin location. As of May 31,
2001, the Company operated 447 first-run screens and 35 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.
The Company added 42 new screens during fiscal 2000, including a new 16-screen
ultraplex in Oakdale, Minnesota. In addition, the Company added 19 screens to
four existing theatres during fiscal 2000 and added the Company's second large
screen IMAX(R) 2D/3D theatre at its Addison, Illinois location. The Company also
purchased a six-screen theatre during fiscal 2000 in Shakopee, Minnesota. The
new screens added during fiscal 2001 and fiscal 2000 generated additional
revenues of $9.3 million and $13.0 million, respectively, compared to the
previous years.
One theatre with a total of six screens was closed during fiscal 2001. In
addition, a four-screen theatre in Stevens Point, Wisconsin was sold and a
five-screen theatre in Wausau, Wisconsin was purchased. These transactions had
minimal impact on operations in fiscal 2001. The Company believes that it may
close approximately four to six theatres with 18-32 screens over the next two
years with minimal impact on operating results.
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 the
Company has no control. This was particularly evident during the last two fiscal
years. Theatre division revenues were down 15.2% compared to the prior year at
the end of the first quarter of fiscal 2001, with only two films, The Perfect
Storm and Mission Impossible 2, producing box office receipts in excess of $1.7
million compared to six films reaching that level during the first quarter of
fiscal 2000. However, strong performances by films later in the year, including
How the Grinch Stole Christmas, Cast Away, What Women Want, Meet the Parents,
Mummy Returns and Hannibal, contributed to an overall increase in box office
receipts for fiscal 2001. Conversely, theatre division revenues were up 27.0%
over the prior year at the end of the first quarter of fiscal 2000, due to the
strong summer box office performance of films such as Star Wars I: The Phantom
Menace, Sixth Sense, Austin Powers 2, Runaway Bride, Tarzan and Big Daddy. With
the exception of the films Toy Story 2 and Green Mile, however, there was a lack
of quality film product during the last three quarters of fiscal 2000, resulting
in an increase in total theatre revenues of only 2.6% during the last three
quarters of fiscal 2000 compared to the same period during the prior year. Each
of the films identified above produced box office receipts in excess of $1.7
million for the theatre division during their respective fiscal years. The
Company played 170, 172 and 153 films at its theatres during fiscal years 2001,
2000 and 1999, respectively. Included in the total films played were 6, 10 and 4
new IMAX(R) films during each fiscal year, respectively.
Total box office receipts during fiscal 2001 were $84.5 million, an increase of
$2.9 million, or 3.5%, over $81.6 million during fiscal 2000. Fiscal 2000 box
office receipts increased $7.6 million, or 10.3%, compared to fiscal 1999. Total
attendance decreased 0.3% during fiscal 2001 and increased 3.6% during fiscal
2000, compared to prior years. The increase in attendance during fiscal 2000 was
due to the increase in new screens that year. Attendance at the Company's
comparable locations decreased 7.3% during fiscal 2001 and 8.4% during fiscal
2000, compared to the previous year. Attendance during both fiscal years was
negatively impacted by additional theatre screens in several of the Company's
markets
14
The Marcus Corporation
and the lack of quality and quantity of film product during significant portions
of the year.
The theatre division's average ticket price increased 3.9% and 6.5% during
fiscal 2001 and fiscal 2000, respectively, compared to the prior year. Ticket
prices were increased during each fiscal year in order to reflect the
significant investments in stadium seating and digital sound that have been made
in the majority of the division's theatres. First-run theatre average ticket
prices increased 3.7% during fiscal 2001 and 5.6% during fiscal 2000, compared
to the respective prior years.
Concession revenues during fiscal 2001 were $38.1 million, an increase of $1.6
million, or 4.6%, from $36.5 million during fiscal 2000. Fiscal 2000 concession
revenues increased $3.1 million, or 9.2%, from fiscal 1999 concession revenues
of $33.4 million. Concession revenues increased due to the Company's added
screens and the 4.8% and 5.6% increase in average concession sales per person
during fiscal years 2001 and 2000, respectively. Average concession sales per
person are impacted by changes in concession pricing, types of films played and
changes in the Company's geographic mix of theatre locations.
Under the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," during fiscal
2001, 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 approximately $3.5 million
carrying value of the assets was written off during fiscal 2001. The Company
believes that the performance of its IMAX(R) theatres has not met expectations
thus far due in large part to the lack of commercially viable film product for
this format. The Company plans to continue operating its two IMAX(R) theatres
for the foreseeable future and is hopeful that commercially viable large-format
film production will improve during fiscal 2002 and beyond and improve operating
results.
Excluding the impairment charge during fiscal 2001, the theatre division's
operating income increased by $100,000, or 0.4%, during fiscal 2001 and $1.6
million, or 7.9%, during fiscal 2000, compared to the respective prior year's
results. The additional week of operations included in the theatre division's
fiscal 2001 results contributed approximately $1.3 million to fiscal 2001
operating income. The division's operating margin decreased to 17.3% during
fiscal 2001, compared to 18.0% and 18.3% in fiscal 2000 and 1999, respectively.
Fiscal 2001 and fiscal 2000 operating margins were impacted by the disappointing
film product and increased occupancy expenses associated with recent capital
investments in the division. The Company believes, however, that its long-term
competitive position has been strengthened as a result of these capital
investments. Fiscal 2001 operating results were also negatively impacted by high
utility costs, unusually high snow removal costs during December 2000, and
significant losses from the Company's two IMAX(R) theatre screens. Fiscal 2000
was further negatively impacted by high film costs associated with the fiscal
year's highest grossing film, Star Wars I: The Phantom Menace. Fiscal 2001 and
fiscal 2000 operating income was reduced by pre-opening expenses for new screens
of approximately $100,000 and $400,000, respectively. No significant pre-opening
expenses are anticipated during fiscal 2002.
Hotels and Resorts
- -------------------------------------------------------------------------------
The Company's hotels and resorts division contributed 28.9% of the Company's
consolidated revenues and 21.8% of the Company's consolidated operating income,
excluding corporate items and the impairment charge, during fiscal 2001. 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, the Company managed three hotels during the majority of the fiscal
years presented. 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:
- -------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Revenues $109.7 $89.9 $81.2
Operating income 10.7 10.8 8.1%
Operating margin (% of revenues) 9.8% 12.0% 10.0%
- -------------------------------------------------------------------------------
Available rooms at fiscal year-end
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Company-owned 2,074 1,683 1,388
Management contracts 640 640 879
- -------------------------------------------------------------------------------
Total rooms available 2,714 2,323 2,267
- -------------------------------------------------------------------------------
Total revenues in the hotels and resorts division increased 22.1% and 10.7%
during fiscal 2001 and fiscal 2000, respectively, compared to the prior year.
The division's operating income decreased 0.7% during fiscal 2001 and increased
33.4% during fiscal 2000, compared to the respective previous years. 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 2001 due to increased RevPAR at Company-owned
properties, a full year of sales of vacation ownership units at the Grand Geneva
Resort & Spa in Lake Geneva, Wisconsin, and the opening of the Hilton Milwaukee
room addition and water park and the new Company-owned Hilton Madison at Monona
Terrace. Increased RevPAR at Company-owned properties, particularly at the
Company's two resorts, the Grand Geneva Resort & Spa and the Miramonte
15
Management's Discussion and Analysis
Resort in Indian Wells, California, and the first partial year of sales of
vacation ownership units contributed to the improved revenues and operating
income during fiscal 2000. Operating margin declined in fiscal 2001 due
primarily to the impact of $1.9 million in pre-opening expenses and
disappointing operating margins from the vacation ownership business.
Occupancy and average daily rate increases at the division's comparable owned
properties contributed to the increase in revenues and operating income in both
fiscal 2001 and fiscal 2000. As a result of the occupancy and average daily rate
increases, the division's total RevPAR for comparable properties increased 3.8%
and 3.2% during fiscal 2001 and 2000, respectively, compared to the prior year.
Prior to fiscal 2000, the hotels and resorts division had experienced
double-digit increases in RevPAR for three consecutive years. This was primarily
because, unlike the limited-service segment of the lodging industry, strong
consumer demand in conjunction with a relatively small increase in industry room
supply resulted in strong operating results for owners and operators of
upper-end hotels and resorts. During fiscal 2000, the upper-end hotel room
supply in the Company's markets increased slightly and average daily rate
increases slowed, resulting in an overall RevPAR increase that more closely
reflected annual inflation trends. During the first half of fiscal 2001, RevPAR
increases at comparable properties returned to double-digits, increasing 10.7%
compared to the first half of fiscal 2000. The second half of fiscal 2001,
however, was impacted by a weakening economic climate, resulting in reduced
business travel and reduced occupancy at the Company's hotels and resorts. The
Company believes that as a result of the current economic environment, RevPAR
increases for the upper-end of the lodging industry, including the Company's
comparable properties in the hotels and resorts division, will be minimal during
the first half of fiscal 2002. If the economic situation for business travel
improves during the remainder of fiscal 2001, the Company believes RevPAR may
increase during the second half of fiscal 2002. As a result, operating margins
at comparable properties are not expected to increase significantly during
fiscal 2002.
An addition to the Hilton Milwaukee City Center opened during the first quarter
of fiscal 2001, making it the largest hotel in Wisconsin with 729 rooms. The
addition also included a family water park fun center, which opened during the
fiscal 2001 second quarter. A skywalk to Milwaukee's new Midwest Express
Convention Center and a new parking structure will be added 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. Late during fiscal 2000, the Company
purchased the Hotel Phillips, a downtown Kansas City, Missouri landmark
property. The Company closed the property during the fall of 2000 in order to
undertake a complete restoration of the hotel. The 217-room hotel is scheduled
to reopen in September 2001 and the Company expects interim operating losses and
pre-opening expenses related to the Hotel Phillips to have an adverse impact on
fiscal 2002 operating results. Pre-opening expenses and start-up operating
losses related to the Hilton Madison and Hotel Phillips adversely impacted
fiscal 2001 division operating results by approximately $1.8 million. The
Company 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 will begin management of a new Hilton Garden Inn in
Houston, Texas later in fiscal 2002.
The Company began sales and construction of a vacation ownership development at
the Grand Geneva Resort & Spa during fiscal 1999, representing the Company's
entry into the timesharing business. The first 18 units, a sales center and a
model unit opened in June 2000. During the first three quarters of fiscal 2000,
the Company accounted for all sales of vacation intervals using the deposit
method, deferring all revenue because certain minimum sales levels had not been
reached. During the fourth quarter of fiscal 2000, minimum sales levels were met
and revenues were recognized on the percentage-of-completion method. Under this
methodology, the vacation ownership development contributed revenues of $3.9
million during fiscal 2000 and negatively impacted operating income in fiscal
2000 by approximately $500,000 due to start-up selling costs and the fact that
initial sales efforts were limited while the Company obtained the necessary
approvals to sell to Illinois residents. During fiscal 2001, the vacation
ownership development contributed revenues of $8.7 million and negatively
impacted operating income by approximately $600,000. Higher than anticipated
construction costs and high sales and marketing expenses contributed to the
disappointing performance of this business. Interest income from financing
operations associated with vacation ownership sales partially offset the
operating loss indicated. Increases in unit pricing and improvements in the
sales and marketing organization are expected to result in improved operating
results from the Company's vacation ownership development efforts during fiscal
2002.
Discontinued Operations
- -------------------------------------------------------------------------------
The Company previously announced its intention to sell its 30 KFC and KFC/Taco
Bell 2-in-1 restaurants and, as a result, the Company has been accounting for
the restaurant operations as discontinued operations in the Company's
consolidated financial statements. The Company decided to dispose of its
restaurant business in order to concentrate on its core lodging and theatre
operations. The Company had previously divested its family restaurant business
and its Applebee's restaurants during fiscal years 1995 and 1996, respectively.
On May 24, 2001, the Company sold its 30 KFC and KFC/Taco Bell 2-in-1
restaurants to H&K Partners, LLC (H&K), a new company of which the former
executive vice president of the Company's restaurant division is a principal.
The assets sold consisted primarily of land, buildings and
16
The Marcus Corporation
equipment. Proceeds from the sale of approximately $26.3 million consisted of
$25.8 million in cash and a $500,000 promissory note. The Company realized a net
before-tax gain of $13.1 million ($7.8 million after-tax) during fiscal 2001 as
a result of the sale. The asset purchase agreement with H&K provides for a
potential additional future purchase price payment to the Company if certain
performance conditions are met. The Company has not recorded a gain associated
with any potential additional purchase price payments at this time. Prior to the
sale, the Company had non-exclusive franchise rights to operate KFC restaurants
in the Milwaukee metropolitan area and in northeast Wisconsin. The Company
operated 27 KFC restaurants and 3 KFC/Taco Bell 2-in-1 restaurants during the
fiscal years presented. The following table sets forth revenues, operating
income, and operating margin for the discontinued operations for the last three
fiscal years.
- -------------------------------------------------------------------------------
(in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Revenues $23.7 $24.4 $26.9
Operating income 2.1 2.3 3.3%
Operating margin (% of revenues) 8.7% 9.6% 12.4%
- -------------------------------------------------------------------------------
Total revenues from discontinued operations decreased 2.8% during fiscal 2001
and 9.3% during fiscal 2000, compared to the respective previous years. The
Company's operating income from discontinued operations decreased 12.1% and
29.7% during fiscal years 2001 and 2000, respectively, compared to the previous
year.
Financial Condition
The Company's 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. The Company believes that these
consistent and predictable cash sources, together with the availability of $48
million of unused credit lines at fiscal 2001 year end, should be adequate to
support the ongoing operational liquidity needs of the Company's businesses. The
Company increased its credit lines during fiscal 2001, increasing its total
availability under revolving credit agreements to $175 million by entering into
a new $45 million 364-day revolving credit agreement with several banks.
Borrowings under the new $45 million line bear interest at LIBOR plus a margin
which is adjusted based on the Company's borrowing levels. The agreement
requires an annual facility fee of 0.2% on the total commitment.
Net cash provided by operating activities decreased by $14.5 million, or 21.5%,
to $52.8 million during fiscal 2001, compared to $67.3 million during fiscal
2000. The decrease was primarily the result of reduced earnings from continuing
operations and timing differences in payments of accounts payable. Depreciation
and amortization (a non-cash expense) increased as a result of the Company's
increased capital spending program.
Net cash used in investing activities during fiscal 2001 decreased by $13.9
million, or 16.5%, to $70.1 million. The reduction in net cash used in investing
activities was primarily the result of increased net proceeds from disposals of
property, equipment and other assets. Cash proceeds from the disposals of
property, equipment and other assets totaled $29.3 million and $15.9 million
during fiscal 2001 and 2000, respectively. The cash proceeds received during
fiscal 2001 were primarily the result of the sale of the Company's discontinued
restaurant operations, in addition to the sale of one Baymont Inn & Suites, two
former restaurant locations and the sale of a parcel of land adjacent to the
Grand Geneva Resort & Spa to the developers of the new Timber Ridge Lodge. The
cash proceeds received during fiscal 2000 were primarily the result of the sale
of four Baymont Inns & Suites, five former restaurant locations and several
parcels of land.
Total capital expenditures (including normal continuing capital maintenance
projects and business acquisitions) of $96.7 million and $99.5 million were
incurred in fiscal 2001 and 2000, respectively. Capital expenditures and
business acquisitions during fiscal 2001 included $37.2 million incurred on
limited-service lodging division projects, $13.1 million on theatre division
projects and $45.8 million on hotels and resorts division projects. During
fiscal 2000, $21.2 million was incurred on limited-service lodging division
projects, $39.6 million on theatre division projects and $33.6 million on hotels
and resorts division projects. Total capital expenditures in fiscal 2002 are
currently expected to be approximately $65 to $75 million and are expected to be
funded by cash generated from operations, net proceeds from the disposal of
selected assets and additional debt, including, but not limited to, additional
institutional debt from the Company's private placement program and borrowings
under the Company's revolving credit facilities. The majority of the fiscal 2002
capital expenditures are anticipated to be incurred in the Company's two lodging
divisions and will include the completion of the Hotel Phillips renovation, the
construction of a new parking structure at the Hilton Milwaukee City Center and
the anticipated development of the Company's first urban Baymont Inn & Suites in
downtown Chicago.
Principally as a result of borrowing a portion of the Company's fiscal 2001
funding used in facility expansions and renovations, the Company's total debt
increased to $328.4 million at the close of fiscal 2001, compared to $302.6
million at the end of fiscal 2000. Net cash provided by financing activities in
fiscal 2001 totaled $15.9 million, compared to $16.1 million in fiscal 2000.
During fiscal 2001, the Company received $42.1 million of net proceeds from the
issuance of notes payable and long-term debt, compared to $38.5 million during
fiscal 2000. The majority of the borrowings during fiscal 2001 were from
commercial paper and the Company's revolving credit facilities. The Company made
total principal payments on notes payable and long-term debt of $16.3 million
during fiscal 2001 compared to $10.9 million during fiscal 2000. The Company's
debt-capitalization ratio was 0.49 at May 31, 2001, compared to 0.48 at the
prior fiscal year end.
Based upon the Company's expectation for fiscal 2002 capital expenditure levels
and potential asset sales proceeds, the Company
17
Management's Discussion and Analysis
does not anticipate its long-term debt at the end of fiscal 2002 to be
significantly greater than current levels. In addition to the Company's new and
existing credit lines, the Company has the ability to issue up to $45 million of
additional senior notes under its existing private placement program. Depending
upon a number of factors, including capital requirements, proceeds from asset
sales and market receptiveness and conditions, the Company anticipates that it
may issue additional senior notes during fiscal 2002. Proceeds from an issuance
would be used primarily to repay existing debt under its revolving credit lines.
During fiscal 2001, the Company repurchased 370,000 of its common shares for
approximately $4.2 million in the open market compared to 528,000 of common
share repurchases for approximately $5.6 million during fiscal 2000. The Company
also announced in the first quarter of fiscal 2001 that its Board of Directors
had authorized the repurchase of up to 2 million additional shares of the
Company's outstanding common stock. At May 31, 2001, approximately 1.975 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.
Quantitative and Qualitative Disclosures
About Market Risk
The Company is exposed to market risk related to changes in interest rates. The
Company manages its exposure to this market risk through the monitoring of
available financing alternatives.
Variable interest rate risk: The Company's earnings are affected by changes in
short-term interest rates as a result of its borrowings under its revolving
credit agreements, floating-rate mortgages/industrial development revenue bonds
and unsecured term notes not subject to interest rate swap agreements. Based
upon the Company's variable rate debt for such borrowings at May 31, 2001, a 100
basis point increase in market rates would increase interest expense and
decrease earnings before income taxes by approximately $1.3 million. This
sensitivity analysis does not consider any actions management might take to
mitigate its exposure in the event of a change of such magnitude.
Fixed interest rate risk: The fair value of long-term fixed interest rate debt
may also be subject to interest rate risk. Generally, the fair market value of
fixed interest rate debt will increase as interest rates fall and decrease as
interest rates rise. Based upon the respective rates and prepayment provisions
of the Company's fixed interest rate senior notes and mortgages at May 31, 2001,
the carrying amounts of such debt approximates their fair value.
Interest rate swaps: The Company enters into interest rate swap agreements to
manage its 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. At May 31, 2001, the Company had interest rate
swap agreements of $25.0 million, expiring on November 14, 2005, and $7.5
million, expiring August 6, 2001. The Company pays a defined fixed rate while
receiving a defined variable rate based on LIBOR. Together, these swap
agreements effectively convert $32.5 million of the Company's variable rate
unsecured term notes and revolving credit agreement loans to a fixed rate. The
additional net interest expense recorded in fiscal 2001 and 2000 as a result of
the swap agreements was not material. The fair value of these interest rate swap
agreements represents the estimated receipts or payments that would be made to
terminate the agreements. At May 31, 2001, the fair market value of the
Company's swap agreements, as determined by the lender, is a liability of
approximately $1.8 million.
Quarterly Information and Stock Prices
- -------------------------------------------------------------------------------
Supplementary quarterly financial data (unaudited)
14 Weeks
(in thousands except per share data) 13 Weeks Ended Ended
- -------------------------------------------------------------------------------
August 24, November 23, February 22, May 31,
Fiscal 2001 2000 2000 2001 2001
- -------------------------------------------------------------------------------
Revenues $108,828 $87,142 $86,876 $96,286
Operating income 23,052 10,244 3,109 2,426
Net earnings 11,449 4,096 341 5,890
Net earnings per diluted share .39 .14 .01 .20
- -------------------------------------------------------------------------------
(in thousands except per share data) 13 Weeks Ended
August 26, November 25, February 24, May 25,
Fiscal 2000 1999 1999 2000 2000
- -------------------------------------------------------------------------------
Revenues $107,717 $80,244 $77,439 $86,718
Operating income 24,500 9,854 5,197 8,537
Net earnings 13,170 5,588 881 2,983
Net earnings per diluted share .44 .19 .03 .10
Last sale price range of common stock
Fiscal 2001 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------------
High $12.75 $15.19 $15.40 $15.40
Low 10.50 10.50 12.00 13.55
- -------------------------------------------------------------------------------
Fiscal 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- -------------------------------------------------------------------------------
High $13.25 $14.25 $14.06 $12.94
Low 11.44 10.75 9.50 8.38
- -------------------------------------------------------------------------------
On August 15, 2001, there were 2,151 shareholders of record for the Common Stock
and 49 shareholders of record for the Class B Common Stock.
18
Auditor's Report and Management Statement The Marcus Corporation
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 31, 2001 and May 25, 2000, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended May 31, 2001. 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
31, 2001 and May 25, 2000, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended May 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
July 20, 2001
Statement of Management Responsibility for Financial Statements
The management of The Marcus Corporation and its subsidiaries is responsible for
the preparation of the financial and operating information contained in this
annual report, including the consolidated financial statements audited by Ernst
& Young LLP, independent auditors. These statements were prepared in conformity
with accounting principles generally accepted in the United States and include
amounts that are based on the best estimates and judgments of management.
A system of internal financial controls provides management with reasonable
assurance that transactions are recorded and executed as authorized, that assets
are properly safeguarded and accounted for, and that records are maintained to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States. The Company also has
policies and guidelines that require employees to maintain a high level of
ethical standards.
The Audit Committee of the Board of Directors is composed entirely of outside
directors and has unrestricted access to representatives of Ernst & Young LLP.
/s/ Stephen H. Marcus /s/ Douglas A. Neis
Stephen H. Marcus Douglas A. Neis
Chairman and Chief Executive Officer Chief Financial Officer and Treasurer
19
Consolidated Statements of Earnings
Year ended
(in thousands, except per share data) May 31, 2001 May 25, 2000 May 27, 1999
- ------------------------------------------------------------------------------------------------------
REVENUES:
Rooms and telephone $182,608 $170,597 $173,305
Theatre admissions 84,535 81,637 74,011
Theatre concessions 38,144 36,482 33,413
Food and beverage 29,896 26,614 25,075
Other income 43,949 36,788 30,195
- ------------------------------------------------------------------------------------------------------
Total revenues 379,132 352,118 335,999
COSTS AND EXPENSES:
Rooms and telephone 82,348 71,238 70,117
Theatre operations 66,971 63,999 58,150
Theatre concessions 9,440 8,887 8,419
Food and beverage 22,975 20,363 19,446
Advertising and marketing 31,537 25,969 24,535
Administrative 40,412 39,654 37,134
Depreciation and amortization 43,329 40,458 37,205
Rent (Note 9) 3,410 2,954 2,853
Property taxes 14,539 14,066 13,498
Pre-opening expenses 2,040 1,004 1,769
Other operating expenses 19,759 15,438 14,368
Impairment charge (Note 2) 3,541 - -
- ------------------------------------------------------------------------------------------------------
Total costs and expenses 340,301 304,030 287,494
- ------------------------------------------------------------------------------------------------------
OPERATING INCOME 38,831 48,088 48,505
OTHER INCOME (EXPENSE):
Investment income 2,592 1,453 783
Interest expense (23,019) (17,975) (16,846)
Gain on insurance contracts 1,582 - -
Gain on disposition of property and equipment 304 4,266 2,754
- ------------------------------------------------------------------------------------------------------
(18,541) (12,256) (13,309)
- ------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 20,290 35,832 35,196
INCOME TAXES (NOTE 8) 7,550 14,594 14,238
- ------------------------------------------------------------------------------------------------------
EARNINGS FROM CONTINUING OPERATIONS 12,740 21,238 20,958
DISCONTINUED OPERATIONS (Note 3):
Income from discontinued operations, net of income
taxes of $823, $951 and $1,346, respectively 1,219 1,384 1,982
Gain on sale of discontinued operations, net of income
taxes of $5,277 in 2001 and $138 in 1999 7,817 - 204
- ------------------------------------------------------------------------------------------------------
EARNINGS FROM DISCONTINUED OPERATIONS 9,036 1,384 2,186
- ------------------------------------------------------------------------------------------------------
NET EARNINGS $ 21,776 $ 22,622 $ 23,144
- ------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - BASIC:
Continuing operations $ .44 $ .71 $ .70
Discontinued operations .31 .05 .07
- ------------------------------------------------------------------------------------------------------
Net earnings per share $ .75 $ .76 $ .77
- ------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - DILUTED:
Continuing operations $ .43 $ .71 $ .70
Discontinued operations .31 .05 .07
- ------------------------------------------------------------------------------------------------------
Net earnings per share $ .74 $ .76 $ .77
- ------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 29,187 29,796 30,005
Diluted 29,345 29,828 30,105
- ------------------------------------------------------------------------------------------------------
See accompanying notes.
20
Consolidated Balance Sheets
The Marcus Corporation
(in thousands, except share and per share data) May 31, 2001 May 25, 2000
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,499 $ 2,935
Accounts and notes receivable (Note 4) 14,207 13,281
Receivables from joint ventures (Note 10) 2,747 2,468
Refundable income taxes 121 3,020
Real estate and development costs 4,999 3,917
Other current assets 4,692 4,147
- ------------------------------------------------------------------------------------------------------
Total current assets 28,265 29,768
PROPERTY AND EQUIPMENT, net (Note 4) 680,346 658,317
OTHER ASSETS:
Investments in joint ventures (Notes 9 and 10) 2,358 2,025
Other (Notes 4 and 11) 47,690 35,039
- ------------------------------------------------------------------------------------------------------
Total other assets 50,048 37,064
- ------------------------------------------------------------------------------------------------------
Total assets $758,659 $725,149
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 10) $ 4,222 $ 4,228
Accounts payable 17,123 24,463
Taxes other than income taxes 13,230 11,219
Accrued compensation 5,569 4,307
Other accrued liabilities 12,273 11,399
Current maturities of long-term debt (Note 5) 18,133 16,228
- ------------------------------------------------------------------------------------------------------
Total current liabilities 70,550 71,844
LONG-TERM DEBT (Note 5) 310,239 286,344
DEFERRED INCOME TAXES (Note 8) 30,759 32,602
DEFERRED COMPENSATION AND OTHER (Note 7) 9,410 9,112
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 19,617,564 shares in 2001 and 19,072,617 shares in 2000 19,618 19,073
Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and
outstanding 11,571,949 shares in 2001 and 12,116,896 shares in 2000 11,572 12,117
Capital in excess of par 41,062 40,774
Retained earnings 284,402 268,808
Accumulated other comprehensive loss (201) (257)
- ------------------------------------------------------------------------------------------------------
356,453 340,515
Less cost of Common Stock in treasury (2,007,591 shares in 2001
and 1,708,247 shares in 2000) (18,752) (15,268)
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 337,701 325,247
- ------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $758,659 $725,149
- ------------------------------------------------------------------------------------------------------
See accompanying notes.
21
Consolidated Statements of Shareholders' Equity
Three years ended May 31, 2001
Accumulated
Class B Capital Other
Common Common in Excess Retained Comprehensive Treasury
(in thousands, except per share data) Stock Stock of Par Earnings Loss Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 28, 1998 $18,512 $12,678 $40,265 $235,708 $ - $ (4,632) $302,531
Cash dividends:
$.20 per share Class B Common Stock - - - (2,524) - - (2,524)
$.22 per share Common Stock - - - (3,830) - - (3,830)
Exercise of stock options - - 54 - - 592 646
Purchase of treasury stock - - - - - (7,169) (7,169)
Savings and profit-sharing contribution - - 208 - - 438 646
Reissuance of treasury stock - - 158 - - 186 344
Conversions of Class B Common Stock 169 (169) - - - - -
Components of comprehensive income (loss):
Net earnings - - - 23,144 - - 23,144
Change in unrealized loss on available
for sale investments, net of tax - - - - (214) - (214)
Total comprehensive income - - - - - - 22,930
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 27, 1999 18,681 12,509 40,685 252,498 (214) (10,585) 313,574
Cash dividends:
$.20 per share Class B Common Stock - - - (2,464) - - (2,464)
$.22 per share Common Stock - - - (3,848) - - (3,848)
Exercise of stock options - - 2 - - 107 109
Purchase of treasury stock - - - - - (5,565) (5,565)
Savings and profit-sharing contribution - - 6 - - 544 550
Reissuance of treasury stock - - 81 - - 231 312
Conversions of Class B Common Stock 392 (392) - - - - -
Components of comprehensive income (loss):
Net earnings - - - 22,622 - - 22,622
Change in unrealized loss on available
for sale investments, net of tax - - - - (43) - (43)
Total comprehensive income - - - - - - 22,579
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 25, 2000 19,073 12,117 40,774 268,808 (257) (15,268) 325,247
Cash dividends:
$.20 per share Class B Common Stock - - - (2,377) - - (2,377)
$.22 per share Common Stock - - - (3,805) - - (3,805)
Exercise of stock options - - (6) - - 152 146
Purchase of treasury stock - - - - - (4,157) (4,157)
Savings and profit-sharing contribution - - 212 - - 338 550
Reissuance of treasury stock - - 82 - - 183 265
Conversions of Class B Common Stock 545 (545) - - - - -
Components of comprehensive income:
Net earnings - - - 21,776 - - 21,776
Change in unrealized loss on available
for sale investments, net of tax - - - - 56 - 56
Total comprehensive income - - - - - - 21,832
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 31, 2001 $19,618 $11,572 $41,062 $284,402 $(201) $(18,752) $337,701
- ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
22
Consolidated Statements of Cash Flows
The Marcus Corporation
Years ended
(in thousands) May 31, 2001 May 25, 2000 May 27, 1999
- ------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 21,776 $ 22,622 $ 23,144
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Losses on investments in joint ventures,
net of distributions 618 20 221
Gain on disposition of property, equipment and
other assets (13,398) (4,266) (3,096)
Impairment charge 3,541 - -
Depreciation and amortization 44,300 41,485 38,258
Deferred income taxes 176 1,197 4,926
Deferred compensation and other 298 1,631 1,712
Contribution of Company stock to savings and
profit-sharing plan 550 550 646
Changes in operating assets and liabilities:
Accounts and notes receivable (926) (2,222) 2,489
Real estate and development costs (1,082) (3,917) -
Other current assets (713) 253 (627)
Accounts payable (7,340) 1,505 (3,427)
Income taxes 880 3,021 (1,656)
Taxes other than income taxes 2,011 1,644 (1,829)
Accrued compensation 1,262 1,690 (26)
Other accrued liabilities 874 2,112 (785)
- ------------------------------------------------------------------------------------------------------
Total adjustments 31,051 44,703 36,806
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 52,827 67,325 59,950
INVESTING ACTIVITIES
Capital expenditures and other (96,748) (99,492) (111,843)
Net proceeds from disposals of property, equipment
and other assets 29,304 15,905 10,509
Purchase of interest in joint ventures - - (3,178)
(Increase) decrease in other assets (2,406) 302 (1,688)
Cash advanced to joint ventures (279) (729) (451)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (70,129) (84,014) (106,651)
FINANCING ACTIVITIES
Debt transactions:
Net proceeds from issuance of notes payable and
long-term debt 42,107 38,513 76,944
Principal payments on notes payable and long-term debt (16,313) (10,932) (18,889)
Equity transactions:
Treasury stock transactions, except for stock options (3,892) (5,253) (6,825)
Exercise of stock options 146 109 646
Dividends paid (6,182) (6,312) (6,354)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,866 16,125 45,522
- ------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,436) (564) (1,179)
Cash and cash equivalents at beginning of year 2,935 3,499 4,678
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,499 $ 2,935 $ 3,499
- ------------------------------------------------------------------------------------------------------
See accompanying notes.
23
Notes to Consolidated Financial Statements
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 and Woodfield Suites, primarily
located in the eastern half of the United States.
Theatres: Operates multiscreen motion picture theatres in Wisconsin,
Illinois, Ohio and Minnesota and a family entertainment center in Wisconsin.
Hotels/Resorts: Owns and operates full service hotels and resorts in
Wisconsin, Missouri and California, manages full service hotels in Wisconsin,
Minnesota 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 53-week year in fiscal 2001 and a 52-week year in
fiscal 2000 and 1999.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Cash Equivalents - The Company considers all highly
liquid investments with maturities of three months or less when purchased to be
cash equivalents. Cash equivalents are carried at cost, which approximates
market.
Long-Lived Assets - The Company periodically considers whether indicators of
impairment of long-lived assets held for use (including goodwill) 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 31, 2001, May 25, 2000 and May 27, 1999, and determined that
there was no significant impact on the Company's results of operations, other
than the impairment charge taken for the IMAX(R) related assets described in
Note 2.
Capitalization of Interest - The Company capitalizes interest during
construction periods by adding such interest to the cost of property and
equipment. Interest of approximately $1,242,000, $2,161,000, and $761,000 was
capitalized in fiscal 2001, 2000 and 1999, respectively.
Investments - Available for sale securities are stated at fair market value,
with unrealized gains and losses reported as a component of shareholders'
equity. The cost of securities sold is based upon the specific identification
method. Realized gains and losses and declines in value judged to be other than
temporary are included in investment income.
Revenue Recognition - The Company recognizes revenue from its rooms as earned on
the close of business each day. Revenues from theatre admissions, concessions
and food and beverage sales are recognized at the time of sale. Revenues from
advanced ticket and gift certificate sales are recorded as deferred revenue and
are recognized when tickets or gift certificates are used or expire.
The following are included in other income:
The Company has entered into franchise agreements that grant to franchisees the
right to own and operate a Baymont Inn or Baymont Inn & Suites at a particular
location for a specified term, as defined in the license agreement. An initial
franchise fee, as defined in the license agreement, is also collected upon
receipt of a prospective licensee's application. The majority of the initial
franchise fee is deferred until operations commence. Royalty and marketing fee
assessments are recognized when actually earned and are receivable from the
franchisee.
Management fees for hotels and resorts under management agreements are
recognized as earned based on the terms of the agreement.
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.
During the first three quarters of fiscal 2000, the Company accounted for all
sales using the deposit method, since certain minimum sales levels had not been
reached. Since the fourth quarter of fiscal 2000, when minimum sales levels were
met, revenues have been recognized on the percentage-of-completion or accrual
methods. Development costs including construction
24
The Marcus Corporation
costs, interest and other carrying costs, which are allocated based on relative
sales values, are included as real estate and development costs in the
accompanying consolidated balance sheets.
Advertising and Marketing Costs - The Company generally expenses all advertising
and marketing costs as incurred.
Depreciation and Amortization - Depreciation and amortization of property and
equipment are provided using the straight-line method over the following
estimated useful lives:
Years
- -------------------------------------------------------------------------------
Land improvements 15 - 39
Buildings and improvements 25 - 39
Leasehold improvements 3 - 39
Furniture, fixtures and equipment 3 - 20
- -------------------------------------------------------------------------------
Preopening Expenses - Costs incurred prior to opening new or remodeled
facilities are expensed as incurred.
Net Earnings Per Share - The numerator for the calculation of basic and diluted
earnings per share is net earnings and the denominator is the respective
weighted-average shares outstanding. The difference between basic and diluted
weighted-average shares outstanding is the dilutive effect of employee stock
options.
Options to purchase 393,102 shares, 961,403 shares and 499,994 shares of common
stock at prices ranging from $13.81 to $18.13 per share, $12.00 to $18.13 per
share, and $14.94 to $18.13 per share were outstanding at May 31, 2001, May 25,
2000 and May 27, 1999, 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 accumulated net
unrealized losses on available for sale securities, net of tax.
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement is
required to be adopted by the Company effective June 1, 2001. The statement will
require the Company to recognize its derivatives, which currently consist of
interest rate swap agreements, on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Based on the Company's derivative positions at May 31, 2001, the Company
estimates that upon adoption it will record the cumulative effect of an
accounting change of approximately $1,830,000 in accumulated other comprehensive
loss in the balance sheet.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill from past
business combinations will cease upon adoption of the statement, which is
required for the Company at the beginning of fiscal 2003. Goodwill and
intangible assets acquired in business combinations completed after June 30,
2001, must comply with the provisions of the statement. Under this statement,
companies will be required to evaluate all existing goodwill for impairment
within six months of adoption and any transitional impairment losses will be
recognized in the first interim period upon adoption. Management does not
anticipate the adoption of the statement will have a significant effect on the
Company's financial condition or results of operations.
Reclassifications - Certain reclassifications have been made to the prior year's
financial statements to conform to the current year presentation.
2. Impairment Charge
During fiscal 2001, the Company evaluated the recoverability of the assets
related to its two IMAX(R) theatre screens and determined that the estimated
future undiscounted cash flows were less than the carrying value of these
assets. Based upon discounted estimated cash flows, the Company believes that
the IMAX(R)-related assets have minimal fair value, and accordingly, the entire
carrying value of the assets was written off. As a result, during the year ended
May 31, 2001, the Company recorded an impairment charge 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. Proceeds from the sale were used to reduce
outstanding debt. In accordance with the provisions of Accounting Principles
Board Opinion No. 30 concerning reporting the effect of disposal of a segment of
a business, the results of operations and the gain on disposal of the
restaurants have been classified as discontinued in the consolidated statements
of earnings. Restaurant revenues for the years ended May 31, 2001, May 25, 2000
and May 27, 1999 were $23,746,000, $24,425,000 and $26,928,000, respectively.
25
Notes to Consolidated Financial Statements
4. Additional Balance Sheet Information
The composition of accounts and notes receivable is as follows:
- -------------------------------------------------------------------------------
(in thousands) May 31, 2001 May 25, 2000
- -------------------------------------------------------------------------------
Trade receivables $ 8,028 $ 6,297
Notes receivable for 588 195
interval ownership
Other notes receivables 1,804 3,238
Employee advances 97 12
Other receivables 3,690 3,539
- -------------------------------------------------------------------------------
$14,207 $13,281
- -------------------------------------------------------------------------------
The Company also has notes receivable for interval ownership totaling $5,572,000
and $1,899,000, which are included in other long-term assets, net of a reserve
for uncollectible amounts of $255,000 and $217,000 as of May 31, 2001 and May
25, 2000, respectively. The notes bear fixed-rate interest between 11.0% and
15.9% over the seven-year terms of the loans. The weighted-average rate of
interest on outstanding notes receivable for interval ownership is 14.9%. The
notes are collateralized by the underlying vacation intervals.
The composition of property and equipment, which is stated at cost, is as
follows:
- -------------------------------------------------------------------------------
(in thousands) May 31, 2001 May 25, 2000
- -------------------------------------------------------------------------------
Land and improvements $ 94,156 $ 96,158
Buildings and improvements 586,056 514,734
Leasehold improvements 7,583 7,649
Furniture, fixtures 245,500 231,643
and equipment
Construction in progress 15,384 48,152
- -------------------------------------------------------------------------------
948,679 898,336
Less accumulated depreciation
and amortization 268,333 240,019
- -------------------------------------------------------------------------------
$680,346 $658,317
- -------------------------------------------------------------------------------
5. Long-Term Debt
Long-term debt is summarized as follows:
- -------------------------------------------------------------------------------
(in thousands, except payment data) May 31, 2001 May 25, 2000
- -------------------------------------------------------------------------------
Mortgage notes due to 2009 $ 4,430 $ 4,836
Industrial Development
Revenue Bonds due to 2006 5,219 5,748
Senior notes due May 31, 2005,
with monthly principal and
interest payments of $362,000,
bearing interest at 10.22% 14,227 17,183
Senior notes 148,333 155,000
Unsecured term notes 29,273 34,967
Commercial paper 54,390 59,838
Revolving credit agreements 72,500 25,000
328,372 302,572
Less current maturities 18,133 16,228
- -------------------------------------------------------------------------------
$310,239 $286,344
- -------------------------------------------------------------------------------
Substantially all of the mortgage notes, both fixed rate and adjustable, bear
interest from 5.81% to 7.68% at May 31, 2001. The Industrial Development Revenue
Bonds, both fixed rate and adjustable, bear interest from 3.30% to 8.77%. The
mortgage notes and the Industrial Development Revenue Bonds are secured by the
related land, buildings and equipment.
The $148,333,000 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 7.51% with a weighted-average
fixed rate of 7.12%.
The Company has unsecured term notes outstanding as follows:
- -------------------------------------------------------------------------------
May 31, May 25,
(in thousands, except payment data) 2001 2000
- -------------------------------------------------------------------------------
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 4.74% at May 31, 2001, and is
payable quarterly. $ 8,594 $12,500
Note due January 31, 2004. The variable interest
rate is based on the LIBOR rate with an
effective rate of 5.42% at May 31, 2001, and is
payable quarterly. 20,000 20,000
Note paid October 1, 2000. - 1,500
Note due April 28, 2003, with monthly payments of
$20,000, including interest at 2.00%. 438 650
Note due March 25, 2004, with monthly payments of
$8,000, including interest at 6.00%. 241 317
- -------------------------------------------------------------------------------
$29,273 $34,967
- -------------------------------------------------------------------------------
The Company issues commercial paper through an agreement with three banks, up to
a maximum of $70,000,000, which bears interest at rates ranging from 4.05% to
5.00% at May 31, 2001. 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 31, 2001, the Company had credit lines totaling $175,000,000 in place.
Borrowings on the $125,000,000 line, which total $72,500,000 at May 31, 2001,
bear interest at LIBOR plus a margin which adjusts based on the Company's
borrowing levels (effectively 4.7% at May 31, 2001). This agreement matures in
2004 and requires an annual facility fee of .25% on the total commitment. No
borrowings are outstanding on the $45,000,000 364-day revolving credit agreement
which bears interest at the bank's prime reference rate (effectively 7% at May
31, 2001) or LIBOR plus a margin which is adjusted based on the Company's
borrowing levels. This revolving credit agreement requires a facility fee of .2%
and matures in December 2001. There are no borrowings outstanding on the
remaining $5,000,000 line at May 31, 2001, which bears interest at the bank's
prime reference rate. Based
26
The Marcus Corporation
on borrowings and commercial paper outstanding, availability under the lines at
May 31, 2001, totaled $48,110,000.
The Company has the ability and intent to replace commercial paper borrowings
with long-term borrowings under its credit lines. Accordingly, the Company has
classified these borrowings at May 31, 2001, as long-term.
Scheduled annual principal payments on long-term debt for the five years
subsequent to May 31, 2001, are:
Fiscal year (in thousands)
- -------------------------------------------------------------------------------
2002 $ 18,133
2003 20,066
2004 162,022
2005 15,682
2006 11,391
Thereafter 101,078
- -------------------------------------------------------------------------------
$328,372
- -------------------------------------------------------------------------------
Interest paid, net of amounts capitalized, in fiscal 2001, 2000 and 1999 totaled
$23,216,000, $17,906,000 and $16,363,000, respectively.
The Company has a swap agreement covering $25,000,000, which expires November
14, 2005, and requires the Company to pay interest at a defined fixed rate of
7.19% while receiving interest at a defined variable rate of three-month LIBOR
(3.99% at May 31, 2001). The Company also has a swap agreement covering
$7,500,000 which expires August 6, 2001, and requires the Company to pay
interest at a defined fixed rate of 6.56% while receiving interest at the same
defined variable rate of three-month LIBOR. Together, these swap agreements
effectively convert $7,500,000 of the Company's variable rate unsecured term
notes and $25,000,000 of the Company's borrowings under revolving credit
agreements to a fixed rate. The Company recorded net interest expense related to
its swap agreements as incurred, which totaled $195,000, $21,000 and $63,000 in
fiscal 2001, 2000 and 1999, respectively. The accompanying consolidated balance
sheet at May 31, 2001, does not reflect the fair market value of the remaining
swap agreements, as determined by the lender, which totals a liability of
approximately $1,830,000.
The fair value of the Company's $148,333,000 million of senior notes is
approximately $142,351,000. 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
31, 2001, there were 2,045,758 shares available for grants under the plans.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), in accounting for its
employee stock options. Under APB No. 25, because the number of shares is fixed
and the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net earnings and earnings per share required by
SFAS No. 123, "Accounting for Stock Based Compensation," has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions: risk-free interest rates of 3.7%, 6.0% and 4.6% for fiscal 2001,
2000 and 1999, respectively, and a dividend yield of 1.3%, volatility factors of
the expected market price of the Company's common stock of 49%, 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 31, May 25, May 27,
(in thousands, except per share data) 2001 2000 1999
- -------------------------------------------------------------------------------
Pro forma earnings:
Pro forma earnings from
continuing operations $11,794 $20,440 $20,391
Discontinued operations:
Income from discontinued
operations, net of income taxes 1,219 1,384 1,982
Gain on sale of discontinued
operations, net of income taxes 7,817 - 204
- -------------------------------------------------------------------------------
Pro forma earnings $20,830 $21,824 $22,577
- -------------------------------------------------------------------------------
Pro forma earnings per common
share - basic and diluted:
Continuing operations $.40 $.68 $.68
Discontinued operations .31 .05 .07
- -------------------------------------------------------------------------------
Pro forma earnings per common
share - basic and diluted $.71 $.73 $.75
- -------------------------------------------------------------------------------
27
Notes to Consolidated Financial Statements
A summary of the Company's stock option activity and related information
follows:
May 31, 2001 May 25, 2000 May 27, 1999
- -------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(options in thousands) Options Price Options Price Options Price
- -------------------------------------------------------------------------------
Outstanding
at beginning
of year 1,202 $13.37 947 $14.17 840 $13.04
Granted 539 11.54 404 12.06 203 16.83
Exercised (14) 10.09 (11) 9.61 (79) 8.54
Forfeited (119) 13.33 (138) 15.11 (17) 16.41
Outstanding at
end of year 1,608 $12.79 1,202 $13.37 947 $14.17
Exercisable at
end of year 619 $13.25 543 $12.53 458 $11.91
Weighted-average
fair value of
options granted
during year $5.24 $5.89 $7.88
- -------------------------------------------------------------------------------
Exercise prices for options outstanding as of May 31, 2001, ranged from $6.67 to
$18.13. The weighted-average remaining contractual life of those options is 6.7
years. Additional information related to these options segregated by exercise
price range is as follows:
Exercise price range
- -------------------------------------------------------------------------------
$6.67 to $10.8751 to $14.51 to
(options in thousands) $10.875 $14.50 $18.125
- -------------------------------------------------------------------------------
Options outstanding 153 1,081 374
Weighted-average exercise
price of options outstanding $9.15 $11.95 $16.71
Weighted-average remaining
contractual life of
options outstanding 4.1 7.2 6.2
- -------------------------------------------------------------------------------
Options exercisable 103 301 215
Weighted-average exercise
price of options exercisable $8.59 $12.36 $16.73
- -------------------------------------------------------------------------------
Through May 31, 2001, 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
Compay intends to reissue these shares upon the exercise of stock options and
for savings and profit-sharing plan contributions. The Company purchased
369,713,527,617 and 490,360 shares pursuant to these authorizations during
fiscal 2001, 2000 and 1999, respectively. At May 31, 2001, there were 1,974,783
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 31, 2001, there were 653,642 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 31, 2001,
retained earnings of approximately $71,015,000 were unrestricted.
7. Employee Benefit Plans
The Company has a qualified profit-sharing savings plan (401(k) plan) covering
eligible employees. The 401(k) plan provides for a contribution of a minimum of
1% of defined compensation for all plan participants and matching of 25% of
employee contributions up to 6% of defined compensation. In addition, the
Company may make additional discretionary contributions. The Company also
sponsors unfunded nonqualified, defined-benefit and deferred compensation plans.
Pension and profit-sharing expense for all plans was $1,838,000, $1,805,000 and
$1,825,000 for fiscal 2001, 2000 and 1999, respectively.
8. Income Taxes
Income tax expense consists of the following:
Year ended
- -------------------------------------------------------------------------------
(in thousands) May 31, 2001 May 25, 2000 May 27, 1999
- -------------------------------------------------------------------------------
Currently payable:
Federal $10,868 $11,031 $ 8,616
State 2,606 3,317 2,180
Deferred 176 1,197 4,926
- -------------------------------------------------------------------------------
$13,650 $15,545 $15,722
- -------------------------------------------------------------------------------
Income tax expense is included in the accompanying consolidated statements of
earnings as follows:
Year ended
- -------------------------------------------------------------------------------
(in thousands) May 31, 2001 May 25, 2000 May 27, 1999
- -------------------------------------------------------------------------------
Continuing
operations $ 7,550 $14,594 $14,238
Discontinued
operations 6,100 951 1,484
- -------------------------------------------------------------------------------
$13,650 $15,545 $15,722
- -------------------------------------------------------------------------------
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.
28
The Marcus Corporation
The components of the net deferred tax liability were as follows:
- -------------------------------------------------------------------------------
(in thousands) May 31, 2001 May 25, 2000
- -------------------------------------------------------------------------------
Deferred tax assets:
Accrued employee benefits $ 3,593 $ 2,689
Other 1,508 295
- -------------------------------------------------------------------------------
Total deferred tax assets 5,101 2,984
Deferred tax liability -
Depreciation and
amortization 35,860 35,586
- -------------------------------------------------------------------------------
Net deferred tax liability
included in balance sheet $30,759 $32,602
- -------------------------------------------------------------------------------
A reconciliation of the statutory federal tax rate to the effective tax rate for
continuing operations follows:
Year ended
- -------------------------------------------------------------------------------
May 31, 2001 May 25, 2000 May 27, 1999
- -------------------------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal income
tax benefit 5.4 5.9 5.5
Other (3.2) (.2) -
- -------------------------------------------------------------------------------
37.2% 40.7% 40.5%
- -------------------------------------------------------------------------------
Income taxes paid, net of refunds received, in fiscal 2001, 2000 and 1999
totaled $12,525,000, $11,484,000 and $11,760,000, 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
- -------------------------------------------------------------------------------
(in thousands) May 31, 2001 May 25, 2000 May 27, 1999
- -------------------------------------------------------------------------------
Fixed minimum rentals $3,339 $2,966 $3,231
Percentage rentals 141 174 203
Sublease rental income (7) (130) (131)
- -------------------------------------------------------------------------------
$3,473 $3,010 $3,303
- -------------------------------------------------------------------------------
Payments to affiliated parties for lease obligations were approximately
$135,000, $176,000 and $44,000 in fiscal 2001, 2000 and 1999, respectively.
Aggregate minimum rental commitments at May 31, 2001, are as follows:
Fiscal year (in thousands)
- -------------------------------------------------------------------------------
2002 $ 2,969
2003 2,735
2004 2,116
2005 2,154
2006 2,148
Thereafter 29,317
- -------------------------------------------------------------------------------
$41,439
- -------------------------------------------------------------------------------
Included in the above commitments is $2,166,000 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
$6,127,000 at May 31, 2001.
License Rights - The Company has license rights to operate two hotels using the
Hilton trademark. Under the terms of the license, the Company is obligated to
pay fees based on defined gross sales.
Contingencies - The Company guarantees the debt of joint ventures and other
entities totaling approximately $20,127,000 at May 31, 2001. 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 31, 2001 and May 25, 2000, the Company held
investments of $2,358,000 and $2,025,000, respectively, in
various approximately 50%-owned affiliates (joint ventures) which are accounted
for under the equity method.
The Company has receivables from the joint ventures of $2,747,000 and $2,468,000
at May 31, 2001 and May 25, 2000, respectively. The Company earns interest on
$1,927,000 and $1,528,000 of the receivables at approximately prime to prime
plus 1.5% at May 31, 2001 and May 25, 2000, respectively.
Included in notes payable at May 31, 2001 and May 25, 2000, is $176,000 and
$1,178,000, 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 Transaction
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.
29
Notes to Consolidated Financial Statements
12. Business Segment Information
The Company evaluates performance and allocates resources based on the operating
income (loss) of each segment. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Following is a summary of business segment information for 1999 through 2001:
Limited- Continuing
Service Hotels/ Corporate Operations Discontinued
(in thousands) Lodging Theatres Resorts Items Total Restaurants Total
- ----------------------------------------------------------------------------------------------------------------------
2001
Revenues $140,403 $127,476 $109,694 $ 1,559 $379,132 $23,746 $402,878
Operating income (loss) 16,309 18,549 10,725 (6,752) 38,831 2,058 40,889
Depreciation and amortization 19,145 13,242 9,366 1,576 43,329 971 44,300
Assets 300,273 231,083 185,644 41,659 758,659 - 758,659
Capital expenditures and other 37,236 13,141 45,828 131 96,336 412 96,748
- ----------------------------------------------------------------------------------------------------------------------
2000
Revenues $138,183 $122,254 $ 89,854 $ 1,827 $352,118 $24,425 $376,543
Operating income (loss) 20,993 22,007 10,806 (5,718) 48,088 2,342 50,430
Depreciation and amortization 19,041 11,696 7,962 1,759 40,458 1,027 41,485
Assets 284,698 234,317 142,400 51,979 713,394 11,755 725,149
Capital expenditures and other 21,215 39,559 33,562 4,204 98,540 952 99,492
- ----------------------------------------------------------------------------------------------------------------------
1999
Revenues $141,577 $111,249 $ 81,169 $ 2,004 $335,999 $26,928 $362,927
Operating income (loss) 25,509 20,395 8,103 (5,502) 48,505 3,331 51,836
Depreciation and amortization 18,922 9,505 7,369 1,409 37,205 1,053 38,258
Assets 290,878 203,737 107,367 61,994 663,976 12,140 676,116
Capital expenditures and other 29,730 64,525 14,060 2,192 110,507 1,336 111,843
- ----------------------------------------------------------------------------------------------------------------------
(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 assets primarily include cash and
cash equivalents, notes receivable, receivables from joint ventures and land
held for development.
30
Eleven-Year Financial Summary
The Marcus Corporation
2001(2) 2000 1999 1998(3) 1997 1996(4) 1995 1994(5) 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Results
(in thousands)
Revenues(7) $379,132 352,118 335,999 308,783 277,643 237,937 204,627 172,210 153,896 148,187 133,368
Earnings from continuing
operations(7) $ 12,740 21,238 20,958 26,343 29,254 27,885 - - - - -
Net earnings $ 21,776 22,622 23,144 28,444 30,881 42,307 24,136 22,829 16,482 13,289 11,618
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock Data(1)
Earnings per share -
continuing operations(7) $ .43 .71 .70 .87 .98 .94 - - - - -
Net earnings per share $ .74 .76 .77 .94 1.04 1.42 .82 .77 .63 .52 .45
Cash dividends per share $ .22 .22 .22 .22 .20 .23(6) .15 .13 .11 .10 .09
Weighted average shares
outstanding (in thousands) 29,345 29,828 30,105 30,293 29,745 29,712 29,537 29,492 26,208 25,325 25,569
Book value per share $ 11.57 11.03 10.48 10.00 9.37 8.51 7.29 6.61 5.95 4.97 4.54
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Position
(in thousands)
Total assets $758,659 725,149 676,116 608,504 521,957 455,315 407,082 361,606 309,455 274,394 255,117
Long-term debt $310,239 286,344 264,270 205,632 168,065 127,135 116,364 107,681 78,995 100,032 96,183
Shareholders' equity $337,701 325,247 313,574 302,531 277,293 251,248 214,464 193,918 173,980 124,874 114,697
Capital expenditures
and other $ 96,748 99,492 111,843 115,880 107,514 83,689 77,083 75,825 47,237 27,23 39,861
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Current ratio .40 .41 .45 .43 .39 .62 .41 .67 .90 .73 .65
Debt/capitalization ratio .49 .48 .47 .42 .39 .35 .37 .37 .34 .46 .47
Return on average
shareholders' equity 6.6% 7.1% 7.5% 9.8% 11.7% 18.2% 11.8% 12.4% 11.0% 11.1% 10.5%
- ----------------------------------------------------------------------------------------------------------------------------------
Return on Average
Shareholders' Equity Shareholders Equity Book Value Per Share(1)
- ---------------------------------- ---------------------------------- ----------------------------------
(in millions)
$277.3 $302.5 $313.6 $325.2 $337.7 11.7% 10.6% 7.5% 7.1% 6.6%(2) $9.37 $10.00 $10.48 $11.03 $11.57
9.8%(3)
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
97 98 99 00 01 97 98 99 00 01 97 98 99 00 01
Total Assets Dividends Per share(1)
- ---------------------------------- ----------------------------------
(in millions)
$522.0 $608.5 $676.1 $725.1 $758.7 $0.20 $0.22 $0.22 $0.22 $0.22
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
97 98 99 00 01 97 98 99 00 01
(1) All per share and shares outstanding data is on a diluted basis and has been adjusted to reflect stock splits in
1998, 1996 and 1993.
(2) Includes gain of $7.8 million or $0.27 per share on sale of discontinued operations and impairment charge of $2.1 million
or $0.07 per share.
(3) Includes charge of $2.3 million or $0.08 per share for costs associated with the Baymont name change.
(4) Includes gain of $14.8 million or $0.49 per share on sale of certain restaurant locations.
(5) Includes gain of $1.8 million or $0.06 per share for cumulative effect of change in accounting for income taxes.
(6) Includes annual dividend of $0.18 per share and one quarterly dividend of $0.05 per share.
(7) Restated to present restaurant operations as discontinued operations. Earnings from continuing operations
and earnings per share-continuing operations were restated for 1996 through 1999.
31