UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 29, 2002
--------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-12604
THE MARCUS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1139844
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
250 East Wisconsin Avenue, Suite 1700
Milwaukee, Wisconsin 53202
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 905-1000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AT SEPTEMBER 30, 2002 - 19,828,155
CLASS B COMMON STOCK OUTSTANDING AT SEPTEMBER 30, 2002 - 9,594,507
THE MARCUS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Balance Sheets
(August 29, 2002 and May 30, 2002)................................ 3
Statements of Earnings
(Thirteen weeks ended August 29, 2002 and August 30, 2001)........ 5
Statements of Cash Flows
(Thirteen weeks ended August 29, 2002 and August 30, 2001)........ 6
Condensed Notes to Financial Statements........................... 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Signatures........................................................ S-1
Certifications.................................................... S-2
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
August 29, May 30,
2002 2002
----------- ----------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 4,975 $ 5,614
Accounts and notes receivable 18,043 16,044
Receivables from joint ventures 3,972 3,760
Refundable income taxes - 4,947
Real estate and development costs 1,594 2,532
Other current assets 4,602 4,512
----------- ----------
Total current assets 33,186 37,409
Property and equipment:
Land and improvements 91,655 92,558
Buildings and improvements 624,365 612,954
Leasehold improvements 9,461 9,082
Furniture, fixtures and equipment 269,869 266,872
Construction in progress 4,818 13,107
----------- ----------
Total property and equipment 1,000,168 994,573
Less accumulated depreciation and
amortization 322,229 310,934
----------- ----------
Net property and equipment 677,939 683,639
Other assets:
Investments in joint ventures 1,211 1,356
Goodwill 11,806 11,806
Other 44,688 40,576
----------- ----------
Total other assets 57,705 53,738
----------- ----------
TOTAL ASSETS $ 768,830 $ 774,786
=========== ==========
See accompanying notes to consolidated financial statements.
3
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
August 29, May 30,
2002 2002
----------- ----------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,672 $ 3,497
Accounts payable 13,254 17,211
Income taxes 3,588 -
Taxes other than income taxes 15,132 13,947
Accrued compensation 4,469 6,555
Other accrued liabilities 15,512 11,265
Current maturities of long-term debt 20,389 20,777
----------- ----------
Total current liabilities 76,016 73,252
Long-term debt 277,949 299,761
Deferred income taxes 36,884 36,529
Deferred compensation and other 11,549 11,176
Shareholders' equity:
Preferred Stock, $1 par; authorized
1,000,000 shares; none issued Common
Stock, $1 par; authorized 50,000,000
shares; issued 21,593,636 shares at
August 29, 2002 and 21,584,239 shares
at May 30, 2002 21,594 21,584
Class B Common Stock, $1 par; authorized
33,000,000 shares; issued and
outstanding 9,595,877 at August 29, 2002
and 9,605,274 at May 30, 2002 9,596 9,606
Capital in excess of par 41,490 41,523
Retained earnings 312,645 300,623
Accumulated other comprehensive loss (1,732) (1,866)
----------- ----------
383,593 371,470
Less cost of Common Stock in treasury
(1,836,860 shares at August 29, 2002
and 1,863,027 shares at May 30, 2002) (17,161) (17,402)
----------- ----------
Total shareholders' equity 366,432 354,068
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 768,830 $ 774,786
=========== ==========
See accompanying notes to consolidated financial statements.
4
THE MARCUS CORPORATION
Consolidated Statements of Earnings (Unaudited)
(in thousands, except per share data) 13 Weeks Ending
----------------------------
Aug. 29, Aug. 30,
---------- ----------
Revenues:
Rooms and telephone $ 52,796 $ 53,588
Theatre admissions 29,211 27,611
Theatre concessions 13,692 12,475
Food and beverage 9,257 8,479
Other income 14,621 14,015
---------- ----------
Total revenues 119,577 116,168
Costs and expenses:
Rooms and telephone 20,986 21,627
Theatre operations 22,387 20,564
Theatre concessions 3,190 3,027
Food and beverage 6,927 6,582
Advertising and marketing 7,731 6,972
Administrative 10,330 10,224
Depreciation and amortization 11,438 10,978
Rent 602 731
Property taxes 4,344 3,969
Preopening expenses 3 576
Other operating expenses 6,484 6,119
---------- ----------
Total costs and expenses 94,422 91,369
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Operating income 25,155 24,799
Other income (expense):
Investment income 622 571
Interest expense (5,324) (4,971)
Gain on disposition of property, equipment
and investments in joint ventures 409 2,264
---------- ----------
(4,293) (2,136)
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Earnings from continuing operations before
income taxes 20,862 22,663
Income taxes 8,491 7,940
---------- ----------
Earnings from continuing operations 12,371 14,723
Discontinued operations (Note 2):
Gain on sale of discontinued operations,
net of applicable income taxes 1,216 -
---------- ----------
Net earnings $ 13,587 $ 14,723
========== ==========
Earnings per share - basic and diluted:
Continuing operations $ 0.42 $ 0.50
Discontinued operations 0.04 -
---------- ----------
Net earnings per share $ 0.46 $ 0.50
========== ==========
Weighted average shares outstanding:
Basic 29,333 29,198
Diluted 29,560 29,416
See accompanying notes to consolidated financial statements.
5
THE MARCUS CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
13 Weeks Ending
----------------------------
Aug. 29, Aug. 30,
---------- ----------
OPERATING ACTIVITIES:
Net earnings $ 13,587 $ 14,723
Adjustments to reconcile net earnings to net
cash provided by operating activities:
(Earnings) losses on investments in joint
ventures, net of distributions 145 (11)
Gain on disposition of property, equipment
and other assets (2,459) (2,264)
Amortization of loss on swap agreement 335 -
Depreciation and amortization 11,438 10,978
Deferred income taxes 355 1,301
Deferred compensation and other 373 406
Changes in assets and liabilities:
Accounts and notes receivable (1,999) (4,295)
Real estate and development costs 938 916
Other current assets (90) (927)
Accounts payable (3,957) 21
Income taxes 8,401 5,719
Taxes other than income taxes 1,185 1,040
Accrued compensation (2,086) (2,405)
Other accrued liabilities 4,247 4,182
---------- ----------
Total adjustments 16,826 14,661
---------- ----------
Net cash provided by operating activities 30,413 29,384
INVESTING ACTIVITIES:
Capital expenditures (5,771) (14,151)
Net proceeds from disposals of property,
equipment and other assets 2,492 25
Increase in other assets (4,179) (2,273)
Cash advanced to joint ventures (212) (189)
---------- ----------
Net cash used in investing activities (7,670) (16,588)
FINANCING ACTIVITIES:
Debt transactions:
Net proceeds from issuance of notes
payable and long-term debt 554 748
Principal payments on notes payable and
long-term debt (22,579) (9,292)
Equity transactions:
Treasury stock transactions, except for
stock options (220) (135)
Exercise of stock options 428 589
Dividends paid (1,565) (1,556)
---------- ----------
Net cash used in financing activities (23,382) (9,646)
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Net increase (decrease) in cash and cash
equivalents (639) 3,150
Cash and cash equivalents at beginning of year 5,614 1,499
---------- ----------
Cash and cash equivalents at end of period $ 4,975 $ 4,649
========== ==========
See accompanying notes to consolidated financial statements.
6
THE MARCUS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS FOR THE
THIRTEEN WEEKS ENDED AUGUST 29, 2002
(Unaudited)
1. General
Accounting Policies - Refer to the Company's audited financial statements
(including footnotes) for the fiscal year ended May 30, 2002, contained in
the Company's Form 10-K Annual Report for such year, for a description of
the Company's accounting policies.
Basis of Presentation - The consolidated financial statements for the
thirteen weeks ended August 29, 2002 and August 30, 2001 have been prepared
by the Company without audit. In the opinion of management, all
adjustments, consisting only of normal recurring accruals necessary to
present fairly the unaudited interim financial information at August 29,
2002, and for all periods presented, have been made. The results of
operations during the interim periods are not necessarily indicative of the
results of operations for the entire year.
Comprehensive Income - Accumulated other comprehensive loss consists of the
change in fair value of hedging transactions, the accumulated net
unrealized losses on available for sale securities and the minimum pension
liability, net of tax. Accumulated other comprehensive loss was $1,732,000
and $1,866,000 as of August 29, 2002 and May 30, 2002, respectively. Total
comprehensive income for the thirteen weeks ended August 29, 2002 and
August 30, 2001, was $13,721,000 and $12,417,000, respectively.
Reclassifications - Certain reclassifications have been made to the prior
year's financial statements to conform to the current year presentation.
2. Discontinued Operations
The restaurant business segment was sold on May 24, 2001 and is presented
as discontinued operations in the accompanying consolidated financial
statements. The asset purchase agreement provided for a potential
additional future purchase price payment to the Company if certain
performance conditions were met. The Company received additional proceeds
of $2,050,000 on July 9, 2002 pursuant to this agreement and recognized an
additional gain on the sale of the restaurant segment of $1,216,000, net of
income taxes of $834,000.
3. Business Segment Information
The Company's primary operations are reported in the following three
business segments: Limited-Service Lodging, Theatres and Hotels/Resorts.
Corporate items include amounts not allocable to the business segments.
Corporate revenues consist principally of rent and the corporate operating
loss includes general corporate expenses. Corporate information technology
costs and accounting shared services costs are
7
allocated to the business segments based upon several factors, including
actual usage and segment revenues.
Following is a summary of business segment information for the thirteen
weeks ended August 29, 2002 and August 30, 2001 (in thousands):
Limited-
13 Weeks Ended Service Corporate
August 29, 2002 Lodging Theatres Hotels/Resorts Items Total
- --------------- -------- -------- -------------- --------- --------
Revenues $37,449 $44,262 $37,458 $408 $119,577
Operating
income (loss) 8,558 11,341 7,137 (1,881) 25,155
Limited-
13 Weeks Ended Service Corporate
August 30, 2001 Lodging Theatres Hotels/Resorts Items Total
- --------------- -------- -------- -------------- --------- --------
Revenues $39,342 $41,165 $35,299 $362 $116,168
Operating
income (loss) 9,989 10,075 6,430 (1,695) 24,799
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and Analysis of
Results of Operations and Financial Condition are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements may generally be identified as such because the context of such
statements will include words such as we "believe," "anticipate," "expect" or
words of similar import. Similarly, statements that describe our future plans,
objectives or goals are also forward-looking statements. Such forward-looking
statements are subject to certain risks and uncertainties which could cause
results to differ materially from those expected, including, but not limited to,
the following: (i) our ability to successfully define and build the Baymont
brand within the "limited-service, mid-price without food and beverage" segment
of the lodging industry; (ii) the availability, in terms of both quantity and
audience appeal, of motion pictures for our theatre division; (iii) the effects
of increasing depreciation expenses and preopening and start-up costs due to the
capital intensive nature of our businesses; (iv) the effects of adverse economic
conditions in our markets, particularly with respect to our limited-service
lodging and hotels and resorts divisions; (v) the effects of adverse weather
conditions, particularly during the winter in the Midwest and in our other
markets; (vi) the effects on our occupancy and room rates from the relative
industry supply of available rooms at comparable lodging facilities in our
markets; (vii) the effects of competitive conditions in the markets served by
us; (viii) our ability to identify properties to acquire, develop and/or manage
and continuing availability of funds for such development; (ix) the adverse
impact on business and consumer spending on travel, leisure and entertainment
resulting from the September 11, 2001 terrorist attacks in the United States,
the United States' responses thereto and subsequent related hostilities; and (x)
the lack of comprehensive terrorist attack insurance. Shareholders, potential
investors and other readers are urged to consider these factors carefully in
evaluating the forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements made
herein are made only as of the date of this Form 10-Q and we undertake no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
RESULTS OF OPERATIONS
General
We report our consolidated and individual segment results of operations on
a 52-or-53-week fiscal year ending on the last Thursday in May. Fiscal 2003 and
2002 are both 52-week years. We divide our fiscal year into three 13-week
quarters and a final quarter consisting of 13 or 14 weeks. Our primary
operations are reported in the following three business segments:
limited-service lodging, theatres and hotels/resorts. As a result of the sale of
our KFC restaurants during fiscal 2001, the restaurant business segment's fiscal
2003 results have been presented as discontinued operations in the accompanying
financial statements and in this discussion.
9
The following table sets forth revenues, operating income, earnings from
continuing operations, net earnings and earnings per share for the comparable
first quarters of fiscal 2003 and 2002 (in millions, except for per share and
variance percentage data):
First Quarter
--------------------------------------
Variance
----------------
F2003 F2002 Amt. Pct.
------- ------- ------ ------
Revenues $ 119.6 $ 116.2 $ 3.4 2.9%
Operating income 25.2 24.8 0.4 1.4%
Earnings from continuing operations 12.4 14.7 (2.3) -16.0%
Net earnings $ 13.6 $ 14.7 $(1.1) -7.7%
Earnings per share - diluted:
Continuing operations $ .42 $ .50 $(.08) -16.0%
Net earnings per share $ .46 $ .50 $(.04) -8.0%
An increase in our theatre and hotels/resorts division revenues and
operating income (earnings before other income/expense and income taxes) during
the first quarter of fiscal 2003 compared to the same period last year was
partially offset by revenue and operating income decreases from our
limited-service lodging division. Operating income from our two lodging
divisions (and the hotel industry in general) continues to be negatively
impacted by an overall reduction in business travel brought on by the current
economic environment.
Increased interest expense, decreased gains on the disposition of property,
equipment and investments in joint ventures and a higher effective income tax
rate negatively impacted earnings from continuing operations and net earnings
during our fiscal 2003 first quarter compared to our first quarter of fiscal
2002. Our interest expense, net of investment income, totaled $4.7 million for
the first quarter of fiscal 2003 compared to $4.4 million during the same period
last year. The increase is primarily the result of our issuance of fixed rate
long-term senior notes during the fourth quarter of fiscal 2002 in lieu of lower
variable interest rate borrowings in place during this period last year. The
resulting increase in interest expense was partially offset by an overall
reduction in our long-term debt during the first quarter of fiscal 2003 compared
to last year's first quarter.
We recognized gains on disposition of property and equipment totaling
$400,000 during the first quarter of fiscal 2003 compared to $2.3 million during
the prior year same period. The fiscal 2003 gain was the result of the sale of a
parcel of land adjacent to one of our theatres and the majority of the fiscal
2002 gain was the result of a sale of a joint venture Baymont Inn & Suites
property. The timing of periodic sales of our property and equipment may vary
from quarter to quarter, resulting in variations in our gains or losses on
disposition of property and equipment. Unlike last year, when the majority of
our total fiscal 2002 gains on disposition of property and equipment occurred
during our first quarter, we anticipate additional sales of property and
equipment with the potential for additional gains on disposition during the
remainder of fiscal 2003.
Our higher effective income tax rate during the first quarter of fiscal
2003 is, with the exception of fiscal 2002 and the second half of fiscal 2001,
consistent with prior years. Our fiscal 2002 effective income tax rate was
significantly reduced as a result of the favorable impact
10
of federal and state historic tax credits related to the renovation of the Hotel
Phillips in Kansas City, Missouri. Without these historic tax credits, our
fiscal 2002 first quarter net earnings would have been approximately $1.3
million or $.04 per share lower than we reported. Income taxes during the
remaining three quarters of fiscal 2003 will also compare unfavorably to fiscal
2002 income taxes as a result of the significant impact of these historic tax
credits on last year's results.
Theatres
The following table sets forth revenues, operating income and operating
margin for our theatre division for the first quarters of fiscal 2003 and 2002
(in millions, except for variance percentage and operating margin):
First Quarter
--------------------------------------
Variance
----------------
F2003 F2002 Amt. Pct.
------- ------- ------ ------
Revenues $ 44.3 $ 41.2 $ 3.1 7.5%
Operating income 11.3 10.1 1.2 12.6%
Operating margin 25.6% 24.5%
(% of revenues)
Consistent with the seasonal nature of the motion picture exhibition
industry, the first and third quarters of our fiscal year are typically the
strongest periods for our theatre division. Our fiscal 2003 first quarter
theatre operating results represent our fifth straight record quarter for this
division. Contributing to the increased first quarter operating margin were
increased box office and concession revenues and reduced advertising costs,
partially offset by increased film rental costs.
The following table breaks out revenues for the theatre division for the
first quarters of fiscal 2003 and 2002 (in millions):
First Quarter
--------------------------------------
Variance
----------------
F2003 F2002 Amt. Pct.
------- ------- ------ ------
Box office receipts $ 29.2 $ 27.6 $ 1.6 5.8%
Concession revenues 13.7 12.5 1.2 9.8%
Other revenues 1.4 1.1 0.3 25.9%
------- ------- ------ ------
Total revenues $ 44.3 $ 41.2 $ 3.1 7.5%
The increase in box office receipts for the first quarter of fiscal 2003
compared to the same period last year was due primarily to increased attendance,
despite less screens in operation during fiscal 2003. Our average ticket price
increased 1.7% during the first quarter of fiscal 2003 and we ended the quarter
with five less company-owned theatres and 26 fewer screens compared to the prior
year. Concession revenues increased due to increased attendance and a 5.3%
increase in our average concession sales per person during the fiscal 2003 first
quarter compared to last year's same period.
11
Total theatre attendance increased 4.1% during the first quarter compared
to total attendance during the same period last year. Total theatre attendance
at our comparable locations increased 6.2% during the first quarter of fiscal
2003, compared to last year's same period. The increase in total attendance and
the resulting increases in box office receipts and concession revenues during
the first quarter of fiscal 2003 were primarily the result of more quality films
compared to the first quarter of fiscal 2002. The first quarter of fiscal 2003
included several blockbuster films, including Austin Powers in Goldmember,
Signs, Men in Black II, Lilo & Stitch and Scooby Doo. Many of the top films for
the quarter were excellent family fare, which traditionally produce better than
average concession sales.
Film product for the second quarter and upcoming holiday season appears to
be very good, with films such as Red Dragon, Harry Potter and the Chamber of
Secrets, Die Another Day and Lord of the Rings: Two Towers expected to perform
well. Revenues for the theatre business and the motion picture industry in
general are heavily dependent upon the general audience appeal of available
films, together with studio marketing, advertising and support campaigns, all
factors over which we have no control.
We ended the first quarter of fiscal 2003 with a total of 456 Company-owned
screens in 44 theatres and 34 managed screens in 3 theatres compared to 482
Company-owned screens in 49 theatres at the end of the same period last year. We
anticipate opening three additional screens, including our third
UltraScreen(TM), at a theatre in Appleton, Wisconsin in time for the holiday
season.
Limited-Service Lodging
The following table sets forth revenues, operating income and operating
margin for our limited-service division for the first quarters of fiscal 2003
and 2002 (in millions, except for variance percentage and operating margin):
First Quarter
--------------------------------------
Variance
----------------
F2003 F2002 Amt. Pct.
------- ------- ------ ------
Revenues $ 37.4 $ 39.3 $(1.9) -4.8%
Operating income 8.6 10.0 (1.4) -14.3%
Operating margin 22.9% 25.4%
(% of revenues)
Comparable Baymont Inns & Suites experienced a 0.7 percentage point decline
in occupancy and a 3.1% decrease in average daily rate during the first quarter
of fiscal 2003, compared to the same quarter last year. The primary factor
contributing to the declines in occupancy and average daily rate was reduced
business travel, as companies continued to respond to the current economic
environment. The result of the average daily rate decrease and occupancy decline
was a 4.1% decrease in Baymont Inns & Suites revenue per available room, or
RevPAR, for comparable Inns during the fiscal 2003 first quarter, compared to
the same period last year.
We owned and operated seven Woodfield Suites all-suite hotels during the
first quarters of fiscal 2003 and 2002. Revenues and operating income from
Woodfield Suites decreased
12
during the first quarter of fiscal 2003 compared to the same period of fiscal
2002 due primarily to reduced occupancy and average rate with a resulting RevPAR
decrease of 6.5% compared to the same period last year. Like the Baymont Inns &
Suites, a reduction in business travel was the primary contributor to the
revenue declines.
The performance of our limited-service, mid-priced Baymont Inns & Suites
during the first quarter of fiscal 2003 continues to be similar to, or in some
cases slightly better than, the results of the majority of the properties in
this lodging industry segment. Data received from outside industry resources,
such as Smith Travel Research, indicates that our company-owned or operated
Baymont Inns & Suites realized small gains in market share despite the reduced
overall demand for lodging during the first quarter compared to the same quarter
last year. In general, Inns that derive a large portion of their occupancies
from over-the-road travelers and leisure travelers have performed better than
others, as have properties located in smaller markets and markets that have not
been impacted as severely by the economic downturn. Conversely, airport
locations and Inns in markets impacted more heavily by the current economic
environment, such as Detroit, Cleveland, Cincinnati, Chicago and Houston, were
disproportionately negatively impacted during our fiscal 2003 first quarter.
The limited-service lodging division's operating income decreased during
the fiscal 2003 first quarter compared to the same period last year due
primarily to the decline in revenues during this same period. As a result of
strict cost controls and prior reductions in corporate overhead, we have been
able to maintain our gross operating profit margins (before fixed expenses)
despite the reduction in revenues. Our overall division operating margin
declined during the fiscal 2003 first quarter compared to the same period last
year due to the impact of fixed occupancy expenses during a period of declining
revenues and due to a small increase in advertising expenditures during the
period.
Our current strategies for this division continue to focus on increasing
occupancy and brand awareness at our Baymont Inns & Suites. At the beginning of
the fiscal 2002 fourth quarter, we introduced and began marketing our new
Ovations Rooms, which feature additional amenities not normally found in the
limited-service lodging sector. The initial guest response to this program has
been very positive, with RevPAR for this room type significantly outpacing
RevPAR for the remaining rooms during the first quarter.
Although the overall RevPAR trend improved during the first quarter of
fiscal 2003 compared to the previous two quarters, the summer results were
likely aided by the traditional influx of leisure travelers during this time
period. We are hopeful that the improvement in the trend will continue during
the fall and winter, when the reliance on the business traveler historically
increases and leisure travel declines. We are encouraged by a recently published
survey reporting that companies expect to increase their business travel over
the next six months. We believe, however, that it is likely that limited-service
lodging RevPAR will continue to fluctuate during the remainder of fiscal 2003.
Our expectation is that we will have several weeks of favorable comparisons to
last year coinciding with the weeks immediately following September 11, with
gradual improvement thereafter as business travel begins to return to earlier
levels.
13
At the end of the fiscal 2003 first quarter, we owned or operated 94
Baymont Inns & Suites and franchised an additional 90 Inns, bringing the total
number of Baymont Inns & Suites in operation to 184. In addition, there are
currently 10 approved franchised locations in development, including two
scheduled to open during the fiscal 2003 second quarter. We also remain on track
to begin construction during fiscal 2003 of our first urban location in downtown
Chicago, Illinois. We continue to believe that the current economic and
financing environment will constrain new hotel development in the near-term,
which may limit the number of new franchised locations approved in the upcoming
months. Conversely, we also continue to believe that the significantly reduced
supply growth throughout the industry should favorably impact operating results
of existing hotels as an economic recovery takes hold.
Hotels and Resorts
The following table sets forth revenues, operating income and operating
margin for our hotels and resorts division for the first quarters of fiscal 2003
and 2002 (in millions, except for variance percentage and operating margin):
First Quarter
--------------------------------------
Variance
----------------
F2003 F2002 Amt. Pct.
------- ------- ------ ------
Revenues $ 37.5 $ 35.3 $ 2.2 6.1%
Operating income 7.1 6.4 0.7 11.0%
Operating margin 19.1% 18.2%
(% of revenues)
Total division revenues and operating income for the first quarter of
fiscal 2003 were a record and increases over the fiscal 2002 comparable period
were primarily due to additional revenues from our newest hotels, the Hotel
Phillips and Hilton Madison at Monona Terrace, and our Timber Ridge Lodge
management contract. Also contributing to the improvement in operating results
was an increase in sales at our vacation ownership development at the Grand
Geneva Resort & Spa and a strong summer at our two Milwaukee hotels, driven by a
steady stream of leisure events in the city. Comparisons to last year's first
quarter were also favorably impacted by the fact that the division's fiscal 2002
first quarter operating results included approximately $600,000 of preopening
expenses related to the Hotel Phillips and Timber Ridge Lodge.
Our hotels and resorts continue to operate in a very challenging
environment as a result of the current economic climate. As noted in our
limited-service lodging discussion, business travel remains below previous
levels, significantly impacting the upscale segment of the hotel industry. In
addition, several of our hotels and resorts derive a significant portion of
their revenues from corporate group business, which also has been below previous
year levels. Despite this difficult environment, our hotels and resorts have
continued to outperform the industry, likely due at least partially to our
property and location mix. Excluding the Hotel Phillips, which has not been open
for a full year, the division's total RevPAR for comparable Company-owned
properties decreased only 1.4% during the fiscal 2003 first quarter compared to
the same quarter last year. The small decline in RevPAR was entirely due to
reduced occupancy, offset by an overall 3.6% increase in average daily rate for
these comparable properties. We have made a conscious effort to retain the
integrity of our rate structure during a period when
14
others in the industry are heavily discounting, believing that this strategy is
in our best long-term interest.
We opened a new parking garage at our Hilton Milwaukee City Center during
the fiscal 2003 first quarter, completing a multi-year expansion and renovation
of this convention hotel. We continue to maintain our properties consistent with
our traditional high standards, and with the recent completion of major room
renovations at the Pfister Hotel and Grand Geneva Resort & Spa and completion of
a major expansion of our spa facilities at the Grand Geneva, our hotel assets
are in excellent condition. We have also recently begun construction on an
additional 32 units at our Grand Geneva vacation ownership development.
Completion of these units, scheduled to open by the end of fiscal 2003, will
double the size of this development.
Our outlook for the future performance of this division continues to be
cautiously optimistic. Continued improved performance at our newest properties
will likely contribute to improved overall division operating results during the
remainder of the fiscal year. The hotels and resorts division was negatively
impacted more than our other divisions in the weeks and months immediately
following September 11 last year, and thus we anticipate favorable comparisons
during our fiscal 2003 second and third quarters. On the other hand, while we
are encouraged by signs of an improving economy, we expect that we will continue
to be negatively impacted by reduced levels of business travel and group
business in the near term.
Discontinued Operations
We sold our KFC restaurant business segment on May 24, 2001. The asset
purchase agreement with the buyer of these restaurants provided for a potential
additional future purchase price payment if certain performance conditions were
met. During the first quarter of fiscal 2003, the buyer elected to terminate
this provision of the agreement by paying us an additional $2.1 million. As a
result, an additional gain on the sale of the restaurant segment of $1.2
million, net of income taxes, was recognized during the first quarter.
FINANCIAL CONDITION
Our lodging and movie theatre businesses each generate significant and
consistent daily amounts of cash because each segment's revenue is derived
predominantly from consumer cash purchases. We believe that these relatively
consistent and predictable cash sources, together with the availability of $128
million of unused credit lines as of the end of the first quarter, should be
adequate to support the ongoing operational liquidity needs of our businesses.
Net cash provided by operating activities increased by $1.0 million during
the first quarter of fiscal 2003 to $30.4 million, compared to $29.4 million
during the prior year's first quarter. The increase was due primarily to
favorable timing differences in collections of accounts and notes receivable and
payments of income taxes, partially offset by an unfavorable timing difference
in payments of accounts payable.
Net cash used in investing activities during the fiscal 2002 first quarter
totaled $7.7 million, compared to $16.6 million during the fiscal 2002 first
quarter. The decrease in net cash used in investing activities was primarily the
result of decreased capital expenditures, partially offset by increased cash
proceeds from disposals of property and equipment. Capital
15
expenditures totaled $5.8 million during the first quarter of fiscal 2003
compared to $14.2 million during the prior year's first quarter. Fiscal 2003
first quarter capital expenditures included $2.2 million incurred in our hotels
and resorts division and $2.9 million incurred in our limited-service lodging
division to fund ongoing capital projects. The increased cash proceeds is
primarily due to the additional payment received on the sale of our KFC
restaurants.
Net cash used in financing activities during the first quarter of fiscal
2003 totaled $23.4 million compared to $9.6 million during the first quarter of
fiscal 2002. As a result of increased cash provided by operating activities and
reduced capital expenditures compared to the same period last year, excess cash
available was used to reduce our outstanding commercial paper borrowings during
the quarter. Our principal payments on notes payable and long-term debt totaled
$22.6 million during the first quarter of fiscal 2003 compared to $9.3 million
during the same period last year, with minimal new debt added in either year.
Cash provided by operating activities is historically highest during our
busy summer first quarter and as a result, our overall debt levels decreased at
the end of the fiscal 2003 first quarter. Our debt capitalization ratio was 0.45
at August 29, 2002, compared to 0.48 at the prior fiscal year end. Based upon
our current expectations for fiscal 2003 capital expenditure levels and
potential asset sales proceeds, we anticipate that our long-term debt total and
debt-capitalization ratio will remain below fiscal 2002 levels during fiscal
2003.
The actual timing and extent of the implementation of our current expansion
plans will depend in large part on industry and general economic conditions, our
financial performance and available capital, the competitive environment,
evolving customer needs and trends and the availability of attractive
opportunities. It is likely that our plans will continue to evolve and change in
response to these and other factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has not experienced any material changes in its market risk
exposures since May 30, 2002.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Written Statement of Chief Executive Officer Pursuant to
189 U.S.C. ss. 1350.
99.2 Written Statement of Chief Financial Officer Pursuant to
189 U.S.C. ss. 1350.
b. Reports on Form 8-K
No Form 8-K was filed by the Company during the quarter to which
this Form 10-Q relates.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MARCUS CORPORATION
(Registrant)
DATE: October 7, 2002 By: /s/ Stephen H. Marcus
-------------------------------------
Stephen H. Marcus,
Chairman of the Board, President
and Chief Executive Officer
DATE: October 7, 2002 By: /s/ Douglas A. Neis
-------------------------------------
Douglas A. Neis
Chief Financial Officer and Treasurer
S-1
CERTIFICATIONS
I, Stephen H. Marcus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Marcus
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: October 7, 2002 /s/ Stephen H. Marcus
--------------------------------------
Stephen H. Marcus
Chairman of the Board, President and
Chief Executive Officer
S-2
I, Douglas A. Neis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Marcus
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: October 7, 2002 /s/ Douglas A. Neis
--------------------------------------
Douglas A. Neis
Chief Financial Officer and Treasurer
S-3