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 November 28, 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
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(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
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(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 JANUARY 8, 2003 - 19,883,223
CLASS B COMMON STOCK OUTSTANDING AT JANUARY 8, 2003 - 9,506,661
THE MARCUS CORPORATION
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INDEX
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PART I - FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements:
Balance Sheets
(November 28, 2002 and May 30, 2002)......................... 3
Statements of Earnings
(Thirteen and twenty-six weeks ended
November 28, 2002 and November 29, 2001)..................... 5
Statements of Cash Flows
(Twenty-six weeks ended November 28, 2002 and
November 29, 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... 17
Item 4. Procedures and Controls...................................... 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 6. Exhibits and Reports on Form 8-K............................. 19
Signatures............................................................. S-1
Certifications......................................................... S-2
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
November 28, May 30,
2002 2002
------------ ---------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,629 $ 5,614
Accounts and notes receivable 13,602 16,044
Receivables from joint ventures 3,190 3,760
Refundable income taxes - 4,947
Real estate and development costs 1,493 2,532
Other current assets 5,089 4,512
-------- --------
Total current assets 26,003 37,409
Property and equipment:
Land and improvements 89,846 92,558
Buildings and improvements 625,405 612,954
Leasehold improvements 7,963 9,082
Furniture, fixtures and equipment 270,810 266,872
Construction in progress 5,797 13,107
-------- --------
Total property and equipment 999,821 994,573
Less accumulated depreciation
and amortization 330,785 310,934
-------- --------
Net property and equipment 669,036 683,639
Other assets:
Investments in joint ventures 2,502 1,356
Goodwill 11,806 11,806
Other 43,909 40,576
-------- --------
Total other assets 58,217 53,738
-------- --------
TOTAL ASSETS $753,256 $774,786
======== ========
See accompanying notes to consolidated financial statements.
3
THE MARCUS CORPORATION
Consolidated Balance Sheets
(Unaudited) (Audited)
November 28, May 30,
2002 2002
------------ ----------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 3,156 $ 3,497
Accounts payable 9,698 17,211
Income taxes 4,023 -
Taxes other than income taxes 15,407 13,947
Accrued compensation 5,733 6,555
Other accrued liabilities 10,718 11,265
Current maturities of long-term debt 20,761 20,777
-------- --------
Total current liabilities 69,496 73,252
Long-term debt 265,578 299,761
Deferred income taxes 37,280 36,529
Deferred compensation and other 13,103 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 21,646,376
shares at November 28, 2002 and
21,584,239 shares at May 30, 2002 21,646 21,584
Class B Common Stock, $1 par;
authorized 33,000,000 shares;
issued and outstanding 9,543,137
at November 28, 2002 and 9,605,274
at May 30, 2002 9,543 9,606
Capital in excess of par 41,417 41,523
Retained earnings 313,627 300,623
Accumulated other comprehensive loss (1,547) (1,866)
-------- --------
384,686 371,470
Less cost of Common Stock in
treasury (1,807,575 shares at
November 28, 2002 and 1,863,027
shares at May 30, 2002) (16,887) (17,402)
-------- --------
Total shareholders' equity 367,799 354,068
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $753,256 $774,786
======== ========
See accompanying notes to consolidated financial statements.
4
THE MARCUS CORPORATION
Consolidated Statements of Earnings (Unaudited)
(in thousands, except per share data) November 28, 2002 November 29, 2001
-------------------------- -------------------------
13 Weeks 26 Weeks 13 Weeks 26 Weeks
-------- -------- -------- --------
Revenues:
Rooms and telephone $ 41,596 $ 94,392 $ 39,091 $ 92,679
Theatre admissions 20,672 49,883 18,676 46,287
Theatre concessions 9,340 23,032 8,903 21,378
Food and beverage 8,353 17,610 7,259 15,738
Other income 8,826 23,447 10,055 24,070
---------- --------- ---------- ----------
Total revenues 88,787 208,364 83,984 200,152
Costs and expenses:
Rooms and telephone 19,694 40,680 19,147 40,774
Theatre operations 16,113 38,500 14,438 35,002
Theatre concessions 2,084 5,274 2,071 5,098
Food and beverage 6,271 13,198 6,019 12,601
Advertising and marketing 6,964 14,695 6,178 13,150
Administrative 9,780 20,110 9,624 19,848
Depreciation and amortization 11,428 22,866 11,144 22,122
Rent 615 1,217 703 1,434
Property taxes 3,925 8,269 4,049 8,018
Preopening expenses - 3 487 1,063
Other operating expenses 4,161 10,645 4,603 10,722
---------- --------- ---------- ----------
Total costs and expenses 81,035 175,457 78,463 169,832
---------- --------- ---------- ----------
Operating income 7,752 32,907 5,521 30,320
Other income (expense):
Investment income 613 1,235 545 1,116
Interest expense (4,973) (10,297) (4,703) (9,674)
Gain on disposition of property, equipment
and investments in joint ventures 911 1,320 (233) 2,031
---------- --------- ---------- ----------
(3,449) (7,742) (4,391) (6,527)
---------- --------- ---------- ----------
Earnings from continuing operations before income taxes 4,303 25,165 1,130 23,793
Income taxes 1,751 10,242 (798) 7,142
---------- --------- ---------- ----------
Earnings from continuing operations 2,552 14,923 1,928 16,651
---------- --------- ---------- ----------
Discontinued operations (Note 2):
Gain on sale of discontinued operations,
net of applicable income taxes - 1,216 - -
---------- --------- ---------- ----------
Net earnings $ 2,552 $ 16,139 $ 1,928 $ 16,651
========== ========= ========== ==========
Earnings per share - basic and diluted:
Continuing operations $ 0.09 $ 0.51 $ 0.07 $ 0.57
Discontinued operations - 0.04 - -
---------- --------- ---------- ----------
Net earnings per share $ 0.09 $ 0.55 $ 0.07 $ 0.57
========== ========= ========== ==========
Weighted average shares outstanding:
Basic 29,373 29,353 29,226 29,212
Diluted 29,510 29,529 29,331 29,377
See accompanying notes to consolidated financial statements.
5
THE MARCUS CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
26 Weeks Ended
-------------------------------------
November 28, November 29,
2002 2001
------------ ------------
(in thousands)
OPERATING ACTIVITIES:
Net earnings $ 16,139 $ 16,651
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Losses on investments in joint ventures, net of distributions 468 321
Gain on disposition of property, equipment and other assets (3,370) (2,031)
Amortization of loss on swap agreement 655 -
Depreciation and amortization 22,866 22,122
Deferred income taxes 751 365
Deferred compensation and other 1,927 851
Changes in assets and liabilities:
Accounts and notes receivable 2,442 (292)
Real estate and development costs 1,039 1,360
Other current assets (577) (985)
Accounts payable (7,513) (1,552)
Income taxes 8,708 2,872
Taxes other than income taxes 1,460 690
Accrued compensation (822) (852)
Other accrued liabilities (547) (679)
-------- --------
Total adjustments 27,487 22,190
-------- --------
Net cash provided by operating activities 43,626 38,841
INVESTING ACTIVITIES:
Capital expenditures (11,497) (28,381)
Net proceeds from disposals of property, equipment and other assets 5,453 1,367
Purchase of interest in joint ventures (463) -
Increase in other assets (3,406) (2,373)
Cash received from (advanced to) joint ventures 570 (1,289)
-------- --------
Net cash used in investing activities (9,343) (30,676)
FINANCING ACTIVITIES:
Debt transactions:
Net proceeds from issuance of notes payable and long-term debt 379 12,527
Principal payments on notes payable and long-term debt (34,919) (13,452)
Equity transactions:
Treasury stock transactions, except for stock options (237) (40)
Exercise of stock options 645 590
Dividends paid (3,136) (3,114)
-------- --------
Net cash used in financing activities (37,268) (3,489)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,985) 4,676
Cash and cash equivalents at beginning of year 5,614 1,499
-------- --------
Cash and cash equivalents at end of period $ 2,629 $ 6,175
======== ========
See accompanying notes to consolidated financial statements.
6
THE MARCUS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS FOR THE
THIRTEEN AND TWENTY-SIX WEEKS ENDED
NOVEMBER 28, 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 and twenty-six weeks ended November 28, 2002 and November 29, 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
November 28, 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 $1,547,000
and $1,866,000 as of November 28, 2002 and May 30, 2002, respectively.
Total comprehensive income for the thirteen and twenty-six weeks ended
November 28, 2002 was $2,737,000 and $16,458,000, respectively. Total
comprehensive income for the thirteen and twenty-six weeks ended November
29, 2001 was $1,540,000 and $13,957,000, 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
7
principally of rent and the corporate operating loss includes general
corporate expenses. Corporate information technology costs and accounting
shared services costs are allocated to the business segments based upon
several factors, including actual usage and segment revenues.
Following is a summary of business segment information for the thirteen and
twenty-six weeks ended November 28, 2002 and November 29, 2001 (in
thousands):
13 Weeks Ended Limited-Service Corporate
November 28, 2002 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- --------- -----
Revenues $30,543 $31,111 $26,687 $ 446 $ 88,787
Operating income (loss) 1,708 6,392 1,383 (1,731) 7,752
13 Weeks Ended Limited-Service Corporate
November 29, 2001 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- --------- -----
Revenues $29,212 $28,737 $25,505 $ 530 $ 83,984
Operating income (loss) 1,833 5,442 76 (1,830) 5,521
26 Weeks Ended Limited-Service Corporate
November 28, 2002 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- ---------- -----
Revenues $67,992 $75,373 $64,145 $ 854 $208,364
Operating income (loss) 10,266 17,733 8,520 (3,612) 32,907
26 Weeks Ended Limited-Service Corporate
November 29, 2001 Lodging Theatres Hotels/Resorts Items Total
----------------- --------------- -------- -------------- --------- -----
Revenues $68,554 $69,902 $60,804 $ 892 $ 200,152
Operating income (loss) 11,822 15,517 6,506 (3,525) 30,320
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 second
quarter and first half of fiscal 2003 and 20\02 (in millions, except for per
share and variance percentage data):
Second Quarter First Half
------------------------------------- --------------------------------
Variance Variance
------------ ------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------ ---- ----- ----- ---- ----
Revenues $ 88.8 $83.9 $ 4.9 5.7% $208.4 $200.2 $ 8.2 4.1%
Operating income 7.8 5.5 2.3 40.4% 32.9 30.3 2.6 8.5%
Earnings from
continuing operations 2.6 1.9 0.7 32.4% 14.9 16.7 (1.8) -10.4%
Net earnings 2.6 1.9 0.7 32.4% 16.1 16.7 (0.6) -3.1%
Earnings per share -
Diluted:
Continuing operations $ .09 $ .07 $ .02 28.6% $ .51 $ .57 $(.06) -10.5%
Net earnings per share $ .09 $ .07 $ .02 28.6% $ .55 $ .57 $(.02) -3.5%
Revenues increased in each of our three operating divisions during the
second quarter of fiscal 2003 compared to the same quarter last year. Last
year's second quarter included the immediate weeks following the September 11
terrorist attacks, which were particularly difficult for the lodging industry.
Increases in our theatre and hotels/resorts division revenues and operating
income (earnings before other income/expense and income taxes) during the first
half of fiscal 2003 compared to the same period last year were partially offset
by small 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 and a higher effective income tax rate
negatively impacted earnings from continuing operations and net earnings during
our fiscal 2003 second quarter and first half compared to the same periods of
fiscal 2002. Our interest expense, net of investment income, totaled $4.4
million and $9.1 million for the second quarter and first half of fiscal 2003,
respectively, compared to $4.2 million and $8.6 million during the same periods
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 these periods last year. The
resulting increase in interest expense was partially offset by an overall
reduction in our long-term debt during the second quarter and first half of
fiscal 2003 compared to last year's same periods.
Our higher effective income tax rate during the second quarter and first
half of fiscal 2003 is, with the exception of fiscal 2002 and the second half of
fiscal 2001, consistent with prior years. Our effective income tax rate during
fiscal 2002 was significantly reduced as a result of the favorable impact of
federal and state historic tax credits related to the renovation of the Hotel
Phillips in Kansas City, Missouri. Without these historic tax credits, our
fiscal 2002 second quarter net earnings would have been approximately $1.3
million, or $.05 per share, lower than we reported and our fiscal 2002 first
half net earnings would have been approximately $2.5 million, or $.09 per share,
lower. Income taxes during the remaining two quarters of fiscal 2003 are
expected to be more comparable to fiscal 2002 income taxes for those same two
quarters.
10
We recognized gains on disposition of property and equipment totaling
$900,000 during the second quarter of fiscal 2003 compared to a loss of $200,000
during the prior year same period. The fiscal 2003 second quarter gain was the
result of the sale of a former restaurant location. Gains on disposition of
property and equipment for the first half of fiscal 2003 of $1.3 million remain
below gains of $2.0 million during the first half of fiscal 2002. The timing of
periodic sales of our property and equipment vary from quarter to quarter,
resulting in variations in our gains or losses on disposition of property and
equipment. 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.
Theatres
The following table sets forth revenues, operating income and operating
margin for our theatre division for the second quarter and first half of fiscal
2003 and 2002 (in millions, except for variance percentage and operating
margin):
Second Quarter First Half
------------------------------------- --------------------------------
Variance Variance
------------ ------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------ ---- ----- ----- ---- ----
Revenues $31.1 $ 28.7 $ 2.4 8.3% $75.4 $69.9 $5.5 7.8%
Operating income 6.4 5.4 1.0 17.5% 17.7 15.5 2.2 14.3%
Operating margin 20.5% 18.9% 23.5% 22.2%
(% of revenues)
Consistent with the seasonal nature of the motion picture exhibition
industry, the second quarter of our fiscal year is typically the slowest period
for our theatre division. Despite this fact, our fiscal 2003 second quarter
theatre operating results represent our sixth straight record quarter for this
division. Contributing to the increased second quarter and first half 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
second quarter and first half of fiscal 2003 and 2002 (in millions):
Second Quarter First Half
------------------------------------- --------------------------------
Variance Variance
------------ ------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------ ---- ----- ----- ---- ----
Box office receipts $20.7 $18.7 $ 2.0 10.7% $49.9 $46.3 $ 3.6 7.8%
Concession revenues 9.3 8.9 0.4 4.9% 23.0 21.4 1.6 7.7%
Other revenues 1.1 1.1 - - 2.5 2.2 0.3 9.9%
----- ----- ----- ----- ----- ----- ----- ----
Total revenues $31.1 $28.7 $ 2.4 8.3% $75.4 $69.9 $ 5.5 7.8%
The increases in box office receipts during the second quarter and first
half of fiscal 2003 compared to the same periods last year were due to both an
increase in average ticket price and increased attendance, despite our having
fewer screens in operation during fiscal 2003 compared to the same periods last
year. Our average ticket price increased 5.7% and 3.3%, respectively, during the
second quarter and first half of fiscal 2003 compared to the same periods last
year. We ended the second quarter with three fewer Company-owned theatres and 14
fewer screens
11
compared to the prior year. Concession revenues during the fiscal 2003 second
quarter increased as a result of increased attendance, with no change in our
average concession sales per person compared to the second quarter of fiscal
2002. Last year's top two films, Harry Potter and the Sorcerer's Stone and
Monsters, Inc., had particularly strong appeal to the family market, which
traditionally produces better than average concession sales. For the first half
of fiscal 2003, our average concession sales per person have increased 3.2%
compared to last year's same period.
Total theatre attendance for the second quarter and first half of fiscal
2003 increased 4.7% and 4.3%, respectively, compared to the same periods last
year. Total theatre attendance at our comparable locations increased 6.2% during
the first half of fiscal 2003, compared to last year's same period. The
increases in total attendance and the resulting increases in box office receipts
and concession revenues during the second quarter and first half of fiscal 2003
were primarily the result of improved consumer appeal of the films compared to
the same periods of fiscal 2002. Last year's second quarter results were also
likely negatively impacted to some degree in the immediate weeks following the
September 11 terrorist attacks. The second quarter of fiscal 2003 included five
films that produced box office receipts in excess of $1 million for us, compared
to only two films reaching that amount during the second quarter of fiscal 2002.
Top films during the quarter included Harry Potter and the Chamber of Secrets,
My Big Fat Greek Wedding and Sweet Home Alabama. During the first half of fiscal
2003, 15 films have generated box office receipts in excess of $1.3 million for
the division, compared to only 10 films with box office receipts in excess of
that amount during the first half of fiscal 2002.
The fiscal 2003 third quarter has started off very strong for this
division, with holiday film product such as Harry Potter, Die Another Day, Lord
of the Rings: Two Towers, Catch Me If You Can, Two Weeks Notice and Maid in
Manhattan performing very well and contributing to two straight record box
office weeks for our theatres at the end of December. The extended outlook for
film product beyond the holiday season looks good, although comparisons to last
year will be challenging, particularly in our fiscal fourth quarter, when three
of the top six films of fiscal 2002 were released: Ice Age, Spiderman and Star
Wars: the Attack of the Clones. 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 second quarter of fiscal 2003 with a total of 459
Company-owned screens in 44 theatres and 34 managed screens in 3 theatres
compared to 469 Company-owned screens in 46 theatres at the end of the same
period last year. We opened three additional screens, including our third
UltraScreen(TM), at a theatre in Appleton, Wisconsin at the end of the fiscal
2003 second quarter. We also entered into our second management agreement
contract during the second quarter, a new six-screen theatre in Tomah, Wisconsin
that is being developed by the Ho-Chunk Nation. We do not anticipate opening any
additional screens during the remainder of fiscal 2003 but we will continue to
review additional development opportunities, with more screen additions likely
during fiscal 2004.
12
Limited-Service Lodging
The following table sets forth revenues, operating income and operating
margin for our limited-service division for the second quarter and first half of
fiscal 2003 and 2002 (in millions, except for variance percentage and operating
margin):
Second Quarter First Half
------------------------------------- --------------------------------
Variance Variance
------------ ------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------ ---- ----- ----- ---- ----
Revenues $30.5 $29.2 $ 1.3 4.6% $68.0 $68.6 $(0.6) -0.8%
Operating income 1.7 1.8 (0.1) -6.8% 10.3 11.8 (1.5) -13.2%
Operating margin 5.6% 6.3% 15.1% 17.2%
(% of revenues)
Comparable Baymont Inns & Suites experienced a 6.4% and 0.4% increase in
revenue per available room, or RevPAR, during the fiscal 2003 second quarter and
first half, respectively, compared to the same periods last year. The increase
in RevPAR during the second quarter was the result of increased occupancy and a
slightly decreased average daily rate. It is important to note that comparable
Baymont Inns & Suites experienced a significant decline in occupancy percentage
during the second quarter of fiscal 2002 in the wake of the tragic events of
September 11 and the resulting further economic decline. We are encouraged by
the fact that, despite continued reduced business travel as a result of the
current economic environment, we were able to recover the entire amount of lost
occupancy and surpass fiscal 2001 second quarter occupancy levels.
The performance of our limited-service, mid-priced Baymont Inns & Suites
properties during the second quarter of fiscal 2003 was better than the results
of the majority of the properties in this lodging industry segment. Data
received from outside industry resources, such as Smith Travel Research,
indicates that our Company-owned or operated Baymont Inns & Suites realized
gains in market share despite the continued challenging environment for lodging
during the second quarter. Specifically, our fiscal 2003 second quarter RevPAR
increase of 6.4% compares very favorably to a reported increase of only 1.3% for
the mid-price without food and beverage segment of the lodging industry and no
increase at all for our specific set of competitors for the same period. We
believe that our recent sales and marketing efforts to increase brand awareness,
including but not limited to additional cable television advertising, and
efforts to differentiate Baymont Inns & Suites from its competitors have
contributed to the improved revenue performance relative to others in our
industry.
We owned and operated seven Woodfield Suites all-suite hotels during the
second quarters of fiscal 2003 and 2002. Although revenues increased slightly
during the second quarter of fiscal 2003 compared to the very challenging second
quarter of fiscal 2002, operating income from Woodfield Suites decreased during
the second quarter and first half of fiscal 2003 compared to the same periods of
fiscal 2002. Reduced average rates at these properties resulted in a first half
RevPAR decrease of 2.1% compared to the same period last year. A reduction in
mid-week business travel was the primary contributor to the overall decline in
Woodfield Suites' operating performance.
13
The limited-service lodging division's operating income and operating
margin decreased slightly during the fiscal 2003 second quarter compared to the
same period last year due to several factors, including reduced Woodfield
Suites' operating income and the added costs of the cable television advertising
initiative. Our division operating income and operating margin during the first
half of fiscal 2003 has decreased compared to the same period last year due to
the factors identified above along with a decline in revenues during our
historically busy summer first quarter.
Our current strategies for this division continue to focus on increasing
occupancy and brand awareness at our Baymont Inns & Suites. Our positive RevPAR
trends in relation to others in our industry continued in December and we
currently believe that we will continue to see better than average RevPAR
improvement during our fiscal 2003 third quarter. We still do not believe a full
recovery for the industry will occur until business travel returns to earlier
levels.
At the end of the fiscal 2003 second quarter, we owned or operated 93
Baymont Inns & Suites and franchised an additional 89 Inns, bringing the total
number of Baymont Inns & Suites in operation to 182. One Company-owned Baymont
was sold out of the system during the second quarter without a material impact
on operating results. In addition, there are currently six approved franchised
locations in development. We also began 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 coming 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 second quarter and first half
of fiscal 2003 and 2002 (in millions, except for variance percentage and
operating margin):
Second Quarter First Half
------------------------------------- --------------------------------
Variance Variance
------------ ------------
F2003 F2002 Amt. Pct. F2003 F2002 Amt. Pct.
----- ----- ------ ---- ----- ----- ---- ----
Revenues $26.7 $25.5 $ 1.2 4.6% $64.1 $60.8 $ 3.3 5.5%
Operating income 1.4 0.1 1.3 1719.8% 8.5 6.5 2.0 31.0%
Operating margin 5.2% 0.3% 13.3% 10.7%
(% of revenues)
Total division revenues and operating income for the second quarter and
first half of fiscal 2003 increased over the fiscal 2002 comparable periods
primarily due to additional revenues from our newest hotels, the Hotel Phillips,
the Hilton Madison at Monona Terrace, and our Timber Ridge Lodge management
contract. In addition, last year's second quarter included the very difficult
weeks immediately following September 11, resulting in favorable comparisons
during the fiscal 2003 second quarter. Comparisons to last year's second quarter
and first half were also favorably impacted by the fact that the division's
fiscal 2002 comparable periods
14
included approximately $500,000 and $1.1 million, respectively, of preopening
expenses related to the Hotel Phillips and Timber Ridge Lodge.
Conversely, a temporary change in our accounting for timeshare sales at our
vacation ownership development at the Grand Geneva Resort & Spa negatively
impacted operating results and comparisons to the prior year for the hotels and
resorts division during the fiscal 2003 second quarter. We have sold all
available timeshare units in our original three buildings at this development
and we are currently under construction on a new building that will include 32
new units, doubling the size of the existing development. While this new
building is under construction, we are required to account for current sales of
timeshare units under the percentage of completion method. At the end of the
fiscal 2003 second quarter, we had approximately $1.2 million in vacation
ownership sales, along with related costs of sales, deferred on our balance
sheet. We currently anticipate that the new building will be completed prior to
the end of fiscal 2003 and that all sales will be fully recognized by year-end.
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, although comparisons to last year's second
quarter indicate an improvement, business travel remains reduced, 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 generally outperformed the
industry, likely due at least partially to our property and location mix.
Excluding the Hotel Phillips, which opened during the second quarter last year,
the division's total RevPAR for comparable Company-owned properties increased
8.5% and 2.6%, respectively, during the fiscal 2003 second quarter and first
half compared to the same periods last year. During the fiscal 2003 second
quarter, the increase in RevPAR compared to the same period last year was the
result of both increased occupancy and an overall 2.2% increase in average daily
rate for these comparable properties. We have attempted to retain the integrity
of our rate structure during a period when others in the industry are heavily
discounting, believing that this strategy is in our best long-term interest.
Our outlook for the future performance of this division remains cautiously
optimistic. While we were pleased with the improvement in operating results
during the fiscal 2003 second quarter, the results remain significantly below
operating results reported by this division during the second quarters of fiscal
2001 and 2000. 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
third and fourth quarters. Continued improved performance at our newest
properties will likely contribute to improved overall division operating results
during the remainder of the fiscal year. On the other hand, we remain concerned
that the current economic climate will continue to negatively impact business
travel and corporate group business in the near term. We will continue to make
the necessary investments needed to keep our hotel assets in top condition and
we will continue to monitor our operating costs very closely during this
difficult environment.
Discontinued Operations
We sold our KFC restaurant business segment on May 24, 2001. The asset
purchase agreement with the buyer of these restaurants provided for a potential
additional future purchase
15
price payment if certain performance conditions were met. During the first
quarter of fiscal 2003, the buyer elected to terminate this provision of the
agreement by paying us an additional $2.1 million. As a result, an additional
gain on the sale of the restaurant segment of $1.2 million, net of income taxes,
is included in the reported results for the first half of fiscal 2003.
FINANCIAL CONDITION
Our lodging and movie theatre businesses each generate significant and
consistent daily amounts of cash because each segment's revenue is derived
predominantly from consumer cash purchases. We believe that these relatively
consistent and predictable cash sources, together with the availability of $88
million of unused credit lines as of the end of the second quarter (adjusted for
a recently expired credit agreement), should be adequate to support the ongoing
operational liquidity needs of our businesses. At the end of December, we
allowed a $40 million, 364-day revolving credit agreement with several banks to
expire due to the significant amount of available credit lines without this
agreement.
Net cash provided by operating activities increased by $4.8 million during
the first half of fiscal 2003 to $43.6 million, compared to $38.8 million during
the prior year's first half. 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 half
totaled $9.3 million, compared to $30.7 million during the first half of fiscal
2002. The decrease in net cash used in investing activities was primarily the
result of decreased capital expenditures and increased cash proceeds from
disposals of property and equipment. Capital expenditures totaled $11.5 million
during the first half of fiscal 2003 compared to $28.4 million during the prior
year's first half. Fiscal 2003 first half capital expenditures included $3.8
million incurred in our hotels and resorts division, $2.4 million incurred in
our theatre division and $4.5 million incurred in our limited-service lodging
division to fund ongoing capital projects. The increased cash proceeds are
primarily due to the additional payment received on the sale of our KFC
restaurants.
Net cash used in financing activities during the first half of fiscal 2003
totaled $37.3 million compared to $3.5 million during the first half 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
$34.9 million during the first half of fiscal 2003 compared to $13.5 million
during the same period last year, with minimal new debt added in fiscal 2003
compared to $12.5 million of new debt added during the first half of fiscal
2002.
Our overall debt levels continued to decrease during the fiscal 2003 second
quarter. Our debt capitalization ratio was 0.44 at November 28, 2002, compared
to 0.48 at the prior fiscal year end. Based upon our current expectations for
fiscal 2003 capital expenditure levels of approximately $50 million or less and
our expectations for additional asset sales proceeds, we anticipate that our
long-term debt total and debt-capitalization ratio will remain below fiscal 2002
levels during the remainder of fiscal 2003.
16
The actual timing and extent of the implementation of our current expansion
plans will depend in large part on industry and general economic conditions, our
financial performance and available capital, the competitive environment,
evolving customer needs and trends and the availability of attractive
opportunities. It is likely that our plans will continue to evolve and change in
response to these and other factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not experienced any material changes in our market risk exposures
since May 30, 2002.
Item 4. Procedures and Controls
a. Evaluation of disclosure controls and procedures
Based on their evaluations, as of a date within 90 days of the filing
date of this Quarterly Report on Form 10-Q, our principal executive
officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms.
b. Changes in internal controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Our 2002 annual meeting of shareholders was held on Thursday, October 10,
2002 (the "Annual Meeting"). At the Annual Meeting, the following matters were
voted on in person or by proxy and approved by our shareholders:
1. The shareholders voted to elect Stephen H. Marcus, Diane Marcus
Gershowitz, Daniel F. McKeithan, Jr., Allan H. Selig, Timothy E.
Hoeksema, Bruce J. Olson, Philip L. Milstein, Bronson J. Haase and
James D. Ericson to our Board of Directors for one-year terms to
expire at our 2003 annual meeting of shareholders and until their
successors are duly qualified and elected.
As of the August 9, 2002 record date for the Annual Meeting, 19,741,998
shares of Common Stock and 9,595,879 shares of Class B Common Stock were
outstanding and eligible to vote, with the Common Stock entitled to one vote per
share and the Class B Common Stock entitled to ten votes per share. Following
are the final votes on the matters presented for shareholder approval of the
Annual Meeting:
Election of Directors For Withheld
----------------------------------------------------
Name Votes Percentage(1) Votes Percentage(1)
----------------------------------------------------
Stephen H. Marcus 107,860,362 99.41% 650,675 0.59%
Diane Marcus Gershowitz 107,864,123 99.41% 646,914 0.59%
Daniel F. McKeithan, Jr. 107,837,091 99.38% 673,946 0.62%
Allan H. Selig 106,585,834 98.23% 1,925,203 1.77%
Timothy E. Hoeksema 108,445,881 99.94% 65,156 0.06%
Bruce J. Olson 108,446,374 99.95% 64,663 0.05%
Philip L. Milstein 107,837,292 99.38% 673,745 0.62%
Bronson J. Haase 108,443,615 99.94% 67,422 0.06%
James D. Ericson 107,832,598 99.38% 678,439 0.62%
_______________________________________________
(1) Based on a total of votes represented by shares of Common Stock and Class B
Common Stock actually voted in person or by proxy at the Annual Meeting.
No other matters were brought before the Annual Meeting for a shareholder vote.
18
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.2 Bylaws, as amended as of January 8, 2003.
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
We did not file any Form 8-K during the quarter to which this Form
10-Q relates.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE MARCUS CORPORATION
----------------------
DATE: January 13, 2003 By: /s/ Stephen H. Marcus
------------------------------------------
Stephen H. Marcus,
Chairman of the Board, President and
Chief Executive Officer
DATE: January 13, 2003 By: /s/ Douglas A. Neis
------------------------------------------
Douglas A. Neis
Chief Financial Officer and Treasurer
S-1
CERTIFICATIONS
I, Stephen H. Marcus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Marcus
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: January 13, 2003
By: /s/ Stephen H. Marcus
-----------------------------------------
Stephen H. Marcus,
Chairman of the Board, President and
Chief Executive Officer
S-2
I, Douglas A. Neis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Marcus
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: January 13, 2003
By: /s/ Douglas A. Neis
----------------------------------------
Douglas A. Neis,
Chief Financial Officer and Treasurer
S-3