management's discussion and analysis
Forward-Looking Statements
Certain matters discussed in this annual report to shareholders, particularly in
the Shareholders' Letter and Management's Discussion and Analysis, are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements may generally be identified as such because the
context of such statements will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements that
describe the Company's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties, including, but not limited to, the following:
(i) the Company's ability to identify properties to acquire, develop and/or
manage and continuing availability of funds for such development; (ii) the
Company's ability to attract potential partners to assist in the acquisition
and/or development of properties; (iii) the limited-service lodging division's
ability to attract and retain quality franchise operators and to effectively
execute its Baymont repositioning strategy; (iv) continuing consumer demand as a
result of general economic conditions with respect to the hotels and resorts and
limited-service lodging divisions; (v) continuing availability, in terms of both
quality and quantity, of films for the theatre division; and (vi) competitive
conditions in the markets served by the Company. Shareholders, potential
investors and other readers are urged to consider these factors carefully in
evaluating the forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements made
herein are made only as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Results of Operations
GENERAL
The Marcus Corporation reports consolidated and individual segment results of
operations on a 52-or-53-week fiscal year ending on the last Thursday in May.
Fiscal 2000 and fiscal 1999 were 52-week years for the Company and each of its
divisions. Fiscal 1998 was a 53-week fiscal year for the Company's restaurant
division, while the Company and each of its other divisions reported on a
52-week fiscal year. Fiscal 2001 will be a 53-week year for the Company and each
of its divisions and the Company anticipates that its reported results for
fiscal 2001 will be increased proportionately by the additional week of
operations.
The Company divides its fiscal year into three 13-week quarters and a final
quarter consisting of 13 or 14 weeks. The Company's primary operations are
reported in the following three business segments: limited-service lodging,
theatres and hotels/resorts. As a result of the Company's stated intention to
dispose of its KFC restaurants, the restaurant business segment has been
presented as discontinued operations in the accompanying financial statements
and prior year financial results have been restated to conform with the current
year presentation.
Total revenues for fiscal 2000 were $352.1 million, an increase of $16.1
million, or 4.8%, compared to fiscal 1999 revenues of $336.0 million. Fiscal
1999 revenues increased $27.2 million, or 8.8%, from fiscal 1998 revenues. The
Company's theatre and hotel/resort divisions contributed to the increase in
revenues during both fiscal years. The Company's limited-service lodging
division revenues decreased during both fiscal years.
Earnings from continuing operations for fiscal 2000 were $21.2 million, or $.71
per share, an increase of 1.3% and 1.4%, respectively, from earnings from
continuing operations of $21.0 million, or $.70 per share, for fiscal 1999.
Fiscal 1999 earnings from continuing operations decreased $7.7 million, or
26.9%, from fiscal 1998 earnings from continuing operations of $28.7 million, or
$.95 per share, excluding the after-tax charge of $2.34 million, or $.08 per
share, in fiscal 1998 resulting from the Company's decision to change the name
of Budgetel Inns to Baymont Inns & Suites. The Company recorded a $2.34 million
after-tax charge ($3.9 million before-tax) to earnings for the write-off of
existing signage and other one-time expenses associated with the name change
during the fourth quarter of fiscal 1998. Including the name change charge,
earnings from continuing operations were $26.3 million, or $.87 per share, for
fiscal 1998.
Net earnings for fiscal 2000 were $22.6 million, or $.76 per share. This
represented a $522,000, or 2.3% decrease, from fiscal 1999 net earnings of $23.1
million, or $.77 per share. Fiscal 1999 net earnings decreased $7.6 million, or
24.8%, from comparable fiscal 1998 earnings of $30.7 million, or $1.02 per
share, excluding the after-tax charge for the Baymont name change. Including the
name change charge, net earnings were $28.4 million, or $.94 per share, for
fiscal 1998. Weighted average shares outstanding were 29.8 million for fiscal
2000, 30.1 million for fiscal 1999 and 30.3 million for fiscal 1998. All per
share and share data in this discussion have been adjusted to reflect the
Company's three-for-two stock split effected in the form of a 50% stock dividend
on December 5, 1997. All per share data presented herein is on a diluted basis.
The Company's net interest expense, net of investment income, totaled $16.5
million for fiscal 2000. This represented an increase of $459,000, or 2.9%, over
fiscal 1999 net interest expense of $16.1 million. Fiscal 1999 net interest
expense increased $4.3 million, or 36.4%, over fiscal 1998 net interest expense
of $11.8 million. These increases were the result of additional borrowings in
fiscal 2000 and fiscal 1999 used to help finance the Company's capital expansion
program and stock repurchase program, partially offset by increased investment
income and capitalized interest.
The Company's income tax expense on continuing operations for fiscal 2000 was
$14.6 million, an increase of $356,000 from
10
<PAGE>
fiscal 1999. The Company's effective tax rate for fiscal 2000 was 40.7%,
compared to 40.5% in fiscal 1999 and 40.0% in fiscal 1998. The increased
effective tax rate during fiscal 2000 and fiscal 1999 was the result of
increased state income taxes, net of federal income tax benefits. The Company
believes that its effective tax rate may decrease slightly in fiscal 2001 as the
Company reorganizes and consolidates some of its operating subsidiaries.
Historically, the Company's first fiscal quarter has produced the strongest
operating results because this period coincides with the typical summer
seasonality of the movie theatre industry and the summer strength of the
Company's lodging businesses. The Company's third fiscal quarter has
historically produced the weakest operating results primarily due to the effects
of reduced travel during the winter months on the Company's lodging businesses.
The Company incurred approximately $100 million in aggregate capital
expenditures during fiscal 2000 and over $500 million during the last five
fiscal years. The Company's current expansion plans include the following goals:
o Continuing to define and build the Baymont Inns & Suites brand, with a goal
to be the "best in class" in the mid-price without food and beverage
segment of the lodging industry. The Company currently believes that most
of its anticipated future growth will ultimately come from its emphasis on
opening new franchised Baymont Inns and Baymont Inns & Suites. As of the
end of fiscal 2000, one new Company-owned and 26 new franchised properties
were under development, the majority of which are expected to open during
fiscal 2001. The Company currently believes that it will add 25 to 35 new
franchised properties per year over the next few years. By emphasizing
franchising, the Company believes the Baymont brand may grow more rapidly,
conserving capital for other strategic purposes within the Company. In
addition to the development of new franchised properties, the Company plans
to further emphasize franchising in the future by exploring the potential
sale of approximately 20 Company-owned properties to new and existing
franchisees over the next three years, with the Company possibly retaining
a management contract in some cases. The Company also anticipates exploring
additional growth of the Baymont brand through potential acquisitions and
joint venture investments.
o Reaching its target of 500 movie theatre screens during fiscal 2001. The
Company plans to open up to 36 new screens during fiscal 2001, including 19
new screens to be added to existing locations in Wisconsin, Illinois and
Minnesota. The Company's second large UltraScreen(TM) opened in June 2000
at a Madison, Wisconsin location. The Company also has plans to complete
its stadium seating retrofit program, resulting in stadium seating in
approximately 90% of its first-run screens by the end of 2001.
o Increasing the number of rooms managed by the hotel and resort division to
10,000 rooms over the next five years, either Company-owned or managed for
others. The Company anticipates that the majority of this growth will come
from management contracts for other owners. In some cases, the Company may
own a partial interest in the new properties. The Company opened an
extensive addition to the Hilton Milwaukee City Center in June 2000. In
addition, the Company currently has two Company-owned projects under
construction or in development: the Hilton Madison at Monona Terrace - a
238-room public/private endeavor with the City of Madison, Wisconsin
scheduled to open late in fiscal 2001; and the Hotel Phillips - a 240-room
public/private project in Kansas City, Missouri. The Company purchased the
Hotel Phillips in May 2000 and currently plans to close the property this
fall in order to undertake a complete restoration of this landmark
property.
o Evaluating additional growth opportunities. The Company opened its seventh
Woodfield Suites during fiscal 2000 and is evaluating additional sites and
franchising opportunities. The Company began selling units of a vacation
ownership development at the Grand Geneva Resort & Spa during fiscal 2000
and recently opened its first 18 units and a sales center, representing the
Company's entrance into the timesharing business. The Company expects to
continue growing this business in fiscal 2001 and beyond.
The actual number, mix and timing of potential future new facilities and
expansions will depend in large part on continuing favorable industry and
economic conditions, the Company's financial performance and available capital,
the competitive environment, evolving customer needs and trends, customer
acceptance of the new Baymont brand, the Company's ability to increase the
number of franchised locations at a pace faster than that achieved under the
Budgetel name and the continued availability of attractive opportunities. It is
likely that the Company's expansion goals will continue to evolve and change in
response to these and other factors with no assurance that these current goals
will be achieved.
LIMITED-SERVICE LODGING
The Company's largest division is its limited-service lodging division, which
contributed 39.2% of the Company's consolidated revenues and 39.0% of Company
consolidated operating income, excluding corporate items, during fiscal 2000.
The division's primary business consists of owning and franchising Baymont Inns
& Suites and Woodfield Suites, which respectively operate in the segments of the
lodging industry designated as "limited-service mid-price without food and
beverage" and "limited-service all-suites." The following tables set forth
revenues, operating income, operating margin, number of units and rooms data for
the limited-service lodging division for the last three fiscal years:
(in millions) 2000 1999 1998
--------------------------------------------------------------------------------
Revenues $138.2 $141.6 $144.7
Operating income 21.0 25.5 35.4*
Operating margin (% of revenues) 15.2% 18.0% 24.4%*
--------------------------------------------------------------------------------
* Excludes $3.9 million before-tax charge for Baymont name change.
<PAGE>
Number of units at year-end
2000 1999 1998
--------------------------------------------------------------------------------
Baymont Inns & Suites
Company-owned or operated 95 99 106
Franchised 76 65 50
--------------------------------------------------------------------------------
Total Baymont Inns & Suites 171 164 156
--------------------------------------------------------------------------------
Woodfield Suites
Company-owned 7 6 5
--------------------------------------------------------------------------------
Total number of units 178 170 161
--------------------------------------------------------------------------------
Available rooms at year-end
2000 1999 1998
--------------------------------------------------------------------------------
Baymont Inns & Suites
Company-owned or operated 9,877 10,380 11,326
Franchised 6,775 5,984 4,766
--------------------------------------------------------------------------------
Total Baymont Inns & Suites 16,652 16,364 16,092
--------------------------------------------------------------------------------
Woodfield Suites 889 737 610
--------------------------------------------------------------------------------
Total available rooms 17,541 17,101 16,702
--------------------------------------------------------------------------------
Total revenues in the limited-service lodging division decreased 2.4% during
fiscal 2000 due primarily to the reduction in the number of Company-owned
Baymont Inns & Suites. Total revenues decreased 2.2% during fiscal 1999
principally as a result of reduced occupancy at the Company's comparable Inns.
Average daily room rates at Baymont Inns & Suites increased 7.9% during fiscal
2000 and 3.1% during fiscal 1999 compared to the respective prior years.
Baymont's occupancy percentage decreased 2.5 and 3.9 percentage points during
fiscal 2000 and fiscal 1999, respectively. The primary factor contributing to
the decline in occupancy in both fiscal years was the significant increase in
the industry supply of limited-service lodging rooms. The increased room supply
was especially prevalent in the Midwestern and Southern portions of the country,
where the Company has a large number of properties. Occupancy was also
negatively impacted during the second half of fiscal 1999 and first half of
fiscal 2000 by the name change from Budgetel to Baymont. The result of the
average daily rate increases and occupancy declines was a 2.4% increase and a
3.7% decrease in Baymont Inns & Suites revenue per available room, or RevPAR,
for comparable Inns for fiscal 2000 and 1999, respectively. RevPAR for
comparable Woodfield Suites increased 2.2% during fiscal 2000 and 7.9% during
fiscal 1999 compared to the prior fiscal years, respectively.
During the third quarter of fiscal 1999, the Company officially changed the name
of its Budgetel Inns to Baymont Inns and Baymont Inns & Suites. As the Company
expected, the Baymont introduction did not immediately alter the trends being
experienced by the Company and others in the limited-service segment of the
lodging industry and may have actually contributed to a decline in occupancy
during the name change transition, as customers were not yet familiar with the
new name. The division's quarterly RevPAR trends for the last two fiscal years
have been as follows:
RevPAR % change
2000 1999
--------------------------------------------------------------------------------
1st Quarter -2.9% +0.9%
2nd Quarter -0.6% -0.9%
3rd Quarter +5.9% -7.3%
4th Quarter +7.2% -5.0%
--------------------------------------------------------------------------------
As the above table indicates, the percentage change in RevPAR at comparable
Baymont Inns & Suites has improved each quarter since the initial introduction
of the new brand during the third quarter of fiscal 1999. The improvement in
RevPAR is attributable primarily to increased market awareness of the Baymont
brand and the addition of lobby breakfasts at the majority of the Company-owned
Baymont locations. Inns with lobby breakfasts consistently performed
significantly better than Inns without the lobby breakfast, due to favorable
guest response to the new amenity and increased average rates implemented in
conjunction with such installations. The Company completed installation of the
lobby breakfasts at its Company-owned Inns during the third quarter of fiscal
2000. Subject to changes in economic and industry conditions, the Company
believes that RevPAR should continue to improve during fiscal 2001 as market
awareness of the Baymont brand continues to increase and the Company benefits
from a full year of the lobby breakfast program.
No Company-owned Baymont Inns & Suites were opened during fiscal 2000 or fiscal
1999, while two new Budgetel Inns were opened in fiscal 1998. One new Woodfield
Suites was opened during each of the last three fiscal years. The Company's
newly opened Woodfield Suites contributed additional revenues of $3.2 million
and nominal operating income during fiscal 2000. Newly opened properties
contributed additional revenue of $2.4 million and nominal operating income
during fiscal 1999. During the first half of fiscal 2000, the Company sold four
Baymont Inns, including one to a franchisee. Pre-tax gains of approximately $2.4
million were recognized during fiscal 2000 as a result of the sale of these
Inns. Late in fiscal 1999, the Company sold seven Baymont Inns & Suites,
including five to a new franchisee. A pre-tax gain of approximately $1.3 million
was recognized during fiscal 1999 as a result of those sales. As a result of the
sale of these 11 Inns, fiscal 2000 and fiscal 1999 revenues were negatively
impacted by $7.9 million and $800,000, respectively, compared to the prior
years. The Company has identified up to 20 additional Baymont Inns & Suites that
will be considered for sale to new and existing franchisees over the next three
years as part of the Company's strategy to emphasize growth through franchising.
In some cases, the Company may continue to manage a sold property for a new
owner under the terms of a management contract. The Company believes that this
strategy will give its franchise partners the opportunity to develop a
significant market presence and will allow the Company to utilize the sales
proceeds for other growth opportunities, including developing Baymont properties
in new markets. Although this strategy will result in reduced revenues until the
sales proceeds are reinvested, the Company expects that profitability will
increase over time as a result.
12
<PAGE>
The limited-service lodging division's operating income decreased 17.7% and
27.9% during fiscal 2000 and fiscal 1999, respectively, excluding the fiscal
1998 $3.9 million before-tax charge for Baymont name-change costs. Operating
margins, excluding the Baymont name-change costs, declined to 15.2%, compared to
18.0% and 24.4% in fiscal 1999 and 1998, respectively, due primarily to the
reductions in RevPAR during fiscal 1999 and first half of fiscal 2000, increased
payroll costs from a tight labor market, combined with increased costs of
additional guest amenities and marketing costs associated with the re-branding
effort. In addition, administrative costs have increased due to recent
investments in information technology and personnel, including sales staff,
incurred in association with the Baymont re-branding. Partially offsetting the
reduced operating income from Baymont Inns & Suites operations were improved
franchise revenues and increased operating income from the division's Woodfield
Suites properties. Overall limited-service lodging division operating margins
increased slightly during the second half of fiscal 2000 compared to the same
period during the prior year and the Company currently expects margins to
continue to stabilize and improve during fiscal 2001 if economic and industry
conditions do not worsen.
THEATRES
The Company's oldest and second largest division is its theatre division. The
theatre division contributed 34.7% of the Company's consolidated revenues and
40.9% of its consolidated operating income, excluding corporate items, during
fiscal 2000. The theatre division operates motion picture theatres in Wisconsin,
Illinois, Ohio and Minnesota, and a family entertainment center in Wisconsin.
The following tables set forth revenues, operating income, operating margin,
screens and theatres for the last three fiscal years:
(in millions) 2000 1999 1998
--------------------------------------------------------------------------------
Revenues $122.3 $111.2 $91.8
Operating income 22.0 20.4 19.7
Operating margin (% of revenues) 18.0% 18.3% 21.4%
--------------------------------------------------------------------------------
Number of screens and
locations at year-end
2000 1999 1998
--------------------------------------------------------------------------------
Theatre screens 470 428 361
Theatre locations 50 48 46
Average screens per location 9.4 8.9 7.8
--------------------------------------------------------------------------------
Total revenues in the theatre division increased 9.9% and 21.2% during fiscal
years 2000 and 1999, respectively, principally as a result of adding additional
screens. Consistent with the Company's long-term strategic plan to focus on
operating large multi-screen theatres, the Company added 42 new screens during
fiscal 2000, including a new 16-screen ultraplex in Oakdale, Minnesota. In
addition, the Company added 19 screens to four existing theatres during fiscal
2000 and added the Company's second large screen IMAX(R) 2D/3D theatre at its
Addison, Illinois location.
The Company also purchased a six-screen theatre during fiscal 2000 in Shakopee,
Minnesota. As of May 25, 2000, the Company operated 445 first-run screens and 25
budget screens. Compared to first-run theatres, budget theatres generally have
lower box office revenues and associated film costs, but higher concession sales
as a percentage of box office revenue.
The Company added 73 new screens during fiscal 1999, including a new 17-screen
ultraplex in suburban Columbus, Ohio. This ultraplex represented the Company's
second theatre in the Columbus market and included the Company's first IMAX(R)
theatre. The Company also purchased three theatres during fiscal 1999 - a
10-screen theatre in Milwaukee; a 14-screen theatre in Elgin, Illinois; and a
10-screen theatre in Wausau, Wisconsin. In addition, the Company added 23
screens to seven existing theatres during fiscal 1999 and converted two screens
at a suburban Milwaukee theatre into its first UltraScreen(TM) - a 75-foot wide,
32-foot high screen nearly three times the size of traditional theatre screens.
The new screens added during fiscal 2000 and fiscal 1999 generated additional
revenues of $13.0 million and $21.9 million, respectively, compared to the
previous years.
Two theatres with a total of six screens were closed during fiscal 1999. These
closed theatres had minimal impact on operations in fiscal 1999.
Revenues for the theatre business and the motion picture industry in general are
heavily dependent on the general audience appeal of available films, together
with studio marketing, advertising and support campaigns, factors over which the
Company has no control. This was particularly evident during the last two fiscal
years. Theatre division revenues were up 27.0% over the prior year at the end of
the first quarter of fiscal 2000, due to the strong summer box office
performance of films such as Star Wars I: The Phantom Menace, The Sixth Sense,
Austin Powers 2: The Spy Who Shagged Me, Runaway Bride, Tarzan and Big Daddy.
With the exception of the films Toy Story 2 and The Green Mile, however, there
was a lack of quality film product during the last three quarters of fiscal
2000, resulting in an increase in total theatre revenues of only 2.6% during the
last three quarters of fiscal 2000 compared to the same period during the prior
year. Similarly, theatre division revenues during fiscal 1999 were up 36% over
the prior year at the end of the second quarter of fiscal 1999, but the lack of
quality and quantity of film product during the second half of fiscal 1999
eliminated the majority of the division's earlier increases. The highest
grossing films during fiscal 1999 included Saving Private Ryan, There's
Something About Mary, Armageddon, Star Wars I: The Phantom Menace, A Bug's Life,
Waterboy, Patch Adams and The Matrix. Comparisons of fiscal 1999 to fiscal 1998
results were also greatly affected by the record-setting box office performance
of the film Titanic during fiscal 1998. Each of the fiscal 2000 films identified
produced box office receipts in excess of $1.7 million for the theatre division
during fiscal 2000. Each of the fiscal 1999 films identified produced box office
receipts in excess of $1.5 million for the theatre division during fiscal 1999.
<PAGE>
The Company played 172, 153 and 162 films at its theatres during fiscal years
2000, 1999 and 1998, respectively. Included in the total films played were 10
IMAX(R) films during fiscal 2000 and 4 IMAX(R) films during fiscal 1999.
Total box office receipts during fiscal 2000 were $81.6 million, an increase of
$7.6 million, or 10.3%, from $74.0 million during fiscal 1999. Fiscal 1999 box
office receipts increased $14.0 million, or 23.4%, compared to fiscal 1998.
These increases were attributable to 3.6% and 21.8% increases in attendance
during fiscal years 2000 and 1999, respectively. The increases in attendance
were due to the increase in new screens each year. Attendance at the Company's
comparable locations decreased 8.4% during fiscal 2000 and 4.1% during fiscal
1999, compared to the previous year. Attendance during both fiscal years was
negatively impacted by additional theatre screens in several of the Company's
markets and the lack of quality and quantity of film product during significant
portions of the year. Attendance during fiscal 1999 was also negatively impacted
by a major winter storm on New Year's weekend during what is traditionally the
largest theatre attendance week of the year. The Company estimates that it lost
approximately $2 million in revenues due to the storm.
The theatre division's average ticket price increased 6.5% and 1.3% during
fiscal 2000 and fiscal 1999, respectively, compared to the prior year. Ticket
prices were increased during fiscal 2000 in order to reflect the significant
investments in stadium seating and digital sound that have been made in the
majority of the division's theatres. First-run theatre average ticket prices
increased 5.6% during fiscal 2000 and 2.2% during fiscal 1999, compared to the
respective prior years.
Concession revenues during fiscal 2000 were $36.5 million, an increase of $3.1
million, or 9.2%, from $33.4 million during fiscal 1999. Fiscal 1999 concession
revenues increased $6.4 million, or 23.9%, from fiscal 1998 concession revenues
of $27.0 million. Concession revenues increased due to increased theatre
attendance from the Company's added screens and the 5.6% and 1.9% increase in
average concession sales per person during fiscal years 2000 and 1999,
respectively. Average concession sales per person are impacted by changes in
concession pricing, types of films played and changes in the Company's
geographic mix of theatre locations.
The theatre division's operating income increased 7.9% during fiscal 2000 and
3.7% during fiscal 1999, compared to the respective prior year's results. The
division's operating margin decreased to 18.0% during fiscal 2000, compared to
18.3% and 21.4% in fiscal 1999 and 1998, respectively. Fiscal 2000 and fiscal
1999 operating margins were impacted by the disappointing film product and
increased occupancy expenses associated with recent capital investments in the
division. The Company believes, however, that its long-term competitive position
has been strengthened as a result of these capital investments. Fiscal 2000 was
further negatively impacted by high film costs associated with the fiscal year's
highest grossing film, Star Wars I: The Phantom Menace and an overall
disappointing performance by the Company's two IMAX(R) theatre screens. Fiscal
2000 and fiscal 1999 operating income was reduced by pre-opening expenses for
new screens of over $400,000 and $700,000, respectively.
HOTELS AND RESORTS
The Company's hotels and resorts division contributed 25.5% of the Company's
consolidated revenues and 20.1% of the Company's consolidated operating income,
excluding corporate items, during fiscal 2000. The hotel and resort division
owns and operates two full-service hotels in downtown Milwaukee, Wisconsin, a
full-facility destination resort in Lake Geneva, Wisconsin, a boutique luxury
resort in Indian Wells, California and a full-service hotel in downtown Kansas
City, Missouri. In addition, the Company managed three hotels and a resort
during the majority of the fiscal years presented. The following table sets
forth revenues, operating income, operating margin and rooms data for the hotels
and resorts division for the last three fiscal years:
(in millions) 2000 1999 1998
--------------------------------------------------------------------------------
Revenues $89.9 $81.2 $70.3
Operating income 10.8 8.1 7.9
Operating margin (% of revenues) 12.0% 10.0% 11.2%
--------------------------------------------------------------------------------
Available rooms at year-end
2000 1999 1998
--------------------------------------------------------------------------------
Company-owned 1,683 1,388 1,388
Management contracts 640 879 879
--------------------------------------------------------------------------------
Total rooms managed 2,323 2,267 2,267
--------------------------------------------------------------------------------
Total revenues in the hotels and resorts division increased 10.7% and 15.5%
during fiscal 2000 and fiscal 1999, respectively, compared to the prior year.
The division's operating income increased 33.4% during fiscal 2000 and 2.9%
during fiscal 1999, compared to the respective previous years. Division revenues
increased during fiscal 2000 due to increased RevPAR at the Company-owned
properties and the first year of sales of vacation ownership units at the Grand
Geneva Resort & Spa in Lake Geneva, Wisconsin. Improved performance at the
Company's two resorts, the Grand Geneva Resort & Spa and the Miramonte Resort in
Indian Wells, California, contributed to the majority of the increased operating
income during fiscal 2000. Increased RevPAR at the Company-owned properties and
increased management fees, due to improved results at the Company's managed
properties, contributed to the improved operating results during fiscal 1999.
Operating margin declined in fiscal 1999 due to the impact of the first full
year of operation at the Miramonte Resort in Indian Wells, California.
Occupancy and average daily rate increases at the division's comparable owned
properties, in particular the Miramonte Resort, contributed to the increase in
revenues and operating income in both fiscal 2000 and fiscal 1999. As a result
of the
14
<PAGE>
occupancy and average daily rate increases, the division's total RevPAR for
comparable properties increased 3.2% and 10.5% during fiscal 2000 and 1999,
respectively, compared to the prior year. Prior to fiscal 2000, the hotels and
resorts division had experienced double-digit increases in RevPAR for three
consecutive years. This was primarily because, unlike the limited-service
segment of the lodging industry, strong consumer demand in conjunction with a
relatively small increase in industry room supply has resulted in strong
operating results for owners and operators of upper-end hotels and resorts.
During fiscal 2000, there were some minor increases in room supply in the
Company's markets and average daily rate increases slowed, resulting in an
overall RevPAR increase that more closely reflected annual inflation trends. The
Company currently believes that its RevPAR for comparable properties in the
hotel and resort division will continue to increase in fiscal 2001, but at a
rate more reflective of fiscal 2000 results. As a result, operating margins at
comparable properties are not expected to increase significantly during fiscal
2001.
The division acquired a resort in Indian Wells, California in fiscal 1997 and
closed the facility for an extensive renovation. The Company reopened the
property in January 1998 under the name Miramonte Resort. Fiscal 1999 and 1998
results were negatively impacted by approximately $2.0 million and $1.2 million,
respectively, of pre-opening costs and start-up operating losses at the
Miramonte. All pre-opening expenses were fully amortized during fiscal 1999,
which contributed to more favorable comparisons in operating income during
fiscal 2000. During fiscal 1998, the Company entered into a management contract
to operate the Mission Point Resort on Mackinac Island, Michigan. The Mission
Point Resort was a seasonal property and did not materially impact the Company's
fiscal 1998 operating results. The Company discontinued management of the
Mission Point Resort during the third quarter of fiscal 2000. The impact on
future operating results will not be material.
The Company began construction during fiscal 1999 on an extensive addition to
the Hilton Milwaukee City Center. The rooms portion of the addition was opened
during the first quarter of fiscal 2001, making it the largest hotel in
Wisconsin with 730 rooms. The addition will also include a family water park fun
center, scheduled to open in September 2000, and a skywalk to Milwaukee's new
Midwest Express Convention Center. Construction also commenced late in fiscal
1999 on the division's new Hilton Madison at Monona Terrace, a 238-room hotel
connected by skywalk to the Monona Terrace Convention Center in Madison,
Wisconsin and scheduled to open late in fiscal 2001. The Company expects that
its pre-opening expenses during fiscal 2001 related to the opening of this new
hotel will have an adverse impact on fiscal 2001 division operating results.
Late during fiscal 2000, the Company purchased the 240-room Hotel Phillips, a
downtown Kansas City, Missouri landmark property. The Company plans to close the
property during the fall of 2000 and undertake a complete restoration of the
hotel. The Company expects interim operating losses and pre-opening expenses
during fiscal 2001 to have an adverse impact on fiscal 2001 operating results.
The Company began sales and construction of a vacation ownership development at
the Grand Geneva Resort & Spa during fiscal 1999, representing the Company's
entrance into the timesharing business. The first 18 units, a sales center and a
model unit opened in June 2000. During the first three quarters of fiscal 2000,
the Company accounted for all sales of vacation intervals using the deposit
method, deferring all revenue because certain minimum sales levels had not been
reached. During the fourth quarter of fiscal 2000, minimum sales levels were met
and revenues were recognized on the percentage-of-completion method, as
construction was not substantially completed by May 25, 2000. Under this
methodology, the vacation ownership development contributed revenues of $3.9
million during fiscal 2000 and negatively impacted operating income in fiscal
2000 by approximately $500,000 due to start-up selling costs and the fact that
initial sales efforts were limited while the Company obtained the necessary
approvals to sell to Illinois residents. The Company expects the vacation
ownership development to add to division operating income in fiscal 2001.
DISCONTINUED OPERATIONS
In September 1999, the Company announced its intention to sell its 30 KFC and
KFC/Taco Bell 2-in-1 restaurants. The Company decided to dispose of its
restaurant business in order to concentrate on its core lodging and theatre
operations. In fiscal years 1995 and 1996, respectively, the Company had
divested its family restaurant business and its Applebee's restaurants. An
agreement entered into by the Company in September 1999 to sell the KFC
restaurants was subsequently terminated during the second quarter. The Company
is currently actively pursuing the sale of the KFC assets, which consist
primarily of land, buildings and equipment. If a sale is consummated, the
Company anticipates that a significant gain from the sale of the assets would be
recognized. Fiscal 2000 results of the restaurant operations have been accounted
for as discontinued operations in the Company's consolidated financial
statements. Rental revenues and operating income resulting from the leasing of
several Company-owned restaurants to restaurant operators, which had previously
been included in restaurant segment results, is now included in corporate items.
Prior year financial results have been restated to conform with the current year
presentation.
The Company has non-exclusive franchise rights to operate KFC restaurants in the
Milwaukee metropolitan area and in northeast Wisconsin. The Company operated 27
KFC restaurants and 3 KFC/Taco Bell 2-in-1 restaurants at the end of fiscal 2000
and fiscal 1999 and 30 KFC restaurants and 1 KFC/Taco Bell 2-in-1 restaurant at
the end of fiscal 1998. The following table sets forth revenues, income from
discontinued operations, net of applicable income taxes, and after-tax operating
margin for the discontinued operations for the last three fiscal years.
<PAGE>
(in millions) 2000 1999 1998
--------------------------------------------------------------------------------
Revenues $24.4 $26.9 $26.1
Income from discontinued operations,
net of applicable income taxes 1.4 2.0 2.1
After-tax operating margin(% of revenues) 5.7% 7.4% 8.0%
--------------------------------------------------------------------------------
Total revenues from discontinued operations decreased 9.3% during fiscal 2000
and increased 3.3% during fiscal 1999, compared to the respective previous
years. Included in fiscal 1999 revenues was approximately $500,000 of revenues
from a Milwaukee summer festival beer tent previously operated by the Company's
restaurant division. The Company discontinued operation of this tent during
fiscal 2000. Excluding the revenues from the beer tent and $300,000 of revenues
from a KFC restaurant that was sold during fiscal 1999, same store KFC revenues
decreased $1.7 million, or 6.3%, during fiscal 2000 compared to fiscal 1999 KFC
same store revenues of $26.1 million. The decrease in revenues during fiscal
2000 was due primarily to a series of national advertising lunch promotions for
sandwiches that were not as effective as anticipated, the temporary dissolution
of a local advertising co-op due to a dispute among its members, discontinuance
of delivery at several locations and an ineffective national Star Wars
promotion. The co-op has since been reinstated and recent national advertising
is once again focusing on KFC's core chicken-on- the-bone products and specialty
chicken products. During fiscal 2000, same store KFC guest counts decreased 2.5%
and the average guest check decreased 4.4% due primarily to the sandwich
promotions, which emphasized lower priced items yet did not result in
incremental increases in customer counts. Excluding the revenues from the sold
restaurant, same store KFC restaurant revenues increased 5.0% during fiscal
1999. Fiscal 1999 same store KFC guest counts increased 1.9% and average guest
checks increased due to increased snack and lunch-time traffic, the consumer
appeal of the KFC/Taco Bell 2-in-1 concept and the introduction of several new
franchisor products.
The Company's income from discontinued operations, net of applicable income
taxes, decreased 30.2% and 4.9% during fiscal years 2000 and 1999, respectively,
compared to the previous year. Fiscal 2000 income from discontinued operations
decreased due to the reduction in sales, higher chicken prices and higher food
costs associated with selling sandwiches. Although operating income from the
Company's KFC restaurants increased during fiscal 1999, the Company's reported
income from discontinued operations decreased due primarily to a one-time
insurance adjustment from a prior year claim that was settled during fiscal
1999. The Company's comparable KFC restaurants experienced a 2.4% increase in
aggregate operating income during fiscal 1999. Increased food costs resulting
from higher chicken prices limited the increase in operating income in fiscal
1999. The Company converted two KFC restaurants into KFC/Taco Bell 2-in-1 units
and sold one KFC restaurant during fiscal 1999 and converted one KFC restaurant
into a KFC/Taco Bell 2-in-1 unit during fiscal 1998.
Financial Condition
The Company's lodging and movie theatre businesses each generate significant and
consistent daily amounts of cash because each segment's revenue is derived
predominantly from consumer cash purchases. The Company believes that these
consistent and predictable cash sources, together with the availability to the
Company of $45 million of unused credit lines at fiscal 2000 year end, should be
adequate to support the ongoing operational liquidity needs of the Company's
businesses. The Company increased its credit lines during fiscal 1999, replacing
several separate lines totaling $90 million with a new five-year $125 million
revolving credit agreement and a separate $5 million line.
Net cash provided by operating activities increased by $7.4 million, or 12.3%,
to $67.3 million in fiscal 2000, compared to $59.9 million in fiscal 1999. The
increase was primarily the result of timing differences in payments of accounts
payable and taxes other than income taxes, net of receipts of accounts and notes
receivable. Development costs incurred during fiscal 2000 associated with the
Company's vacation ownership business reduced the net increase in cash provided
by operating activities. Depreciation and amortization (a non-cash expense)
increased as a result of the Company's increased capital spending program.
Net cash used in investing activities during fiscal 2000 decreased by $22.6
million, or 21.2%, to $84.0 million. The reduction in net cash used in investing
activities was primarily the result of reduced capital expenditures and
increased net proceeds from disposals of property, equipment and other assets.
Total capital expenditures (including normal continuing capital maintenance
projects and business acquisitions) of $99.5 million and $111.8 million were
incurred in fiscal 2000 and 1999, respectively. Capital expenditures and
business acquisitions during fiscal 2000 included $21.2 million incurred on
limited-service lodging division projects, $39.6 million on theatre division
projects and $33.6 million on hotel and resort division projects. During fiscal
1999, $29.7 million was incurred on limited-service lodging division projects,
$64.5 million on theatre division projects and $14.1 million on hotel and resort
division projects. Total capital expenditures in fiscal 2001 are currently not
expected to exceed fiscal 2000 expenditures and are expected to be funded by
cash generated from operations, net proceeds from the disposal of selected
assets and additional debt, including, but not limited to, additional
institutional debt from the Company's private placement program and borrowings
under the Company's revolving credit facility. Fiscal 2001 capital expenditures
on theatre division projects are anticipated to be significantly less than the
prior year and fiscal 2001 capital expenditures on hotels and resorts division
projects may increase. The Company's ability to attract potential partners to
assist in the acquisition and/or development of hotel and resort properties will
impact total capital expenditures during fiscal 2001 for the hotel and resort
division.
16
<PAGE>
Cash proceeds from the disposals of property, equipment and other assets totaled
$15.9 million and $10.5 million during fiscal 2000 and 1999, respectively. The
cash proceeds received during fiscal 2000 were primarily the result of the sale
of four Baymont Inns & Suites, five former restaurant locations and several
parcels of land. The cash proceeds received during fiscal 1999 were primarily
the result of the sale of seven Baymont Inns & Suites, one KFC restaurant and
one bowling alley. During fiscal 1999, the Company expended $3.2 million for the
purchase of interests in several joint ventures in the limited-service lodging
division.
Principally as a result of borrowing a portion of the Company's fiscal 2000
funding used in facility expansions and renovations, the Company's total debt
increased to $302.6 million at the close of fiscal 2000, compared to $274.7
million at the end of fiscal 1999. Net cash provided by financing activities in
fiscal 2000 totaled $16.1 million, compared to $45.5 million in fiscal 1999.
During fiscal 2000, the Company received $38.5 million of net proceeds from the
issuance of notes payable and long-term debt, compared to $76.9 million during
fiscal 1999. Included in the fiscal 1999 proceeds was $40 million in principal
of senior unsecured long-term notes privately placed with two institutional
lenders. The Company has the ability to issue up to $45 million of additional
senior notes under its private placement program. The Company used a portion of
the proceeds from its issued senior notes during fiscal 1999 to pay off existing
short-term debt, resulting in total principal payments on notes payable and
long-term debt of $18.9 million in fiscal 1999 compared to $10.9 million in
fiscal 2000. The Company's debt-capitalization ratio was 0.48 at May 25, 2000,
compared to 0.47 at the prior fiscal year end.
During fiscal 2000, the Company repurchased 528,000 of its common shares for
approximately $5.6 million in the open market compared to 490,000 of common
share repurchases for approximately $7.2 million during fiscal 1999. As of July
20, 2000, the Company had repurchased an additional 214,000 of its common shares
during the first quarter of fiscal 2001. The Company also announced in the first
quarter of fiscal 2001 that its Board of Directors had authorized the repurchase
of up to 2 million additional shares of the Company's outstanding common stock.
If a sale of the restaurant business is consummated, the Company will consider
using a portion of the anticipated proceeds from the sale for its stock
repurchase program. Any such repurchases are expected to be executed on the open
market or in privately negotiated transactions depending upon a number of
factors, including prevailing market conditions.
Quantitative and Qualitative Disclosures
About Market Risk
The Company is exposed to market risk related to changes in interest rates. The
Company manages its exposure to this market risk through the monitoring of
available financing alternatives.
Variable interest rate risk: The Company's earnings are affected by changes in
short-term interest rates as a result of its borrowings under its revolving
credit agreements, floating-rate mortgages/industrial development revenue bonds
and unsecured term notes not subject to interest rate swap agreements. Based
upon the Company's variable rate debt for such borrowings at May 25, 2000, a 100
basis point increase in market rates would increase interest expense and
decrease earnings before income taxes by approximately $500,000. This
sensitivity analysis does not consider any actions management might take to
mitigate its exposure in the event of a change of such magnitude. The Company's
commercial paper outstanding at May 25, 2000 has been excluded from the above
sensitivity analysis. Although commercial paper is classified as long-term debt
based upon the Company's ability and intent to replace it with long-term
borrowings, all outstanding commercial paper matures within three months of
year-end. As a result, there would be no expected material change in interest
expense or fair market value following a reasonably expected change in interest
rates.
Fixed interest rate risk: The fair value of long-term fixed interest rate debt
may also be subject to interest rate risk. Generally, the fair market value of
fixed interest rate debt will increase as interest rates fall and decrease as
interest rates rise. Based upon the respective rates and prepayment provisions
of the Company's fixed interest rate senior notes and mortgages at May 25, 2000,
the carrying amounts of such debt approximates their fair value.
Interest rate swaps: The Company enters into interest rate swap agreements to
manage its exposure to interest rate changes. The swaps involve the exchange of
fixed and variable interest rate payments without exchanging the notional
principal amount. Payments or receipts on the agreements are recorded as
adjustments to interest expense. At May 25, 2000, the Company had interest rate
swap agreements of $1.5 million, expiring on October 2, 2000, and $7.5 million,
expiring August 6, 2001. The Company pays a defined fixed rate while receiving a
defined variable rate based on LIBOR. Together, these swap agreements
effectively convert $9.0 million of the Company's variable rate unsecured term
notes to a fixed rate. The additional net interest expense recorded in fiscal
2000 and 1999 as a result of the swap agreements was not material. The fair
value of these interest rate swap agreements represents the estimated receipts
or payments that would be made to terminate the agreements. At May 25, 2000, the
fair market value of the Company's swap agreements, as determined by the lender,
is an asset of approximately $69,000.
<PAGE>
<TABLE>
consolidated statements of earnings
<CAPTION>
Year ended
(in thousands, except per share data) May 25, 2000 May 27, 1999 May 28, 1998
--------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Rooms and telephone $170,597 $173,305 $171,668
Theatre admissions 81,637 74,011 59,969
Theatre concessions 36,482 33,413 26,968
Food and beverage 26,614 25,075 22,314
Other income 36,788 30,195 27,864
--------------------------------------------------------------------------------------------------------------------------
Total revenues 352,118 335,999 308,783
Costs and expenses:
Rooms and telephone 71,238 70,117 66,644
Theatre operations 63,999 58,150 46,231
Theatre concessions 8,887 8,419 7,321
Food and beverage 20,363 19,446 17,652
Advertising and marketing 25,969 24,535 21,301
Administrative 39,654 37,134 30,403
Depreciation and amortization 40,458 37,205 31,865
Rent (Note 10) 2,954 2,853 2,340
Property taxes 14,066 13,498 11,948
Pre-opening expenses 1,004 1,769 2,041
Other operating expenses 15,438 14,368 13,012
Baymont name change (Note 3) - - 3,900
--------------------------------------------------------------------------------------------------------------------------
Total costs and expenses 304,030 287,494 254,658
--------------------------------------------------------------------------------------------------------------------------
Operating income 48,088 48,505 54,125
Other income (expense):
Investment income 1,453 783 834
Interest expense (17,975) (16,846) (12,612)
Gain on disposition of property and equipment 4,266 2,754 1,537
--------------------------------------------------------------------------------------------------------------------------
(12,256) (13,309) (10,241)
--------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before income taxes 35,832 35,196 43,884
Income taxes (Note 9) 14,594 14,238 17,541
--------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 21,238 20,958 26,343
Discontinued operations (Note 4):
Income from discontinued operations, net of income
taxes of $951, $1,346 and $1,395, respectively 1,384 1,982 2,095
Gain on disposal of discontinued operations, net of income
taxes of $139 and $4 in 1999 and 1998, respectively - 204 6
--------------------------------------------------------------------------------------------------------------------------
Net earnings $ 22,622 $ 23,144 $ 28,444
--------------------------------------------------------------------------------------------------------------------------
Earnings per common share - basic:
Continuing operations $ .71 $ .70 $ .88
Discontinued operations .05 .07 .07
--------------------------------------------------------------------------------------------------------------------------
Net earnings per share - basic $ .76 $ .77 $ .95
--------------------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted:
Continuing operations $ .71 $ .70 $ .87
Discontinued operations .05 .07 .07
--------------------------------------------------------------------------------------------------------------------------
Net earnings per share - diluted $ .76 $ .77 $ .94
--------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 29,796 30,005 30,046
Diluted 29,828 30,105 30,293
--------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
18
<PAGE>
consolidated balance sheets
<TABLE>
(in thousands, except share and per share data) May 25, 2000 May 27, 1999
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 2,935 $ 3,499
Accounts and notes receivable (Note 5) 11,908 11,059
Receivables from joint ventures (Note 11) 2,468 1,739
Refundable income taxes 3,020 6,041
Real estate and development costs 3,917 -
Other current assets 4,147 4,400
--------------------------------------------------------------------------------------------------------------------------
Total current assets 28,395 26,738
Property and equipment, net (Note 5) 658,317 611,213
Other assets:
Investments in joint ventures (Notes 10 and 11) 2,025 2,045
Other (Note 5) 35,039 36,120
--------------------------------------------------------------------------------------------------------------------------
Total other assets 37,064 38,165
--------------------------------------------------------------------------------------------------------------------------
Total assets $723,776 $676,116
--------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 11) $ 4,228 $ 4,479
Accounts payable 24,463 22,958
Taxes other than income taxes 11,219 9,575
Accrued compensation 4,307 2,617
Other accrued liabilities 10,026 9,287
Current maturities of long-term debt (Note 6) 16,228 10,470
--------------------------------------------------------------------------------------------------------------------------
Total current liabilities 70,471 59,386
Long-term debt (Note 6) 286,344 264,270
Deferred income taxes (Note 9) 32,602 31,405
Deferred compensation and other (Note 8) 9,112 7,481
Commitments, license rights and contingencies (Note 10)
Shareholders' equity (Note 7):
Preferred Stock, $1 par; authorized 1,000,000 shares; none issued
Common Stock:
Common Stock, $1 par; authorized 50,000,000 shares;
issued 19,072,617 shares in 2000 and 18,680,508 shares in 1999 19,073 18,681
Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and
outstanding 12,116,896 shares in 2000 and 12,509,005 shares in 1999 12,117 12,509
Capital in excess of par 40,774 40,685
Retained earnings 268,808 252,498
Accumulated other comprehensive loss (257) (214)
--------------------------------------------------------------------------------------------------------------------------
340,515 324,159
Less cost of Common Stock in treasury (1,708,247 shares in 2000 and
1,280,676 shares in 1999) (15,268) (10,585)
--------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 325,247 313,574
--------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $723,776 $676,116
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE>
consolidated statements of shareholders' equity
<TABLE>
<CAPTION>
Three years ended May 25, 2000
Accumulated
Class B Capital Other
Common Common in Excess Retained Comprehensive Treasury
(in thousands, except per share data) Stock Stock of Par Earnings Loss Stock Total
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT MAY 29, 1997 $17,518 $13,062 $29,277 $220,860 $ - $ (3,424) $277,293
Cash dividends:
$.20 per share Class B Common Stock - - - (2,522) - - (2,522)
$.22 per share Common Stock - - - (3,756) - - (3,756)
Exercise of stock options - - 339 - - 1,107 1,446
Purchase of treasury stock - - - - - (2,504) (2,504)
Savings and profit-sharing contribution - - 464 - - 118 582
Reissuance of treasury stock - - 266 - - 71 337
Conversions of Class B Common Stock 384 (384) - - - - -
Guest House Inn, Inc. acquisition (Note 2) 610 - 9,919 (7,318) - - 3,211
Net earnings - - - 28,444 - - 28,444
----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 28, 1998 18,512 12,678 40,265 235,708 - (4,632) 302,531
Cash dividends:
$.20 per share Class B Common Stock - - - (2,524) - - (2,524)
$.22 per share Common Stock - - - (3,830) - - (3,830)
Exercise of stock options - - 54 - - 592 646
Purchase of treasury stock - - - - - (7,169) (7,169)
Savings and profit-sharing contribution - - 208 - - 438 646
Reissuance of treasury stock - - 158 - - 186 344
Conversions of Class B Common Stock 169 (169) - - - - - -
Components of comprehensive income (loss):
Net earnings - - - 23,144 - - 23,144
Change in unrealized loss on available
for sale investments, net of tax - - - - (214) - (214)
------
Total comprehensive income 22,930
----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 27, 1999 18,681 12,509 40,685 252,498 (214) (10,585) 313,574
Cash dividends:
$.20 per share Class B Common Stock - - - (2,464) - - (2,464)
$.22 per share Common Stock - - - (3,848) - - (3,848)
Exercise of stock options - - 2 - - 107 109
Purchase of treasury stock - - - - - (5,565) (5,565)
Savings and profit-sharing contribution - - 6 - - 544 550
Reissuance of treasury stock - - 81 - - 231 312
Conversions of Class B Common Stock 392 (392) - - - - -
Components of comprehensive income (loss):
Net earnings - - - 22,622 - - 22,622
Change in unrealized loss on available
for sale investments, net of tax - - - - (43) - (43)
------
Total comprehensive income 22,579
----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MAY 25, 2000 $19,073 $12,117 $40,774 $268,808 $(257) $(15,268) $325,247
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
20
<PAGE>
consolidated statements of cash flows
<TABLE>
<CAPTION>
Years ended
(in thousands) May 25, 2000 May 27, 1999 May 28, 1998
--------------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net earnings $ 22,622 $ 23,144 $ 28,444
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Earnings) losses on investments in joint ventures,
net of distributions 20 221 (57)
Gain on disposition of property and equipment (4,266) (3,096) (1,547)
Impairment of property and equipment - - 1,521
Depreciation and amortization 41,485 38,258 32,904
Deferred income taxes 1,197 4,926 4,054
Deferred compensation and other 1,631 1,712 400
Contribution of Company stock to savings and profit-sharing plan 550 646 582
Changes in operating assets and liabilities:
Accounts and notes receivable (849) 2,489 (8,763)
Real estate and development costs (3,917) - -
Other current assets 253 (627) (182)
Accounts payable 1,505 (3,427) 16,094
Income taxes 3,021 (1,656) (4,437)
Taxes other than income taxes 1,644 (1,829) 2,107
Accrued compensation 1,690 (26) 1,373
Other accrued liabilities 739 (785) (814)
--------------------------------------------------------------------------------------------------------------------------
Total adjustments 44,703 36,806 43,235
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 67,325 59,950 71,679
Investing Activities
Capital expenditures, including business acquisitions (99,492) (111,843) (115,880)
Net proceeds from disposals of property, equipment and other assets 15,905 10,509 6,093
Purchase of interest in joint ventures - (3,178) -
(Increase) decrease in other assets 302 (1,688) 1,280
Cash acquired pursuant to Guest House Inn, Inc. acquisition - - 2,589
Cash advanced to joint ventures (729) (451) (222)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (84,014) (106,651) (106,140)
Financing Activities
Debt transactions:
Net proceeds from issuance of notes payable and long-term debt 38,513 76,944 54,665
Principal payments on notes payable and long-term debt (10,932) (18,889) (16,518)
Equity transactions:
Treasury stock transactions, except for stock options (5,253) (6,825) (2,167)
Exercise of stock options 109 646 1,446
Dividends paid (6,312) (6,354) (6,278)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,125 45,522 31,148
--------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (564) (1,179) (3,313)
Cash and cash equivalents at beginning of year 3,499 4,678 7,991
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,935 $ 3,499 $ 4,678
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE>
notes to consolidated financial statements
1. Description of Business and Summary of
Significant Accounting Policies
Description of Business - The Marcus Corporation and its subsidiaries (the
Company) operate principally in three business segments:
Limited-Service Lodging: Operates and franchises lodging facilities, under
the names Baymont Inns, Baymont Inns & Suites and Woodfield Suites,
primarily located in the eastern half of the United States.
Theatres: Operates multi-screen motion picture theatres in Wisconsin,
Illinois, Ohio and Minnesota, and a family entertainment center in
Wisconsin.
Hotels/Resorts: Owns and operates full service hotels and resorts in
Wisconsin, Missouri and California, manages full service hotels in
Wisconsin, Minnesota and California and operates a vacation ownership
development in Wisconsin.
In addition, the Company operates KFC restaurants under a license agreement for
certain areas in the state of Wisconsin. The Company has classified the
restaurant operations as discontinued (See Note 4).
Principles of Consolidation - The consolidated financial statements include the
accounts of The Marcus Corporation and all of its subsidiaries. Investments in
50%-owned affiliates are accounted for on the equity method. All intercompany
accounts and transactions have been eliminated in consolidation.
Fiscal Year - The Company reports on a 52/53-week year ending the last Thursday
of May. The discontinued Restaurant segment had a 53-week year in fiscal 1998.
All other segments had 52-week years in each period.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents - The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash equivalents. Cash
equivalents are carried at cost, which approximates market.
Long-Lived Assets - The Company periodically considers whether indicators of
impairment of long-lived assets held for use (including goodwill) are present.
If such indicators are present, the Company determines whether the sum of the
estimated undiscounted future cash flows attributable to such assets is less
than their carrying amounts. The Company recognizes any impairment losses based
on the excess of the carrying amount of the assets over their value. The Company
evaluated the ongoing value of its property and equipment and other long-lived
assets as of May 25, 2000, May 27, 1999 and May 28, 1998, and determined that
there was no significant impact on the Company's results of operations, other
than the Baymont name change costs described in Note 3.
Capitalization of Interest - The Company capitalizes interest during
construction periods by adding such interest to the cost of property and
equipment. Interest of approximately $2,161,000, $761,000 and $1,601,000 was
capitalized in fiscal 2000, 1999 and 1998, respectively.
Investments - Available for sale securities are stated at fair market value,
with unrealized gains and losses reported as a component of shareholders'
equity. The cost of securities sold is based upon the specific identification
method. Realized gains and losses and declines in value judged to be other than
temporary are included in investment income.
Revenue Recognition - The Company recognizes revenue from its rooms as earned on
the close of business each day. Revenues from theatre admissions, concessions
and food and beverage sales are recognized at the time of sale. Revenues from
advanced ticket and gift certificate sales are recorded as deferred revenue and
are recognized when tickets or gift certificates are used or expire.
The following are included in other income:
The Company has entered into franchise agreements that grant to franchisees the
right to own and operate a Baymont Inn or Baymont Inn & Suites at a particular
location for a specified term, as defined in the license agreement. An initial
franchise fee, as defined in the license agreement, is collected upon receipt of
a prospective licensee's application. A portion of the initial franchise fee is
nonrefundable and recorded as revenue by the Company upon receipt. The remainder
of the initial franchise fee is deferred until operations commence. Direct costs
relating to franchise sales are also recognized when operations commence.
Royalty and marketing fee assessments are recognized when actually earned and
are receivable from the franchisee.
Management fees for hotels and resorts under management agreements are
recognized as earned based on the terms of the agreement.
Sale of vacation intervals are recognized on an accrual basis after a binding
sales contract has been executed, a 10% minimum down payment is received, the
rescission period has expired, construction is substantially complete and
certain minimum sales levels have been reached. If all the criteria are met
except that construction is not substantially complete, revenues are recognized
on the percentage-of-completion basis. For sales that do not qualify for either
accrual or percentage-of-completion accounting, all revenue is deferred using
the deposit method. Deferred revenue is included in other accrued liabilities.
During the first three quarters of fiscal 2000, the Company accounted for all
sales using the deposit method, since certain minimum sales levels had not been
reached. During the fourth quarter of fiscal 2000, when minimum sales levels
were met, revenues have been recognized on the percentage-of-completion method.
Development costs including construction costs, interest and
22
<PAGE>
other carrying costs, which are allocated based on relative sales values, are
included as real estate and development costs in the accompanying consolidated
balance sheets.
Advertising and Marketing Costs - Deferred selling and marketing costs related
to the sale of vacation intervals under the percentage-of-completion method are
included in other current assets. The Company expenses all other advertising and
marketing costs as incurred.
Depreciation and Amortization - Depreciation and amortization of property and
equipment are provided using the straight-line method over the following
estimated useful lives:
Years
------------------------------------------------------------------------------
Land improvements 15 - 39
Buildings and improvements 25 - 39
Leasehold improvements 3 - 39
Furniture, fixtures and equipment 3 - 20
------------------------------------------------------------------------------
Pre-opening Expenses - Costs incurred prior to opening new or remodeled
facilities are expensed as incurred.
Net Earnings Per Share - The numerator for the calculation of basic and diluted
earnings per share is net earnings and the denominator is the respective
weighted average shares outstanding. The difference between basic and diluted
weighted average shares outstanding is the dilutive effect of employee stock
options.
Options to purchase 961,403 shares and 499,994 shares of common stock at prices
ranging from $12.00 to $18.13 per share and $14.94 to $18.13 per share were
outstanding at May 25, 2000 and May 27, 1999, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
Comprehensive Income - Accumulated other comprehensive loss presented in the
accompanying balance sheets consists of the accumulated net unrealized losses on
available for sale securities.
New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. The Statement
will require the Company to recognize all derivatives, including interest rate
swaps, on the balance sheet at fair value, with offset going through income or
other comprehensive income based on the nature of the hedged item. Because of
the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new Statement will have a significant effect on the
Company's financial condition or results of operations.
2. Acquisition
On October 1, 1997, the Company issued 610,173 shares of Common Stock to Guest
House Inn, Inc. (GHI) in exchange for all of the net operating assets of GHI and
issued 449,320 new shares of Class B Common Stock to GHI in exchange for the
cancellation of the existing 449,320 shares of Class B Common Stock owned by
GHI. Share data has been adjusted to reflect the three-for-two stock split (see
Note 7). GHI was owned and controlled by certain officers, directors and/or
principal controlling shareholders of the Company. Based on this common
ownership and control, for financial reporting purposes the assets acquired from
GHI were recorded at the historical book value of GHI rather than fair value.
The common shares issued to complete this transaction were recorded at their
fair value and the excess of this fair value over the historical book value of
the assets acquired was recorded as a distribution.
3. Baymont Name Change
On February 10, 1998, the Company announced the name change of its Budgetel Inns
to Baymont Inns and Baymont Inns & Suites. This change was effective in January
1999. As a result of the name change, the Company recorded a $3.9 million
pre-tax charge in fiscal 1998 for the write-off of existing signage ($1.5
million), assistance provided to franchisees ($1.4 million) and other one-time
expenses associated with the name change.
4. Discontinued Operations
In September 1999, the Company announced its intention to sell its 30 KFC and
KFC/Taco Bell 2-in-1 restaurants. The Company is currently actively pursuing a
sale of the assets, which consist primarily of land, buildings and equipment. In
accordance with the provisions of Accounting Principles Board Opinion No. 30
concerning reporting the effect of disposal of a segment of a business, the
results of operations of the Restaurant division have been classified as
discontinued in the statement of operations for fiscal 2000. Prior period
financial statements have been restated to conform to the current year
presentation. Restaurant revenues for the years ended May 25, 2000, May 27, 1999
and May 28, 1998, were $24,425,000, $26,928,000 and $26,056,000, respectively.
5. Additional Balance Sheet Information
The composition of accounts and notes receivable is as follows:
(in thousands) May 25, 2000 May 27, 1999
---------------------------------------------------------------------
Trade receivables $ 4,924 $ 5,888
Notes receivable for
interval ownership 195 -
Other notes receivables 3,238 2,176
Employee advances 12 14
Other receivables 3,539 2,981
---------------------------------------------------------------------
$11,908 $11,059
---------------------------------------------------------------------
<PAGE>
The Company also has notes receivable for interval ownership totaling $1,899,000
which are included in other long-term assets, net of a reserve for uncollectible
amounts of $217,000 as of May 25, 2000. The notes bear fixed-rate interest
between 11.0% and 15.9% over the seven-year terms of the loans. The
weighted-average rate of interest on outstanding notes receivable for interval
ownership is 14.9%. The notes are collateralized by the underlying vacation
intervals.
The composition of property and equipment, which is stated at cost, is as
follows:
(in thousands) May 25, 2000 May 27, 1999
---------------------------------------------------------------------
Land and improvements $ 96,158 $ 88,221
Buildings and improvements 514,734 481,517
Leasehold improvements 7,649 6,963
Furniture, fixtures and equipment 231,643 213,408
Construction in progress 48,152 28,620
---------------------------------------------------------------------
898,336 818,729
Less accumulated depreciation
and amortization 240,019 207,516
---------------------------------------------------------------------
$658,317 $611,213
---------------------------------------------------------------------
6. Long-Term Debt
Long-term debt is summarized as follows:
(in thousands, except payment data) May 25, 2000 May 27, 1999
---------------------------------------------------------------------
Mortgage notes due to 2009 $ 4,836 $ 5,768
Industrial Development Revenue
Bonds due to 2006 5,748 6,250
Senior notes due May 31, 2005,
with monthly principal and interest
payments of $362,346, bearing
interest at 10.22% 17,183 19,637
Senior notes 155,000 155,000
Unsecured term notes 34,967 40,621
Commercial paper 59,838 37,464
Revolving credit agreements 25,000 10,000
---------------------------------------------------------------------
302,572 274,740
Less current maturities 16,228 10,470
---------------------------------------------------------------------
$286,344 $264,270
---------------------------------------------------------------------
Substantially all of the mortgage notes, both fixed rate and adjustable, bear
interest from 6.50% to 9.50% at May 25, 2000. The Industrial Revenue Bonds, both
fixed rate and adjustable, bear interest from 4.50% to 8.77%. The mortgage notes
and the Industrial Development Revenue Bonds are secured by the related land,
buildings and equipment.
The $155 million of senior notes maturing in 2008 through 2014 require annual
principal payments in varying installments beginning October 15, 2000, and bear
interest payable semiannually at fixed rates ranging from 6.66% to 7.51% with a
weighted average fixed rate of 7.13%.
The Company has unsecured term notes outstanding as follows:
May 25, May 27,
(in thousands, except payment data) 2000 1999
--------------------------------------------------------------------------
Note due May 31, 2004, with quarterly
principal payments of $781,250.
The variable interest rate is based on the
LIBOR rate with an effective rate of 7.40%
at May 25, 2000, and is payable quarterly. $12,500 $14,844
Note due February 1, 2004. The variable
interest rate is based on the LIBOR rate
with an effective rate of 7.23% at
May 25, 2000, and is payable quarterly. 20,000 20,000
Note due October 1, 2000, with quarterly
principal payments of $750,000.
The variable interest rate is based on the
LIBOR rate with an effective rate of 6.28%
at May 25, 2000, and is payable quarterly. 1,500 4,500
Note due April 28, 2003, with monthly
payments of $20,267, including interest
at 2%. 650 893
Note due March 25, 2004, with monthly
payments of $7,733, including interest
at 6%. 317 384
--------------------------------------------------------------------------
$34,967 $40,621
--------------------------------------------------------------------------
The Company issues commercial paper through an agreement with three banks, up to
a maximum of $70,000,000, which bears interest at rates ranging from 6.20% to
6.85% at May 25, 2000. The agreements require the Company to maintain unused
bank lines of credit at least equal to the principal amount of outstanding
commercial paper.
At May 25, 2000, the Company had credit lines totaling $130,000,000 in place.
Borrowings on the $125,000,000 line, which total $25,000,000 at May 25, 2000,
bear interest at LIBOR plus a margin which adjusts based on the Company's
borrowing levels (effectively 7.08% at May 25, 2000). This agreement matures in
2004 and requires an annual facility fee of .2% on the total commitment. Based
on borrowings and commercial paper outstanding, availability under this line at
May 25, 2000, totaled $40,162,000. There are no borrowings outstanding on the
remaining $5,000,000 line at May 25, 2000, which bears interest at the bank's
prime reference rate (effectively 9.5% at May 25, 2000).
The Company has the ability and intent to replace commercial paper borrowings
with long-term borrowings under its $125,000,000 revolving credit facility
agreement. Accordingly, the Company has classified these borrowings at May 25,
2000, as long-term.
24
<PAGE>
Scheduled annual principal payments on long-term debt for the five years
subsequent to May 25, 2000, are:
Fiscal Year (in thousands)
-----------------------------------------------------------------
2001 $ 16,228
2002 18,053
2003 16,836
2004 103,255
2005 15,682
-----------------------------------------------------------------
Interest paid, net of amounts capitalized, in 2000, 1999 and 1998 totaled
$17,906,000, $16,363,000 and $13,179,000, respectively.
The Company has a swap agreement covering $1,500,000, which is reduced by
$750,000 quarterly, expires October 2, 2000, and requires the Company to pay
interest at a defined fixed rate of 5.08% while receiving interest at a defined
variable rate of three-month LIBOR (6.83% at May 25, 2000). The Company also has
a swap agreement covering $7,500,000 which expires August 6, 2001, and requires
the Company to pay interest at a defined fixed rate of 6.56% while receiving
interest at a defined variable rate of three-month LIBOR (6.83% at May 25,
2000). Together, these swap agreements effectively convert $9,000,000 of the
Company's variable rate unsecured term notes to a fixed rate. The Company
recorded net interest expense related to these swap agreements as incurred,
totaling $21,000, $63,000 and $3,000 in 2000, 1999 and 1998, respectively. The
accompanying consolidated balance sheet at May 25, 2000, does not reflect the
fair market value of the remaining swap agreements as determined by the lender,
which totals an asset of approximately $69,000.
The fair value of the Company's $155 million of senior notes is approximately
$145 million. The carrying amounts of the Company's remaining long-term debt,
based on the respective rates and prepayment provisions of the senior notes due
May 31, 2005, approximate their fair value.
7. Shareholders' Equity
The Company's Board of Directors declared a three-for-two stock split, effected
in the form of a 50% stock dividend, which was distributed on December 5, 1997,
to all holders of common and Class B common stock. Shareholders' equity and all
share and per share amounts have been adjusted to reflect these dividends.
Shareholders may convert their shares of Class B Common Stock into shares of
Common Stock at any time. Class B Common Stock shareholders are substantially
restricted in their ability to transfer their Class B Common Stock. Holders of
Common Stock are entitled to cash dividends per share equal to 110% of all
dividends declared and paid on each share of the Class B Common Stock. Holders
of Class B Common Stock are entitled to ten votes per share while holders of
Common Stock are entitled to one vote per share on any matters brought before
the shareholders of the Company. Liquidation rights are the same for both
classes of stock.
Shareholders have approved the issuance of up to 3,237,500 shares of Common
Stock under various stock option plans. The options generally become exercisable
40% after two years, 60% after three years and 80% after four years. The
remaining options are exercisable five years after the date of the grant. At May
25, 2000, there were 2,466,233 shares available for grants under the plans.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), in accounting for its
employee stock options. Under APB No. 25, because the number of shares is fixed
and the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net earnings and earnings per share required by
SFAS No. 123, "Accounting for Stock Based Compensation," has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of
6.0%, 4.6% and 5.2%; dividend yield of 1.3% in all years; volatility factors of
the expected market price of the Company's common stock of 49% for 2000 and 1999
and 48% for 1998, and an expected life of the option of approximately six years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Had compensation cost
been determined based upon the fair value at the grant date for awards under the
plans based on the provisions of SFAS No. 123, the Company's pro forma net
earnings and earnings per share would have been as follows:
Year ended
May 25, May 27, May 28,
(in thousands, except per share data) 2000 1999 1998
--------------------------------------------------------------------------------
Pro forma net earnings:
Pro forma earnings from
continuing operations $20,440 $20,391 $25,941
Discontinued operations:
Income from discontinued
operations, net of
applicable income taxes 1,384 1,982 2,095
Gain on disposal of
discontinued operations,
net of applicable income
taxes - 204 6
--------------------------------------------------------------------------------
Pro forma net earnings $21,824 $22,577 $28,042
--------------------------------------------------------------------------------
Pro forma earnings per
common share - basic and
diluted:
Continuing operations $.68 $.68 $.86
Discontinued operations .05 .07 .07
--------------------------------------------------------------------------------
Pro forma net earnings per
share - basic and diluted $.73 $.75 $.93
--------------------------------------------------------------------------------
<PAGE>
A summary of the Company's stock option activity and related information
follows:
May 25, 2000 May 27, 1999 May 28, 1998
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(options in thousands) Options Price Options Price Options Price
--------------------------------------------------------------------------------
Outstanding at
beginning of
year 947 $14.17 840 $13.04 828 $11.72
Granted 404 12.06 203 16.83 180 16.52
Exercised (11) 9.61 (79) 8.54 (145) 9.48
Forfeited (138) 15.11 (17) 16.41 (23) 15.34
--------------------------------------------------------------------------------
Outstanding at
end of year 1,202 $13.37 947 $14.17 840 $13.04
--------------------------------------------------------------------------------
Exercisable at
end of year 543 $12.53 458 $11.91 389 $10.66
--------------------------------------------------------------------------------
Weighted-average
fair value of
options granted
during year $5.89 $7.88 $7.77
Exercise prices for options outstanding as of May 25, 2000, ranged from $6.67 to
$18.13. The weighted-average remaining contractual life of those options is 6.7
years. Additional information related to these options segregated by exercise
price range is as follows:
Exercise price range
$6.67 to $10.876 to $14.51 to
(options in thousands) $10.875 $14.50 $18.125
-----------------------------------------------------------------------------
Options outstanding 161 639 402
Weighted-average exercise
price of options outstanding $9.10 $12.32 $16.74
Weighted-average remaining
contractual life of
options outstanding 5.0 6.8 7.2
-----------------------------------------------------------------------------
Options exercisable 111 311 121
Weighted-average exercise
price of options exercisable $8.55 $12.33 $16.67
-----------------------------------------------------------------------------
Through May 25, 2000, the Company's Board of Directors has approved the
repurchase of up to 2,687,500 shares of Common Stock to be held in treasury. The
Company intends to reissue these shares upon the exercise of stock options and
for savings and profit-sharing contributions. The Company purchased 527,617,
490,360 and 145,297 shares pursuant to these authorizations during 2000, 1999
and 1998, respectively. At May 25, 2000, there were 344,496 shares available for
repurchase under these authorizations. Subsequent to May 25, 2000, the Company's
Board of Directors approved the repurchase of an additional 2,000,000 shares of
Common Stock to be held in treasury.
The Company's Board of Directors has authorized the issuance of up to 750,000
shares of Common Stock for The Marcus Corporation Dividend Reinvestment and
Associate Stock Purchase Plan. At May 25, 2000, there were 670,794 shares
available under this authorization.
The Company's loan agreements include, among other covenants, restrictions on
retained earnings and maintenance of certain financial ratios. At May 25, 2000,
retained earnings of approximately $73,078,000 were unrestricted.
8. Employee Benefit Plans
The Company has a qualified profit-sharing savings plan (401(k) plan) covering
eligible employees. The 401(k) plan provides for a contribution of a minimum of
1% of defined compensation for all plan participants and matching of 25% of
employee contributions up to 6% of defined compensation. In addition, the
Company may make additional discretionary contributions. The Company also
sponsors unfunded nonqualified defined benefit and deferred compensation plans.
Pension and profit-sharing expense for all plans was $1,805,000, $1,825,000 and
$1,814,000 for fiscal 2000, 1999 and 1998, respectively.
9. Income Taxes
Income tax expense consists of the following:
Year ended
(in thousands) May 25, 2000 May 27, 1999 May 28, 1998
----------------------------------------------------------------------------
Currently payable:
Federal $11,031 $ 8,616 $12,173
State 3,317 2,181 2,713
Deferred 1,197 4,926 4,054
----------------------------------------------------------------------------
$15,545 $15,723 $18,940
----------------------------------------------------------------------------
Income tax expense is included in the accompanying consolidated statements of
earnings as follows:
Year ended
(in thousands) May 25, 2000 May 27, 1999 May 28, 1998
----------------------------------------------------------------------------
Continuing
operations $14,594 $14,238 $17,541
Discontinued
operations 951 1,485 1,399
----------------------------------------------------------------------------
$15,545 $15,723 $18,940
----------------------------------------------------------------------------
The Company recognizes deferred tax assets and liabilities based upon the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under the liability method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates for the year in which the differences are expected to reverse.
26
<PAGE>
The components of the net deferred tax liability were as follows:
(in thousands) May 25, 2000 May 27, 1999
----------------------------------------------------------------------------
Deferred tax assets:
Accrued employee benefits $ 2,689 $ 2,586
Other 295 813
----------------------------------------------------------------------------
Total deferred tax assets 2,984 3,399
Deferred tax liability -
Depreciation and amortization 35,586 34,804
----------------------------------------------------------------------------
Net deferred tax liability
included in balance sheet $32,602 $31,405
----------------------------------------------------------------------------
A reconciliation of the statutory federal tax rate to the effective tax rate
follows:
Year ended
May 25, May 27, May 28,
2000 1999 1998
----------------------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal income
tax benefit 5.9 5.5 5.1
Other (.2) - (.1)
----------------------------------------------------------------------------
40.7% 40.5% 40.0%
----------------------------------------------------------------------------
Income taxes paid, net of refunds received, in 2000, 1999 and 1998 totaled
$11,484,000, $11,760,000 and $19,323,000, respectively.
10. Commitments, License Rights and Contingencies
Lease Commitments - The Company leases real estate under various noncancellable
operating leases with an initial term greater than one year. Percentage rentals
are based on the revenues at the specific rented property. Certain sublease
agreements include buyout incentives. Rent expense charged to operations under
these leases, including rent for discontinued operations, was as follows:
Year ended
May 25, May 27, May 28,
(in thousands) 2000 1999 1998
----------------------------------------------------------------------------
Fixed minimum rentals $2,966 $3,231 $2,733
Percentage rentals 174 203 188
Sublease rental income (130) (131) (182)
----------------------------------------------------------------------------
$3,010 $3,303 $2,739
----------------------------------------------------------------------------
Payments to affiliated parties for lease obligations were approximately
$176,000, $44,000 and $144,000 in fiscal 2000, 1999 and 1998, respectively.
Aggregate minimum rental commitments at May 25, 2000, are as follows:
Fiscal Year (in thousands)
----------------------------------------------------------------------------
2001 $ 2,318
2002 2,230
2003 1,987
2004 1,372
2005 1,399
After 2005 17,687
----------------------------------------------------------------------------
$26,993
----------------------------------------------------------------------------
Included in the above commitments is $2,741,000 in minimum rental commitments to
affiliated parties.
Commitments - The Company has commitments for the completion of construction at
various properties and the purchase of various properties totaling approximately
$24,755,000 at May 25, 2000.
License Rights - The Company owns the license rights in certain areas to operate
its restaurants and to sell products using the KFC trademark. In addition, the
Company has license rights to operate a hotel using the Hilton trademark. Under
the terms of the licenses, the Company is obligated to pay fees based on defined
gross sales. The KFC license also requires the Company to pay an additional fee
for each new location established.
Contingencies - The Company guarantees the debt of joint ventures and other
entities totaling approximately $20,982,000 at May 25, 2000. The debt of the
joint ventures is collateralized by the real estate, buildings and improvements
and all equipment of each joint venture.
11. Joint Venture Transactions
At May 25, 2000 and May 27, 1999, the Company held investments of $2,025,000 and
$2,045,000, respectively, in various 50%-owned affiliates (joint ventures) which
are accounted for under the equity method.
The Company has receivables from the joint ventures of $2,468,000 and $1,739,000
at May 25, 2000 and May 27, 1999, respectively. The Company earns interest on
$1,528,000 and $907,000 of the receivables at approximately prime to prime plus
1.5% at May 25, 2000 and May 27, 1999, respectively.
Included in notes payable at May 25, 2000 and May 27, 1999, is $1,178,000 and
$1,276,000, respectively, due to joint ventures in connection with cash advanced
to the Company. The Company pays interest on the cash advances based on the
90-day certificate of deposit rates.
<PAGE>
12. Business Segment Information
The Company evaluates performance and allocates resources based on the operating
income (loss) of each segment. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Following is a summary of business segment information for 1998 through 2000:
<TABLE>
<CAPTION>
Limited- Continuing
Service Hotels/ Corporate Operations Discontinued
(in thousands) Lodging Theatres Resorts Items Total Restaurants Total
----------------------------------------------------------------------------------------------------------------------------------
2000
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $138,183 $122,254 $ 89,854 $ 1,827 $352,118 $24,425 $376,543
Operating income (loss) 20,993 22,007 10,806 (5,718) 48,088 2,342 50,340
Depreciation and amortization 19,041 11,696 7,962 1,759 40,458 1,027 41,485
Assets 284,698 234,317 141,027 51,979 712,021 11,755 723,776
Capital expenditures,
including business acquisitions 21,215 39,559 33,562 4,204 98,540 952 99,492
----------------------------------------------------------------------------------------------------------------------------------
1999
Revenues $141,577 $111,249 $ 81,169 $ 2,004 $335,999 $26,928 $362,927
Operating income (loss) 25,509 20,395 8,103 (5,502) 48,505 3,331 51,836
Depreciation and amortization 18,922 9,505 7,369 1,409 37,205 1,053 38,258
Assets 290,878 203,737 107,367 61,994 663,976 12,140 676,116
Capital expenditures,
including business acquisitions 29,730 64,525 14,060 2,192 110,507 1,336 111,843
----------------------------------------------------------------------------------------------------------------------------------
1998
Revenues $144,713 $ 91,825 $ 70,305 $ 1,940 $308,783 $26,056 $334,839
Operating income (loss) 31,479 19,676 7,874 (4,904) 54,125 3,494 57,619
Depreciation and amortization 17,910 6,069 6,649 1,237 31,865 1,039 32,904
Assets 292,571 149,491 102,923 51,210 596,195 12,309 608,504
Capital expenditures,
including business acquisitions 25,241 59,440 24,903 5,727 115,311 569 115,880
----------------------------------------------------------------------------------------------------------------------------------
(1) Includes a $3.9 million charge related to the Baymont name change.
</TABLE>
Corporate items include amounts not allocable to the business segments.
Corporate revenues consist principally of rent and the corporate operating loss
includes general corporate expenses. Corporate assets primarily include cash and
cash equivalents, notes receivable, receivables from joint ventures and land
held for development. Rental revenues, operating income, depreciation and
amortization and assets resulting from the leasing of several Company-owned
restaurants to restaurant operators, which had previously been included in
restaurant segment results, are now included in corporate items.
28
<PAGE>
auditor's report and management statement
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of The Marcus Corporation
We have audited the accompanying consolidated balance sheets of The Marcus
Corporation (the Company) as of May 25, 2000 and May 27, 1999, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended May 25, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at May
25, 2000 and May 27, 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended May 25, 2000, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young
Milwaukee, Wisconsin
July 14, 2000
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of The Marcus Corporation and its subsidiaries is responsible for
the preparation of the financial and operating information contained in this
annual report, including the consolidated financial statements audited by Ernst
& Young LLP, independent auditors. These statements were prepared in conformity
with accounting principles generally accepted in the United States and include
amounts that are based on the best estimates and judgments of management.
A system of internal financial controls provides management with reasonable
assurance that transactions are recorded and executed as authorized, that assets
are properly safeguarded and accounted for, and that records are maintained to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States. The Company also has
policies and guidelines that require employees to maintain a high level of
ethical standards.
The Audit Committee of the Board of Directors is composed entirely of outside
directors and has unrestricted access to representatives of Ernst & Young LLP.
/s/ Stephen H. Marcus /s/ Douglas A. Neis
Stephen H. Marcus Douglas A. Neis
Chairman and Chief Executive Officer Chief Financial Officer and Treasurer
<PAGE>
eleven-year financial summary
<TABLE>
<CAPTION>
2000 1999 1998(2) 1997 1996(3) 1995 1994(4) 1993 1992 1991 1990
----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues(6) $352,118 335,999 308,783 277,643 237,937 204,627 172,210 153,896 148,187 133,368 122,237
Earnings from continuing
operations(6) $ 21,238 20,958 26,343 29,254 27,885 - - - - - -
Net earnings $ 22,622 23,144 28,444 30,881 42,307 24,136 22,829 16,482 13,289 11,618 10,781
----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK DATA(1)
Earnings per share -
continuing operations(6) $ .71 .70 .87 .98 .94 - - - - - -
Net earnings per share $ .76 .77 .94 1.04 1.42 .82 .77 .63 .52 .45 .42
Cash dividends per share $ .22 .22 .22 .20 .23 .15 .13 .11 .10 .09 .08
Weighted average shares
outstanding (in thousands) 29,828 30,105 30,293 29,745 29,712 29,537 29,492 26,208 25,325 25,569 25,839
Book value per share $ 11.03 10.48 10.00 9.37 8.51 7.29 6.61 5.95 4.97 4.54 4.17
----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
(in thousands)
Total assets $723,776 676,116 608,504 521,957 455,315 407,082 361,606 309,455 274,394 255,117 230,789
Long-term debt $286,344 264,270 205,632 168,065 127,135 116,364 107,681 78,995 100,032 96,183 85,563
Shareholders' equity $325,247 313,574 302,531 277,293 251,248 214,464 193,918 173,980 124,874 114,697 106,983
Capital expenditures,
including business
acquisitions $ 99,492 111,843 115,880 107,514 83,689 77,083 75,825 47,237 27,238 39,861 42,385
----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Current ratio .40 .45 .43 .39 .62 .41 .67 .90 .73 .65 .91
Debt/capitalization ratio .48 .47 .42 .39 .35 .37 .37 .34 .46 .47 .45
Return on average
shareholders' equity 7.1% 7.5% 9.8% 11.7% 18.2% 11.8% 12.4% 11.0% 11.1% 10.5% 10.5%
----------------------------------------------------------------------------------------------------------------------------------
(1) All per share and shares outstanding data is on a diluted basis and has been adjusted to reflect stock splits in 1998, 1996
and 1993.
(2) Includes charge of $2.34 million or $0.08 per share for costs associated with the Baymont name change.
(3) Includes gain of $14.8 million or $0.49 per share on sale of certain restaurant locations.
(4) Includes gain of $1.8 million or $0.06 per share for cumulative effect of change in accounting for income taxes.
(5) Includes annual dividend of $0.18 per share and one quarterly dividend of $0.05 per share.
(6) Restated to conform to the fiscal 2000 presentation of restaurant operations as discontinued operations. Earnings from
continuing operations and earnings per share - continuing operations were restated for 1996 through 1999.
</TABLE>
30
<PAGE>
quarterly information and stock prices
SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands except per share data)
13 Weeks Ended
August 26, November 25, February 24, May 25,
Fiscal 2000 1999 1999 2000 2000
-------------------------------------------------------------------------------
Revenues $107,717 $80,244 $77,439 $86,718
Operating incom 24,500 9,854 5,197 8,537
Net earnings 13,170 5,588 881 2,983
Net earnings per diluted share .44 .19 .03 .10
-------------------------------------------------------------------------------
13 Weeks Ended
August 27, November 26, February 25, May 27,
Fiscal 1999 1998 1998 1999 1999
-------------------------------------------------------------------------------
Revenues(1) $ 99,978 $78,641 $75,519 $81,861
Operating income(1) 25,162 11,703 4,640 7,000
Net earnings 14,191 5,889 513 2,551
Net earnings per diluted share .47 .20 .02 .09
-------------------------------------------------------------------------------
(1) Revenues and operating income as previously reported in the Company's
quarterly reports differ from amounts set forth above because of the
classification of the Company's restaurant operations as discontinued operations
as more fully described in Note 4 of the Notes to Consolidated Financial
Statements. The quarterly revenue and operating income have been restated to
reflect only the Company's continuing operations. In addition, certain other
reclassifications were made to revenues in order to conform to the current year
presentation. There was no effect on previously reported net earnings.
<TABLE>
<CAPTION>
13 Weeks Ended
August 27, November 26, February 25, May 27,
1998 1998 1999 1999
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
Revenues as previously reported $107,360 $87,994 $82,269 $85,304
Less revenues of discontinued operations (7,382) (6,796) (6,246) (6,504)
Other reclassifications - (2,557) (504) 3,061
--------------------------------------------------------------------------------------------------------
Revenues as restated $99,978 $78,641 $75,519 $81,861
--------------------------------------------------------------------------------------------------------
Operating income as previously reported $26,098 $12,711 $5,280 $7,747
Less operating income of discontiued operations (936) (1,008) (640) (747)
--------------------------------------------------------------------------------------------------------
Operating income as restated $25,162 $11,703 $4,640 $7,000
--------------------------------------------------------------------------------------------------------
</TABLE>
LAST SALE PRICE RANGE OF COMMON STOCK
Fiscal 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------------------------------------------------------------------
High $13.25 $14.25 $14.06 $12.94
Low 11.44 10.75 9.50 8.38
------------------------------------------------------------------------------
Fiscal 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------------------------------------------------------------------
High $18.19 $16.56 $16.25 $14.19
Low 14.00 12.50 12.50 10.94
------------------------------------------------------------------------------
On August 11, 2000, there were 2,253 shareholders of record for the Common Stock
and 49 shareholders of record for the Class B Common Stock.
<PAGE>
corporate information
ANNUAL MEETING
Shareholders are invited to attend The Marcus Corporation's 2000 Annual Meeting
at 10:00 a.m. on Monday, September 25, 2000, at the Hilton Milwaukee City
Center, 509 West Wisconsin Avenue, Milwaukee, Wisconsin.
DIVIDEND REINVESTMENT PLAN
The Marcus Corporation has a dividend reinvestment plan through which
shareholders of record may invest their cash dividends and make supplemental
cash investments in additional shares. There are no commissions or service
charges to purchase shares. For additional information, write or call:
Firstar Bank, N.A.
P.O. Box 2077
Milwaukee, WI 53201-2077
(800) 637-7549
Members of the National Association of Investors Corporation (NAIC) may also
participate in The Marcus Corporation's Dividend Reinvestment Plan through the
NAIC Low Cost Investment Plan.
STOCK LISTING AND SYMBOL
The Marcus Corporation common stock is traded on the
New York Stock Exchange under the symbol MCS.
FORM 10-K REPORT
A copy of the company's fiscal 2000 Form 10-K annual report (without exhibits)
filed with the Securities and Exchange Commission is available to shareholders,
without charge, by contacting the corporate secretary at the company's address.
TRANSFER AGENT
Firstar Bank, N.A.
P.O. Box 2077
Milwaukee, WI 53201-2077
(800) 637-7549
LEGAL COUNSEL
Foley & Lardner o Milwaukee, Wisconsin
INDEPENDENT AUDITORS
Ernst & Young LLP o Milwaukee, Wisconsin
CORPORATE HEADQUARTERS
The Marcus Corporation
250 East Wisconsin Avenue Suite 1700
Milwaukee, Wisconsin 53202-4220
(414) 905-1000
33
