-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E2l4p2zP2lmQ7vTGKKjUHKiNLiNtqQgZFRKbZQTunTxUspKrDDafFijlUGba6hxr Pohw1gV3HiQGS5slsHG0Og== 0000897069-97-000369.txt : 19970827 0000897069-97-000369.hdr.sgml : 19970827 ACCESSION NUMBER: 0000897069-97-000369 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970529 FILED AS OF DATE: 19970826 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARCUS CORP CENTRAL INDEX KEY: 0000062234 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 391139844 STATE OF INCORPORATION: WI FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12604 FILM NUMBER: 97670034 BUSINESS ADDRESS: STREET 1: 250 EAST WISCONSIN AVE STREET 2: SUITE 1700 CITY: MILWAUKEE STATE: WI ZIP: 53202-4220 BUSINESS PHONE: 4142726020 MAIL ADDRESS: STREET 1: 250 EAST WISCONSIN AVENUE STREET 2: STE 1700 CITY: MILWAUKEE STATE: WI ZIP: 53202-4220 10-K 1 THE MARCUS CORPORATION FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 29, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to __________ Commission file number 1-12604 THE MARCUS CORPORATION (Exact name of registrant) as specified in its charter) Wisconsin 39-1139844 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 250 East Wisconsin Avenue - Suite 1700 Milwaukee, Wisconsin 53202-4220 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 272-6020 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $1 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant as of August 8, 1997: $301,628,448 Number of shares outstanding of each of the classes of the registrant's capital stock as of August 8, 1997: Common Stock, $1 par value: 11,240,376 shares Class B Common Stock, $1 par value: 8,504,252 shares PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: Proxy Statement for 1997 annual meeting of shareholders (incorporated by reference into Part III, to the extent indicated therein). PART I Unless the context indicates otherwise, references to the number of the Company's various facilities set forth in this Form 10-K Annual Report are as of May 29, 1997. Special Note Regarding Forward-Looking Statements Certain matters discussed in this Annual Report on Form 10-K 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 the statement 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 which are described in close proximity to such statements and which may cause actual results to differ materially from those currently anticipated. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made 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. Item 1. Business. The Marcus Corporation through its subsidiaries (collectively, the "Company") is engaged in four business segments: motels; movie theatres; hotels and resorts; and restaurants. The Company's motel operations include a chain of 143 Budgetel Inn limited service motels in 28 states and four Woodfield Suites all- suite hotels in Wisconsin, Colorado and Ohio. Of the 143 Budgetel Inns, 104 are owned or operated by the Company and 39 are franchised. The Company operates 40 movie theatres with an aggregate of 297 screens throughout Wisconsin and Illinois. The Company also operates a family entertainment center, Funset Boulevard, in Appleton, Wisconsin. The Company's hotel and resort operations include the Pfister and the Milwaukee Hilton, which are full-service hotels in the Milwaukee, Wisconsin metropolitan area, and the Grand Geneva Resort & Spa, which is a full-facility destination resort in Lake Geneva, Wisconsin. The Company also manages three hotels for third parties: the Mead Inn in Wisconsin Rapids, Wisconsin, the Crowne-Plaza Northstar in Minneapolis, Minnesota and Beverly Garland's Holiday Inn in North Hollywood, California. In fiscal 1997, the Company acquired a full-facility destination resort in Indian Wells, California, which is being renovated before reopening in November 1997 as the Miramonte Resort. The Company's restaurant division includes 31 KFC (Kentucky Fried Chicken) restaurants in Wisconsin. The Company is continuing its aggressive expansion plan that it began in fiscal 1994. The Company's current plans include pursuing the following goals: - Increasing its number of Budgetel Inns to 300 by the year 2000, with up to six new Company-owned and 24 new franchised motels currently planned to be opened in fiscal 1998. The Company currently believes that much of this anticipated future growth will ultimately come from its increasing emphasis on opening new franchised Budgetel Inns. - Increasing its number of Woodfield Suites to approximately 40 to 50 within the next five years. The Company believes that the majority of this potential growth will come from a franchise program to be introduced in fiscal 1998, supplemented by up to two or three Company-owned units per year. - Increasing its number of movie theatre screens to 500 by the year 2000, with continued expansion outside of Wisconsin. Up to 79 new screens are currently planned to be opened by the Company in fiscal 1998, including 32 new screens in development at two locations in Columbus, Ohio. Currently under construction is a new 12-screen, all- stadium seating ultraplex theatre in Menomonee Falls, Wisconsin. Other current expansion plans include 35 new screens to be added to existing locations in Wisconsin and Illinois. The Company also has plans to add stadium seating to a majority of its existing theatres. - Adding one or two hotel properties each year over the next few fiscal years, either Company-owned or managed for others. In some cases, the Company may own only a partial interest in new properties. The Company's newest property, the Miramonte Resort in Indian Wells, California, is scheduled to open in November 1997 after extensive renovation. - Expanding and enhancing the Company's KFC franchise. The Company's first KFC/Taco Bell 2-in-1 unit, a conversion of an existing KFC, opened in early fiscal 1998. The actual number, mix and timing of potential future new facilities and expansions will depend in large part on continuing favorable industry and general economic conditions, the Company's financial performance and available capital, the competitive environment, evolving customer needs and trends, and the 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 and there can be no assurance that these current goals will be achieved. Business Segment Data Certain business segment data for the Company's three most recent fiscal years relating to the Company's four industry segments is set forth in Item 8 of Part II of this Form 10-K in footnote 10 to the Notes to Consolidated Financial Statements. Motel Operations Budgetel Inns The Company owns, operates or franchises 143 economy motels, with almost 15,000 available rooms, under the name "Budgetel Inns" in 28 states. Of this total, 39 Budgetel Inns are operated through franchisees, 95 are Company-owned or operated and nine are operated under joint venture type agreements. During fiscal 1997, 11 new Company-owned units and eight new franchised units were opened. Depending upon continuing favorable industry conditions and attractive opportunities, the Company currently plans to add up to 30 new Budgetel Inns in fiscal 1998 (including up to six Company-owned and up to 24 franchised facilities). Targeted at the business traveler, Budgetel Inns feature an upscale, contemporary exterior appearance, are generally located in high traffic commercial areas in close proximity to interstate highway exits and major thoroughfares and typically vary in size between 60 and 150 rooms. The Company believes that providing amenities not typically associated with limited service motels distinguish Budgetel Inns from many of its competitors. These amenities include executive conference centers, room-delivered complimentary continental breakfasts, king-sized beds, free local telephone calls and incoming fax transmissions, non-smoking rooms, in-room coffee makers and hair dryers, remote control cable televisions, extra-long telephone cords and large working desks. To enhance customer security, the Company has converted all of its Company-owned and franchised Budgetel Inn rooms to "card key" locking systems and provides well-lighted parking areas and all-night front desk staffing. The interior of each Budgetel Inn is refurbished in accordance with a strict periodic schedule. The Company has a national franchise program for its Budgetel Inns and has increased its emphasis on opening more franchised Budgetel Inns. Support offices in Atlanta, Chicago and Dallas and a service office in Florida are intended to help support expansion of the Budgetel Inn franchise. Franchisees pay an initial franchise fee and annual marketing assessments, reservation system assessments and royalty fees based on room revenues. The Company is qualified to sell, and anticipates ultimately selling, franchises in all 50 states. During fiscal 1997, Budgetel Inns became the first limited service lodging chain in the United States to offer business-class rooms with a comprehensive package of business amenities at all locations. The Company converted 10 percent of all rooms at each of its Budgetel Inn locations into Business First rooms, which feature more than 20 business- travel conveniences and amenities, including a speakerphone, an ergonomic chair and an extra-large desk. Budgetel Inns began testing a new upscale design at its new locations in Macedonia, Ohio and Delafield, Wisconsin in fiscal 1997. The design features all-brick exteriors and expanded lobbies. Woodfield Suites The Company operates four mid-priced, all-suite hotels under the name "Woodfield Suites" and, in addition to a new Woodfield Suites opened in Madison, Wisconsin early in fiscal 1998, currently plans to open one additional Woodfield Suites in fiscal 1998. Although the Company currently plans to increase the number of its Woodfield Suites to approximately 40 to 50 within the next five years, the actual number of potential additional Woodfield Suites will depend on continuing favorable industry and economic conditions, the availability of attractive site locations and customer acceptance. Woodfield Suites offers all of its guests the use of its centrally-located swimming pool, whirlpool and game room. Most suites have a bedroom and separate living room and feature an extra-length bed, sleeper sofa for additional guests, microwave, refrigerator, wet bar, television and hair dryer. Some suites also have a kitchenette. All guests receive a free continental breakfast and are invited to a free cocktail hour. Meeting rooms and two-line telephones equipped with dataports in every suite enhance Woodfield Suites' appeal for business travelers. Hotels and Resorts Operations The Pfister Hotel The Company owns and operates the Pfister Hotel in downtown Milwaukee. The Pfister Hotel, a full service, luxury hotel, has 307 rooms (including 80 luxury suites), three restaurants, two cocktail lounges, a night club, an indoor swimming pool, an exercise facility and a 275-car parking ramp. The Pfister has 20,000 square feet of banquet and convention facilities. Banquet and meeting rooms can accommodate up to 3,000 persons and the hotel features two large ballrooms, including one of the largest ballrooms in the Milwaukee metropolitan area, with banquet seating for 1,200 people. A portion of the Pfister's first-floor space is leased for use by retail tenants. In fiscal 1997, the Pfister Hotel earned its 21st consecutive four-diamond award from the American Automobile Association. The Pfister is also a member of Preferred Hotels and Resorts Worldwide Association, an organization of independent luxury hotels and resorts, and the Association of Historic Hotels of America. The Milwaukee Hilton The Company owns and operates the 500-room Milwaukee Hilton. All 500 guest rooms, bathrooms, public areas and a significant portion of meeting space were remodeled in 1995. The Hilton franchise affiliation has benefitted the Milwaukee Hilton through the Hilton's international centralized reservation and marketing system, advertising cooperatives and frequent stay programs. In connection with the City of Milwaukee's construction of a new convention facility in downtown Milwaukee, the Company will add approximately 250 new rooms and connect the Milwaukee Hilton by skywalk to the convention center by the end of fiscal 1999. The addition will also include meeting rooms, a new ballroom and a family fun center. The Grand Geneva Resort & Spa The Grand Geneva Resort & Spa in Lake Geneva, Wisconsin is a full-facility destination resort located on 1,300 acres. The largest convention resort in Wisconsin includes 355 guest rooms, 50,000 square feet of banquet, meeting and exhibit space, three speciality restaurants, two cocktail lounges, two championship golf courses, several ski-hills, four indoor and five outdoor tennis courts, three swimming pools, an executive and fitness complex, horse stables and an on-site airport. Miramonte Resort The Miramonte Resort in Indian Wells, California, purchased in August 1996 and scheduled to open after renovations are completed in November 1997, is a full-service destination resort located on 11 landscaped acres. The resort includes 14 two-story Tuscan style buildings housing 224 guest rooms, including 60 suites, one restaurant, one lounge and 9,500 square feet of banquet, meeting and exhibit space, including a 5,000 square foot grand ballroom. Additionally, there is a fully equipped fitness center and two outdoor swimming pools, each with an adjacent jacuzzi spa and sauna. Operated and Managed Hotels The Company operates the Crowne Plaza-Northstar Hotel in Minneapolis, Minnesota. The Crowne Plaza - Northstar Hotel is located in downtown Minneapolis and has 226 rooms, 13 meeting rooms, 6,370 square feet of ballroom and convention space, one restaurant, one cocktail lounge and an exercise facility. The Company manages the Mead Inn in Wisconsin Rapids, Wisconsin. The Mead Inn has 154 guest rooms, 11 meeting rooms totaling 8,180 square feet of meeting space, two cocktail lounges, two restaurants and an indoor pool with a sauna and whirlpool. During fiscal 1997, the Company completed a renovation of the ballroom and lobby of the Mead Inn. The Company manages Beverly Garland's Holiday Inn in North Hollywood, California. The Beverly Garland has 255 rooms, including 12 suites, meeting space for up to 600, including an amphitheater and ballroom, and an outdoor swimming pool and lighted tennis courts. The mission-style hotel is located on seven acres near Universal Studios. Theatre Operations The Company operates 40 movie theatre locations with an aggregate of 297 screens in Wisconsin and Illinois for an average of 7.4 screens per location, compared to an average of 6.1 screens per location at the end of fiscal 1996 and 5.4 at the end of fiscal 1995. The Company's facilities include 38 multi-screen complexes and two single- screen theatres. The theatre division's long-term growth strategy is to focus on multi-screen theatres having between eight to 20 screens which typically vary in seating capacity from 150 to 450 seats per screen. Multi-screen theatres allow the Company to offer a more diversified selection of films to attract additional customers, exhibit movies in larger or smaller auditoriums within the same theatre depending on the popularity of the movie and benefit from the economies of having common box office, concession, projection and lobby facilities. Most of the Company's movie theatres feature exclusively first-run films. In fiscal 1997, the Company opened 80 new screens, including a new 20-screen ultraplex in Addison, Illinois, a 12-plex in New Berlin, Wisconsin and an eight-plex in Appleton, Wisconsin. Also added in fiscal 1997 were 27 screens acquired at the beginning of the fiscal year, consisting of an 11-screen theatre in Chicago Heights, Illinois and two budget-film eight-plex theatres in the metropolitan Milwaukee area. Also added in fiscal 1997 were 13 screens to two existing locations, including a six-screen addition to the Gurnee, Illinois theatre, making that location a 20-screen ultraplex. With the conversion of one of its Appleton, Wisconsin theatres from first-run movies to budget movies, the Company now operates 24 budget-oriented screens. The Company plans on opening up to 79 additional new screens in fiscal 1998, including 32 new screens in development at two locations in Columbus, Ohio. The results of the Company's movie theatre business and the motion picture industry in general are largely dependent upon the box office appeal and marketing of available first-run films. Movie production has been stimulated by additional demand from ancillary markets such as home video, pay-per-view and cable television, as well as increased demand from foreign film markets. The annual number of first- run film releases has more than doubled since the late 1970s. Fiscal 1997 featured such box office hits as Independence Day, the Star Wars trilogy, Mission Impossible, The Rock, Nutty Professor, A Time to Kill and Ransom. The Company obtains its films from the national motion picture production and distribution companies and is not dependent on any single motion picture supplier. Booking, advertising, refreshment purchases and promotion are handled centrally by an administrative staff. The Company strives to provide its movie patrons with high- quality picture and sound presentation in clean, comfortable, attractive and contemporary theatre environments. Substantially all of the Company's movie theatre complexes feature either digital sound, Dolby or other stereo sound systems; acoustical ceilings; side wall insulation; engineered drapery folds to eliminate sound imbalance, reverberation and distortion; tiled floors; loge seats; cup-holder chair-arms; and computer- controlled heating, air conditioning and ventilation. Computerized box offices permit most of the Company's movie theatres to sell tickets in advance. Most of the Company's theatres are accessible to persons with disabilities and provide wireless headphones for hearing-impaired moviegoers. Other amenities at certain theatres include THX auditoriums, which allow customers to hear the softest and loudest sounds, and touch- screen, computerized, self-service ticket kiosks, which simplify advance ticket purchases. The Company also operates an exclusive customer information telephone system in Milwaukee and Madison, allowing customers to call for information regarding the locations, times and titles of movies being shown by the Company throughout each metropolitan area. The Company enhanced its offerings of amenities in fiscal 1997 by introducing stadium seating, a tiered seating system that permits unobstructed viewing, at its theatres in Appleton and New Berlin, Wisconsin, and Addison, Illinois. The Company is now installing stadium seating in all of its new theatres and began an extensive program to retrofit many of its existing auditoriums in fiscal 1998. The Company sells food and beverage concessions at all of its movie theatres. The Company believes that a wide variety of food and beverage items, properly merchandised, increases concession revenue per patron. Although popcorn still remains the traditional favorite with moviegoers, the Company continues to upgrade its available concessions by offering a wide range of choices. For example, some of the Company's theatres offer hot dogs, pizza, ice cream, pretzel bites, frozen yogurt, coffee, mineral water and juices. In early fiscal 1997, the Company opened its first family entertainment center, Funset Boulevard, adjacent to its new eight-screen movie theatre in Appleton, Wisconsin. Funset Boulevard features a 40,000 square foot Hollywood-themed indoor amusement facility, including a restaurant, party rooms, a laser tag center, virtual reality games, a miniature golf course and an arcade. Restaurant Operations The Company has non-exclusive franchise rights to operate KFC restaurants in the Milwaukee metropolitan area and in northeast Wisconsin. The Company has operated KFC restaurants for 37 years, currently operates 31 KFC restaurants and is the largest operator of KFC restaurants in Wisconsin, based on the number of facilities operated. The restaurants feature Kentucky Fried Chicken and other franchisor-authorized food items. Virtually all of the Company's KFC restaurants feature inside seating for approximately 40 customers, drive-thru windows and updated electronic equipment to better facilitate food preparation and order processing. Fourteen locations in the Fox Valley and Milwaukee metropolitan areas offer home delivery. The Company's KFC locations operate under individual franchise agreements, all of which were renewed in early fiscal 1998 for a term of 20 years. Franchise royalties approximate 4% of net sales and, in addition, an initial flat fee of $20,000 is payable for each new KFC restaurant. The KFC franchisor specifies certain product requirements and provide for certain approved suppliers of products and supplies in order to maintain the franchise's quality standards. The Company is exploring various expansion and acquisition opportunities for its KFC operations. Early in fiscal 1998, the Company opened its first combined two-in-one KFC and Taco Bell location in Milwaukee, Wisconsin. Additional two-in-one locations are under consideration. Competition In each of its businesses, the Company experiences intense competition from national and/or regional chain and franchise operations, some of which have substantially greater financial and marketing resources than the Company. Most of the Company's facilities are located in close proximity to other facilities which compete directly with those of the Company. The Company's Budgetel Inns compete with such national limited service motel chains as Days Inn, Hampton Inn (owned by The Promus Companies Incorporated), Fairfield Inn (owned by Marriott Corporation), Red Roof Inn, La Quinta Inn, Comfort Inn and others, as well as a large number of regional and local motels. The Company's Woodfield Suites compete with such national chains as Embassy Suites, Comfort Suites, AmeriSuites and Courtyard by Marriott, as well as other regional and local all-suite facilities. The Company's hotels and resorts compete with the hotels and resorts operated by Hyatt Corporation, Marriott Corporation, Ramada Inns, Holiday Inns and Wyndham Hotels, along with other regional and local hotels and resorts. In the restaurant business, the Company's KFC restaurants compete locally with Hardee's, Boston Market, Popeye's and similar national, as well as regional, fast food chains and individual restaurants offering chicken. The Company's movie theatres compete with large national movie theatre operators, such as United Artists, Cinemark, Cineplex Odeon and Carmike Cinemas, as well as with a wide array of smaller first-run and discount exhibitors. Although movie exhibitors also generally compete with the home video, pay-per-view and cable television markets, the Company believes that such ancillary markets have assisted the growth of the movie theatre industry by encouraging the production of first-run movies released for initial movie theatre exhibition, which establishes the demand for such movies in these ancillary markets. The Company believes that the principal factors of competition in each of its businesses, in varying degrees, are the price and quality of its product, quality and location of its facilities, and customer service. The Company believes that it is well positioned to compete on the basis of these factors. Seasonality Historically, the Company's first and fourth fiscal quarters have produced the strongest operating results, since such periods coincide with the typical summer seasonality of the movie theatre industry and the spring and summer strength of the travel and food service aspects of the Company's business. Research and Development Research and development expenditures for the Company are not material. Environmental Regulation The Company does not expect federal, state or local environmental legislation to have a material effect on the Company's capital expenditures, earnings or competitive position. However, the Company's activities in acquiring and selling real estate for business development purposes have been complicated by the continued emphasis placed by Company personnel on properly analyzing real estate sites for potential environmental problems. This circumstance has resulted in, and is expected to continue to result in, greater time and increased costs involved in acquiring and selling properties associated with the Company's various businesses. Employees As of the end of fiscal 1997, the Company had approximately 7,400 employees, a majority of whom were employed on a part-time basis. A majority of the Company's hotel employees in Milwaukee, Wisconsin are covered by collective bargaining agreements which expire in June 1998. A number of the Company's hotel employees in Minneapolis, Minnesota are covered by collective bargaining agreements which expire in April 2000. Relations with employees have been satisfactory and there have been no work stoppages due to labor disputes. Item 2. Properties. The Company owns a substantial portion of its facilities, including the Pfister Hotel, the Milwaukee Hilton and the Grand Geneva Resort and Spa, all of the Company-owned Budgetel Inns and Woodfield Suites, the majority of its theatres and restaurants, and leases the remainder. In August 1996, the Company purchased the Miramonte Resort, which is scheduled to open after renovations are completed in November 1997. The Company also manages three hotel properties for third parties. ` Additionally, the Company owns properties acquired for the future construction and operation of new Company operating facilities. Some of its properties are leased from entities owned by principal shareholders of the Company. All of the Company's properties are suitably maintained and adequately utilized to cover the respective business segment served. The operating properties owned, leased and franchised by the Company as of May 29, 1997 are summarized in the following table:
Leased From Leased Managed Managed Total Number Unrelated From for for Operated of Facilities Owned Parties Related Related Unrelated By Business Segment in Operation (1) Parties Parties Parties Franchisees Restaurants: KFC 31 30 1 0 0 0 0 Movie Theatres: 40 27 12 1 0 0 0 Hotels and Resorts: Hotels 5 2 0 0 0 3 0 Resorts 1 1 0 0 0 0 0 Motels: Budgetel 143 93 0 1 9 1 39 Woodfield Suites 4 4 0 0 0 0 0 TOTALS 224 157 13 2 9 4 39 _______________ (1) Two of the KFC restaurants, two of the movie theatres owned by the Company, and two of the motels are on land leased from unrelated parties under long-term leases. One of the motels and one of the theatres is on land leased from related parties. The Company's partnership interests in nine Budgetel Inns that it manages and one movie theatre that it leases are not included in this column. Also not included in this column is the Miramonte Resort, which is scheduled to open in November 1997.
Certain of the above individual properties or facilities are subject to purchase money or construction mortgages or commercial lease financing arrangements; none of these encumbrances are considered in the aggregate to be material to the Company. The terms of over 90% of the Company's operating property leases expire on various dates after 1998 (assuming exercise by the Company of all renewal and extension options). Item 3. Legal Proceedings. The Company does not believe that any pending legal proceeding involving the Company is material to its business. No legal proceeding required to be disclosed under this item was terminated during the fourth quarter of the Company's 1997 fiscal year. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's shareholders during the fourth quarter of the Company's 1997 fiscal year. EXECUTIVE OFFICERS OF COMPANY Each of the current executive officers of the Company is identified below together with information about each such officer's age, current position with the Company and employment history for at least the past five years: Name Position Age Stephen H. Marcus Chairman of the Board, President and Chief Executive Officer 62 Bruce J. Olson Group Vice President 47 H. Fred Delmenhorst Vice President-Human Resources 56 Thomas F. Kissinger General Counsel and Secretary 37 Douglas A. Neis Chief Financial Officer and Treasurer 38 Stephen H. Marcus has been Chairman of the Board of the Company since December 1991 and President and Chief Executive Officer since December 1988. Mr. Marcus has been employed by the Company for 36 years. Bruce J. Olson has been employed in his present position with the Company since July 1991. He was elected to serve on the Company's Board of Directors in April 1996. Mr. Olson previously served as Vice President-Administration and Planning for the Company from September 1987 until July 1991 and as Executive Vice President and Chief Operating Officer of Marcus Theatres Corporation from August 1978 until October 1988, when he was appointed President of that corporation. Mr. Olson joined the Company in 1974. H. Fred Delmenhorst has been the Vice President-Human Resources since he joined the Company in December 1984. Thomas F. Kissinger joined the Company in August 1993 as Secretary and Director of Legal Affairs and in August 1995 was promoted to General Counsel and Secretary. Prior thereto, Mr. Kissinger was associated with the law firm of Foley & Lardner for five years. Douglas A. Neis joined the Company in February 1986 as Controller of the Marcus Theatres division. In November 1987, Mr. Neis was promoted to Controller of Marcus Restaurants. In July 1991, he was appointed Vice President of Planning and Administration for Marcus Restaurants. In September 1994, Mr. Neis was also named Director of Technology for the Company and in September 1995 he was elected Corporate Controller for the Company. In September 1996, Mr. Neis was promoted to Chief Financial Officer and Treasurer of the Company. The executive officers of the Company are generally elected annually by the Board of Directors after the annual meeting of shareholders. Each executive officer holds office until his successor has been duly qualified and elected or until his earlier death, resignation or removal. PART II Item 5. Market for the Company's Common Equity and Related Shareholder Matters. The following data has been adjusted, where necessary, to retroactively adjust for the Company's three-for-two stock split effected in the form of a 50% stock dividend distributed on November 14, 1995. Last Sale Price Range of Common Stock First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year Ended May 29, 1997 High $27.75 $24.88 $23.25 $24.50 Low $21.25 $21.88 $20.25 $21.00 Fiscal Year Ended May 30, 1996 High $21.33 $23.67 $28.00 $28.25 Low $19.08 $19.83 $22.25 $25.00 On August 8, 1997, there were 1,980 shareholders of record for the Common Stock and 40 shareholders of record for the Class B Common Stock. See Item 6 for information on the Company's cash dividends paid on its Common Stock. Item 6. Selected Financial Data.
Fiscal Year 1997 1996(2) 1995 1994 1993 1992 1991 1990 1989 1988 1987 Operating Results (Dollars in Thousands) Revenues $303,357 $262,287 $277,990 $242,614 $212,910 $204,297 $188,008 $176,592 $166,710 $162,393 $152,531 Net earnings $ 30,881 $ 42,307 $ 24,136 $ 22,829 $ 16,482 $ 13,289 $ 11,618 $ 10,781 $ 10,042 $ 10,073 $ 8,078 Common Stock Data(1) Net earnings per share $ 1.56 $ 2.14 $ 1.23 $ 1.16 $ 0.95 $ 0.79 $ 0.68 $ 0.63 $ 0.58 $ 0.58 $ 0.47 Cash dividends per common share $ 0.30 $ 0.34 $ 0.23 $ 0.19 $ 0.17 $ 0.15 $ 0.13 $ 0.12 $ 0.11 $ 0.10 $ 0.10 Average shares outstanding (In Thousands) 19,830 19,808 19,691 19,661 17,472 16,883 17,046 17,226 17,306 17,364 17,364 Book value per share $ 14.06 $ 12.77 $ 10.94 $ 9.92 $ 8.93 $ 7.46 $ 6.81 $ 6.25 $ 5.74 $ 5.29 $ 4.80 Financial Position (Year End) (Dollars in Thousands) Total assets $521,957 $455,315 $407,082 $361,606 $309,455 $274,394 $255,117 $230,789 $197,898 $181,354 $167,289 Long-term debt $168,065 $127,135 $116,364 $107,681 $ 78,995 $100,032 $ 96,183 $ 85,563 $ 64,163 $ 56,635 $ 55,255 Shareholders' equity $277,293 $251,248 $214,464 $193,918 $173,980 $124,874 $114,697 $106,983 $ 98,250 $ 91,318 $ 82,952 Capital expenditures $107,514 $ 83,689 $ 77,083 $ 75,825 $ 47,237 $ 27,238 $ 39,861 $ 42,385 $ 34,253 $ 23,591 $ 28,234 Financial Ratios Current ratio (year end) 0.39 0.62 0.41 0.67 0.90 0.73 0.65 0.91 0.75 1.00 0.94 Debt/capitalization ratio (year-end) 0.39 0.35 0.37 0.37 0.34 0.46 0.47 0.45 0.41 0.40 0.41 Return on revenues 10.2% 16.1% 8.7% 9.4% 7.7% 6.5% 6.2% 6.1% 6.0% 6.2% 5.3% Return on average shareholders' equity 111.7% 18.2% 11.8% 12.4% 11.0% 11.1% 10.5% 10.5% 10.6% 11.6% 10.1% _______________________ (1) All per share and shares outstanding data have been adjusted to reflect stock splits in fiscal 1996, 1993 and 1987. (2) Includes an after-tax gain of $14.8 million, or $0.75 per share, on the sale of certain restaurant locations.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain statements herein constitute "forward-looking statements." See "Special Note Regarding Forward-Looking Statements" under Part I of this report. Results of Operations General The Marcus Corporation and its four divisions report their consolidated and individual segment results of operations on either a 52- or-53-week fiscal year. Fiscal 1997 was a 53-week fiscal year for the Company's motel and hotels/resorts divisions, while the Company and each of its other divisions reported on a 52-week fiscal year. Fiscal 1996 was a 53-week fiscal year for the Company and its theatre division, while the Company's remaining divisions reported on a 52-week fiscal year. Fiscal 1995 was a 52-week year for the Company and each of its divisions. Fiscal 1998 will be a 53-week year for the Company's restaurant division, while the Company and each of its other divisions will report on a 52-week fiscal year. Total consolidated revenues for fiscal 1997 were $303.4 million, an increase of $41.1 million, or 15.7%, compared to fiscal 1996 consolidated revenues of $262.3 million. All four of the Company's divisions contributed to the increase in revenues in fiscal 1997, with the largest increase occurring in the Company's theatre division. Fiscal 1996 consolidated revenues were down $15.7 million, or 5.6%, from fiscal 1995 consolidated revenues due to the loss of approximately $46 million in restaurant division revenues in fiscal 1996, resulting from the Company's June 1995 sale of its 18 Applebee's restaurants and February 1995 disposition through lease of its 11 Marc's Cafe & Coffee Mill restaurants. The additional week of results reported for the motel and hotels/resorts divisions in fiscal 1997 contributed an additional $3.5 million in revenues and $1.5 million in operating income to the Company's fourth quarter and fiscal 1997 results. The additional week of results reported for the theatre division in fiscal 1996 contributed an additional $2.0 million in revenues and $550,000 in operating income to the Company's fourth quarter and fiscal 1996 results. Due to the relative size of the Company's restaurant division compared to the Company's other divisions, the additional week of results in fiscal 1998 from the restaurant division is not anticipated to materially impact results from operations. Net earnings for fiscal 1997 were $30.9 million, or $1.56 per share. This represented a $3.4 million, or 12.3%, increase over comparable fiscal 1996 earnings of $27.5 million, or $1.39 per share, excluding the after-tax gain of $14.8 million, or $0.75 per share, resulting from the Company's fiscal 1996 sale of restaurants. Including the gain from the sale of restaurants, net earnings were $42.3 million, or $2.14 per share, for fiscal 1996. Fiscal 1996 earnings, again excluding the gain from the sale of the restaurants, increased 14.1% over fiscal 1995 net earnings. Weighted average shares outstanding were 19.8 million for both fiscal 1997 and fiscal 1996 and 19.7 million for fiscal 1995. The Company's interest expense, net of investment income, totaled $10.0 million for fiscal 1997. This represented an increase of $3.7 million, or 58.5%, over fiscal 1996 net interest expense of $6.3 million. This increase was the result of additional borrowings in fiscal 1997 necessary to finance the Company's capital program and the fact that the Company was able to use proceeds from its sale of restaurants in fiscal 1996 to fund a portion of its growth in that year. The Company's income tax expense for fiscal 1997 was $20.3 million, a decrease of $7.5 million from fiscal 1996. The Company's effective tax rate for fiscal 1997 was 39.7% versus the prior fiscal year's 39.6%. Historically, the Company's first and fourth fiscal quarters have produced the strongest operating results, because these periods coincide with the typical summer seasonality of the movie theatre industry and the spring and summer strength of the Company's travel and food service businesses. In addition, the Company reports its results of operations in three equal 12-week quarters plus a 16-or-17-week fourth quarter, contributing to the typically larger results in the fourth quarter. The Company is continuing its aggressive expansion plan that it began in fiscal 1994, incurring a record $107.5 million in capital expenditures in fiscal 1997 compared to $83.7 million in fiscal 1996. The Company's current plans include the following goals: - Increasing its number of Budgetel Inns to 300 by the year 2000, with up to six new Company-owned and 24 new franchised motels currently planned to be opened in fiscal 1998. The Company currently believes that much of this anticipated future growth will ultimately come from its continued increased emphasis on opening new franchised Budgetel Inns. - Increasing its number of Woodfield Suites to approximately 40 to 50 within the next five years. The Company believes that the majority of this prospective growth will come from a franchise program to be introduced in fiscal 1998, supplemented by up to two or three Company-owned units per year. - Increasing its number of movie theatre screens to 500 by the year 2000, with continued expansion outside of Wisconsin. Up to 79 new screens are currently planned to be opened by the Company in fiscal 1998, including 32 new screens in development at two locations in Columbus, Ohio. Currently under construction is a new 12-screen, all-stadium-seating ultraplex theatre in Menomonee Falls, Wisconsin. Other current expansion plans include 35 new screens to be added to existing locations in Wisconsin and Illinois. The Company also has plans to add stadium seating to a majority of its existing theatres. - Adding one or two hotel properties each year over the next few fiscal years, either Company-owned or managed for others. In some cases, the Company may own only a partial interest in new properties. The Company's newest property, the Miramonte Resort in Indian Wells, California, is scheduled to open in November 1997 after extensive renovation. - Expanding and enhancing the Company's KFC franchise. The Company's first KFC/Taco Bell 2-in-1 unit, a conversion of an existing KFC, opened early in fiscal 1998. 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 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 and there can be no assurance that these current goals will be achieved. Motels The Company's largest division is its motel division, which contributed 44.6% of Company consolidated revenues and 61.4% of Company consolidated operating income, excluding corporate items, in fiscal 1997. The motel division's primary business is the owning and franchising of Budgetel Inns and Woodfield Suites which respectively operate in the limited-service economy and limited-service all-suites segments of the lodging industry. The following tables set forth revenues, operating income, number of units and rooms data for the motel division for the last three fiscal years: (in millions) 1997 1996 1995 Revenues $135.3 $118.7 $104.4 Operating income 39.8 36.3 32.0 Operating margin (% of revenue) 29.4% 30.6% 30.7% (as of the fiscal year ended May) 1997 1996 1995 Budgetel Inns - number of units: Company-owned or operated 104 93 82 Franchised 39 31 24 Total Budgetel Inns 143 124 106 Woodfield Suites - company owned 4 3 3 Total number of units 147 127 109 Available rooms at year-end 1997 1996 1995 Budgetel Inns (includes franchised) 14,868 13,018 11,564 Woodfield Suites 490 339 339 Total revenues in the motel division increased 14.0% and 13.7% in fiscal 1997 and fiscal 1996, respectively, principally as a result of increasing available rooms. The additional week of operations included in the motel division's fiscal 1997 results contributed an additional $2.5 million to the division's fiscal 1997 revenues and approximately $1.2 million to fiscal 1997 operating income. In addition to the increased number of units in each year, increases in the average daily room rate at the Company's Budgetel Inns of 3.0% and 4.2% in fiscal 1997 and 1996, respectively, also contributed to the increased revenues. The Company's motel occupancy percentage decreased slightly in both fiscal 1997 and fiscal 1996, but still remained above industry averages. Factors contributing to the slight decline in occupancy in both fiscal years included an increase in the room supply of the limited service economy lodging segment in both years and severe weather conditions and two federal government shutdowns during the third quarter of fiscal 1996. The result of the average daily rate increases and occupancy declines was a 1.1% and 3.2% increase in the division's revenue per available room, or RevPAR, for comparable Inns for the fiscal years 1997 and 1996, respectively. The Company's newly opened motels contributed additional revenues of $4.9 million and nominal operating income in fiscal 1997. Newly opened motels in fiscal 1996 contributed additional revenue of $5.3 million and nominal operating income. Similar comparative operating results are expected for new facilities to be opened in fiscal 1998. The motel division's operating income increased 9.7% in fiscal 1997 and 13.4% in fiscal 1996. Operating margins declined slightly to 29.4%, compared to 30.6% and 30.7% in fiscal years 1996 and 1995, respectively, due primarily to the slight reductions in occupancy percentages, start-up expenses associated with new motels and increased advertising costs. Theatres The Company's oldest and second largest division is its theatre division. The theatre division contributed 26.6% of the Company's consolidated revenues and 26.0% of its consolidated operating income, excluding corporate items, in fiscal 1997. The theatre division operates motion picture theatres and a family entertainment center in Wisconsin and Illinois, with plans to expand its theatres to additional states. The following tables set forth revenues, operating income, screens and theatres for the last three fiscal years: (in millions) 1997 1996 1995 Revenues $80.6 $63.7 $54.0 Operating income 16.9 15.0 12.2 Operating margin (% of revenue) 20.9% 23.6% 22.7% (as of the fiscal year ended May) 1997 1996 1995 Theatre screens 297 219 199 Theatre locations 40 36 37 Average screens per location 7.4 6.1 5.4 Family entertainment centers 1 - - Total revenues in the theatre division increased 26.5% and 18.0% in fiscal years 1997 and 1996, respectively, principally as a result of adding additional screens. The additional week of operations included in the theatre division's fiscal 1996 results (which included the Memorial Day holiday weekend) contributed an additional $2.0 million to the division's fiscal 1996 revenues. Consistent with the Company's long-term strategic plan to focus on operating large multi-screen theatres, the Company opened 80 new screens in fiscal 1997, including a new 20-screen ultraplex in Addison, Illinois, a twelve-plex in New Berlin, Wisconsin and an eight-plex in Appleton, Wisconsin. Also added in fiscal 1997 were 27 screens acquired at the beginning of the year, consisting of an 11-screen theatre in Chicago Heights, Illinois and two budget-film eight-plex theatres in the metropolitan Milwaukee area, and 13 screens added to existing locations, including a six-screen addition to the Gurnee, Illinois theatre, also making that location a twenty-screen ultraplex. As of May, 1997, the Company operated 273 first-run screens and 24 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. Additionally, the Company's first family entertainment center opened early in fiscal 1997 in Appleton, Wisconsin. The 95,000 square foot Hollywood-themed indoor amusement facility includes a restaurant, party rooms, a laser tag center, virtual reality games, a miniature golf course, an arcade and the Company's new eight-plex theatre in Appleton. The addition of the new screens and family entertainment center in fiscal 1997 generated additional revenues of $17.6 million compared to fiscal 1996. The Company opened 27 new screens in fiscal 1996, including a new ten-plex theatre in Orland Park, Illinois, and an eight-plex in Green Bay, Wisconsin. The addition of the new screens in fiscal 1996 generated additional revenues of over $7.0 million compared to fiscal 1995. Two theatres with a total of two screens were closed in fiscal 1997 and three theatres with a total of seven screens were closed in fiscal 1996. These closed theatres had a minimal impact on operations in these years. Revenues of 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. Fiscal 1997 included such box office hits as Independence Day, the Star Wars trilogy, Mission Impossible, The Rock, Nutty Professor, A Time to Kill and Ransom, while fiscal 1996 included the hits Apollo 13, Toy Story, Twister, Batman Forever, Grumpier Old Men and Pocahontas. Each of these films produced box office receipts in excess of $1 million for the theatre division in their respective fiscal years. Approximately the same number of first-run films were released in fiscal years 1995, 1996 and 1997. Total box office receipts in fiscal 1997 were $54.5 million, an increase of $10.1 million, or 22.7%, from $44.4 million in fiscal 1996. Fiscal 1996 box office receipts increased $6.1 million, or 15.9%, compared to fiscal 1995. These increases are attributable to 22.7% and 9.2% increases in attendance in fiscal years 1997 and 1996, respectively. The increases in attendance are due to the increase in new screens each year. Attendance at the Company's comparable locations was down 4.5% in fiscal 1997 and flat in fiscal 1996, compared to the previous year. Fiscal 1997 attendance at the Company's theatres, and the industry in general, was adversely affected by the 1996 Summer Olympics. Not only did television coverage of the Olympics reduce movie theatre attendance, but many motion picture film distributors anticipated lower theatre attendance during the Olympics and released their best films during the late spring and early summer of 1996 in order to avoid competing with the Olympics. This strategy meant that less attractive films were distributed in late summer and early fall, with the result being reduced attendance late in the Company's fiscal 1997 first quarter and the lack of quality holdovers into the Company's fiscal 1997 second quarter. The decrease in fiscal 1997 attendance compared to the prior year was also due to the additional week of operations in fiscal 1996. This additional week in fiscal 1996 included the 1996 Memorial Day weekend, which is traditionally one of the year's busiest motion picture viewing weekends. The theatre division's average ticket price did not change in fiscal 1997 compared to the prior year. The lack of an increase in the fiscal 1997 average ticket price was due to the additional budget-oriented screens added during the fiscal year. First-run theatre average ticket prices increased 4.9% in fiscal 1997 compared to the prior year. The fiscal 1996 average ticket price increased 6.0% compared to the average price in fiscal 1995. Vending revenues in fiscal 1997 were $22.9 million, an increase of $5.2 million, or 29.7%, from $17.7 million in fiscal 1996. Fiscal 1996 vending revenues increased $3.1 million, or 20.9%, from fiscal 1995 vending revenues of $14.6 million. Vending revenues increased due to the increase in theatre attendance from the Company's added screens and the 5.8% and 10.4% increase in the average concession sales per person in fiscal years 1997 and 1996, respectively. The theatre division's operating income increased 12.3% in fiscal 1997 and 23.3% in fiscal 1996, compared to the prior year results. The division's operating margin declined slightly to 20.9%, compared to 23.6% and 22.7% in fiscal years 1996 and 1995, respectively. Fiscal 1997 operating income was reduced by over $800,000 of pre-opening expenses related to new screens and the Company's new family entertainment center, Funset Boulevard, and margins were further impacted by the weak film product in late summer and early fall. Fiscal 1996 operating income included $550,000 from the additional week of results reported during the year. Hotels and Resorts The Company's hotels and resorts division contributed 19.8% of Company consolidated revenues and 8.4% of Company consolidated operating income, excluding corporate items, in fiscal 1997. The hotel and resort division owns and operates two full-service hotels in downtown Milwaukee, Wisconsin, and a full-facility destination resort in Lake Geneva, Wisconsin. In addition, the Company managed three additional hotels in fiscal 1997, two in fiscal 1996 and three in fiscal 1995. The division acquired a resort in Indian Wells, California in fiscal 1997 and closed the facility for an extensive renovation. The property is scheduled to re-open in November, 1997 under the name Miramonte Resort. The following table sets forth revenues and operating income for the hotels and resorts division for the last three fiscal years: (in millions) 1997 1996 1995 Revenues $60.2 $53.5 $45.3 Operating income 5.5 3.4 1.5 Operating margin (% of revenue) 9.1% 6.3% 3.3% Total revenues in the hotels and resorts division increased 12.5% and 18.1% in fiscal 1997 and fiscal 1996, respectively. The additional week of operations included in the division's fiscal 1997 results contributed an additional $1.0 million to the division's fiscal 1997 revenues and $230,000 to the fiscal 1997 operating income. The hotels and resorts division's operating income increased 61.9% in fiscal 1997 and 129% in fiscal 1996, compared to the previous year. Operating margins have steadily increased each year. Occupancy and average daily rate increases at all three of the division's owned properties contributed to the increase in revenues and operating income in fiscal 1997, despite unseasonably cold weather in the early summer which impacted occupancy and delayed the opening of the newly designed Highland's golf course at the Grand Geneva Resort & Spa. As a result of the occupancy and average daily rate increases, the division's total RevPAR increased 12.4% in fiscal 1997 compared to the prior year. Fiscal 1997 operating results were also favorably impacted by reduced charges for pre-opening costs for the Milwaukee Hilton (formerly the Marc Plaza) and increased management fees from properties managed but not owned by the hotels and resorts division. The division's Miramonte Resort, currently under renovation, did not have a material effect on fiscal 1997 results. Increased occupancy at the Grand Geneva Resort & Spa as a result of greater market awareness and the reduction of start-up related expenses, together with the revenue from having the restored and renovated Milwaukee Hilton open for the entire 1996 fiscal year and the impact of increased average daily room rates at all three of the Company's owned hotels, were the primary reasons for the division's increased fiscal 1996 revenues and operating income compared to the prior year. The division's total RevPAR increased 16.0% in fiscal 1996 compared to the prior year. However, the amortization of the Hilton's pre-opening costs, the loss of revenue from the non-renewal of an operating agreement for the Sheraton- Mayfair Inn in Milwaukee, Wisconsin, together with the effects on occupancy of adverse winter weather, negatively impacted the division's fiscal 1996 operating results. In addition to completing the renovation of the Miramonte Resort, the division expects to begin construction in fiscal 1998 on a 250-room expansion of the Milwaukee Hilton, which will create the largest hotel in Wisconsin. Scheduled to open in 1999, the addition will also include meeting rooms, a new ballroom, a family fun center and a skywalk to the city's new Midwest Express Convention Center. Restaurants The Company's restaurant division contributed 8.8% of the Company's consolidated revenues and 4.1% of its consolidated operating income, excluding corporate items, in fiscal 1997. The restaurant division has non-exclusive franchise rights to operate KFC restaurants in the Milwaukee metropolitan area and in northeast Wisconsin. Prior to June 1996, the division also operated Applebee's Neighborhood Grill & Bar restaurants under a franchise agreement and owned and operated additional restaurants, including Marc's Cafe & Coffee Mills. The following tables set forth revenues, operating income and number of restaurants for the last three fiscal years: (in millions) 1997 1996 1995 Revenues $26.8 $25.9 $74.1 Operating income 2.7 2.0 3.3 Operating margin (% of revenue) 10.0% 7.7% 4.5% (as of the fiscal year ended May) 1997 1996 1995 KFC restaurants 31 31 34 Applebee's restaurants - - 18 Total restaurants 31 31 52 Total revenues in the restaurant division increased 3.5% in fiscal 1997 and decreased 65.0% in fiscal 1996. Excluding $1.1 million of revenues from subsequently sold or closed restaurants from fiscal 1996 revenues, restaurant division fiscal 1997 revenues increased 7.9% over the prior year. The restaurant division's operating income increased 34.6% in fiscal 1997 and decreased 40.0% in fiscal 1996, compared to the previous year. Improved KFC results and the disposal of the full-service restaurants has resulted in increased operating margins each year. The sale of the Company's Applebee's restaurants, together with the fiscal 1995 divestiture of the Marc's Cafe & Coffee Mill and other restaurants, reduced fiscal 1996 restaurant division revenues by approximately $46 million and reduced 1996 operating income by $1.2 million. In addition to improvements in the division's KFC restaurants, reduced administrative costs associated with the disposition of certain restaurant properties in fiscal 1996 contributed to the increases in operating income. Annual rental income of approximately $1 million from leasing the 11 divested Marc's Cafes and one of the sold Applebee's was included as restaurant division revenue in fiscal years 1997 and 1996. The Company's KFC restaurants experienced a 6.8% increase in aggregate revenues and a 1.4% decrease in aggregate revenues during fiscal years 1997 and 1996, respectively, compared to the previous year. Excluding $400,000 of decreased revenues in fiscal 1997 and $1.0 million of decreased revenues in fiscal 1996 resulting from the closure of four under performing KFC restaurants during fiscal 1996, same store KFC restaurant sales increased 8.6% and 4.3% in fiscal years 1997 and 1996, respectively. Same store KFC guest counts increased 4.2% and 3.3% in fiscal years 1997 and 1996, respectively, due to increased lunch-time traffic, the introduction and expansion of home delivery service and the introduction of several new franchisor products. Average guest checks increased in both fiscal 1997 and 1996 over previous year levels. The Company's KFC restaurants experienced a 39.3% increase in aggregate operating income during fiscal 1997, compared to a 1.4% decrease in KFC aggregate operating income in fiscal 1996. Start-up costs associated with the introduction of home delivery services in fiscal 1996 contributed to the decrease in operating income in fiscal 1996 and corresponding increase in operating income in fiscal 1997. The Company opened a new KFC during the fiscal 1996 fourth quarter and did not open any new restaurants in fiscal 1997. In June 1997, the Company opened its first KFC/Taco Bell 2-in-1 unit, converting an existing KFC restaurant. Depending upon the success of this conversion, the Company may pursue additional conversions as well as explore various other KFC expansion and acquisition opportunities. Financial Condition The Company's lodging, movie theatre and restaurant 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 $50 million of unused credit lines at fiscal 1997 year end, should be adequate to support the ongoing operational liquidity needs of the Company's businesses. Net cash provided by operating activities increased by $19.3 million, or 46.3%, to $61.1 million in fiscal 1997, compared to $41.8 million in fiscal 1996. The increase was primarily the result of approximately $10 million of income taxes incurred on the gain on the sale of restaurants in fiscal 1996, combined with increased net earnings in fiscal 1997 compared to fiscal 1996 earnings excluding the restaurant sale gain. Timing differences in receipts of accounts and notes receivable, net of increased payments of accounts payable contributed to the increase in net cash provided by operating activities as well. Net cash used in investing activities in fiscal 1997 increased by $63.7 million, or 156%, to $104.5 million. Fiscal 1996 net cash used in investing activities was significantly reduced by net proceeds of $48.9 million from the disposal of property, equipment and other assets (principally from the sale of Applebee's). Capital expenditures in fiscal 1997 included $55.9 million incurred on motel division capital projects, $37.4 million on theatre division projects and $13.4 million on hotels and resorts division projects. In fiscal 1996, $51.5 million was incurred on motel division projects, $20.3 million on theatre division projects and $8.0 million on hotels and resorts division projects. Principally as a result of funding a portion of the Company's fiscal 1997 facility expansions and renovations, the Company's total debt increased to $177.4 million at the close of fiscal 1997, compared to $136.2 million at the end of fiscal 1996. Net cash provided by financing activities in fiscal 1997 totaled $35.9 million, compared to $5.7 million in fiscal 1996. During fiscal 1997, the Company received $99.9 million of net proceeds from the issuance of notes payable and long-term debt, compared to only $19.6 million in fiscal 1996. The relatively small amount of debt proceeds in fiscal 1996 was due to the Company's use of cash proceeds from its Applebee's sale to fund expansion during that time period. Included in the fiscal 1997 proceeds was $85 million in principal amount of senior unsecured long-term notes privately placed with six institutional lendors. The Company has the ability to issue up to $115 million of additional senior notes under the private placement program through February 1999. The Company used a portion of the proceeds from the senior notes to pay off existing debt, resulting in total principal payments on notes payable and long-term debt of $58.6 million in fiscal 1997, compared to only $7.9 million in fiscal 1996. The Company expects to use the remaining proceeds to help fund the Company's ongoing expansion plans. The Company's debt-capitalization ratio was 0.39 at May 29, 1997, compared to 0.35 at the prior fiscal year end. In addition to the changes in debt transactions noted above, net cash provided by financing activities also increased due to dividend payments of $5.7 million in fiscal 1997 compared to $6.3 million in fiscal 1996. The reduction in dividend payments was the result of a one-time timing difference between the Company's quarterly dividend payments during fiscal 1997 compared to the annual dividend payment plus one quarterly payment made during fiscal 1996. Total capital expenditures (including normal continuing capital maintenance projects) of $107.5 million and $83.7 million were incurred in fiscal 1997 and 1996, respectively. Total capital expenditures in fiscal 1998 are expected to exceed fiscal 1997 expenditures and are expected to be funded by cash generated from operations and additional debt, including additional institutional debt from the Company's private placement program. Item 8. Financial Statements and Supplementary Data. 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 29, 1997 and May 30, 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended May 29, 1997. 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 generally accepted auditing standards. 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 29, 1997 and May 30, 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 29, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Milwaukee, Wisconsin July 18, 1997 THE MARCUS CORPORATION CONSOLIDATED BALANCE SHEETS May 29, 1997 May 30, 1996 (In Thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,991 $ 15,466 Accounts and notes receivable (Note 3) 5,531 8,780 Receivables from joint ventures (Note 9) 1,066 4,890 Other current assets 3,591 2,463 -------------------- Total current assets 18,179 31,599 PROPERTY AND EQUIPMENT, net (Note 3) 487,052 411,563 OTHER ASSETS: Investments in joint ventures (Notes 8 and 9) 1,439 1,295 Other (Note 10) 15,287 10,858 -------------------- Total other assets 16,726 12,153 -------------------- Total assets $521,957 $455,315 ==================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 9) $ 5,625 $ 5,555 Accounts payable 10,291 15,646 Income taxes 52 1,393 Taxes other than income taxes 9,297 8,323 Accrued compensation 1,270 1,380 Other accrued liabilities 10,886 9,352 Current maturities on long-term debt (Note 4) 9,327 9,069 -------------------- Total current liabilities 46,748 50,718 LONG-TERM DEBT (Note 4) 168,065 127,135 DEFERRED INCOME TAXES (Note 7) 22,425 20,027 DEFERRED COMPENSATION AND OTHER (Note 6) 7,426 6,187 COMMITMENTS, LICENSE RIGHTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY (Note 5): Preferred Stock, $1 par; authorized 1,000,000 shares; none issued Common Stock: Common Stock, $1 par; authorized 30,000,000 shares; issued 11,678,935 shares in 1997 and 11,529,962 shares in 1996 11,679 11,530 Class B Common Stock, $1 par; authorized 20,000,000 shares; issued and outstanding 8,707,632 shares in 1997 and 8,856,605 shares in 1996 8,708 8,857 Capital in excess of par 39,470 38,832 Retained earnings 220,860 195,643 -------------------- 280,717 254,862 Less cost of Common Stock in treasury (668,272 shares in 1997 and 718,352 shares in 1996) 3,424 3,614 -------------------- Total shareholders' equity 277,293 251,248 -------------------- Total liabilities and shareholders' equity $521,957 $455,315 ==================== See accompanying notes. THE MARCUS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED MAY 29, 1997 May 29, May 30, May 25, 1997 1996 1995 (In Thousands, Except Per Share Data) REVENUES: Rooms and telephone $156,689 $137,961 $119,705 Food and beverage 45,401 43,193 89,755 Theatre operations 79,733 63,099 53,733 Other income 21,534 18,034 14,797 ------------------------------- Total revenues 303,357 262,287 277,990 COSTS AND EXPENSES: Rooms and telephone 60,198 51,346 42,780 Food and beverage 33,218 32,014 69,137 Theatre operations 49,149 38,055 32,612 Advertising and marketing 20,635 15,273 16,241 Administrative 27,108 25,532 23,080 Depreciation and amortization 28,903 25,117 23,570 Rent (Note 8) 2,435 2,461 3,727 Property taxes 10,175 9,416 9,488 Other operating expenses 10,805 11,258 10,560 ------------------------------- Total costs and expenses 242,626 210,472 231,195 ------------------------------- OPERATING INCOME 60,731 51,815 46,795 OTHER INCOME (EXPENSE): Investment income 1,584 2,378 1,525 Interest expense (11,597) (8,696) (8,587) Gain on disposition of property and equipment (Note 2) 488 24,595 463 ------------------------------- (9,525) 18,277 (6,599) ------------------------------- EARNINGS BEFORE INCOME TAXES 51,206 70,092 40,196 INCOME TAXES (Note 7) 20,325 27,785 16,060 ------------------------------- NET EARNINGS $ 30,881 $ 42,307 $ 24,136 =============================== NET EARNINGS PER SHARE $ 1.56 $ 2.14 $ 1.23 =============================== WEIGHTED AVERAGE SHARES OUTSTANDING (Note 5) 19,830 19,808 19,691 =============================== See accompanying notes. THE MARCUS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE YEARS ENDED MAY 29, 1997 Class B Capital Common Common in Excess Retained Treasury Stock Stock of Par Earnings Stock (In Thousands) BALANCES AT MAY 26, 1994 $ 7,366 $6,225 $44,745 $139,777 $(4,195) Cash dividends: $.21 per share Class B Common Stock - - - (1,924) - $.23 per share Common Stock - - - (2,314) - Exercise of stock options - - - - 186 Savings and profit- sharing contribution - - 404 - 49 Reissuance of treasury stock - - 5 - 4 Conversions of Class B Common Stock 156 (156) - - - Net earnings - - - 24,136 - ------- ------ ------ ------- ------ BALANCES AT MAY 25, 1995 7,522 6,069 45,154 159,675 (3,956) Cash dividends: $.31 per share Class B Common Stock - - - (2,770) - $.34 per share Common Stock - - - (3,559) - Three-for-two stock split 3,764 3,032 (6,796) (10) - Exercise of stock options - - 118 - 403 Purchase of treasury stock - - - - (145) Savings and profit- sharing contribution - - 350 - 83 Reissuance of treasury stock - - 6 - 1 Conversions of Class B Common Stock 244 (244) - - - Net earnings - - - 42,307 - ------- ------ ------ ------- ------ BALANCES AT MAY 30, 1996 11,530 8,857 38,832 195,643 (3,614) Cash dividends: $.27 per share Class B Common Stock - - - (2,409) - $.30 per share Common Stock - - - (3,255) - Exercise of stock options - - 127 - 251 Purchase of treasury stock - - - - (214) Savings and profit- sharing contribution - - 383 - 115 Reissuance of treasury stock - - 128 - 38 Conversions of Class B Common Stock 149 (149) - - - Net earnings - - - 30,881 - ------- ------ ------ ------- ------ BALANCES AT MAY 29, 1997 $11,679 $8,708 $39,470 $220,860 $(3,424) ======= ====== ======= ======== ======= See accompanying notes. THE MARCUS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED MAY 29, 1997 May 29, May 30, May 25, 1997 1996 1995 (In Thousands) OPERATING ACTIVITIES Net earnings $ 30,881 $ 42,307 $24,136 Adjustments to reconcile net earnings to net cash provided by operating activities: Earnings on investments in joint ventures, net of distributions (144) (406) 33 Gain on disposition of property and equipment (488) (24,595) (463) Depreciation and amortization 28,903 25,117 23,570 Deferred income taxes 2,398 70 3,958 Deferred compensation and other 1,239 2,143 703 Contribution of Company stock to savings and profit-sharing plan 498 433 453 Changes in operating assets and liabilities: Accounts and notes receivable 3,249 (2,614) 193 Other current assets (1,128) 1,767 (1,768) Accounts payable (5,355) (2,240) 4,638 Income taxes (1,341) (676) (727) Taxes other than income taxes 974 (768) 1,784 Accrued compensation (110) (78) 10 Other accrued liabilities 1,534 1,300 1,074 ---------------------------- Total adjustments 30,229 (547) 33,458 ---------------------------- Net cash provided by operating activities 61,110 41,760 57,594 INVESTING ACTIVITIES Capital expenditures (107,514) (83,689) (77,083) Net proceeds from disposals of property, equipment and other assets 3,783 48,914 1,695 Purchase of interest in joint ventures, net of cash acquired - (260) - (Increase) decrease in other assets (4,602) (2,770) 1,049 Cash received from (advanced to) joint ventures 3,824 (3,029) 6,122 ---------------------------- Net cash used in investing activities (104,509) (40,834) (68,217) FINANCING ACTIVITIES Debt transactions: Net proceeds from issuance of notes payable and long-term debt 99,857 19,603 17,984 Principal payments on notes payable and long-term debt (58,599) (7,905) (4,494) Equity transactions: Treasury stock transactions, except for stock options (48) (138) 9 Exercise of stock options 378 521 186 Dividends paid (5,664) (6,339) (4,238) ---------------------------- Net cash provided by financing activities 35,924 5,742 9,447 ---------------------------- Net increase (decrease) in cash and cash equivalents (7,475) 6,668 (1,176) Cash and cash equivalents at beginning of year 15,466 8,798 9,974 ---------------------------- Cash and cash equivalents at end of year $ 7,991 $ 15,466 $ 8,798 ============================ See accompanying notes. THE MARCUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 29, 1997 1. Description of Business and Summary of Significant Accounting Policies Description of Business - The Marcus Corporation and its subsidiaries (the Company) operate principally in four business segments: Motels: Operates and franchises lodging facilities under the names Budgetel Inns and Woodfield Suites, primarily located in the eastern half of the United States. Theatres: Operates multi-screen motion picture theatres and a family entertainment center in Wisconsin and Illinois. Hotels/Resorts: Owns and operates full service hotels and resorts in Wisconsin and manages full service hotels in Wisconsin, Minnesota and California. Restaurants: Operates KFC restaurants under a license agreement for certain areas in the state of Wisconsin. 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 Motels and Hotels/Resorts segments had a 53-week year in fiscal 1997. The Theatres and Corporate segments had a 53-week year in fiscal 1996. All other segments in 1997 and 1996 and all segments in fiscal 1995 had 52-week years. 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. Inventories - Inventories, consisting principally of food and beverages, are stated at average cost or at first-in, first-out cost. Preopening Costs - Certain costs incurred prior to opening new or remodeled motels and remodeled hotels are deferred and charged to operations over the 12 months subsequent to the opening. Similar expenses incurred in connection with the opening and remodeling of theatres and restaurants are deferred and charged to operations at the time of opening. Depreciation and Amortization - Depreciation and amortization of property and equipment is provided using the straight-line method over the following estimated useful lives: Years Land improvements 10 - 39 Buildings and improvements 10 - 39 Leasehold improvements 3 - 39 Furniture, fixtures and equipment 3 - 15 Advertising and Marketing Costs - The Company expenses all advertising and marketing costs as incurred. Net Earnings Per Share - Net earnings per share were computed based on the weighted average number of shares of Common Stock, Class B Common Stock and common stock equivalents (stock options) outstanding during the year. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, entitled "Earnings per Share," which will be effective for periods ending after December 15, 1997. This Statement modifies the computation, presentation and disclosure requirements of earnings per share. The Company does not anticipate that this pronouncement will have a material impact on its reported earnings per share. Capitalization of Interest - The Company capitalizes interest during construction periods by adding such interest to the cost of property and equipment. Interest of approximately $1,320,000, $1,119,000 and $867,000 was capitalized in fiscal 1997, 1996 and 1995, respectively. 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. 2. Disposition of Restaurant Properties Pursuant to an asset purchase agreement dated April 12, 1995, the Company sold its 18 existing Applebee's Neighborhood Grill & Bar restaurants (Applebee's), two Applebee's under construction, five Applebee's under development and its development rights for Applebee's to Apple South, Inc. (the Purchaser). On June 5, 1995, the Company entered into a management agreement with the Purchaser, whereby the Purchaser would commence immediately managing, operating and assuming all of the Company's existing operating and development responsibilities related to the Company's Applebee's restaurant operations. The Purchaser was entitled to all profits of the restaurants subsequent to June 5, 1996, as reimbursement for its management service. On June 30, 1995, proceeds from the sale of approximately $48.3 million were received in cash. The Company realized a net pretax gain of $25.4 million in fiscal 1996. Revenues and operating income from the Company's Applebee's operations were not significant in fiscal 1996 and were as follows for the fiscal year ended May 25, 1995: (In Thousands) Revenues $35,574 Operating income 2,250 On February 27, 1995, the Company leased 11 of its Marc's Cafe and Coffee Mill restaurants to a group led by former members of the restaurants' management team. The lease terms, which include certain buyout incentives, differ for each location with the leases expiring on various dates through February 28, 2001. Revenues related to the Company's operation of the 11 restaurants were $10,169,000 for the fiscal year ended May 25, 1995. 3. Additional Balance Sheet Information The composition of accounts and notes receivable is as follows: May 29, 1997 May 30, 1996 (In Thousands) Trade receivables $3,871 $4,981 Notes receivable - 798 Other receivables 1,660 3,001 ------------------------ $5,531 $8,780 ======================== The composition of property and equipment, which is stated at cost, is as follows: May 29, 1997 May 30, 1996 (In Thousands) Land and improvements $ 70,313 $ 60,177 Buildings and improvements 399,416 329,458 Leasehold improvements 8,059 5,688 Furniture, fixtures and equipment 159,715 137,305 Construction in progress 12,019 22,336 ------------------------ Total property and equipment 649,522 554,964 Less accumulated depreciation and amortization 162,470 143,401 ------------------------ $487,052 $411,563 ======================== 4. Long-Term Debt Long-term debt is summarized as follows: May 29, 1997 May 30, 1996 (In Thousands) Mortgage notes due to 2002 $ 9,061 $ 9,890 Senior notes due May 31, 2005, with monthly principal and interest payments of $362,346, bearing interest at 10.22% 23,856 25,665 Senior notes due October 15, 2008, with annual principal payments of $6,666,666 due beginning October 15, 2000, bearing interest at 7.41% 60,000 - Senior notes due October 15, 2011, with annual principal payments of $2,272,727 due beginning October 15, 2001, bearing interest at 7.51% 25,000 - Industrial Development Revenue Bonds due to 2006 7,100 7,459 Unsecured term notes 52,375 57,719 Commercial paper - 11,971 Revolving credit agreements - 23,500 ------------------------ 177,392 136,204 Less current maturities 9,327 9,069 ------------------------ $168,065 $127,135 ======================== Substantially all of the mortgage notes, both fixed rate and adjustable, bear interest from 7.2% to 9.3% at May 29, 1997. Adjustable rate Industrial Development Revenue Bonds ($3,486,000 at May 29, 1997) bear interest at 76.5% of prime plus 1% (7.8% at May 29, 1997), or are adjustable based on high quality tax-exempt obligation rates (approximately 4.2% at May 29, 1997). The Company's remaining Industrial Development Revenue Bonds bear interest at 6.5% or 8.8%. The mortgage notes and the Industrial Development Revenue Bonds are secured by the related land, buildings and equipment. The Company has three unsecured term notes outstanding, as follows: May 29, 1997 May 30, 1996 (In Thousands) 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 6.56% at May 29, 1997. $21,875 $24,219 Note due February 1, 2003, with quarterly principal payments of $714,286 due beginning May 1, 1999. The variable interest rate is based on the LIBOR rate with an effective rate of 6.73% at May 29, 1997. 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 5.83% at May 29, 1997. 10,500 13,500 ------------------------ $52,375 $57,719 ======================== The Company periodically issues commercial paper through an agreement with a bank. The agreement requires the Company to maintain unused bank lines of credit at least equal to the principal amount of its outstanding commercial paper. At May 29, 1997, the Company had $50,000,000 of unused credit lines available under various bank revolving credit agreements. The interest rates under the revolving agreements were at prime or LIBOR plus 1%. There is an annual commitment fee of .25% of the unused portion of these commitments. Scheduled annual principal payments on long-term debt for the five years subsequent to May 29, 1997, are: Fiscal Year (In Thousands) 1998 $ 9,327 1999 15,167 2000 13,165 2001 18,686 2002 20,488 Interest paid, net of amounts capitalized, in 1997, 1996 and 1995 totaled $10,985,000, $8,272,000, and $8,610,000, respectively. Two swap agreements covering $15,000,000 were terminated during 1995 at a loss of $185,000. One remaining swap agreement covering $10,500,000, which is reduced by $750,000 quarterly, expires October 1, 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 (5.78% at May 29, 1997). The second remaining swap agreement covering $7,500,000 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 (5.81% at May 29, 1997). Together, these swap agreements effectively convert $18,000,000 of the Company's variable rate unsecured term notes to a fixed rate. The Company recorded the net interest expense (income) related to these swap agreements as incurred, totaling $4,000, $(96,000) and $61,000 in 1997, 1996 and 1995, respectively. The accompanying consolidated balance sheet at May 29, 1997, does not reflect the fair market value of the remaining swap agreements as determined by the lender, which totals approximately $252,000. The carrying amounts of the Company's long-term debt, based on the respective rates and prepayment provisions of the senior notes, approximate their fair value. 5. Shareholders' Equity The Company's Board of Directors declared a three-for-two stock split, effected in the form of a 50% stock dividend, distributed on November 14, 1995, to all holders of Common and Class B Common Stock. All per share, weighted average shares outstanding and stock option data prior to November 14, 1995, have been adjusted to reflect this dividend. 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 1,668,750 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 29, 1997 and May 30, 1996, there were 722,150 and 895,063 shares, respectively, 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 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 1997 and 1996, respectively: risk-free interest rates of 5.3% and 5.5%; dividend yield of 1.3% in both years; volatility factors of the expected market price of the Company's common stock of 55% in both years and an expected life of the option of approximately 6 years. Based on this analysis, the impact on net earnings and earnings per share is immaterial. A summary of the Company's stock option activity and related information follows: Year ended May 30, May 25, May 29, 1997 1996 1995 Weighted- Average Exercise Options Price Options Options (In Thousands, Except Per Share Data) Outstanding at beginning of year 506 $16.12 474 441 Granted 84 25.00 124 126 Exercised (29) 13.72 (59) (26) Forfeited (9) 19.72 (33) (67) ----- --- --- Outstanding at end of year 552 17.58 506 474 ===== === === Exercisable at end of year 247 15.91 144 101 ===== === === Weighted-average fair value of options granted during year $12.96 $10.21 Exercise prices for options outstanding as of May 29, 1997 ranged from $4.67 to $25.88. The weighted-average remaining contractual life of those options is 7.1 years. The Company's Board of Directors has approved the repurchase of up to 1,125,000 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 9,167 and 7,127 shares pursuant to this plan during 1997 and 1996, respectively. There were no purchases in 1995. At May 29, 1997, there were 338,513 shares available for repurchase under this authorization. The Board has authorized the issuance of up to 500,000 shares of Common Stock for The Marcus Corporation Dividend Reinvestment and Associate Stock Purchase Plan. At May 29, 1997, there were 492,762 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 29, 1997, retained earnings of approximately $74,396,000 were unrestricted. 6. 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 $1,485,000, $1,355,000 and $917,000 for 1997, 1996 and 1995, respectively. 7. Income Taxes Income tax expense consists of the following: Year ended May 29, 1997 May 30, 1996 May 25, 1995 (In Thousands) Currently payable: Federal $14,415 $22,347 $ 9,273 State 3,512 5,368 2,829 Deferred 2,398 70 3,958 -------------------------------- $20,325 $27,785 $16,060 ================================ 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. The components of the net deferred tax liability were as follows: May 29, 1997 May 30, 1996 (In Thousands) Deferred tax assets: Accrued employee benefits $ 1,765 $ 1,297 Other 493 263 Total deferred assets 2,258 1,560 ------------------------ Deferred tax liability - Depreciation and amortization 24,683 21,587 ------------------------ Net deferred tax liability included in balance sheet $22,425 $20,027 ======================== A reconciliation of the statutory federal tax rate to the effective tax rate follows: Year ended May 29, 1997 May 30, 1996 May 25, 1995 Expected tax expense: 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 5.1 5.1 5.3 Jobs tax credits - - (.3) Other (.4) (.5) - ---------------------------------- 39.7% 39.6% 40.0% ================================== Income taxes paid in 1997, 1996 and 1995 totaled $19,268,000, $28,391,000 and $12,830,000, respectively. 8. 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. Rent expense charged to operations under these leases was as follows: Year ended May 29, 1997 May 30, 1996 May 25, 1995 (In Thousands) Fixed minimum rentals $2,282 $2,287 $2,358 Percentage rentals 335 356 1,551 Sublease rental income (182) (182) (182) ------------------------------ $2,435 $2,461 $3,727 ============================== Payments to affiliated parties for lease obligations were approximately $492,000, $268,000 and $335,000 in 1997, 1996 and 1995, respectively. Aggregate minimum rental commitments at May 29, 1997, are as follows, in thousands: Fiscal Year 1998 $ 1,710 1999 1,631 2000 1,577 2001 1,616 2002 1,577 After 2002 14,659 ------- $22,770 ======= Included in the above commitments is $6,274,000 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 $24,000,000 at May 29, 1997. 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 $17,599,000 at May 29, 1997. The debt of the joint ventures is collateralized by the real estate, buildings and improvements, and all equipment of each joint venture. 9. Joint Venture Transactions At May 29, 1997 and May 30, 1996, the Company held investments of $1,439,000 and $1,295,000, respectively, in various approximately 50%-owned affiliates (joint ventures) which are accounted for under the equity method. The Company has receivables from the joint ventures of $1,066,000 and $4,890,000 at May 29, 1997 and May 30, 1996, respectively. The Company earns interest on $189,000 and $4,076,000 of the receivables at approximately prime to prime plus 1.5% at May 29, 1997 and May 30, 1996, respectively. Included in notes payable at May 29, 1997 and May 30, 1996, is $2,294,000 and $1,515,000, 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. 10. Business Segment Information Following is a summary of business segment information for 1995 through 1997: Hotels/ Corporate Motels Theatres Resorts Restaurants Items Total (In Thousands) 1997 Revenues $135,251 $80,586 $60,210 $26,828 $ 482 $303,357 Operating income (loss) 39,787 16,865 5,464 2,681 (4,066) 60,731 Depreciation and amortization 15,389 5,071 6,174 2,001 268 28,903 Assets 287,027 98,554 79,829 24,979 31,568 521,957 Capital expenditures 55,916 37,364 13,445 384 405 107,514 1996 Revenues $118,679 $63,696 $53,498 $25,927 $ 487 $262,287 Operating income (loss) 36,266 15,017 3,374 1,992 (4,834) 51,815 Depreciation and amortization 13,815 3,265 5,467 2,191 379 25,117 Assets 247,328 63,365 73,045 29,041 42,536 455,315 Capital expenditures 51,542 20,316 8,010 619 3,202 83,689 1995 Revenues $104,356 $53,968 $45,292 $74,076 $ 298 $277,990 Operating income (loss) 31,992 12,175 1,473 3,318 (2,163) 46,795 Depreciation and amortization 12,883 2,766 4,101 3,385 435 23,570 Assets 211,112 46,928 68,731 53,090 27,221 407,082 Capital expenditures 32,880 10,999 27,207 5,900 97 77,083 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. The Company has a loan outstanding of approximately $2,750,000 at May 29, 1997, to one of the hotels it manages, which bears interest at the prime rate plus 1% and matures December 31, 2008. PART III Item 10. Directors and Executive Officers of the Company. The information required by this item with respect to directors is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Election of Directors" in the definitive Proxy Statement for the Company's 1997 Annual Meeting of Shareholders scheduled to be held September 29, 1997 ("Proxy Statement"). The required information with respect to executive officers appears at the end of Part I of this Form 10-K. Item 11. Executive Compensation. The information required by this item is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Executive Compensation" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Stock Ownership of Management and Others" in the Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item, to the extent applicable, is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Certain Transactions" in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 1. Financial Statement Schedules. (a) All schedules are omitted because they are inapplicable, not required under the instructions or the financial information is included in the consolidated financial statements or notes thereto. 2. Exhibits and Reports on Form 8-K. (a) The exhibits filed herewith or incorporated by reference herein are set forth on the attached Exhibit Index.* (b) The Company did not file a Form 8-K with the Securities and Exchange Commission during the fourth quarter of fiscal 1997. __________________ * Exhibits to this Form 10-K will be furnished to shareholders upon advance payment of a fee of $0.20 per page, plus mailing expenses. Requests for copies should be addressed to Thomas F. Kissinger, General Counsel and Secretary, The Marcus Corporation, 250 East Wisconsin Avenue, Suite 1700, Milwaukee, Wisconsin 53202. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MARCUS CORPORATION Date: August 22, 1997 By:/s/ Stephen H. Marcus Stephen H. Marcus, Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities as of the date indicated above. By:/s/ Stephen H. Marcus By:/s/ George R. Slater Stephen H. Marcus, Chairman of the George R. Slater, Director Board and President (Chief Executive Officer) By:/s/ Douglas A. Neis By:/s/ Lee Sherman Dreyfus Douglas A. Neis, Treasurer and Lee Sherman Dreyfus, Director Controller (Chief Financial and Accounting Officer) By:/s/ Bruce J. Olson By:/s/ Daniel F. McKeithan, Jr. Bruce J. Olson, Director Daniel F. McKeithan, Jr., Director By:/s/ John L. Murray By:/s/ Diane Marcus Gershowitz John L. Murray, Director Diane Marcus Gershowitz, Director By:/s/ Alan H. Selig By:/s/ Timothy E. Hoeksema Alan H. Selig, Director Timothy E. Hoeksema, Director By:/s/ Ulice Payne, Jr. By:/s/ Philip L. Milstein Ulice Payne, Jr., Director Philip L. Milstein, Director EXHIBIT INDEX 3.1 Articles of Incorporation. [Incorporated by reference to Exhibit 3.1 to the Company's Form S-3 Registration Statement (No. 33-57468).] 3.2* Bylaws, as amended as of September 28, 1995. [Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended May 30, 1996.] 4.1 Senior Note Purchase Agreement dated May 31, 1990 between the Company and The Northwestern Mutual Life Insurance Company. [Incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1990.] 4.2 The Marcus Corporation Note Purchase Agreement, dated October 25, 1996. [Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended November 14, 1996. 4.3 Other than as set forth in Exhibits 4.1 and 4.2, the Company has numerous instruments which define the rights of holders of long-term debt. These instruments, primarily promissory notes, have arisen from the purchase of operating properties in the ordinary course of business. These instruments are not being filed with this Annual Report on Form 10-K in reliance upon Item 601(b)(4)(iii) of Regulation S-K. Copies of these instruments will be furnished to the Securities and Exchange Commission upon request. 10.1 The Company is the guarantor and/or obligor under various loan agreements in connection with operating properties (primarily Budgetel Inns) which were financed through the issuance of industrial development bonds. These loan agreements and the additional documentation relating to these projects are not being filed with this Annual Report on Form 10-K in reliance upon Item 601(b)(4)(iii) of Regulation S-K. Copies of these documents will be furnished to the Securities and Exchange Commission upon request. 10.2 Comprehensive Image Enhancement Agreement dated October 12, 1988 between the Company and KFC Corporation. [Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended May 25, 1989.] 10.3 Form of individual Kentucky Fried Chicken franchise agreement between the Company and KFC Corporation. 10.4* The Marcus Corporation 1987 Stock Option Plan. [Incorporated by reference to Exhibit A to the Company's 1987 Proxy Statement.] 10.5* The Marcus Corporation 1995 Equity Incentive Plan, as amended. [Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended May 30, 1996.] 10.6* The Marcus Corporation 1994 Nonemployee Director Stock Option Plan. [Incorporated by reference to Exhibit A to the Company's 1994 Proxy Statement.] 21 Subsidiaries of the Company as of May 29, 1997. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule. 99 Definitive Proxy Statement for 1997 Annual Meeting of Shareholders scheduled to be held on September 29, 1997 (filed with the Securities and Exchange Commission under Regulation 14A on August 22, 1997 and incorporated by reference herein to the extent indicated). __________ * This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K. EX-10.3 2 EXHIBIT 10.3 Exhibit 10.3 Effective Date: _________________________ Reference: Opening Date KENTUCKY FRIED CHICKEN FRANCHISE AGREEMENT dated ___________________ by and between KFC CORPORATION, a Delaware corporation ("KFC"), which has its principal office at 1441 Gardiner Lane, Louisville, Kentucky, and (the "Franchisee"), with respect to the "Outlet" consisting of the premises, and all structures, appurtenances, fixtures, equipment, facilities and entry, exit, parking and other areas, now or at any time located on the real property the dimensions and layout of which have previously been submitted by plot plan to KFC and which bear the address: In consideration of the premises, the Franchisee and KFC hereby agree as follows: 1. Section Headings The section headings listed below are for convenience of reference only and shall not affect the interpretation of this Agreement. Heading Page 1. Section Headings 1 2. Recitals - Caveat 2 3. License 2 4. New Agreement upon Expiration 4 5. Compliance with Standards, Etc. 5 6. Maintenance and Upgrading of Outlet 9 7. Services by KFC 9 8. Royalties 10 9. Gross Revenues 10 10. Advertising 11 11. Records and Audits 13 12. Purchase of Equipment, Supplies, Etc. 14 13. Insurance 15 14. Condemnation and Casualty 16 15. Restriction on Certain Activities 16 16. Assignment 17 17. Termination of License 19 18. National Franchisee Advisory Council 20 19. Right to Apply for New Franchised Outlets 20 20. Miscellaneous 20 21. Certain Representations by the Franchisee 22 2. Recitals - Caveat. KFC over the course of years has developed a unique system for preparing and marketing fried chicken and other food products pursuant to trade secrets, standards and specifications designed to maintain a uniform high quality of product, service and national image. KFC has also developed and owns certain trademarks and service marks which enjoy a national reputation. Franchisee recognizes the value of the system, the trademarks and continued uniformity of image to himself, to KFC and to other franchisees of Kentucky Fried Chicken outlets. In order to enhance the value of the system and trademarks and goodwill associated therewith, this Agreement places detailed and substantial obligations on the Franchisee including strict adherence to KFC's reasonable present and future requirements regarding menu items, advertising, physical facilities, etc. Future improvements may be required in the Outlet, and certain provisions apply to other KFC outlets under common control with the Outlet. The rights granted to the Franchisee are for a limited time. Their value derives principally from certain KFC trademarks and associated goodwill, designs, systems and processes developed at considerable expense and effort. BEFORE SIGNING THIS AGREEMENT, THE FRANCHISEE SHOULD READ IT CAREFULLY WITH THE ASSISTANCE OF LEGAL COUNSEL. The Franchisee acknowledges that (1) THE SUCCESS OF THE BUSINESS VENTURE CONTEMPLATED HEREIN INVOLVES SUBSTANTIAL RISKS AND DEPENDS UPON THE ABILITY OF THE FRANCHISEE AS AN INDEPENDENT BUSINESSMAN AND HIS ACTIVE PARTICIPATION IN THE DAILY AFFAIRS OF THE BUSINESS, AND (2) NO ASSURANCE OR WARRANTY, EXPRESS OR IMPLIED, HAS BEEN GIVEN AS TO THE POTENTIAL SUCCESS OF SUCH BUSINESS VENTURE OR THE GROSS REVENUES, VOLUME OR EARNINGS LIKELY TO BE ACHIEVED, AND (3) NO STATEMENT, REPRESENTATION OR OTHER ACT, EVENT OR COMMUNICATION, EXCEPT AS SET FORTH HEREIN, IS BINDING ON KFC IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT. 3. License. 3.1 Subject to the limitations elsewhere in this Agreement, KFC hereby grants to the Franchisee during the License Term the right and license (the "License") to use at the Outlet certain trade names, trademarks and service marks owned by KFC and to prepare and market Approved Products at the Outlet (and only at the Outlet) only in connection with products and services meeting KFC's quality standards through the use of processes and trade secrets communicated by KFC. The Approved Products shall consist of Required Products and Optional Products. Required Products are Colonel Sanders' Kentucky Fried Chicken Original Recipe ("Original Recipe"), Kentucky Fried Chicken Extra Tasty Crispy Chicken ("Extra Crispy"), or Hot & Spicy Chicken, mashed potatoes, gravy, cole slaw, and other "fixin's" and other products introduced into the system in accordance with subsection 5.7. Optional Products are products which are authorized for sale under KFC's trademarks and service marks, but are not required to be sold. As additional Optional Products are introduced by KFC, KFC will give notice of the time and manner of introduction. Franchisee must seek the written approval of KFC for Optional Products, and KFC may withhold such approval if the Franchisee is not in compliance with the terms of this Agreement. If KFC approves in writing, at its sole discretion, upon review of Franchisee's specifications, Franchisee may also sell at the Outlet, certain high quality food items for which KFC does not presently have specifications. The initial Required Products and Optional Products and the trade names, trademarks, and service marks presently authorized for use in connection with them are shown on Exhibit A. 3.2 Subject to the termination provisions in this Agreement, the Franchisee agrees to operate the Outlet during the License Term in accordance with this Agreement. 3.3 The License Term shall expire on the 20th anniversary of the opening date subject to earlier termination pursuant to this Agreement. KFC will notify the Franchisee at least six months in advance of expiration of the License Term. Should KFC fail to give such notice, then the License Term shall be extended but only to the date six months from the date KFC does give notice, and any renewal term granted pursuant to Section 4 shall expire on the appropriate anniversary date as though KFC had given notice when required. 3.4 Upon termination or expiration of the License, the Franchisee (and, if Franchisee is a corporation, the officers, directors and shareholders and agents of Franchisee) shall immediately discontinue use of all KFC trademarks, service marks, trade names, trade secrets, and know-how and processes developed and owned by KFC and shall immediately and at no cost to KFC remove signs, menuboard inserts, point-of-sale material, red and white stripes and any characteristically designed roof from the Outlet and otherwise change its exterior and interior appearance so that it is no longer confusingly similar to a Kentucky Fried Chicken outlet and no longer bears any KFC trademarks, service marks or trade names or designations or marks similar thereto. If the Franchisee fails to immediately remove the signs and make such changes, KFC may do so by entering the premises of the Outlet and the Franchisee shall pay to KFC the costs it so incurs. Franchisee shall also return all confidential operating manuals and other confidential materials to KFC and at KFC's option, upon payment of the fair market value thereof by KFC, return to KFC all supplies and any other materials bearing the trademarks, service marks or trade names of KFC. This Agreement and the obligations of the parties hereunder shall survive the termination or expiration of the License except to the extent expressly otherwise provided herein. 3.5 The License does not include the right to sell any product for resale, the right to sell any product at or from any place except the Outlet, or the right to prepare or deliver any product at any place other than the Outlet except for catering and special event sales made in strict accordance with KFC's catering and special event procedures, which procedures are subject to reasonable changes from time to time by KFC on at least sixty (60) days' notice. Franchisee shall give KFC at least thirty (30) days' (or such shorter period as may be reasonable under the circumstances) advance notice of any special event sale (such as fairs, athletic events and conventions). 3.6 Except as provided in subsection 3.8, during the License Term KFC shall not use or license others to use any of the trademarks licensed hereunder, in connection with the sale of any food products at any location within a radius of one and one-half miles of the Outlet, unless: (a) the sales are made at locations which (at the time KFC or any of its affiliates commits to buy, lease or franchise any such location or locations) are outside of a circular area having the Outlet as its center and within which 30,000 people reside or, in case of a metropolitan area containing more than 100,000 people, within which 30,000 people reside or work, or both reside and work, or (b) the sales are made in connection with special events, the occurrence of which KFC notifies Franchisee with sufficient time for Franchisee to meet the requirements of subsection 3.5, and Franchise chooses not to make such sales. If Franchisee does not notify KFC of its intention to make sales at a special event as provided in subsection 3.5, then KFC may make such sales itself or license others to make them. 3.7 Franchisee will strictly comply with the requirements and instructions of KFC regarding the use of the trademarks, trade names and service marks in connection with the Approved Products and the Outlet. The Franchisee acknowledges that the goodwill associated with KFC's trademarks, service marks and trade names is and will remain the exclusive property of KFC and that the Franchisee will derive no benefit from such goodwill except through profit received from the operation or possible sale of the Outlet during the License Term, which is subject to early termination as set forth herein. Any enhancement of the goodwill associated with KFC's trademarks, service marks and trade names during the License Term will inure to the benefit of KFC except to the extent of such profits, if any, realized by the Franchisee during the License Term, following which no value shall be attributable to any goodwill of KFC's trademarks, service marks and trade names acquired or enjoyed by the Franchisee pursuant to this Agreement and all right to use KFC's trademarks, etc. shall revert automatically to KFC at no cost to KFC. 3.8 KFC or any company affiliated with it may sell within the area described in subsection 3.6, or grant franchises to others to sell, through grocery stores or other quick-service restaurants or otherwise, food products (other than chicken served in whole pieces) using the name or likeness of Colonel Sanders and the trademarks historically associated with the product "Kentucky Kandies", but which otherwise bear different trade names, trademarks and service marks from those licensed hereunder. KFC covenants, however, that it will not use, or permit the use of, the name or the likeness of Colonel Sanders in connection with alcoholic or tobacco products or poultry products other than Approved Products, or in connection with quick-service restaurants other than Kentucky Fried Chicken outlets, whether within or without the area described in subsection 3.6. 4. New Agreement Upon Expiration. At the expiration of the term hereof, Franchisee may extend this Agreement for successive ten (10) year periods, provided that at the time of expiration of the term hereof or the then current extended term: (a) Franchisee shall not have failed to remedy any breach specified by KFC in any notice then outstanding under subsection 17.3. (b) Franchisee shall agree to make such capital expenditures as may be reasonably required to renovate and modernize the Outlet and its signs and equipment so as to reflect the image of Kentucky Fried Chicken outlets. (c) If renovation and modernization of the Outlet is not possible or feasible, Franchisee shall relocate the Outlet within the area described in subsection 3.6 or such other area as may be approved by KFC in writing in accordance with KFC's relocation procedures. (d) Franchisee shall execute a new license agreement on the form then being used by KFC, but without any increase in royalty fee or advertising contributions or any change in renewal or assignment provisions or in the protected territory provision contained in subsection 3.6. (e) All monetary obligations owed to KFC and its subsidiaries and affiliates must be current at the time of renewal. (f) Franchisee shall pay to KFC $2,000, which amount will be adjusted to reflect each 10% rise in the United States Department of Commerce Composite Consumer Price Index (or the nearest comparable index should that index no longer be prepared), hereinafter referred to as the "Consumer Price Index," using June 1976 as the base period (such index being 170.10), but in no event shall such amount exceed the renewal fee then being provided for in contracts issued for new Kentucky Fried Chicken franchises. (g) Franchisee shall not have engaged in chronic repeated breaches of this Agreement of a substantial nature within the preceding twenty-four (24) months prior to renewal. 5. Compliance with Standards, Etc. 5.1 The Franchisee represents that the Outlet has in all respects been constructed, established and prepared to conduct business in strict compliance with all plans, specifications and requirements prescribed by KFC, and that any material deviations from KFC's standard plans, specifications, and requirements have been approved in writing by KFC. At KFC's request made at any time within one year of the date of this Agreement, the Franchisee will promptly correct any unapproved deviations. 5.2 The Franchisee shall, consistent with the terms of this Agreement, diligently develop the business of the Outlet and use his best efforts to market and promote the Required Products and the Optional Products which are offered for sale at the Outlet. 5.3 During the License Term, the Franchisee will strictly comply with all reasonable standards, specifications, processes, procedures, requirements, and instructions of KFC regarding the operation of the business which now exist or may be established from time to time, and Franchisee will take such action and precautions as necessary to assure that: (a) the Franchisee or a fully trained and qualified manager devotes his full time to the supervision, management and operation of the Outlet. (b) the Franchisee and employees at the Outlet attend and complete such courses, programs and seminars at such locations, as KFC may from time to time reasonably require, in order that such persons may be fully trained and instructed on a continuing basis in various aspects of operating a KFC outlet, provided that KFC shall not bear the salary, travel, hotel, meal or other expenses of persons attending. (c) all Approved Products offered for sale at the Outlet are prepared at the Outlet for sale to customers at the Outlet, except that beverages, "side items" or "fixin's," as authorized by KFC, may be prepared elsewhere, but any such authorization shall be subject to change or termination by KFC, in exercise of its reasonable business judgment, if it is found by KFC that preparation elsewhere results in a lessening of the high quality of food products required by KFC's specifications. (d) each additional Required Product introduced into the franchised system as provided in subsection 5.7, is offered for sale on a continuing basis at the Outlet at the time and in the manner required by KFC. (e) no sale of any product except Approved Products is solicited, accepted or made at or from the Outlet, and that no products except Approved Products are prepared at the Outlet, except when specifically authorized in writing by KFC. (f) the provisions of subsection 3.5 are adhered to. (g) if requested by KFC on at least ninety (90) days' notice as part of a general program or standardization effort by KFC, the marketing of any Optional Product is discontinued, whereupon the discontinued product shall cease to be an Approved Product, but Franchisee may continue to sell such discontinued product with written approval of KFC, which approval shall not be unreasonably withheld taking into consideration such factors as Franchisee's investment in equipment used to prepare the Optional Product and the potential loss in revenues to the Franchisee from discontinuing the sale of such product. (h) only signs and menuboards, advertising and promotional material, equipment, supplies, uniforms, paper goods, packaging, furnishings, fixtures, recipes, and food ingredients which meet KFC's standards and specifications (as established from time to time) are used at the Outlet or in connection with its business. (i) all equipment, signs, menuboards, supplies and other items necessary in connection with adding new Approved Products are acquired, installed and utilized (and that the marketing of such new Approved Products begins) at the Outlet as soon as possible consistent with the reasonable requirements of KFC. (j) equipment, signs, menuboards, supplies, and other items are added, eliminated, substituted and modified at the Outlet as soon as practicable in accordance with reasonable changes in KFC's specifications and requirements. (k) the Outlet and everything located at the Outlet are maintained in first-class condition and repair and are kept clean, neat and sanitary; the Outlet is adequately lighted and is operated in a clean, wholesome and sanitary manner consistent with KFC's requirements; all maintenance, repairs and replacements reasonably requested by KFC or needed in connection with the Outlet are promptly made; and all employees are clean and neat in appearance. (l) no alterations of the Outlet affecting the image are made except at KFC's request or with KFC's approval, and that any such alterations strictly conform to specifications and requirements established or approved by KFC. (m) the Outlet and its business will comply with applicable laws, ordinances and governmental rules, regulations and other requirements, including but not limited to health and sanitation requirements, and that KFC is advised promptly in the event of a conflict between this requirement and any other requirement in or pursuant to this Agreement. (n) such advertising materials as may be furnished to KFC or the National Co-Op (hereafter defined) from time to time for use by the Franchisee are used only in the manner and during the period specified by KFC or the National Co-Op. (o) the Outlet is open for business every day during the License Term during the hours reasonably specified by KFC, except Christmas and Thanksgiving and such days as the Outlet is closed for repairs pursuant to Section 14 (Condemnation and Casualty). (p) the employees, and the supplies and other items on hand at the Outlet, are at all times sufficient to meet the anticipated volume of business. (q) all debts and taxes in connection with the Outlet and its business, except those duly contested in a bona fide dispute, are paid when due, including but not limited to debts payable to KFC and its affiliates. (r) all necessary and appropriate measures are taken to avoid an unsatisfactory or equivalent safety, sanitation or health rating at any time from any governmental agency or authority, and that conditions or practices disapproved by any such agency or authority are promptly corrected except that, after consultation with KFC by Franchisee, Franchisee may contest the action by such agency or authority as being arbitrary, capricious, unfair and unwise. 5.4 In prescribing standards, specifications, processes, procedures, requirements or instructions under subsection 5.3 or any other provision of this Agreement, KFC shall take no part in determining the prices charged by the Franchisee for products or services of any kind and shall not have control over the day-to-day managerial operations of the Outlet. 5.5 KFC will deliver to the Franchisee a Confidential Operating Manual, and the Franchisee will abide by and may rely upon the Confidential Operating Manual, which shall be subject to and which shall be deemed to include such reasonable supplements, revisions and later instructions as may be issued from time to time by KFC. The Franchisee will treat the Confidential Operating Manual and trade secrets and know-how of KFC as confidential, and will not disclose any such information to anyone except employees of the Franchisee as necessary for the proper operation of the Outlet and except other persons authorized by KFC to receive such information. The Franchisee will take reasonable precautions to cause his employees to keep such information confidential by entering into appropriate agreements, in such form as approved by KFC, with those employees who have access to such information. The Confidential Operating Manual and other information furnished by KFC in connection with the business of KFC or the Outlet will be and remain the property of KFC and, if in tangible form, will be returned to KFC at the end of the License Term. The Franchisee shall not copy, duplicate, record or otherwise reproduce all or any part of the Confidential Operating Manual or any other material containing the trade secrets or confidential information concerning KFC or its trademarks or processes, and shall take all reasonable precautions to prevent his employees from doing so. 5.6 KFC and its representatives shall have the right, during business hours and at all other reasonable times, to enter and inspect the Outlet and all other facilities used for the preparation, storage, transportation, etc., of any Approved Products, to discuss with the Franchisee or such other people as the Franchisee may designate, concerning all matters that may pertain to compliance with this Agreement and with standards, specifications, requirements, instructions and procedures hereunder, to take photographs of the Outlet and such other facilities, and to buy samples of food products and other items at the Outlet and other points-of-sale. KFC and its representatives shall also have the right, under the supervision of the Franchisee or his designee, to collect samples at any other facilities under the control of the Franchisee. The Franchisee will in all respects cooperate with KFC in its exercise of rights under this subsection. 5.7 When an Optional Product is sold in the United States in stores owned by two-thirds of the Kentucky Fried Chicken franchisees or when such Optional Product is sold in the United States in three-fourths of the Kentucky Fried Chicken stores franchised by KFC and owned by KFC and its affiliates, then on advance notice of at least one year, KFC may specify such Optional Product as a Required Product. 5.8 KFC shall not enforce against Franchisee the standards, specifications, requirements, instructions and procedures set forth in Sections 5 and 10 if they exceed the standards, specifications, requirements, instructions and procedures enforced by KFC in Kentucky Fried Chicken outlets owned and operated by KFC or its affiliates in the market nearest the Outlet in which they have such outlets. 6. Maintenance and Upgrading of Outlet 6.1 Franchisee shall at all times comply, and cause the Outlet to comply with all standards, specifications, processes, procedures, requirements and reasonable instructions of KFC regarding the Outlet's physical facilities, including the layout of furnishings and fixtures, and facilities at which or by means of which the Franchisee is permitted by KFC to store, handle, prepare or transport Approved Products or ingredients to be used in preparing them. 6.2 Recognizing the value of uniform national standards to Franchisee, KFC and the franchised system, Franchisee shall from time to time abide by any reasonable requirement of KFC with regard to the remodeling and upgrading of the Outlet to comply with standards then applicable to new franchises and stores owned by KFC and its affiliates, provided, however, that such requirements shall not impose an undue economic burden. 6.3 If any changes in or additions of equipment or changes in or additions to the Outlet are required by KFC in connection with upgrading or remodeling, the Franchisee will bear the entire cost thereof. Similarly, Franchisee will bear the entire cost of adding equipment and altering the Outlet for Optional Products which Franchisee desires to sell or for Required Products which KFC requires Franchisee to sell pursuant to subsection 5.7. KFC cannot foresee with precision what may become Required Products in the future. Certain Optional Products may become Required Products, and KFC is testing other food products which may become Optional and then Required Products. Franchisee acknowledges that possible additional investment may be called for pursuant to this subsection. 6.4 KFC agrees that it will not enforce against Franchisee the provisions of Section 6 if they exceed the reasonable remodeling or upgrading standards that are applied to the Kentucky Fried Chicken outlets owned by KFC or its affiliates in the market nearest the Outlet, in which they have such outlets. In interpreting this subsection, the outlets of KFC or its affiliates in such nearest market shall be considered as a whole so that Franchisee may not deny his obligations under Section 6 by comparing the Outlet to any single outlet of KFC or its affiliates in such nearest market. 7. Services by KFC. The initial franchise fee and the royalties hereunder are paid or payable for the License and not for services by KFC, and any failure by KFC to provide services shall not excuse Franchisee from paying the initial franchise fee or the royalties. KFC shall offer to the Franchisee such initial and continuing services as KFC deems necessary or advisable in connection with furthering the business of the Franchisee and the KFC system and in connection with protecting the trade names, trademarks, service marks and goodwill of KFC. Among such continuing services shall be the furnishing of operating advice and training at KFC's school or otherwise on a continuing basis through its representatives; undertaking further refinement of products and equipment and informing Franchisee of proven methods of quality control; informing Franchisee of such engineering research and development which in KFC's opinion may be beneficial to Franchisee's operations; recommending such accounting and business procedures which KFC believes may be of value; and scheduling and holding from time to time local, regional and national meetings and seminars for the advancement and dissemination of its methods in processing and marketing Approved Products. Although no charge is presently made for services offered to franchisees generally, KFC may charge for optional services which are in addition to the services presently offered without charge. KFC expects to continue to offer products for sale to its franchisees for use in their operations but is not bound to do so, except for assuring (subject to causes or conditions beyond KFC's control) a source of supply of items incorporating KFC trade secrets which are essential in operating a KFC outlet. 8. Royalties 8.1 Franchisee shall pay to KFC royalties for the License at the rate of 4% of Gross Revenues (as defined in Section 9) for each month or partial month that the store is in operation. Franchisee shall pay to KFC as a minimum monthly royalty the sum of $600, said minimum to be adjusted for every 10% increase in the Consumer Price Index, using June 1976 as the base period (170.10), but in no event shall such minimum royalty exceed the minimum royalty then being charged by KFC for new Kentucky Fried Chicken franchises. If Franchisee is unable to operate from the Outlet due to damage or loss to the Outlet caused or created by a casualty, act of God or other condition over which Franchisee has no control, then the minimum royalty referred to in the preceding sentence shall be waived, provided, however, that such waiver shall not extend beyond the twelve- month period commencing with the month the casualty occurs. 8.2 On or before the 20th day of each month, the Franchisee shall, with or without notice from KFC, pay to KFC, or deposit in the mail addressed for KFC, his royalty payments for the preceding month or partial month. Each payment of royalties shall be accompanied by a statement as to the relevant Gross Revenues, and the statement shall be in such form and detail as may be furnished by KFC from time to time. 8.3 Although each failure to pay royalties when due will be a material breach of this Agreement, to encourage prompt payment and to cover the costs and expenses involved in handling and processing late payments, the Franchisee shall also pay, upon demand, a late payment charge at the rate of 1 1/2% of all royalties for each month or partial month cumulative during which they are due and unpaid. 9. Gross Revenues 9.1 No mention of products or services in this section is intended to mean or imply that such products or services are approved for sale at the Outlet. 9.2 For purposes of this Agreement, Gross Revenues includes the total of all monies and receipts derived from products prepared and services performed at the Outlet, at special events or from catering and from all sales and orders made, solicited or received at the Outlet or at special events and from all other business whatsoever conducted at or from the Outlet, whether such revenues are evidenced by cash, credit, checks, gift certificates, scrip, food stamps, coupons (but see subsection 9.3(b) below), services, property or other means of exchange, and whether such sales are of food, beverages, tobacco products, vending machine items, services, merchandise or products of any nature whatsoever. 9.3 However, Gross Revenues shall not include: (a) sales or merchants' or other taxes measured on the basis of the gross revenues of the business imposed by governmental authorities directly on sales and collected from customers, provided the taxes are added to the selling price and are in fact paid by the Franchisee to the appropriate governmental authorities, or (b) promotional or discount coupons to the extent that the Franchisee realizes no revenue therefrom through issuance, redemption or otherwise. Cash refunded and credit given to customers, and receivables uncollectible from customers, shall be deducted in computing Gross Revenues to the extent that such cash, credit or receivables represent amounts previously included in Gross Revenues on which royalties were paid. 9.4 Gross Revenues shall be deemed received by the Franchisee at the time the products, merchandise or services from which they derive are delivered or rendered or at the time the relevant sale takes place, whichever occurs first. Gross Revenues consisting of property or services shall be valued at the prices applicable, at the time such Gross Revenues are received, to the products or services exchanged for such Gross Revenues. 10. Advertising 10.1 During the License Term, the Franchisee shall make such payments to the KFC National Council and Advertising Cooperative Inc. (the "National Co-Op") as shall be established by it from time to time, and shall spend at least 3% of Gross Revenues on other advertising and marketing activities, including participation in Approved Local Co-Ops, as more fully provided in subsection 10.4 below. Franchisee shall submit all advertising material, except material received from KFC or the National Co-Op, to KFC's Legal Department 15 days prior to use and KFC shall have 5 working days to approve or disapprove the use, provided that if KFC takes no action, Franchisee may use the material and provided further, that KFC shall have no participation in establishing prices charged by the Franchisee for products or services of any kind. 10.2 The Franchisee shall promptly join the National Co-Op and promptly enter into with it, effective as of the date of this Agreement, an Advertising Agreement in the form attached hereto (unless Franchisee shall have already signed such an agreement for the Outlet). The Franchisee shall, during the License Term, comply with all the terms of The Advertising Agreement, maintain it in full force and effect, be and remain a member in good standing of the National Co-Op, faithfully abide by its rules and bylaws, and make payments to it in the amounts and at the times established by it from time to time. Such payments shall be made with respect to the Outlet and all other outlets which sell Kentucky Fried Chicken and which are owned or controlled by or franchised to all or any of the persons named herein as the Franchisee, or any person or persons who control, are controlled by or are under common control with any person or persons named herein as the Franchisee. The present National Co-Op contribution rate is 2% subject to change in accordance with its bylaws. Should the rate be changed to an amount exceeding 2%, then the amount to be expended pursuant to subsection 10.3 below shall correspondingly decrease so Franchisee will at no time be required by KFC to expend in excess of 5% of Gross Revenues for advertising purposes. KFC will also not require Franchisee to expend in excess of 5% of Gross Revenues for advertising purposes pursuant to franchise agreements for other outlets to which this section pertains. NOTE THAT THIS LIABILITY OF THE FRANCHISEE TO CONTRIBUTE TO NATIONAL ADVERTISING EXTENDS TO OUTLETS OTHER THAN THE ONE COVERED BY THIS AGREEMENT. 10.3 The Franchisee shall spend, during each full or partial calendar year during the License Term at least 3% of Gross Revenues for such period (subject to the provision set forth in subsection 10.2 above) on the preparation, production, placement and dissemination of local advertising of the Approved Products, all in a manner and using medial and materials approved in advance by KFC. Such expenditures may include amounts paid to Approved Local Co-Ops and monies expended in advertising and promotional media such as television, radio, newspapers, magazines, billboards, posters, handbills, direct mail, yellow pages, sports program booklet advertising, collateral promotional and novelty items (e.g. matchbooks, pens and pencils, bumper stickers, calendars) which prominently display KFC's trademarks, advertising on public vehicles such as cabs and buses, the cost of market research, the cost of producing materials necessary to participate in these media, and agency commissions related to the production of such advertising. Local advertising shall not include payments to the National Co-Op nor payments in connection with permanent on-premises signs, lighting, menus, menuboards, purchasing or maintaining vehicles even though such vehicles display in some manner KFC's trademarks (except the cost of the materials displayed are included), contributions sponsorships (unless KFC's trademarks are prominently displayed by the group or activity being sponsored), premium or similar offers such as discounts, price reductions, special offers, free offers and sweepstake offers (except that the media costs associated with promoting the premium offers are included); employee incentive programs, and other similar payments which KFC may determine in its sole discretion should not be included in determining whether Franchisee has met his obligation to spend 3% of Gross Revenues for local advertising. Within sixty (60) days following the close of the Franchisee's fiscal year, the Franchisee shall pay to the National Co-Op, in addition to other payments to it, such amount as may be necessary so that payments pursuant to this subsection 10.3 shall not be less than 3% of Gross Revenues for the preceding fiscal year, unless he can demonstrate to KFC's satisfaction that sound business judgment does not call for additional local advertising. 10.4 At the request of KFC, the Franchisee will promptly join, and during the License Term faithfully participate in and make contributions to (at rates and upon terms established from time to time by) one or more Approved Local Co-Ops which, for purposes of this Agreement, are programs, or groups or associations of operators of KFC outlets now or hereafter from time to time designated and approved by KFC for the pooling of resources to advertise or promote (or both) any of the Approved Products in a locality or region designed by KFC for such purposes. The Franchisee will subscribe to and abide by the bylaws and advertising agreements adopted by such Approved Local Co-Ops. The Franchisee may not be required to join more than one Approved Local Co-Op if the contributions of the Franchisee to Approved Local Co-Ops would exceed 3% of Gross Revenue solely by reason of belonging to more than one such Co-Op. The Franchisee shall abide by all reasonable determinations of an Approved Local Co-Op as to areas assigned to or covered by it and as to allocations of program expenditures among its participants based on relative media coverage within a given area. The Franchisee's obligations hereunder shall not depend upon participation in any Approved Local Co-Op by other KFC franchisees within the area designed for the Co-Op. In the event of a dispute between two or more Approved Local Co-Ops as to the extent of area coverage, KFC shall resolve the dispute and assign the Outlet to one or more such Approved Local Co-Ops in exercise of its reasonable business judgment. Franchisee shall also join and faithfully participate in and make contributions to Approved Local Co-Ops as may be designated by KFC from time to time with respect to all other outlets which sell Kentucky Fried Chicken and which are owned or controlled by or franchised to all or any of the persons named herein as the Franchisee, or any person or persons who control, are controlled by or are under common control with any person or persons named herein as the Franchisee. NOTE THAT THIS REQUIREMENT TO JOIN APPROVED LOCAL CO-OPS EXTENDS TO OUTLETS OTHER THAN THE ONE COVERED BY THIS AGREEMENT. 10.05 No action taken by the National Co-Op or any Local Co-Op shall diminish the Franchisee's obligations to KFC hereunder. The Franchisee's obligations to the National Co-Op or to any Approved Local Co-Op shall be for the benefit of, and may be enforced by, KFC, such Co-Op, or any participant in such Co-Op. 11. Records and Audits 11.1 All Gross Revenues shall be recorded on cash registers. The Franchisee shall, in a manner and form satisfactory to KFC, prepare on a current basis (and preserve for no less than three years) complete and accurate records concerning Gross Revenues and all financial, operating, marketing and other aspects of the Outlet and the business conducted under this Agreement, and maintain an accounting system which fully and accurately reflects all aspects of the Outlet and such business. Such records shall include but not be limited to books of account, tax returns, daily reports, statements of Gross Revenues (to be prepared each month for the preceding month), profit and loss statements (to be prepared at least annually), and balance sheets (to be prepared at least annually). Franchisee shall also submit to KFC current financial statements and such other reports as KFC may reasonably request to evaluate or compile research data on any aspects of the Outlet or its business. 11.2 From the date hereof until three years elapse following the end of the License Term, KFC or its authorized agent shall have the right to request, receive, inspect and audit, at all reasonable times, any or all of the records referred to above wherever they may be located or at any other mutually agreeable location. If any such inspection or audit discloses a deficiency in the payment of any royalty, advertising or other amount required to be paid under this Agreement, the Franchisee shall immediately pay the deficiency in royalty to KFC and the deficiency in advertising to the National Co-Op, provided the deficiency exceeds $50. In addition, if the deficiency for any audit period equals or exceeds 2% of the correct amount of royalties due, the Franchisee shall also immediately pay to KFC the entire cost of such inspection or audit (including but not limited to travel, lodging, meals, salaries and other expenses of the inspecting or auditing personnel). For the purposes of the preceding sentence, an audit period shall be each fiscal year of the Franchisee and the current fiscal year of the Franchisee even if less than a year. If the audit discloses an overpayment of royalties, KFC will promptly pay the amount of such overpayment to Franchisee, provided that the amount exceeds $50. 12. Purchase of Equipment, Supplies, Etc. 12.1 The Franchisee shall have the right to purchase directly from any approved manufacturer or distributor the equipment, paper goods and other products required by KFC to be utilized in the establishment or operation of the Outlet. 12.2 KFC shall promptly (and in any event within 30 days) furnish to the Franchisee at his request the then current standards and specifications applicable to any equipment, supplies, trademarked paper goods or other products required by KFC to be utilized in the establishment or operation of the Outlet provided that KFC shall not be obligated to disclose any of its trade secrets. In addition, KFC shall promptly (and in any event within 30 days) furnish to the Franchisee at his request the names and addresses of all manufacturers and distributors currently approved by KFC from whom such equipment, supplies trademarked paper goods and other products are available for sale to the Franchisee. 12.3 If the Franchisee desires to purchase the required products from a manufacturer or distributor not then approved by KFC, the Franchisee shall provide KFC with all information regarding such manufacturer or distributor reasonably requested by KFC, and where appropriate, the manufacturer or distributor may be required to provide KFC with samples of the products that the Franchisee desires to purchase. 12.4 Any tests reasonably required by KFC to determine whether the products meet current KFC standards and specifications shall be performed by or under the direction or supervision of KFC but at the cost of the manufacturer or distributor. On the completion of any such tests and any other procedures reasonably required by KFC, and on completion of KFC's determination as to whether the manufacturer or distributor possesses adequate capacity and facilities to supply the Franchisee's needs in the quantities and at the times and with the reliability requisite to an efficient operation, KFC shall promptly notify the Franchisee and the manufacturer or distributor whether KFC approves the manufacturer or distributor as a source of supply of the products involved to the Franchisee; and, if not, KFC shall advise the Franchisee and the manufacturer or distributor of the basis for its decision. KFC shall not be required to approve sources of equipment, paper goods or other products which do not meet KFC's standards and specifications or which constitute or embody seasoning or other trade secrets of KFC. KFC shall not be arbitrary or capricious in establishing applicable standards and specifications. 12.5 KFC may from time to time review the qualify of such equipment, supplies, paper goods and other products produced or supplied by approved manufacturers and distributors and their capacity and facilities, and shall have the right to monitor the production, use and ultimate disposition of items bearing KFC's trademarks. On the basis of such review and monitoring, KFC may remove such manufacturers or distributors from the list of approved sources. In such event, KFC shall promptly advise Franchisee of such action. 13. Insurance. At all times during the License Term, the Franchisee shall maintain in effect such insurance as may be required by the terms of any lease or mortgage covering the Outlet, and in any event shall maintain: (a) Fire, extended, coverage and vandalism and malicious mischief at 80% of actual cash value of building, contents and improvements. (b) Employer's liability and workmen's compensation insurance as prescribed by applicable law, and (c) Comprehensive general liability and automobile insurance on an occurrence basis naming KFC as an additional insured and underwritten by any reputable insurance carrier approved by KFC, covering the following risks in no less than the following amounts, subject to reasonable increase by KFC after five years based on inflation or future experience with claims asserted against food outlets: Type of Risk Limit of Liability Bodily injury to or death $300,000 each accident of one or more persons or each person Property damage or destruction $100,000 each accident Public and product liability $300,000 each occurrence Simultaneously herewith, annually hereafter and each time a change is made in such insurance or insurance carrier, the Franchisee shall furnish KFC with certifications by the insurance carrier evidencing the term and coverage of the insurance in force and the persons insured. Such certificates shall provide that the insurance coverage will not be canceled, altered, or permitted to lapse or expire without 30 days' advance written notice to KFC. KFC, or its insurer, shall have the right to participate in discussions with the Franchisee's insurance company or any claimant (in conjunction with Franchisee's insurance company) regarding any product liability claim and the Franchisee agrees to adopt KFC's reasonable recommendations to his insurance carrier regarding the settlement of any such claims. 14. Condemnation and Casualty. 14.1 The Franchisee shall give KFC notice of any proposed taking through the exercise of the power of eminent domain, at the earliest possible time. If the Outlet or a substantial part thereof is to be taken, the Outlet may be relocated within the area specified in subsection 3.5 or elsewhere with KFC's written approval in accordance with KFC's relocation procedures. If such relocation is authorized by KFC and the Franchisee opens a new outlet at such other location in accordance with KFC's specifications within one year of the closing of the old outlet, the new outlet will thenceforth be deemed to be the Outlet licensed under this Agreement. If such a condemnation takes place and a new Outlet does not, for whatever reason, become the Outlet under this agreement in strict accordance with this paragraph, then the License shall terminate forthwith upon notice thereof by KFC to the Franchisee. 14.2 If the Outlet is damaged by fire or other casualty, the Franchisee will expeditiously repair the damage. If the damage or repair requires closing the Outlet, the Franchisee will immediately notify KFC, will repair or rebuild the Outlet in accordance with KFC's specifications, and will reopen the Outlet for continuous business operations as soon as practicable (but in any event within one year after closing of the outlet), giving KFC advance notice of the date of reopening. If the Outlet is not reopened in accordance with this paragraph, the License will forthwith terminate. 14.3 The License Term shall not be extended by any interruption in the Outlet's operations except by an act of God that results in the Outlet being closed not less than 60 days nor more than 365 days. Franchisee must apply for any such extension within sixty (60) days following the reopening of the Outlet. Except as provided in subsection 8.1, no event during the License Term shall excuse the Franchisee from paying royalties or minimum royalties as provided herein. 15. Restrictions on Certain Activities. 15.1 During the License Term, the Franchisee shall not (without the prior written consent of KFC) directly or indirectly, through corporation, or through partnerships, trusts, associations, joint ventures or other unincorporated businesses, perform any services for, engage in or acquire be an employee of, have any financial, beneficial or equity interest in, or have any interest based on the profits or revenues of, any business similar to the Outlet, except for other outlets franchised from KFC or its affiliates. For one year following the License Term, the same restrictions shall apply but only with respect to businesses operated within ten miles of the Outlet. For purposes of this paragraph, a "similar business" is a business which sells or prepares fried chicken or other products similar to other Required Products or in which know-how acquired by KFC franchisees could be used to the disadvantage of KFC or its other franchisees. Nothing in this paragraph shall prevent the Franchisee and his family, collectively from owning not more than a total of 10% of the stock of a company engaged in a similar business, the stock of which is publicly traded at the time of such ownership. 15.2 If any court or other tribunal having jurisdiction to determine the validity or enforceability of the preceding subsection determines that, strictly applied, it would be invalid or unenforceable, the definition of "similar business" and the time and geographical provisions of the preceding subsection shall be deemed modified to the extent necessary (but only to that extent) so that the restrictions in that subsection, as modified, will be valid and enforceable. 15.3 Franchisee covenants that as a KFC franchisee, he will have access to KFC's trade secrets and confidential practices and therefore, is in a unique position to use the special knowledge he will have gained while a franchisee. Franchisee acknowledges that a breach of the covenants contained in Section 15 will be deemed to threaten immediate and substantial irreparable injury to KFC giving KFC the right to obtain immediate injunctive relief without limiting any other rights or remedies of KFC. 16. Assignment 16.1 General. None of the Franchisee's rights under this Agreement, all of which are personal in nature, may be the subject of any pledge, lien, levy, attachment, or security interest or arrangement, or acquired through execution, foreclosure, or like action or event. Without KFC's prior written consent and compliance in all other respects with the terms in this Section, none of the Franchisee's rights or obligations under this Agreement are assignable or transferable. Any purported transaction, interest or action contrary to this Section will be a breach of this Agreement and will be void. Upon and after each valid assignment of the License pursuant to this Section 16, the assignee or assignees shall be deemed to be the Franchisee hereunder and shall be bound by and liable for all existing and future obligations of the Franchisee. No stockholder in any corporation which becomes the Franchisee shall have any rights in or under this Agreement by reason of his stock ownership, and the name of such corporation shall not include any of the names, trademarks, or service marks of KFC, without KFC's prior written consent. 16.2 Approved Assignments and Transfers. This Agreement may not be assigned or transferred, whether by sale, by death of Franchisee, or otherwise, except: (a) to a corporation in which the Franchisee is the 'Control Person,' or (b) to an individual who is determined by KFC to meet the requirements of an individual assignee or transferee under subsection 16.3(b) below; or (c) to a corporation in which the 'Control Person' is determined by KFC to meet the requirements of a 'Control Person' under subsection 16.3(b) below. Any change in the 'Control Person' thereof shall be deemed to be a transfer for purposes of this subsection 16.2. If the initial Franchisee named on page 1 hereof is a corporation, an assignment of this Agreement shall be deemed to have been made to such corporation and a 'Control Person' shall be established for such corporation as hereinabove provided. As used in this Agreement, the term 'Control Person' means the individual who has the authority to, and does in fact, actively direct the business affairs of a corporation with respect to the Outlet. Such authority may arise by reason of the ability to vote a majority of the voting stock of the corporation, by contract, or as otherwise may be determined by KFC. 16.3 Conditions to Assignments and Transfers. (a) No assignment or transfer of this Agreement shall be approved by KFC unless and until all accrued obligations of Franchisee to KFC under this Agreement shall have been satisfied in full. KFC may conduct an investigation and audit under Section 11 (Records and Audits) in order to determine the extent of accrued obligations. (b) A proposed 'Control Person' or a proposed individual assignee or transferee must demonstrate to KFC's satisfaction that he meets in all respects KFC's high standards applicable to new franchisees regarding experience in the food business, personal and financial reputation and stability, willingness and ability to devote adequate time and best efforts to the operation of the Outlet, and such other criteria and conditions as KFC may reasonably apply in evaluating new franchisees. KFC must be provided such information about the proposed individual as it may reasonably require. (c) A proposed assignee or transferee must agree in a writing satisfactory to KFC to assume all of the obligations of Franchisee under the Agreement and demonstrate to KFC's satisfaction that he meets in all respects KFC's standards applicable to new franchisees regarding financial resources. In addition, the proposed assignee or transferee (or its 'Control Person,' if the proposed assignee or transferee is a corporation) must meet the requirements of a 'Control Person' Specified in Clause (b) above. 16.4 Anything herein to the contrary notwithstanding, no assignment of the franchise or of a majority of the capital stock of a corporate franchisee shall be made for value to any person other than the Franchisee's relatives by blood or marriage unless and until (a) the parties to the proposed transaction have entered a binding agreement with respect thereto, subject only to the rights of KFC hereunder, (b) KFC has been furnished a copy of the said binding agreement, and (c) KFC has been offered in writing a 30 day period in which to acquire the said franchise or capital stock upon the same or equivalent terms and conditions specified in the said agreement. The Franchisee will advise each prospective transferee of this provision and the other terms of this Agreement. 16.5 Upon any transfer or assignment of this Agreement, (other than a transfer deemed to occur upon a change in the Control Person), Franchisee shall pay to KFC the sum of $2,000 as an assignment expense charge; provided, however, that if several assignments are made simultaneously, to the same party, the aggregate assignment expense charge will be reduced by KFC to a reasonable amount. The assignment expense charge shall be $1,000 when a transfer to an existing Kentucky Fried Chicken franchisee occurs. The assignment expense charge shall be adjusted to reflect any 10% increase in the Consumer Price Index using June 1976 as the base period (170.10). 17. Termination of License. 17.1 Termination by Notice from Franchisee. If the Franchisee desires to permanently close the Outlet and cease doing business, he may terminate the License by giving 30 days advance notice to KFC, provided the Outlet is permanently closed simultaneously with such termination of the License. 17.2 Termination by KFC without Notice. Unless KFC promptly after discovery of the relevant facts notifies the Franchisee to the contrary in writing, the License will immediately terminate without notice (or in the event notice is required by law, immediately upon the giving of such notice or at the earliest time thereafter permitted by applicable law) in the event that: (a) the Franchisee is adjudicated bankrupt, or files any petition or pleading under Chapter XI of the Federal Bankruptcy Law or any other state or federal bankruptcy or insolvency laws, or an involuntary petition is filed with respect to the Franchisee under any such laws and is not dismissed within 30 days after it is filed, or a permanent or temporary receiver or trustee for the Outlet or all or substantially all of the Franchisee's property is appointed by any court, or any such appointment is acquiesced in, consented to, or not opposed through legal action, by the Franchisee, or the Franchisee makes a general assignment for the benefit of his creditors or makes a written statement to the effect that he is unable to pay his debts as they become due, or a levy of execution is made upon the Franchise, or an attachment or lien remains on the Outlet for 30 days unless the attachment or lien is being duly contested in good faith by the Franchisee and KFC is so advised, or (b) the Franchisee loses possession or the right of possession of all or a significant part of the Outlet through condemnation or casualty and the Outlet is not relocated or reopened as provided in Section 14 (Condemnation and Casualty), or (c) the Franchisee contests in any court or proceeding the validity of, or KFC's ownership of, any of the trademarks, service marks or other rights licensed hereunder, or (d) a breach of Section 16 (Assignment) occurs, or (e) if the Franchisee is a corporation any action is taken which purports to merge, consolidate, dissolve or liquidate the Franchisee without KFC's prior written consent. 17.3 Termination With Notice from KFC. The License will terminate on notice in certain circumstances as provided in Section 14 (Condemnation and Casualty). The License will terminate on the termination date specified in any notice by KFC to the Franchisee (without any further notice of termination unless required by law), provided that (i) the notice is hand-delivered or mailed at least 30 days (or such longer period as may be required by law) in advance of the termination date, (ii) the notice reasonably identifies one or more breaches or defaults in the Franchisee's obligations or performance hereunder, (iii) the notice specifies the manner in which the breach(es) or default(s) may be remedied, and (iv) the breach(es) or default(s) are not fully remedied before, and as of, the termination date. The period given to remedy breaches and defaults shall, if permitted by law, be 10 days instead of 30 days if the Franchisee shall have engaged in repeated breaches or defaults of this Agreement within the then preceding 24 months for which he shall have received notice of termination and termination failed to take effect because the breaches or defaults were remedied. 18. National Franchisee Advisory Counsel. KFC will encourage the continuance of the Kentucky Fried Chicken National Franchisee Advisory Council (now incorporated within the National Co-Op) and will urge such Council to maintain in operation procedures whereby Franchisee may, as an absolute right, submit to Council members any matter to which, in any Council member's reasonable judgment, KFC should have, but has not, responded through normal channels. KFC will respond with reasonable promptness to any such matter which the Council member forwards to KFC, stating its position on all such matters, and on any recommendations made by a Council member thereon, together with a full and complete written explanation of the reasons for KFC's position. KFC shall assist the Council in establishing procedures for submission to KFC of matters of general interest to franchisees for discussion with, and investigation and consideration by, KFC. 19. Right to Apply for New Franchised Outlets. Before permitting the establishment of any new franchised outlet (defined below) at a location closer to the Outlet than to any other franchised outlet (except pursuant to commitments made before the Effective Date of this Agreement), KFC shall be obligated to give Franchisee 30 days prior written notice of such proposed action. During such 30-day period, Franchisee may apply to KFC for a franchise to operate an outlet at such proposed new location and KFC shall negotiate in food faith with Franchisee regarding said application, taking into consideration all relevant factors, including, without limitation: (a) the established past and present operational performance and financial capacities of Franchisee, (b) whether he is currently in compliance with financial and other obligations to KFC and under this and other franchise agreements, and (c) efforts of Franchisee that have contributed to the development o consumer demand for Kentucky Fried Chicken locally and elsewhere. As used herein "new franchised outlet" means an outlet not previously in existence, whether franchised or owned by KFC or its affiliates, and which will not be owned by KFC or its affiliates. 20. Miscellaneous 20.1 No Agency, Etc. The Franchisee shall neither have nor exercise any authority, express, implied, or apparent, to act on behalf of or as an agent of KFC or any of its affiliates or subsidiaries for any purpose, and shall take no action which might tend to create an apparent employer- employee or agency relationship between KFC and the Franchisee. No fiduciary relationship exists between KFC and the Franchisee. The Franchisee is, and shall remain, an independent contractor responsible for all obligations and liabilities of, and for all loss or damage to, the Outlet and its business and for all claims and demands based on damages or destruction of property or based on an injury, illness or death of any person or persons, directly or indirectly arising from or in connection with the operation of the Outlet. KFC shall neither have nor exercise the right to control the day-to-day managerial operations of the Outlet or to manage the business of the Outlet or to hire, fire, or discipline persons employed by the Franchisee or at the Outlet. 20.2 No Conflict with Other Agreements. The Franchisee represents that he is not a party to or subject to agreements which might conflict with the terms of this Agreement and agrees not to enter into any such agreement during the License Term. 20.3 Cost of Enforcement. If KFC institutes and prevails entirely in any action at law or in equity against the Franchisee based entirely or in part on the terms of this Agreement, KFC shall be entitled to recover, in addition to any judgment entered in its favor, reasonable attorney's fees, court costs and all of KFC's expenses in connection with the litigation. If the Franchisee prevails entirely in the claim instituted by KFC, he will be entitled to such fees, costs and expenses. If neither side prevails entirely, each will bear his own costs. 20.4 Non-Waiver. No failure, forbearance, neglect or delay of any kind or extent on the part of KFC in connection with the enforcement or exercise of any rights under this Agreement shall affect or diminish KFC's right to strictly enforce and take full benefit of each provision of this Agreement at any time, whether at law for damages, in equity for injunctive relief of specific performance, or otherwise. No custom, usage, concession or practice with regard to this Agreement, the Franchisee or KFC's other franchisees shall preclude at any time the strict enforcement of this Agreement (upon due notice) in accordance with its literal terms. No waiver by KFC of performance of any provision of this Agreement shall constitute or be implied as a waiver of KFC's right to enforce such provisions at any future time. 20.5 Scope of Agreement, Changes, Consents, Etc.. This Agreement constitutes the entire understanding and agreement of the parties concerning the outlet and supersedes all prior and contemporaneous understandings and agreements of the parties, whether oral or written, pertaining to the Outlet, except for any express obligations of the Franchisee under the franchise option agreement for the Outlet and except for any written "master" agreement that may be in force between KFC and the Franchisee. No interpretation, change, termination or waiver of any provision hereof, and no consent or approval hereunder, shall be binding upon the other party or effective unless in writing and signed by Franchisee and KFC's President, Vice President in charge of franchising or franchise services or General Counsel, except that a waiver need be signed only by the party waiving. 20.6 Severability. All provisions of this Agreement shall be severable and no such provision shall be affected by he invalidity of any other such provisions to the extent that such invalidity does not also render such other provision invalid. In the event of the invalidity of any provision, this Agreement shall be interpreted and enforced as if all provisions thereby rendered invalid were not contained herein. 20.7 Trademark Infringement. Franchisee shall immediately inform KFC of any suspected or known infringement of or challenge to KFC's trademarks and systems by others and assist and cooperate with KFC in taking such action at KFC's own expense as KFC in its sole discretion deems appropriate. 20.8 governing Law. This Agreement has been made and accepted in Kentucky, and it shall be interpreted in accordance with and governed by the laws of the State of Kentucky and any applicable state franchise laws. 20.9 Notices. All notices and other communications provided for herein must be in writing and shall be sufficiently given if delivered in person or mailed by certified or other receipted mail, if to the Franchisee, at his address shown on page 23 or, if to KFC at Post Office Box 32070, Louisville, Kentucky, 40232, Attention: Vice President-Franchising. Either party, by such notice, may change the address to which notices shall be sent. Notices delivered in person shall be deemed given when delivered and mailed notices shall be deemed given when mailed. If a corporation or more than one individual is in the Franchisee, then the Franchisee will authorize one natural person as correspondent with authority to bind Franchisee. 20.10 Certain References. References to weeks and months mean calendar weeks and calendar months. References to persons mean legal entities as well as natural person. Whenever the pronoun "he" or "his" is used herein, it is understood that such usage is the common gender and refers to masculine, feminine and neuter genders an also singular and plural. 21. Certain Representations by the Franchisee. The Franchisee represents that: (a) the Franchisee received a copy of the form of this Agreement at least 15 working days before signing it and has had ample opportunity to consult with his attorney with respect thereto, and (b) no representation has been made by KFC as to the anticipated profitability of the Outlet, and (c) before signing this Agreement, the Franchisee either had experience working in a KFC outlet or investigated KFC and outlets franchised by KFC and had ample opportunity to contact existing KFC franchisees. IN WITNESS WHEREOF, the parties hereto set their hands and seals, in duplicate, the day and year in this instrument first above written. Attest: KFC CORPORATION ________________________________ BY_______________________________ Assistant Secretary Vice President The address of Franchisee is: EX-21 3 SUBSIDIARIES OF COMPANY Exhibit 21 Subsidiaries of the Company as of May 29, 1997 The Company owns all of the stock of the following corporations: Name State of Incorporation Marcus Theatres Corporation Wisconsin Marcus Restaurants, Inc. Wisconsin B & G Realty, Inc. Wisconsin First American Finance Corporation Wisconsin Marc Plaza Corporation Wisconsin Pfister Corporation Wisconsin Marcus Geneva, Inc. Wisconsin Marcus Hotels, Inc. Wisconsin Budgetel Inns, Inc. Wisconsin Woodfield Suites, Inc. Wisconsin Woodfield Suites, Inc. owns all of the stock of the following corporations: Name State of Incorporation Woodfield Suites Hospitality Corporation Wisconsin Woodfield Suites Franchises International, Inc. Wisconsin Marcus Theatres Corporation owns all of the stock of the following corporations: Name State of Incorporation Appleton Theatres Corporation Wisconsin Centre Theatres Corporation Wisconsin Marcus Cinemas, Inc. Wisconsin Marcus Productions, Inc. Wisconsin Southtown Corporation Wisconsin Stephen Amusement Corporation Wisconsin Tower 41-Corporation Wisconsin Vending Corporation Wisconsin 41-Bowl, Inc. Wisconsin Marcus Amusement Co., Inc. Wisconsin Budgetel Inns, Inc. owns all of the stock of the following corporations: Name State of Incorporation Budgetel Partners, Inc. Wisconsin Guest House Inn-Appleton, Inc. Wisconsin Guest House Inn of Manitowoc, Inc. Wisconsin Marc's Budgetel of Nebraska, Inc. Nebraska Budgetel Franchises International, Inc. Wisconsin Woodfield Refreshments of Colorado, Inc. Colorado Woodfield Refreshments of Ohio, Inc. Ohio Marcus Restaurants, Inc. owns all of the stock of the following corporations, except it owns 50% of 642, Inc.: Name State of Incorporation Marc's Carryout Corporation Wisconsin Tops, Inc. Illinois Captains-Juneau, Inc. Wisconsin Captains-Wausau, Inc. Wisconsin Captains-Kenosha, Inc. Wisconsin Colony Inns Restaurant Corporation Wisconsin 642, Inc. Wisconsin Cafe Refreshments, Inc. Wisconsin Glendale Refreshments, Inc. Wisconsin Grand Avenue Refreshments, Inc. Wisconsin Marcus Restaurants, Inc. has an option to purchase the remaining 50% of the stock of 642, Inc. for $5. Colony Inns Restaurant Corporation owns 80% of the stock of Colony Inns Refreshments, Inc., a Wisconsin corporation, and has an option to purchase the remaining 20% for $5. Hasty Host Distributing Corp. is a subsidiary of Tops, Inc. Marcus Hotels, Inc. owns all of the stock of the following corporations: Name State of Incorporation HPG Laundry Systems, Inc. Wisconsin Marcus Northstar, Inc. Minnesota Marcus Hotels of California, Inc. California Marcus Indian Wells, Inc. California EX-23.1 4 CONSENT Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in Registration Statements (Forms S-8 No. 33-18801 and No. 33-55695) of The Marcus Corporation of our report dated July 18, 1997, with respect to the consolidated financial statements of The Marcus Corporation included in the Annual Report (Form 10-K) for the year ended May 29, 1997. ERNST & YOUNG LLP Milwaukee, Wisconsin August 22, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCUS CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAY-29-1997 MAY-30-1996 MAY-29-1997 7,991 0 6,597 0 0 18,179 649,522 162,470 521,957 46,748 168,065 0 0 20,387 256,906 521,957 281,823 303,357 142,565 242,626 0 0 11,597 51,206 20,325 30,881 0 0 0 30,881 1.56 1.56
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