-----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, MVvUQeM8Au/XMMg6VuddhUFSIK5AA1gsohwxMrmbJFULwgK3k3e3xTKrsrrqb3/q LJzoM7zVkbyVI9WvrzVhvQ== 0000897069-98-000431.txt : 19980826 0000897069-98-000431.hdr.sgml : 19980826 ACCESSION NUMBER: 0000897069-98-000431 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980528 FILED AS OF DATE: 19980825 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: 0529 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12604 FILM NUMBER: 98697130 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-K405 1 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 28, 1998 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) 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) 905-1000 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $1 par value New York Stock Exchange (Title of class) (Name of exchange on which registered) 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 7, 1998: $395,613,829. Number of shares outstanding of each of the classes of the registrant's capital stock as of August 7, 1998: Common Stock, $1 par value: 18,517,345 shares Class B Common Stock, $1 par value: 12,672,168 shares DOCUMENTS INCORPORATED BY REFERENCE: 1998 Annual Report to Shareholders (incorporated by reference into Parts I, II and IV); Proxy Statement for 1998 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year and, upon such filing, to be incorporated by reference into Part III). 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 28, 1998. 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 made only as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Item 1. Business. The Marcus Corporation through its subsidiaries (collectively, the "Company") is engaged in four business segments: limited-service lodging; movie theatres; hotels and resorts; and restaurants. The Company's limited-service lodging operations include a chain of 156 Budgetel Inn limited-service facilities in 30 states and five Woodfield Suites all-suite hotels in Wisconsin, Colorado and Ohio. Of the 156 Budgetel Inns, 106 are owned or operated by the Company and 50 are franchised. The Company operates 46 movie theatres with an aggregate of 361 screens throughout Wisconsin, Illinois, Minnesota and Ohio. 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 Milwaukee, Wisconsin, and the Grand Geneva Resort & Spa and the Miramonte Resort, which are full-facility destination resorts in Lake Geneva, Wisconsin and Indian Wells, California, respectively. The Company also manages three hotels and a resort for third parties: the Mead Inn in Wisconsin Rapids, Wisconsin, the Crowne-Plaza Northstar in Minneapolis, Minnesota, Beverly Garland's Holiday Inn in North Hollywood, California and the Mission Point Resort on Mackinac Island, Michigan. 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 the following goals: - Converting Budgetel Inns to Baymont Inns and Baymont Inns & Suites in fiscal 1999 and then increasing the total number of Baymont Inns and Baymont Inns & Suites to over 400 within the next five years. Up to four Company-owned and 27 franchised properties are currently in development for fiscal 1999. The Company currently believes that much of this anticipated future growth will ultimately come from its emphasis on opening new franchised Baymont Inns and Baymont Inns & Suites. - Increasing its number of movie theatre screens to 500 by the year 2000, with expected continued expansion outside of Wisconsin. Up to 66 new screens are currently planned to be opened by the Company in fiscal 1999, including 16 new screens recently completed at the Company's second location in Columbus, Ohio. Other current expansions include 49 new screens to be added to existing locations in Wisconsin, Illinois and Minnesota and completion of the Company's first large screen IMAX/R/ 2D/3D theatre at its new Columbus location. The Company also has current plans to add stadium seating to a majority of its existing screens by the end of fiscal 2000. - 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 the new properties. The Company recently announced plans for the development of new hotels in Madison, Wisconsin and Chicago, Illinois. The Madison Hilton, which is a public/private endeavor with the City of Madison, is anticipated to be a 222-room Company-owned property scheduled to open in 2000. The 250-room downtown Chicago luxury hotel is currently planned to be developed and managed by the Company. - Increasing its number of Woodfield Suites. The Company has two Company-owned Woodfield Suites scheduled to open late in fiscal 1999 and is evaluating additional sites. - 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, and the Company plans to open at least two additional 2-in-1 conversions in fiscal 1999. 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 footnote 11 to the Notes to Consolidated Financial Statements included on Page 31 of the Company's 1998 Annual Report to Shareholders, which pages are incorporated by reference herein. Limited-Service Lodging Operations Budgetel Inns The Company owns, operates or franchises 156 limited-service facilities, with over 16,000 available rooms, under the name "Budgetel Inns" in 30 states. Of this total, 50 Budgetel Inns are operated through franchisees, 97 are Company-owned or operated and nine are operated under joint venture agreements. During fiscal 1998, two new Company-owned units and 11 new franchised units were opened, with an additional 27 franchised units under construction or development at fiscal year-end. Depending upon continuing favorable industry conditions and attractive opportunities, the Company currently plans to add up to 31 new Budgetel Inns in fiscal 1999 (including up to four Company-owned and up to 27 franchised facilities). During fiscal 1998, the Company announced that it was changing the name of Budgetel Inns to Baymont Inns and Baymont Inns & Suites. The Company plans to convert Company-owned and franchised units to the Baymont name by approximately October 31, 1998. The name change, which was endorsed by the Budgetel Franchise Advisory Council and franchisees, is intended to help expand the Company's customer base, increase revenue per available room (RevPAR) and increase development opportunities. 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 vary in size between 60 and 150 rooms. The Company believes that providing amenities not typically associated with limited-service facilities distinguishes 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, incoming fax transmissions, non-smoking rooms, in-room coffee makers, remote control cable televisions, extra-long telephone cords and large working desks. Additional amenities, including voice mail, hair dryers, irons and ironing boards and complimentary copies of USA Today are being introduced in conjunction with the Baymont name change. To enhance customer security, all Budgetel Inns feature "card key" room locking systems and provide 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. Budgetel Inns has a national franchise program and has increased its emphasis on opening more franchised 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 1998, the Company tested a new Inn and Suites concept, which combines two-room suites along with traditional rooms at the same facility. Due to positive results of four test sites in diverse markets throughout the country, the Company currently plans to convert the majority of its Company-owned properties to Baymont Inns and Suites. All new Inns and Suites properties will feature lobby breakfasts, swimming pools, 25-inch in-room televisions and fitness facilities. Fiscal 1998 was the first full year the Company offered travel agent commissions for all of its Budgetel Inns. The Company's "Pay-In-A- Day" program benefits travel agents by issuing commission checks within 24 hours of the guest's check-out. Woodfield Suites The Company operates five mid-priced, all-suite hotels under the name "Woodfield Suites." In addition to opening a Madison, Wisconsin facility in early fiscal 1998, the Company has started construction of two new Company-owned properties, one in Bannockburn (suburban Chicago), Illinois, and another near the River Walk in San Antonio, Texas, which are scheduled to open late in fiscal 1999. The San Antonio property will be the prototype for future new construction. Woodfield Suites offers all of its guests the use of a 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 complimentary continental breakfast and are invited to a complimentary 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 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 1998, the Pfister Hotel earned its 22nd 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. During fiscal 1998, plans were finalized to create a full-service health club and a new cocktail lounge on the top floor of the hotel, which will replace the existing night club. 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. During fiscal 1999, the Company expects to begin construction on a 250-room addition. The addition will include meeting rooms, a family water park fun center and a skywalk to the Midwest Express Center convention facility. 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, a spa and fitness complex, horse stables and an on-site airport. The Company has plans underway for the development of a 100-unit vacation ownership complex. Miramonte Resort The Miramonte Resort in Indian Wells, California, a boutique luxury resort located on 11 landscaped acres, opened in January 1998 following an extensive renovation. The resort includes 14 two-story Tuscan style buildings housing 226 guest rooms, 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. New amenities include outdoor meeting facilities, a golf concierge and Rolls Royce limousine service. 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 1998, the Company provided planning and technical assistance for construction of a new 89-room tower and expanded conference and health club facilities. 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. During fiscal 1998, the Company entered into a management contract to operate the Mission Point Resort on Mackinac Island, Michigan. The Mission Point Resort is a seasonal property and has 239 rooms, a 3,000 square foot health club and fitness center, three restaurants, tennis courts, a swimming pool and a 575-seat theatre. New Developments After the end of fiscal 1998, the Company announced plans for new hotels in Madison, Wisconsin and Chicago, Illinois. The Madison Hilton, which is a public/private endeavor with the City of Madison, is anticipated to be a 222-room Company-owned hotel located adjacent to the new Monona Terrace Convention Center and is scheduled to open in 2000. The 250-room downtown Chicago luxury hotel is currently planned to be developed and managed by the Company and will feature 10,000 square feet of meeting space, a fitness center and roof garden. Theatre Operations The Company operates 46 movie theatre locations with an aggregate of 361 screens in Wisconsin, Illinois, Minnesota and Ohio for an average of 7.8 screens per location, compared to an average of 7.4 screens per location at the end of fiscal 1997 and 6.1 at the end of fiscal 1996. The Company's facilities include 44 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 12 and 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. The Company added 66 new screens during fiscal 1998, including a new 12-plex in Menomonee Falls, Wisconsin and a 16-screen theatre in Pickerington (Columbus), Ohio. During the final weeks of fiscal 1998, the Company also completed the purchase of five suburban Minneapolis/St. Paul, Minnesota theatres with a total of 38 screens (32 first-run and six budget screens). Upon opening its new location in Menomonee Falls, the Company converted an existing five-screen complex in that city into a budget- oriented theatre. As of May 28, 1998, the Company operated 329 first-run screens and 32 budget-oriented screens. The Company plans on opening up to 66 additional new screens in fiscal 1999. 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 1998 featured such box office hits as Titanic, Men in Black, Good Will Hunting, As Good as It Gets, Tomorrow Never Dies, Lost World, My Best Friend's Wedding, Batman & Robin and Air Force One. 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 all 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 is also testing Tele-ticketing, a new service that enables moviegoers to reserve seats over the telephone using a credit card, at three locations. The Company has enhanced its offerings of amenities at certain theatres by introducing stadium seating, a tiered seating system that permits unobstructed viewing. The Company is now installing stadium seating in all of its new theatres and is continuing an extensive program to add stadium seating to a majority of its existing screens by the end of fiscal 2000. The Company also intends to add two new large screen IMAX/R/ 2D/3D theatres, the first scheduled to open in fall of 1998 in Columbus, Ohio, and the second in 1999 in Addison (suburban Chicago), Illinois. 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 11-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 38 years and currently operates 30 KFC restaurants and one KFC/Taco Bell 2-in-1 restaurant. The Company 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 provides for certain approved suppliers of products and supplies in order to maintain 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, with at least two additional two-in-one conversions planned for fiscal 1999. 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 lodging 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 chains. 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 American Multi-Cinema, Cinemark, Regal Cinemas, Loews/Cineplex 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. In addition, the Company's historical method of reporting on a 16 or 17-week fourth quarter has always contributed to the larger results in such quarter. 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 1998, the Company had approximately 7,000 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 2002. 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, the Grand Geneva Resort and Spa and the Miramonte Resort, all of the Company-owned Budgetel Inns and Woodfield Suites, the majority of its theatres and restaurants, and leases the remainder. The Company also manages four 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 28, 1998 are summarized in the following table:
Leased Total Number Leased From from Managed for Managed for of Facilities Unrelated Related Related Unrelated Owned By Business Segment in Operation Owned(1) Parties Parties Parties Parties Franchisees(2) Restaurants: KFC 31 30 1 0 0 0 0 Movie Theatres: 46 33 12 1 0 0 0 Hotels and Resorts: Hotels 5 2 0 0 0 3 0 Resorts 3 2 0 0 0 1 0 Limited-Service Lodging: Budgetel 156 96 0 0 9 1 50 Woodfield Suites 5 5 0 0 0 0 0 ----- ----- ----- ----- ----- ----- ----- TOTALS 246 168 13 1 9 5 50 ===== ===== ===== ===== ===== ===== ===== _______________ (1) Two of the KFC restaurants, two of the movie theatres and two of the Budgetel Inns are on land leased from unrelated parties under long- term leases. One of the Budgetel Inns is located 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. (2) The Company manages one Budgetel Inn for a franchisee.
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 1999 (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 1998 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 1998 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 63 Bruce J. Olson Group Vice President 48 H. Fred Delmenhorst Vice President-Human Resources 57 Thomas F. Kissinger General Counsel and Secretary 38 Douglas A. Neis Chief Financial Officer and Treasurer 39 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 37 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 information required by this item is incorporated by reference to the information pertaining thereto included on Page 34 of the Company's 1998 Annual Report to Shareholders. Item 6. Selected Financial Data. The information required by this item is incorporated by reference to the information pertaining thereto included on Page 33 of the Company's 1998 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by this item is incorporated by reference to the information pertaining thereto included on Pages 14 through 21 of the Company's 1998 Annual Report to Shareholders. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. The information required by this item is incorporated by reference to the information pertaining thereto included on Pages 22 through 32 and 34 of the Company's 1998 Annual Report to Shareholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. 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 1998 Annual Meeting of Shareholders scheduled to be held September 28, 1998 (the "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. (a)(1) Financial Statements. The consolidated financial statements of the Company as of May 28, 1998 and May 29, 1997 and for each of the three years in the period ended May 28, 1998, together with the report thereon of Ernst & Young LLP, dated July 22, 1998, appear on Pages 22 through 32 of the Company's 1998 Annual Report to Shareholders, and are incorporated herein by reference. (a)(2) Financial Statement Schedules. 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. (a)(3) Exhibits. The exhibits filed herewith or incorporated by reference herein are set forth on the attached Exhibit Index.* (b) Reports on Form 8-K. The Company did not file a Form 8-K with the Securities and Exchange Commission during the fourth quarter of fiscal 1998. __________________ * 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 25, 1998 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/ Daniel F. McKeithan, Jr. Stephen H. Marcus, Chairman Daniel F. McKeithan, Jr., of the Board and President Director (Chief Executive Officer By: /s/ Douglas A. Neis By: /s/ Diane Marcus Gershowitz Douglas A. Neis, Treasurer Diane Marcus Gershowitz, and Controller (Chief Director Financial and Accounting Officer) By: /s/ Bruce J. Olson By: /s/ Timothy E. Hoeksema Bruce J. Olson, Director Timothy E. Hoeksema, Director By: /s/ Philip L. Milstein By: /s/ Allan H. Selig Philip L. Milstein, Director Allan H. Selig, Director EXHIBIT INDEX 3.1 Restated Articles of Incorporation. [Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended November 13, 1997.] 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 First Supplement to Note Purchase Agreements dated May 15, 1998. 4.4 Other than as set forth in Exhibits 4.1, 4.2 and 4.3, 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. [Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended May 29, 1997.] 10.4* The Marcus Corporation 1995 Equity Incentive Plan, as amended. 10.5* The Marcus Corporation 1994 Nonemployee Director Stock Option Plan. [Incorporated by reference to Exhibit A to the Company's 1994 Proxy Statement.] 13 The Company's 1998 Annual Report to Shareholders, to the extent incorporated by reference herein. 21 Subsidiaries of the Company as of May 28, 1998. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedule for the fiscal year ended May 28, 1998. 27.2 Restated Financial Data Schedule for the fiscal year ended May 29, 1997. 27.3 Restated Financial Data Schedule for the nine months ended February 6, 1997. 27.4 Restated Financial Data Schedule for the fiscal year ended May 30, 1996. 99 Proxy Statement for the 1998 Annual Meeting of Shareholders. (The Proxy Statement for the 1998 Annual Meeting of Shareholders will be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Company's fiscal year. Except to the extent specifically incorporated by reference, the Proxy Statement for the 1998 Annual Meeting of Shareholders shall not be deemed to be filed with the Securities and Exchange Commission as part of this Annual Report on Form 10- K.) __________ * 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-4.3 2 Exhibit 4.3 THE MARCUS CORPORATION FIRST SUPPLEMENT TO NOTE PURCHASE AGREEMENTS Dated as of May 15, 1998 Re: $5,000,000 6.66% Series B Senior Notes, Tranche A, due May 15, 2013 and $25,000,000 6.70% Series B Senior Notes, Tranche B, due May 15, 2013 FIRST SUPPLEMENT TO NOTE PURCHASE AGREEMENTS Dated as of May 15, 1998 To the Purchaser named in Schedule A hereto which is a signatory of this Agreement Ladies and Gentlemen: This First Supplement to Note Purchase Agreements (the "First Supplement") is between The Marcus Corporation (the "Company") whose address is 250 East Wisconsin Avenue, Suite 1700, Milwaukee, Wisconsin 53202 and the institutional investors named on Schedule A attached hereto (the "Purchasers"). Reference is hereby made to those certain Note Purchase Agreements dated as of October 25, 1996 (the "Note Agreements") between the Company and the purchasers listed on Schedule A thereto. All capitalized terms not otherwise defined herein shall have the same meaning as specified in the Note Agreements. Reference is further made to Section 4.11 thereof which requires that, prior to the delivery of any Additional Notes, the Company and each Additional Purchaser shall execute and deliver a Supplement. The Company hereby agrees with you as follows: 1. The Company has authorized the issue and sale of $5,000,000 aggregate principal amount of its 6.66% Series B Senior Notes, Tranche A due May 15, 2013 (the "Tranche A Notes") and $25,000,000 aggregate principal amount of its 6.70% Series B Senior Notes, Tranche B due May 15, 2013 (the "Tranche B Notes" and together with the Tranche A Notes, the "Series B Notes"). The Series B Notes, together with the Series A Notes initially issued pursuant to the Note Agreements and each Series of Additional Notes which may from time to time be issued pursuant to the provisions of Section 2.2 of the Notes Agreements, are collectively referred to as the "Notes" (such term shall also include any such notes issued in substitution therefor pursuant to Section 13 of the Note Agreements). The Tranche A Notes and the Tranche B Notes shall be substantially in the forms set out in Exhibit 1 and Exhibit 2 hereto, respectively, with such changes therefrom, if any, as may be approved by you and the Company. 2. Subject to the terms and conditions hereof and as set forth in the Note Agreements and on the basis of the representations and warranties hereinafter set forth, the Company agrees to issue and sell to you, and you agree to purchase from the Company, Series B Notes in the principal amount set forth opposite your name on Schedule A hereto at a price of 100% of the principal amount thereof on the closing date hereafter mentioned. 3. Delivery of the $30,000,000 in aggregate principal amount of the Series B Notes will be made at the offices of Chapman and Cutler, 111 West Monroe, Chicago, Illinois 60603, against payment therefor in Federal Reserve or other funds current and immediately available at the principal office of Bank One Milwaukee, N.A., 111 East Wisconsin Avenue, Milwaukee, Wisconsin 53202 (ABA Number 075-0000-19) for credit to the First American Finance Corporation Account, Account Number 550-2510-15 with telephonic confirmation to Ms. Debbie Ludkee at (414) 905-1160 in the amount of the purchase price at 11:00 A.M., Milwaukee, Wisconsin time, on May 22, 1998 or such later date (not later than [May 27, 1998)] as shall mutually be agreed upon by the Company and the Purchasers of the Series B Notes (the "Closing"). 4. (a) Required Prepayments. (i) Tranche A Notes. On May 15, 2003 and on each May 15 thereafter to and including May 15, 2012, the Company will prepay $454,545 principal amount (or such lesser principal amount as shall then be outstanding) of the Tranche A Notes at par and without payment of the Make-Whole Amount or any premium. The entire remaining principal amount of the Tranche A Notes shall become due and payable on May 15, 2013. For purposes of this Section 4(a)(i), any prepayment of less than all of the outstanding Tranche A Notes pursuant to Section 4(b) shall be deemed to be applied first to the amount of principal scheduled to be repaid on May 15, 2013, and then to the remaining scheduled principal payments, if any, in inverse chronological order. (ii) Tranche B Notes. On May 15, 2007 and on each May 15 thereafter to and including May 15, 2012, the Company will prepay $3,571,429 principal amount (or such lesser principal amount as shall then be outstanding) of the Tranche B Notes at par and without payment of the Make-Whole Amount or any premium. The entire remaining principal amount of the Tranche B Notes shall become due and payable on May 15, 2013. For purposes of this Section 4(a)(ii), any prepayment of less than all of the outstanding Tranche B Notes pursuant to Section 4(b) shall be deemed to be applied first to the amount of principal scheduled to be repaid on May 15, 2013, and then to the remaining scheduled principal payments, if any, in inverse chronological order. (b) Application of Prepayments. In the event of a purchase of the Series B Notes pursuant to Section 8.5 of the Note Agreements or a Partial Redemption of the Series B Notes all required prepayments on the Series B Notes shall be adjusted as provided in Section 8.1(c) of the Note Agreements. (c) Optional Prepayments. The Series B Notes are subject to prepayment at the option of the Company in the manner and with the effect set forth in Section 8.2 of the Note Agreements. (d) Allocation of Partial Prepayments. In the case of each partial prepayment of the Series B Notes pursuant to the provisions of Section 8.2 of the Note Agreements, the principal amount of the Series B Notes to be prepaid shall be allocated among all of the Notes of such Series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof. In the case of each required prepayment of the Series B Notes pursuant to Section 4(a), the principal amount of the Tranche to be prepaid shall be allocated among all of the Notes of such Tranche at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof. (e) Make-Whole Amount for Series B Notes. The term "Make-Whole Amount" means, with respect to any Series B Note of any Tranche, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Series B Note of such Tranche over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "Called Principal" means, with respect to any Series B Note of any Tranche, the principal of such Series B Note of such Tranche that is to be prepaid pursuant to Section 8.2 of the Note Agreements or has become or is declared to be immediately due and payable pursuant to Section 12.1 of the Note Agreements, as the context requires. "Discontinued Value" means, with respect to the Called Principal of any Series B Note of any Tranche, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Series B Note of such Tranche is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of any Series B Note of any Tranche, 0.50% over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as "PX-1" on the Bloomberg Financial Markets Services Screen (or such other display as may replace PX-1 of the Bloomberg Financial Markets Services Screen) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the maturity closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the maturity closest to and less than the Remaining Average Life. "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" means, with respect to the Called Principal of any Series B Note of any Tranche, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Series B Note of such Tranche, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 of the Note Agreements or 12.1 of the Note Agreements. "Settlement Date" means, with respect to the Called Principal of any Series B Note of any Tranche, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 of the Note Agreements or has become or is declared to be immediately due and payable pursuant to Section 12.1 of the Note Agreements, as the context requires. 5. The obligations of each Purchaser to purchase and pay for the Series B Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to such Purchaser's satisfaction, prior to the Closing, of the conditions set forth in Section 4 of the Note Agreements, and to the following additional conditions: (a) Except as supplemented by the representations and warranties set forth in Exhibit A hereto, each of the representations and warranties of the Company set forth in Section 5 of the Note Agreements shall be correct as of the date of Closing and the Company shall have delivered to each Purchaser an Officer's Certificate, dated the date of the Closing certifying that such condition has been fulfilled. (b) Contemporaneously with the Closing, the Company shall sell to each Purchaser, and each Purchaser shall purchase, the Notes to be purchased by such Purchaser at the Closing as specified in Schedule A. (c) A Private Placement Number shall have been obtained for the Series B Notes. 6. Each Purchaser represents and warrants that the representations and warranties set forth in Section 6 of the Note Agreements are true and correct on the date hereof with respect to the Series B Notes purchased by such Purchaser. 7. The Company and each purchaser agrees to be bound by and comply with the terms and provision of the Note Agreements for the benefit of the holders of the Series B Notes as fully and as completely as if each Purchaser were an original signatory to the Note Agreements. The execution hereof shall constitute a contract between us for the uses and purposes hereinabove set forth, and this agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all together only one agreement. THE MARCUS CORPORATION By: /s/ Stephen H. Marcus Its: President Accepted as of May 22, 1998 Printed Name: Stephen H. Marcus CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: CIGNA INVESTMENTS, INC. By: /s/ Stephen A. Osborn Name: Stephen A. Osborn Title: Managing Director THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY By: /s/ Gary A. Poliner Its: Authorized Representative Printed Name: Gary A. Poliner EX-10.4 3 Exhibit 10.4 THE MARCUS CORPORATION 1995 EQUITY INCENTIVE PLAN AMENDED THROUGH JUNE 26, 1997 (Sections 6(a)(ii) and 6(e)(v) amended in their entirety) THE MARCUS CORPORATION 1995 EQUITY INCENTIVE PLAN AMENDED THROUGH JUNE 26, 1997 (Sections 6(a)(ii) and 6(e)(v) amended in their entirety) Section 1. Purpose The purpose of The Marcus Corporation 1995 Equity Incentive Plan (the "Plan") is to promote the best interests of The Marcus Corporation (the "Company") and its shareholders by providing key employees of the Company and its Affiliates (as defined below) with an opportunity to acquire a, or increase their, proprietary interest in the Company. It is intended that the Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Company by those key employees who are primarily responsible for shaping and carrying out the long-range plans of the Company and securing the Company's continued growth and financial success. Section 2. Definitions As used in the Plan, the following terms shall have the respective meanings set forth below: (a) "Affiliate" shall mean any entity that, directly or through one or more intermediaries, is controlled by, controls, or is under common control with, the Company. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock or Performance Share granted under the Plan. (c) "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Commission" shall mean the Securities and Exchange Commission. (f) "Committee" shall mean the Compensation and Nominating Committee of the Board of Directors of the Company (or any other committee thereof designated by such Board to administer the Plan); provided, however, that the Committee is composed of not less than two directors, each of whom is a "disinterested person" within the meaning of Rule 16b-3. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (h) "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (i) "Incentive Stock Option" shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code (or any successor provision thereto). (j) "Key Employee" shall mean any officer or other key employee of the Company or of any Affiliate who is responsible for or contributes to the management, growth or profitability of the business of the Company or any Affiliate as determined by the Committee in its discretion. (k) "Non-Qualified Stock Option" shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option. (l) "Option" shall mean an Incentive Stock Option or a Non- Qualified Stock Option. (m) "Participating Key Employee" shall mean a Key Employee designated to be granted an Award under the Plan. (n) "Performance Period" shall mean, in relation to Performance Shares, any period for which a performance goal or goals have been established. (o) "Performance Share" shall mean any right granted under Section 6(d) of the Plan that will be paid out as a Share (which, in specified circumstances, may be a Share of Restricted Stock). (p) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization or government or political subdivision thereof. (q) "Released Securities" shall mean Shares of Restricted Stock with respect to which all applicable restrictions have expired, lapsed or been waived. (r) "Restricted Securities" shall mean Awards of Restricted Stock or other Awards under which issued and outstanding Shares are held subject to certain restrictions. (s) "Restricted Stock" shall mean any Share granted under Section 6(c) of the Plan or, in specified circumstances, a Share paid in connection with a Performance Share under Section 6(e) of the Plan. (t) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Commission under the Exchange Act, or any successor rule or regulation thereto. (u) "Shares" shall mean shares of common stock of the Company, $1 par value, and such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(b) of the Plan. (v) "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan. Section 3. Administration The Plan shall be administered by the Committee; provided, however, that if at any time the Committee shall not be in existence, the functions of the Committee as specified in the Plan shall be exercised by those members of the Board of Directors of the Company who qualify as "disinterested persons" under Rule 16b-3. Subject to the terms of the Plan and applicable laws and without limitation by reason of enumeration, the Committee shall have full discretionary power and authority to: (i) designate Participating Key Employees; (ii) determine the type or types of Awards to be granted to each Participating Key Employee under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) Awards granted to Participating Key Employees; (iv) determine the terms and conditions of any Award granted to a Participating Key Employee; (v) determine whether, to what extent and under what circumstances Awards granted to Participating Key Employees may be settled or exercised in cash, Shares, other securities, other Awards or other property, and the method or methods by which Awards may be settled, exercised, canceled, forfeited or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other Awards and other amounts payable with respect to an Award granted to Participating Key Employees under the Plan shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan (including, without limitation, any Award Agreement); (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time or from time to time, and shall be final, conclusive and binding upon all Persons, including the Company, any Affiliate, any Participating Key Employee, any holder or beneficiary of any Award, any shareholder and any employee of the Company or of any Affiliate. Section 4. Shares Available for Award (a) Shares Available. Subject to adjustment as provided in Section 4(b): (i) Number of Shares Available. The number of Shares with respect to which Awards may be granted under the Plan shall be 500,000, subject to the limitations set forth in Section 6(c)(i). (ii) Accounting for Awards. The number of Shares covered by an Award under the Plan, or to which such Award relates, shall be counted on the date of grant of such Award against the number of Shares available for granting Awards under the Plan. (iii) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. (b) Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split- up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares subject to the Plan and which thereafter may be made the subject of Awards under the Plan; (ii) the number and type of Shares subject to outstanding Awards; and (iii) the grant, purchase or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, however, in each case, that with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b) of the Code (or any successor provision thereto); and provided further that the number of Shares subject to any Award payable or denominated in Shares shall always be a whole number. Section 5. Eligibility Any Key Employee, including any executive officer or employee- director of the Company or of any Affiliate, who is not a member of the Committee shall be eligible to be designated a Participating Key Employee. Ben Marcus, Stephen H. Marcus, Diane Marcus Gershowitz and any other person who beneficially owns, directly or indirectly (taking into account stock ownership attributed to such person pursuant to Section 425(d) of the Code), stock possessing more than five percent (5%) of the total combined voting power of all classes of stock of the Company or of any Affiliate of the Company shall not be eligible to receive Awards under the Plan. Section 6. Awards (a) Option Awards. The Committee is hereby authorized to grant Options to Key Employees with the terms and conditions as set forth below and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine in its discretion. (i) Exercise Price. The exercise price per Share of an Option granted pursuant to this Section 6(a) shall be determined by the Committee; provided, however, that such exercise price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option. (ii) Option Term. The term of each Option shall be fixed by the Committee; provided, however, that in no event shall the term of any Option exceed a period of ten years from the date of its grant. (iii) Exercisability and Method of Exercise. An Option shall become exercisable in such manner and within such period or periods and in such installments or otherwise as shall be determined by the Committee. The Committee also shall determine the method or methods by which, and the form or forms, including, without limitation, cash, Shares, other securities, other Awards, other property or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price, in which payment of the exercise price with respect to any Option may be made or deemed to have been made. (iv) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code (or any successor provision thereto) and any regulations promulgated thereunder. Notwithstanding any provision in the Plan to the contrary, no Incentive Stock Option may be granted hereunder after the tenth anniversary of the adoption of the Plan by the Board of Directors of the Company. (b) Stock Appreciation Right Awards. The Committee is hereby authorized to grant Stock Appreciation Rights to Key Employees. Subject to the terms of the Plan and any applicable Award Agreement, a Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of one Share on the date of exercise over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan, the grant price, term, methods of exercise, methods of settlement (including whether the Participating Key Employee will be paid in cash, Shares, other securities, other Awards, or other property or any combination thereof), and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee in its discretion. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate, including, without limitation, restricting the time of exercise of the Stock Appreciation Right to specified periods as may be necessary to satisfy the requirements of Rule 16b-3. (c) Restricted Stock Awards. (i) Issuance. The Committee is hereby authorized to grant Awards of Restricted Stock to Key Employees; provided, however, that the aggregate number of Shares of Restricted Stock granted under the Plan to all Participating Key Employees as a group shall not exceed 50,000 Shares (such number of Shares subject to adjustment in accordance with the terms of Section 4(b) hereof) of the total number of Shares available for Awards under Section 4(a)(i). (ii) Restrictions. Shares of Restricted Stock granted to Participating Key Employees shall be subject to such restrictions as the Committee may impose in its discretion (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate in its discretion. (iii) Registration. Any Restricted Stock granted under the Plan to a Participating Key Employee may be evidenced in such manner as the Committee may deem appropriate in its discretion, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Shares of Restricted Stock granted under the Plan to a Participating Key Employee, such certificate shall be registered in the name of the Participating Key Employee and shall bear an appropriate legend (as determined by the Committee) referring to the terms, conditions and restrictions applicable to such Restricted Stock. (iv) Payment of Restricted Stock. At the end of the applicable restriction period relating to Restricted Stock granted to a Participating Key Employee, one or more stock certificates for the appropriate number of Shares, free of restrictions imposed under the Plan, shall be delivered to the Participating Key Employee or, if the Participating Key Employee received stock certificates representing the Restricted Stock at the time of grant, the legends placed on such certificates shall be removed. (v) Forfeiture. Except as otherwise determined by the Committee in its discretion, upon termination of employment of a Participating Key Employee (as determined under criteria established by the Committee in its discretion) for any reason during the applicable restriction period, all Shares of Restricted Stock still subject to restriction shall be forfeited by the Participating Key Employee; provided, however, that the Committee may, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock held by a Participating Key Employee. (d) Performance Share Awards. (i) Issuance. The Committee is hereby authorized to grant Awards of Performance Shares to Key Employees. (ii) Performance Goals and Other Terms. The Committee shall determine in its discretion the Performance Period, the performance goal or goals to be achieved during any Performance Period, the proportion of payments, if any, to be made for performance between the minimum and full performance levels, the restrictions applicable to Shares of Restricted Stock received upon payment of Performance Shares if Performance Shares are paid in such manner, and any other terms, conditions and rights relating to a grant of Performance Shares. Performance goals established by the Committee may be based on one or more measures such as return on shareholders' equity, earnings or any other standard or standards deemed relevant by the Committee, measured internally or relative to other organizations and before or after extraordinary items. (iii) Rights and Benefits During the Performance Period. The Committee may provide that, during a Performance Period, a Participating Key Employee shall be paid cash amounts, with respect to each Performance Share held by such Participating Key Employee, in the same manner, at the same time, and in the same amount paid, as a cash dividend on a Share. Participating Key Employees shall have no voting rights with respect to Performance Shares held by them. (iv) Adjustments with Respect to Performance Shares. Any other provision of the Plan to the contrary notwithstanding, the Committee may in its discretion at any time or from time to time adjust performance goals (up or down) and minimum or full performance levels (and any intermediate levels and proportion of payments related thereto), adjust the manner in which performance goals are measured, or shorten any Performance Period or waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock issued in payment of Performance Shares, if the Committee determines that conditions, including but not limited to, changes in the economy, changes in competitive conditions, changes in laws or governmental regulations, changes in generally accepted accounting principles, changes in the Company's accounting policies, acquisitions or dispositions by the Company or its Affiliates, or the occurrence of other unusual, unforeseen or extraordinary events, so warrant. (v) Payment of Performance Shares. As soon as is reasonably practicable following the end of the applicable Performance Period, one or more certificates representing the number of Shares equal to the number of Performance Shares payable shall be registered in the name of and delivered to the Participating Key Employee; provided, however, that any Shares of Restricted Stock payable in connection with Performance Shares shall, pending the expiration, lapse, or waiver of the applicable restrictions, be evidenced in the manner as set forth in Section 6(c)(iii) hereof. (e) General. (i) No Consideration for Awards. Awards shall be granted to Participating Key Employees for no cash consideration unless otherwise determined by the Committee. (ii) Award Agreements. Each Award granted under the Plan shall be evidenced by an Award Agreement in such form (consistent with the terms of the Plan) as shall have been approved by the Committee. (iii) Awards May Be Granted Separately or Together. Awards to Participating Key Employees under the Plan may be granted either alone or in addition to, in tandem with, or in substitution for, any other Award or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to, or in tandem with, other Awards, or in addition to, or in tandem with, awards granted under any other plan of the Company or any Affiliate, may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iv) Forms of Payment Under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award to a Participating Key Employee may be made in such form or forms as the Committee shall determine, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee in its discretion. Such rules and procedures may include, without limitation, provisions for the payment or crediting of interest on installment or deferred payments. (v) Transferability. Each Award granted under the Plan shall not be transferable other than by will or the laws of descent and distribution except that a Participating Key Employee may, to the extent allowed by the Committee and in a manner specified by the Committee or the Award Agreement, (a) designate in writing a beneficiary to exercise the Award after the Participating Key Employee's death, as the case may be, and (b) transfer any Award. (vi) Term of Awards. Except as otherwise provided in the Plan, the term of each Award shall be for such period as may be determined by the Committee. (vii) Rule 16b-3 Six-Month Limitations. To the extent required in order to comply with Rule 16b-3 only, any equity security offered pursuant to the Plan may not be sold for at least six months after acquisition, except in the case of death or disability, and any derivative security issued pursuant to the Plan shall not be exercisable for at least six months, except in case of death or disability of the holder thereof. Terms used in the preceding sentence shall, for the purposes of such sentence only, have the meanings, if any, assigned or attributed to them under Rule 16b-3. (viii) Share Certificates; Representation. In addition to the restrictions imposed pursuant to Section 6(c) and Section 6(d) hereof, all certificates for Shares delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Commission, New York Stock Exchange or any other stock exchange or other market upon which such Shares are then listed or traded, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Committee may require each Participating Key Employee, or other Person who acquires Shares under the Plan by means of an Award originally made to a Participating Key Employee to represent to the Company in writing that such Participating Key Employee, or other Person is acquiring the Shares without a view to the distribution thereof. Section 7. Amendment and Termination of the Plan; Correction of Defects and Omissions (a) Amendments to and Termination of the Plan. The Board of Directors of the Company may at any time amend, alter, suspend, discontinue or terminate the Plan; provided, however, that shareholder approval of any amendment of the Plan shall also be obtained if otherwise required by: (i) the rules and/or regulations promulgated under Section 16 of the Exchange Act (in order for the Plan to remain qualified under Rule 16b-3); (ii) the Code or any rules promulgated thereunder (in order to allow for Incentive Stock Options to be granted under the Plan); or (iii) the listing requirements of the New York Stock Exchange or any other principal securities exchange or market on which the Shares are then traded (in order to maintain the listing of the Shares thereon). Termination of the Plan shall not affect the rights of Participating Key Employees with respect to Awards previously granted to them, and all unexpired Awards shall continue in force and effect after termination of the Plan except as they may lapse or be terminated by their own terms and conditions. (b) Correction of Defects, Omissions and Inconsistencies. The Committee may in its discretion correct any defect, supply any omission or reconcile any inconsistency in any Award or Award Agreement in the manner and to the extent it shall deem desirable to carry the Plan into effect. Section 8. General Provisions (a) No Rights to Awards. No Key Employee, Participating Key Employee or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Key Employees, Participating Key Employees or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to each Participating Key Employee. (b) Withholding. No later than the date as of which an amount first becomes includable in the gross income of a Participating Key Employee for federal income tax purposes with respect to any Award under the Plan, the Participating Key Employee shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations arising with respect to Awards to Participating Key Employees under the Plan may be settled with Shares previously owned by the Participating Key Employee; provided, however, that the Participating Key Employee may not settle such obligations with Shares that are part of, or are received upon exercise of, the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and any Affiliate shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participating Key Employee. The Committee may establish such procedures as it deems appropriate for the settling of withholding obligations with Shares, including, without limitation, the establishment of such procedures as may be necessary to satisfy the requirements of Rule 16b-3. (c) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (d) Rights and Status of Recipients of Awards. The grant of an Award shall not be construed as giving a Participating Key Employee the right to be retained in the employ of the Company or any Affiliate. Further, the Company or any Affiliate may at any time dismiss a Participating Key Employee from employment, free from any liability, or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. Except for rights accorded under the Plan and under any applicable Award Agreement, Participating Key Employees shall have no rights as holders of Shares as a result of the granting of Awards hereunder. (e) Unfunded Status of the Plan. Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company or the Committee and any Participating Key Employee or other Person. To the extent any Person holds any right by virtue of a grant under the Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company. (f) Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the internal laws of the State of Wisconsin and applicable federal law. (g) Severability. If any provision of the Plan or any Award Agreement or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any Person or Award, or would disqualify the Plan, any Award Agreement or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, any Award Agreement or the Award, such provision shall be stricken as to such jurisdiction, Person or Award, and the remainder of the Plan, any such Award Agreement and any such Award shall remain in full force and effect. (h) No Fractional Shares. No fractional Shares or other securities shall be issued or delivered pursuant to the Plan, any Award Agreement or any Award, and the Committee shall determine (except as otherwise provided in the Plan) whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares or other securities, or whether such fractional Shares or other securities or any rights thereto shall be canceled, terminated or otherwise eliminated. (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. Section 9. Effective Date of the Plan The Plan shall be effective as of the date the Plan is adopted by the shareholders, provided such shareholder approval of the Plan is within 12 months following the date of adoption of the Plan by the Board of Directors, and all Awards granted under the Plan prior to the date of shareholder approval shall be subject to such approval and the effective date of such Award grants shall be deemed to be the date of such shareholder approval. Section 10. Term of the Plan No Award shall be granted under the Plan following the tenth anniversary of its effective date. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date and, to the extent set forth in the Plan, the authority of the Committee to amend, alter, adjust, suspend, discontinue or terminate any such Award, or to waive any conditions or restrictions with respect to any such Award, and the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond such date. EX-13 4 Management's discussion and analysis Forward-Looking Statements Certain matters discussed in this annual report to shareholders, particularly in the Shareholders' Letter and Management's Discussion and Analysis, are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can 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 carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Results of Operations General The Marcus Corporation and its four divisions report their consolidated and individual segment results of operations on either a 52-or 53-week fiscal year. Fiscal 1998 was a 53-week fiscal year for the Company's restaurant division, while the Company and each of its other divisions reported on a 52-week fiscal year. Fiscal 1997 was a 53-week fiscal year for the Company's limited-service lodging and hotel/resort 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 1999 will be a 52-week year for the Company and each of its divisions. Historically, the Company's fiscal year has been divided into three 12-week quarters and a final quarter consisting of 16 or 17 weeks. Beginning in fiscal 1999, the Company will begin dividing its fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. The Company is making this change in order to simplify its reporting process and provide greater consistency between quarters. The Company's fiscal year end will not change. To facilitate future comparisons with fiscal 1999 quarterly results, the following table sets forth approximate pro forma revenues, earnings and earnings per share (diluted) for each of the Company's fiscal 1998 quarters as if the quarters had been reported on the new basis: Revenues (in thousands) 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter 1998 Reported $90,053 $71,184 $71,220 $103,327 $335,784 Pro forma $96,111 $76,051 $79,625 $ 83,997 $335,784 Earnings (in thousands) 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter* 1998* Reported $13,065 $6,917 $3,035 $7,767 $30,784 Pro forma $13,669 $6,707 $4,284 $6,124 $30,784 Earnings Per Share (diluted) 1st 2nd 3rd 4th Fiscal Quarter Quarter Quarter Quarter* 1998* Reported $0.44 $0.23 $0.10 $0.25 $1.02 Pro forma $0.46 $0.22 $0.14 $0.20 $1.02 * Excludes $2.34 million or $.08 per share after-tax charge for Budgetel name change Total consolidated revenues for fiscal 1998 were $335.8 million, an increase of $32.4 million, or 10.7%, compared to fiscal 1997 consolidated revenues of $303.4 million. All four of the Company's divisions contributed to the increase in revenues in fiscal 1998, with the greatest increases resulting from the Company's theatre and hotel/resort divisions. Fiscal 1997 consolidated revenues increased $41.1 million, or 15.7%, from fiscal 1996 consolidated revenues. The additional week of results reported for the restaurant division in fiscal 1998 did not materially impact the Company's consolidated results of operations due to the relative size of the restaurant division compared to the Company's other divisions. The additional week of results reported for the limited-service lodging and hotel/resort 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. Net earnings for fiscal 1998 were $28.4 million, or $0.94 per share. As a result of the Company's announcement that it is changing the name of its Budgetel Inns to Baymont Inns and Baymont Inns & Suites, the Company recorded a $2.34 million after-tax charge ($3.9 million before-tax) to earnings for the write-off of existing signage and other one-time expenses associated with the name change during the fourth quarter of fiscal 1998. Excluding the name change charge, earnings for fiscal 1998 were $30.7 million, or 1.02 per share, a decrease from comparable fiscal 1997 earnings of $30.9 million, or $1.04 per share. Fiscal 1997 earnings increased $3.4 million, or 12.3%, over comparable fiscal 1996 earnings of $27.5 million, or $0.93 per share, excluding the after-tax gain of $14.8 million, or $0.49 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 $1.42 per share, for fiscal 1996. Weighted average shares outstanding were 30.3 million for fiscal 1998 and 29.7 million for both fiscal 1997 and fiscal 1996. All per share and share data in this discussion have been adjusted to reflect the Company's three-for-two stock split effected in the form of a 50% stock dividend on December 5, 1997. The Company adopted SFAS No. 128, "Earnings Per Share," in fiscal 1998. Prior period amounts have been restated under the new standard. All per share data presented herein is on a diluted basis. The Company's net interest expense, net of investment income, totaled $11.8 million for fiscal 1998. This represented an increase of $1.8 million, or 17.7%, over fiscal 1997 net interest expense of $10.0 million. Fiscal 1997 net interest expense increased $3.7 million, or 58.5%, over fiscal 1996 net interest expense of $6.3 million. These increases were the result of additional borrowings in fiscal 1998 and fiscal 1997 used to help finance the Company's capital program. 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, reducing its borrowing needs. The Company's income tax expense for fiscal 1998 was $18.9 million, a decrease of $1.4 million from fiscal 1997. The Company's effective tax rate for fiscal 1998 was 40.0% compared to 39.7% in fiscal 1997 and 39.6% in fiscal 1996. 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's historical method of reporting a 16- or 17-week fourth quarter has always contributed to the larger results in that quarter. The Company is continuing its aggressive expansion plan that it began in fiscal 1994, incurring over $300 million in aggregate capital expenditures during the last three fiscal years. The Company's current plans include the following goals: - Converting Budgetel Inns to Baymont Inns and Baymont Inns & Suites in fiscal 1999 and then increasing the total number of Baymont Inns and Baymont Inns & Suites to over 400 within the next five years. Up to four Company-owned and 27 franchised properties are currently under development for fiscal 1999. The Company currently believes that much of this anticipated future growth will ultimately come from its emphasis on opening new franchised Baymont Inns and Baymont Inns & Suites. - Increasing its number of movie theatre screens to 500 by fiscal 2000, with expected continued expansion outside of Wisconsin. Up to 66 new screens are currently planned to be opened by the Company in fiscal 1999, including 16 new screens recently completed at the Company's second location in Columbus, Ohio. Other current expansion plans include 49 new screens to be added to existing locations in Wisconsin, Illinois and Minnesota and completion of the Company's first large screen IMAX/R/ 2D/3D theatre at its new Columbus location. The Company also has plans to add stadium seating to a majority of its existing screens by the end of fiscal 2000. - 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 the new properties. The Company recently announced plans for the development of new hotels in Madison, Wisconsin, and Chicago, Illinois. The Madison Hilton, which is a public/private endeavor with the City of Madison, is anticipated to be a 222-room Company-owned property scheduled to open in 2000. A 250-room downtown Chicago luxury hotel is planned to be developed and managed by the Company. Plans are also underway to expand the Milwaukee Hilton to 750 rooms. - Increasing its number of Woodfield Suites. The Company currently has two Company-owned Woodfield Suites scheduled to open late in fiscal 1999 and is evaluating additional sites. - 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, and the Company plans to open at least two additional 2-in-1 conversions in fiscal 1999. 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. The Company is conducting a review of its computer systems to identify those areas that may be affected by the Year 2000 issue and is developing an implementation plan to resolve the issue. The Company expects the project to be substantially complete by early 1999 and does not, at this time, expect this project to have a significant effect on the business, results of operations or financial condition of the Company. The Company began converting critical accounting and data processing systems in fiscal 1998 in the normal course of business and expects that the new systems will provide business benefits in addition to being ready for the Year 2000. The Company is also assessing the impact of this issue with its key vendors and suppliers. Limited-Service Lodging The Company's largest division is its limited-service lodging division, which contributed 43.4% of Company consolidated revenues and 53.2% of Company consolidated operating income, excluding corporate items and the Budgetel name change charge, during fiscal 1998. The division's primary business consists of owning and franchising 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, operating margin, number of units and rooms data for the limited-service lodging division for the last three fiscal years: 1998 1997 1996 (in millions) Revenues $145.7 $135.3 $118.7 Operating income* 35.4 39.8 36.3 Operating margin* (% of revenues) 24.3% 29.4% 30.6% * Excludes $3.9 million before-tax charge for Budgetel name change. Number of units at year-end 1998 1997 1996 Budgetel Inns Company-owned or operated 106 104 93 Franchised 50 39 31 ---- ---- ---- Total Budgetel Inns 156 143 124 ==== ==== ==== Woodfield Suites Company-owned 5 4 3 ---- ---- ---- Total number of units 161 147 127 ==== ==== ==== Available rooms at year-end 1998 1997 1996 Budgetel Inns Company-owned or operated 11,326 11,111 9,931 Franchised 4,766 3,757 3,087 ------- ------- ------- Total Budgetel Inns 16,092 14,868 13,018 ======= ======= ======= Woodfield Suites 610 490 339 ------- ------- ------- Total available rooms 16,702 15,358 13,357 ======= ======= ======= Total revenues in the limited-service lodging division increased 7.7% and 14.0% during fiscal 1998 and fiscal 1997, respectively, principally as a result of increasing available rooms. The additional week of operations included in the limited-service lodging division's fiscal 1997 results contributed an additional $2.5 million to fiscal 1997 revenues and approximately $1.2 million to fiscal 1997 operating income. In addition to the increased number of units each fiscal year, increases in the average daily room rate at the Company's Budgetel Inns of 3.1% and 3.0% in fiscal 1998 and 1997, respectively, also contributed to the increased revenues. Budgetel Inn's occupancy percentage decreased during both fiscal 1998 and fiscal 1997, but still remained above limited-service lodging industry averages. The primary factor contributing to the decline in occupancy in both fiscal years was the significant increase in the supply of limited-service economy lodging rooms. The increased room supply was especially prevalent in the Midwestern and Southern portions of the country, where the Company has a large number of properties. The result of the average daily rate increases and occupancy declines was a 0.4% decrease and 1.1% increase in the division's revenue per available room, or RevPAR, for comparable Inns for fiscal 1998 and 1997, respectively. The Company's newly opened Budgetel Inns and Woodfield Suites contributed additional revenues of $11.5 million and nominal operating income during fiscal 1998. Newly opened properties in fiscal 1997 contributed additional revenue of $4.9 million and nominal operating income. The limited-service lodging division's operating income, excluding the $3.9 million before-tax charge for Budgetel name change costs, decreased 11.1% during fiscal 1998, compared to an increase of 9.7% during fiscal 1997. Operating margins, excluding the Budgetel name change costs, declined to 24.3%, compared to 29.4% and 30.6% in fiscal 1997 and 1996, respectively, due primarily to the reductions in occupancy percentages, increased payroll costs from a tight labor market and recent minimum wage increases, increased administrative costs associated with the Company's expansion program, and increased marketing expenditures. In addition, the operating margins of new properties opened during the past two fiscal years were below the Company average due to the increased room supply. During fiscal 1998, the Company announced that it was changing the name of its Budgetel Inns to Baymont Inns and Baymont Inns & Suites. The Company believes that the Budgetel name no longer reflects the current product's features and amenities. The name change is intended to help expand the Company's customer base, increase RevPAR and increase development opportunities. Additional features and amenities are being added to the product and it is the Company's intention to change the majority of its company-owned and operated properties to Baymont Inns & Suites. The Company currently plans to convert all properties, including franchised inns, to the Baymont name by approximately October 31, 1998. As a result of the name change and the anticipated expanded market potential, the Company's goal is to have over 400 locations under the Baymont banner within the next five years, a change from the Company's prior goal of 300 Budgetel Inns by fiscal 2000. The Company's ability to reach this goal will be significantly impacted by customer acceptance of the new name and product and the Company's ability to increase the number of franchised locations at a pace faster than that achieved under the Budgetel name, as well as industry and economic conditions, the competitive environment and other factors. Theatres The Company's oldest and second largest division is its theatre division. The theatre division contributed 27.3% of the Company's consolidated revenues and 29.6% of its consolidated operating income, excluding corporate items and the Budgetel name change charge, during fiscal 1998. The theatre division operates motion picture theatres in Wisconsin, Illinois, Ohio and Minnesota, and a family entertainment center in Wisconsin. The following tables set forth revenues, operating income, operating margin, screens and theatres for the last three fiscal years: 1998 1997 1996 (in millions) Revenues $91.8 $80.6 $63.7 Operating income 19.7 16.9 15.0 Operating margin (% of revenues) 21.4% 20.9% 23.6% Number of screens and locations at year-end 1998 1997 1996 Theatre screens 361 297 219 Theatre locations 46 40 36 Average screens per location 7.8 7.4 6.1 Total revenues in the theatre division increased 13.9% and 26.5% during fiscal years 1998 and 1997, 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 added 66 new screens during fiscal 1998, all during the fourth quarter, including a new 12-plex in Menomonee Falls, Wisconsin, and a 16-screen theatre in Pickerington (Columbus), Ohio. During the final weeks of fiscal 1998, the Company also completed the purchase of five suburban Minneapolis/St. Paul, Minnesota, theatres with a total of 38 screens (32 first-run and 6 budget screens). Upon opening the new location in Menomonee Falls, the Company converted an existing five-screen complex in that city into a budget-oriented theatre. As of May 28, 1998, the Company operated 329 first-run screens and 32 budget screens. Compared to first-run theatres, budget theatres generally have lower box office revenues and associated film costs, but higher concession sales as a percentage of box office revenue. The Company opened 80 new screens during fiscal 1997, 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 during fiscal 1997 were 27 screens acquired at the beginning of the year, consisting of an 11-screen theatre in Chicago Heights, Illinois, 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 20-screen ultraplex). Additionally, the Company's first family entertainment center opened early in fiscal 1997 in Appleton, Wisconsin. The 40,000 square foot Hollywood-themed indoor amusement facility includes a restaurant, party rooms, a laser tag center, virtual reality games, a miniature golf course and an arcade and adjoins the Company's new theatre in Appleton. The addition of the new screens and the family entertainment center during fiscal 1998 and 1997 generated additional revenues of $8.5 million and $17.6 million, respectively, compared to the previous years. One theatre with two screens was closed during fiscal 1998 and two theatres with a total of two screens were closed during fiscal 1997. These closed theatres had minimal impact on operations in each year. Revenues for the theatre business and the motion picture industry in general are heavily dependent on the general audience appeal of available films, together with studio marketing, advertising and support campaigns, factors over which the Company has no control. Fiscal 1998 results were greatly enhanced by the record-setting box office performance of the film Titanic. Additional box office hits during fiscal 1998 included Men in Black, Air Force One, Good Will Hunting, As Good as It Gets, Tomorrow Never Dies, Lost World, My Best Friend's Wedding and Batman & Robin, while fiscal 1997 included the hits Independence Day, the Star Wars trilogy, Jerry Maguire, Liar Liar, 101 Dalmations, Ransom and Scream. 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 1996, 1997 and 1998. Total box office receipts during fiscal 1998 were $60.0 million, an increase of $5.5 million, or 10.1%, from $54.5 million during fiscal 1997. Fiscal 1997 box office receipts increased $10.1 million, or 22.7%, compared to fiscal 1996. These increases were attributable to 7.4% and 22.7% increases in attendance during fiscal years 1998 and 1997, respectively. The increases in attendance were due to the increase in new screens each year. Attendance at the Company's comparable locations decreased 1.4% during fiscal 1998 and 4.5% during fiscal 1997, compared to the previous year. Early in the third quarter of fiscal 1998, the Company experienced a fire at its North Shore Cinema in Mequon, Wisconsin, resulting in the loss of 11 screens for approximately five months in fiscal 1998. Fiscal 1997 attendance at the Company's theatres, and the industry in general, was adversely affected by the 1996 Summer Olympics. The decrease in fiscal 1997 attendance compared to the prior year was also due to the additional week of operations during fiscal 1996. This additional week during fiscal 1996 included the Memorial Day weekend, which is traditionally one of the year's busiest motion picture viewing weekends. The theatre division's average ticket price increased 2.4% during fiscal 1998 after remaining unchanged during fiscal 1997, compared to the prior year. The fiscal 1997 average ticket price did not increase due to the additional budget-oriented screens added during the fiscal year. First-run theatre average ticket prices increased 1.4% during fiscal 1998 and 4.9% during fiscal 1997, compared to the prior year. Vending revenues in fiscal 1998 were $27.3 million, an increase of $4.4 million, or 19.1%, from $22.9 million in fiscal 1997. Fiscal 1997 vending revenues increased $5.2 million, or 29.7%, from fiscal 1996 vending revenues of $17.7 million. Vending revenues increased due to increased theatre attendance from the Company's added screens and the 11.4% and 5.8% increase in average concession sales per person during fiscal years 1998 and 1997, respectively. The theatre division's operating income increased 16.7% during fiscal 1998 and 12.3% during fiscal 1997, compared to the prior year results. The division's operating margin increased to 21.4%, compared to 20.9% and 23.6% in fiscal 1997 and 1996, respectively. Fiscal 1998 and fiscal 1997 operating income was reduced by pre-opening expenses of over $550,000 and $800,000, respectively, related to new screens and the Company's new family entertainment center in fiscal 1997. Fiscal 1996 operating income included $550,000 from the additional week of results reported during the year. Hotels and Resorts The Company's hotel and resort division contributed 20.9% of the Company's consolidated revenues and 11.8% of the Company's consolidated operating income, excluding corporate items and the Budgetel name change charge, during fiscal 1998. The hotel and resort division owns and operates two full-service hotels in downtown Milwaukee, Wisconsin, a full-facility destination resort in Lake Geneva, Wisconsin, and a boutique luxury resort in Indian Wells, California. In addition, the Company managed three hotels and a resort during fiscal 1998, compared to three hotels during fiscal 1997 and two hotels during fiscal 1996. The following table sets forth revenues, operating income and operating margin for the hotel and resort division for the last three fiscal years: 1998 1997 1996 (in millions) Revenues $70.3 $60.2 $53.5 Operating income 7.9 5.5 3.4 Operating margin (% of revenues) 11.2% 9.1% 6.3% Total revenues in the hotel and resort division increased 16.8% and 12.5% during fiscal 1998 and fiscal 1997, respectively, compared to the prior year. The additional week of operations included in the division's fiscal 1997 results contributed an additional $1.0 million to fiscal 1997 revenues and $230,000 to the fiscal 1997 operating income. The division's operating income increased 44.1% during fiscal 1998 and 61.9% during fiscal 1997, compared to the previous year. Operating margins have increased each year. Occupancy and average daily rate increases at all three of the division's comparable owned properties contributed to the increase in revenues and operating income in both fiscal 1998 and fiscal 1997. As a result of the occupancy and average daily rate increases, the division's total RevPAR for comparable properties increased 12.5% and 12.4% during fiscal 1998 and 1997, respectively, compared to the prior year. Unlike the limited-service segment of the lodging industry, strong consumer demand in conjunction with relatively little increase in room supply has resulted in strong operating results for owners and operators of upper-end hotels and resorts during the past two years. The division acquired a resort in Indian Wells, California, in fiscal 1997 and closed the facility for an extensive renovation. The Company reopened the property in January 1998 under the name Miramonte Resort. Fiscal 1998 results were negatively impacted by approximately $1.2 million of pre-opening costs and anticipated start-up operating losses at the Miramonte. The Miramonte did not have a material effect on fiscal 1997 results. During fiscal 1998, the Company entered into a management contract to operate its first property in Michigan, the Mission Point Resort on Mackinac Island. The Mission Point Resort is a seasonal property and did not materially impact the Company's fiscal 1998 operating results. Fiscal 1997 operating results were favorably impacted by reduced charges for pre-opening costs for the Milwaukee Hilton (formerly the Marc Plaza) and increased management fees. The Company expects to begin construction in fiscal 1999 on a 250-room expansion of the Milwaukee Hilton, which will create the largest hotel in Wisconsin. Scheduled to open in 2000, the addition will also include meeting rooms, a family water park fun center and a skywalk to the city's new Midwest Express Convention Center. Shortly after the end of the fiscal year, the Company announced plans for new hotels in Madison, Wisconsin, and Chicago, Illinois. The Madison Hilton is anticipated to be a 222-room Company-owned headquarters hotel adjacent to the new Monona Terrace Convention Center. Additionally, a 250-room downtown Chicago luxury hotel is planned to be developed and managed by the Company, but will not be company-owned. Restaurants The Company's restaurant division contributed 8.2% of the Company's consolidated revenues and 5.4% of its consolidated operating income, excluding corporate items and the Budgetel name change charge, during fiscal 1998. The restaurant division has non-exclusive franchise rights to operate KFC restaurants in the Milwaukee metropolitan area and in northeast Wisconsin. The division has operated 31 KFC restaurants since the end of fiscal 1996. The division also leases several Company-owned restaurants to other restaurant operators. The following tables set forth revenues, operating income and operating margin for the restaurant division for the last three fiscal years: 1998 1997 1996 (in millions) Revenues $27.6 $26.8 $25.9 Operating income 3.6 2.7 2.0 Operating margin (% of revenues) 12.9% 10.0% 7.7% Total revenues in the restaurant division increased 2.9% and 3.5% in fiscal years 1998 and 1997, respectively, compared to the previous year. 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. Restaurant division revenues include annual rental income from leased restaurants of approximately $1.5 million in fiscal 1998, $1.7 million in fiscal 1997 and $1.9 million in fiscal 1996. The restaurant division's operating income increased 32.7% in fiscal 1998 and 34.6% in fiscal 1997, compared to the previous year. The Company's KFC restaurants experienced a 3.5% and 6.8% increase in aggregate revenues during fiscal years 1998 and 1997, 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, same store KFC restaurant sales increased 8.6% in fiscal 1997. Same store KFC guest counts increased 2.1% and 4.2% during fiscal 1998 and 1997, 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 1998 and 1997 over previous year levels. The Company's comparable KFC restaurants experienced a 41.9% increase in aggregate operating income during fiscal 1998, compared to a 74.8% increase during fiscal 1997. The improved operating results in fiscal 1998 were primarily the result of the increased customer counts and average guest checks, significantly reduced food costs as the result of favorable chicken pricing and the successful conversion of an existing KFC restaurant into the Company's first KFC/Taco Bell 2-in-1 unit in June 1997. Start-up costs associated with the introduction of home delivery services in fiscal 1996 contributed to the comparative 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 or fiscal 1998. The Company is pursuing additional KFC/Taco Bell 2-in-1 conversions as well as exploring 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 $36 million of unused credit lines at fiscal 1998 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 $10.6 million, or 17.3%, to $71.7 million in fiscal 1998, compared to $61.1 million in fiscal 1997. The increase was primarily the result of increased depreciation and amortization in fiscal 1998 compared to fiscal 1997 and timing differences in payments of accounts payable, net of receipts of accounts and notes receivable. Net cash used in investing activities in fiscal 1998 increased by $1.6 million, or 1.6%, to $106.1 million. Capital expenditures and business acquisitions during fiscal 1998 included $25.2 million incurred on limited-service lodging division projects, $59.4 million on theatre division projects and $24.9 million on hotel and resort division projects. During fiscal 1997, $55.9 million was incurred on limited-service lodging division projects, $37.4 million on theatre division projects and $13.4 million on hotel and resort division projects. During fiscal 1998, the Company acquired $2.6 million in cash pursuant to the acquisition of operating assets of a related company, Guest House Inn, Inc. The Company issued 610,173 shares of its Common Stock in conjunction with the acquisition. Principally as a result of funding a portion of the Company's fiscal 1998 facility expansions and renovations, the Company's total debt increased to $215.9 million at the close of fiscal 1998, compared to $177.4 million at the end of fiscal 1997. Net cash provided by financing activities in fiscal 1998 totaled $31.1 million, compared to $35.9 million in fiscal 1997. During fiscal 1998, the Company received $54.7 million of net proceeds from the issuance of notes payable and long-term debt, compared to $99.9 million during fiscal 1997. Included in the fiscal 1998 proceeds was $30 million in principal amount of senior unsecured long-term notes privately placed with two institutional lenders. Fiscal 1997 proceeds included $85 million in principal amount of senior unsecured long-term notes privately placed with six institutional lenders. The Company has the ability to issue up to $85 million of additional senior notes under the private placement program through February 1999. The Company used a portion of the proceeds from its issued senior notes to pay off existing short-term debt, resulting in total principal payments on notes payable and long-term debt of $16.5 million in fiscal 1998 and $58.6 million in fiscal 1997. The Company expects to use the remaining proceeds to help fund the Company's ongoing expansion plans. The Company's debt-capitalization ratio was 0.42 at May 28, 1998, compared to 0.39 at the prior fiscal year end. In addition to the changes in debt transactions noted above, net cash provided by financing activities also decreased due to dividend payments of $6.3 million in fiscal 1998 compared to $5.7 million in fiscal 1997. Total capital expenditures (including normal continuing capital maintenance projects and business acquisitions) of $115.9 million and $107.5 million were incurred in fiscal 1998 and 1997, respectively. Total capital expenditures in fiscal 1999 are expected to exceed fiscal 1998 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. The mix of fiscal 1999 capital expenditures between segments is currently not anticipated to be significantly different than fiscal 1998 capital expenditures. Consolidated Statements of Earnings Years ended May 28, May 29, May 30, 1998 1997 1996 (in thousands, except per share data) Revenues: Rooms and telephone $171,668 $156,689 $137,961 Theatre operations 90,806 79,733 63,099 Food and beverage 48,346 45,401 43,193 Other income 24,964 21,534 18,034 ------- ------- ------- Total revenues 335,784 303,357 262,287 Costs and expenses: Rooms and telephone 68,130 60,198 51,346 Theatre operations 54,107 49,149 38,055 Food and beverage 34,686 33,218 32,014 Advertising and marketing 23,820 20,635 15,273 Administrative 32,387 27,108 25,532 Depreciation and amortization 32,904 28,903 25,117 Rent (Note 9) 2,739 2,435 2,461 Property taxes 12,300 10,175 9,416 Other operating expenses 13,192 10,805 11,258 Budgetel name change (Note 3) 3,900 - - ------- ------- ------- Total costs and expenses 278,165 242,626 210,472 ------- ------- ------- Operating income 57,619 60,731 51,815 Other income (expense): Investment income 834 1,584 2,378 Interest expense (12,616) (11,597) (8,696) Gain on disposition of property and equipment (Note 2) 1,547 488 24,595 ------- ------- ------- (10,235) (9,525) 18,277 ------- ------- ------- Earnings before income taxes 47,384 51,206 70,092 Income taxes (Note 8) 18,940 20,325 27,785 ------- ------- ------- Net earnings $ 28,444 $ 30,881 $ 42,307 ======= ======= ======= Net earnings per common share Basic $ .95 $ 1.05 $ 1.44 Diluted .94 1.04 1.42 ======= ======= ======= Weighted average shares outstanding Basic 30,046 29,525 29,452 Diluted 30,293 29,745 29,712 ======= ======= ======= See accompanying notes. Consolidated Balance Sheets May 28, May 29, 1998 1997 (in thousands) Assets Current assets: Cash and cash equivalents $ 4,678 $ 7,991 Accounts and notes receivable (Note 4) 14,294 5,531 Receivables from joint ventures (Note 10) 1,288 1,066 Refundable income taxes 4,385 - Other current assets 3,773 3,591 ------- ------- Total current assets 28,418 18,179 Property and equipment, net (Note 4) 559,996 487,052 Other assets: Investments in joint ventures (Notes 9 and 10) 1,496 1,439 Other (Note 11) 18,594 15,287 ------- ------- Total other assets 20,090 16,726 ------- ------- Total assets $608,504 $521,957 ======= ======= Liabilities and shareholders' equity Current liabilities: Notes payable (Note 10) $ 5,255 $ 5,625 Accounts payable 26,385 10,291 Income taxes - 52 Taxes other than income taxes 11,404 9,297 Accrued compensation 2,643 1,270 Other accrued liabilities 10,072 10,886 Current maturities of long-term debt (Note 5) 10,277 9,327 ------- ------- Total current liabilities 66,036 46,748 Long-term debt (Note 5) 205,632 168,065 Deferred income taxes (Note 8) 26,479 22,425 Deferred compensation and other (Note 7) 7,826 7,426 Commitments, license rights and contingencies (Note 9) Shareholders' equity (Note 6): Preferred Stock, $1 par; authorized 1,000,000 shares; none issued Common Stock: Common Stock, $1 par; authorized 50,000,000 shares; issued 18,511,866 shares in 1998 and 11,678,935 shares in 1997 18,512 11,679 Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and outstanding 12,677,656 shares in 1998 and 8,707,632 shares in 1997 12,678 8,708 Capital in excess of par 40,265 39,470 Retained earnings 235,708 220,860 ------- ------- 307,163 280,717 Less cost of Common Stock in treasury (944,544 shares in 1998 and 668,272 shares in 1997) 4,632 3,424 ------- ------- Total shareholders' equity 302,531 277,293 ------- ------- Total liabilities and shareholders' equity $608,504 $521,957 ======= ======= See accompanying notes. Consolidated Statements of Shareholders' Equity
Three Years ended May 28, 1998 Class B Capital Common Common in Excess Retained Treasury Stock Stock of Par Earnings Stock (in thousands) Balances at May 25, 1995 $ 7,522 $ 6,069 $45,154 $159,675 $(3,956) Cash dividends: $.21 per share Class B Common Stock - - - (2,770) - $.23 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: $.18 per share Class B Common Stock - - - (2,409) - $.20 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) Cash dividends: $.20 per share Class B Common Stock - - - (2,522) - $.22 per share Common Stock - - - (3,756) - Three-for-two stock split 6,144 4,252 (10,396) - - Exercise of stock options - - 339 - 1,107 Purchase of treasury stock - - - - (2,504) Savings and profit-sharing contribution - - 464 - 118 Reissuance of treasury stock - - 266 - 71 Conversions of Class B Common Stock 282 (282) - - - Guest House Inn, Inc. acquisition (Note 2) 407 - 10,122 (7,318) - Net earnings - - - 28,444 - ------- ------- ------- ------- ------- Balances at May 28, 1998 $18,512 $12,678 $40,265 $235,708 $ (4,632) ======= ======= ======= ======= =======
See accompanying notes. Consolidated statements of cash flows Years ended May 28, May 29, May 30, 1998 1997 1996 (in thousands) Operating activities Net earnings $ 28,444 $ 30,881 $ 42,307 Adjustments to reconcile net earnings to net cash provided by operating activities: Earnings on investments in joint ventures, net of distributions (57) (144) (406) Gain on disposition of property and equipment (1,547) (488) (24,595) Impairment of fixed assets 1,521 - - Depreciation and amortization 32,904 28,903 25,117 Deferred income taxes 4,054 2,398 70 Deferred compensation and other 400 1,239 2,143 Contribution of Company stock to savings and profit-sharing plan 582 498 433 Changes in operating assets and liabilities: Accounts and notes receivable (8,763) 3,249 (2,614) Other current assets (182) (1,128) 1,767 Accounts payable 16,094 (5,355) (2,240) Income taxes (4,437) (1,341) (676) Taxes other than income taxes 2,107 974 (768) Accrued compensation 1,373 (110) (78) Other accrued liabilities (814) 1,534 1,300 ------- ------- ------- Total adjustments 43,235 30,229 (547) ------- ------- ------- Net cash provided by operating activities 71,679 61,110 41,760 ------- ------- ------- Investing activities Capital expenditures, including business acquistions (115,880) (107,514) (83,689) Net proceeds from disposals of property, equipment and other assets 6,093 3,783 48,914 Purchase of interest in joint ventures, net of cash acquired - - (260) (Increase) decrease in other assets 1,280 (4,602) (2,770) Cash acquired pursuant to Guest House Inn, Inc. acquisition 2,589 - - Cash received from (advanced to) joint ventures (222) 3,824 (3,029) ------- ------- ------- Net cash used in investing activities (106,140) (104,509) (40,834) Financing activities Debt transactions: Net proceeds from issuance of notes payable and long- term debt 54,665 99,857 19,603 Principal payments on notes payable and long-term debt (16,518) (58,599) (7,905) Equity transactions: Treasury stock transactions, except for stock options (2,167) (48) (138) Exercise of stock options 1,446 378 521 Dividends paid (6,278) (5,664) (6,339) ------- ------- ------- Net cash provided by financing activities 31,148 35,924 5,742 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (3,313) (7,475) 6,668 Cash and cash equivalents at beginning of year 7,991 15,466 8,798 ------- ------- ------- Cash and cash equivalents at end of year $ 4,678 $ 7,991 $ 15,466 ======= ======= ======= See accompanying notes. Notes to Consolidated Financial Statements 1. Description of Business and Summary of Significant Accounting Policies Description of Business - The Marcus Corporation and its subsidiaries (the Company) operate principally in four business segments: Limited-Service Lodging: Operates and franchises lodging facilities under the names Budgetel Inns (see Note 3) 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, Illinois, Ohio and Minnesota. Hotels/Resorts: Owns and operates full service hotels and resorts in Wisconsin and California and manages full service hotels and resorts in Wisconsin, Minnesota, Michigan and California. Restaurants: Operates KFC restaurants under a license agreement for certain areas in 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 Restaurants segment had a 53-week year in fiscal 1998. The Limited-Service Lodging 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 had 52-week years in each period. 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. Pre-opening 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. In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." The SOP is effective for fiscal years beginning after December 15, 1998 and requires that start-up costs capitalized prior to adoption of the SOP be written off and any future costs be expensed as incurred. As of May 28, 1998, the Company had $917,000 of unamortized start-up costs. It is not practical to estimate at this time what the effect of this change will be on the Company's future earnings or financial position. Depreciation and Amortization - Depreciation and amortization of property and equipment are provided using the straight-line method over the following estimated useful lives: Years Land improvements 10 - 39 Buildings and improvements 10 - 39 Leasehold improvements 3 - 39 Furniture, fixtures and equipment 3 - 20 Advertising and Marketing Costs - The Company expenses all advertising and marketing costs as incurred. Net Earnings Per Share - In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements of earnings per share. All earnings per share amounts for all periods have been presented to conform to SFAS No. 128 disclosure requirements. The numerator for the calculation of basic and diluted earnings per share is net income and the denominator is the respective weighted average shares outstanding. The difference between basic and diluted weighted average shares outstanding is the dilutive effect of employee stock options. New Accounting Pronouncements - In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes the standards for reporting and displaying comprehensive income and its components (revenue, expenses, gains and losses) as part of a full set of financial statements. This statement requires that all elements of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The statement is effective for fiscal years beginning after December 15, 1997. Since this standard applies only to the presentation of comprehensive income, it will not have any impact on the Company's results of operations, financial position or cash flows. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company will adopt Statement No. 131 in fiscal 1999. Management has not completed its review of SFAS No. 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's reported segments. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use." The SOP is effective for fiscal years beginning after December 15, 1998. The SOP will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently capitalizes such costs as incurred and, accordingly, the adoption of this SOP should not have any material impact on the Company's results of operations or financial position. Capitalization of Interest - The Company capitalizes interest during construction periods by adding such interest to the cost of property and equipment. Interest of approximately $1,601,000, $1,320,000 and $1,119,000 was capitalized in fiscal 1998, 1997 and 1996, 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. Acquisitions and Dispositions On October 1, 1997, the Company issued 610,173 shares of Common Stock to Guest House Inn, Inc. (GHI) in exchange for all of the net operating assets of GHI and issued 449,320 new shares of Class B Common Stock to GHI in exchange for the cancellation of the existing 449,320 shares of Class B Common Stock owned by GHI. Share data has been adjusted to reflect the three-for-two stock split (see Note 6). GHI was owned and controlled by certain officers, directors and/or principal controlling shareholders of the Company. Based on this common ownership and control, for financial reporting purposes the assets acquired from GHI were recorded at the historical book value of GHI rather than fair value. The common shares issued to complete this transaction were recorded at their fair value and the excess of this fair value over the historical book value of the assets acquired was recorded as a distribution. 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 immediately commence 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, 1995, 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 pre-tax 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. 3. Budgetel Name Change On February 10, 1998, the Company announced that it is planning to change the name of its Budgetel Inns to Baymont Inns and Baymont Inns & Suites by approximately October 31, 1998. As a result of the name change, the Company recorded a $3.9 million pre-tax charge in fiscal 1998 for the write-off of existing signage ($1.5 million), assistance to franchisees ($1.4 million) and other one-time expenses associated with the name change. 4. Additional Balance Sheet Information The composition of accounts and notes receivable is as follows: May 28, May 29, 1998 1997 (in thousands) Trade receivables $7,549 $3,871 Notes receivable 646 - Employee advances 2,257 343 Other receivables 3,842 1,317 ------ ------ $14,294 $5,531 ====== ====== The composition of property and equipment, which is stated at cost, is as follows: May 28, May 29, 1998 1997 (in thousands) Land and improvements $ 85,282 $ 70,313 Buildings and improvements 440,737 399,416 Leasehold improvements 9,355 8,059 Furniture, fixtures and equipment 187,341 159,715 Construction in progress 27,510 12,019 ------- ------- 750,225 649,522 Less accumulated depreciation and amortization 190,229 162,470 ------- ------- $559,996 $487,052 ======= ======= 5. Long-Term Debt Long-term debt is summarized as follows: May 28, May 29, 1998 1997 (in thousands) Senior notes due May 31, 2005, with monthly principal and interest payments of $362,346, bearing interest at 10.22% $ 21,854 $ 23,856 Senior notes due October 15, 2008, with annual principal payments of $6,666,666 due beginning October 15, 2000, bearing interest at 7.41% paid semiannually 60,000 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% paid semiannually 25,000 25,000 Senior notes due May 15, 2013, with annual principal payments of $3,571,429 due beginning May 15, 2007, bearing interest at 6.70% paid semiannually 25,000 - Senior notes due May 15, 2013, with annual principal payments of $454,545 due beginning May 15, 2003, bearing interest at 6.66% paid semiannually 5,000 - Mortgage notes due to 2008 11,564 9,061 Industrial Development Revenue Bonds due to 2006 6,686 7,100 Unsecured term notes 46,625 52,375 Commercial paper 12,180 - Revolving credit agreements 2,000 - ------- ------- 215,909 177,392 Less current maturities 10,277 9,327 ------- ------- $205,632 $168,065 ======= ======= Substantially all of the mortgage notes, both fixed rate and adjustable, bear interest from 7.2% to 9.0% at May 28, 1998. Adjustable rate Industrial Development Revenue Bonds ($3,781,000 at May 28, 1998) bear interest at 76.5% of prime plus 1% (effectively 7.5% at May 28, 1998), or are adjustable based on high quality tax-exempt obligation rates (approximately 4.0% at May 28, 1998). 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 four unsecured term notes outstanding, as follows: May 28, May 29, 1998 1997 (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 6.44% at May 28, 1998 and is payable quarterly. $17,969 $21,875 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 6.71% at May 28, 1998 and is payable quarterly. 20,000 20,000 Note due October 1, 2000, with quarterly principal payments of $750,000. The variable interest rate is based on the LIBOR rate with an effective rate of 6.44% at May 28, 1998 and is payable quarterly. 7,500 10,500 Note due April 28, 2003, with monthly payments of $20,267, including interest at 2% 1,156 - ------- ------- $46,625 $52,375 ======= ======= The Company issues commercial paper through an agreement with a bank which bears interest at 5.7% at May 28, 1998. 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 28, 1998, the Company had $35,820,000 of unused credit lines available under various bank revolving credit agreements which mature throughout 1999. The interest rates under the revolving credit agreements were at prime (8.5%) at May 28, 1998. There is an annual commitment fee of .25% of the unused portion of these commitments. The Company has the ability and intent to replace commercial paper borrowings, revolving credit borrowings and certain other long-term debt with long-term borrowings under its private placement financing agreement. Accordingly, the Company has classified these borrowings at May 28, 1998, as long-term. Scheduled annual principal payments on long-term debt for the five years subsequent to May 28, 1998, are: Fiscal Year (in thousands) 1999 $10,277 2000 13,398 2001 19,005 2002 20,812 2003 27,478 Interest paid, net of amounts capitalized, in 1998, 1997 and 1996 totaled $13,179,000, $10,985,000, and $8,272,000, respectively. The Company has a swap agreement covering $7,500,000, 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 (5.69% at May 28, 1998). The Company also has a swap agreement covering $7,500,000 which expires August 6, 2001, and requires the Company to pay interest at a defined fixed rate of 6.56% while receiving interest at a defined variable rate of three-month LIBOR (5.69% at May 28, 1998). Together, these swap agreements effectively convert $15,000,000 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 $3,000, $4,000 and $(96,000) in 1998, 1997 and 1996, respectively. The accompanying consolidated balance sheet at May 28, 1998, does not reflect the negative fair market value of the remaining swap agreements as determined by the lender, which totals approximately $101,000. 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. 6. Shareholders' Equity The Company's Board of Directors declared three-for-two stock splits, effected in the form of 50% stock dividends, which were distributed on December 5, 1997 and 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 the respective distribution dates have been adjusted to reflect these dividends. Shareholders may convert their shares of Class B Common Stock into shares of Common Stock at any time. Class B Common Stock shareholders are substantially restricted in their ability to transfer their Class B Common Stock. Holders of Common Stock are entitled to cash dividends per share equal to 110% of all dividends declared and paid on each share of the Class B Common Stock. Holders of Class B Common Stock are entitled to ten votes per share while holders of Common Stock are entitled to one vote per share on any matters brought before the shareholders of the Company. Liquidation rights are the same for both classes of stock. Shareholders have approved the issuance of up to 1,237,500 shares of Common Stock under various stock option plans. The options generally become exercisable 40% after two years, 60% after three years and 80% after four years. The remaining options are exercisable five years after the date of the grant. At May 28, 1998 and May 29, 1997, there were 918,980 and 1,083,225 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 1998, 1997 and 1996, respectively: risk-free interest rates of 5.2%, 5.3% and 5.5%; dividend yield of 1.3% in all years; volatility factors of the expected market price of the Company's common stock of 48% for 1998 and 55% for 1997 and 1996, 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:
May 28, May 29, May 30, 1998 1997 1996 Weighted- Weighted- Average Average Exercise Exercise Options Price Options Price Options (options in thousands) Outstanding at beginning of year 828 $11.72 759 $10.75 711 Granted 180 16.52 126 16.67 186 Exercised (145) 9.48 (44) 9.15 (89) Forfeited (23) 15.34 (13) 13.15 (49) ----- ------ ----- ------ ----- Outstanding at end of year 840 $13.04 828 $11.72 759 ----- ------ ----- ------ ----- Exercisable at end of year 389 $10.66 371 $10.61 216 ----- ------ ----- ------ ----- Weighted-average fair value of options granted during year $7.77 $8.64 $6.81 ===== ===== =====
Exercise prices for options outstanding as of May 28, 1998 ranged from $3.11 to $18.13. The weighted-average remaining contractual life of those options is 6.8 years. The Company's Board of Directors has approved the repurchase of up to 1,687,500 shares of Common Stock to be held in treasury. The Company intends to reissue these shares upon the exercise of stock options and for savings and profit-sharing contributions. The Company purchased 145,297, 13,751 and 10,691 shares pursuant to this plan during 1998, 1997 and 1996, respectively. At May 28, 1998, there were 362,473 shares available for repurchase under this authorization. The Board has authorized the issuance of up to 750,000 shares of Common Stock for The Marcus Corporation Dividend Reinvestment and Associate Stock Purchase Plan. At May 28, 1998, there were 719,985 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 28, 1998, retained earnings of approximately $80,874,000 were unrestricted. 7. Employee Benefit Plans The Company has a qualified profit-sharing savings plan (401(k) plan) covering eligible employees. The 401(k) plan provides for a contribution of a minimum of 1% of defined compensation for all plan participants and matching of 25% of employee contributions up to 6% of defined compensation. In addition, the Company may make additional discretionary contributions. The Company also sponsors unfunded nonqualified defined benefit and deferred compensation plans. Pension and profit-sharing expense for all plans was $1,814,000, $1,485,000 and $1,355,000 for fiscal 1998, 1997 and 1996, respectively. 8. Income Taxes Income tax expense consists of the following: Year ended May 28, May 29, May 30, 1998 1997 1996 (in thousands) Currently payable: Federal $12,173 $14,415 $22,347 State 2,713 3,512 5,368 Deferred 4,054 2,398 70 ------- ------- ------- $18,940 $20,325 $27,785 ======= ======= ======= 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 28, May 29, 1998 1997 (in thousands) Deferred tax assets: Accrued employee benefits $ 2,140 $ 1,765 Other 1,419 493 ------- ------- Total deferred assets 3,559 2,258 Deferred tax liability - Depreciation and amortization 30,038 24,683 ------- ------- Net deferred tax liability included in balance sheet $ 26,479 $22,425 ======= ====== A reconciliation of the statutory federal tax rate to the effective tax rate follows: Year ended May 28, May 29, May 30, 1998 1997 1996 Statutory federal tax rate 35.0 % 35.0 % 35.0 % State income taxes, net of federal income tax benefit 5.1 5.1 5.1 Other (.1) (.4) (.5) ---- ---- ---- 40.0 % 39.7 % 39.6 % ==== ==== ==== Income taxes paid in 1998, 1997 and 1996 totaled $19,323,000, $19,268,000 and $28,391,000, respectively. 9. Commitments, License Rights and Contingencies Lease Commitments - The Company leases real estate under various noncancellable operating leases with an initial term greater than one year. Percentage rentals are based on the revenues at the specific rented property. Certain sublease agreements include buyout incentives. Rent expense charged to operations under these leases was as follows: Year ended May 28, May 29, May 30, 1998 1997 1996 (thousands) Fixed minimum rentals $2,733 $2,282 $2,287 Percentage rentals 188 335 356 Sublease rental income (182) (182) (182) ----- ----- ----- $2,739 $2,435 $2,461 ===== ===== ===== Payments to affiliated parties for lease obligations were approximately $144,000, $492,000 and $268,000 in 1998, 1997 and 1996, respectively. Aggregate minimum rental commitments at May 28, 1998, are as follows: Fiscal Year (in thousands) 1999 $ 1,433 2000 1,418 2001 1,470 2002 1,457 2003 1,221 After 2003 9,519 ------- $16,518 ======= Included in the above commitments is $528,000 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 $53,600,000 at May 28, 1998. 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 $16,599,000 at May 28, 1998. The debt of the joint ventures is collateralized by the real estate, buildings and improvements, and all equipment of each joint venture. 10. Joint Venture Transactions At May 28, 1998 and May 29, 1997, the Company held investments of $1,496,000 and $1,439,000, 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 $1,288,000 and $1,066,000 at May 28, 1998 and May 29, 1997, respectively. The Company earns interest on $405,000 and $189,000 of the receivables at approximately prime to prime plus 1.5% at May 28, 1998 and May 29, 1997, respectively. Included in notes payable at May 28, 1998 and May 29, 1997, is $2,044,000 and $2,294,000, respectively, due to joint ventures in connection with cash advanced to the Company. The Company pays interest on the cash advances based on the 90-day certificate of deposit rates. 11. Business Segment Information Following is a summary of business segment information for 1996 through 1998:
Limited-Service Hotels/ Corporate Lodging Theatres Resorts Restaurants Items Total (in thousands) 1998 Revenues $145,658 $ 91,825 $ 70,305 $27,596 $ 400 $335,784 Operating income (loss) 31,479 19,676 7,874 3,558 (4,968) 57,619 Depreciation and amortization 17,910 6,069 6,649 1,969 307 32,904 Assets 292,571 149,491 102,923 23,279 40,240 608,504 Capital expenditures, including business acquisitions 25,241 59,440 24,903 569 5,727 115,880 ------- ------- ------- ------- -------- ------- 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, including business acquisitions 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, including business acquisitions 51,542 20,316 8,010 619 3,202 83,689 ======= ======= ======= ======= ======== (1) Includes a $3.9 million charge related to the Budgetel name change.
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 $2,749,000 at May 28, 1998, to one of the hotels it manages, which bears interest at the prime rate plus 1% and matures December 31, 2008. Auditors' Report and Management Statement Report of Independent Auditors The Board of Directors and Shareholders of The Marcus Corporation We have audited the accompanying consolidated balance sheets of The Marcus Corporation (the Company) as of May 28, 1998 and May 29, 1997, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended May 28, 1998. 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 28, 1998 and May 29, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 28, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Milwaukee, Wisconsin July 22, 1998 Statement of Management Responsibility for Financial Statements The management of The Marcus Corporation and its subsidiaries is responsible for the preparation of the financial and operating information contained in this annual report, including the consolidated financial statements audited by Ernst & Young LLP, independent auditors. These statements were prepared in conformity with generally accepted accounting principles and include amounts that are based on the best estimates and judgments of management. A system of internal financial controls provides management with reasonable assurance that transactions are recorded and executed as authorized, that assets are properly safeguarded and accounted for, and that records are maintained to permit preparation of financial statements in accordance with generally accepted accounting principles. The Company also has policies and guidelines that require employees to maintain a high level of ethical standards. The Audit Committee of the Board of Directors is composed entirely of outside directors and has unrestricted access to representatives of Ernst & Young LLP. /s/ Stephen H. Marcus /s/ Douglas A. Neis Stephen H. Marcus Douglas A. Neis Chairman and Chief Executive Officer Chief Financial Officer and Treasurer Eleven-year Financial Summary
1998(2) 1997 1996(3) 1995 1994(4) 1993 1992 1991 1990 1989 1988 Operating Results (dollars in thousands) Revenues $335,784 303,357 262,287 277,990 242,614 212,910 204,297 188,008 176,592 166,710 162,393 Net earnings $ 28,444 30,881 42,307 24,136 22,829 16,482 13,289 11,618 10,781 10,042 10,073 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Common Stock Data(1) Net earnings per share $ .94 1.04 1.42 .82 .77 .63 .52 .45 .42 .39 .39 Cash dividends per share $ .22 .20 .23 .15 .13 .11 .10 .09 .08 .07 .07 Weighted average shares outstanding (in thousands) 30,293 29,745 29,712 29,537 29,492 26,208 25,325 25,569 25,839 25,959 26,046 Book value per share $ 10.00 9.37 8.51 7.29 6.61 5.95 4.97 4.54 4.17 3.83 3.53 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Financial Position (dollars in thousands) Total assets $608,504 521,957 455,315 407,082 361,606 309,455 274,394 255,117 230,789 197,898 181,354 Long-term debt $205,632 168,065 127,135 116,364 107,681 78,995 100,032 96,183 85,563 64,163 56,635 Shareholders' equity $302,531 277,293 251,248 214,464 193,918 173,980 124,874 114,697 106,983 98,250 91,318 Capital expenditures, including business acquisitions $115,880 107,514 83,689 77,083 75,825 47,237 27,238 39,861 42,385 34,253 23,591 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Financial Ratios Current ratio .43 .39 .62 .41 .67 .90 .73 .65 .91 .75 1.00 Debt/capitali- zation ratio .42 .39 .35 .37 .37 .34 .46 .47 .45 .41 .40 Return on revenues 8.5% 10.2% 16.1% 8.7% 9.4% 7.7% 6.5% 6.2% 6.1% 6.0% 6.2% Return on average shareholders' equity 9.8% 11.7% 18.2% 11.8% 12.4% 11.0% 11.1% 10.5% 10.5% 10.6% 11.6% ====== ====== ====== ====== ====== ===== ====== ====== ====== ====== ====== (1) All per share and shares outstanding data is on a diluted basis and has been adjusted to reflect stock splits in 1998, 1996 and 1993. (2) Includes charge of $2.34 million or $0.08 per share for costs associated with the Budgetel name change. (3) Includes gain of $14.8 million or $0.49 per share on sale of certain restaurant locations. (4) Includes gain of $1.8 million or $0.06 per share for cumulative effect of change in accounting for income taxes.
Quarterly Information and Stock Prices Supplementary Quarterly Financial Data (Unaudited) (in thousands except per share data)
12 Weeks Ended 12 Weeks Ended 12 Weeks Ended 16 Weeks Ended Fiscal 1998 August 21, 1997 November 13, 1997 February 5, 1998 May 28, 1998 Revenues $90,053 $71,184 $71,220 $103,327 Operating income 24,205 13,674 8,092 11,648 Net earnings 13,065 6,917 3,035 5,427 Net earnings per share* .44 .23 .10 .18 12 Weeks Ended 12 Weeks Ended 12 Weeks Ended 16 Weeks Ended Fiscal 1997 August 22, 1996 November 14, 1996 February 6, 1997 May 29, 1997 Revenues $77,824 $64,828 $63,206 $97,499 Operating income 21,418 13,487 8,745 17,081 Net earnings 11,628 6,782 3,715 8,756 Net earnings per share* .39 .23 .12 .29 Last Sale Price Range of Common Stock First Second Third Fourth Fiscal 1998* Quarter Quarter Quarter Quarter High $17.29 $20.67 $20.38 $18.13 Low 16.00 16.54 16.38 16.06 Fiscal 1997* High $18.50 $16.59 $15.50 $16.33 Low 14.17 14.59 13.50 14.00 *Adjusted for the 50% stock dividend distributed December 5, 1997.
On August 7, 1998, there were 2,215 shareholders of record for the Common Stock and 47 shareholders of record for the Class B Common Stock. EX-21 5 Exhibit 21 Subsidiaries of the Company as of May 28, 1998 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 Baymont Inns, Inc. f/k/a 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 Woodfield Suites Hospitality Corporation owns all of the stock of the following corporation: Name State of Incorporation Woodfield Refreshments, 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 Marcus Cinemas of Minnesota, Inc. Wisconsin Baymont Inns, Inc. f/k/a Budgetel Inns, Inc. owns all of the stock of the following corporations: Name State of Incorporation Baymont Partners, Inc. f/k/a Budgetel Partners, Inc. Wisconsin Guest House Inn of Manitowoc, Inc. Wisconsin Baymont Inns Hospitality Corporation f/k/a Guest House Inn-Appleton, Inc. Wisconsin Marc's Budgetel of Nebraska, Inc. Nebraska Baymont Franchises International, Inc. f/k/a 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 Marcus Hotel Partners, Inc. Wisconsin Marcus Hotels Associates, Inc. Wisconsin EX-23.1 6 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 22, 1998, with respect to the consolidated financial statements of The Marcus Corporation incorporated by reference in the Annual Report (Form 10-K) for the year ended May 28, 1998. ERNST & YOUNG LLP Milwaukee, Wisconsin August 24, 1998 EX-27.1 7
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-28-1998 MAY-30-1997 MAY-28-1998 4,678 0 15,582 0 0 28,418 750,225 190,229 608,504 66,036 205,632 0 0 31,190 271,341 608,504 310,820 335,784 156,923 278,165 0 0 12,616 47,384 18,940 28,444 0 0 0 28,444 0.95 0.94
EX-27.2 8
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 1.05 1.04
EX-27.3 9
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 9-MOS MAY-29-1997 MAY-31-1996 FEB-06-1997 20,966 0 6,934 0 0 31,867 628,342 157,760 516,924 52,932 167,680 0 0 20,386 250,257 516,924 191,285 205,858 95,630 162,208 0 0 7,693 36,892 14,767 22,125 0 0 0 22,125 0.75 0.74
EX-27.4 10
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-30-1996 MAY-26-1995 MAY-30-1996 15,466 0 13,670 0 0 31,599 554,964 143,401 455,315 50,718 127,135 0 0 20,387 230,861 455,315 244,253 262,287 121,415 210,472 0 0 8,696 70,092 27,785 42,307 0 0 0 42,307 1.44 1.42
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