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MARCUS CORP — Interim / Quarterly Report 2005
Apr 5, 2005
32859_10-q_2005-04-05_80f40cbb-2a7f-4846-85c7-35e725bf2cbe.zip
Interim / Quarterly Report
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10-Q 1 cmw1342.htm QUARTERLY REPORT MARKER FORMAT-SHEET="Head Major Center Bold-TNR" FSL="Project"
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended February 24, 2005
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _ to _
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Commission File Number 1-12604
| THE MARCUS CORPORATION |
|---|
| (Exact name of registrant as specified in its charter) |
| Wisconsin | 39-1139844 |
|---|---|
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 100 East Wisconsin Avenue, Suite 1900 | |
| Milwaukee, Wisconsin | 53202-4125 |
| (Address of principal executive offices) | (Zip Code) |
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Registrants telephone number, including area code: (414) 905-1000
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
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Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
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Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
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COMMON STOCK OUTSTANDING AT APRIL 1, 2005 - 21,228,042
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CLASS B COMMON STOCK OUTSTANDING AT APRIL 1, 2005 - 9,090,471
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THE MARCUS CORPORATION
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INDEX
| PART I -
FINANCIAL INFORMATION | | Page |
| --- | --- | --- |
| Item 1. | Consolidated Financial Statements: | |
| | Balance Sheets | |
| | (February 24, 2005 and May 27, 2004) | 3 |
| | Statements of Earnings | |
| | (Thirteen and thirty-nine weeks ended February 24, 2005 and | |
| | February 26, 2004) | 5 |
| | Statements of Cash Flows | |
| | (Thirty-nine weeks ended February 24, 2005 and February 26, 2004) | 6 |
| | Condensed Notes to Financial Statements | 7 |
| Item 2. | Management's Discussion and Analysis of Results of Operations and Financial Condition | 12 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 20 |
| Item 4. | Controls and Procedures | 20 |
| PART II - OTHER INFORMATION | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds; Purchases of Equity | |
| | Securities by the Issuer | 21 |
| Item 6. | Exhibits | 21 |
| | Signatures | S-1 |
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PART I FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements
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THE MARCUS CORPORATION Consolidated Balance Sheets
| (Unaudited) | (Audited) | |
|---|---|---|
| (in thousands, except share and per share data) | February 24, 2005 | May 27, 2004 |
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | $ 176,261 | $ 9,439 |
| Cash held by intermediaries | 155,164 | -- |
| Accounts and notes receivable | 8,144 | 7,742 |
| Receivables from joint ventures, net of reserves | 2,887 | 2,666 |
| Real estate and development costs | 5,202 | 6,438 |
| Other current assets | 4,095 | 5,677 |
| Assets of discontinued operations | 30,868 | 290,023 |
| Total current assets | 382,621 | 321,985 |
| Property and equipment: | ||
| Land and improvements | 46,787 | 43,991 |
| Buildings and improvements | 333,985 | 328,246 |
| Leasehold improvements | 9,137 | 9,291 |
| Furniture, fixtures and equipment | 157,880 | 154,682 |
| Construction in progress | 39,462 | 18,814 |
| Total property and equipment | 587,251 | 555,024 |
| Less accumulated depreciation and amortization | 197,802 | 181,407 |
| Net property and equipment | 389,449 | 373,617 |
| Other assets: | ||
| Investments in joint ventures | 7,667 | 4,300 |
| Goodwill | 11,196 | 11,222 |
| Other | 32,959 | 33,745 |
| Total other assets | 51,822 | 49,267 |
| TOTAL ASSETS | $ 823,892 | $ 744,869 |
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See accompanying notes to consolidated financial statements.
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THE MARCUS CORPORATION Consolidated Balance Sheets
| (in thousands, except share and per share data) | (Unaudited) — February 24, 2005 | May 27, 2004 | ||
|---|---|---|---|---|
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||
| Current liabilities: | ||||
| Notes payable | $ 6,098 | $ | 2,066 | |
| Accounts payable | 8,169 | 14,819 | ||
| Income taxes | 367 | 1,311 | ||
| Taxes other than income taxes | 7,496 | 8,113 | ||
| Accrued compensation | 4,362 | 5,934 | ||
| Other accrued liabilities | 18,503 | 12,122 | ||
| Current maturities of long-term debt | 23,454 | 25,738 | ||
| Liabilities of discontinued operations | 46,383 | 39,668 | ||
| Total current liabilities | 114,832 | 109,771 | ||
| Long-term debt | 184,667 | 207,282 | ||
| Deferred income taxes | 16,765 | 18,714 | ||
| Deferred compensation and other | 15,864 | 15,379 | ||
| Shareholders' equity: | ||||
| Preferred Stock, $1 par; authorized 1,000,000 shares; none issued | -- | -- | ||
| Common Stock, $1 par; authorized 50,000,000 shares; issued 22,099,042 | ||||
| shares at February 24, 2005 and 21,865,853 shares at May 27, 2004 | 22,099 | 21,866 | ||
| Class B Common Stock, $1 par; authorized 33,000,000 shares; issued and | ||||
| outstanding 9,090,471 at February 24, 2005 and 9,323,660 at May 27, | ||||
| 2004 | 9,090 | 9,324 | ||
| Capital in excess of par | 44,936 | 42,952 | ||
| Retained earnings | 424,670 | 333,171 | ||
| Accumulated other comprehensive loss | (196 | ) | (289 | ) |
| 500,599 | 407,024 | |||
| Less unearned compensation on restricted stock | (443 | ) | (630 | ) |
| Less cost of Common Stock in treasury (898,451 shares at February 24, | ||||
| 2005 and 1,356,620 shares at May 27, 2004) | (8,392 | ) | (12,671 | ) |
| Total shareholders' equity | 491,764 | 393,723 | ||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 823,892 | $ | 744,869 |
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See accompanying notes to consolidated financial statements.
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THE MARCUS CORPORATION Consolidated Statements of Earnings (Unaudited)
| (in thousands, except per share data) | February 24, 2005 — 13 Weeks | 39 Weeks | 13 Weeks | 39 Weeks | ||||
|---|---|---|---|---|---|---|---|---|
| Revenues: | ||||||||
| Rooms and telephone | $ 9,226 | $ | 42,612 | $ | 9,540 | $ 42,461 | ||
| Theatre admissions | 24,976 | 76,549 | 26,441 | 77,652 | ||||
| Theatre concessions | 11,740 | 36,092 | 12,427 | 35,876 | ||||
| Food and beverage | 8,213 | 27,863 | 8,609 | 27,114 | ||||
| Other revenues | 8,317 | 28,830 | 8,747 | 28,301 | ||||
| Total revenues | 62,472 | 211,946 | 65,764 | 211,404 | ||||
| Costs and expenses: | ||||||||
| Rooms and telephone | 5,085 | 16,861 | 4,813 | 16,386 | ||||
| Theatre operations | 19,622 | 59,572 | 20,495 | 59,979 | ||||
| Theatre concessions | 2,482 | 7,781 | 2,721 | 7,914 | ||||
| Food and beverage | 7,002 | 21,491 | 6,939 | 20,606 | ||||
| Advertising and marketing | 3,529 | 11,748 | 3,462 | 11,436 | ||||
| Administrative | 6,635 | 19,552 | 5,980 | 18,588 | ||||
| Depreciation and amortization | 6,181 | 18,370 | 6,229 | 18,563 | ||||
| Rent | 518 | 1,482 | 381 | 1,362 | ||||
| Property taxes | 1,671 | 5,723 | 2,183 | 5,977 | ||||
| Preopening expenses | 221 | 396 | 59 | 156 | ||||
| Other operating expenses | 4,811 | 15,443 | 4,539 | 15,044 | ||||
| Total costs and expenses | 57,757 | 178,419 | 57,801 | 176,011 | ||||
| Operating income | 4,715 | 33,527 | 7,963 | 35,393 | ||||
| Other income (expense): | ||||||||
| Investment income | 1,982 | 3,801 | 413 | 1,464 | ||||
| Interest expense | (3,722 | ) | (11,381 | ) | (3,924 | ) | (12,343 | ) |
| Gain (loss) on disposition of property, equipment and | ||||||||
| investments in joint ventures | 19 | 2,251 | (43 | ) | 1,344 | |||
| (1,721 | ) | (5,329 | ) | (3,554 | ) | (9,535 | ) | |
| Earnings from continuing operations before income taxes | 2,994 | 28,198 | 4,409 | 25,858 | ||||
| Income taxes | 1,208 | 10,809 | 1,764 | 10,346 | ||||
| Earnings from continuing operations | 1,786 | 17,389 | 2,645 | 15,512 | ||||
| Discontinued operations (Note 2): | ||||||||
| Income (loss) from discontinued operations, net of income taxes | ||||||||
| (benefit) of $(544) and $1,524 for the 13 and 39 weeks ended | ||||||||
| February 24, 2005, respectively, and income taxes (benefit) of | ||||||||
| $(241) and $3,013 for the 13 and 39 weeks ended February 26, | ||||||||
| 2004, respectively | (835 | ) | 2,338 | (361 | ) | 4,520 | ||
| Gain on sale of discontinued operations, net of income taxes of | ||||||||
| $3,679 and $49,929 for the 13 and 39 weeks ended February 24, | ||||||||
| 2005, respectively | 5,644 | 76,601 | -- | -- | ||||
| 4,809 | 78,939 | (361 | ) | 4,520 | ||||
| Net earnings | $ 6,595 | $ | 96,328 | $ | 2,284 | $ 20,032 | ||
| Earnings per share - basic: | ||||||||
| Continuing operations | $ 0.06 | $ | 0.58 | $ | 0.09 | $ 0.53 | ||
| Discontinued operations | $ 0.16 | $ | 2.62 | $ | (0.01 | ) | $ 0.15 | |
| Net earnings per share | $ 0.22 | $ | 3.20 | $ | 0.08 | $ 0.68 | ||
| Earnings per share - diluted: | ||||||||
| Continuing operations | $ 0.06 | $ | 0.57 | $ | 0.09 | $ 0.52 | ||
| Discontinued operations | $ 0.15 | $ | 2.59 | $ | (0.01 | ) | $ 0.15 | |
| Net earnings per share | $ 0.21 | $ | 3.16 | $ | 0.08 | $ 0.67 | ||
| Dividends per share: | ||||||||
| Class B Common Stock | $ 0.050 | $ | 0.150 | $ | 0.050 | $ 0.150 | ||
| Common Stock | $ 0.055 | $ | 0.165 | $ | 0.055 | $ 0.165 |
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See accompanying notes to consolidated financial statements.
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THE MARCUS CORPORATION Consolidated Statements of Cash Flows (Unaudited)
| (in thousands) | 39 Weeks Ended — February 24, 2005 | February 26, 2004 | ||
|---|---|---|---|---|
| OPERATING ACTIVITIES: | ||||
| Net earnings | $ 96,328 | $ 20,032 | ||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||
| Losses on loans to and investments in joint ventures | 1,016 | 646 | ||
| Gain on disposition of property, equipment and investments in joint ventures | (2,251 | ) | (759 | ) |
| Gain on sale of limited service lodging division | (120,611 | ) | -- | |
| Gain on sale of Miramonte Resort | (5,919 | ) | -- | |
| Distributions from joint ventures | 1,897 | 87 | ||
| Amortization of loss on swap agreement | 338 | 536 | ||
| Amortization of restricted stock | 187 | -- | ||
| Depreciation and amortization | 22,140 | 34,197 | ||
| Deferred income taxes | 9,407 | 1,500 | ||
| Deferred compensation and other | 449 | 1,121 | ||
| Changes in assets and liabilities: | ||||
| Accounts and notes receivable | 712 | 11,679 | ||
| Real estate and development costs | 1,236 | (1,450 | ) | |
| Other current assets | 1,529 | (4,159 | ) | |
| Accounts payable | (9,226 | ) | (6,990 | ) |
| Income taxes | 7,497 | 5,413 | ||
| Taxes other than income taxes | (2,078 | ) | (1,713 | ) |
| Accrued compensation | (3,742 | ) | (1,355 | ) |
| Other accrued liabilities | 7,699 | 7,687 | ||
| Total adjustments | (89,720 | ) | 46,440 | |
| Net cash provided by operating activities | 6,608 | 66,472 | ||
| INVESTING ACTIVITIES: | ||||
| Capital expenditures | (40,074 | ) | (33,925 | ) |
| Net proceeds from disposals of property, equipment and other assets | 4,139 | 6,923 | ||
| Net proceeds from sale of the limited service lodging division | 349,198 | -- | ||
| Net proceeds from sale of Miramonte Resort | 28,527 | -- | ||
| Proceeds from sale of discontinued operations held by intermediaries | (155,164 | ) | -- | |
| Purchase of interest in joint ventures | (4,246 | ) | (3,500 | ) |
| (Increase) decrease in other assets | 594 | (199 | ) | |
| Cash advanced to joint ventures | (13 | ) | (2,134 | ) |
| Net cash provided by (used in) investing activities | 182,961 | (32,835 | ) | |
| FINANCING ACTIVITIES: | ||||
| Debt transactions: | ||||
| Net proceeds from issuance of notes payable and long-term debt | 15,255 | 5,383 | ||
| Principal payments on notes payable and long-term debt | (39,625 | ) | (39,183 | ) |
| Equity transactions: | ||||
| Treasury stock transactions, except for stock options | (256 | ) | (248 | ) |
| Exercise of stock options | 6,519 | 2,612 | ||
| Dividends paid | (4,828 | ) | (4,750 | ) |
| Net cash used in financing activities | (22,935 | ) | (36,186 | ) |
| Net increase (decrease) in cash and cash equivalents | 166,634 | (2,549 | ) | |
| Cash and cash equivalents at beginning of year | 9,629 | * | 6,039 | |
| Cash and cash equivalents at end of period | $ 176,263 | ** | $ 3,490 |
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- Includes $190 of cash included in assets of discontinued operations. ** Includes $2 of cash included in assets of discontinued operations.
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See accompanying notes to consolidated financial statements.
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THE MARCUS CORPORATION
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CONDENSED NOTES TO FINANCIAL STATEMENTS FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED FEBRUARY 24, 2005 (Unaudited)
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- General
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Accounting Policies Refer to the Companys audited financial statements (including footnotes) for the fiscal year ended May 27, 2004, contained in the Companys Form 10-K Annual Report for such year, for a description of the Companys accounting policies.
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Basis of Presentation The consolidated financial statements for the thirteen and thirty-nine weeks ended February 24, 2005 and February 26, 2004 have been prepared by the Company without audit. In the opinion of management, all adjustments, consisting only of normal recurring accruals necessary to present fairly the unaudited interim financial information at February 24, 2005, and for all periods presented, have been made. The results of operations during the interim periods are not necessarily indicative of the results of operations for the entire year.
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Comprehensive Income Accumulated other comprehensive loss consists of the unrecognized loss on hedging transactions, the accumulated net unrealized gain on available for sale securities and the minimum pension liability, all net of tax. Accumulated other comprehensive loss was $196,000 and $289,000 as of February 24, 2005 and May 27, 2004, respectively. Total comprehensive income for the thirteen and thirty-nine weeks ended February 24, 2005 was $6,616,000 and $96,421,000, respectively. Total comprehensive income for the thirteen and thirty-nine weeks ended February 26, 2004 was $2,410,000 and $20,440,000, respectively.
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Earnings Per Share (EPS) Basic earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options and non-vested restricted stock.
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The following table illustrates the computation of basic and diluted earnings per share for earnings from continuing operations and provides a reconciliation of the number of weighted-average basic and diluted shares outstanding:
| 13 Weeks Ended February 24, 2005 | 13 Weeks Ended February 26, 2004 | 39 Weeks Ended February 24, 2005 | 39 Weeks Ended February 26, 2004 | |
|---|---|---|---|---|
| (in thousands, except per share data) | ||||
| Numerator: | ||||
| Earnings from continuing operations | $ 1,786 | $ 2,645 | $ 17,389 | $ 15,512 |
| Denominator: | ||||
| Denominator for basic EPS | 30,224 | 29,664 | 30,061 | 29,580 |
| Effect of dilutive employee stock options | ||||
| and non-vested restricted stock | 546 | 275 | 447 | 199 |
| Denominator for diluted EPS | 30,770 | 29,939 | 30,508 | 29,779 |
| Earnings per share from continuing operations: | ||||
| Basic | $ 0.06 | $ 0.09 | $ 0.58 | $ 0.53 |
| Diluted | $ 0.06 | $ 0.09 | $ 0.57 | $ 0.52 |
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Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), in accounting for its employee stock options. Under APB No. 25, because the number of shares is fixed and the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
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For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. Had compensation cost been determined based upon the fair value at the grant date for awards under the plans based on the provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, the Companys pro forma earnings and earnings per share would have been as follows:
| 13 Weeks Ended February 24, 2005 | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | ||||||||
| Net earnings, as reported | $ 6,595 | $ | 2,284 | $ | 96,328 | $ | 20,032 | |
| Deduct: Stock-based employee compensation | ||||||||
| expense determined under the fair value | ||||||||
| method for all option awards, net of | ||||||||
| related tax effects | (239 | ) | (272 | ) | (689 | ) | (786 | ) |
| Pro forma net earnings | $ 6,356 | $ | 2,012 | $ | 95,639 | $ | 19,246 | |
| Earnings per share: | ||||||||
| Basic - as reported | $ 0.22 | $ | 0.08 | $ | 3.20 | $ | 0.68 | |
| Basic - pro forma | $ 0.21 | $ | 0.07 | $ | 3.18 | $ | 0.65 | |
| Diluted - as reported | $ 0.21 | $ | 0.08 | $ | 3.16 | $ | 0.67 | |
| Diluted - pro forma | $ 0.21 | $ | 0.07 | $ | 3.13 | $ | 0.65 |
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Defined Benefit Plan The components of the net periodic pension cost of the Companys unfunded nonqualified, defined-benefit plan are as follows:
| 13 Weeks Ended February 24, 2005 | 13 Weeks Ended February 26, 2004 | 39 Weeks Ended February 24, 2005 | 39 Weeks Ended February 26, 2004 | |
|---|---|---|---|---|
| (in thousands) | ||||
| Service Cost | $ 113 | $ 115 | $ 338 | $ 347 |
| Interest Cost | 212 | 191 | 637 | 575 |
| Net amortization of prior service cost | ||||
| and transition obligation | 50 | 62 | 150 | 182 |
| Net periodic pension cost | $ 375 | $ 368 | $ 1,125 | $ 1,104 |
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New Accounting Pronouncements In December 2004, the FASB issued Statement No. 123(R) (SFAS 123(R)), Share-Based Payment, which changed the accounting rules relating to equity compensation programs. Effective July 1, 2005, companies that award share-based payments to employees, including stock options, must begin to recognize the expense of these awards in the financial statements at the time the employee receives the award. As allowed by SFAS 123, the Company has elected to follow APB No. 25 in accounting for its stock option plans until the effective date of SFAS 123(R).
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Under APB No. 25s intrinsic value method, no compensation cost for the Companys employee stock options is recognized. Accordingly, the adoption of SFAS(R)s fair value method will have an impact on the Companys results of operations, although it will not have an impact on the overall financial position. The impact of adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, it is believed that had the Company adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net earnings and earnings per share in the discussion of Stock-Based Compensation above.
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- Discontinued Operations
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On September 3, 2004, the Company sold substantially all of the assets of its limited-service lodging division for a total purchase price of $414.9 million in cash. Net proceeds to the Company to-date from the sale are $349.2 million, net of transaction costs and excluding $35.1 million in proceeds held in escrow pending completion of certain customary transfer requirements. Net proceeds also exclude $19.0 million of proceeds related to the sale of four joint venture properties sold in the original transaction and $10.5 million of proceeds related to the sale of a joint venture sold in a subsequent transaction. Net proceeds include $126.8 held by intermediaries in conjunction with potential tax deferral options the Company is exploring.
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The assets sold to-date consist primarily of land, buildings and equipment with a net book value of approximately $228.6 million. The result of the transaction to-date is a gain on sale of $73.0 million, which is net of income taxes of $47.6 million. Upon completion of the transfer requirements associated with the $35.1 million in escrow, net proceeds will increase and the Company anticipates reporting additional gains on the sale of approximately $7.5 to $8.0 million after income taxes. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the results of operations of the limited-service lodging division have been reported as discontinued operations in the consolidated statement of earnings for all periods presented. Limited-service lodging revenues for the thirteen and thirty-nine weeks ended February 24, 2005 were $(76,000) and $42,727,000, respectively. Revenues for the thirteen and thirty-nine weeks ended February 26, 2004 were $26,855,000 and $94,373,000, respectively. Limited-service lodging operating income (loss) for the thirteen and thirty-nine weeks ended February 24, 2005 was $(1,038,000) and $5,967,000, respectively. Operating income for the thirteen and thirty-nine weeks ended February 26, 2004 was $84,000 and $10,838,000, respectively.
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The Company incurred approximately $1.8 million in one-time severance related costs during the second quarter of fiscal 2005. Approximately $1.6 million of these costs were paid out during the second and third quarter with the remaining payments expected to be completed by the end of fiscal 2005. These one-time termination benefits are included in income (loss) from discontinued operations in the consolidated statement of earnings.
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On December 1, 2004, the Company sold the Miramonte Resort for a total purchase price of approximately $28.7 million in cash. Net proceeds to the Company from the sale are $28.5 million, net of transaction costs. Net proceeds include $28.4 million held by intermediaries in conjunction with potential tax deferral options the Company is exploring. The assets sold consist primarily of land, building and equipment with a net book value of approximately $22.6 million. The result of the transaction is a gain on sale of $3.6 million, which is net of income taxes of $2.3 million. In accordance with SFAS 144, the results of operations of the Miramonte, which have historically been included in the Hotels and Resorts financial results, have been reported as discontinued operations in the consolidated statement of earnings for all periods presented. Miramonte revenues for the thirteen and thirty-nine weeks ended February 24, 2005 were $104,000 and $3,445,000, respectively. Miramonte revenues for the thirteen and thirty-nine weeks ended February 26, 2004 were $1,812,000 and $4,097,000, respectively. Miramontes operating loss for the thirteen and thirty-nine weeks ended February 24, 2005 was $301,000 and $1,928,000, respectively. The operating loss for the thirteen and thirty-nine weeks ended February 26, 2004 was $600,000 and $2,406,000, respectively.
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The components of the assets and liabilities of discontinued operations included in the consolidated balance sheets are as follows:
| February 24, 2005 | May 27, 2004 | |
|---|---|---|
| (in thousands) | ||
| Assets | ||
| Cash | $ 2 | $ 190 |
| Other current assets | 987 | 6,000 |
| Net property and equipment | 24,435 | 280,862 |
| Other assets | 5,444 | 2,971 |
| Assets of discontinued operations | $ 30,868 | $ 290,023 |
| Liabilities | ||
| Current liabilities | $ 4,456 | $ 14,113 |
| Income taxes | 8,437 | -- |
| Deferred income taxes | 32,977 | 21,696 |
| Other long-term liabilities | 513 | 3,859 |
| Liabilities of discontinued operations | $ 46,383 | $ 39,668 |
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- Business Segment Information
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The Companys primary operations are reported in the following business segments: Theatres and Hotels/Resorts. Corporate items include amounts not allocable to the business segments. Corporate revenues consist principally of rent and the corporate operating loss includes general corporate expenses. Corporate information technology costs and accounting shared services costs are allocated to the business segments based upon several factors, including actual usage and segment revenues.
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Following is a summary of business segment information for the thirteen and thirty-nine weeks ended February 24, 2005 and February 26, 2004 (in thousands):
| 13 Weeks Ended February 24, 2005 — Revenues | Theatres — $ 38,470 | Hotels/ Resorts — $ 23,696 | $ | 306 | $ | 62,472 | Discontinued Operations — $ 28 | $ | 62,500 |
|---|---|---|---|---|---|---|---|---|---|
| Operating income (loss) | 9,113 | (2,100 | ) | (2,298 | ) | 4,715 | (1,339 | ) | 3,376 |
| Depreciation and amortization | 3,050 | 2,729 | 402 | 6,181 | 39 | 6,220 | |||
| 13 Weeks Ended February 26, 2004 | Theatres | Hotels/ Resorts | Corporate Items | Continuing Operations Total | Discontinued Operations | Total | |||
| Revenues | $ 40,850 | $ 24,570 | $ | 344 | $ | 65,764 | $ 28,667 | $ | 94,431 |
| Operating income (loss) | 10,387 | (789 | ) | (1,635 | ) | 7,963 | (516 | ) | 7,447 |
| Depreciation and amortization | 2,959 | 2,893 | 377 | 6,229 | 5,324 | 11,553 | |||
| 39 Weeks Ended February 24, 2005 | Theatres | Hotels/ Resorts | Corporate Items | Continuing Operations Total | Discontinued Operations | Total | |||
| Revenues | $ 117,809 | $ 93,074 | $ | 1,063 | $ | 211,946 | $ 46,172 | $ | 258,118 |
| Operating income (loss) | 29,018 | 10,451 | (5,942 | ) | 33,527 | 4,039 | 37,566 | ||
| Depreciation and amortization | 8,906 | 8,267 | 1,197 | 18,370 | 3,770 | 22,140 | |||
| 39 Weeks Ended February 26, 2004 | Theatres | Hotels/ Resorts | Corporate Items | Continuing Operations Total | Discontinued Operations | Total | |||
| Revenues | $ 119,340 | $ 91,162 | $ | 902 | $ | 211,404 | $ 98,470 | $ | 309,874 |
| Operating income (loss) | 30,246 | 10,902 | (5,755 | ) | 35,393 | 8,432 | 43,825 | ||
| Depreciation and amortization | 8,725 | 8,717 | 1,121 | 18,563 | 15,634 | 34,197 |
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Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
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Special Note Regarding Forward-Looking Statements
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Certain matters discussed in this Managements Discussion and Analysis of Results of Operations and Financial Condition are forward-looking statements intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may generally be identified as such because the context of such statements will include words such as we believe, anticipate, expect or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause results to differ materially from those expected, including, but not limited to, the following: (i) the availability, in terms of both quantity and audience appeal, of motion pictures for our theatre division; (ii) the effects of increasing depreciation expenses and preopening and start-up costs due to the capital intensive nature of our businesses, including the possibility that such costs may exceed our expectations; (iii) the effects of adverse economic conditions in our markets, particularly with respect to our hotels and resorts division; (iv) the effects of adverse weather conditions, particularly during the winter in the Midwest and in our other markets; (v) the effects on our occupancy and room rates from the relative industry supply of available rooms at comparable lodging facilities in our markets; (vi) the effects of competitive conditions in the markets served by us; (vii) our ability to identify properties to acquire, develop and/or manage and continuing availability of funds for such development; (viii) the adverse impact on business and consumer spending on travel, leisure and entertainment resulting from terrorist attacks in the United States, the United States responses thereto and subsequent hostilities; and (ix) our decisions regarding the use of the proceeds received from the sale of our limited-service lodging division and other asset sales. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this Form 10-Q and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances or otherwise.
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RESULTS OF OPERATIONS
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General
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We report our consolidated and individual segment results of operations on a 52-or-53-week fiscal year ending on the last Thursday in May. Fiscal 2005 and 2004 are both 52-week years. We divide our fiscal year into three 13-week quarters and a final quarter consisting of 13 or 14 weeks. Our primary operations are reported in the following two business segments: movie theatres and hotels and resorts. As a result of our recent sale of substantially all of the assets of our limited-service lodging division, this segment has been presented as discontinued operations in the accompanying financial statements and in this discussion. As a result of our recent sale of the Miramonte Resort, this asset and related results of operations, previously included in our hotels and resorts segment, has also been presented as discontinued operations in the accompanying financial statements and in this discussion. Prior year results have been restated to conform to the current year presentation.
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The following table sets forth revenues, operating income, earnings from continuing operations, earnings from discontinued operations, net earnings and earnings per share for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for per share data and variance percentage):
| Third Quarter | First Three Quarters | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | Variance | ||||||||||
| F2005 | F2004 | Amt. | Pct. | F2005 | F2004 | Amt. | Pct. | ||||
| Revenues | $ 62.5 | $ 65.8 | $ | (3.3 | ) | -5.0 % | $ 211.9 | $ 211.4 | $ 0.5 | 0.3 % | |
| Operating income | 4.7 | 8.0 | (3.3 | ) | -40.8 % | 33.5 | 35.4 | (1.9 | ) | -5.3 % | |
| Earnings from continuing | |||||||||||
| operations | 1.8 | 2.6 | (0.8 | ) | -32.5 % | 17.4 | 15.5 | 1.9 | 12.1 % | ||
| Earnings from | |||||||||||
| discontinued operations | 4.8 | (0.3 | ) | 5.1 | 1432 % | 78.9 | 4.5 | 74.4 | 1646 % | ||
| Net earnings | $ 6.6 | $ 2.3 | $ | 4.3 | 188.7 % | $ 96.3 | $ 20.0 | $ 76.3 | 380.9 % | ||
| Earnings per share - | |||||||||||
| Diluted: | |||||||||||
| Continuing operations | $ .06 | $ .09 | $ | (.03 | ) | -33.3 % | $ .57 | $ .52 | $ .05 | 9.6 % | |
| Net earnings | $ .21 | $ .08 | $ | .13 | 162.5 % | $ 3.16 | $ .67 | $ 2.49 | 371.6 % |
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Revenues and operating income (earnings before other income/expense and income taxes) from both our theatre and hotels/resorts divisions decreased during the third quarter of fiscal 2005 compared to the same period last year. Theatre division operating results were negatively impacted by a weaker slate of movies compared to the same period last year. The hotels and resorts division, with all of its remaining owned properties located in the Midwest, experienced a relatively soft winter, particularly for group business. Year-to-date, increased revenues from our hotels/resorts division were partially offset by reduced theatre division revenues, resulting in a slight increase in overall revenues for the first three quarters of fiscal 2005 compared to the same period last year. The declines in third quarter operating income from both divisions have resulted in small year-to-date decreases in operating income in these same two divisions, compared to the first three quarters last year. As described in more detail below, increased investment income and decreased interest expense partially offset the reduced operating income during the third quarter and contributed to our increased earnings from continuing operations during our fiscal 2005 first three quarters compared to the same period last year. Net earnings increased during both the fiscal 2005 third quarter and first three quarters compared to the same periods last year due to significant gains from the sale of discontinued operations.
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Our investment income totaled $2.0 million and $3.8 million for the third quarter and first three quarters of fiscal 2005, respectively, compared to $400,000 and $1.5 million during the same periods last year. The increases during the fiscal 2005 periods were the result of interest earned on proceeds received from the sale of the limited-service lodging division in September 2004 and Miramonte Resort in December 2004. The majority of our $176.3 million of cash and cash equivalents at the end of our third quarter is invested in federal tax-exempt short-term financial instruments. Our estimated effective income tax rate for continuing operations has been lowered to reflect this current method of investment. In addition, $155.2 million of cash was being held by intermediaries at the end of our fiscal third quarter in conjunction with potential tax deferral opportunities that we were exploring. We earned taxable interest on these funds. The majority of the cash held by intermediaries was released to us in early March 2005 and has subsequently been reinvested in additional federal tax-exempt short-term financial instruments. Investment income will continue to exceed prior year amounts in future periods until a further determination of the potential uses of the sales proceeds is made.
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Our interest expense totaled $3.7 million and $11.4 million for the third quarter and first three quarters of fiscal 2005, respectively, compared to $3.9 million and $12.3 million during the same periods last year. The decrease was primarily the result of reductions in outstanding borrowings that we made during the first half of fiscal 2005 compared to the prior year. Due to the fact that we paid off all of our outstanding short-term borrowings, consisting of commercial paper, during the first half of fiscal 2005 with cash provided by operating and investing activities (including the sale of the limited-service lodging division), we do not expect our interest expense to change substantially during the remainder of fiscal 2005 other than as a result of the payment of scheduled current maturities of our long-term debt.
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Our continuing operations did not recognize any material gains or losses on disposition of property and equipment during the third quarter of fiscal 2005 or fiscal 2004. Gains to continuing operations on disposition of property and equipment for the first three quarters of fiscal 2005 were $2.3 million compared to gains of $1.3 million during the first three quarters of fiscal 2004. The timing of periodic sales of our property and equipment may vary from quarter to quarter, resulting in variations in our gains or losses on disposition of property and equipment. We anticipate periodic additional sales of non-revenue generating property and equipment with the potential for additional gains on disposition from time to time during the remainder of fiscal 2005.
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Theatres
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The following table sets forth revenues, operating income and operating margin for our theatre division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage and operating margin):
| Third Quarter | First Three Quarters | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Variance | Variance | |||||||||
| F2005 | F2004 | Amt. | Pct. | F2005 | F2004 | Amt. | Pct. | |||
| Revenues | $ 38.5 | $ 40.9 | $ (2.4 | ) | -5.8% | $ 117.8 | $ 119.3 | $ (1.5 | ) | -1.3% |
| Operating income | 9.1 | 10.4 | (1.3 | ) | -12.3% | 29.0 | 30.2 | (1.2 | ) | -4.1% |
| Operating margin | 23.7 % | 25.4 % | 24.6 % | 25.3 % | ||||||
| (% of revenues) |
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Consistent with the seasonal nature of the motion picture exhibition industry, our third quarter is typically one of the strongest periods for our theatre division due to the traditionally strong holiday movie season. The decrease in third quarter revenues, operating income and operating margin was entirely due to decreased box office and concession revenues. Despite a very strong summer box office, theatre division revenues and operating income are now slightly lower for the first three quarters of fiscal 2005 compared to the same periods last year.
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The following table breaks out revenues for the theatre division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage):
| Third Quarter | First Three Quarters | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Variance | Variance | |||||||||
| F2005 | F2004 | Amt. | Pct. | F2005 | F2004 | Amt. | Pct. | |||
| Box office receipts | $ 25.0 | $ 26.5 | $ (1.5 | ) | -5.5 % | $ 76.6 | $ 77.7 | $ (1.1 | ) | -1.4 % |
| Concession revenues | 11.7 | 12.4 | (0.7 | ) | -5.5 % | 36.1 | 35.9 | 0.2 | 0.6 % | |
| Other revenues | 1.8 | 2.0 | (0.2 | ) | -11.6 % | 5.1 | 5.7 | (0.6 | ) | -11.1 % |
| Total revenues | $ 38.5 | $ 40.9 | $ (2.4 | ) | -5.8 % | $ 117.8 | $ 119.3 | $ (1.5 | ) | -1.3 % |
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The decrease in our box office receipts and concession revenues for the third quarter of fiscal 2005 compared to the same period last year was due to a decrease in attendance. Our average ticket price increased 2.8% and 2.6% during the third quarter and first three quarters of fiscal 2005, respectively, partially offsetting the attendance decreases. These increases in our average ticket price were attributable primarily to modest ticket price increases. Our average concession sales per person during our fiscal 2005 third quarter and first three quarters increased 2.9% and 4.8%, respectively, compared to the same periods last year. Modest concession price increases have contributed to these increases. In addition, this years film mix has included more family-oriented movies compared to last year and films that appeal to families and teenagers generally produce greater concession sales compared to more adult-oriented films. Other revenues, which include management fees and pre-show advertising income, decreased slightly compared to last years third quarter and have decreased during the first three quarters of fiscal 2005 due to the fact that last years revenues (and resulting operating income and operating margin) were favorably impacted by an insurance settlement of approximately $400,000 related to a fire that occurred several years ago at one of our Milwaukee-area theatres.
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Total theatre attendance decreased 8.1% during the third quarter compared to the same period last year. For the first three quarters of fiscal 2005, total attendance was down 3.9% compared to the first three quarters of fiscal 2004. Overall, the audience appeal of this years third quarter films, which included top grossing films Meet the Fockers , National Treasure and Oceans 12 , was not as strong as last years third quarter films, which included the mega-blockbuster Lord of the Rings: The Return of the King (which was our top grossing movie during all of fiscal 2004). In addition, comparisons to last years results were negatively impacted by the fact that during this years holiday season, Christmas Eve (the only night of the year on which our theatres close) and Christmas Day were on a Friday and Saturday, which are normally the two biggest movie-going days of the week. Excluding the last two weeks of December that were negatively impacted by the holiday and Lord of the Rings comparisons, our total box office receipts for the other 11 weeks of the third quarter actually increased compared to the same weeks last year.
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Film product for the fourth quarter has thus far underperformed compared to the prior year fourth quarter due to the very strong performance of The Passion of The Christ last year. As a result, we do not expect our fiscal 2005 fourth quarter operating results for our theatre division to equal last years fourth quarter results. The extended outlook for film product begins to look significantly better in May and beyond, beginning with Kingdom of Heaven and Kicking and Screaming and including the final Star Wars installment, which is due to open in mid-May. In addition, our fiscal 2006 first quarter appears to have the potential to be very strong, due to expected blockbuster films such as Madagascar , The Longest Yard , Cinderella Man , Batman Begins and War of the Worlds . Revenues for the theatre business and the motion picture industry in general are heavily dependent upon the general audience appeal of available films, together with studio marketing, advertising and support campaigns, all factors over which we have no control.
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We ended the third quarter of fiscal 2005 with 451 company-owned screens in 40 theatres and 40 managed screens in four theatres compared to 454 company-owned screens in 42 theatres and 40 managed screens in four theatres at the end of the same period last year. During the fiscal 2005 third quarter, we opened two additional screens at a theatre in Oshkosh, Wisconsin. In addition, a new 12-screen theatre in Saukville, Wisconsin opened early during the fourth quarter of fiscal 2005. A new Ultra Screen® (our sixth such screen) at our theatre in Oakdale, Minnesota is scheduled to open in time for the new Star Wars film in mid-May. We continue to review additional opportunities to add new screens to existing locations and to develop or acquire new locations in and around our existing markets, including recently announced new multi-screen theatres in Green Bay, Racine, East Troy, and Brookfield, Wisconsin. Groundbreaking for two of these new theatres (Green Bay and Racine) is currently scheduled during our fiscal 2005 fourth quarter.
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Hotels and Resorts
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The following table sets forth revenues, operating income and operating margin for our hotels and resorts division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage and operating margin). Prior year results have been restated to reflect the current year presentation of the recently sold Miramonte Resort as a discontinued operation.
| Third Quarter | First Three Quarters | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | Variance | |||||||||||
| F2005 | F2004 | Amt. | Pct. | F2005 | F2004 | Amt. | Pct. | |||||
| Revenues | $ 23.7 | $ | 24.6 | $ | (0.9 | ) | -3.6 % | $ 93.1 | $ 91.2 | $ 1.9 | 2.1 % | |
| Operating income | (2.1 | ) | (0.8 | ) | (1.3 | ) | -166.2 % | 10.5 | 10.9 | (0.4 | ) | -4.1 % |
| Operating margin | -8.9 | % | -3.2 | % | 11.2 % | 12.0 % | ||||||
| (% of revenues) |
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Our third quarter is historically the weakest quarter of the year for our hotels and resorts division due to reduced travel during the winter months at our predominantly Midwestern properties. Total division revenues decreased during the third quarter of fiscal 2005 compared to the same period last year due primarily to slow group travel business. Continued strong improvement at our newest properties partially offset the reduced performance at our group-oriented hotels and resorts. Total revenues have increased during the first three quarters of fiscal 2005 compared to the same period last year, with our properties that focus on the individual business traveler, such as the Pfister, Hotel Phillips and Hilton Madison Monona Terrace, experiencing the strongest increases. Also contributing to the improvement in fiscal 2005 year-to-date revenues was increased food and beverage revenues. Operating income decreased during the third quarter and first three quarters of fiscal 2005 compared to the same period last year. A substantial portion of the third quarter decrease in operating income and all of the year-to-date decrease may be attributed to reduced earnings from our timeshare operations due to increased marketing and selling costs and approximately $380,000 and $940,000, respectively, of combined start-up and preopening costs associated with our Las Vegas condominium hotel and downtown Chicago hotel projects.
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The total revenue per available room, or RevPAR, for comparable company-owned properties (i.e., excluding the Miramonte Resort) decreased 1.4% during our fiscal 2005 third quarter compared to the same period last year. The decrease in RevPAR was due entirely to a decrease in occupancy percentage (number of occupied rooms as a percentage of available rooms) of 1.9 percentage points during this same period. Our overall average daily room rate (ADR) for these comparable properties increased 2.6% during the third quarter compared to the same period last year. The small decline in group business travel, which often involves lower negotiated room rates, contributed to the occupancy decline and ADR increase during the quarter. Total RevPAR for comparable properties increased 1.3% during the first three quarters of fiscal 2005 compared to the same period last year. An overall increase in occupancy percentage of 1.3 percentage points, partially offset by a small decline in our ADR of 0.7%, contributed to the overall RevPAR improvement during fiscal 2005 to date.
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As we indicated in prior discussions, we have attempted to retain the integrity of our rate structure during the past several years (a period when others in the industry were heavily discounting), believing that this strategy was in our best long-term interest. As a result, according to data from outside industry sources such as Smith Travel Research, our comparative changes in RevPAR during calendar 2002 and 2003 consistently outperformed others in our segment of the industry but underperformed compared to others during calendar 2004. As the economy and the industry recover, it appears that those that heavily discounted or operated in markets that were impacted more severely by the economic downturn are generally now experiencing larger increases in RevPAR and ADR than our hotels and resorts. Historically, our hotels have generally experienced RevPAR changes equal to or better than others in our industry segment and we would expect that trend to continue as conditions stabilize in the industry.
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The near-term outlook for the future performance of our hotels and resorts division appears very promising. Despite a brief decline in group travel during the third quarter, our advanced booking pace for group business at our hotels is encouraging, with our fiscal 2005 fourth quarter looking particularly strong. The group business segment is very important to several of our properties, as this is a segment of our customer base that typically provides non-room revenues to our hotels and resorts that are a key to returning this division to prior profitability levels. In addition, the individual business travel segment, which has been the strength of our fiscal 2005 results to date, continues to show steady improvement. As a result, based on the current trends and subject to continued improvement in economic conditions, we expect our division operating results to continue to improve during the remainder of fiscal 2005 and into fiscal 2006, with cost controls remaining a high priority.
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We recently began construction on our Las Vegas condominium hotel joint venture, the Platinum Suite Hotel & Spa, with a targeted opening date in spring 2006. Construction continues on a company-owned hotel in downtown Chicago, Illinois that was originally expected to be a Baymont Inn & Suites. This project was not included in the sale of our limited-service lodging division and has been taken over by our hotels and resorts division. We anticipate announcing the brand that has been selected for this location in the very near future. With a targeted opening date at the end of May 2005, we expect to incur additional preopening expenses and other initial start-up losses from this hotel and the Las Vegas project during the fourth quarter of fiscal 2005. We also continue to pursue multiple new growth opportunities, with a focus on expanding our hotel management business. A number of the projects that we are currently exploring may also include some small equity investments. We recently expanded our internal development team in order to help facilitate our future growth.
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Discontinued Operations
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On September 3, 2004, we sold substantially all of the assets of our limited-service lodging division to La Quinta Corporation of Dallas, Texas for a total purchase price of approximately $415 million in cash. La Quinta purchased our Baymont Inns & Suites, Woodfield Suites and Budgetel Inns brands, substantially all of the divisions real estate and related assets and assumed the operation of 90 company-owned and operated Baymont Inns & Suites, seven Woodfield Suites, one Budgetel Inn and the 87-unit Baymont franchise system (including four joint venture Baymont Inns & Suites that were excluded from the transaction and have become franchisees). Our net proceeds as of the end of the fiscal 2005 third quarter, before the payment of income taxes resulting from the gain on sale, were $349.2 million, net of transaction costs and excluding approximately $35 million in proceeds held in escrow pending completion of certain customary transfer requirements on eight locations. The net proceeds amount above excludes approximately $19 million of proceeds related to the sale of four joint venture properties to LaQuinta and $10.5 million of proceeds related to the sale of a joint venture property to a third party. The assets sold to date consist primarily of land, buildings and equipment with a net book value of approximately $229 million. As a result, we have reported an after-tax gain on sale of discontinued operations of approximately $73 million during the first three quarters of fiscal 2005, including approximately $2 million reported during the third quarter of fiscal 2005 related to the sale of one location that was previously held in escrow and the sale of one of the four joint venture properties that were not included in the sale to LaQuinta. Upon completion of the transfer requirements associated with the $35 million in funds currently held in escrow, assets with a net book value of approximately $22 million will be sold and we would expect to report additional after-tax gains on sale of approximately $7.5 to 8.0 million in future periods. Approximately $13 million of these escrow funds were released early in our fiscal 2005 fourth quarter.
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The results of our limited-service lodging division have been accounted for as discontinued operations in our consolidated financial statements for the third quarter and first three quarters of fiscal 2005 and prior year results have been restated to conform with the current year presentation. The following table sets forth revenues, operating income and income from discontinued operations, net of applicable taxes, for our limited-service lodging division for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage):
| Third Quarter | First Three Quarters | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | Variance | ||||||||||
| F2005 | F2004 | Amt. | Pct. | F2005 | F2004 | Amt. | Pct. | ||||
| Revenues | $ (0.1 | ) | $ 26.9 | $ (27.0 | ) | -100 % | $ 42.7 | $ 94.4 | $ (51.7 | ) | -54.7 % |
| Operating income (loss) | (1.0 | ) | 0.1 | (1.1 | ) | -1336 % | 6.0 | 10.8 | (4.8 | ) | -44.9 % |
| Income (loss) from | |||||||||||
| discontinued operations | (0.6 | ) | -- | (0.6 | ) | N/A | 3.5 | 6.0 | (2.5 | ) | -41.2 % |
| (net of income taxes) |
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Our fiscal 2005 third quarter operating results include various remaining costs associated with the now-sold division, as well as results from three of our joint venture Baymont Inns & Suites that were excluded from the transaction and are now operating as Baymont franchises. As noted earlier, one of the original four joint venture properties excluded from the sale to LaQuinta was sold early in our fiscal 2005 third quarter and we are exploring opportunities to sell the remaining three properties. The limited-service lodging divisions operating loss and loss from discontinued operations, net of applicable taxes, during the fiscal 2005 first three quarters included various costs associated with exiting the business, including approximately $1.8 million of severance related costs.
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On December 1, 2004, we sold the Miramonte Resort for $28.7 million in cash, before transaction costs. The assets sold consisted primarily of land, building and equipment. As a result of this transaction, we reported a gain of $5.9 million before tax and $3.6 million after tax during our fiscal 2005 third quarter.
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The results of the Miramonte Resort, which had previously been included in our hotels and resorts segment results, have been accounted for as discontinued operations in our consolidated financial statements for the third quarter and first three quarters of fiscal 2005 and prior year results have been restated to conform with the current year presentation. The following table sets forth revenues, operating loss and loss from discontinued operations, net of applicable taxes, for the Miramonte Resort for the third quarter and first three quarters of fiscal 2005 and 2004 (in millions, except for variance percentage):
| Third Quarter | First Three Quarters | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | Variance | |||||||||||||
| F2005 | F2004 | Amt. | Pct. | F2005 | F2004 | Amt. | Pct. | |||||||
| Revenues | $ 0.1 | $ | 1.8 | $ | (1.7 | ) | -94.3 % | $ 3.4 | $ | 4.1 | $ | (0.7 | ) | -15.9 % |
| Operating loss | (0.3 | ) | (0.6 | ) | 0.3 | 49.8 % | (1.9 | ) | (2.4 | ) | 0.5 | 19.9 % | ||
| Loss from discontinued | ||||||||||||||
| operations | (0.2 | ) | (0.4 | ) | 0.2 | 49.3 % | (1.2 | ) | (1.4 | ) | 0.2 | 19.1 % | ||
| (net of income taxes) |
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Operating results for the Miramonte Resort for the third quarter of fiscal 2005 included five days of operation prior to completion of the sale. Operating results for the first three quarters of fiscal 2005 benefited from increased revenues as a result of a recently opened spa.
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FINANCIAL CONDITION
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Our movie theatre and hotels/resorts businesses each generate significant and consistent daily amounts of cash because each segments revenue is derived predominantly from consumer cash purchases. We believe that these relatively consistent and predictable cash sources, together with the funds from our sale of the limited-service lodging division and the sale of our Miramonte Resort, as well as the availability of $125 million of unused credit lines as of the end of the third quarter, should be adequate to support the near-term anticipated ongoing operational liquidity needs of our businesses.
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Net cash provided by operating activities decreased by $59.9 million during the first three quarters of fiscal 2005 to $6.6 million, compared to $66.5 million during the prior years first three quarters. The decrease was due primarily to $50.0 million in income taxes related to the gain on sale of discontinued operations as well as the collection of a large note receivable last year, resulting in an unfavorable comparison in collections of accounts and notes receivable, partially offset by improved operating results.
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Net cash provided by investing activities during the fiscal 2005 first three quarters totaled $183.0 million, compared to net cash used in investing activities of $32.8 million during the fiscal 2004 first three quarters. Our fiscal 2005 results include $349.2 million of net proceeds from the disposal of our limited-service lodging division and $28.5 million of net proceeds from the sale of the Miramonte Resort, of which $155.2 million was invested with intermediaries in conjunction with potential tax deferral opportunities that we were exploring. The majority of the cash held by intermediaries was released to us in early March 2005. Capital expenditures totaled $40.1 million during the first three quarters of fiscal 2005 compared to $33.9 million during the prior years first three quarters. Fiscal 2005 first three quarters capital expenditures included $15.4 million incurred in our hotels and resorts division, the majority of which was related to the downtown Chicago development recently absorbed by that division and several major remodeling projects at our Grand Geneva Resort & Spa. In addition, we incurred capital expenditures of approximately $19.8 million in our theatre division related to the recently opened new theatre in Saukville, Wisconsin as well as screen additions and remodeling projects at existing theatres and land for new theatres. Also included in our capital expenditure totals for fiscal 2005 year-to-date are $3.8 million of expenditures in our limited-service lodging division incurred prior to the sale related to previously committed capital projects.
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Net cash used in financing activities during the first three quarters of fiscal 2005 totaled $22.9 million compared to $36.2 million during the first three quarters of fiscal 2004. Excess cash available during the first three quarters of both fiscal years was used to reduce our outstanding commercial paper borrowings during the periods. Our principal payments on notes payable and long-term debt totaled $39.6 million during the first three quarters of fiscal 2005 compared to $39.2 million during the same period last year. New debt of $15.3 million related primarily to the Chicago project was added during the first three quarters of fiscal 2005, compared to $5.4 million of new debt added during the same period last year. Our debt capitalization ratio (long-term debt, including current maturities, divided by shareholders equity plus long-term debt, including current maturities) was 0.30 at February 24, 2005, compared to 0.38 at the prior fiscal year-end, with the decrease attributable to reduced debt levels and an increase in shareholders equity due to the significant gains on sale of discontinued operations.
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Based upon our current expectations for fiscal 2005 capital expenditure levels (estimated to be approximately $60 million) and our expectation for recording additional gains as funds currently held in escrow from the limited-service lodging division are released, we anticipate that our debt-capitalization ratio will remain at or below current levels during the remainder of fiscal 2005. Our actual long-term debt total and debt-capitalization ratio at the end of fiscal 2005 will be dependent upon our decisions regarding the use of the limited-service lodging division sale proceeds. We are actively evaluating the potential uses of the sale proceeds. We are committed to growing our two remaining divisions and we will also consider other opportunities and uses of the proceeds. We continue to be patient in assessing these opportunities to ensure that all uses of the proceeds are in the best interests of our shareholders.
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The actual timing and extent of the implementation of our current expansion plans will depend in large part on industry and general economic conditions, our financial performance and available capital, the competitive environment, evolving customer needs and trends and the availability of attractive opportunities. It is likely that our plans will continue to evolve and change in response to these and other factors.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
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We have not experienced any material changes in our market risk exposures since May 27, 2004.
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Item 4. Controls and Procedures
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a. Evaluation of disclosure controls and procedures
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Based on their evaluations, as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
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b. Changes in internal controls over financial reporting
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There were no significant changes in our internal controls identified in connection with the evaluation required by Rule 13a-15 of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds; Purchases of Equity Securities by the Issuer
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Through February 24, 2005, our board of directors has approved the repurchase of up to 4.7 million shares of our outstanding Common Stock. Under these authorizations, we may repurchase shares of our Common Stock from time to time in the open market, pursuant to privately negotiated transactions or otherwise. The repurchased shares are held in our treasury pending potential future issuance in connection with employee benefit, option or stock ownership plans or other general corporate purposes. These authorizations do not have an expiration date.
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The following table sets forth information with respect to purchases made by us or on our behalf of our Common Stock during the periods indicated. All of these repurchases were from employees who tendered shares in connection with the exercise of stock options and pursuant to the publicly announced repurchase authorizations described above.
| November 26 - December 25 | 0 | N/A | 1.9 million |
|---|---|---|---|
| December 26 - January 25 | 0 | N/A | 1.9 million |
| January 26 - February 24 | 2,353 | $24.87 | 1.9 million |
| Total/Average | 2,353 | $24.87 | 1.9 million |
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Item 6. Exhibits
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31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32 Certification of Periodic Financial Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| THE MARCUS CORPORATION | |
|---|---|
| DATE: April 5, 2005 | By: /s/ Stephen H. Marcus |
| Stephen H. Marcus, | |
| Chairman of the Board, President and | |
| Chief Executive Officer | |
| DATE: April 5, 2005 | By: /s/ Douglas A. Neis |
| Douglas A. Neis | |
| Chief Financial Officer and Treasurer |
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