(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 24, 2005
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number1-12604
Registrant’s telephone number, including area code: (414) 905-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
COMMON STOCK OUTSTANDING AT DECEMBER 29, 2005 – 22,099,042CLASS B COMMON STOCK OUTSTANDING AT DECEMBER 29, 2005 – 9,090,471
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See accompanying notes to consolidated financial statements.
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Certain matters discussed in this Management’s Discussion and Analysis of Results of Operations and Financial Condition are “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements may generally be identified as such because the context of such statements 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: (1) the availability, in terms of both quantity and audience appeal, of motion pictures for our theatre division, as well as the maintenance of a suitable window between the date such motion pictures are released in theatres and the date they are released to other distribution channels; (2) the effects of increasing depreciation expenses and preopening and start-up costs due to the capital intensive nature of our businesses; (3) the effects of adverse economic conditions in our markets, particularly with respect to our hotels and resorts division; (4) the effects of adverse weather conditions, particularly during the winter in the Midwest and in our other markets; (5) the effects on our occupancy and room rates from the relative industry supply of available rooms at comparable lodging facilities in our markets; (6) the effects of competitive conditions in our markets; (7) our ability to identify properties to acquire, develop and/or manage and continuing availability of funds for such development; (8) 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 (9) our decisions regarding the use of the proceeds received from the sale of our limited-service lodging division. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this Form 10-Q and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
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 2006 and 2005 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 sale of substantially all of the assets of our limited-service lodging division during fiscal 2005, this segment has been presented as discontinued operations in the accompanying financial statements and in this discussion. As a result of our sale of the Miramonte Resort during fiscal 2005, we have also presented this asset and related results of operations, previously included in our hotels and resorts segment, as part of our discontinued operations in the accompanying financial statements and in this discussion.
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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 comparable second quarter and first half of fiscal 2006 and 2005 (in millions, except for per share and variance percentage data):
An increase in revenues from our hotels and resorts division, due in part to the addition of two new hotels, offset a decrease in revenues from our theatre division during the second quarter and first half of fiscal 2006 compared to the same periods last year. Operating income (earnings before other income/expense and income taxes) from our hotels and resorts division increased during the second quarter, offsetting a small decrease in operating income from our theatre division during the second quarter compared to the same period last year. Year-to-date through the first half of fiscal 2006, our total operating income remains below the prior year levels, despite improved results from our hotels and resorts division, due to particularly weak first quarter theatre operating results. The theatre division operating results continued to be negatively impacted by a weaker slate of movies compared to the prior year. The improved hotels and resorts division operating results reflected an improved business travel environment and results from our two new hotels. Our fiscal 2006 first half earnings from continuing operations increased compared to the same period last year due to increased investment income, reduced interest expense and increased gains on disposition of property, equipment and investments in joint ventures. Our overall net earnings decreased during our fiscal 2006 second quarter and first half compared to the same periods of the prior year due to the fact that our prior year’s results included the gain on sale and the results from our discontinued limited-service lodging division.
We recognized investment income of $1.9 million and $3.8 million during the second quarter and first half of fiscal 2006, respectively, compared to $1.5 million and $1.8 million during the same periods last year. The increase in investment income was the result of interest earned on our substantial cash balances, received primarily as a result of the sale of our limited-service lodging division during fiscal 2005. The majority of our $273.6 million of cash and cash equivalents at the end of the fiscal 2006 second quarter was invested in federal tax-exempt short-term financial instruments. Our estimated effective income tax rate for continuing operations has been lowered to 34.8% year-to-date to reflect this current method of investment. Until further determinations are made about the use of our available cash balances, we expect that our investment income will remain at current levels and that our effective income tax rate will continue to remain below our historical 39-40% range.
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Our interest expense totaled $3.6 million and $7.3 million for the second quarter and first half of fiscal 2006, respectively, compared to $3.8 million and $7.7 million during the same periods last year. We do not expect our interest expense to change substantially during the remaining quarters of fiscal 2006, other than as a result of the payment of scheduled current principal maturities. Current maturities of long-term debt on our balance sheet as of November 24, 2005 include $25.4 million related to a mortgage note on our new Chicago hotel with an initial maturity date of June 2006. We currently anticipate extending the maturity date of this note, which would result in the majority of that amount being reclassified as long-term.
We recognized gains on the disposition of property, equipment and investments in joint ventures totaling $239,000 during the second quarter of fiscal 2006 compared to $1.3 million during the prior year’s same period. The prior year’s gain was the result of the sale of two theatre outlots on existing theatre land parcels. Continuing operations gains on the disposition of property and equipment for the first half of fiscal 2006 were $3.2 million compared to gains of $2.2 million during the first half of fiscal 2005. 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 the disposition of our property and equipment. We anticipate periodic additional sales of non-core property and equipment with the potential for additional disposition gains from time to time during the remainder of fiscal 2006.
Net earnings during the fiscal 2006 second quarter and first half included after-tax earnings from discontinued operations of $522,000 and $3.7 million, respectively, compared to after-tax earnings from discontinued operations of $67.2 million and $74.1 million during the prior year’s same periods. Net earnings during the second quarter and first half of fiscal 2005 included an after-tax gain on sale of discontinued operations of $71.0 million. A detailed discussion of these items is included in the Discontinued Operations section.
The following table sets forth revenues, operating income and operating margin for our theatre division for the second quarter and first half of fiscal 2006 and 2005 (in millions, except for variance percentage and operating margin):
Consistent with the seasonal nature of the motion picture exhibition industry, the second quarter of our fiscal year is typically the slowest period for our theatre division. Our theatre division reported reduced operating results for our fiscal 2006 second quarter and first half compared to last year’s results during the same periods. Contributing to the decreased operating margins during both periods were decreased box office and concession revenues, partially offset by reduced film rental costs and concession cost of sales.
The following table breaks down the components of revenues for the theatre division for the second quarter and first half of fiscal 2006 and 2005 (in millions, except for variance percentage):
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The decrease in our box office receipts and concession revenues for the second quarter and first half of fiscal 2006 compared to the same periods last year was entirely due to a decrease in attendance. Partially offsetting our reduced attendance was a 3.4% and 3.5% increase in our average ticket price during the second quarter and first half of fiscal 2006, respectively, compared to the same periods last year, attributable primarily to modest price increases. Our average concession sales per person during the fiscal 2006 second quarter and first half also increased 1.0% and 3.9%, respectively, compared to the same periods last year. Concession pricing and film product mix are the two primary factors that impact our average concession sales per person. Films that appeal to families and teenagers, such as the two top pictures during last year’s second quarter (Shark Tales and The Incredibles) generally produce greater concession sales compared to more adult-oriented films. Other revenues, which include management fees, pre-show advertising income, miscellaneous theatre revenues and family entertainment center revenues, increased slightly during our fiscal 2006 second quarter and were equal to last year on a year-to-date basis.
Total theatre attendance decreased 4.9% during the second quarter of fiscal 2006 compared to the same period last year. For the first half of fiscal 2006, total attendance was down 10.4% compared to the first half of fiscal 2005. The division’s fiscal 2006 second quarter results benefited from a strong September compared to the prior year and ended on a strong note with the opening of Harry Potter and the Goblet of Fire in mid-November. Unfortunately, the slate of movies during October and early November was not able to match last year’s performance, with box office receipts down between 5 and 20% during six of those seven weeks during the quarter when compared to the prior year. Our highest grossing films during the quarter included the previously mentioned Harry Potter film in addition to Chicken Little and Flightplan.
Film product for the third quarter has thus far performed equal to the prior year third quarter due to continued strong performance from Harry Potter and blockbuster films such as Chronicles of Narnia: The Lion, The Witch and The Wardrobe and King Kong. In fact, each of these holiday films will gross over $200 million in box office admissions nationally, the first time in history that three films have performed at that level during the holiday period. In addition, films such as Cheaper by the Dozen 2, Fun with Dick and Jane and Family Stone have contributed to the improved box office trend compared to the prior two fiscal 2006 quarters. This year’s results were negatively impacted by the fact that, during this year’s holiday season, Christmas Eve (the only night of the year on which our theatres close) and Christmas Day, as well as New Year’s Eve and New Year’s Day, were on a Saturday and Sunday, which are normally two of the biggest movie-going days of the week. The extended outlook for film product looks promising, with films such as Hoodwinked,Curious George, Ice Age 2, and The Wild scheduled for release in the coming months. We will end our fiscal year in May with the scheduled openings of Mission Impossible III,Poseidon and The DaVinci Code.
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 campaigns and the maintenance of the current “windows” between the date a film is released in theatres and the date a motion picture is released to other channels, including video on demand and DVDs. These are factors which we have no control over. There are other external trends which may affect the future of theatre attendance positively or negatively. These include all forms of competitive out-of-home leisure time activities. We also continue to evaluate the potential impact that in-home technology, such as large screens and video gaming, has on movie-going. We have also begun to analyze the possible advantages of the anticipated introduction of digital projection technology in our theatres.
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We ended the first half of fiscal 2006 with a total of 464 company-owned screens in 41 theatres and 40 managed screens in four theatres compared to 449 company-owned screens in 40 theatres and 40 managed screens in four theatres at the end of the same period last year. We are currently preparing our recently purchased land in Brookfield, Wisconsin for development of an UltraCinema™ that would replace two smaller existing theatres in the same market, as well as reviewing plans for additional new locations on previously purchased land and screen additions at existing locations. The actual timing of these developments has not been finalized as we continue to evaluate the current theatre environment and what it may mean to the future design, size and features of our new theatres. We do not expect to open any new screens prior to the end of fiscal 2006.
The following table sets forth revenues, operating income and operating margin for our hotels and resorts division for the second quarter and first half of fiscal 2006 and 2005 (in millions, except for variance percentage and operating margin).
Our hotels and resorts division recognized record revenues and operating income during our fiscal 2006 second quarter and first half. Continued improvement in business travel, particularly from the short-term transient business traveler, and our two new company-owned hotels contributed to our improved results during the second quarter and first half compared to the same periods last year. Operating income increased during the fiscal 2006 second quarter and first half compared to the prior year periods, despite over $300,000 of preopening expenses associated with our new Chicago hotel, reduced earnings from our timeshare operations of approximately $175,000 and continued start-up costs associated with our Las Vegas condominium hotel project. The aforementioned items contributed to a slightly lower operating margin for our first half.
The total revenue per available room, or RevPAR, for comparable company-owned properties increased 9.8% and 7.0%, respectively, during our fiscal 2006 second quarter and first half compared to the same periods last year. The increases in RevPAR were partially due to an increase in occupancy percentage (number of occupied rooms as a percentage of available rooms) of 3.4 and 2.6 percentage points, respectively, during these same periods. In addition, our overall average daily room rate (“ADR”) for these comparable properties increased 4.5% and 3.3%, respectively, during the second quarter and first half of fiscal 2006, compared to the same periods last year. The relative lack of new hotel supply growth and continued improvement in business travel demand contributed to these ADR increases after several years of stagnant or declining rates at our hotels and throughout the hotel industry.
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During the first week of our fiscal 2006 first quarter, we purchased the 220-room Wyndham Milwaukee Center hotel for a total cash purchase price of $23.6 million. The hotel features 12,000 square feet of meeting space, on-site parking, a restaurant and two lounges and complements our other two downtown Milwaukee, Wisconsin hotels. We anticipate our major renovation of this property to begin in the near future. This renovation will likely have some negative impact on this hotel’s operating results during the remainder of fiscal 2006.
We also opened another new hotel during the first week of our fiscal 2006 first quarter - the Four Points by Sheraton Chicago Downtown/Magnificent Mile. This hotel features 226 units (including 130 suites), an indoor swimming pool and fitness center, high-tech meeting rooms, an on-site parking facility (just recently opened) and will lease space to several area restaurants. In addition to the previously noted preopening expenses incurred at this property during the first quarter, like most new hotels, we expect that this property may incur some additional start-up operating losses during the remainder of fiscal 2006 prior to stabilizing. Having said that, the initial guest response to this new hotel has exceeded our expectations to-date and the hotel has contributed to our overall increase in operating income.
The near-term outlook for the future performance of this division remains promising. Although group business has continued to be inconsistent during our fiscal 2006 first half, particularly at our Grand Geneva Resort, the advance booking pace at our hotels appears strong and the overall trend for this customer segment is improving. Our fiscal third and fourth quarters are typically our weakest quarters due to our Midwestern locations. However, subject to economic conditions and the potential negative impact of the factors noted above related to our two new hotels, we currently expect continued improvement in our division operating results during the remainder of fiscal 2006.
Construction continues on our Las Vegas condominium hotel joint venture, the Platinum Hotel & Spa, with the property currently expected to open in early fiscal 2007. We expect to incur preopening costs related to this hotel during our fiscal 2006 fourth quarter, but we had similar preopening costs from our Chicago hotel during the same period last year. We also continue to work on the public-private venture that will restore the historic Skirvin Hotel in Oklahoma City. Renovation of this landmark hotel has begun, with a target opening date later in fiscal 2007. We will be the principal equity partner in this venture and, as a result, the hotel will be reported as a company-owned hotel when opened. We currently anticipate our total equity investment in this venture to be approximately $10 million, the majority of which will be offset in fiscal 2007 by federal and state historic tax credits. We continue to pursue several new growth opportunities as well, 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 are also currently considering several significant projects at the Grand Geneva Resort and Pfister Hotel during fiscal 2006 and 2007 in order to maintain and enhance the value of those properties.
Early in the second quarter of fiscal 2005, we sold substantially all of the assets of our limited-service lodging division to La Quinta Corporation of Dallas, Texas and we reported a significant after-tax gain on the sale of discontinued operations. At the time of the sale, a portion of the sale proceeds was held in escrow pending completion of certain customary transfer requirements on several locations and several joint venture properties were excluded from the transaction. During the first quarter of fiscal 2006, the necessary transfer requirements for two of the escrowed locations were met and during the second quarter of fiscal 2006, one of the three remaining joint venture properties was sold. As a result, additional net proceeds of $12.3 million were received and additional after-tax gains on sale of discontinued operations of $4.3 million were recognized during the first half of fiscal 2006. Upon completion of the transfer requirements associated with approximately $12 million in funds currently held in escrow on four remaining properties, assets with a net book value of approximately $9 million will be sold and we currently expect to report additional after-tax gains on sale of nearly $2 million in future periods. Two of these four remaining properties were sold early in our fiscal 2006 third quarter and we currently expect closing on the remaining two locations within the next 60 days.
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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 second quarter and first half of fiscal 2006 and 2005. 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 second quarter and first half of fiscal 2006 and 2005 (in millions, except for variance percentage):
Our fiscal 2006 second quarter and first half operating results included results from three joint venture Baymont Inns & Suites that were excluded from the sale to LaQuinta and are now operating as Baymont franchises. As previously noted, one of these joint venture properties was sold late in our fiscal 2006 second quarter. We are actively exploring opportunities to sell the remaining two properties and, as a result, we continue to include their operating results in discontinued operations. Our fiscal 2006 first half loss from discontinued operations included a one-time charge to earnings related to the costs associated with exiting leased office space for our former limited-service lodging division.
Early in our fiscal 2005 third quarter, we sold the Miramonte Resort, which had previously been included in our hotels and resorts segment results. The results of the Miramonte Resort have been accounted for as discontinued operations in our consolidated financial statements for the second quarter and first half of fiscal 2006 and 2005. The following table sets forth revenues, operating loss and loss from discontinued operations, net of applicable taxes, for the Miramonte Resort for the second quarter and first half of fiscal 2006 and 2005 (in millions, except for variance percentage):
Our movie theatre and hotels/resorts businesses each generate significant and consistent daily amounts of cash because each segment’s revenue is derived predominantly from consumer cash purchases. We believe that these relatively consistent and predictable cash sources, together with our substantial cash balances and the availability of $125 million of unused credit lines as of the end of the second quarter, will 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 increased by $10.9 million during the first half of fiscal 2006 to $20.6 million, compared to $9.7 million during the prior year’s first half. The increase was due primarily to significant income taxes related to the gain on sale of the limited-service lodging division during fiscal 2005, partially offset by reduced earnings from discontinued operations and an unfavorable comparison in collections of accounts and notes receivable.
Net cash provided by and used in investing activities during the fiscal 2006 first half netted to zero, compared to net cash provided by investing activities of $202.2 million during the fiscal 2005 first half. The decrease in net cash provided by investing activities was primarily the result of $345.1 million of net cash proceeds received from the sale of our limited-service lodging division during fiscal 2005 (of which $123.1 million was invested with intermediaries in conjunction with tax deferral opportunities we were exploring at the time), partially offset by increased capital expenditures and acquisition costs. Capital expenditures totaled $37.8 million, including the $23.6 million acquisition of the Wyndham Milwaukee Center hotel, during the first half of fiscal 2006 compared to $24.0 million during the prior year’s first half. Fiscal 2006 first half capital expenditures included $32.5 million incurred in our hotels and resorts division, the majority of which was related to our purchase of the Wyndham Milwaukee Center hotel and completion of our Chicago hotel construction. In addition, we incurred capital expenditures of approximately $4.5 million in our theatre division, including costs associated with a parking structure at one of our Chicago-area theatres, and $800,000 in our corporate real estate division.
Based upon a review of the projected timing of several previously identified capital projects in our two divisions as of the end of the second quarter, we estimate that our total capital expenditures for all of fiscal 2006 will be approximately $60 to $80 million, down from our previous estimate of $80 to $100 million. The timing on several new theatre projects has been adjusted as we continue to refine our plans for the new theatres. Specifically, our theatre development plans are currently addressing issues such as the proper number and size of auditoriums, including UltraScreens, the introduction of alternative food and beverage outlets in our theatres and the impact that digital projection systems may have on our theatre design. As a result, we would expect that the majority of our total fiscal 2006 expenditures will occur in our hotels and resorts division.
Net cash used in financing activities during the first half of fiscal 2006 totaled $6.0 million compared to net cash used in financing activities of $25.7 million during the first half of fiscal 2005. We used certain amounts of our available cash during the first half of last year to reduce our outstanding commercial paper borrowings, accounting for the majority of the change in the first half of fiscal 2006 versus last year same period. Our principal payments on notes payable and long-term debt totaled $9.9 million during the first half of fiscal 2006 compared to $37.8 million during the same period last year. New debt of $5.6 million related to our Chicago hotel was added during the first half of fiscal 2006, compared to $10.5 million of new debt added during the same period last year. Our debt-capitalization ratio was 0.27 at November 24, 2005, reduced slightly from our fiscal 2005 year-end debt-capitalization ratio of .28.
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Our actual debt-capitalization ratio at the end of fiscal 2006 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. In addition to evaluating potential growth opportunities in our theatre and hotels and resorts divisions, we are also considering other opportunities and uses of the proceeds, including returns of capital to shareholders. We continue to be patient in assessing these opportunities to ensure that all uses of the proceeds are in the best long-term interests of our shareholders. While we have not established an arbitrary deadline for determining the use of the funds, we currently anticipate providing additional direction on potential applications of at least a portion of these proceeds in the near future.
The actual timing and extent of the implementation of our current expansion plans and use of the sale proceeds 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.
We have not experienced any material changes in our market risk exposures since May 26, 2005.
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Through November 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.
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.
Our 2005 annual meeting of shareholders was held on Thursday, October 6, 2005 (the “Annual Meeting”). At the Annual Meeting, the following matter was voted on in person or by proxy and approved by our shareholders:
As of the August 5, 2005 record date for the Annual Meeting, 21,282,299 shares of Common Stock and 9,090,471 shares of Class B Common Stock were outstanding and eligible to vote, with the Common Stock entitled to one vote per share and the Class B Common Stock entitled to ten votes per share. Following are the final votes on the matter presented for shareholder approval at the Annual Meeting:
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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
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