FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 30, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to __________ Commission file number 1-12604 THE MARCUS CORPORATION (Exact name of registrant) as specified in its charter) Wisconsin 39-1139844 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 250 East Wisconsin Avenue - Suite 1700 Milwaukee, Wisconsin 53202-4220 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (414) 272-6020 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $1 par value Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant as of August 9, 1996: $353,000,000 Number of shares outstanding of each of the classes of the registrant's capital stock as of August 9, 1996: Common Stock, $1 par value: 10,816,145 shares Class B Common Stock, $1 par value: 8,856,405 shares PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: Proxy Statement for 1996 annual meeting of shareholders (incorporated by reference into Part III, to the extent indicated therein).
PART I Unless the context indicates otherwise, references to the number of the Company's various facilities set forth in this Form 10-K Annual Report are as of May 30, 1996. Special Note Regarding Forward-Looking Statements Certain matters discussed in this Annual Report on Form 10-K are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those currently anticipated. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Item 1. Business. The Marcus Corporation through its subsidiaries (collectively, the "Company") is engaged in four business segments: motels; movie theatres; hotels and resorts; and restaurants. The Company's motel operations include a chain of 124 Budgetel Inn limited service motels in 28 states and three Woodfield Suites all- suite hotels. Of the 124 Budgetel Inns, 93 are owned or operated by the Company and 31 are franchised. The Company operates 36 movie theatres with an aggregate of 219 screens throughout Wisconsin and in Northern Illinois. The Company's hotel and resort operations include the Pfister and the Milwaukee Hilton which are full-service hotels in the Milwaukee, Wisconsin metropolitan area, and the Grand Geneva Resort & Spa, which is a full-facility destination resort in Lake Geneva, Wisconsin. The Company also manages two hotels for third parties: the Mead Inn in Wisconsin Rapids, Wisconsin and the Crowne-Plaza Northstar in Minneapolis, Minnesota. The Company's restaurant division includes 31 KFC (Kentucky Fried Chicken) restaurants in Wisconsin. The Company is currently in the third year of an aggressive multi-year expansion plan which is expected to impact all four divisions. The Company's current plans include pursuing the following goals: - Increasing its number of Budgetel Inns to 300 by the year 2000, with up to 12 new Company-owned and 16 new franchised motels currently planned to be opened in fiscal 1997. The Company currently believes that much of this anticipated future growth will ultimately come from its increasing emphasis on opening new franchised Budgetel Inns. - Continuing to expand the number of Company-owned Woodfield Suites, including two new facilities in fiscal 1997. - Increasing its number of movie theatre screens to 400 by the year 2000, with planned continued expansion outside of Wisconsin. Up to 90 new screens are currently planned to be opened by the Company in fiscal 1997, including the 27 new screens at the three theatres acquired by the Company immediately after the end of fiscal 1996. Early in fiscal 1997, two new eight-plex theatres opened in Appleton and New Berlin, Wisconsin, along with a four-screen addition to an existing theatre in Green Bay, Wisconsin. Currently under construction is a new 20-screen ultraplex theatre in Addison, Illinois. Other current expansion plans include a six-screen addition to the Company's existing 14-plex in Gurnee Mills, Illinois and 17 new screens to be added to existing locations in Delafield, Mequon and New Berlin, Wisconsin and Addison, Illinois. - Adding up to one or two hotel properties each year over the next few fiscal years, either Company-owned or managed for others. - Expanding and enhancing the Company's KFC franchise. The actual number, mix and timing of future new facilities or expansions will depend in large part on continuing favorable industry and general economic conditions, the Company's financial performance and available capital, the competitive environment, evolving customer needs and trends, and the availability of attractive opportunities. It is likely that the Company's expansion goals will continue to evolve and change in response to these and other factors and there can be no assurance that the Company will succeed in achieving these goals. Business Segment Data Set forth below is certain business segment data for the Company's three most recent fiscal years relating to the Company's four industry segments. Intersegment sales and transfers are not material. Fiscal Year 1996 1995 1994 (Dollars in thousands) Revenues from unaffiliated customers: Motels $118,679 $104,356 $ 89,043 Theatres 63,696 53,968 50,494 Hotels and resorts 53,498 45,292 32,330 Restaurants 25,927 74,076 70,404 Corporate items(1) 487 298 343 -------- -------- -------- $262,287 $277,990 $242,614 ======== ======== ======== Operating income (loss): Motels $ 36,266 $ 31,992 $ 26,041 Theatres 15,017 12,175 11,483 Hotels and resorts 3,374 1,473 2,550 Restaurants 1,992 3,318 1,499 Corporate items(1) (4,834) (2,163) (3,689) -------- -------- -------- $ 51,815 $ 46,795 $ 37,884 ======== ======== ======== Identifiable assets: Motels $247,328 $211,112 $182,174 Theatres 63,365 46,928 47,244 Hotels and resorts 73,045 68,731 45,787 Restaurants 29,041 53,090 51,896 Corporate items(1) 42,536 27,221 34,505 -------- -------- -------- $455,315 $407,082 $361,606 ======== ======== ======== _______________ (1) Corporate items include amounts not allocable to specific business segments. Corporate revenues consist principally of rent and the corporate operating loss includes general corporate expenses. Corporate assets primarily include cash and cash equivalents, notes receivable, receivables from joint ventures and land held for development. Motel Operations Budgetel Inns The Company owns, operates or franchises 124 economy motels, with over 12,000 rooms, under the name "Budgetel Inn" in 28 states. Of this total, 31 Budgetel Inns are operated through franchisees, 84 are Company-owned or operated and nine are operated under joint venture type agreements. Targeted at the business traveler, Budgetel Inns feature an upscale, contemporary exterior appearance, are generally located in high traffic commercial areas in close proximity to interstate highway exits and major thoroughfares and typically vary in size between 60 and 150 rooms. The Company believes that providing amenities not typically associated with limited service motels distinguish Budgetel Inns from many of its competitors. These amenities include executive conference centers, room-delivered complimentary continental breakfasts, king-sized beds, free local telephone calls and incoming fax transmissions, non-smoking rooms, in-room coffee makers and hair dryers, remote control cable televisions, extra-long telephone cords and large working desks. To enhance customer security, the Company has converted substantially all of its Company-owned and franchised Budgetel Inn rooms to "card key" locking systems and provides well-lighted parking areas and all-night front desk staffing. The interior of each Budgetel Inn is refurbished in accordance with a strict periodic schedule. During fiscal 1996, Budgetel Inns opened a new 7,000 square foot nationwide guest reservations center. Travelers can call 1-800-4-BUDGET toll-free to obtain Budgetel Inn room reservations and other information. The Company has a national franchise program for its Budgetel Inns and has increased its emphasis on opening more franchised Budgetel Inns. Towards this end, the Company opened a third franchise support office in fiscal 1996. The new support office in Chicago, together with existing support offices in Atlanta and Dallas, and a service office in Florida, are intended to help support expansion of the Budgetel Inn franchise. Franchisees pay an initial franchise fee and annual marketing assessments, reservation system assessments and royalty fees based on room revenues. The Company is qualified to sell, and anticipates ultimately selling, franchises in all 50 states. Depending upon continuing favorable industry conditions and attractive opportunities, the Company currently plans to add up to 28 new Budgetel Inns in fiscal 1997 (including up to 12 Company-owned and 16 franchised facilities). During fiscal 1996, 11 new Company-owned units and seven new franchised units were opened. Woodfield Suites The Company operates three mid-priced, all-suite hotels under the name "Woodfield Suites" and currently plans to open two additional Woodfield Suites in fiscal 1997. Although the Company remains enthusiastic about the future growth potential of its Woodfield Suites concept, the number of potential additional Woodfield Suites will depend on continuing favorable industry and economic conditions, the availability of attractive site locations and customer acceptance. Woodfield Suites offers all of its guests the use of its centrally-located swimming pool, whirlpool and game room. Each suite has a bedroom and separate living room and features an extra-length bed, sleeper sofa for additional guests, microwave, refrigerator, wet bar, television and hair dryer. Some suites also have a kitchenette. All guests receive a free continental breakfast and are invited to a free cocktail hour. Hotels and Resorts Operations The Pfister Hotel The Company owns and operates the Pfister Hotel in downtown Milwaukee. The Pfister Hotel, a full service, luxury hotel, has 307 rooms (including 80 luxury suites), three restaurants, two cocktail lounges, a night club, an indoor swimming pool, an exercise facility and a 275-car parking ramp. The Pfister has 20,000 square feet of banquet and convention facilities. Banquet and meeting rooms can accommodate up to 3,000 persons and the hotel features two large ballrooms, including one of the largest ballrooms in the Milwaukee metropolitan area, with banquet seating for 1,200 people. A portion of the Pfister's first-floor space is leased for use by retail tenants. In fiscal 1996, the Pfister Hotel earned its 20th consecutive four-diamond award from the American Automobile Association. The Pfister is also a member of Preferred Hotels and Resorts Worldwide Association, an organization of independent luxury hotels and resorts, and the Association of Historic Hotels of America. The Milwaukee Hilton The Company owns and operates the 500-room Milwaukee Hilton. Formerly known as the Marc Plaza Hotel, the Company secured a Hilton franchise for the hotel which reopened on June 1, 1995 after a six-month renovation and restoration project. All 500 guest rooms, bathrooms, public areas and a significant portion of meeting space have been remodeled. The Company leases office suites on two floors of the Milwaukee Hilton to professional and other business tenants on a short- term to intermediate-term basis. The Hilton franchise affiliation has benefitted the Milwaukee Hilton through the Hilton's international centralized reservation and marketing system, advertising cooperatives and frequent stay programs. In connection with the City of Milwaukee's planned construction of a new convention facility in downtown Milwaukee, the Company plans to add up to 250 new rooms, together with ancillary facilities, and connect the Milwaukee Hilton by skywalk to the convention center by the end of fiscal 1998. The Grand Geneva Resort & Spa The Grand Geneva Resort & Spa in Lake Geneva, Wisconsin is a full-facility destination resort located on 1,300 acres. The largest convention resort in Wisconsin includes 355 guest rooms, 50,000 square feet of banquet meeting and exhibit space, three speciality restaurants, two cocktail lounges, two championship golf courses, several ski-hills, four indoor and five outdoor tennis courts, four swimming pools, an executive and fitness complex, horse stables and an on-site airport. Completed renovation projects at the Grand Geneva in fiscal 1996 included renovation of the resort's condominiums and the renovation of the renamed "Highland's" golf course, which opened during the late summer of 1996, as well as other property enhancements. Operated and Managed Hotels The Company operates the Crowne Plaza-Northstar Hotel in Minneapolis, Minnesota pursuant to a management agreement. The Crowne Plaza - Northstar Hotel is located in downtown Minneapolis and has 226 rooms, 13 meeting rooms, 6,370 square feet of ballroom and convention space, one restaurant, one cocktail lounge, and an exercise facility. Although closed for a portion of fiscal 1996 due to an electrical fire, the Northstar has been reopened since May 1996. The Company manages the Mead Inn in Wisconsin Rapids, Wisconsin, pursuant to a management agreement. The Mead Inn has 154 guest rooms, 11 meeting rooms totaling 8,180 square feet of meeting space, two cocktail lounges, two restaurants, and an indoor pool with sauna and whirlpool. The Company completed construction of a fully-automated laundry facility in fiscal 1996. This central facility will process the laundry for the Pfister, Milwaukee Hilton and Grand Geneva Resort & Spa and is expected to provide significant efficiencies to the hotels and resorts division. Theatre Operations The Company operates 36 movie theatre locations with an aggregate of 219 screens in Wisconsin and Northern Illinois for an average of 6.1 screens per location, compared to an average of 5.3 screens per location at the end of fiscal 1995 and 5.0 at the end of fiscal 1994. The Company's facilities include 32 multi-screen complexes and four single- screen theatres. The theatre division's long-term growth strategy is to focus on multi-screen theatres having between eight to 20 screens and which typically vary in seating capacity from 150 to 450 seats per screen. Multi-screen theatres allow the Company to offer a diversified selection of films to attract additional customers, exhibit movies in larger or smaller auditoriums within the same theatre depending on the popularity of the movie and benefit from the economies of having common box office, concession, projection and lobby facilities. Most of the Company's movie theatres feature exclusively first-run films. In fiscal 1996, the Company opened 27 new screens, including a new ten-plex theatre in Orland Park, Illinois, an eight-plex in Green Bay, Wisconsin and a total of nine screens added to existing theatres. Three theatres with a total of seven screens were closed in fiscal 1996. Immediately after the end of fiscal 1996, the Company acquired an 11- screen theatre in Chicago Heights, Illinois and two eight-screen budget movie theatres in the Milwaukee metropolitan area. With the conversion of one of its existing first-run theatres to a budget theatre shortly after the end of fiscal 1996, the Company now operates 24 budget movie screens. In addition to the 27 screens acquired in early fiscal 1997, the Company plans on opening up to 63 additional new screens in fiscal 1997. The results of the Company's movie theatre business and the motion picture industry in general are largely dependent upon the box office appeal and marketing of available first-run films. Movie production has been stimulated by additional demand from ancillary markets such as home video, pay-per-view and cable television, as well as increased demand from European film markets. The annual number of first- run film releases has more than doubled since the late 1970s. Fiscal 1996 featured such box office hits as Apollo 13, Toy Story, Twister, Batman Forever, Grumpier Old Men and Pocahontas. The Company obtains its films from all of the various national motion picture production and distribution companies and is not dependent on any single motion picture supplier. Booking, advertising, refreshment purchases and promotion are handled centrally by an administrative staff. The Company strives to provide its movie patrons with high- quality picture and sound presentation in clean, comfortable, attractive and contemporary theatre environments. Substantially all of the Company's movie theatre complexes feature either digital sound, Dolby or other stereo sound systems; acoustical ceilings; side wall insulation; engineered drapery folds to eliminate sound imbalance, reverberation and distortion; tiled floors; loge seats; cup-holder chair-arms; and computer- controlled heating, air conditioning and ventilation. Many of the Company's new theatres also offer tiered high-back stadium seating and oversized "love seats." Computerized box offices permit most of the Company's movie theatres to sell tickets in advance. Most of the Company's theatres are accessible to persons with disabilities and provide wireless headphones for hearing-impaired moviegoers. The Company also operates an exclusive customer information telephone system in Milwaukee and Madison, allowing customers to call for information as to the locations, times and titles of movies being shown by the Company throughout each metropolitan area. The Company sells food and beverage concessions at all of its movie theatres. The Company believes that a wide variety of food and beverage items, properly merchandised, increases concession revenue per patron. Although popcorn still remains the traditional favorite with moviegoers, the Company continues to upgrade its available concessions by offering a wide range of choices. For example, some of the Company's theatres offer hot dogs, pizza, ice cream, pretzel bites, frozen yogurt, coffee, mineral water and juices. In July 1996, the Company opened its first family entertainment center, Funset Boulevard, adjacent to its new eight-screen movie theatre in Appleton, Wisconsin. Funset Boulevard features a 40,000 square foot entertainment center with a restaurant, soft play areas for toddlers, laser tag and virtual reality games for teenagers, mini golf for the family and other entertainment options. Restaurant Operations Significant changes occurred in the Company's restaurant division in early fiscal 1996. On June 30, 1995, the Company sold its Applebee's restaurants and associated development rights for approximately $48.3 million, resulting in a substantial gain on investment. The Company has non-exclusive franchise rights to operate KFC restaurants in the Milwaukee metropolitan area and in northeast Wisconsin. The Company has operated KFC restaurants for 36 years, currently operates 31 KFC restaurants and is the largest operator of KFC restaurants in Wisconsin, based on the number of facilities operated. The restaurants feature Kentucky Fried Chicken and other franchisor-authorized food items. Virtually all of the Company's KFC restaurants feature inside seating for approximately 40 customers, drive-thru windows and updated electronic equipment to better facilitate food preparation and order processing. In fiscal 1996, the Company closed four underperforming KFC restaurants and opened one new KFC restaurant during the fourth quarter. The Company is exploring various expansion and acquisition opportunities for its KFC operations. In fiscal 1996, the Company's KFC restaurants introduced home delivery service, as well as three new products, including the Colonel's Crispy Chicken Strips, Chunky Chicken Pot Pies and Tender Roast chicken by the piece. All three new products were well received by customers and contributed to increased luncheon sales. The Company's KFC locations operate under individual franchise agreements ranging in terms from 10 to 20 years in length. Franchise royalties approximate 4% of net sales and, in addition, an initial flat fee of $20,000 is payable for each new KFC restaurant. The KFC franchisor specifies certain product requirements and provide for certain approved suppliers of products and supplies in order to maintain the franchise's quality standards. Competition In each of its businesses, the Company experiences intense competition from national and/or regional chain and franchise operations, some of which have substantially greater financial and marketing resources than the Company. There are other facilities in close proximity to most of the Company's facilities which compete directly with those of the Company. The Company's Budgetel Inns compete with such national limited service motel chains as Days Inn, Hampton Inn (owned by The Promus Companies Incorporated), Fairfield Inn (owned by Marriott Corporation), Red Roof Inn, La Quinta Inn, Comfort Inn and others, as well as a large number of regional and local motels. The Company's hotels compete in the Milwaukee metropolitan area with the hotels operated by Hyatt Corporation, Marriott Corporation, Ramada Inns, Holiday Inns and Wyndham Hotels. The major competition for the Grand Geneva Resort & Spa consists primarily of independently operated full-service resorts in the Lake Geneva area and other full service and destination resorts in Wisconsin and Illinois. The Mead Inn competes with limited-service motels in Wisconsin Rapids for business, and with other central Wisconsin properties such as the Holiday Inn of Stevens Point, for groups. The Crowne Plaza in Minneapolis competes with Hilton Hotels, Hyatt Corporation, Marriott Corporation, Radisson Hotels and Holiday Inns. In the restaurant business, the Company's KFC restaurants compete locally with Hardee's, Boston Market, Popeye's and similar national, as well as regional, fast food chains and individual restaurants offering chicken. The Company's movie theatres compete with large national movie theatre operators, such as United Artists, Cinemark, Cineplex Odeon and Carmike Cinemas, Inc., as well as with a wide array of smaller first-run and discount exhibitors. Although movie exhibitors in general also compete with the home video, pay-per-view and cable television markets, the Company believes that such markets have assisted the growth of the movie theatre industry by encouraging a significant increase in the number of first-run movies produced and released for initial movie theatre exhibition, which establishes the demand in the ancillary markets. The Company believes that the principal factors of competition in each of its businesses, in varying degrees, are the price and quality of its product, quality and location of its facilities, and customer service. The Company believes that it is well positioned to compete on the basis of these factors. Seasonality Historically, the Company's first and fourth fiscal quarters have produced the strongest operating results, since such periods coincide with the typical summer seasonality of the movie theatre industry and the spring and summer strength of the travel and food service aspects of the Company's business. Research and Development Research and development expenditures for the Company are not material. Environmental Regulation The Company does not expect federal, state or local environmental legislation to have a material effect on the Company's capital expenditures, earnings or competitive position. However, the Company's activities in acquiring and selling real estate for business development purposes have been complicated by the continued increased emphasis placed by Company personnel on properly analyzing real estate sites for potential environmental problems. This circumstance has resulted in, and is expected to continue to result in, greater time and increased costs involved in acquiring and selling properties associated with the Company's various businesses. Employees As of the end of fiscal 1996, the Company had approximately 7,600 employees, a majority of whom were employed on a part-time basis. A majority of the Company's hotel employees in Milwaukee are covered by collective bargaining agreements. Relations with employees have been satisfactory and there have been no work stoppages due to labor disputes. Item 2. Properties. The Company owns a substantial portion of its facilities, including the Pfister Hotel, the Milwaukee Hilton and the Grand Geneva Resort and Spa, all of the Company-owned Budgetel Inns, the majority of its theatres and restaurants, and leases the remainder. The Company also manages two hotel properties for third parties. Additionally, the Company owns properties acquired for the future construction and operation of new Company operating facilities. Some of its properties are leased from entities owned by principal shareholders of the Company. All of the Company's properties are suitably maintained and adequately utilized to cover the respective business segment served. The operating properties owned, leased and franchised by the Company as of May 30, 1996 are summarized in the following table: <TABLE> <CAPTION> Leased Leased Managed Managed Total Number From From for for Operated of Facilities Unrelated Related Related Unrelated By Business Segment in Operation Owned(1) Parties Parties Parties Parties Franchisees <S> <C> <C> <C> <C> <C> <C> <C> Restaurants: KFC 31 30 1 0 0 0 0 Movie Theatres: Indoor 36 23 12 1 0 0 0 Hotels and Resorts: Hotels 4 2 0 0 0 2 0 Resorts 1 1 0 0 0 0 0 Motels: Budgetel 124 82 0 1 9 1 31 Woodfield Suites 3 3 0 0 0 0 0 --- --- --- -- -- -- --- TOTALS 199 141 13 2 9 3 31 === === === == == == === <FN> ________________ (1) Two of the KFC restaurants, two of the movie theatres owned by the Company, and two of the motels are on land leased from unrelated parties under long-term leases. One of the motels is on land leased from related parties. The Company's partnership interests in nine Budgetel Inns that it manages and one movie theatre that it leases are not included in this column. </TABLE> Certain of the above individual properties or facilities are subject to purchase money or construction mortgages or commercial lease financing arrangements, none of which encumbrances are considered in the aggregate to be material to the Company. Assuming exercise by the Company of all renewal and extension options, the terms of the Company's operating property leases expire on various dates, with over 90% of the leases expiring after 1997. Item 3. Legal Proceedings. The Company does not believe that any pending legal proceeding involving the Company is material to its business. No legal proceeding required to be disclosed under this item was terminated during the fourth quarter of the Company's 1996 fiscal year. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's shareholders during the fourth quarter of the Company's 1996 fiscal year. EXECUTIVE OFFICERS OF COMPANY Each of the current executive officers of the Company is identified below together with information about each such officer's age, current position with the Company and employment history for at least the past five years: Name Position Age Stephen H. Marcus Chairman of the Board, President and Chief Executive Officer 61 Bruce J. Olson Group Vice President 46 H. Fred Delmenhorst Vice President-Human Resources 55 Kenneth A. MacKenzie Chief Financial Officer and Treasurer 62 Thomas F. Kissinger General Counsel and Secretary 36 Douglas A. Neis Corporate Controller 37 Stephen H. Marcus became Chairman of the Board of the Company in December 1991. He also served as Treasurer of the Company prior to the election of Mr. MacKenzie to such position in September 1987. In December 1988, he became the Chief Executive Officer of the Company, in addition to Chief Operating Officer. Mr. Marcus has been with the Company for 35 years. Bruce J. Olson has been employed in his present position with the Company since July 1991. He was elected to serve on the Company's Board of Directors in April 1996. Mr. Olson previously served as Vice President-Administration and Planning for the Company from September 1987 until July 1991 and as Executive Vice President and Chief Operating Officer of Marcus Theatres Corporation from August 1978 until October 1988, when he was appointed President of that corporation. Mr. Olson joined the Company in 1974. H. Fred Delmenhorst has been the Vice President-Human Resources since he joined the Company in December 1984. Kenneth A. MacKenzie was elected Treasurer of the Company in September 1987 and Chief Financial Officer in June 1994. He was the Controller of the Company or its Marcus Restaurants, Inc. subsidiary June 1979 through September 1995. Thomas F. Kissinger joined the Company in August 1993 as Secretary and Director of Legal Affairs and in August 1995 was promoted to General Counsel and Secretary. Prior thereto, Mr. Kissinger was associated with the law firm of Foley & Lardner for five years. Douglas A. Neis joined the Company in February 1986 as Controller of the Marcus Theatres division. In November 1987, Mr. Neis was promoted to Controller of Marcus Restaurants. In July 1991, he was appointed Vice President of Planning and Administration for Marcus Restaurants. In September 1994, Mr. Neis was also named Director of Technology for the Company and in September 1995 he was elected Corporate Controller for the Company. The executive officers of the Company are generally elected annually by the Board of Directors after the annual meeting of shareholders. Each executive officer holds office until his successor has been duly qualified and elected or until his earlier death, resignation or removal. PART II Item 5. Market for the Company's Common Equity and Related Shareholder Matters. The following data has been adjusted, where necessary, to retroactively adjust for the Company's three-for-two stock split effected in the form of a 50% stock dividend distributed on November 14, 1995. Last Sale Price Range of Common Stock First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Ended May 30, 1996 High $21.33 $23.67 $28.00 $28.25 Low $19.08 $19.83 $22.25 $25.00 Fiscal Year Ended May 25, 1995 High $19.08 $18.67 $18.67 $20.50 Low $16.42 $16.67 $16.00 $17.08 On August 9, 1996, there were 1,740 shareholders of record for the Common Stock and 34 shareholders of record for the Class B Common Stock. See Item 6 for information on the Company's cash dividends paid on its Common Stock. Cash dividends paid on the Company's Class B Common Stock were $0.31 and $0.21 per share in fiscal 1996 and 1995, respectively. In April 1996, the Company announced that its Board of Directors intended to commence paying regular quarterly dividends on or about the middle of February, May, August and November of each year, subject to future specific Board of Directors' authorization and declaration in each case based on, among other factors, the Company's financial performance and condition. Item 6. Selected Financial Data. <TABLE> <CAPTION> Fiscal Year 1996(1) 1995 1994 1993 1992 1991 Operating Results (Dollars In Thousands) <S> <C> <C> <C> <C> <C> <C> Revenues $262,287 $277,990 $242,614 $212,910 $204,297 $188,008 Net earnings $ 42,307 $ 24,136 $ 22,829 $ 16,482 $ 13,289 $ 11,618 Common Stock Data(2) Net earnings per share $ 2.14 $ 1.23 $ 1.16 $ 0.95 $ 0.79 $ 0.68 Cash dividends per common share $ 0.34 $ 0.23 $ 0.19 $ 0.17 $ 0.15 $ 0.13 Average shares outstanding (In Thousands) 19,808 19,691 19,661 17,472 16,883 17,046 Book value per share $ 12.77 $ 10.94 $ 9.92 $ 8.93 $ 7.46 $ 6.81 Financial Position (Year End) (In Thousands) Total assets $455,315 $407,082 $361,606 $309,455 $274,394 $255,117 Long-term debt $127,135 $116,364 $107,681 $ 78,995 $100,032 $ 96,183 Shareholders' equity $251,248 $214,464 $193,918 $173,980 $124,874 $114,697 Capital expenditures $ 83,689 $ 77,083 $ 75,825 $ 47,237 $ 27,238 $ 39,861 Financial Ratios Current ratio (year end) 0.62 0.41 0.67 0.90 0.73 0.65 Debt/capitalization ratio (year-end) 0.35 0.37 0.37 0.34 0.46 0.47 Return on revenues 16.1% 8.7% 9.4% 7.7% 6.5% 6.2% Return on average shareholders' equity 18.2% 11.8% 12.4% 11.0% 11.1% 10.5% <CAPTION> Fiscal Year 1990 1989 1988 1987 1986 Operating Results (Dollars In Thousands) <S> <C> <C> <C> <C> <C> Revenues $176,592 $166,710 $162,393 $152,531 $141,202 Net earnings $ 10,781 $ 10,042 $ 10,073 $ 8,078 $ 8,719 Common Stock Data(2) Net earnings per share $ 0.63 $ 0.58 $ 0.58 $ 0.47 $ 0.50 Cash dividends per common share $ 0.12 $ 0.11 $ 0.10 $ 0.10 $ 0.09 Average shares outstanding (In Thousands) 17,226 17,306 17,364 17,364 17,315 Book value per share $ 6.25 $ 5.74 $ 5.29 $ 4.80 $ 4.43 Financial Position (Year End) (In Thousands) Total assets $230,789 $197,898 $181,354 $167,289 $156,343 Long-term debt $ 85,563 $ 64,163 $ 56,635 $ 55,255 $ 52,316 Shareholders' equity $106,983 $ 98,250 $ 91,318 $ 82,952 $ 76,328 Capital expenditures $ 42,385 $ 34,253 $ 23,591 $ 28,234 $ 38,865 Financial Ratios Current ratio (year end) 0.91 0.75 1.00 0.94 1.13 Debt/capitalization ratio (year-end) 0.45 0.41 0.40 0.41 0.42 Return on revenues 6.1% 6.0% 6.2% 5.3% 6.2% Return on average shareholders' equity 10.5% 10.6% 11.6% 10.1% 12.0% <FN> _______________ (1) Includes an after-tax gain of $14.8 million, or $0.75 per share, on the sale of certain restaurant locations. (2) All per share and shares outstanding data have been adjusted to reflect stock splits in fiscal 1996, 1993 and 1987. </TABLE> Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Certain statements herein constitute "forward-looking statements." See "Special Note Regarding Forward-Looking Statements" included in the forepart of this report. RESULTS OF OPERATIONS GENERAL The Marcus Corporation and its four divisions report their consolidated and individual segment results of operations on either a 52- or 53-week fiscal year. Fiscal 1996 was a 53-week fiscal year for the Company and its theatre division, while the Company's remaining divisions reported on a 52-week fiscal year. Fiscal 1995 and 1994 were 52-week years for the Company and each of its divisions. Fiscal 1997 will be a 53-week fiscal year for the Company's motel and hotels/resorts divisions, while the Company and each of its other divisions will report on a 52-week fiscal year. Total consolidated revenues for fiscal 1996 were $262.3 million, a decrease of $15.7 million, or 5.6%, compared to fiscal 1995 consolidated revenues of $278.0 million. The anticipated decline in fiscal 1996 revenues from the prior year was due to the loss of approximately $46 million in restaurant division revenues in fiscal 1996, resulting from the Company's June 1995 sale of its 18 Applebee's restaurants and February 1995 disposition through lease of its 11 Marc's Cafe & Coffee Mill restaurants. However, as described below, the loss of revenues from the disposition of these restaurants was substantially offset by increased 1996 revenues by all of the Company's other divisions. The Company increasingly overcame this loss of revenue throughout fiscal 1996, with the Company's fiscal 1996 fourth quarter revenues equal to fiscal 1995 fourth quarter revenues. The additional week of results reported for the theatre division in fiscal 1996 contributed an additional $2.0 million in revenues and $550,000 in operating income to the Company's fourth quarter and fiscal 1996 results. Excluding the after-tax gain of $14.8 million, or $0.75 per share, resulting from the Company's sale of restaurants, fiscal 1996 earnings were $27.5 million, or $1.39 per share. This represented a 14.1% increase from net earnings of $24.1 million, or $1.23 per share, in fiscal 1995. Including the gain from the sale of restaurants, net earnings were $42.3 million, or $2.14 per share, for fiscal 1996. Weighted average shares outstanding were 19.8 million in fiscal 1996 and 19.7 million in 1995. All per share and share data in this discussion have been adjusted to reflect the Company's three-for-two stock split effected in the form of a 50% stock dividend on November 14, 1995. The Company's income tax expense for fiscal 1996 was $27.8 million, an increase of $11.7 million from fiscal 1995. The Company's effective tax rate for fiscal 1996 was 39.6% versus the prior fiscal year's 40.0%. Historically, the Company's first and fourth fiscal quarters have produced the strongest operating results, since these periods coincide with the typical summer seasonality of the movie theatre industry and the spring and summer strength of the Company's travel and food service businesses. The Company is currently in the third year of an aggressive multi-year expansion plan which is expected to impact all four divisions. The Company's current plans include the following goals: - Increasing its number of Budgetel Inns to 300 by the year 2000, with up to 12 new Company-owned and 16 new franchised motels currently planned to be opened in fiscal 1997. The Company currently believes that much of this anticipated future growth will ultimately come from its increasing emphasis on opening new franchised Budgetel Inns. - Continuing to expand its number of Company-owned Woodfield Suites, including two new facilities in fiscal 1997. - Increasing its number of movie theatre screens to 400 by the year 2000, with continued expansion outside of Wisconsin. Up to 90 new screens are currently planned to be opened by the Company in fiscal 1997, including the 27 new screens at the three theatres acquired by the Company immediately after the end of fiscal 1996. Early in fiscal 1997, two eight-plexes opened in Appleton and New Berlin, Wisconsin, along with a four-screen addition to an existing theatre in Green Bay, Wisconsin. Currently under construction is a new 20-screen ultraplex theatre in Addison, Illinois. Other current expansion plans include a six-screen addition to the Company's existing 14-plex in Gurnee Mills, Illinois and 17 new screens to be added to existing locations in Delafield, Mequon and New Berlin, Wisconsin and Addison, Illinois. - Adding up to one or two hotel properties each year over the next few fiscal years, either Company-owned or managed for others. - Expanding and enhancing the Company's KFC franchise. The actual number, mix and timing of potential future new facilities and expansions will depend in large part on continuing favorable industry and general economic conditions, the Company's financial performance and available capital, the competitive environment, evolving customer needs and trends, and the continued availability of attractive opportunities. It is likely that the Company's expansion goals will continue to evolve and change in response to these and other factors and there can be no assurance that these current goals will be achieved. MOTELS Fiscal 1996 Versus Fiscal 1995 Total revenues in fiscal 1996 for the motel division were $118.7 million, an increase of $14.3 million, or 13.7%, compared to $104.4 million in fiscal 1995. The motel division's operating income in fiscal 1996 totaled $36.3 million, an increase of $4.3 million, or 13.4%, over the division's fiscal 1995 operating income of $32.0 million. Average daily room rates increased by 4.2% at the Company's motels in fiscal 1996 compared to fiscal 1995 principally as a result of scheduled selective price increases and continued favorable lodging and general economic conditions. The Company's motel occupancy percentage in fiscal 1996 fell slightly compared to fiscal 1995 but still remained well above industry averages. Factors contributing to this slight decline included severe weather conditions and two federal government shutdowns during the third quarter. At May 30, 1996, there were 124 Budgetel Inns (93 Company owned or operated and 31 franchised) and three Woodfield Suites in operation, compared to 106 Budgetel Inns (82 Company owned and operated and 24 franchised) and three Woodfield Suites at 1995 fiscal year end. Eleven new Company-owned Budgetel locations and seven new franchised Budgetel locations were opened in fiscal 1996. The Company's newly opened motels contributed additional revenues of $5.3 million and nominal operating income in fiscal 1996. Similar comparative operating results are expected for new facilities to be opened in fiscal 1997. Fiscal 1995 Versus Fiscal 1994 Total revenues in fiscal 1995 for the motel division were $104.4 million, an increase of $15.4 million, or 17.2%, compared to $89.0 million in fiscal 1994. The motel division's operating income in fiscal 1995 totaled $32.0 million, an increase of $6.0 million, or 22.9%, over the division's fiscal 1994 operating income of $26.0 million. Average daily room rates increased by 6.3% at the Company's motels in fiscal 1995 principally as a result of increased demand from continued favorable lodging industry and general economic conditions. The Company's motel occupancy percentage in fiscal 1995 remained consistent with fiscal 1994, well above industry averages. At the end of fiscal 1995, there were 106 Budgetel Inns and three Woodfield Suites in operation, compared to 98 Budgetel Inns and one Woodfield Suites at 1994 fiscal year end. Together with the two new Woodfield Suites, the Company's new motels contributed additional revenues of $9.9 million and nominal operating income in fiscal 1995. THEATRES Fiscal 1996 Versus Fiscal 1995 The theatre division's fiscal 1996 revenues were $63.7 million, an increase of $9.7 million, or 18.0%, over $54.0 million in fiscal 1995. The division's operating income for fiscal 1996 was $15.0 million, an increase of $2.8 million or 23.3%, from $12.2 million in fiscal 1995. The additional week of operations included in the theatre division's fiscal 1996 results (which included the Memorial Day holiday weekend) contributed an additional $2.0 million to the division's fiscal 1996 revenues. At May 30, 1996, the Company operated 219 screens at 36 locations in Wisconsin and Illinois, compared to 199 screens at 37 locations at the end of fiscal 1995. Consistent with the Company's long- term strategic plan to focus on operating large multi-screen theatres, the Company opened 27 new screens, including a new ten-plex theatre in Orland Park, Illinois and an eight-plex in Green Bay, Wisconsin. Additionally, three theatres with a total of seven screens were closed in fiscal 1996. These closed theatres had a minimal impact on fiscal 1996 operations. The addition of the new screens in fiscal 1996 generated additional revenues of over $7.0 million compared to fiscal 1995. Immediately after the end of fiscal 1996, the Company acquired an 11-screen theatre in Chicago Heights, Illinois and two budget-film, eight-plex theatres in the metropolitan Milwaukee area. The Company also switched the emphasis of one of its Appleton, Wisconsin theatres from first-run movies to budget movies, bringing the Company's total number of budget oriented screens to 24. Compared to first-run theatres, budget theatres generally have lower box office revenues and associated film costs and higher concession sales as a percentage of box office. Additionally, the Company's first family entertainment center opened in late July 1996 in Appleton, Wisconsin. The 95,000 square foot Hollywood-themed indoor amusement facility includes an eight-plex theatre and a restaurant, party rooms, a laser tag center, virtual reality games, a miniature golf course and an arcade. Revenues of the theatre business and the motion picture industry in general are heavily dependent on the general audience appeal of available films, together with studio marketing, advertising and support campaigns, factors over which the Company has no control. Fiscal 1996 included such box office hits as Apollo 13, Toy Story, Twister, Batman Forever, Grumpier Old Men and Pocahontas. Each of these films produced box office receipts in excess of $1 million for the theatre division in fiscal 1996. Approximately the same number of first-run films were released in fiscal 1996 as in fiscal 1995. The Company exhibited five films which contributed box office receipts in excess of $1 million in fiscal 1995. Total box office receipts in fiscal 1996 were $44.4 million, an increase of $6.1 million, or 15.9%, from $38.3 million in fiscal 1995. This increase can be attributed to a 9.2% increase in attendance and a 6.0% increase in the average ticket price. The increase in attendance in fiscal 1996 was due to the addition of new screens, including the new Orland Park ten-plex. Attendance at the Company's other comparable locations was virtually the same between fiscal years. Vending revenues in fiscal 1996 were $17.7 million, an increase of $3.1 million, or 20.9%, over $14.6 million in fiscal 1995. Vending revenues increased due to the increase in theatre attendance from the Company's added screens and the 10.4% increase in the average concession sales per person in fiscal 1996 from fiscal 1995. Fiscal 1995 Versus Fiscal 1994 The theatre division's fiscal 1995 revenues were $54.0 million, an increase of $3.5 million, or 6.9%, over $50.5 million in fiscal 1994. Operating income for fiscal 1995 was $12.2 million, an increase of almost $700,000, or 6.0%, from $11.5 million in fiscal 1994. At the end of fiscal 1995, the Company operated 199 screens at 37 locations in Wisconsin and Illinois, compared to 189 screens at 36 locations at the end of fiscal 1994. The Company opened a new eight-plex theatre in Delafield, Wisconsin, in November 1994 and added two screens to an existing theatre in Racine, Wisconsin. The addition of the new Delafield theatre for a part of the fiscal year and the operation of the Gurnee Mills ten-plex theatre for an entire year generated additional revenues of over $3.8 million compared to fiscal 1994. In fiscal 1995, over 160 first-run films were released, including such box office hits as The Lion King, Forrest Gump, The Santa Clause, True Lies and Speed. Each of these films produced box office receipts in excess of $1 million for the theatre division. Approximately the same number of first-run films were released in fiscal 1994. The Company exhibited six films which contributed box office receipts in excess of $1 million in fiscal 1994. Total box office receipts in fiscal 1995 were $38.3 million, an increase of $2.8 million, or 8.0%, from $35.5 million in fiscal 1994. This increase can be attributed to a 3.1% increase in attendance and a 4.8% increase in the average ticket price. The increase in attendance was due solely to the addition of the new Delafield theatre for the last half of the fiscal year and the operation of Gurnee Mills for an entire fiscal year. Attendance at other comparable locations decreased 2.0% between fiscal years. Vending revenues in fiscal 1995 were $14.6 million, an increase of $1 million, or 7.3%, over $13.6 million in fiscal 1994, due to the increase in theatre attendance and the 3.5% increase in the average concession sales per person in fiscal 1995 from fiscal 1994. HOTELS AND RESORTS Fiscal 1996 Versus Fiscal 1995 Total revenues from the Company's hotels and resorts division in fiscal 1996 increased by $8.2 million, or 18.1%, to $53.5 million, compared to the $45.3 million recognized in the previous fiscal year, while operating income increased by $1.9 million, or 129%, to $3.4 million, compared to the $1.5 million earned in fiscal 1995. Increased occupancy at the Grand Geneva Resort & Spa as a result of greater market awareness and the reduction of start-up related expenses, together with the revenue from having the restored and renovated Milwaukee Hilton (formerly the Marc Plaza) open for the entire 1996 fiscal year and the impact of increased average daily room rates at all three of the Company's owned hotels, were the primary reasons for the division's increased fiscal 1996 revenues and operating income compared to the prior year. However, the amortization of the Hilton's pre-opening costs, the loss of revenue from the nonrenewal of the operating agreement for the Sheraton-Mayfair Inn, together with the effects on occupancy of adverse winter weather, negatively impacted the division's fiscal 1996 operating results. Construction of a new central laundry facility during fiscal 1996 is expected to reduce future housekeeping expenses for the division and further improve the division's profitability. Fiscal 1995 Versus Fiscal 1994 Total revenues from the Company's hotels and resorts division in fiscal 1995 increased by $13.0 million, or 40.1%, to $45.3 million, compared to the $32.3 million recognized in the previous fiscal year, while operating income decreased by $1.1 million, or 42.2%, to $1.5 million, compared to the $2.6 million earned in fiscal 1994. The reason for the reduction in operating income was the continuing non-capitalized start-up and renovation expenses incurred for ongoing upgrades at the Grand Geneva Resort & Spa. The division's increase in revenues in fiscal 1995 was attributable principally to an 11.4% increase in occupancy rates and a 16.5% increase in room rates. The increase in occupancy rates was due primarily to generally favorable economic conditions and the increase in room rates was mainly due to the relatively higher room rates at the newly renovated Grand Geneva which was open for the entire fiscal year. These factors contributed $14.2 million to the division's revenues in fiscal 1995. Additionally, the continuing favorable customer response to the fiscal 1994 renovation of the Pfister Hotel contributed positively to fiscal 1995 revenues, while the temporary closing of the Marc Plaza for major renovation and remodeling for the last half of fiscal 1995 modestly reduced revenues. The remainder of the fiscal 1995 revenue increase was derived from an entire fiscal year of management fees from operating the Mead Inn and the Crowne Plaza-Northstar. The Company elected not to renew its Sheraton-Mayfair Inn operating agreement for fiscal 1996. The Marc Plaza Hotel reopened as the Milwaukee Hilton on June 1, 1995. RESTAURANTS Fiscal 1996 Versus Fiscal 1995 Fiscal 1996 restaurant division revenues totaled $25.9 million, a decrease of $48.1 million, or 65.0%, from $74.1 million in fiscal 1995. The division's operating income for fiscal 1996 was $2.0 million, a decrease of $1.3 million, or 40.0%, from operating income of $3.3 million in fiscal 1995. The sale of the Company's Applebee's restaurants, together with the fiscal 1995 divestiture of the Marc's Cafe & Coffee Mill and other restaurants, reduced fiscal 1996 restaurant division revenues by approximately $46 million and reduced 1996 operating income by $1.2 million. Annual rental income of approximately $1 million from leasing the 11 divested Marc's Cafes and one of the sold Applebee's was included as restaurant division revenue in fiscal 1996. The Company's KFC restaurants experienced a 1.4% decrease in aggregate revenues and a 25.0% decrease in aggregate operating income during fiscal 1996 compared to fiscal 1995. The decreased revenues were the result of the loss of $1.0 million in revenues from the closure of four underperforming KFC restaurants during fiscal 1996. The decrease in operating income was almost entirely the result of start-up costs associated with the introduction of home delivery services. Same-store KFC restaurants sales increased 4.3% during fiscal 1996 compared to fiscal 1995 because guest counts increased 3.3% due to increased lunch-time traffic, the introduction of home delivery service and the introduction of several new franchisor products. Average check amounts increased over fiscal 1995 levels. The Company opened a new KFC during the fiscal 1996 fourth quarter and, at the end of fiscal 1996, operated 31 KFC restaurants compared to 34 at the end of fiscal 1995. The Company is currently exploring various KFC expansion and acquisition opportunities. Fiscal 1995 Versus Fiscal 1994 During fiscal 1995, the Company divested 11 Marc's Cafe & Coffee Mill restaurants by leasing the restaurants to a group of former restaurant division employees and closed its three remaining Marc's Big Boy, two Big Boy Expresses, one KFC and one Original Gino's East of Chicago restaurants. Restaurant division revenues totaled almost $74.1 million for fiscal 1995, an increase of almost $3.7 million, or 5.2%, from $70.4 million in fiscal 1994. The revenue increase was due almost entirely to the Company's five newly opened Applebee's, the operation of three additional Applebee's for an entire fiscal year, and increasing customer counts and average check amounts at the Company's 10 continuing Applebee's and 34 KFC restaurants. The division's operating income for fiscal 1994 was $3.3 million, an increase of $1.8 million, or 121.3%, from operating income of $1.5 million in fiscal 1994. Fiscal 1995 operating income improvements were derived principally from improved same store sales at continuing Applebee's and KFCs and expense savings realized from divesting its underperforming restaurants. The Company's KFC operating income increased significantly in fiscal 1995 over fiscal 1994. KFC's decreased fiscal 1995 guest counts were more than offset by an increase in average check amounts, resulting in a same store sales increase of 1.7% in fiscal 1995 over fiscal 1994. The Company believes that this result was largely caused by the focus of the franchisor's promotional campaign on higher priced family meals. The Company closed one underperforming KFC restaurant in fiscal 1995. FINANCIAL CONDITION The Company's lodging, movie theatre and restaurant businesses each generate significant and consistent daily amounts of cash because each segment's revenue is derived predominantly from consumer cash purchases. The Company believes that these consistent and predictable cash sources, together with the availability to the Company of $44.5 million in unused credit lines at fiscal 1996 year end, should be adequate to support the ongoing operational liquidity needs of the Company's businesses. Net cash provided by operating activities decreased by $15.8 million, or 27.5%, in fiscal 1996 to $41.8 million compared to $57.6 million in fiscal 1995. The decrease was primarily the result of approximately $10 million of income taxes incurred on the gain on the sale of restaurants, combined with timing differences in the payment of accounts payable and receipt of accounts receivable. Net cash used in investing activities decreased by $27.4 million, or 40.1%, to $40.8 million in fiscal 1996. The net proceeds of $48.9 million from disposals of property, equipment and other assets (principally from the sale of Applebee's) more than offset increased advances to joint ventures and a $6.6 million, or 8.6%, increase in capital expenditures. Capital expenditures in fiscal 1996 included $51.5 million spent on motel division capital projects, $20.3 million on theatre division projects and $8.0 million on hotels and resorts division projects. In fiscal 1995, $32.9 million was spent on motel division projects, $11.0 million on theatre division projects, $27.2 million on hotels and resorts division projects and $5.9 million on restaurant division projects. Principally as a result of funding a portion of the Company's fiscal 1996 facility expansions and renovations, the Company's total debt increased to $136.2 million at the close of fiscal 1996, compared to $125.6 million at the end of fiscal 1995, primarily through increased borrowings on its lines of credit. Net cash provided by financing activities was $5.7 million in fiscal 1996, a decrease of $3.7 million, or 39.2%, from fiscal 1995, as the Company financed more of its capital requirements from cash generated from operating and investing activities. The Company issued $19.6 million of new notes payable and long-term debt in fiscal 1996 compared to $18.0 million in the prior year and made $7.9 million of debt principal payments in fiscal 1996 compared to $4.5 million in fiscal 1995. The Company's debt-capitalization ratio was 0.35 at May 30, 1996, compared to 0.37 at the prior fiscal year end. Total capital expenditures (including normal continuing capital maintenance projects) of $83.7 million and $77.1 million were incurred in fiscal 1996 and 1995, respectively. Total capital expenditures in fiscal 1997 are expected to exceed fiscal 1996 expenditures and are expected to be funded by cash generated from operations and additional debt, including potentially up to $85 million of additional institutional debt. Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of The Marcus Corporation We have audited the accompanying consolidated balance sheets of The Marcus Corporation (the Company) as of May 30, 1996 and May 25, 1995, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended May 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at May 30, 1996 and May 25, 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 30, 1996, in conformity with generally accepted accounting principles. As discussed in Note 7 to the consolidated financial statements, effective May 28, 1993, the Company changed its method of accounting for income taxes. Milwaukee, Wisconsin ERNST & YOUNG LLP July 19, 1996
THE MARCUS CORPORATION CONSOLIDATED BALANCE SHEETS May 30, 1996 May 25, 1995 (In Thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 15,466 $ 8,798 Accounts and notes receivable (Note 3) 8,780 6,166 Receivables from joint ventures (Note 9) 4,890 1,861 Other current assets 2,463 4,817 -------- -------- Total current assets 31,599 21,642 PROPERTY AND EQUIPMENT, net (Note 3) 411,563 374,284 OTHER ASSETS: Investments in joint ventures (Notes 8 and 9) 1,295 629 Other (Note 10) 10,858 10,527 -------- -------- Total other assets 12,153 11,156 -------- -------- Total assets $455,315 $407,082 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 9) $ 5,555 $ 4,452 Accounts payable 15,646 17,886 Income taxes 1,393 2,069 Taxes other than income taxes 8,323 9,091 Accrued compensation 1,380 1,458 Other accrued liabilities 9,352 8,052 Current maturities on long-term debt (Note 4) 9,069 9,245 -------- -------- Total current liabilities 50,718 52,253 LONG-TERM DEBT (Note 4) 127,135 116,364 DEFERRED INCOME TAXES (Note 7) 20,027 19,957 DEFERRED COMPENSATION AND OTHER (Note 6) 6,187 4,044 COMMITMENTS, LICENSE RIGHTS AND CONTINGENCIES (Note 8) SHAREHOLDERS' EQUITY (Note 5): Preferred Stock, $1 par; authorized 1,000,000 shares; none issued Common Stock: Common Stock, $1 par; authorized 30,000,000 shares; issued 11,529,962 shares in 1996 and 7,522,368 shares in 1995 11,530 7,522 Class B Common Stock, $1 par; authorized 20,000,000 shares; issued and outstanding 8,856,605 shares in 1996 and 6,068,952 shares in 1995 8,857 6,069 Capital in excess of par 38,832 45,154 Retained earnings 195,643 159,675 -------- -------- 254,862 218,420 Less cost of Common Stock in treasury (718,352 shares in 1996 and 525,847 shares in 1995) 3,614 3,956 -------- -------- Total shareholders' equity 251,248 214,464 -------- -------- Total liabilities and shareholders' equity $455,315 $407,082 ======== ======== See accompanying notes.
THE MARCUS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED MAY 30, 1996 May 30, May 25, May 26, 1996 1995 1994 (In Thousands, Except Per Share Data) REVENUES: Rooms and telephone $137,961 $119,705 $100,691 Food and beverage 43,193 89,755 81,948 Theatre operations 63,099 53,733 50,263 Other income 18,034 14,797 9,712 ------- ------- ------- Total revenues 262,287 277,990 242,614 COSTS AND EXPENSES: Rooms and telephone 51,346 42,780 37,100 Food and beverage 32,014 69,137 63,470 Theatre operations 38,055 32,612 30,212 Advertising and marketing 15,273 16,241 13,348 Administrative 25,532 23,080 21,569 Depreciation and amortization 25,117 23,570 20,385 Rent (Note 8) 2,461 3,727 3,572 Property taxes 9,416 9,488 8,873 Other operating expenses 11,258 10,560 6,201 ------- ------- ------- Total costs and expenses 210,472 231,195 204,730 ------- ------- ------- OPERATING INCOME 51,815 46,795 37,884 OTHER INCOME (LOSS): Investment income 2,378 1,525 2,162 Interest expense (8,696) (8,587) (6,931) Gain on disposition of property and equipment (Note 2) 24,595 463 1,539 ------- ------- ------- 18,277 (6,599) (3,230) ------- ------- ------- EARNINGS BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE 70,092 40,196 34,654 INCOME TAXES (Note 7) 27,785 16,060 13,607 ------- ------- ------- EARNINGS BEFORE CHANGE IN ACCOUNTING PRINCIPLE 42,307 24,136 21,047 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES (Note 7) - - 1,782 ------- ------- ------- NET EARNINGS $ 42,307 $ 24,136 $ 22,829 ====== ====== ====== EARNINGS PER SHARE: Earnings before change in accounting principle $2.14 $1.23 $1.07 Cumulative effect of change in accounting for income taxes - - .09 ------- ------- ------- Net earnings $2.14 $1.23 $1.16 ====== ====== ====== WEIGHTED AVERAGE SHARES OUTSTANDING (Note 5) 19,808 19,691 19,661 ====== ====== ====== See accompanying notes.
<TABLE> THE MARCUS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY THREE YEARS ENDED MAY 30, 1996 <CAPTION> Class B Capital Common Common in Excess Retained Treasury Stock Stock of Par Earnings Stock (In Thousands) <C> <S> <S> <S> <S> <S> BALANCES AT MAY 27, 1993 $ 7,269 $6,322 $44,557 $120,429 $(4,597) Cash dividends: $.17 per share Class B Common Stock - - - (1,609) - $.19 per share Common Stock - - - (1,872) - Exercise of stock options - - (38) - 389 Purchase of treasury stock - - - - (148) Savings and profit-sharing contribution - - 224 - 160 Reissuance of treasury stock - - 2 - 1 Conversion of Class B Common Stock 97 (97) - - - Net earnings for the year - - - 22,829 - ------ ------ ------ ------- ------ BALANCES AT MAY 26, 1994 7,366 6,225 44,745 139,777 (4,195) Cash dividends: $.21 per share Class B Common Stock - - - (1,924) - $.23 per share Common Stock - - - (2,314) - Exercise of stock options - - - - 186 Savings and profit-sharing contribution - - 404 - 49 Reissuance of treasury stock - - 5 - 4 Conversions of Class B Common Stock 156 (156) - - - Net earnings for the year - - - 24,136 - ------ ------ ------ ------- ------ BALANCES AT MAY 25, 1995 7,522 6,069 45,154 159,675 (3,956) Cash dividends: $.31 per share Class B Common Stock - - - (2,770) - $.34 per share Common Stock - - - (3,559) - Three-for-two stock split 3,764 3,032 (6,796) (10) - Exercise of stock options - - 118 - 403 Purchase of treasury stock - - - - (145) Savings and profit-sharing contribution - - 350 - 83 Reissuance of treasury stock - - 6 - 1 Conversions of Class B Common Stock 244 (244) - - - Net earnings for the year - - - 42,307 - ------ ------ ------ ------- ------ BALANCES AT MAY 30, 1996 $11,530 $8,857 $38,832 $195,643 $(3,614) ======= ====== ======= ======== ======= </TABLE> See accompanying notes.
<TABLE> THE MARCUS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED MAY 30, 1996 <CAPTION> May 30, May 25, May 26, 1996 1995 1994 OPERATING ACTIVITIES <S> <C> <C> <C> Net earnings $42,307 $24,136 $22,829 Adjustments to reconcile net earnings to net cash provided by operating activities: Earnings on investments in joint ventures, net of distributions (406) 33 308 Gain on disposition of property and equipment (24,595) (463) (1,539) Depreciation and amortization 25,117 23,570 20,385 Deferred income taxes 70 3,958 1,643 Deferred compensation and other 2,143 703 901 Contribution of Company stock to savings and profit-sharing plan 433 453 384 Changes in assets and liabilities: Accounts and notes receivable (2,614) 193 (862) Other current assets 1,767 (1,768) (1,375) Accounts payable (2,240) 4,638 6,398 Income taxes (676) (727) 2,535 Taxes other than income taxes (768) 1,784 (12) Accrued compensation (78) 10 (106) Other accrued liabilities 1,300 1,074 1,272 ------- ------- ------- Total adjustments (547) 33,458 29,932 Cumulative effect of change in accounting for income taxes (Note 7) - - (1,782) ------- ------- ------- Net cash provided by operating activities 41,760 57,594 50,979 INVESTING ACTIVITIES Capital expenditures (83,689) (77,083) (75,825) Net proceeds from disposals of property, equipment and other assets 48,914 1,695 3,349 Purchase of interest in joint ventures, net of cash acquired (260) - (692) Loan to affiliated hotel - - (2,860) (Increase) decrease in other assets (2,770) 1,049 (1,986) Cash received from (advanced to) joint ventures (3,029) 6,122 2,389 ------- ------- ------- Net cash used in investing activities (40,834) (68,217) (75,625) FINANCING ACTIVITIES Debt transactions: Net proceeds from issuance of notes payable and long-term debt 19,603 17,984 64,650 Principal payments on notes payable and long-term debt (7,905) (4,494) (42,594) Equity transactions: Treasury stock transactions, except for stock options (138) 9 (145) Exercise of stock options 521 186 351 Dividends paid (6,339) (4,238) (3,481) ------- ------- ------- Net cash provided by financing activities 5,742 9,447 18,781 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 6,668 (1,176) (5,865) Cash and cash equivalents at beginning of year 8,798 9,974 15,839 ------- ------- ------- Cash and cash equivalents at end of year $15,466 $ 8,798 $ 9,974 ======= ======= ======= </TABLE> See accompanying notes.
THE MARCUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS May 30, 1996 1. Description of Business and Summary of Significant Accounting Policies Description of Business - The Marcus Corporation and its subsidiaries (the Company) operates principally in four business segments: Motels: Operates and franchises lodging facilities under the names Budgetel Inns and Woodfield Suites, primarily located in the eastern half of the United States. Theatres: Operates multi-screen motion picture theatres in Wisconsin and Illinois. Hotels/Resorts: Owns and operates full service hotels and resorts in Wisconsin and manages full service hotels in Wisconsin and Minnesota. Restaurants: Operates KFC restaurants under a license agreement for certain areas in the state of Wisconsin. Principles of Consolidation - The consolidated financial statements include the accounts of The Marcus Corporation and all of its subsidiaries. Investments in 50%-owned affiliates are accounted for on the equity method. All intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year - The Company reports on a 52/53-week year ending the last Thursday of May. The Theatres and Corporate segments had a 53-week year in fiscal 1996. All other segments in 1996 and all segments in fiscal 1995 and 1994 had 52-week years. Cash Equivalents - The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates market. Inventories - Inventories, consisting principally of food and beverages, are stated at average cost or at first-in, first-out cost. Preopening Costs - Certain costs incurred prior to opening new or remodeled motels and remodeled hotels are deferred and charged to operations over the 12 months subsequent to the opening. Similar expenses incurred in connection with the opening and remodeling of theatres and all restaurants are deferred and charged to operations at the time of opening. Depreciation and Amortization - Depreciation and amortization of property and equipment is provided using the straight-line method over the following estimated useful lives: Years Land improvements 10 - 39 Buildings and improvements 10 - 39 Leasehold improvements 3 - 39 Furniture, fixtures and equipment 3 - 15 Recent Accounting Pronouncements - In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement No. 121 in the first quarter of fiscal 1997, and based on current circumstances, does not believe the effect of adoption will be material. During October 1995, the FASB issued SFAS No. 123, "Accounting for Stock- Based Compensation," which will be effective for the Company beginning May 31, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board (APB) Opinion No. 25, which recognized compensation cost based on the intrinsic value of the equity instrument award. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees. Advertising and Marketing Costs - The Company expenses all advertising and marketing costs as incurred. Net Earnings Per Share - Net earnings per share were computed based on the weighted average number of shares of Common Stock, Class B Common Stock and common stock equivalents (stock options) outstanding during the year. Capitalization of Interest - The Company capitalizes interest during construction periods by adding such interest to the cost of property and equipment. Interest of approximately $1,119,000, $867,000 and $726,000 was capitalized in fiscal 1996, 1995 and 1994, respectively. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications - Certain items in the accompanying fiscal 1995 and 1994 financial statements have been reclassified to conform to the fiscal 1996 presentation. 2. Disposition of Restaurant Properties Pursuant to an asset purchase agreement dated April 12, 1995, the Company completed the sale of its 18 existing Applebee's Neighborhood Grill & Bar restaurants (Applebee's), two Applebee's under construction, five Applebee's under development and its development rights for Applebee's to Apple South, Inc. (the Purchaser). On June 5, 1995, the Company entered into a management agreement with the Purchaser, whereby the Purchaser would commence immediately managing, operating and assuming all of the Company's existing operating and development responsibilities related to the Company's Applebee's restaurant operations. The Purchaser was entitled to all profits of the restaurants since June 5, 1995, as reimbursement for its management service. On June 30, 1995, proceeds from the sale of approximately $48.3 million were received in cash. The Company realized a net pretax gain of $25.4 million. Revenues and operating income from the Company's Applebee's operations were not significant in fiscal 1996 and were as follows in fiscal 1995 and 1994: Year ended May 25, May 26, 1995 1994 (In Thousands) Revenues $35,574 $24,438 Operating Income 2,250 983 On February 27, 1995, the Company leased 11 of its Marc's Cafe and Coffee Mill restaurants to a group led by former members of the restaurants' management team. The lease terms, which include certain buyout incentives, differ for each location with the leases expiring on various dates through February 28, 2001. Revenues related to the Company's operation of the 11 restaurants were $10,169,000 and $14,958,000 for fiscal years ended May 25, 1995 and May 26, 1994, respectively. 3. Additional Balance Sheet Information The composition of accounts and notes receivable is as follows: May 30, May 25, 1996 1995 (In Thousands) Trade receivables $4,981 $2,667 Notes receivable 798 758 Other receivables 3,001 2,741 ------ ----- $8,780 $6,166 ====== ====== The composition of property and equipment, which is stated at cost, is as follows: May 30, May 25, 1996 1995 (In Thousands) Land and improvements $ 60,177 $ 54,740 Buildings and improvements 329,458 290,219 Leasehold improvements 5,688 7,562 Furniture, fixtures and equipment 137,305 128,035 Construction in progress 22,336 27,434 -------- -------- Total property and equipment 554,964 507,990 Less accumulated depreciation and amortization 143,401 133,706 -------- -------- $411,563 $374,284 ======== ======== 4. Long-Term Debt Long-term debt is summarized as follows: May 30, May 25, 1996 1995 (In Thousands) Mortgage notes due to 2001 $ 9,890 $ 10,513 Senior notes, unsecured, due 2005 at 10.22% 25,665 27,298 Industrial Development Revenue Bonds due to 2006 7,459 9,814 Unsecured term notes 57,719 60,000 Commercial paper 11,971 12,984 Revolving credit agreements 23,500 5,000 -------- -------- 136,204 125,609 Less current maturities 9,069 9,245 -------- -------- $127,135 $116,364 ======== ======== Substantially all of the mortgage notes, both fixed rate and adjustable, bear interest from 7.16% to 9.25% at May 30, 1996. Adjustable rate Industrial Development Revenue Bonds ($3,579,000 at May 30, 1996) bear interest at 76.5% of prime plus 1% (7.31% at May 30, 1996), or are adjustable based on high quality tax-exempt obligation rates (approximately 3.75% at May 30, 1996). The Company's remaining Industrial Development Revenue Bonds bear interest at 6.3% or 8.8%. The mortgage notes and the Industrial Development Revenue Bonds are secured by the related land, buildings and equipment. The Company has three unsecured term notes outstanding, as follows: May 30, May 25, 1996 1995 (In Thousands) Note due May 31, 2004, with quarterly principal payments of $781,250. The variable interest rate is based on the LIBOR rate with an effective rate of 5.88% at May 30, 1996. $24,219 $25,000 Note due February 1, 2001, with quarterly principal payments of $714,286 due beginning May 1, 1997. The variable interest rate is based on the LIBOR rate with an effective rate of 6.66% at May 30, 1996. 20,000 20,000 Note due November 1, 2000, with quarterly principal payments of $750,000. The variable interest rate is based on the LIBOR rate with an effective rate of 6.21% at May 30, 1996. 13,500 15,000 ------- ------- $57,719 $60,000 ======= ======= The Company issues commercial paper through an agreement with a bank. The agreement requires the Company to maintain unused bank lines of credit at least equal to the principal amount of its outstanding commercial paper. At May 30, 1996, after reduction for outstanding commercial paper borrowings, the Company had $44,529,000 of unused credit lines available under various bank revolving credit agreements. The weighted average interest rate on amounts outstanding under the revolving credit agreements was 6.4% at May 30, 1996. There is an annual commitment fee of .25% of the unused portion of $65,000,000 of these commitments. Interest on outstanding commercial paper borrowings at May 30, 1996, ranged from 5.5% to 5.6%. The Company has the ability to replace commercial paper borrowings with long-term borrowings under its revolving credit agreement, which matures October 31, 1997. Accordingly, the Company has classified its outstanding commercial paper borrowings at May 30, 1996, as long-term debt. Scheduled annual principal payments on long-term debt for the five years subsequent to May 30, 1996, are: Fiscal Year (In Thousands) 1997 $ 9,069 1998 37,669 1999 27,296 2000 13,165 2001 12,017 Interest paid, net of amounts capitalized, in 1996, 1995 and 1994 totaled $8,272,000, $8,610,000, and $7,266,000, respectively. Two swap agreements covering $15,000,000 were terminated during 1995 at a loss of $185,000. The remaining swap agreement covering $13,500,000, which is reduced by $750,000 quarterly, expires October 31, 2000, and requires the Company to pay interest at a defined fixed rate of 5.08% while receiving interest at a defined variable rate of three-month LIBOR (5.47% at May 30, 1996), which effectively converts $13,500,000 of the Company's variable rate unsecured term notes to a fixed rate. The Company recorded the net interest expense (income) related to these swap agreements as incurred, totaling ($96,000), $61,000 and $94,000 in 1996, 1995 and 1994, respectively. The accompanying consolidated balance sheet at May 30, 1996, does not reflect the fair market value of the remaining swap agreement as determined by the lender, which totals approximately $457,000. The carrying amounts of the Company's long-term debt, based on the respective rates and prepayment provisions of the senior notes, approximate their fair value. 5. Shareholders' Equity The Company's Board of Directors declared a three-for-two stock split, effected in the form of a 50% stock dividend, distributed on November 14, 1995, to all holders of Common and Class B Common Stock. All per share, weighted average shares outstanding and stock option data prior to November 14, 1995, have been adjusted to reflect this dividend. Shareholders may convert their shares of Class B Common Stock into shares of Common Stock at any time. Class B Common Stock shareholders are substantially restricted in their ability to transfer their Class_B Common Stock. Holders of Common Stock are entitled to cash dividends per share equal to 110% of all dividends declared and paid on each share of the Class B Common Stock. Holders of Class_B Common Stock are entitled to ten votes per share while holders of Common Stock are entitled to one vote per share on any matters brought before the shareholders of the Company. Liquidation rights are the same for both classes of stock. Shareholders have approved the issuance of up to 1,668,750 shares of Common Stock under various stock option plans. The options generally become exercisable 40% after two years, 60% after three years and 80% after four years. The remaining options are exercisable four and one-half years after the date of the grant. At May 30, 1996, there were 895,063 shares available for grants under the plans. Transactions with respect to the Company's stock option plans for each of the three years in the period ended May 30, 1996, are summarized as follows: Price Range Number of Shares Outstanding at May 27, 1993 $ 4.67 - $10.00 319,748 Granted $13.83 - $18.00 211,275 Exercised $ 4.67 - $10.00 (48,128) Canceled $ 4.67 - $10.00 (42,323) -------- Outstanding at May 26, 1994 $ 4.67 - $18.00 440,572 Granted $17.75 - $19.17 125,550 Exercised $ 4.67 - $10.00 (25,815) Canceled $ 5.11 - $18.00 (66,735) -------- Outstanding at May 25, 1995 $ 4.67 - $19.17 473,572 Granted $17.25 - $25.75 124,825 Exercised $ 4.67 - $18.00 (59,296) Canceled $ 5.11 - $19.50 (32,820) -------- Outstanding at May 30, 1996 $ 4.67 - $25.75 506,281 ======== Shares exercisable at May 30, 1996 144,206 ======== The Company's Board of Directors has approved the repurchase of up to 1,125,000 shares of Common Stock to be held in treasury. The Company intends to reissue these shares upon the exercise of stock options and for savings and profit-sharing contributions. The Company purchased 7,127 and 9,251 shares pursuant to this plan during 1996 and 1994, respectively. There were no purchases in 1995. At May 30, 1996, there were 347,680 shares available for repurchase under this authorization. The Company's loan agreements include, among other covenants, restrictions on retained earnings and maintenance of certain financial ratios. At May 30, 1996, retained earnings of approximately $69,042,000 were unrestricted. 6. Employee Benefit Plans The Company has a qualified profit-sharing savings plan (401(k) plan) covering eligible employees. The 401(k) plan provides for a contribution of a minimum of 1% of defined compensation for all plan participants and matching of 25% of employee contributions up to 6% of defined compensation. In addition, the Company may make additional discretionary contributions. The Company also sponsors unfunded nonqualified defined benefit and deferred compensation plans. Pension and profit-sharing expense for all plans was $1,355,000, $917,000 and $1,138,000 for 1996, 1995 and 1994, respectively. 7. Income Taxes Income tax expense consists of the following: Year ended May 30, 1996 May 25, 1995 May 26, 1994 (In Thousands) Currently payable: Federal $22,347 $ 9,273 $ 9,470 State 5,368 2,829 2,494 Deferred 70 3,958 1,643 ------- ------- ------- $27,785 $16,060 $13,607 ======= ======= ======= Effective May 28, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates for the year in which the differences are expected to reverse. As of May 28, 1993, the Company recorded a tax benefit of $1,782,000, or $.09 per share, which represents the net change in its deferred income tax assets and liabilities at that date. Such amount has been reflected in the 1994 consolidated statement of earnings as the cumulative effect of change in accounting for income taxes. The components of the net deferred tax liability were as follows: May 30, 1996 May 25, 1995 (In Thousands) Deferred tax assets: Accrued employee benefits $ 1,297 $ 787 Other accrued liabilities 263 294 Total deferred assets 1,560 1,081 ------- ------- Deferred tax liability Depreciation and amortization 21,587 21,038 ------- ------- Net deferred tax liability included in balance sheet $20,027 $19,957 ======= ======= A reconciliation of the statutory federal tax rate to the effective tax rate follows: Year ended May 30, 1996 May 25, 1995 May 26, 1994 Expected tax expense: 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 5.1 5.3 5.3 Jobs tax credits - (.3) (.6) Other (.5) - (.4) ----- ----- ----- 39.6% 40.0% 39.3% ===== ===== ===== Income taxes paid in 1996, 1995 and 1994 totaled $28,391,000, $12,830,000 and $9,445,000, respectively. 8. Commitments, License Rights and Contingencies Lease Commitments The Company leases real estate under various noncancellable operating leases with an initial term greater than one year. Percentage rentals are based on the revenues at the specific rented property. Rent expense charged to operations under these leases was as follows: Year ended May 30, 1996 May 25, 1995 May 26, 1994 (In Thousands) Fixed minimum rentals $2,287 $2,358 $2,519 Percentage rentals 356 1,551 1,218 Sublease rental income (182) (182) (165) ------ ------ ------ $2,461 $3,727 $3,572 ====== ====== ====== Payments to affiliated parties for lease obligations were approximately $268,000, $335,000 and $390,000 in 1996, 1995 and 1994, respectively. Aggregate minimum rental commitments at May 30, 1996, are as follows, in thousands: Fiscal Year 1997 $ 1,505 1998 1,348 1999 1,265 2000 1,218 2001 1,245 After 2001 11,464 ------- $18,045 ======= Included in the above commitments is $1,906,000 in minimum rental commitments to affiliated parties. Commitments - The Company has commitments for the completion of construction at various properties and the purchase of various properties totaling approximately $37,000,000 at May 30, 1996. License Rights - The Company owns the license rights in certain areas to operate its restaurants and to sell products using the KFC trademark. In addition, the Company has license rights to operate a hotel using the Hilton trademark. Under the terms of the licenses, the Company is obligated to pay fees based on defined gross sales. The KFC license also requires the Company to pay an additional fee for each new location established. Contingencies - The Company guarantees the debt of joint ventures totaling approximately $12,858,000 at May 30, 1996. The debt has been collateralized by the real estate, buildings and improvements, and all equipment of each joint venture. 9. Joint Venture Transactions At May 30, 1996 and May 25, 1995, the Company held investments of $1,295,000 and $629,000, respectively, in various approximately 50%-owned affiliates (joint ventures) which are accounted for under the equity method. The Company has receivables from the joint ventures of $4,890,000 and $1,861,000 at May 30, 1996 and May 25, 1995, respectively. The Company earns interest on $4,076,000 and $1,082,000 of the receivables at approximately prime to prime plus 1.5% at May 30, 1996 and May 25, 1995, respectively. Included in notes payable at May 30, 1996 and May 25, 1995, is $1,515,000 and $1,211,000, respectively, due to joint ventures in connection with cash advanced to the Company. The Company pays interest on the cash advances based on the 90-day certificate of deposit rates. 10. Business Segment Information Following is a summary of business segment information for 1994 through 1996: <TABLE> <CAPTION> Hotels/ Corporate Motels Theatres Resorts Restaurants Items Total (In Thousands) 1996 <S> <C> <C> <C> <C> <C> <C> Revenues $118,679 $63,696 $53,498 $25,927 $ 487 $262,287 Operating income (loss) 36,266 15,017 3,374 1,992 (4,834) 51,815 Depreciation and amortization 13,815 3,265 5,467 2,191 379 25,117 Assets 247,328 63,365 73,045 29,041 42,536 455,315 Capital expenditures 51,542 20,316 8,010 619 3,202 83,689 1995 Revenues $104,356 $53,968 $45,292 $74,076 $ 298 $277,990 Operating income (loss) 31,992 12,175 1,473 3,318 (2,163) 46,795 Depreciation and amortization 12,883 2,766 4,101 3,385 435 23,570 Assets 211,112 46,928 68,731 53,090 27,221 407,082 Capital expenditures 32,880 10,999 27,207 5,900 97 77,083 1994 Revenues $ 89,043 $50,494 $32,330 $70,404 $ 343 $242,614 Operating income (loss) 26,041 11,483 2,550 1,499 (3,689) 37,884 Depreciation and amortization 11,246 2,519 3,030 3,112 478 20,385 Assets 182,174 47,244 45,787 51,896 34,505 361,606 Capital expenditures 33,377 7,305 23,654 11,039 450 75,825 </TABLE> Corporate items include amounts not allocable to the business segments. Corporate revenues consist principally of rent and the corporate operating loss includes general corporate expenses. Corporate assets primarily include cash and cash equivalents, notes receivable, receivables from joint ventures and land held for development. During 1994, the Company entered into contracts to manage two hotel properties. The Company also has loans outstanding of $3,049,284 at May 30, 1996, to one of these hotels, which bears interest at the prime rate plus 1% and matures December 31, 2008. Interest on this note totaled approximately $297,000 and $292,000 for fiscal 1996 and 1995, respectively. PART III Item 10. Directors and Executive Officers of the Company. The information required by this item with respect to directors is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Election of Directors" in the definitive Proxy Statement for the Company's 1996 Annual Meeting of Shareholders scheduled to be held September 26, 1996 ("Proxy Statement"). The required information with respect to executive officers appears at the end of Part I of this Form 10-K. Item 11. Executive Compensation. The information required by this item is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Executive Compensation" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Stock Ownership of Management and Others" in the Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item, to the extent applicable, is incorporated herein by reference to the information pertaining thereto set forth under the caption entitled "Certain Transactions" in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 1. Financial Statement Schedules. (a) All schedules are omitted because they are inapplicable, not required under the instructions or the financial information is included in the consolidated financial statements or notes thereto. 2. Exhibits and Reports on Form 8-K. (a) The exhibits filed herewith or incorporated by reference herein are set forth on the attached Exhibit Index.* (b) The Company did not file a Form 8-K with the Securities and Exchange Commission during the fourth quarter of fiscal 1996. __________________ * Exhibits to this Form 10-K will be furnished to shareholders upon advance payment of a fee of $0.20 per page, plus mailing expenses. Requests for copies should be addressed to Thomas F. Kissinger, General Counsel and Secretary, The Marcus Corporation, 250 East Wisconsin Avenue, Suite 1700, Milwaukee, Wisconsin 53202.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MARCUS CORPORATION Date: August 28, 1996 By: /s/ Stephen H. Marcus Stephen H. Marcus, Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities as of the date indicated above. By: /s/ Stephen H. Marcus By: /s/ George R. Slater Stephen H. Marcus, George R. Slater, Director Chairman of the Board and President (Chief Executive and Financial Officer) By: /s/ Kenneth A. MacKenzie By: /s/ Lee Sherman Dreyfus Kenneth A. MacKenzie, Lee Sherman Dreyfus, Director Treasurer (Chief Accounting Officer) By: /s/ Bruce J. Olson By: /s/ Daniel F. McKeithan, Jr. Bruce J. Olson, Director Daniel F. McKeithan, Jr., Director By: /s/ John L. Murray By: /s/ Diane Marcus Gershowitz John L. Murray, Director Diane Marcus Gershowitz, Director By: /s/ Alan H. Selig By: /s/ Timothy E. Hoeksema Alan H. Selig, Director Timothy E. Hoeksema, Director
EXHIBIT INDEX 3.1 Articles of Incorporation. [Incorporated by reference to Exhibit 3.1 to the Company's Form S-3 Registration Statement (No. 33-57468).] 3.2 Bylaws, as amended as of September 28, 1995.* 4 Senior Note Purchase Agreement dated May 31, 1990 between the Company and The Northwestern Mutual Life Insurance Company. [Incorporated by reference to Exhibit 4 to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1990.] 4.1 Other than as set forth in Exhibit 4, the Company has numerous instruments which define the rights of holders of long-term debt. These instruments, primarily promissory notes, have arisen from the purchase of operating properties in the ordinary course of business. These instruments are not being filed with this Annual Report on Form 10-K in reliance upon Item 601(b)(4)(iii) of Regulation S-K. Copies of these instruments will be furnished to the Securities and Exchange Commission upon request. 10.1 The Company is the guarantor and/or obligor under various loan agreements in connection with operating properties (primarily Budgetel Inns) which were financed through the issuance of industrial development bonds. These loan agreements and the additional documentation relating to these projects are not being filed with this Annual Report on Form 10-K in reliance upon Item 601(b)(4)(iii) of Regulation S-K. Copies of these documents will be furnished to the Securities and Exchange Commission upon request. 10.2 Comprehensive Image Enhancement Agreement dated October 12, 1988 between the Company and KFC Corporation. [Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended May 25, 1989.] 10.3 Form of individual Kentucky Fried Chicken franchise agreement between the Company and KFC Corporation. [Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended May 25, 1989.] 10.4* The Marcus Corporation 1987 Stock Option Plan. [Incorporated by reference to Exhibit A to the Company's 1987 Proxy Statement.] 10.5* The Marcus Corporation 1995 Equity Incentive Plan, as amended. 10.6* The Marcus Corporation 1994 Nonemployee Director Stock Option Plan. [Incorporated by reference to Exhibit A to the Company's 1994 Proxy Statement.] 21 Subsidiaries of the Company as of May 30, 1996. 23.1 Consent of Ernst & Young LLP. 27 Financial Data Schedule 99 Proxy Statement for 1996 Annual Meeting of Shareholders scheduled to be held on September 26, 1996. (To be filed with the Securities and Exchange Commission under Regulation 14A within 120 days of May 30, 1996 and, upon such filing, to be hereby incorporated by reference herein to the extent indicated). __________ * This exhibit is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of Form 10-K.