5. Shareholders’ Equity and Stock-Based Compensation

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.

Through May 31, 2012, the Company’s Board of Directors has approved the repurchase of up to 6,687,000 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 plan contributions. The Company purchased 1,077,314, 388,705, and 70,081 shares pursuant to these authorizations during fiscal 2012, 2011, and 2010, respectively. At May 31, 2012, there were 763,077 shares available for repurchase under these authorizations. On July 18, 2012, the Company’s Board of Directors approved the repurchase of up to an additional 2,000,000 shares of Common Stock.

The Company’s Board of Directors has authorized the issuance of up to 750,000 shares of Common Stock for The Marcus Corporation Dividend Reinvestment and Associate Stock Purchase Plan. At May 31, 2012, there were 514,072 shares available under this authorization.

Shareholders have approved the issuance of up to 4,937,500 shares of Common Stock under various equity incentive plans. Options granted under the plans to employees generally become exercisable 40% after two years, 60% after three years, 80% after four years and 100% after five years of the date of grant. The options generally expire ten years from the date of grant as long as the optionee is still employed with the Company.

Awarded shares of non-vested stock cumulatively vest either 25% after three years of the grant date, 50% after five years of the grant date, 75% after ten years of the grant date and 100% upon retirement, or 50% after three years of the grant date and 100% after five years of the grant date, depending on the date of grant. The non-vested stock may not be sold, transferred, pledged or assigned, except as provided by the vesting schedule included in the Company’s equity incentive plan. During the period of restriction, the holder of the non-vested stock has voting rights and is entitled to receive all dividends and other distributions paid with respect to the stock. Non-vested stock awards and shares issued upon option exercises are issued from previously acquired treasury shares. At May 31, 2012, there were 1,779,827 shares available for grants of additional stock options, non-vested stock and other types of equity awards under the current plan.

Stock-based compensation, including stock options and non-vested stock awards, is expensed over the vesting period of the awards based on the grant date fair value.

The Company estimated the fair value of stock options using the Black-Scholes option pricing model with the following assumptions used for awards granted during fiscal 2012, 2011, and 2010:

	Year Ended May 31, 2012	Year Ended May 26, 2011	Year Ended May 27, 2010

Risk-free interest rate	0.96 – 2.69%	1.4 – 2.8%	2.2 – 3.5%
Dividend yield	2.9%	2.8%	2.7%
Volatility	48–63%	49–61 %	49-59%
Expected life	4–9 years	4–9 years	4-9 years

Total pre-tax stock-based compensation expense was $2,010,000, $1,795,000, and $1,607,000 in fiscal 2012, 2011, 2010, respectively. The recognized tax benefit on stock-based compensation was $337,000, $399,000, and $287,000 in fiscal 2012, 2011, and 2010, respectively.

A summary of the Company’s stock option activity and related information follows:

	May 31, 2012					May 26, 2011					May 27, 2010
				Weighted-					Weighted-					Weighted-
				Average					Average					Average
				Exercise					Exercise					Exercise
	Options			Price		Options			Price		Options			Price
	(options in thousands)
Outstanding at beginning of year		1,873		$	14.31		1,729		$	14.33		1,500		$	14.37
Granted		328			10.00		314			11.87		298			13.31
Exercised		(121	)		10.61		(120	)		8.71		(38	)		8.92
Forfeited		(74	)		11.98		(50	)		13.31		(30	)		13.35
Outstanding at end of year		2,006		$	13.91		1,873		$	14.31		1,730		$	14.33
Exercisable at end of year		1,122		$	15.13		999		$	14.46		907		$	13.08
Weighted-average fair value of options granted during year				$	3.96				$	4.85				$	5.56

Exercise prices for options outstanding as of May 31, 2012, ranged from $8.52 to $23.37. The weighted-average remaining contractual life of those options is 5.8 years. The weighted-average remaining contractual life of options currently exercisable is 4.2 years. There were 1,979,000 options outstanding, vested and expected to vest as of May 31, 2012 with a weighted-average exercise price of $13.95 and an intrinsic value of $1,957,000. Additional information related to these options segregated by exercise price range is as follows:

	Exercise Price Range
	$8.52 to $12.71		$12.72 to $17.73		$17.74 to $23.37
	(options in thousands)

Options outstanding		767		900		339
Weighted-average exercise price of options outstanding	$	10.79	$	14.22	$	20.14
Weighted-average remaining contractual life of options outstanding		6.8		5.4		4.7
Options exercisable		205		612		305
Weighted-average exercise price of options exercisable	$	10.54	$	14.19	$	20.11

The intrinsic value of options outstanding at May 31, 2012 was $2,014,000 and the intrinsic value of options exercisable at May 31, 2012, was $639,000. The intrinsic value of options exercised was $174,000, $311,000, and $93,000 during fiscal 2012, 2011, and 2010, respectively. As of May 31, 2012, total remaining unearned compensation cost related to stock options was $2,820,000, which will be amortized to expense over the remaining service period of five years.

A summary of the Company’s non-vested stock activity and related information follows:

	May 31, 2012					May 26, 2011					May 27, 2010
	Shares			Weighted- Average Fair Value		Shares			Weighted- Average Fair Value		Shares			Weighted- Average Fair Value
	(shares in thousands)
Outstanding at beginning of year		94		$	14.55		73		$	16.00		75		$	19.07
Granted		24			10.98		23			10.42		22			10.36
Vested		(32	)		17.57		(2	)		20.26		(24	)		20.37
Forfeited		-			-		-			-		-			-
Outstanding at end of year		86		$	12.37		94		$	14.55		73		$	16.00

The Company expenses awards of non-vested stock based on the fair value of the Company’s common stock at the date of grant. As of May 31, 2012, total remaining unearned compensation related to non-vested stock was $536,000, which will be amortized over the weighted-average remaining service period of 5.5 years.