General

3 Months Ended

Aug. 27, 2015

1. General

Accounting Policies – Refer to the Company’s audited consolidated financial statements (including footnotes) for the fiscal year ended May 28, 2015, contained in the Company’s Annual Report on Form 10-K for such year, for a description of the Company’s accounting policies.

Basis of Presentation – The unaudited consolidated financial statements for the 13 weeks ended August 27, 2015 and August 28, 2014 have been prepared by the Company. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary to present fairly the unaudited interim financial information at August 27, 2015, and for all periods presented, have been made. The results of operations during the interim periods are not necessarily indicative of the results of operations for the entire year or other interim periods. However, the unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended May 28, 2015.

Depreciation and Amortization – Depreciation and amortization of property and equipment are provided using the straight-line method over the shorter of the estimated useful lives of the assets or any related lease terms. Depreciation expense totaled $10,328,000 and $8,960,000 for the 13 weeks ended August 27, 2015 and August 28, 2014, respectively.

Accumulated Other Comprehensive Loss – Accumulated other comprehensive loss presented in the accompanying consolidated balance sheets consists of the following, all presented net of tax:

	Swap Agreements		Available for Sale Investments		Pension Obligation		Accumulated Other Comprehensive Loss
	(in thousands)
Balance at May 28, 2015	$	(17)	$	(11)	$	(5,284)	$	(5,312)
Other comprehensive loss before reclassifications		(66)		-		-		(66)
Amounts reclassified from accumulated other comprehensive loss ⁽¹⁾		29		-		-		29
Net other comprehensive loss		(37)		-		-		(37)
Balance at August 27, 2015	$	(54)	$	(11)	$	(5,284)	$	(5,349)

	Swap Agreements		Available for Sale Investments		Pension Obligation		Accumulated Other Comprehensive Loss
	(in thousands)
Balance at May 29, 2014	$	34	$	(11)	$	(4,581)	$	(4,558)
Other comprehensive income before reclassifications		40		-		-		40
Amounts reclassified from accumulated other comprehensive loss ⁽¹⁾		29		-		-		29
Net other comprehensive income		69		-		-		69
Balance at August 28, 2014	$	103	$	(11)	$	(4,581)	$	(4,489)

⁽¹⁾ Amounts are included in interest expense in the consolidated statements of earnings.

Earnings Per Share – Net earnings per share (EPS) of Common Stock and Class B Common Stock is computed using the two class method. Basic net earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Diluted net earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding, adjusted for the effect of dilutive stock options using the treasury method. Convertible Class B Common Stock is reflected on an if-converted basis. The computation of the diluted net earnings per share of Common Stock assumes the conversion of Class B Common Stock, while the diluted net earnings per share of Class B Common Stock does not assume the conversion of those shares.

Holders of Common Stock are entitled to cash dividends per share equal to 110% of all dividends declared and paid on each share of Class B Common Stock. As such, the undistributed earnings for each period are allocated based on the proportionate share of entitled cash dividends. The computation of diluted net earnings per share of Common Stock assumes the conversion of Class B Common Stock and, as such, the undistributed earnings are equal to net earnings for that computation.

The following table illustrates the computation of Common Stock and Class B Common Stock basic and diluted net earnings per share for net earnings and provides a reconciliation of the number of weighted-average basic and diluted shares outstanding:

	13 Weeks Ended August 27, 2015		13 Weeks Ended August 28, 2014
	(in thousands, except per share data)
Numerator:
Net earnings attributable to The Marcus Corporation	$	14,651	$	12,432
Denominator:
Denominator for basic EPS		27,573		27,347
Effect of dilutive employee stock options		309		266
Denominator for diluted EPS		27,882		27,613
Net earnings per share – basic:
Common Stock	$	0.55	$	0.47
Class B Common Stock	$	0.50	$	0.43
Net earnings per share – diluted:
Common Stock	$	0.53	$	0.45
Class B Common Stock	$	0.49	$	0.42

Equity – Activity impacting total shareholders’ equity attributable to The Marcus Corporation and noncontrolling interests for the 13 weeks ended August 27, 2015 and August 28, 2014 was as follows:

	Total Shareholders’ Equity Attributable to The Marcus Corporation		Noncontrolling Interests
	(in thousands)
Balance at May 28, 2015	$	343,779	$	2,456
Net earnings attributable to The Marcus Corporation		14,651		–
Net loss attributable to noncontrolling interests		–		(198)
Distributions to noncontrolling interests		–		(379)
Cash dividends		(2,814)		–
Exercise of stock options		266		–
Treasury stock transactions, except for stock options		45		–
Share-based compensation		364		–
Other		44		–
Other comprehensive loss, net of tax		(37)		–
Balance at August 27, 2015	$	356,298	$	1,879

	Total Shareholders’ Equity Attributable to The Marcus Corporation		Noncontrolling Interests
	(in thousands)
Balance at May 29, 2014	$	326,211	$	3,768
Net earnings attributable to The Marcus Corporation		12,432		–
Net loss attributable to noncontrolling interests		–		(156)
Distributions to noncontrolling interests		–		(719)
Cash dividends		(2,525)		–
Exercise of stock options		1,003		–
Treasury stock transactions, except for stock options		25		–
Share-based compensation		319		–
Other		32		–
Other comprehensive income, net of tax		69		–
Balance at August 28, 2014	$	337,566	$	2,893

Fair Value Measurements – Certain financial assets and liabilities are recorded at fair value in the consolidated financial statements. Some are measured on a recurring basis while others are measured on a non-recurring basis. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. A fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.

The Company’s assets and liabilities measured at fair value are classified in one of the following categories:

Level 1 – Assets or liabilities for which fair value is based on quoted prices in active markets for identical instruments as of the reporting date. At August 27, 2015 and May 28, 2015, the Company’s $70,000 of available for sale securities were valued using Level 1 pricing inputs and were included in other current assets.

Level 2 – Assets or liabilities for which fair value is based on pricing inputs that were either directly or indirectly observable as of the reporting date. At August 27, 2015 and May 28, 2015, respectively, the $90,000 and $28,000 liability related to the Company’s interest rate swap contract was valued using Level 2 pricing inputs.

Level 3 – Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which result in the use of management estimates. At August 27, 2015, none of the Company’s fair value measurements were valued using Level 3 pricing inputs. At May 28, 2015, $7,737,000 related to impaired assets was valued using Level 3 pricing inputs.

Defined Benefit Plan – The components of the net periodic pension cost of the Company’s unfunded nonqualified, defined-benefit plan are as follows:

	13 Weeks Ended August 27, 2015		13 Weeks Ended August 28, 2014
	(in thousands)
Service cost	$	197	$	175
Interest cost		328		311
Net amortization of prior service cost and actuarial loss		90		81
Net periodic pension cost	$	615	$	567

New Accounting Pronouncements – In April 2015, Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30), which requires an entity to present debt issuance costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset, and requires the amortization of the costs be reported as interest expense. The new standard is effective for the Company in fiscal 2017 and the Company does not expect the adoption of this statement to have an impact on its overall financial position.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The guidance will replace most existing revenue recognition guidance in Generally Accepted Accounting Principles when it becomes effective. The new standard is effective for the Company in fiscal 2018 and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.