1. General

Accounting Policies – Refer to the Company’s audited consolidated financial statements (including footnotes) for the fiscal year ended May 30, 2013, 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 and 39 weeks ended February 27, 2014 and February 28, 2013 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 February 27, 2014, 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 30, 2013.

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 $8,160,000 and $24,699,000 for the 13 and 39 weeks ended February 27, 2014, respectively, and $8,439,000 and $25,231,000 for the 13 and 39 weeks ended February 28, 2013, respectively.

Long-Lived Assets – The Company periodically considers whether indicators of impairment of long-lived assets held for use are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying amounts. The Company recognizes any impairment losses based on the excess of the carrying amount of the assets over their fair value. For the purpose of determining fair value, defined as the amount at which an asset or group of assets could be bought or sold in a current transaction between willing parties, the Company utilizes currently available market valuations of similar assets in its respective industries, often expressed as a given multiple of operating cash flow. The Company evaluated the ongoing value of its property and equipment and other long-lived assets as of February 27, 2014 and February 28, 2013 and determined that there was no significant impact on the Company’s results of operations, other than impairment losses recorded in fiscal 2013 related to a theatre that closed during the second quarter of fiscal 2013 and a budget-oriented theatre that was offered for sale during the third quarter of fiscal 2013. The company determined that the fair value of these theatres, measured using Level 3 pricing inputs, was less than their carrying values, and recorded pre-tax impairment losses of $417,000 and $618,000 during the second and third quarters of fiscal 2013, 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 30, 2013	$	18	$	(10)	$	(3,836)	$	(3,828)
Other comprehensive loss before reclassifications		(50)		(1)		-		(51)
Amounts reclassified from accumulated other comprehensive loss (1)		87		-		-		87
Net other comprehensive income (loss)		37		(1)		-		36
Balance at February 27, 2014	$	55	$	(11)	$	(3,836)	$	(3,792)

	Swap Agreements		Available for Sale Investments		Pension Obligation		Accumulated Other Comprehensive Loss

	(in thousands)
Balance at May 31, 2012	$	(58)	$	(8)	$	(4,073)	$	(4,139)
Other comprehensive income (loss) before reclassifications		-		-		-		-
Amounts reclassified from accumulated other comprehensive loss (1)		51		-		-		51
Net other comprehensive income		51		-		-		51
Balance at February 28, 2013	$	(7)	$	(8)	$	(4,073)	$	(4,088)

⁽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 February 27, 2014		13 Weeks Ended February 28, 2013		39 Weeks Ended February 27, 2014		39 Weeks Ended February 28, 2013
	(in thousands, except per share data)
Numerator:
Net earnings (loss) attributable to The Marcus Corporation	$	4,071	$	(1,372)	$	20,747	$	14,031
Denominator:
Denominator for basic EPS		26,986		27,254		27,039		28,105
Effect of dilutive employee stock options		50		20		44		19
Denominator for diluted EPS		27,036		27,274		27,083		28,124
Net earnings (loss) per share – basic:
Common Stock	$	0.16	$	(0.05)	$	0.79	$	0.56
Class B Common Stock	$	0.14	$	(0.05)	$	0.72	$	0.48
Net earnings (loss) per share – diluted:
Common Stock	$	0.15	$	(0.05)	$	0.77	$	0.50
Class B Common Stock	$	0.14	$	(0.05)	$	0.72	$	0.48

Equity – Activity impacting total shareholders’ equity attributable to The Marcus Corporation and noncontrolling interests for the 39 weeks ended February 27, 2014 and February 28, 2013 was as follows:

	Total Shareholders’ Equity Attributable to The Marcus Corporation		Noncontrolling Interests

	(in thousands)
Balance at May 30, 2013	$	306,702	$	9,994
Net earnings attributable to The Marcus Corporation		20,747		–
Net loss attributable to noncontrolling interests		–		(4,146)
Distributions to noncontrolling interests		–		(1,060)
Cash dividends		(6,690)		–
Exercise of stock options		1,323		–
Treasury stock transactions, except for stock options		(3,497)		–
Share-based compensation		1,380		–
Other		86		–
Other comprehensive income, net of tax		36		–
Balance at February 27, 2014	$	320,087	$	4,788

	Total Shareholders’ Equity Attributable to The Marcus Corporation		Noncontrolling Interests
	(in thousands)
Balance at June 1, 2012	$	343,789	$	–
Net earnings attributable to The Marcus Corporation		14,031		–
Net earnings attributable to noncontrolling interests		–		5,713
Cash dividends		(35,615)		–
Exercise of stock options		1,476		–
Treasury stock transactions, except for stock options		(19,889)		–
Share-based compensation		1,333		–
Other		–		170
Equity contribution		–		4,000
Other comprehensive income, net of tax		51		–
Balance at February 28, 2013	$	305,176	$	9,883

Fair Value Measurements – Certain financial assets and liabilities are recorded at fair value in the consolidated financial statements. 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 February 27, 2014 and May 30, 2013, the Company’s $70,000 and $71,000, respectively, 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 February 27, 2014 and May 30, 2013, respectively, the $90,000 and $30,000 asset 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 February 27, 2014 and May 30, 2013, none of the Company’s fair value measurements were 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 February 27, 2014		13 Weeks Ended February 28, 2013		39 Weeks Ended February 27, 2014		39 Weeks Ended February 28, 2013
	(in thousands)
Service cost	$	176	$	178	$	527	$	534
Interest cost		293		274		880		824
Net amortization of prior service cost and actuarial loss		67		72		201		215
Net periodic pension cost	$	536	$	524	$	1,608	$	1,573

Reclassifications – Certain reclassifications have been made to the prior year’s consolidated statement of cash flows within certain captions to conform with the presentation of extinguishment of debt as presented on the prior year consolidated statement of earnings. There were no changes to total cash flows provided by operating activities.