NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2017
(dollars in thousands, except share
and per share data)
Note 1. Summary of Significant Accounting
Policies
Description of Business
The accompanying unaudited consolidated
financial statements of Biglari Holdings Inc. (“Biglari Holdings” or the “Company”) have been prepared
in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and notes required by GAAP for complete financial statements. In our opinion, all adjustments considered
necessary to present fairly the results of the interim periods have been included and consist only of normal recurring adjustments.
The results for the interim periods shown are not necessarily indicative of results for the entire fiscal year. The financial statements
contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2016.
Biglari Holdings is a holding company
owning subsidiaries engaged in a number of diverse business activities, including media, property and casualty insurance, and restaurants.
The Company’s largest operating subsidiaries are involved in the franchising and operating of restaurants. Biglari Holdings
is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of Biglari Holdings and its major operating subsidiaries.
The Company’s long-term objective is to maximize per-share intrinsic value. All major operating, investment, and capital
allocation decisions are made for the Company and its subsidiaries by Mr. Biglari. As of March 31, 2017, Mr. Biglari’s beneficial
ownership of the Company’s outstanding common stock was approximately 51.3%.
Principles of Consolidation
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries including Steak n Shake Inc. (“Steak n Shake”),
Western Sizzlin Corporation (“Western”), Maxim Inc. (“Maxim”) and First Guard Insurance Company and its
agency, 1st Guard Corporation (collectively “First Guard”). Intercompany accounts and transactions have been
eliminated in consolidation.
Note 2. New Accounting Standards
In January 2017, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04,
Intangibles - Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
ASU 2017-04 provides for the elimination of Step 2 from
the goodwill impairment test. If impairment charges are recognized, the amount recorded will be the amount by which the carrying
amount exceeds the reporting unit’s fair value with certain limitations. The ASU is effective for public companies for annual
periods, and interim periods within those annual periods, beginning after December 15, 2020. The Company does not currently anticipate
ASU 2017-04 will have a material impact on the consolidated financial statements.
In October 2016, the FASB issued
ASU 2016-17,
Interests Held through Related Parties That Are under Common Control.
ASU 2016-17 amends the
consolidation guidance in ASU 2015-02 regarding the treatment of indirect interests held through related parties that are
under common control. The amendments in this update are effective for annual reporting periods beginning after
December 15, 2016 and interim periods within those years. The Company adopted the provisions of ASU 2016-17 on January
1, 2017. The adoption of this update has had no material effect on the Company’s financial statements.
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
The objective of
the update is to reduce diversity in how certain transactions are classified in the statement of cash flows. The amendments in
this update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company is currently evaluating the impact the adoption of ASU 2016-15 will have on its consolidated
financial statements and related disclosures.
Note 2. New Accounting Standards
(continued)
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
. Topic 326
amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For
available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however Topic 326 will
require that credit losses be presented as an allowance rather than as a write-down. The amendments in this update are effective
for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and
related disclosures.
In February 2016, the FASB issued ASU
2016-02
Leases
. ASU 2016-02 requires a lessee to recognize lease assets and lease liabilities on the balance sheet, along
with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for annual and interim periods beginning after
December 15, 2018, with early adoption permitted. We are currently evaluating the effect this amended guidance will have on our
results of operations. We anticipate the ASU will have a material impact on our balance sheet, but the ASU is non-cash in nature
and will not affect our cash position.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This update provides a comprehensive new revenue recognition model that
requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the
consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In July 2015, the FASB voted
to defer the effective date of this ASU by one year, which would make the guidance effective for our first quarter fiscal year
2018 financial statements using either of two acceptable adoption methods: (i) retrospective adoption to each prior reporting period
presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect of initially applying
the guidance recognized at the date of initial application and providing certain additional disclosures. We currently expect to
adopt ASU 2014-09 as of January 1, 2018 under the modified retrospective method where the cumulative effect is recognized at the
date of initial application. Our evaluation of ASU 2014-09 is ongoing and not complete. The FASB has issued, and may issue in the
future, interpretative guidance that may cause our evaluation to change. While we anticipate some changes to revenue recognition
for certain transactions, we do not currently believe ASU 2014-09 will have a material effect on our consolidated financial statements.
The Company consolidated goodwill
and other intangible assets into a single line item on the balance sheet at March 31, 2017 and changed the December 31, 2016
presentation to conform.
Note 3. Earnings Per Share
Earnings per share of common stock is
based on the weighted average number of shares outstanding during the year. The shares of Company stock attributable to our limited
partner interest in The Lion Fund, L.P. and The Lion Fund II, L.P. (collectively, the “investment partnerships”) —
based on our proportional ownership during this period — are considered treasury stock on the consolidated balance sheet
and thereby deemed not to be included in the calculation of weighted average common shares outstanding. However, these shares
are legally outstanding.
The following table presents a reconciliation
of basic and diluted weighted average common shares.
|
|
|
First Quarter
|
|
|
|
2017
|
|
|
|
2016
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,234,478
|
|
|
|
1,241,733
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
1,234,478
|
|
|
|
1,241,733
|
|
Dilutive effect of stock awards
|
|
|
—
|
|
|
|
1,205
|
|
Weighted average common and incremental shares
|
|
|
1,234,478
|
|
|
|
1,242,938
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive stock awards excluded from the calculation of eanings per share
|
|
|
1,497
|
|
|
|
—
|
|
Note 3. Earnings Per Share
(continued)
The Company’s common stock is
$0.50 stated value. The following table presents shares authorized, issued and outstanding.
|
|
March 31,
2017
|
|
December 31, 2016
|
Common stock authorized
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
2,142,202
|
|
|
|
2,142,202
|
|
Treasury stock held by the Company
|
|
|
(74,589
|
)
|
|
|
(75,009
|
)
|
Outstanding shares
|
|
|
2,067,613
|
|
|
|
2,067,193
|
|
Proportional ownership of the Company's
|
|
|
|
|
|
|
|
|
common stock in investment partnerships
|
|
|
(838,012
|
)
|
|
|
(834,889
|
)
|
Net outstanding shares for financial reporting purposes
|
|
|
1,229,601
|
|
|
|
1,232,304
|
|
Note 4. Investments
Investments consisted of the following.
|
|
March 31,
2017
|
|
December 31, 2016
|
Cost
|
|
$
|
20,722
|
|
|
$
|
22,508
|
|
Gross unrealized gains
|
|
|
5
|
|
|
|
24
|
|
Gross unrealized losses
|
|
|
(25
|
)
|
|
|
(235
|
)
|
Fair value
|
|
$
|
20,702
|
|
|
$
|
22,297
|
|
Investment gains/losses are recognized
when investments are sold (as determined on a specific identification basis) or as otherwise required by GAAP. The timing of realized
gains and losses from sales can have a material effect on periodic earnings. However, such realized gains or losses usually have
little, if any, impact on total shareholders’ equity because the investments are carried at fair value with any unrealized
gains/losses included as a component of accumulated other comprehensive income in shareholders’ equity. We believe that
realized investment gains/losses are often meaningless in terms of understanding reported results. Short-term investment gains/losses
have caused and may continue to cause volatility in our results.
Investments in equity securities and
a related put option of $4,463 are included in other assets and recorded at fair value.
Note 5. Investment Partnerships
The Company reports on the limited partnership
interests in investment partnerships under the equity method of accounting. We record our proportional share of equity in
the investment partnerships but exclude Company common stock held by said partnerships. The Company’s pro-rata share
of its common stock held by the investment partnerships is recorded as treasury stock even though they are legally outstanding. The
Company records gains/losses from investment partnerships (inclusive of the investment partnerships’ unrealized gains and
losses on their securities) in the consolidated statements of earnings based on our carrying value of these partnerships. The
fair value is calculated net of the general partner’s accrued incentive fees. Gains and losses on Company common stock included
in the earnings of these partnerships are eliminated because they are recorded as treasury stock.
Note 5. Investment Partnerships
(continued)
The fair value and adjustment for Company
common stock held by the investment partnerships to determine carrying value of our partnership interest is presented below.
|
|
Fair Value
|
|
Company Common Stock
|
|
Carrying Value
|
Partnership interest at December 31, 2016
|
|
$
|
972,707
|
|
|
$
|
395,070
|
|
|
$
|
577,637
|
|
Investment partnership gains (losses)
|
|
|
(59,517
|
)
|
|
|
(34,549
|
)
|
|
|
(24,968
|
)
|
Contributions (net of distributions) to investment partnerships
|
|
|
(5,015
|
)
|
|
|
|
|
|
|
(5,015
|
)
|
Increase in proportionate share of Company stock held
|
|
|
|
|
|
|
1,484
|
|
|
|
(1,484
|
)
|
Partnership interest at March 31, 2017
|
|
$
|
908,175
|
|
|
$
|
362,005
|
|
|
$
|
546,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Company
Common Stock
|
|
|
|
Carrying Value
|
|
Partnership interest at December 31, 2015
|
|
$
|
734,668
|
|
|
$
|
262,979
|
|
|
$
|
471,689
|
|
Investment partnership gains
|
|
|
115,894
|
|
|
|
36,921
|
|
|
|
78,973
|
|
Contributions (net of distributions) to investment partnerships
|
|
|
6,750
|
|
|
|
|
|
|
|
6,750
|
|
Increase in proportionate share of Company stock held
|
|
|
|
|
|
|
10,930
|
|
|
|
(10,930
|
)
|
Partnership interest at March 31, 2016
|
|
$
|
857,312
|
|
|
$
|
310,830
|
|
|
$
|
546,482
|
|
The carrying value of the investment partnerships net of
deferred taxes is presented below.
|
|
March 31,
2017
|
|
December 31, 2016
|
Carrying value of investment partnerships
|
|
$
|
546,170
|
|
|
$
|
577,637
|
|
Deferred tax liability related to investment partnerships
|
|
|
(144,676
|
)
|
|
|
(155,553
|
)
|
Carrying value of investment partnerships net of deferred taxes
|
|
$
|
401,494
|
|
|
$
|
422,084
|
|
The Company’s proportionate share
of Company stock held by investment partnerships at cost is $343,530 and $341,930 at March 31, 2017 and December 31, 2016, respectively,
and is recorded as treasury stock.
The carrying value of the partnership
interest approximates fair value adjusted by the value of held Company stock. Fair value is according to our proportional ownership
interest of the fair value of investments held by the investment partnerships. The fair value measurement is classified as level
3 within the fair value hierarchy.
Gains from investment partnerships recorded in the Company’s
consolidated statements of earnings are presented below.
|
|
|
First Quarter
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Investment partnership gains (losses)
|
|
$
|
(24,968
|
)
|
|
$
|
78,973
|
|
Tax expense (benefit)
|
|
|
(9,761
|
)
|
|
|
28,585
|
|
Contribution to net earnings (loss)
|
|
$
|
(15,207
|
)
|
|
$
|
50,388
|
|
On December 31 of each year, the general
partner of the investment partnerships, Biglari Capital Corp. (“Biglari Capital”), will earn an incentive reallocation
fee for the Company’s investments equal to 25% of the net profits above an annual hurdle rate of 6% over the previous high-water
mark. Our policy is to accrue an estimated incentive fee throughout the year. The Company did not accrue an incentive fee during
the first quarter of 2017. During the first quarter of 2016, the Company accrued incentive fees for Biglari Capital of $2,921.
Our investments in these partnerships are committed on a rolling 5-year basis. Biglari Capital is an entity solely owned by Mr.
Biglari.
Note 5. Investment Partnerships
(continued)
Summarized financial information for
The Lion Fund, L.P. and The Lion Fund II, L.P. is presented below.
|
|
|
Equity in Investment Partnerships
|
|
|
|
|
Lion Fund
|
|
|
|
Lion Fund II
|
|
Total assets as of March 31, 2017
|
|
$
|
203,202
|
|
|
$
|
1,041,405
|
|
Total liabilities as of March 31, 2017
|
|
$
|
202
|
|
|
$
|
199,443
|
|
Revenue for the first quarter ending March 31, 2017
|
|
$
|
(15,696
|
)
|
|
$
|
(52,652
|
)
|
Earnings (loss) for the first quarter ending March 31, 2017
|
|
$
|
(15,716
|
)
|
|
$
|
(53,514
|
)
|
Biglari Holdings’ Ownership Interest
|
|
|
63.6
|
%
|
|
|
92.5
|
%
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2016
|
|
$
|
221,676
|
|
|
$
|
1,109,465
|
|
Total liabilities as of December 31, 2016
|
|
$
|
2,694
|
|
|
$
|
201,460
|
|
Revenue for the first quarter ending March 31, 2016
|
|
$
|
(1,738
|
)
|
|
$
|
130,525
|
|
Earnings (loss) for the first quarter ending March 31, 2016
|
|
$
|
(1,771
|
)
|
|
$
|
129,285
|
|
Biglari Holdings’ Ownership Interest
|
|
|
63.4
|
%
|
|
|
93.5
|
%
|
Revenue in the above summarized financial
information of the investment partnerships includes investment income and unrealized gains and losses on investments. The investments
held by the investment partnerships are largely concentrated in the common stock of one investee, Cracker Barrel Old Country Store,
Inc.
Note 6. Property and Equipment
Property and equipment is composed of
the following.
|
|
March 31,
2017
|
|
December 31, 2016
|
Land
|
|
$
|
160,219
|
|
|
$
|
160,328
|
|
Buildings
|
|
|
156,168
|
|
|
|
156,723
|
|
Land and leasehold improvements
|
|
|
164,287
|
|
|
|
163,817
|
|
Equipment
|
|
|
201,452
|
|
|
|
200,214
|
|
Construction in progress
|
|
|
1,695
|
|
|
|
1,539
|
|
|
|
|
683,821
|
|
|
|
682,621
|
|
Less accumulated depreciation and amortization
|
|
|
(374,244
|
)
|
|
|
(370,357
|
)
|
Property and equipment, net
|
|
$
|
309,577
|
|
|
$
|
312,264
|
|
Note 7. Goodwill and Other
Intangible Assets
Goodwill
Goodwill consists of the excess of the
purchase price over the fair value of the net assets acquired in connection with business acquisitions.
A reconciliation of the change in the
carrying value of goodwill is as follows.
|
|
Restaurants
|
|
Other
|
|
Total
|
Goodwill at December 31, 2016
|
|
$
|
28,090
|
|
|
$
|
11,913
|
|
|
$
|
40,003
|
|
Change in foreign exchange rates during first quarter 2017
|
|
|
9
|
|
|
|
—
|
|
|
|
9
|
|
Goodwill at March 31, 2017
|
|
$
|
28,099
|
|
|
$
|
11,913
|
|
|
$
|
40,012
|
|
We are required to assess goodwill and
any indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have
occurred. When evaluating goodwill for impairment, we may first perform a qualitative assessment to determine whether it is more
likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is
not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we test for potential impairment
using a two-step approach. The first is the estimation of fair value of each reporting unit. If step one indicates that impairment
potentially exists, the second step is performed to measure the amount of impairment, if any. Goodwill impairment occurs when the
estimated fair value of goodwill is less than its carrying value.
Note 7. Goodwill and Other
Intangible Assets
(continued)
The valuation methodology and underlying
financial information included in our determination of fair value require significant management judgments. We use both market
and income approaches to derive fair value. The judgments in these two approaches include, but are not limited to, comparable market
multiples, long-term projections of future financial performance, and the selection of appropriate discount rates used to determine
the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly
different results. No impairment charges for goodwill were recorded in the first three months of 2017 or 2016.
Other Intangible Assets
Other intangibles assets are
composed of the following.
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Total
|
|
Gross carrying amount
|
|
Accumulated amortization
|
|
Total
|
Franchise agreement
|
|
$
|
5,310
|
|
|
$
|
(3,717
|
)
|
|
$
|
1,593
|
|
|
$
|
5,310
|
|
|
$
|
(3,585
|
)
|
|
$
|
1,725
|
|
Other
|
|
|
810
|
|
|
|
(717
|
)
|
|
|
93
|
|
|
|
810
|
|
|
|
(707
|
)
|
|
|
103
|
|
Total
|
|
|
6,120
|
|
|
|
(4,434
|
)
|
|
|
1,686
|
|
|
|
6,120
|
|
|
|
(4,292
|
)
|
|
|
1,828
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
15,876
|
|
|
|
—
|
|
|
|
15,876
|
|
|
|
15,876
|
|
|
|
—
|
|
|
|
15,876
|
|
Other assets with indefinite lives
|
|
|
8,466
|
|
|
|
—
|
|
|
|
8,466
|
|
|
|
8,347
|
|
|
|
—
|
|
|
|
8,347
|
|
Total intangible assets
|
|
$
|
30,462
|
|
|
$
|
(4,434
|
)
|
|
$
|
26,028
|
|
|
$
|
30,343
|
|
|
$
|
(4,292
|
)
|
|
$
|
26,051
|
|
Intangible assets subject to amortization
consist of franchise agreements connected with the purchase of Western as well as rights to favorable leases related to prior acquisitions.
These intangible assets are being amortized over their estimated weighted average of useful lives ranging from eight to twelve
years.
Amortization expense for the first quarters
of 2017 and 2016 was $142 and $141, respectively. The Company’s intangible assets with definite lives will fully amortize
in 2020. Total annual amortization expense for each of 2018 and 2019 will approximate $500.
Intangible assets with indefinite lives
consist of trade names, franchise rights as well as lease rights.
Note 8. Restaurant Operations Revenues
Restaurant operations revenues were
as follows.
|
|
|
First Quarter
|
|
|
|
|
2017
|
|
|
|
2016
|
|
Net sales
|
|
$
|
189,051
|
|
|
$
|
195,067
|
|
Franchise royalties and fees
|
|
|
5,556
|
|
|
|
4,350
|
|
Other
|
|
|
1,087
|
|
|
|
878
|
|
|
|
$
|
195,694
|
|
|
$
|
200,295
|
|
Note 9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses
include the following.
|
|
March 31,
2017
|
|
December 31, 2016
|
Accounts payable
|
|
$
|
36,622
|
|
|
$
|
33,961
|
|
Gift card liability
|
|
|
20,360
|
|
|
|
25,321
|
|
Salaries, wages, and vacation
|
|
|
9,076
|
|
|
|
15,618
|
|
Taxes payable
|
|
|
13,529
|
|
|
|
12,254
|
|
Workers' compensation and other self-insurance accruals
|
|
|
9,870
|
|
|
|
9,960
|
|
Deferred revenue
|
|
|
10,350
|
|
|
|
7,407
|
|
Other
|
|
|
7,984
|
|
|
|
8,361
|
|
Accounts payable and accrued expenses
|
|
$
|
107,791
|
|
|
$
|
112,882
|
|
Note 10. Borrowings
Notes payable and other borrowings include the following.
Current portion of notes payable and other borrowings
|
|
March 31,
2017
|
|
December 31, 2016
|
Notes payable
|
|
$
|
2,200
|
|
|
$
|
2,200
|
|
Unamortized original issue discount
|
|
|
(312
|
)
|
|
|
(308
|
)
|
Unamortized debt issuance costs
|
|
|
(716
|
)
|
|
|
(711
|
)
|
Obligations under leases
|
|
|
5,538
|
|
|
|
5,571
|
|
Western revolver
|
|
|
357
|
|
|
|
377
|
|
Total current portion of notes payable and other borrowings
|
|
$
|
7,067
|
|
|
$
|
7,129
|
|
|
|
|
|
|
|
|
|
|
Long-term notes payable and other borrowings
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
185,348
|
|
|
$
|
200,898
|
|
Unamortized original issue discount
|
|
|
(1,014
|
)
|
|
|
(1,093
|
)
|
Unamortized debt issuance costs
|
|
|
(1,996
|
)
|
|
|
(2,177
|
)
|
Obligations under leases
|
|
|
82,173
|
|
|
|
83,927
|
|
Total long-term notes payable and other borrowings
|
|
$
|
264,511
|
|
|
$
|
281,555
|
|
Steak n Shake Credit Facility
On March 19, 2014, Steak n Shake and
its subsidiaries entered into the current credit agreement. The credit agreement provides for a senior secured term loan facility
in an aggregate principal amount of $220,000 and a senior secured revolving credit facility in an aggregate principal amount of
up to $30,000.
The term loan is scheduled to mature
on March 19, 2021. It amortizes at an annual rate of 1.0% in equal quarterly installments, beginning June 30, 2014, at 0.25% of
the original principal amount of the term loan, subject to mandatory prepayments from excess cash flow, asset sales and other events
described in the credit agreement. The balance will be due at maturity. The revolver will be available on a revolving basis until
March 19, 2019.
Steak n Shake has the right to request
an incremental term loan facility from participating lenders and/or eligible assignees at any time, up to an aggregate total principal
amount not to exceed $70,000 if certain customary conditions within the credit agreement are met.
Borrowings bear interest at a rate per
annum equal to a base rate or a Eurodollar rate (minimum of 1%) plus an applicable margin. Interest on the term loan is based on
a Eurodollar rate plus an applicable margin of 3.75% or on the prime rate plus an applicable margin of 2.75%. Interest on loans
under the revolver is based on a Eurodollar rate plus an applicable margin ranging from 2.75% to 4.25% or on the prime rate plus
an applicable margin ranging from 1.75% to 3.25%. The applicable margins on revolver loans are contingent on Steak n Shake’s
total leverage ratio. The revolver also carries a commitment fee ranging from 0.40% to 0.50% per annum, depending on Steak n Shake’s
total leverage ratio, on the unused portion of the revolver.
The interest rate on the term loan was
4.75% as of March 31, 2017.
Note 10. Borrowings
(continued)
The credit agreement includes customary
affirmative and negative covenants and events of default, as well as a financial maintenance covenant, solely with respect to the
revolver, relating to the maximum total leverage ratio. Steak n Shake’s credit facility contains restrictions on its ability
to pay dividends to Biglari Holdings.
Both the term loan and the revolver
have been secured by first priority security interests in substantially all the assets of Steak n Shake. Biglari Holdings is not
a guarantor under the credit facility. As of March 31, 2017, $187,548 was outstanding under the term loan, and no amount was outstanding
under the revolver.
Steak n Shake had $10,893 in standby
letters of credit outstanding as of March 31, 2017 and December 31, 2016.
Western Revolver
As of March 31, 2017, Western has $357
due June 13, 2017.
Fair Value of Debt
The carrying amounts for debt reported
in the consolidated balance sheet did not differ materially from their fair values at March 31, 2017 and December 31, 2016. The
fair value was determined to be a Level 3 fair value measurement.
Note 11. Accumulated Other Comprehensive
Income
During the first quarters of 2017 and
2016, the changes in the balances of each component of accumulated other comprehensive income, net of tax, were as follows.
|
|
Three months ended March 31, 2017
|
|
Three months ended March 31, 2016
|
|
|
|
Foreign Currency Translation Adjustments
|
|
|
|
Investment Gain (Loss)
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
|
|
Foreign Currency Translation Adjustments
|
|
|
|
Investment Gain (Loss)
|
|
|
|
Accumulated
Other
Comprehensive Income (Loss)
|
|
Beginning Balance
|
|
$
|
(3,447
|
)
|
|
$
|
(137
|
)
|
|
$
|
(3,584
|
)
|
|
$
|
(2,992
|
)
|
|
$
|
(687
|
)
|
|
$
|
(3,679
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
|
185
|
|
|
|
124
|
|
|
|
309
|
|
|
|
331
|
|
|
|
(256
|
)
|
|
|
75
|
|
Ending Balance
|
|
$
|
(3,262
|
)
|
|
$
|
(13
|
)
|
|
$
|
(3,275
|
)
|
|
$
|
(2,661
|
)
|
|
$
|
(943
|
)
|
|
$
|
(3,604
|
)
|
There were no reclassifications made
from accumulated other comprehensive income to the consolidated statement of earnings during the first quarters of 2017 and 2016.
Note 12. Income Taxes
In determining the quarterly provision
for income taxes, the Company uses an estimated annual effective tax rate based on expected annual income, statutory tax rates,
and available tax planning opportunities in the various jurisdictions in which the Company operates. Unusual or infrequently occurring
items are separately recognized during the quarter in which they occur.
Income tax for the first quarter of
2017 was a benefit of $9,776 compared to an expense of $29,578 for the first quarter of 2016. The variance in income
taxes between the first quarters of 2017 and 2016 is primarily attributable to taxes on income and losses from investment partnerships.
As of March 31, 2017 and December 31,
2016, we had approximately $396 of unrecognized tax benefits, which are included in other liabilities in the consolidated balance
sheets.
Note 13. Commitments and Contingencies
We are involved in various legal proceedings
and have certain unresolved claims pending. We believe, based on examination of these matters and experiences to date, that the
ultimate liability, if any, in excess of amounts already provided in our consolidated financial statements is not likely to have
a material effect on our results of operations, financial position or cash flows.
Note 14. Fair Value of Financial Assets and Liabilities
The fair values of substantially all
of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting
market data used to develop the estimates of fair value. Accordingly, the fair values presented are not necessarily indicative
of the amounts that could be realized in an actual current market exchange. The use of alternative market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value.
The hierarchy for measuring fair value
consists of Levels 1 through 3, which are described below.
-
Level 1 – Inputs represent unadjusted
quoted prices for identical assets or liabilities exchanged in active markets.
-
Level 2 – Inputs include directly
or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in
active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that
may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities,
prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated
by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash
flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations
and yields for other instruments of the issuer or entities in the same industry sector.
-
Level 3 – Inputs include unobservable
inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable
inputs because there is little, if any, market activity in the assets or liabilities and we may be unable to corroborate the related
observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that
would be used by market participants in pricing assets or liabilities.
The following methods and assumptions
were used to determine the fair value of each class of the following assets and liabilities recorded at fair value in the consolidated
balance sheet:
Cash equivalents:
Cash equivalents
primarily consist of money market funds which are classified within Level 1 of the fair value hierarchy.
Equity securities:
The Company’s
investments in equity securities are classified within Level 1 of the fair value hierarchy.
Bonds:
The Company’s investments
in bonds are classified within Level 2 of the fair value hierarchy.
Non-qualified deferred compensation
plan investments:
The assets of the non-qualified plan are set up in a rabbi trust. They represent mutual funds and are classified
within Level 1 of the fair value hierarchy.
Derivative instruments:
Options
related to equity securities are marked to market each reporting period and are classified within Level 2 of the fair value hierarchy.
As of March 31, 2017 and December 31,
2016, the fair values of financial assets and liabilities were as follows.
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
2,293
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,293
|
|
|
$
|
471
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
471
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer goods
|
|
|
2,445
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,445
|
|
|
|
2,018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,018
|
|
Bonds
|
|
|
—
|
|
|
|
23,037
|
|
|
|
—
|
|
|
|
23,037
|
|
|
|
—
|
|
|
|
24,904
|
|
|
|
—
|
|
|
|
24,904
|
|
Options on equity securities
|
|
|
—
|
|
|
|
2,018
|
|
|
|
—
|
|
|
|
2,018
|
|
|
|
—
|
|
|
|
2,445
|
|
|
|
—
|
|
|
|
2,445
|
|
Non-qualified deferred compensation plan investments
|
|
|
3,081
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,081
|
|
|
|
2,872
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,872
|
|
Total assets at fair value
|
|
$
|
7,819
|
|
|
$
|
25,055
|
|
|
$
|
—
|
|
|
$
|
32,874
|
|
|
$
|
5,361
|
|
|
$
|
27,349
|
|
|
$
|
—
|
|
|
$
|
32,710
|
|
There were no changes in our valuation
techniques used to measure fair values on a recurring basis.
Note 15. Related Party Transactions
Shared Services Agreement
During fiscal 2013, Biglari Holdings
and Biglari Capital entered into the Shared Services Agreement pursuant to which Biglari Holdings provides certain services to
Biglari Capital. Biglari Capital is an entity solely owned by Mr. Biglari. The Shared Services Agreement runs for an initial five-year
term, and automatically renews for successive five-year periods, unless terminated by either party effective at the end of the
initial or the renewed term, as applicable. The term of the Shared Services Agreement coincides with the lock-up period for the
Company’s investments in The Lion Fund, L.P. and The Lion Fund II, L.P. under their respective partnership agreements. During
the first quarters of 2017 and 2016, the Company provided services for Biglari Capital under the Shared Services Agreement costing
an aggregate of $227, and $301, respectively.
Investments in The Lion Fund,
L.P. and The Lion Fund II, L.P.
As of March 31, 2017, the Company’s investments in The Lion Fund, L.P. and The Lion Fund II, L.P. had a fair value of $908,175.
Contributions to and distributions from
The Lion Fund, L.P. and The Lion Fund II, L.P. were as follows.
|
|
First Quarter
|
|
|
2017
|
|
2016
|
|
|
|
|
|
Contributions of cash
|
|
$
|
—
|
|
|
$
|
11,500
|
|
Distributions of cash
|
|
|
(5,015
|
)
|
|
|
(4,750
|
)
|
|
|
$
|
(5,015
|
)
|
|
$
|
6,750
|
|
As the general partner of the investment
partnerships, Biglari Capital on December 31 of each year will earn an incentive reallocation fee for the Company’s investments
equal to 25% of the net profits above an annual hurdle rate of 6% over the previous high water mark. Our policy is to accrue
an estimated incentive fee throughout the year. The Company did not accrue incentive fees for Biglari Capital during the first
quarter of 2017. The Company accrued $2,921 in incentive fees for Biglari Capital during the first quarter of 2016.
Incentive Agreement Amendment
During 2013, Biglari Holdings and Mr.
Biglari entered into an amendment to the Incentive Agreement to exclude earnings by the investment partnerships from the calculation
of Mr. Biglari’s incentive bonus. Under the Amended and Restated Incentive Agreement Mr. Biglari would receive a payment
of approximately $14,700 if an event occurred entitling him to a severance payment.
License Agreement
On January 11, 2013, the Company entered
into a Trademark License Agreement (the “License Agreement”) with Mr. Biglari. The License Agreement was unanimously
approved by the Governance, Nominating and Compensation Committee (comprised of independent members of the Company’s Board
of Directors). In addition, the license under the License Agreement is provided on a royalty-free basis in the absence of specified
extraordinary events described below. Accordingly, the Company and its subsidiaries have paid no royalties to Mr. Biglari under
the License Agreement since its inception.
Under the License Agreement, Mr. Biglari
granted to the Company an exclusive license to use the Biglari and Biglari Holdings names (the “Licensed Marks”) in
association with various products and services (collectively the “Products and Services”). Upon (a) the expiration
of twenty years from the date of the License Agreement (subject to extension as provided in the License Agreement), (b) Mr. Biglari’s
death, (c) the termination of Mr. Biglari’s employment by the Company for Cause (as defined in the License Agreement), or
(d) Mr. Biglari’s resignation from his employment with the Company absent an Involuntary Termination Event (as defined in
the License Agreement), the Licensed Marks for the Products and Services will transfer from Mr. Biglari to the Company, without
any compensation, if the Company is continuing to use the Licensed Marks in the ordinary course of its business. Otherwise, the
rights will revert to Mr. Biglari.
If (i) a Change of Control (as defined
in the License Agreement) of the Company; (ii) the termination of Mr. Biglari’s employment by the Company without Cause;
or (iii) Mr. Biglari’s resignation from his employment with the Company due to an Involuntary Termination Event (each, a
“Triggering Event”) were to occur, Mr. Biglari would be entitled to receive a 2.5% royalty on “Revenues”
with respect to the “Royalty Period.” The royalty payment to Mr. Biglari would not apply to all revenues received by
Biglari Holdings and its subsidiaries nor would it apply retrospectively (
i.e.
, to revenues received with respect to the
period prior to the Triggering Event). The royalty would apply to revenues recorded by the Company on an accrual basis under GAAP,
solely with respect to the defined period of time after the Triggering Event equal to the Royalty Period, from a covered Product,
Service or business that (1) has used the Biglari Holdings or Biglari name at any time during the term of the License Agreement,
whether prior to or after a Triggering Event, or (2) the Company has specifically identified, prior to a Triggering Event, will
use the name Biglari or Biglari Holdings.
Note 15. Related Party Transactions
(continued)
“Revenues” means all revenues
received, on an accrual basis under GAAP, by the Company, its subsidiaries and affiliates from the following: (1) all Products
and Services covered by the License Agreement bearing or associated with the names Biglari and Biglari Holdings at any time (whether
prior to or after a Triggering Event). This category would include, without limitation, the use of Biglari or Biglari Holdings
in the public name of a business providing any covered Product or Service; and (2) all covered Products, Services and businesses
that the Company has specifically identified, prior to a Triggering Event, will bear, use or be associated with the name Biglari
or Biglari Holdings.
The Governance, Nominating and Compensation
Committee unanimously approved the association of the Biglari name and mark with all of Steak n Shake’s restaurants (including
Company operated and franchised locations), products and brands. On May 14, 2013, the Company, Steak n Shake, LLC and Steak n Shake
Enterprises, Inc. entered into a Trademark Sublicense Agreement in connection therewith. Accordingly, revenues received by the
Company, its subsidiaries and affiliates from Steak n Shake’s restaurants, products and brands would come within the definition
of Revenues for purposes of the License Agreement.
The “Royalty Period” is
a defined period of time, after the Triggering Event, calculated as follows: (i) if, following three months after a Triggering
Event, the Company or any of its subsidiaries or affiliates continues to use the Biglari or Biglari Holdings name in connection
with any covered product or service, or continues to use Biglari as part of its corporate or public company name, then the “Royalty
Period” will equal (a) the period of time during which the Company or any of its subsidiaries or affiliates continues any
such use, plus (b) a period of time after the Company, its subsidiaries and affiliates have ceased all uses of the names Biglari
and Biglari Holdings equal to the length of the term of the License Agreement prior to the Triggering Event, plus three years.
As an example, if a Triggering Event occurs five years after the date of the License Agreement, and the Company ceases all uses
of the Biglari and Biglari Holdings names two years after the Triggering Event, the Royalty Period will equal a total of ten years
(the sum of two years after the Triggering Event during which the Biglari and Biglari Holdings names are being used, plus a period
of time equal to the five years prior to the Triggering Event, plus three years); or (ii) if the Company, its subsidiaries and
affiliates cease all uses of the Biglari and Biglari Holdings names within three months after a Triggering Event, then the “Royalty
Period” will equal the length of the term of the License Agreement prior to the Triggering Event, plus three years. As an
example, if a Triggering Event occurs five years after the date of the License Agreement, and the Company ceases all uses of the
Biglari and Biglari Holdings names two months after the Triggering Event, the Royalty Period will equal a total of eight years
(the sum of the period of time equal to the five years prior to the Triggering Event, plus three years). Notwithstanding the above
methods of determining the Royalty Period, the minimum Royalty Period is five years after a Triggering Event.
The actual amount of royalties paid
to Mr. Biglari following the occurrence of a Triggering Event (as defined in the License Agreement) would depend on the Company’s
revenues during the applicable period following the Triggering Event, and, therefore, depends on material assumptions and estimates
regarding future operations and revenues. Assuming for purposes of illustration a Triggering Event occurred on December 31, 2016,
using revenue from 2016 as an estimate of future revenue and calculated according to terms of the License Agreement, Mr. Biglari
would receive approximately $20,300 in royalty payments annually. At a minimum, the royalties would be earned on revenue generated
from January 1, 2017 through December 21, 2023. Royalty payments beyond the minimum period would be subject to the licensee's continued
use of the licensed marks.
Note 16. Business Segment Reporting
Our reportable business segments are
organized in a manner that reflects how management views those business activities.
Our restaurant operations includes Steak
n Shake and Western. As a result of the acquisitions of First Guard and Maxim, the Company reports segment information for these
businesses. Other business activities not specifically identified with reportable business segments are presented in “Other”
within total operating businesses. We report our earnings from investment partnerships separate from our corporate expenses.
We assess and measure segment operating
results based on segment earnings as disclosed below. Segment earnings from operations are neither necessarily indicative of cash
available to fund cash requirements, nor synonymous with cash flow from operations.
The tabular information that follows
shows data of our reportable segments reconciled to amounts reflected in the consolidated financial statements.
Revenue and earnings before income taxes
for the first quarters of 2017 and 2016 were as follows.
|
|
Revenue
|
|
|
First Quarter
|
|
|
2017
|
|
2016
|
Operating Businesses:
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
Steak n Shake
|
|
$
|
192,690
|
|
|
$
|
196,898
|
|
Western
|
|
|
3,004
|
|
|
|
3,397
|
|
Total Restaurant Operations
|
|
|
195,694
|
|
|
|
200,295
|
|
First Guard
|
|
|
6,080
|
|
|
|
5,499
|
|
Maxim
|
|
|
1,619
|
|
|
|
2,448
|
|
|
|
$
|
203,393
|
|
|
$
|
208,242
|
|
|
|
Earnings Before Income Taxes
|
|
|
First Quarter
|
|
|
2017
|
|
2016
|
Operating Businesses:
|
|
|
|
|
Restaurant Operations:
|
|
|
|
|
Steak n Shake
|
|
$
|
3,352
|
|
|
$
|
8,362
|
|
Western
|
|
|
450
|
|
|
|
586
|
|
Total Restaurant Operations
|
|
|
3,802
|
|
|
|
8,948
|
|
First Guard
|
|
|
969
|
|
|
|
1,327
|
|
Maxim
|
|
|
(324
|
)
|
|
|
(3,515
|
)
|
Other
|
|
|
148
|
|
|
|
125
|
|
Total Operating Businesses
|
|
|
4,595
|
|
|
|
6,885
|
|
Corporate and Investments:
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(2,400
|
)
|
|
|
(2,195
|
)
|
Investment partnership gains (losses)
|
|
|
(24,968
|
)
|
|
|
78,973
|
|
Total Corporate and Investments
|
|
|
(27,368
|
)
|
|
|
76,778
|
|
Interest expense on notes payable and other borrowings
|
|
|
(2,824
|
)
|
|
|
(2,922
|
)
|
|
|
$
|
(25,597
|
)
|
|
$
|
80,741
|
|